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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission file number 0-15325
Ascential Software Corporation
(formerly Informix Corporation)
(Exact name of registrant as specified in its charter)
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Delaware
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94-3011736 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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50 Washington Street,
Westborough, MA
(Address of principal executive office) |
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01581
(Zip Code) |
(Registrant’s telephone number, including area code)
508-366-3888
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 30, 2004 based
on the closing sales price of the Company’s common stock,
as reported on The NASDAQ Stock Market, was $934.7 million.
Shares of common stock held by each executive officer and
director have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not
intended as a conclusive determination for any other purpose.
As of February 28, 2005, the registrant had
59,652,713 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for
its annual meeting of stockholders for the fiscal year ended
December 31, 2004, which will be filed with the Securities
and Exchange Commission within 120 days after the end of
the registrant’s fiscal year, are incorporated by reference
into Part III hereof.
ASCENTIAL SOFTWARE CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Ascential, Ascential DataStage, Ascential QualityStage,
Ascential ProfileStage and Ascential Enterprise Integration
Suite are trademarks of Ascential Software Corporation or its
affiliates and may be registered in the United States or other
jurisdictions. Other marks are the property of the owners of
those marks.
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PART I
This report contains forward-looking statements that are
subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or
anticipated results. These risks and uncertainties include, but
are not limited to, those set forth under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Factors That May
Affect Future Results” and elsewhere in, or incorporated by
reference into, this report. Readers of this report should
review carefully these factors as well as the description of
risks and uncertainties, which, together with other detailed
information about us, is contained in other documents and
periodic reports that we file from time to time with the
Securities and Exchange Commission. These forward-looking
statements reflect management’s opinions only and only as
of the date of this report and we disclaim any obligation to
update or revise these statements.
Business Overview
Overview. Headquartered in Westborough, Massachusetts
since July 2001, Ascential Software Corporation (“the
Company”,“we”, “our”,
“Ascential”) is a leading supplier of enterprise
integration solutions to the Global 2000 and other large
organizations. We believe that the Ascential Enterprise
Integration Suite, built upon a highly scalable execution
engine, is the industry’s only single vendor solution to
address the full range of enterprise data integration needs,
turning data into “Intelligent
Information” — information that is reliable,
relevant, and complete — so organizations can make
better-informed business decisions and drive their strategic
application initiatives.
We were incorporated in Delaware in 1986 and, until the third
quarter of 2001, operated under the name “Informix
Corporation”. Effective January 1, 2001, we
consolidated our business units into two reportable operating
segments: (i) Informix Software, which operated our
database software systems business, and (ii) Ascential
Software, which operated our extract, transform and load
(“ETL”) and digital asset management software and
solutions business. During the third quarter of 2001, we
completed the sale of our database business assets, including
the name “Informix”, to International Business
Machines (“IBM”) for $1.0 billion in cash, which
we refer to as the “IBM Transaction” (see Note 14
to the Consolidated Financial Statements). In connection with
the IBM Transaction, we changed our name to “Ascential
Software Corporation” and changed the symbol under which
our stock is traded on the NASDAQ National Market to
“ASCL”. These changes became effective in July 2001.
Since that time, our sole reportable operating segment has been
our Ascential Software business.
We derive our revenue from sales of product licenses, related
support and professional services. Revenue for 2004, 2003 and
2002 attributable to all operations was $271.9 million,
$185.6 million and $113.0 million, respectively. Net
income was $15.0 million in 2004 and $15.8 million in
2003. Net loss was $63.6 million in 2002. Total assets were
$935.1 million and $966.1 million in 2004 and 2003,
respectively. Our software products are most frequently licensed
to customers on a perpetual basis, accompanied by annual
maintenance. Professional services are generally rendered either
on a time and materials basis, or for a fixed fee.
Industry Background. Data integration is the means by
which organizations understand the data scattered throughout or
external to their organization, access it and deliver it,
adapted for its intended use, to enterprise applications and
data warehouses. Historically, many organizations accomplished
this through internal hand-coded programs that would extract
data from one or more sources and deliver it to a target system.
By the mid-1990s, certain companies, including Ascential, began
developing packaged applications that would efficiently
accomplish this basic extract, transform and load, or
“ETL”, function. By accessing data from various
disparate sources, and preparing and delivering it to the
applications that require it, business users can leverage those
applications to make mission-critical decisions.
Data integration requirements have evolved from earlier ETL
functionality to encompass additional functionality, such as
expanded connectivity, data profiling, data quality enhancement,
bi-directional meta data (data about data) management, data
transformation and routing and highly scalable parallel
processing
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technology. We believe that some key factors and trends driving
demand for packaged data integration solutions include the
following:
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Substantial investments in enterprise applications often fail to
realize expected returns on investment due to inadequately
addressed data issues. |
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Rapidly expanding data volumes and increasing data complexity
are straining the ability of in-house coding to satisfy demand. |
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“Real time” functionality is becoming a much more
prevalent requirement, which in-house coding and most ETL tools
may be less well-equipped to address. |
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Many in-house programming organizations do not have adequate
expertise or resources to devote to the creation and maintenance
of additional functionality such as data profiling, data quality
enhancement, bi-directional meta data management and
highly-scalable parallel processing technology. |
Solution. Our products for automated data profiling, data
quality management and cleansing, and data transformation
address the needs of organizations that have invested in
enterprise applications such as customer relationship management
(“CRM”), enterprise resource planning
(“ERP”), supply chain management (“SCM”),
analytic applications, transactional environments, or data
stores such as data warehouses and data marts.
We have combined the functionality of all of our core
integration services onto a single enterprise data integration
platform that provides end-to-end meta data management. Our
integration platform provides definition and history of the data
used to drive strategic enterprise applications. It also
provides connectivity between virtually any standard data source
and target application, and virtually unlimited scalability and
performance through our parallel processing engine. This
complete offering is called the Ascential Enterprise Integration
Suite.
We also offer a full range of consulting, educational and
support services to assist our clients through all phases of a
project. Based on demonstrated methodologies, these services
represent years of accumulated capital in terms of knowledge and
experience, gained through many successful engagements across a
range of industries and enterprise application requirements.
We support more than 3,000 customers in such industries as
financial services and banking, insurance, healthcare, retail,
manufacturing, consumer packaged goods, telecommunications and
government, in all major markets around the world. One of our
resellers, IBM, accounted for 11% of our revenues in 2002. In
2004 and 2003, no single customer accounted for more than 10% of
our revenue. Termination of our relationship with IBM, if it
were to occur, could have a negative impact on our financial
results if the revenue were not replaced.
Products. Our products, as described below, are designed
to operate as part of the Ascential Enterprise Integration
Suite, or as stand-alone integration components. Our product
functionality includes: automated data profiling to analyze and
manage source data content and structure; data quality and
cleansing to identify, correct and reconcile inaccurate,
misdirected, or redundant data; and data transformation to
obtain data from a source, format it as required for its
intended purpose, and deliver it to a specified target system.
Our products are supported by a comprehensive platform of
integration services that delivers end-to-end meta data
management, connectivity between virtually any standard data
source and application, and virtually unlimited scalability
through use of parallel execution technology. These applications
may be deployed in any configuration to support event driven or
scheduled processing, or deployed as enterprise web services
that are invoked on demand by a service-oriented application.
This combination of integration products built on a platform of
integration services forms the Ascential Enterprise Integration
Suite.
The Ascential Enterprise Integration Suite is a complete and
scalable data integration solution that delivers comprehensive
data profiling, data quality, and data transformation
capabilities. Built on a platform of common services for meta
data management and parallel processing, the Ascential
Enterprise Integration Suite supports discovery of the data
contained within corporate data sources, standardization and
cleansing of this data, matching and merging records across
sources, and transformation of the data, regardless of its
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complexity. It provides these services for transactional,
operational and analytical data, and supports integration on
demand in a service-oriented architecture. The Ascential
Enterprise Integration Suite offers a comprehensive, modular
solution that can expand with business needs or as customer
budgets dictate. We believe our customers benefit from the
ability to deploy the complete Ascential Enterprise Integration
Suite to address the entire enterprise data integration life
cycle, or use individual integration products and add other
components as needed. This approach allows customers to achieve
complete integration through application of the entire Ascential
Enterprise Integration Suite, or to realize targeted benefits
through application of one or more components of the Ascential
Enterprise Integration Suite, with the ability to later add the
other components to create a single, integrated solution.
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Ascential ProfileStage — Source System
Discovery |
Our Ascential ProfileStage product, acquired originally from
Metagenix, Inc. (“Metagenix”) on March 31, 2002,
and significantly enhanced in two subsequent new releases, is
the core data profiling product in the Ascential Enterprise
Integration Suite. Ascential ProfileStage automates the critical
and fundamental task of data source analysis; expediting
comprehensive data analysis, reducing the time-to-market, and
reducing overall costs and resources for critical data
integration projects. Ascential ProfileStage profiles source
data by analyzing the values within and across columns, and
provides target database recommendations, such as primary keys,
foreign keys, and table normalizations. Armed with this
information, Ascential ProfileStage builds a model of the data
to facilitate the source-to-target mapping and automatically
generates data integration jobs.
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Ascential QualityStage — Data Preparation and
Cleansing |
Our Ascential QualityStage product, acquired through the
acquisition of Vality Technology Incorporated
(“Vality”) on April 3, 2002, is the core data
quality component of Ascential Enterprise Integration Suite.
Ascential QualityStage is designed to ensure that strategic
systems deliver accurate, complete information to business users
seeking a single view of customers, suppliers, and products from
across their enterprise. Through a user-friendly graphical
interface, Ascential QualityStage provides quality control
mechanisms over structured data elements —
international names and addresses, phone numbers, birth dates,
part numbers and descriptions, suppliers, email addresses and
other data — and seeks to determine relationships
among them. Based on rigorous statistical principles, Ascential
QualityStage’s probabilistic matching capabilities are
designed to detect duplications (despite anomalous,
inconsistent, and missing data values) and reconcile, isolate,
or discard records as appropriate. Ascential QualityStage
provides a complete solution for organizations to re-engineer
their data into high quality enterprise information. Ascential
QualityStage automates the process of cleansing, standardizing,
matching and surviving data through both batch and real-time
processes on a variety of conventional computing platforms.
Ascential QualityStage promotes high quality, accurate data and
consistent identification of core business entities such as
customer, location and product throughout the enterprise.
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Ascential DataStage — Data Transformation and
Integration |
Ascential DataStage, our data transformation and integration
solutions family, is designed to integrate enterprise
information across various sources and targets within specified
timeframes. Ascential DataStage features a powerful architecture
designed to provide developers with increased speed and
flexibility in building, deploying and managing their data
integration infrastructure across analytical, operational and
transactional environments. With features such as a graphical
user interface driven “work as you think” design
metaphor, a library of over 300 pre-built transformations,
support for job reuse, versioning and sharing, and event-based
job scheduling, Ascential DataStage is designed to enable
companies to minimize internal resources allocated to
development of integration jobs. Additionally, Ascential
DataStage incorporates Packaged Application Connectivity Kits
(“PACKs”) for many widely recognized enterprise
applications, including SAP, Siebel, Oracle and PeopleSoft.
Ascential DataStage TX, acquired through the acquisition of
Mercator Software, Inc. (“Mercator”) on
September 12, 2003, extends the transformation capabilities
of the Ascential Enterprise Integration Suite to
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support event driven, parsing, validation and transformation of
complex, hierarchical data formats. This functionality is
essential in many industries that rely on specific document
formats to conduct business with customers, financial
institutions and partners. Ascential DataStage TX is a powerful,
transaction-oriented data integration solution that automates
the transformation of high-volume, complex transactions without
the need for hand coding. It supports EDI, XML, SWIFT, HIPAA,
and other standards-based B2B integration, as well as the
real-time integration of data from multiple applications,
databases, messaging middleware, and communications technologies
across an enterprise.
The configuration options of the products within the Ascential
Enterprise Integration Suite enable customers to purchase the
functionality they need on a project basis, or deploy the
Ascential Enterprise Integration Suite as an enterprise
standard, scalable to meet the largest data integration
requirement. The Ascential Enterprise Integration Suite and its
component products are also available in enterprise editions. In
an enterprise edition, our patented parallel processing
technology automatically reconfigures the relevant product set
to take advantage of complex symmetric multiprocessing or
massively parallel multiprocessing CPU configurations in order
to significantly increase throughput.
Ascential SOA Editions are service-oriented architecture
(SOA)-enabling components of the Ascential Enterprise
Integration Suite, responsible for brokering the benefits of
Ascential DataStage, Ascential DataStage TX, and Ascential
QualityStage capabilities across a continuum of time
constraints, application suites, interface protocols and
integration technologies across an enterprise. With the benefits
of shorter development cycles, lower costs and greater
repeatability, the Ascential Enterprise Integration Suite
becomes an SOA-enabled data integration service where the same
data transformation rules can be applied consistently across
analytical, application, portal and business process integration
environments. As part of a strategic Data Governance initiative,
Ascential SOA Editions enable companies to set thresholds for
the required level of data synchronization and data quality
performance.
Services. We believe that a highly skilled customer
service organization is a key driver to our success in the
enterprise data integration software market. While services are
not necessary for customers to benefit from our software
products, our professional services consultants offer customers
the ability to implement their integration projects faster and
can often structure implementations to optimize user-defined
objectives. In addition to professional service consulting fees,
services revenues consist primarily of software maintenance and
support fees and customer education fees.
We maintain both field-based and centralized corporate technical
personnel to provide a comprehensive range of assistance to
customers and resellers. Services include post-sales technical
support, consulting, and product education. Consultants and
educators provide services to customers to assist in their use
of our products and their design and development of applications
that utilize our products.
We provide customer service via telephone, e-mail exchange and
web site access. All of our customers on active maintenance have
access to customer service resources, delivered by service
professionals focused on resolution of customer issues. We are
committed to providing reliable technical support wherever and
whenever our clients need it. Customer Care assists in problem
identification, verification and resolution. We also provide
access to an expanding Knowledge Database of known issues and
solutions that assists our customers to quickly find and resolve
any common issues. We electronically track and escalate support
requests through our worldwide Case Tracking System.
We offer a variety of consulting services to our customers
directly and through third-party systems integrators. Consulting
services include implementation assistance, project planning and
deployment, optimization services and mentoring. Our Advanced
Consulting Group is focused on assisting customers in
implementing new technologies and enterprise-wide solutions. We
complement our professional service offerings by working with
leading international and regional third-party consulting and
systems integration firms to provide customers with a wide range
of service options.
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Education and Training |
We offer comprehensive education and training courses that
provide a broad selection of classroom, computer-based
certification, and custom education offerings intended to assist
customers and resellers to optimally deploy and use our products
using best practices. Training is also available to value-added
resellers, systems integrators and embedded resellers.
Strategy. Our business objective is to continually expand
our leadership position in delivering enterprise data
integration software solutions to the Global 2000 and other
large organizations. Key elements of our strategy to achieve
this business objective are as follows:
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We have methodically executed our plan to build the
industry’s broadest and most scalable enterprise data
integration platform. That plan included the expansion of our
original ETL product offering through internal development and
through external acquisitions to encompass broader connectivity,
expanded support of industry standards such as web services,
data profiling, data quality, rich meta data management and
parallel processing technology. We currently offer end-to-end
data integration functionality from a single vendor, which we
believe is unique in the industry and may provide us with
meaningful competitive differentiation. |
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We have expanded our strategic alliances with IBM, SAP, business
intelligence vendors and systems integrators, among others, to
broaden our market reach. We also entered into new strategic OEM
and reseller agreements with other application vendors,
including Ariba, PeopleSoft, Sybase and Teradata. In 2004, the
amount of our license revenue sold through partner relationships
increased by approximately 9%, and represents approximately 33%
of license revenue in 2004, compared to 36% in 2003. In
addition, many of the sales made by our direct sales
organization are positively influenced by our strategic partner
relationships. As a result, we believe that in the aggregate, a
majority of revenue from our license sales is influenced or
generated directly by partners. |
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Our marketing and sales organizations seek to increase our
visibility and brand awareness through an array of initiatives,
including expanding our Customer Advisory Board, conducting our
annual Ascential World global user conference, conducting
proactive public relations activities, participating in major
industry and partner events, actively maintaining industry
analyst relations, conducting web-based seminars and direct
email campaigns, communicating through our website and continual
direct sales and account management contact with customers and
prospects. In addition, we actively participate in several
industry standards organizations such as OASIS, ACORD, SWIFT and
WS-I. |
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We have dedicated substantial financial resources to broadening
and deepening our enterprise data integration platform and
promoting the benefits of its use, and our plan is to continue
to utilize our resources in the future to continue building out
a platform that can deliver a highly differentiated enterprise
data integration capability. |
Sales and Marketing
We distribute products through four main channels: direct sales
end-user licensing, value-added resellers, systems integrators
and embedded resellers. We also regularly receive customer
referrals from enterprise application and business intelligence
vendors whose customers can benefit from the data integration
functionality of our products. We use a multiple channel
distribution strategy to maintain broad market coverage and
competitiveness. Discount policies and reseller licensing
programs are intended to support each distribution channel with
a minimum of channel conflict and are focused on maximizing our
market reach and meeting evolving customer purchasing
requirements. The principal geographic markets for our products
are North America, Europe and the Asia/ Pacific region. Our
revenues for 2004, 2003 and 2002 attributable to operations
within the United States were $127.9 million,
$99.8 million and $60.8 million, or 47%, 54% and 54%
of total revenues, respectively, while revenues attributable to
international operations during the same periods were
$144.0 million, $85.8 million and $52.2 million,
or 53%, 46% and 46% of total revenues, respectively. See
Note 9 to the Consolidated Financial Statements for summary
information regarding revenues derived from our geographic
regions. See also “Management’s Discussion and
Analysis of Financial
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Condition and Results of Operations — Factors That May
Affect Future Results” regarding risks related to our
foreign operations.
Historically, our sales patterns have demonstrated seasonality
over the course of the year. Typically, the first quarter is
weaker because many customers have just completed their fourth
quarter and expended their budget allocations for the prior
year. The second quarter generally shows increases in spending
over the first quarter. The third quarter tends to be weaker
than the second quarter due to extensive vacation and holiday
schedules, primarily in Europe, which slows software spending
decision cycles. The fourth quarter has historically been the
strongest revenue generating quarter of the year, as customers
typically complete their capital spending for the year. Although
these patterns have been prevalent in the past, there is no
guarantee that these trends will continue, or that they will
persist despite factors that affect the economy or IT investment
by companies domestically and abroad. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Factors That May
Affect Future Results”.
In support of our sales efforts, we conduct comprehensive
integrated marketing programs, which include a variety of
marketing activities such as telemarketing, direct mail, e-mail
campaigns, local events, public relations activities, seminars,
tradeshows and ongoing customer communications programs. The
sales cycle begins with the generation of a sales lead, or often
the receipt of a request for proposal or request for information
from a prospective customer, followed by a qualification of the
lead, analysis of the customer’s needs, response to the
request for proposal or request for information (if solicited by
the customer), one or more presentations to the customer, proof
of concept (if required), customer internal approval activities,
contract negotiation and shipment to the customer. While the
sales cycle can vary considerably from customer to customer, the
typical sales cycle has in recent years ranged from
approximately three to twelve months.
Our sales and marketing strategy is based on building and
maintaining our position as a category and thought leader with
our customers and key industry influencers and forging strong
relationships with organizations that can positively influence
the sale of our products. Our customers and prospective
customers often rely on third-party systems integrators or other
technology partners, such as analytic, database, enterprise
software and hardware vendors to structure, develop, deploy and
manage an overall solution that may include our products. We
have conducted several joint marketing and sales programs with
partners in each of these categories and continue to invest in
market development activities that include market education,
seminars, direct mail campaigns and conference and exhibition
participation.
Long-lived assets
We have recorded tangible long-lived assets, primarily property
and equipment, software development costs, goodwill, and
intangible assets. The total value of these tangible long-lived
assets was $23.9 million and $24.1 million at
December 31, 2004 and 2003, respectively. In the United
States, the value of these tangible long-lived assets was
$20.6 million and $21.0 million at December 31,
2004 and 2003, respectively. The value of these tangible
long-lived assets attributable to international operations was
$3.3 million and $3.1 million at December 31,
2004 and 2003, respectively.
Licensing
We license software to organizations worldwide through a direct
sales force. Our infrastructure solutions are sold principally
to Global 2000 and government agencies and organizations seeking
to convert their volumes of unrefined data into reliable and
reusable information assets. Our observation has been that
certain organizations have begun to standardize their
information solutions enterprise-wide and are entering into more
global enterprise agreements. This can result in volume-based
discounts for those organizations that deploy our products on a
large scale.
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Value-Added Reseller, Systems Integrators and OEM
Licensing |
We license products to value-added resellers, such as IBM, who
in turn distribute our products as part of their total
solutions. A typical reseller sells our products to handle the
integration of data into or from their applications (such as a
data management solution or an analytic application for risk
management). We also work with many business intelligence and
applications vendors whose customers require the capabilities of
our product. These vendors usually do not resell our products to
their customers directly, but rather refer these customers to us
in exchange for a referral fee. We provide specialized programs
to support our reseller distribution channel. Under these
programs, we have provided a combination of marketing
development services, consulting and technical marketing support
and discounts. Systems integrators typically do not distribute
our software. In most cases they include us, on a referral
basis, in a project in which one or more elements of our
integration suite is required in order to fulfill their
clients’ needs. We also conduct business through original
equipment manufacturers (OEMs) who incorporate our technology as
components of their offerings, but the amount of revenue from
this source is not currently significant.
We offer our customers a variety of options with respect to
software maintenance and upgrade support. Enhanced enterprise
support offerings are also available for customers seeking
additional services and support. We currently have four
progressive levels of maintenance offerings ranging from
web-based e.Support to Premier (8:00 am - 5:00 pm
local) to Premier Anytime (24 × 7) to
Enterprise Support, which incorporates service level agreements.
We also provide an e-Learning facility as a key component of our
Premier, Premier Anytime and Enterprise Support offerings.
Competition
The enterprise integration software market is extremely
competitive and subject to rapid technological change with
frequent new product introductions and enhancements. Our primary
competitors in the market include in-house hand-coded solutions,
vendors that develop and market certain aspects of the data
integration requirement such as Informatica and Pervasive
Software and certain business intelligence vendors who have
embedded limited data transformation and loading capabilities
into their offerings such as SAS (DataFlux) and Business
Objects. Other vendors that offer ETL functionality include,
among others, Microsoft and Oracle. We also face competition
from private companies such as ETI, as well as various
enterprise software vendors who have embedded ETL capabilities
such as SAP, and companies’ own internal development
resources. Competitors for Ascential ProfileStage, our data
profiling offering, include Trillium, which was purchased by
Harte-Hanks, CSI, which recently purchased Evoke, and SAS, which
has built profiling capabilities around their DataFlux product
line, among others. Competitors for Ascential QualityStage, our
data quality offering, include Firstlogic, Group One, SAS
DataFlux and Trillium, among others. We believe that there is no
single competitor that competes across the full range of our
enterprise data integration platform at present. We believe that
we are a strong competitor in the market with each of our data
integration component products, and a recognized leader in
providing end-to-end enterprise data integration.
Competitors in the enterprise data integration market compete
primarily on the basis of product performance, scalability and
other capabilities, but also on technical product support,
professional services and price. We believe that the following
factors influence our competitive position in the market:
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Breadth and completeness of each product to meet or exceed the
functional requirements of its specific market. |
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The ability of products to interoperate synergistically
together, providing an end-to-end solution for data integration
tasks, accelerating time to market while reducing overall
implementation costs. |
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The ability of each product to maximize investments in hardware
and software, to achieve operational efficiencies, and to scale
to handle extremely large data volumes. |
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Reliability and serviceability of products. |
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Total cost of ownership. |
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The desire of customers to reduce the number of vendors with
whom they do business. |
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Availability of a comprehensive services offering. |
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Vendor viability and commitment to the enterprise integration
market. |
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The ability to develop, introduce and support innovative
products and the market’s acceptance of such technical
innovations. |
Product Development
Major product releases resulting from research and development
projects in 2004 included the Ascential Enterprise Integration
Suite 7.5, the most advanced and innovative version of our
flagship enterprise integration solution. This next generation
technology extends the reach of our powerful data profiling,
data quality, data transformation, parallel processing, meta
data and connectivity solutions by enabling the seamless
interoperability of our data integration solutions within an
enterprise’s service oriented architecture (SOA).
Our current product development efforts are focused on:
|
|
|
| |
• |
Further evolving and enhancing the capabilities of our product
set to support existing and emerging standards, including XML,
JMS and Web Services. |
| |
| |
• |
Exceptional performance and scalability capabilities that extend
the reach of our solutions for high performance grid
architectures and advanced 64-bit operating platforms. |
| |
| |
• |
Seamless and scalable advanced native connectivity across new
versions of enterprise applications, relational database
systems, enterprise service buses, messaging systems and
mainframe source systems. |
| |
| |
• |
Enhancing the “out of box” experience for our
customers and innovating in the development of next generation
user interfaces for our products that are designed for an
engaging, efficient, and productive user experience. |
| |
| |
• |
Advancing and extending the capabilities of our core
service-oriented, highly modernized internal architecture. |
| |
| |
• |
Significantly expanding and extending the capabilities of our
core meta data infrastructure. |
| |
| |
• |
User-oriented functional and feature enhancements of our data
profiling, data quality, data transformation, meta data and
connectivity capabilities. |
There can be no assurances that our product development efforts
will yield the anticipated results. In addition, we intend to
adapt to the changing needs of the market in which we operate
and, accordingly, any of the product development efforts
described above may be terminated or delayed.
Research and Development Expenditures
Our research and development expenditures for 2004, 2003 and
2002 were $39.3 million, $27.5 million and
$24.0 million, respectively, representing approximately
14%, 15% and 21%, respectively, of net revenues for these
periods. These expenditures are net of $9.6 million,
$7.8 million and $11.0 million of development costs
that were capitalized in 2004, 2003 and 2002, respectively.
Amounts spent on research and development during 2002 included
expenditures attributable to product development activities
relating to our content management product line which was
terminated in the second quarter of 2002. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Costs and
Expenses.”
Intellectual Property
Certain aspects of our internal operations, products, and
documentation are considered proprietary, and we rely primarily
on a combination of patent, copyright, trademark and trade
secret laws and other measures
9
to protect our proprietary rights. However, we cannot ensure
that these measures will provide enforceable legal remedies or a
meaningful competitive advantage. We also rely on contractual
restrictions in agreements with customers, employees and others
to protect our intellectual property rights. However, we cannot
ensure that these agreements will not be breached, that we would
have adequate remedies for any breach or that our trade secrets
will not otherwise become known.
We currently hold 11 United States patents and a number of
pending and granted foreign counterparts. We also have a number
of pending U.S. patent applications, and may continue to
file patent applications in the future. We cannot ensure that
any of these applications will mature into patent rights or
that, if issued, such patents will provide any meaningful
competitive advantage. We believe that, because of the rapid
pace of technological change in the computer software industry,
factors such as the expertise, ability and experience of our
employees, frequent software product enhancements and the
timeliness and quality of support services are critical to our
success. This success is also dependent, in part, upon our
proprietary technology and other intellectual property rights.
Our products are typically licensed to end-users on a
“right-to-use” basis pursuant to a license that
restricts the use of the products for the customer’s
internal business purposes. In some regions of the world, we
also rely on “click wrap” licenses, which include a
notice informing the end-user that, by installing the product,
the end-user agrees to be bound by the license agreement
displayed on the customer’s computer screen. Despite such
precautions, it may be possible for unauthorized third parties
to copy aspects of, or the whole of, current or future products
or to obtain and use information regarded as proprietary. In
particular, we have licensed the source code of our products to
certain customers for restricted uses under certain
circumstances. We have also entered into source code escrow
agreements with certain customers that generally require the
release of our source code to the customer in the event of our
bankruptcy, insolvency, or discontinuation of our business or
support of a product line, in each case where support and
maintenance of the product line is not assumed by a third party.
The source code for our products is protected both as a trade
secret and as a copyrighted work. We cannot ensure that these
protections will be adequate or that competitors will not
independently develop technologies that are substantially
equivalent or superior to our technology or to technology that
we may acquire or develop in the future.
We believe that our business as we currently conduct it does not
infringe the proprietary rights of third parties. However, third
parties may from time to time assert infringement claims against
us that could require us to enter into royalty arrangements,
result in costly and time consuming litigation, or require us to
cease offering one or more of our products or services.
Employees
As of December 31, 2004, we employed 970 employees,
including 236 in services, 310 in sales and marketing, 291 in
research and development and 133 in general and administrative
functions. Of these employees, 633 were located in the United
States. None of our employees in the United States are
represented by a labor union or are subject to a collective
bargaining agreement. Certain of our international employees are
covered by the customary employment contracts and agreements of
the countries in which they are employed.
Executive Officers
The following table sets forth certain information concerning
our executive officers as of December 31, 2004:
| |
|
|
|
|
| Name |
|
Age |
|
Position |
| |
|
|
|
|
|
Peter Gyenes
|
|
59 |
|
Chief Executive Officer and Chairman of the Board |
|
Peter Fiore
|
|
47 |
|
President |
|
Robert McBride
|
|
60 |
|
Vice President and Chief Financial Officer |
|
Scott Semel
|
|
48 |
|
Vice President, Legal, General Counsel and Secretary |
10
Peter Gyenes has served as the Chairman and Chief
Executive Officer of Ascential since July 2000. Mr. Gyenes
has more than 30 years of experience in sales, marketing
and general management positions within the computer systems and
software industry. Prior to our acquisition of Ardent Software,
Inc. in March 2000, he was chairman, president and Chief
Executive Officer of Ardent, which he joined in May 1996. Before
joining Ardent, he was president and Chief Executive Officer of
Racal InterLan, Inc. Previously, Mr. Gyenes served in
executive sales, marketing, and general management positions at
Prime Computer Inc., Encore Computer and Data General
Corporation (now, part of EMC Corporation). Earlier in his
career, Mr. Gyenes held technical positions with Xerox Data
Systems and IBM. He serves on the boards of Applix Computer
Systems, ViryaNet Ltd. and the Massachusetts Software Council.
Mr. Gyenes received a Bachelor of Arts degree in
Mathematics and a Masters of Business Administration degree from
Columbia University.
Peter Fiore has served as the President of Ascential
since July 2000. Previously Mr. Fiore served as Senior Vice
President of Informix Corporation and President of Ascential
Software, Inc., which was a subsidiary of Informix Corporation
that was later merged into the Company, after serving as the
head of the Informix Business Solutions business unit. Prior to
the acquisition by Informix of Ardent Software, Inc. in March
2000, Mr. Fiore held the position of vice president and
general manager of the data warehouse business unit of Ardent,
which he joined in 1994. Before joining Ardent, Mr. Fiore
directed channel marketing for CrossComm Corporation and held
sales and marketing management positions at Stratus Computer,
Inc. Mr. Fiore received a Bachelor of Arts degree in
Engineering and Applied Sciences from Harvard University.
Robert McBride has served as the Vice President and Chief
Financial Officer of Ascential since June 2001. Mr. McBride
directs our financial, operational and administrative business
functions. He brings more than 30 years of financial and
administrative experience at Fortune 500 information systems
companies to our company. During a 17-year tenure at Data
General Corporation (now part of EMC Corporation), spanning from
September 1983 to January 2000, Mr. McBride served as vice
president, chief administrative officer, corporate controller
and corporate treasurer, among other senior financial management
positions. He also held a variety of senior management positions
in the Information Systems and Finance areas of Burroughs
Corporation and prior to that served as an Infantry Officer in
the U.S. Army. Mr. McBride received a Master’s
Degree in Business Administration from Washington University and
a Bachelor’s Degree in Economics from Ohio Wesleyan
University.
Scott Semel has served as the Vice President, Legal,
General Counsel and Secretary of Ascential since August 2001.
Mr. Semel manages our legal matters, and directs our
worldwide legal department. Mr. Semel has more than
20 years of extensive legal experience, having previously
served as general counsel and corporate secretary to NaviSite,
Inc. from June 2000 through July 2001 and Designs, Inc. from
December 1986 through February 2000. In addition to his
corporate experience, Mr. Semel was previously engaged in
the private practice of law in Boston from 1980 to 1986. He
received a Bachelor of Arts degree, cum laude, from Boston
University and a Juris Doctor degree from New England School of
Law.
Access to SEC Filings
Our SEC filings are available through the SEC web site at
http://www.sec.gov, or through our website at
http://www.ascential.com in the Investors section under SEC
Filings. The annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the “Exchange Act”) are available free of charge
through our Internet web site as soon as reasonably practicable
after they are electronically filed with the SEC.
Our corporate headquarters is situated in a 93,000 square
foot facility in Westborough, Massachusetts. This facility
contains a significant portion of our marketing, finance, sales
and administration functions and a significant portion of our
customer service, manufacturing and research and development
operations. The lease for the Westborough facility expires on
December 31, 2008. In addition, significant parts of our
research and development organizations are housed in facilities
in Los Gatos, California (7,000 square feet), Milton
11
Keynes, United Kingdom (7,000 square feet) and Boca Raton,
Florida (24,000 square feet) and Hyderabad, India (28,000).
These buildings are under lease until March 2007, September
2007, January 2006 and March 2008 respectively. We also lease
office space, principally for sales and support offices, in a
number of facilities in the United States, Canada and outside
North America. As of December 31, 2004, we controlled a
total of approximately 498,000 square feet of office space
and/or research and development space for all our facilities
worldwide.
Approximately 56% of our leased facility square footage is
actively being utilized, 32% of the square footage has been
vacated and the remaining 12% of the square footage is being
sublet. Of all of our leased property, approximately 65% is
located in North America (United States and Canada), 33% is
located in Europe and the remaining 2% is located in the
Asia/Pacific region. Ascential maintains major sales and service
offices in Paris, France (21,000 square feet), which is
under lease until March 2008, Bedfont Lakes, England
(19,000 square feet), which is under lease until September
2008, and Sydney, Australia (3,000 square feet), which is
under lease until March 2008.
We believe that our existing facilities are generally adequate
to meet our business needs through the next twelve months
although growth of our business could create the need for
additional space. We have approximately 157,000 square feet
of vacant space that we are seeking to sublease to third parties
or surrender to landlords. We believe that we have adequately
provided for the lease obligations in excess of expected
sublease income related to these vacant facilities.
|
|
| Item 3. |
Legal Proceedings |
The Company is a defendant in one action filed against Unidata,
Inc., a company that the Company merged with in 1998
(“Unidata”), in May 1996 in the U.S. District
Court for the Western District of Washington, and was previously
a defendant in another action filed 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, alleged in both actions the improper distribution of
certain Unidata products in the plaintiff’s exclusive
territory and asserted damages of approximately
$30.0 million (among other relief) under claims for fraud,
breach of contract, unfair competition, racketeering and
corruption, and trademark and copyright infringement. 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 the Company for
$3.5 million plus attorneys’ fees and expenses
estimated to be approximately $0.8 million.
The Company was also joined as a party in an action in China
filed against Unidata, its former distributor and a customer, by
the same plaintiff who filed the U.S. actions against
Unidata and a related company. This action, filed in the
Guangdong Provincial People’s Superior Court in China,
arose out of the same facts at issue in the U.S. actions.
The Company entered into a settlement agreement with the
plaintiff pursuant to which, among other things, as each of the
actions was dismissed, the underlying license terminated,
certain intellectual property rights were assigned to the
Company by the plaintiff, and the Company was obligated to pay
into escrow, and then have released from escrow to the
plaintiff, certain amounts totaling approximately
$16.0 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 related amounts, if any, paid in
settlement. Subsequently, the China and Denver actions were
dismissed; the plaintiff’s claims in the Washington State
action were dismissed; the license agreement was terminated; and
the intellectual property rights were assigned to the Company as
of the end of the second quarter of fiscal 2002 and the full
amount escrowed was released to plaintiff. During the year ended
December 31, 2002, the Company paid into escrow the entire
amount of the settlement of approximately $16.0 million.
The only remaining claim is by a former licensee of Unidata in
China relating to legal costs it incurred in defending the China
litigation that was dismissed as part of the settlement with the
original plaintiff.
12
From time to time, in the ordinary course of business, the
Company is involved in various other legal proceedings and
claims, including but not limited to those related to the
operations of the former database business and/or asserted by
former employees of the Company relating to their employment or
compensation by the Company. The Company does not believe that
any of these other proceedings and claims will have a material
adverse effect on the Company’s business or financial
condition.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
We did not submit any matters to a vote of security holders
during the fourth quarter of 2004.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock is traded on the NASDAQ National Market under
the symbol “ASCL.” The following table lists the high
and low sales prices of our common stock for the periods
indicated.
| |
|
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
Fiscal Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
| |
Fourth Quarter
|
|
$ |
16.50 |
|
|
$ |
12.90 |
|
| |
Third Quarter
|
|
|
16.02 |
|
|
|
11.13 |
|
| |
Second Quarter
|
|
|
24.01 |
|
|
|
14.51 |
|
| |
First Quarter
|
|
|
28.00 |
|
|
|
19.80 |
|
|
Fiscal Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
| |
Fourth Quarter
|
|
$ |
26.50 |
|
|
|
18.33 |
|
| |
Third Quarter
|
|
|
20.34 |
|
|
|
14.51 |
|
| |
Second Quarter
|
|
|
18.00 |
|
|
|
10.56 |
|
| |
First Quarter
|
|
|
13.16 |
|
|
|
8.64 |
|
On June 17, 2003 we effected a one-for-four reverse split
of our common stock. Accordingly, all per share prices have been
restated as though the reverse stock split had been in effect
for all periods presented.
At February 28, 2005, there were approximately 8,253
stockholders of record of our common stock, as shown in the
records of our transfer agent. Because brokers and other
institutions hold many of such shares on behalf of stockholders,
we are unable to estimate the total number of stockholders
represented by these record holders.
The following table summarizes our share repurchase activity in
the quarter ended December 31, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(d) Maximum | |
| |
|
|
|
|
|
|
|
Number | |
| |
|
|
|
|
|
|
|
(or Approximate | |
| |
|
|
|
|
|
(c) Total Number of | |
|
Dollar Value) of | |
| |
|
|
|
|
|
Shares Purchased as | |
|
Shares that May Yet | |
| |
|
(a) Total Number of | |
|
|
|
Part of Publicly | |
|
Be Purchased Under | |
| |
|
Shares Purchased | |
|
(b) Average Price | |
|
Announced Plans or | |
|
the Plans or | |
| |
|
(1) | |
|
Paid per Share | |
|
Programs | |
|
Programs | |
| |
|
| |
|
| |
|
| |
|
| |
|
October 1 - October 31
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
101,207 |
|
|
November 1 - November 30
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
101,207 |
|
|
December 1 - December 31
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
101,207 |
|
|
Total
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
101,207 |
|
|
|
| (1) |
We publicly announced a $100 million common stock
repurchase program (the “Program”) on April 26,
2001 under which our Board of Directors authorized the
repurchase of common stock. We publicly |
13
|
|
|
announced on July 2, 2001 that the Program was increased
from $100 million to $350 million. Under the Program,
we may repurchase outstanding shares of our common stock from
time to time in the open market and through privately negotiated
transactions. Unless terminated earlier by resolution of our
Board of Directors, the Program will expire when we have
utilized the full amount of funds authorized for repurchase of
shares under the Program. As of December 31, 2004, the
Company has repurchased 17.0 million shares under the
program, at a total cost of $248.8 million. |
|
|
| Item 6. |
Selected Financial Data |
Financial Overview
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and the related notes, and with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” included elsewhere in this report. From 2000
through 2004, we acquired five companies and disposed of the
assets of our database business. In March 2000, we completed the
acquisition of Ardent Software, Inc. (“Ardent”). We
sold the assets of our database business to IBM in July 2001,
(see Note 13 to the Consolidated Financial Statements), and
we acquired Torrent Systems Inc. (“Torrent”) in
November 2001. In April 2002, we acquired Vality Technology,
Inc. In September 2003, we completed our acquisition of Mercator
Software, Inc. (see Note 12 to the Consolidated Financial
Statements). In October 2004 we acquired the assets of iNuCom
(India) Limited and its affiliate iNuCom.com, Inc (collectively
referred to as iNuCom). On June 17, 2003 we effected a
one-for-four reverse split of our common stock. Accordingly, all
earnings per share figures have been restated as though the
reverse stock split had been in effect for all periods presented.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004(1) | |
|
2003(2) | |
|
2002(3) | |
|
2001(4) | |
|
2000(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Net revenues
|
|
$ |
271,879 |
|
|
$ |
185,586 |
|
|
$ |
113,018 |
|
|
$ |
481,332 |
|
|
$ |
929,319 |
|
|
Net income (loss)
|
|
|
14,951 |
|
|
|
15,805 |
|
|
|
(63,573 |
) |
|
|
624,948 |
|
|
|
(98,315 |
) |
|
Preferred stock dividend
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(191 |
) |
|
Net income (loss) applicable to common stockholders
|
|
|
14,951 |
|
|
|
15,805 |
|
|
|
(63,573 |
) |
|
|
624,948 |
|
|
|
(98,506 |
) |
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.25 |
|
|
|
0.27 |
|
|
|
(1.03 |
) |
|
|
9.01 |
|
|
|
(1.38 |
) |
| |
Diluted
|
|
|
0.25 |
|
|
|
0.26 |
|
|
|
(1.03 |
) |
|
|
8.79 |
|
|
|
(1.38 |
) |
|
Total assets
|
|
|
935,073 |
|
|
|
966,079 |
|
|
|
906,250 |
|
|
|
1,079,740 |
|
|
|
655,881 |
|
|
Long-term liabilities
|
|
|
709 |
|
|
|
558 |
|
|
|
— |
|
|
|
28,710 |
|
|
|
787 |
|
|
Retained earnings (accumulated deficit)
|
|
|
232,999 |
|
|
|
218,048 |
|
|
|
202,243 |
|
|
|
265,816 |
|
|
|
(359,132 |
) |
|
|
| (1) |
During 2004, we recorded merger, realignment and other charges
totaling $0.8 million. Also during 2004, we recorded a tax
benefit of $2.4 million resulting from adjustments that
were recorded to reflect the impact of closed tax audits and
changes in estimates resulting from new or additional
information related to certain tax accruals. |
| |
| (2) |
During 2003, we recorded merger, realignment and other charges
totaling $3.9 million. In connection with the acquisition
of Mercator, we recorded a charge of $2.0 million for
in-process research and development that had not yet reached
technological feasibility and had no alternative future use.
Also during 2003 we recorded a net tax benefit of
$16.3 million. This amount includes a benefit of
$25.2 million resulting from adjustments that were recorded
to reflect the impact of closed tax audits, |
14
|
|
|
expiring statutes of limitations for the assessment of tax, and
changes in estimates resulting from additional or new
information related to certain tax accruals. |
| |
| (3) |
During 2002, we recorded merger, realignment and other charges
of $23.7 million. In June 2002, we ceased efforts to find a
buyer for our content management product line and recorded a
$4.5 million charge as cost of software for the impairment
of software costs previously capitalized (see Note 14 to
the Consolidated Financial Statements). During the fourth
quarter of 2002, we recorded impairment losses on long-term,
publicly traded equity investments of $2.2 million. In
connection with the Vality acquisition, we recorded a charge of
$1.2 million for in-process research and development that
had not yet reached technological feasibility and had no
alternative future use. During 2002, we recorded
$3.0 million of adjustments to the gain from the sale of
database business (see Note 13 to the Consolidated
Financial Statements). In 2002, we reversed expense accruals of
$2.8 million and recorded $2.6 million of other income
as a result of the $5.4 million favorable judgment rendered
in a litigation matter. Effective January 1, 2002, we
completed our adoption of Statement of Financial Accounting
Standards No. 142, which required that goodwill and
intangible assets with indefinite lives no longer be amortized,
but instead be tested for impairment at least annually (see
Note 11 to the Consolidated Financial Statements). |
| |
| (4) |
In July 2001, we sold the assets of our database business to IBM
(see Note 13 to the Consolidated Financial Statements)
which resulted in a gain of $865.7 million that was
recorded in 2001. In 2001, we also recorded merger, realignment
and other charges of $54.4 million. In connection with the
Torrent acquisition, we recorded a charge of $5.5 million
for in-process research and development that had not yet reached
technological feasibility and had no alternative future use. In
addition, during 2001, we recorded impairment losses on
long-term investments of $10.2 million, which related to
both publicly-traded and non-marketable investments. |
| |
| (5) |
In 2000, we recorded merger, realignment and other charges of
$126.8 million. |
Selected financial data should be reviewed with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Factors That May
Affect Future Results”.
|
|
| Item 7. |
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 certain
forward-looking statements relating to future events or our
future financial performance which involve risks and
uncertainties. Such forward-looking statements address, for
example expansion of product offerings; expansion of worldwide
distribution through alliances with recognized industry leaders;
our ability to leverage our substantial customer base and the
completeness of our enterprise data integration offerings; our
ability to leverage our global professional services
organization to accelerate the adoption of our product offerings
and provide value-added services to existing customers; costs
associated with continued investment in research and development
and investment in sales and marketing and product support;
continued investments in property and equipment; sufficiency of
Cash (as defined below) and short-term investment balances to
meet working capital requirements, fund research, repurchases of
our common stock, potential acquisitions, facilities, severance,
obligations and restructuring initiatives; effects of exchange
rate fluctuation on future operating results; effects of
termination of relationship with IBM; allowances for doubtful
accounts; increase in prevalence of vendors offering solutions
for various aspects of data integration requirements; growth of
consulting maintenance and education revenue; increase in use of
internal consulting resources; completion of payment of
severance payments and related costs due to Mercator
acquisition; future charges relation to undiscounted Mercator
lease obligations; and facilities costs related to the IBM
transaction.. 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 Annual Report on Form 10-K. The following
discussion and analysis should be read in conjunction with our
consolidated financial statements and related Notes appearing
elsewhere in this report.
15
Overview
Overview. Headquartered in Westborough, Massachusetts
since July 2001, Ascential Software Corporation (“we”,
“our”) is a leading supplier of enterprise integration
solutions to the Global 2000 and other large organizations. We
believe that the Ascential Enterprise Integration Suite, built
upon a highly scalable execution engine, is the industry’s
only single vendor solution to address the full range of
enterprise data integration needs, turning data into
“Intelligent Information” — information that
is reliable, relevant, and complete — so organizations
can make better-informed business decisions and drive their
strategic application initiatives.
We were incorporated in Delaware in 1986 and, until the third
quarter of 2001, operated under the name “Informix
Corporation”. Effective January 1, 2001, we
consolidated our business units into two operating segments:
(i) Informix Software, which operated our database software
systems business, and (ii) Ascential Software, which
operated our extract, transform and load (“ETL”) and
digital asset management software and solutions business. During
the third quarter of 2001, we completed the sale of our database
business assets, including the name “Informix”, to IBM
for $1.0 billion in cash, which we refer to as the
“IBM Transaction” (see Note 13 to the
Consolidated Financial Statements). In connection with the IBM
Transaction, we changed our name to “Ascential Software
Corporation” and changed the symbol under which our stock
is traded on the NASDAQ National Market to “ASCL”.
These changes became effective in July 2001. Since that time,
our sole operating segment has been our Ascential Software
business, which no longer includes digital asset management
products, but has expanded to embrace a full range of enterprise
data integration solutions.
Our products for automated data profiling, data quality
management and cleansing, and data transformation address the
needs of organizations that have invested in enterprise
applications such as customer relationship management
(“CRM”), enterprise resource planning
(“ERP”), supply chain management (“SCM”),
analytic applications, transactional environments, or data
stores such as data warehouses and data marts.
We have combined the functionality of all of our core
integration services onto a single enterprise data integration
platform that provides end-to-end meta data management. Our
integration platform provides definition and history of the data
used to drive strategic enterprise applications. It also
provides connectivity between virtually any standard data source
and target application, and virtually unlimited scalability and
performance through our parallel processing engine. This
complete offering is called the Ascential Enterprise Integration
Suite.
We also offer a full range of consulting, educational and
support services to assist our clients through all phases of a
project. Based on demonstrated methodologies, these services
represent years of accumulated capital in terms of knowledge and
experience, gained through many successful engagements across a
range of industries and enterprise application requirements.
We support more than 3,000 customers in such industries as
financial services and banking, insurance, healthcare, retail,
manufacturing, consumer packaged goods, telecommunications and
government, in all major markets around the world. One of our
resellers, IBM, accounted for 11% of our revenues in 2002. In
2004 and 2003, no single customer accounted for more than 10% of
our revenue. Termination of our relationship with IBM, if it
were to occur, could have a negative impact on our financial
results if the revenue were not replaced.
Enterprises are faced with managing the significant growth of
data and obtaining a more accurate view of the factors that
impact their performance. Enterprises are also coping with the
requirement to access data from an increasing number of
disparate sources of data which frequently contain incomplete,
inaccurate, inconsistent or duplicate information. We believe
these organizations want to be able to use the data efficiently
and effectively to increase their revenue and market share,
decrease operating costs and improve asset utilization. Our
overall business strategy is to establish and maintain Ascential
Software Corporation as the leader in the enterprise data
integration market by delivering what we believe to be the
industry’s most comprehensive data integration product
solution. We seek to accomplish this, in part, by continuing to
expand
16
our product offerings through internal development and strategic
technology and business acquisitions. We are focused on efforts
to accelerate revenue growth by leveraging our substantial
customer base and the completeness of our enterprise data
integration offerings, and by expanding our worldwide
distribution through alliances with recognized industry leaders.
We also intend to leverage our global professional services
organization to accelerate the adoption of our product offerings
and provide a variety of value-added services to our existing
customers.
We use a number of key metrics internally to track our progress
against these objectives. We measure and track the number of new
customers signed each quarter, the number of our customers
constituting Fortune 500 and Global 2000 companies, and the
amount of incremental revenue generated from new projects within
our existing installed base. We monitor the success of our
strategic alliances by reviewing the revenue generated from
these relationships and the number of license deals and revenue
generated or influenced by third parties, on a quarterly basis.
In order to ensure that spending is consistently monitored and
resources are used appropriately, we track revenue, headcount,
and spending on a weekly basis. We regularly review relevant
margin metrics, including license margins, maintenance margins,
professional service margins, total service margins and
operating margins. In addition, in order to maximize cash flow
and to identify customer payment issues on a timely basis, we
closely monitor cash collections and accounts receivable days
sales outstanding (“DSO”).
On January 22, 2002, our Board of Directors endorsed the
decision to divest our content management product line because
it did not align with our strategic goals. We engaged an
investment bank to assist in the divestiture process and sought
potential buyers for the product line during the six months
ended June 30, 2002. In June 2002, we ceased efforts to
find a buyer for the product line as no interested buyers were
identified and terminated the related operations, except for the
completion of previously committed consulting and support
contracts. As a result, in June 2002 we recorded a charge
totaling $7.3 million consisting of $4.5 million
charged to “Cost of software” for the impairment of
software costs previously capitalized and $2.8 million
charged to “Merger, realignment and other charges” for
severance costs, computer equipment impairment costs and
professional fees incurred in connection with efforts to sell
the product line. There are no remaining contractual customer
support obligations related to this product line.
On September 12, 2003, we completed the acquisition of
Mercator Software, Inc. (“Mercator”). The aggregate
cash purchase price for all of the common stock of Mercator was
approximately $94.9 million, net of $14.4 million of
cash acquired from Mercator. In addition, all outstanding
options to purchase shares of Mercator common stock were
converted into options to purchase shares of our common stock,
subject to certain adjustments.
On January 27, 2004, we entered into a software purchase
agreement with Phoenix Software International, Inc. pursuant to
which we sold the rights to our Key/Master data entry software
product line, obtained through our acquisition of Mercator.
Accordingly, at December 31, 2003, this technology was
recorded as an asset held for sale, as a component of other
assets, at a fair market value of $6.8 million. The total
sales price of $6.8 million was received in the quarter
ended March 31, 2004.
Products and Services
Our products are designed to operate as part of the Ascential
Enterprise Integration Suite, or as stand-alone integration
components. Our product functionality includes: automated data
profiling to analyze and manage source data content and
structure; data quality and cleansing to identify, correct and
reconcile inaccurate, misdirected, or redundant data; and data
transformation to obtain data from a source, format it as
required for its intended purpose, and deliver it to a specified
target system. Our products are supported by a comprehensive
platform of integration services that delivers end-to-end meta
data management, connectivity between virtually any standard
data source and application, and virtually unlimited scalability
through use of parallel execution technology. These applications
may be deployed in any configuration to support event-driven or
scheduled processing, as well as deployed as enterprise web
services that are called on demand by a service-oriented
application. This combination of integration products built on a
platform of integration services forms the Ascential Enterprise
Integration Suite.
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The Ascential Enterprise Integration Suite is a complete and
scalable data integration solution that delivers comprehensive
data profiling, data quality, and data transformation
capabilities. Built on a platform of common services for meta
data management and parallel processing, the Ascential
Enterprise Integration Suite supports discovery of the data
contained within corporate data sources, standardization and
cleansing of this data, matching and merging records across
sources, and transformation of the data, regardless of its
complexity. It provides these services for transactional,
operational and analytical data, and supports integration on
demand in a service-oriented architecture. The Ascential
Enterprise Integration Suite offers a comprehensive, modular
solution that can expand with business needs or as customer
budgets dictate. We believe our customers benefit from the
ability to deploy the complete Ascential Enterprise Integration
Suite to address the entire enterprise data integration life
cycle, or use individual integration products and add other
components as needed. This approach allows customers to achieve
complete integration through application of the entire Ascential
Enterprise Integration Suite, or to realize targeted benefits
through application of one or more components of the Ascential
Enterprise Integration Suite, with the ability to later add the
other components to create a single, integrated solution.
Critical Accounting Policies
We have prepared our consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America. In preparing our financial statements,
we make estimates, assumptions and judgments that can have a
significant impact on our reported revenues, results from
operations, and net income (loss), as well as on the value of
certain assets and liabilities on our balance sheet. These
estimates, assumptions and judgments about future events and
their effects on our results cannot be determined with
certainty, and are made based on our historical experience and
on other assumptions that are believed to be reasonable under
the circumstances. These estimates may change as new events
occur or additional information is obtained, and we may
periodically be faced with uncertainties, the outcomes of which
are not within our control and may not be known for a prolonged
period of time. While there are a number of accounting policies,
methods and estimates affecting our financial statements
described in Note 1 to the Consolidated Financial
Statements, the areas that we believe to be our most critical
accounting policies include revenue recognition, allowance for
doubtful accounts, software development costs, business
combinations, goodwill and intangible assets, income taxes and
merger, realignments and other charges. These areas are
described below. A critical accounting policy is one that is
both material to the presentation of our financial statements
and requires us to make difficult, subjective or complex
judgments that could have a material effect on our financial
condition and results of operations. Critical accounting
policies require us to make assumptions about matters that are
uncertain at the time of the estimate, and different estimates
that we could have used, or changes in the estimate that are
reasonably likely to occur, may have a material impact on our
financial condition or results of operations. Because the use of
estimates is inherent in the financial reporting process, actual
results could differ from those estimates.
We derive revenues from two primary sources:
(1) software license revenues and (2) services
revenues, which include maintenance, consulting and education
revenues. While the basis for software license revenue
recognition is substantially governed by the provisions of
Statement of Position (“SOP”) No. 97-2,
Software Revenue Recognition, issued by the American
Institute of Certified Public Accountants
(“SOP 97-2”), in the application of this standard
we exercise judgment and use estimates in connection with the
determination of the amount of software license and services
revenues to be recognized in each accounting period.
We sell software using primarily two types of licenses:
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(1) Perpetual licenses: software licensed on a perpetual
basis to a fixed number of users with no right to return the
licensed software; and |
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(2) Enterprise licenses: software licensed on either a
perpetual or term basis to a customer as opposed to a fixed
number of users, with no right to return the licensed software. |
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Our software license arrangements do not include significant
modification or customization of the underlying software, and as
a result, we recognize license revenue when: (1) persuasive
evidence of an arrangement exists; (2) delivery has
occurred; (3) customer payment is deemed fixed or
determinable; and (4) collection is probable. Substantially
all of our license revenues are recognized in this manner. We
define each of the four criteria as follows:
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Persuasive evidence of an arrangement exists: It is our
customary practice to have a written contract, which is signed
by both the customer and us, or a purchase order from those
customers that have previously negotiated a standard end-user
license arrangement or a purchase order with negotiated
governing terms or volume purchase agreement, prior to
recognizing revenue on an arrangement. Sales to resellers are
evidenced by purchase orders submitted to us under a master
agreement governing the terms of the relationship. Certain
reseller arrangements are structured as royalty agreements in
which royalties as a percent of either list price or net sales
price are due to us upon product shipment to the end-user
customer. Evidence of arrangement in these circumstances
consists of request for shipment, or notification of shipment
for resellers who ship duplicates directly to end-user customers
from a master copy. |
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Delivery has occurred: Software is delivered either through
electronic delivery or physically on a compact disk using
standard free-on-board shipping point terms in which title and
risk of loss transfer to the customer upon shipment. For some
existing customers, delivery may occur when the customer has
been provided access codes if the newly purchased software is
already contained on a previously delivered compact disk. It is
uncommon for us to offer a specified upgrade to an existing
product; however, in such instances, revenue is deferred until
the upgrade is delivered. Our software solutions continue to be
distributed primarily through our direct sales force; however,
our indirect distribution channel continues to broaden through
alliances with resellers and referral partners Revenue
arrangements with resellers are recognized when we receive
evidence that the reseller has an order from an end-user
customer. This evidence may take a variety of forms, including
(1) a copy of the purchase order or contract identifying an
end-user customer, or (2) a royalty or sell-through report
from the reseller, or other documented, objective evidence of
product shipment. We do not typically offer our resellers
contractual rights of return, stock balancing, or price
protection. |
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The customer’s payment is deemed fixed or determinable: We
assess whether fees are fixed or determinable and free of
contingencies or significant uncertainties at the time of sale
and recognize revenue if all other revenue recognition
requirements are met. While our standard payment terms are net
30 days, we have a practice of occasionally providing
extended payment terms of less than one year on high-dollar
sales to creditworthy customers. We have established a history
of collection, without concessions, on these receivables. |
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Collection is probable: Likelihood of collection is assessed on
a customer-by-customer basis. Both new and existing customers
are subjected to a credit review process that evaluates the
customers’ financial position and ultimately their
respective ability to pay. If it is determined at the outset of
the arrangement that collection is not probable based upon our
credit review process, revenue is recognized on a cash-collected
basis. |
Our license arrangements generally do not include acceptance
provisions. However, if acceptance provisions exist, for
example, in agreements with government entities when acceptance
periods are required by law, or within previously executed
agreements that we are not able to renegotiate, revenue is
recognized upon the earlier of receipt of written customer
acceptance, expiration of the acceptance period or final payment.
Many of our software arrangements include consulting services
sold separately under consulting engagement contracts that
generally include implementation, network configuration, and
optimization services. These services are often provided
completely or partially by independent, third-party system
integrators experienced in providing such consulting and
implementation in coordination with dedicated customer
personnel. Revenues from these arrangements are generally
accounted for separately from the license revenue because the
services are “not essential to the functionality” of
the software as defined in SOP 97-2. The more significant
factors considered in determining whether the revenue should be
accounted for separately include
19
the nature of services (i.e., whether the services are essential
to the functionality of the licensed product), degree of risk,
availability of services from other vendors, timing of payments
and impact of milestones or acceptance.
We account for software license revenues included in multiple
element arrangements using the residual method prescribed in
Statement of Position 98-9, Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions. Under the residual method, the fair value of the
undelivered elements (i.e., maintenance, consulting, and
education services) based on vendor specified objective evidence
(“VSOE”) is deferred and the remaining portion of the
arrangement fee is allocated to the delivered elements
(i.e., software license). If evidence of the fair value of
one or more of the undelivered elements does not exist, revenues
are deferred and recognized when delivery of those elements
occurs or the fair value can be established. We determine the
VSOE of fair value for professional services revenues based upon
our recent pricing for those services when sold separately. VSOE
of the fair value of maintenance services is typically based on
a substantive maintenance renewal clause, if any, within a
customer contract or based on our recent pricing for those
services when sold separately. Our current pricing practices are
influenced primarily by market conditions, product type,
purchase volume, maintenance term, and geography. Significant
incremental discounts offered in multiple element arrangements
that would be characterized as separate elements are infrequent
and are allocated to software license revenues under the
residual method.
Maintenance services include rights to upgrades (when and if
available) telephone support, updates, and bug fixes.
Maintenance revenue is recognized ratably over the term of the
maintenance contract on a straight-line basis when all revenue
recognition requirements are met.
Consulting revenues are recognized as the services are performed
on a time and materials basis. Consulting revenues for
fixed-priced contracts are recognized using percentage of
completion accounting, as described below. If there is a
significant uncertainty about the project completion or receipt
of payment for the consulting services, revenue is deferred
until the uncertainty is sufficiently resolved. Reimbursements
of out-of-pocket expenditures incurred in connection with
providing consulting services are included in services revenue
with the offsetting expense recorded in cost of services revenue.
Education services include on site, web-based and classroom
training and self-evaluation. Education revenues are recognized
as the related training services are provided. Reimbursements of
out-of-pocket expenditures incurred in connection with providing
education services are included in education revenue with the
offsetting expense recorded in cost of education revenue.
We estimate the percentage of completion on contracts with fixed
or “not to exceed” fees on a monthly basis utilizing
hours incurred to date as a percentage of total estimated hours
to complete the project. If we do not have a sufficient basis to
measure progress towards completion, revenue is recognized when
we receive final acceptance from the customer. When total cost
estimates exceed revenues, we accrue for the estimated losses
when known based upon an average fully burdened daily rate
applicable to the consulting organization delivering the
services. The use of the percentage-of-completion method of
accounting requires significant judgment relative to estimating
total contract costs, including assumptions relative to the
length of time to complete the project, the nature and
complexity of the work to be performed, and anticipated changes
in salaries and other costs. When adjustments in estimated
contract costs are determined, such revisions may have the
effect of adjusting in the current period the earnings and
revenue applicable to performance in prior periods.
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Allowance for Doubtful Accounts |
Management judgment is required in assessing the collection
certainty of customer accounts and other receivables, for which
we generally do not require collateral. We maintain allowances
for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. Management
specifically analyzes individual accounts receivable, historical
bad debts, customer concentrations, customer credit-worthiness,
current economic and accounts receivable aging trends and
changes in customer payment patterns.
20
If the financial condition of our customers were to deteriorate,
additional allowances might be required, resulting in future
operating expenses that are not included in the allowance for
doubtful accounts. Concentration of credit risk with respect to
trade receivables is not significant.
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Software Development Costs |
We account for software development costs in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed.
SFAS No. 86 specifies that costs incurred internally
in creating a computer software product should be charged to
expense when incurred as research and development costs until
technological feasibility has been established for the product.
Once technological feasibility is established, all development
costs should be capitalized until the product is available for
general release to customers.
We achieve technological feasibility for each product upon
completion of a detailed program in which (1) we have
established that the necessary skills, hardware and software
technology are available to us to produce the product,
(2) the completeness of the detailed program design has
been confirmed by documentation and tracing the design to
product specifications, and (3) the detailed program design
has been reviewed for high-risk development issues (for example,
novel, unique, unproven function and features or technological
innovations), and any uncertainties related to identified
high-risk development issues have been resolved through coding
and testing. Significant judgment is required in determining
technological feasibility and the estimated life over which
related capitalized costs will be amortized. We currently
amortize capitalized costs on a straight line basis over the
estimated useful lives of the respective products, generally
three years. We have determined that this method results in
greater amortization than if the capitalized costs were
amortized on the basis of each product’s projected revenue
stream.
In addition, capitalized software costs must be carried at the
lower of cost or net realizable value. Therefore, if the
estimated future operating profits related to a product do not
exceed the related capitalized software development costs, then
an impairment charge will be recorded to reduce the value of the
capitalized software development costs to its net realizable
value. If there are significant changes to the development
process or product strategy, it could materially impact the net
realizable value of the previously capitalized costs and the
amount of future costs that are capitalized.
The purchase price of businesses acquired, accounted for as
purchase business combinations, is allocated to the tangible and
intangible assets acquired based on their estimated fair values
with any amount in excess of such allocations designated as
goodwill, in accordance with SFAS No. 141, Business
Combinations. Significant management judgment and
assumptions are required in determining the fair value of
acquired assets and liabilities, particularly acquired
intangibles. For example, it is necessary to estimate the
portion of development efforts that are associated with
technology that is in process and has no alternative future use.
The valuation of purchased intangibles is based upon estimates
of the future performance and cash flows from the acquired
business. If different assumptions are used, it could materially
impact the purchase price allocation and our financial position
and results of operations. Significant judgment is also required
in determining the estimated useful life of the identified
intangibles acquired. In making this determination we consider
the guidance of SFAS 142, which requires amortization of an
intangible asset based upon the pattern in which the
asset’s economic benefits are consumed. We consider, among
other things, long range forecasts and an assessment of the
economic benefit of acquired intangibles. We have concluded that
an accelerated amortization method could not be reliably
determined and accordingly, our identifiable intangible assets
are being amortized on a straight-line basis over their
estimated useful life.
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Goodwill and Intangible Assets |
We assess the impairment of goodwill and identifiable assets on
at least an annual basis and whenever events or changes in
circumstances indicate that the carrying value of the asset may
not be recoverable. Factors we consider important that could
trigger an impairment review include significant underperformance
21
relative to the historical or projected future operating
results, significant changes in the manner of use of the
acquired assets or the strategy for our overall business,
significant negative industry or economic trends, a significant
decline in our stock price for a sustained period, or a
reduction of our market capitalization relative to our net book
value.
We account for goodwill and other intangible assets in
accordance with SFAS 142, Goodwill and Other Intangible
Assets. The goodwill impairment test prescribed by
SFAS No. 142 requires us to identify reporting units
and to determine estimates of the fair values of our reporting
units as of the date we test for impairment. We have two
reporting units which are currently the same as our operating
segments, — Ascential Software and Informix
Software — as described in Note 9 to Consolidated
Financial Statements. All goodwill is attributable to our
Ascential Software reporting unit. To conduct these tests of
goodwill, the fair value of the reporting unit is compared to
its carrying value. If the reporting unit’s carrying value
exceeds its fair value, we record an impairment loss to the
extent that the carrying value of goodwill exceeds its implied
fair value. We estimate the fair value of our reporting units
using discounted cash flow valuation models. Those models
require estimates of future revenues, profits, capital
expenditures and working capital for each unit. We estimate
these amounts by evaluating historical trends, current budgets,
operating plans and industry data.
We conduct our annual impairment test of goodwill and
indefinite-lived assets as of December 1st of each
fiscal year. There can be no assurance that, at the time
subsequent impairment reviews are completed, an impairment
charge will not be recorded in light of the factors described
above. If a charge were deemed necessary in the future, it would
directly affect net income (loss) for the period in which the
charge is taken.
For long-lived assets and identifiable intangible assets other
than goodwill and indefinite-lived assets, we assess the
recoverability of the asset on projected undiscounted cash flows
over the asset’s remaining life whenever events or changes
in circumstances indicate that the carrying value of the asset
may not be recoverable. When the carrying value of the asset
exceeds its undiscounted cash flows, we record an impairment
loss equal to the excess of the carrying value over the fair
value of the asset, determined using projected discounted future
cash flows of the asset. Determining the fair value of goodwill
and intangible assets includes significant judgment by
management. Different judgments could yield different results.
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Significant management judgment is required in determining the
provision for income taxes, deferred income taxes and
liabilities and any valuation allowance recorded against net
deferred tax assets. In preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
estimating our actual current tax liability, together with
assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we
believe that it is more likely than not that all or a portion of
deferred tax assets will not be realized, we must establish a
valuation allowance as a charge to income tax expense. In fiscal
2004, we continued to significantly reserve our deferred tax
assets, primarily related to net operating loss carryforwards
generated in prior periods. The establishment of a deferred tax
valuation allowance requires considerable judgment. If the
realization of deferred tax assets in the future is considered
more likely than not, a reduction in the valuation allowance
would increase net income in the period such determination is
made. We maintain reserves related to prior years’ income
taxes for uncertainties in the tax treatment of certain items in
various tax jurisdictions, particularly as they relate to
disposed operations. These tax reserves are maintained until
such time as we resolve the tax treatment of these items via the
completion of tax audits, expiration of the statute of
limitations for the assessment of tax, or additional factual
development or discovery which results in a change in estimate.
Management judgment is required to assess the probability and
amount of the tax reserves, and our estimates are continually
re-evaluated and updated each reporting period to reflect
current information. If our estimates prove to be inaccurate, we
would need to make changes in these estimates that would
materially affect our results of operations and our financial
condition.
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Merger, Realignment and Other Charges |
We periodically record restructuring charges resulting from
restructuring our operations (including consolidations and/or
relocations of operations), changes in our strategic plan, or
managerial responses to declines in demand, increasing costs or
other environmental factors. The determination of restructuring
charges requires management judgment and may include costs
related to employee benefits, such as costs of severance and
termination benefits, and costs for future lease commitments on
abandoned facilities, net of estimated sublease income. In
determining the amount of the facilities charge, we are required
to estimate such factors as future vacancy rates, the time
required to sublet properties and sublease rates. These
estimated amounts are be reviewed and potentially revised
quarterly based on known real estate market conditions and the
creditworthiness of subtenants, and may result in revisions to
established facility reserves. If our sublease assumptions prove
to be inaccurate, we may need to make changes in these estimates
that would affect our results of operations and potentially our
financial condition.
Results of Operations
References to “Ascential Software” in this report
refer to our existing enterprise integration business. Reference
to “Informix Software” refer to our legacy database
business assets sold to IBM on July 1, 2001 in the
IBM Transaction. References to “Ascential Software
Corporation” refer to Ascential Software and Informix
Software on a combined basis.
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Executive Overview of Results of Operations —
Ascential Software Corporation |
The following table compares key financial metrics for the years
ended December 31, 2004, 2003 and 2002.
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Years Ended December 31, | |
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2004 | |
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2002 | |
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License revenue (in millions)
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110.2 |
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92.6 |
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59.6 |
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Total revenue (in millions)
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271.9 |
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185.6 |
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|
|
113.0 |
|
|
Gross margin
|
|
|
68 |
% |
|
|
70 |
% |
|
|
54 |
% |
|
Services margin
|
|
|
57 |
% |
|
|
57 |
% |
|
|
38 |
% |
|
Operating margin
|
|
|
2 |
% |
|
|
(7 |
)% |
|
|
(90 |
)% |
|
Ending headcount(5)
|
|
|
970 |
|
|
|
856 |
|
|
|
639 |
|
|
Average license revenue per quota carrying sales representative
(in thousands)(1)
|
|
$ |
1,225 |
|
|
$ |
1,381 |
|
|
$ |
764 |
|
|
Revenue per employee (in thousands)(2)
|
|
$ |
297 |
|
|
$ |
251 |
|
|
$ |
163 |
|
|
Average license selling price (in thousands)(3)
|
|
$ |
148 |
|
|
$ |
121 |
|
|
$ |
98 |
|
|
Days sales outstanding(4)
|
|
|
65 |
|
|
|
59 |
|
|
|
72 |
|
|
|
| (1) |
Average license revenue per quota carrying sales representative
is calculated for each quarterly period during the year using
license revenue divided by the number of sales representatives
with sales quotas at the end of the respective period. The sum
of the four quarters calculations represents the total for the
respective annual period. |
| |
| (2) |
Calculated using total revenue divided by average number of
employees for the respective period. |
| |
| (3) |
Calculated as total license revenue from transactions greater
than $25,000 in license revenue, divided by total number of
those transactions for the period. |
| |
| (4) |
Calculated by dividing net accounts receivable as of the balance
sheet date, by the quotient determined by dividing the
respective year’s fourth quarter revenue by ninety days.
Accounts receivable and deferred revenue are reduced for certain
amounts for which revenue has not been recognized. At
December 31, 2004, accounts receivable has been reduced for
amounts sold under a receivables purchase agreement as described
in “Liquidity and Capital Resources” and Note 2
to the Consolidated Financial Statements. |
23
|
|
| (5) |
Headcount at December 31, 2003 includes approximately
400 employees acquired from Mercator on September 12,
2003 less approximately 150 terminations during the third
and fourth quarters of 2003. The expense associated with these
employees and their activities only impacted 15 weeks of
the year ended December 31, 2003, therefore headcount at
June 30, 2003 of 614 is used for comparison purposes in our
analysis of expenses for the year ended December 31, 2003
in the following discussion. |
During the year ended December 31, 2004, our total revenue
growth was 46%, with 19% growth in license revenue, compared
with the prior year. This overall growth was achieved primarily
through a higher average sales price on license transactions, an
expanded maintenance base including those customers acquired in
the Mercator transaction, and an expanded professional services
business. Our average license selling price, defined throughout
this Annual Report on Form 10-K to include transactions
yielding more than $25,000 in license revenue, increased by 22%
during 2004 compared to 2003. This increase was driven by sales
of our expanded product set into Fortune 500 companies and
was positively impacted by sales of Ascential DataStage TX,
the evolution of technology acquired in the Mercator
acquisition. The decline in our average license revenue per
quota carrying sales representative is a result of the addition,
on a net basis, of 15 new sales representatives in the
first half of 2004 who became gradually more productive
throughout the later part of the year. During 2004 we were
impacted by an economic environment in which companies were very
cautious in spending, particularly for the enterprise-scale
projects in which we are often involved. The prevalence of
vendors offering solutions for various aspects of data
integration requirements appears to be increasing, causing
customers to require more time to evaluate the various
alternatives available to fulfill their requirements. However,
our sales pipeline has grown as data integration has become a
strategic focus for many organizations.
The revenue growth that we have experienced, combined with the
results of business management efforts and elimination of
merger-related costs, enabled us to improve operating margin
from (7%) in 2003 to 2% in 2004. The services margin remained
flat at 57%. License revenue represented 41% of total revenue in
2004 compared to 50% of total revenue in 2003, thereby causing a
decline in our total gross margin.
During 2003, we made significant progress toward our long term
goals for operating performance. We achieved 64% growth in total
revenue, with 55% growth in license revenue. This was
achieved by a substantial improvement in the productivity of our
sales force, by leveraging new product deployment into our
existing customer base, and includes revenue attributable to
products obtained through the Mercator acquisition totaling
$22.0 million in the last month of the third quarter and
the entire fourth quarter of 2003. Even without the benefit of
the revenue achieved from products and services associated with
the Mercator acquisition, our revenue growth was 45%. Our
expanded product set also increased average license selling
price by 23%. This revenue growth, combined with the results of
cost control efforts, enabled us to improve all margin metrics
that we measure. Our gross margin for 2003 improved to
$130.2 million, or 70% of total revenue, compared to
$61.6 million, or 54% of revenue, during 2002. This
increase was driven by the license revenue growth that we
experienced and a 50% improvement in our services margins. The
services margin improvement was a result of an expanded
maintenance base as well as more profitable and extensive
consulting engagements. Our operating margin improved from (90%)
in 2002 to (7%) in 2003. Of this improvement, more than half
resulted from a reduction of costs related to termination of
businesses and product lines and merger or realignment
activities; with the remainder resulting from the leverage
afforded by the revenue growth and adjusted cost structure. We
continued to maximize our cash flow from customer sales by
reducing our days sales outstanding in 2003 by 13 days as
compared to 2002.
24
The following table and discussion compares our revenue by type
for the years ended December 31, 2004, 2003 and 2002 (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
License revenue
|
|
$ |
110.2 |
|
|
$ |
92.6 |
|
|
$ |
59.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
Service revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Maintenance revenue
|
|
|
94.6 |
|
|
|
55.1 |
|
|
|
30.0 |
|
| |
Consulting and education revenue
|
|
|
67.1 |
|
|
|
37.9 |
|
|
|
23.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total service revenue
|
|
|
161.7 |
|
|
|
93.0 |
|
|
|
53.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
271.9 |
|
|
$ |
185.6 |
|
|
$ |
113.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
License revenue as a percent of total revenue
|
|
|
41 |
% |
|
|
50 |
% |
|
|
53 |
% |
|
Service revenue as a percent of total revenue
|
|
|
59 |
% |
|
|
50 |
% |
|
|
47 |
% |
License revenue. License revenue for the year ended
December 31, 2004 increased 19% to $110.2 million from
$92.6 million for the year ended December 31, 2003.
This $17.6 million increase was primarily the result of a
22% increase in the average price of license sold in
transactions. We believe that this reflects increased adoption
of our expanded product suite. We experienced this increase
worldwide, although the largest impact came from an increase in
the average selling price of international license transactions.
In 2004 we also experienced a 54% increase in the average
selling price of transactions in which our products were resold
by strategic partners, with the number of those transactions
declining 29%. The volume of transactions entered into directly
with end user customers (including those influenced, but not
resold, by strategic partners) increased 28% in 2004 while the
average price of those transactions declined 2% principally due
to the inclusion, in 2003, of three license transactions
generating an aggregate $8.1 million of license revenue,
while 2004 did not have a similar concentration of sales. The
average license selling price during 2004 in transactions with
both new and existing customers continued to increase by 41% and
13%, respectively as compared to 2003. The volume of
transactions sold to new customers increased 7% while the volume
of transactions sold to existing customers decreased 6%. We
continue to focus both on increasing sales to our existing
customer base and new customers as well as increasing overall
market reach through strategic partners.
During 2004 we were impacted by an economic environment in which
companies were very cautious in spending, particularly for the
enterprise-scale projects in which we are often involved. The
prevalence of vendors offering solutions for various aspects of
data integration requirements appears to be increasing,
resulting in customers requiring more time to evaluate the
various alternatives available to fulfill their requirements.
However, our sales pipeline has grown as data integration has
become a strategic focus for many organizations.
License revenue for the year ended December 31, 2003
increased 55% to $92.6 million from $59.6 million for
the year ended December 31, 2002. This $33.0 million
increase was a result of an 81% improvement in sales force
license productivity on a worldwide basis, measured as total
license revenue divided by the average number of quota carrying
sales reps during the year. We experienced this productivity
improvement principally in our North America and Europe sales
regions driven by increases in both price and volume of products
sold, including a $7.4 million contribution to license
revenue from Mercator products. The number of license
transactions increased 30% from 2002 to 2003 principally because
of an increase in transactions conducted directly with existing
customers. The average selling price of licensed software
increased 24% from the year ended December 31, 2002 to the
year ended December 31, 2003. We experienced an increase in
average selling price principally in transactions conducted
directly with existing customers due to (1) an expanded and
higher priced product offering following the addition of
products and technology acquired from Torrent Systems Inc.
(“Torrent”), Vality Technology Incorporated
(“Vality”), Metagenix, Inc. (“Metagenix”)
and Mercator that were integrated into the Ascential Enterprise
Integration Suite, (2) the
25
release of enhancements to existing products and new products
during the second half of 2002 and the third quarter of 2003,
and (3) three significant license transactions during 2003
that collectively generated $8.1 million in license
revenue. License revenue under our reseller agreement with IBM
increased $3.5 million or 32% as compared to 2002.
Service revenue. Total service revenue for the year ended
December 31, 2004 increased by $68.7 million, or 74%,
to $161.7 million from $93.0 million for the year
ended December 31, 2004.
Maintenance revenue increased by $39.5 million, or 72%, to
$94.6 million in year ended December 31, 2004 from
$55.1 million in the year ended December 31, 2003. The
increase in maintenance revenue is attributable primarily to the
installed base of customers acquired from Mercator as well as
the increase in our installed base of customers following the
license growth experienced during 2003 and 2004.
Consulting and education revenue increased by
$29.2 million, or 77%, to $67.1 million in the year
ended December 31, 2004 from $37.9 million in the same
period of 2003. The increase in consulting and education revenue
correlates to an increase in the volume and average size of
consulting engagements worldwide following the growth of license
revenue experienced during 2003 and 2004 and includes revenue
totaling $16.7 million from two customers. Consulting
revenue in 2003 included revenue totaling $8.1 million from
two customers. We believe the growth of our professional
services business reflects increased customer adoption of our
products and expanded deployment of our offerings. Additionally,
our consulting engagements have increasingly extended throughout
our enterprise customers rather than a single department or
division within an enterprise. We expect that future growth of
consulting, maintenance and education revenue, barring
unforeseen circumstances, will be largely dependent on the
growth of license revenue.
Total service revenue for the year ended December 31, 2003
increased 74% to $93.0 million from $53.4 million for
the year ended December 31, 2002.
Maintenance revenue increased by $25.1 million, or 84%, to
$55.1 million in 2003 from $30.0 million for 2002. The
increase in maintenance revenue is attributable to the growing
installed base of customers, including customers acquired from
Mercator who collectively contributed $11.3 million to the
increase. The remaining increase of $13.8 million or 46%
corresponds with the 55% increase in license revenue in the same
period. The increase in maintenance revenue is net of an
$0.8 million decline in maintenance revenue from the
content management product line that was terminated in the
second quarter of 2002.
Revenue derived from consulting and education increased
$14.5 million, or 62%, to $37.9 million in the year
ended December 31, 2003 from $23.4 million in the same
period of 2002. The increase in consulting and education revenue
is attributable to an increase in the volume of and the average
size of consulting engagements, principally in North America and
Europe, associated with the increased penetration of those
geographic areas and the expansion of our product offering
discussed above. With the addition of products to our product
set over the past two years, consulting engagements generally
have become more extensive and have expanded across enterprises
where they were previously focused on departments within
enterprises. The overall increase in consulting and education
revenue corresponds to the 55% increase in license revenue over
the same period and was impacted by two large consulting
engagements in Europe during 2003 that together contributed
$8.1 million to the growth. The overall increase is net of
a $0.4 million decline in consulting and education revenue
from content management products.
26
The following table and discussion compares our costs and
expenses for the years ended December 31, 2004, 2003 and
2002 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cost of licenses
|
|
$ |
16.8 |
|
|
$ |
15.3 |
|
|
$ |
18.3 |
|
|
Cost of services
|
|
|
70.1 |
|
|
|
40.1 |
|
|
|
33.1 |
|
|
Sales and marketing
|
|
|
110.6 |
|
|
|
79.9 |
|
|
|
73.1 |
|
|
Research and development
|
|
|
39.3 |
|
|
|
27.5 |
|
|
|
24.0 |
|
|
General and administrative
|
|
|
28.2 |
|
|
|
30.8 |
|
|
|
41.1 |
|
|
In-process research and development
|
|
|
— |
|
|
|
2.0 |
|
|
|
1.2 |
|
|
Merger, realignment and other charges
|
|
|
0.8 |
|
|
|
3.9 |
|
|
|
23.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$ |
265.8 |
|
|
$ |
199.5 |
|
|
$ |
214.5 |
|
| |
|
|
|
|
|
|
|
|
|
Cost of licenses. Cost of licenses consists primarily of:
(1) amortization of capitalized software development costs
or acquired technology and previously capitalized software that
was written-off, (2) third-party royalties, and
(3) distribution and manufacturing personnel costs. During
the year ended December 31, 2004, cost of licenses
increased $1.5 million, or 10%, to $16.8 million from
$15.3 million in the year ended December 31, 2003.
This increase is principally attributable to a $1.5 million
increase in amortization costs consisting of $1.0 million
due to the amortization of completed technology acquired through
the Mercator acquisition and a $0.5 million increase in
amortization of capitalized software development costs following
the release of new products. Third-party royalty costs decreased
by $0.3 million consisting of a $1.4 million decline
in amortization of prepaid royalties acquired in connection with
the June 28, 2002 settlement of a dispute with former
shareholders of IntegraSoft (a company that we acquired in 1998)
that became fully amortized in December 2003, that were
partially offset by a $1.1 million increase in
miscellaneous third party royalties associated with increased
license transactions. Distribution and manufacturing costs
increased by $0.3 million following the increase in license
sales.
During the year ended December 31, 2003, cost of licenses
decreased $3.0 million, or 16%, to $15.3 million from
$18.3 million in 2002. This decrease was primarily the
result of three factors. First, amortization costs decreased by
$3.3 million driven by a decline of $5.2 million in
asset impairment costs related principally to the write-off of
capitalized software associated with our content management and
portal products. Both of these product lines were terminated in
the second quarter of 2002. This decline was offset by a
$0.8 million increase in amortization of capitalized
software development costs and a $1.1 million increase in
amortization principally related to developed technology
acquired through the Vality and Mercator acquisitions. We
acquired $7.0 million of completed technology in connection
with the Mercator acquisition in the third quarter of 2003 that
is being amortized over 5 years and, accordingly, we began
to recognize amortization expense in September, 2003. The Vality
acquisition occurred during the second quarter of 2002. As a
result, we began to recognize amortization expense related to
the Vality developed technology in the second quarter of 2002.
Second, third-party royalties increased $1.1 million due to
an additional $0.4 million during 2003 in amortization of
prepaid license royalties acquired in connection with the
June 28, 2002 settlement of a dispute with former
shareholders of IntegraSoft, Inc. and an increase of
$0.7 million in miscellaneous third party royalties
associated with increased license transactions. Third, there was
a $0.8 million decrease in transition costs associated with
the Informix Software business.
27
Cost of services. Cost of services consists of
maintenance, consulting and education personnel expenses and
third-party subcontracting costs. The following table depicts
the trend in service margins for the three years ended
December 31, 2004, 2003, and 2002, respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Ascential Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service margin
|
|
|
57 |
% |
|
|
57 |
% |
|
|
38 |
% |
|
Maintenance margin
|
|
|
81 |
% |
|
|
82 |
% |
|
|
73 |
% |
|
Consulting and education margin
|
|
|
22 |
% |
|
|
21 |
% |
|
|
(7 |
)% |
Cost of services for the year ended December 31, 2004
increased $30.0 million or 75%, to $70.1 million, from
$40.1 million in the year ended December 31, 2003.
This net increase is a result of a combination of factors. We
incurred $22.2 million in additional costs of consulting
and education, principally headcount, third-party
subcontracting, commissions and travel associated with
generating an additional $29.2 million in consulting and
education revenue as compared to 2003. We also incurred
$7.8 million in additional maintenance costs associated
with generating $39.5 million in additional maintenance
revenue as compared to 2003. This increase in maintenance costs
consists principally of increased personnel related costs
following a 100% increase in headcount from June 30, 2003
in order to support the Mercator maintenance customer base,
$2.5 million of costs associated with the subcontracting
and outsourcing of various functions related to support
obligations with respect to certain products acquired from
Mercator that were determined not to be strategic and
$1.0 million in amortization of customer relationships
acquired through the Mercator acquisition.
The total services margin remained flat at 57% for the year
ended December 31, 2004 as compared to 2003. Maintenance
margin declined to 81% from 82% as a result of the
$2.5 million of subcontracting of support obligations and
$1.0 million of amortization costs discussed above. The
consulting and education margin improved slightly to 22% from
21%. This is a result of the impact of improved utilization of
internal consultants offset slightly by a reduction of margin
resulting from the increased use of subcontractors to fulfill
increased demand for our services. These subcontracted resources
are at a higher cost than internal resources. We have targeted
to increase the proportion of consulting projects that are
fulfilled using internal resources as opposed to subcontracted
resources in 2005.
Cost of services for the year ended December 31, 2003
increased 21%, or $7.0 million, to $40.1 million from
$33.1 million in the same period of 2002. This net increase
is a result of a combination of factors. We incurred
$8.1 million in additional costs of consulting and
education, principally headcount, third-party subcontracting,
commissions and travel associated with generating an additional
$14.9 million in data integration consulting and service
revenue. We also incurred $1.8 million in additional
maintenance costs, principally headcount related, associated
with generating $26.0 million in additional data
integration maintenance revenue as compared to 2002.
Additionally, there was a total of $0.5 million of
transition costs that will not recur associated with the
integration of Mercator service operations into the operations
of Ascential. These increases were offset by a $3.4 million
decline in service costs related to the content management
product line. Although there was only $0.5 million in
associated content management service revenue in 2002, the
completion of certain engagements required the use of third
party subcontractors. Additionally, we attempted to maintain our
base of technical employees (despite the decline in revenue
opportunities) associated with content management products
intact during the process of seeking a buyer for that product
line during the first half of 2002.
The total services margin increased to 57% for the year ended
December 31, 2003 from 38% for 2002 due to substantial
improvements in both maintenance and consulting and education
margins during the year. The improvement in our maintenance
margin was a result of the increase in total maintenance revenue
by $25.1 million on a year over year basis with an increase
to headcount only for those Mercator employees who became
Ascential employees in connection with the acquisition of
Mercator during the third quarter of 2003. We have accomplished
this by leveraging our existing technical support personnel, as
well as our on-line support website, in providing customer
support. The improvement in consulting and education margins is a
28
result of the termination of the loss-generating content
management business, as described above, headcount reductions in
late 2002, the benefit of which was realized in 2003, as well as
an increase in the number and average length of enterprise data
integration consulting engagements that enabled improved
utilization of our consultants.
Sales and marketing expenses. Sales and marketing
expenses consist primarily of salaries, commissions, marketing,
communications programs and related overhead costs. Sales and
marketing expenses for the year ended December 31, 2004
increased 38%, or $30.7 million, to $110.6 million
from $79.9 million for 2003. This increase is principally
due to a 34% increase in headcount following the acquisition of
Mercator, $3.3 million in additional commissions associated
with a 46% increase in total revenue, $3.0 million of
additional subcontracting costs, a $3.3 million increase in
travel costs associated with the additional sales headcount and
increased customer activity and $2.4 million of additional
marketing program expenditures associated with new products and
increased marketing activities. The increases were partially
offset by a decline in Mercator sales and marketing transition
costs of $1.3 million. Mercator transition costs consist
principally of expenses associated with the wind down of
activities that were being terminated or the transfer of
continuing activities. Total selling and marketing headcount was
310 at December 31, 2004, including 91 quota carrying
sales representatives.
Sales and marketing expenses for the year ended
December 31, 2003 increased 9%, or $6.8 million, to
$79.9 million from $73.1 million for 2002. This
increase is principally the result of a $5.0 million, or
50%, increase in commissions and bonuses associated with a 64%
increase in total revenue over the prior year, with the
remaining increase attributable mainly to increased marketing
program spending associated with new products and increased
marketing activities. Increased costs in the third and fourth
quarters of 2003 related to transitional activities of
$1.3 million and net headcount additions to selling and
marketing functions of approximately 30% associated with the
Mercator acquisition were generally offset by headcount
reductions in these functions that occurred in the second half
of 2002, the benefit of which was realized in 2003.
Research and development expenses. Research and
development expenses consist primarily of salaries, project
consulting outsourcing costs and related overhead costs for
development of our products. During 2004, our research and
development efforts were principally focused on enhancements to
the Ascential Enterprise Integration Suite to enable increased
levels of integration, performance and scalability as well as
enhanced interoperability among our products. Research and
development expenses for the year ended December 31, 2004
increased 43%, or $11.8 million, to $39.3 million from
$27.5 million for 2003. This increase was primarily the
result of an 89% increase in research and development headcount
from 154 at June 30, 2003 to 291 at December 31, 2004,
resulting in increased salary, overhead and related costs. This
increase in headcount relates primarily to Mercator research and
development personnel who became Ascential Software employees in
September 2003 following the acquisition. Additionally, we added
45 engineers in connection with our purchase of the assets of
iNuCom (India) Limited and its affiliate iNuCom.com, Inc. to
create a facility dedicated primarily to research and
development in Hyderabad, India for the purpose of reducing the
costs associated with subcontracted offshore resources and
maximizing the efficiency of research and development spending
over the long term. iNuCom was an engineering services
subcontractor that we had previously utilized. In addition, in
2004 as compared to 2003, there was a $2.6 million increase
in consultant and subcontractor costs, including off-shore
resources, and a $0.9 million increase in facilities and
equipment costs resulting from the larger employee base and
increased development activity. These increases were offset by a
reduction of $0.7 million in research and development
transition costs related to the Mercator acquisition.
Capitalization of software development costs during 2004 related
principally to the development of enhancements to the Ascential
Enterprise Integration Suite and increased by approximately
$1.8 million as compared to 2003 as a result of an increase
in overall research and development spending and the nature and
stage of development projects.
During 2003, our research and development efforts were focused
primarily on major enhancements to the Ascential Enterprise
Integration Suite. In September, 2003, we released Ascential
Enterprise Integration Suite 7.0 incorporating these major
enhancements. Research and development expenses for the year
ended December 31, 2003 increased 15%, or
$3.5 million, to $27.5 million from $24.0 million
for 2002. This increase is a result of a 45% increase in
headcount from December 31, 2002 to December 31, 2003,
principally affecting
29
the fourth quarter, related to Mercator research and development
personnel who became Ascential employees following the
acquisition, a $1.6 million increase in consultant and
subcontractors costs during 2003, and $0.7 million in costs
that will not recur associated with Mercator transition
activities. This total increase is net of a reduction of
$3.1 million in costs associated with the content
management product line from 2002 to 2003. During the first
quarter of 2002, we were seeking a buyer for this technology
and, until the product line was terminated at the end of the
second quarter of 2002, we continued to incur costs in order to
maintain the technical personnel base associated with the
product line. Without these costs in 2002, costs associated with
enterprise data integration research and development activities
increased 31% during 2003. Capitalization of software
development costs during 2003 related principally to the
development of the release of our Ascential Enterprise
Integration Suite 7.0 and increased by approximately
$1.0 million during 2003 as compared to 2002 as a result of
an increase in overall spending and the status of capitalized
projects.
General and administrative expenses. General and
administrative expenses consist primarily of finance, legal,
information systems, human resources, bad debt expense and
related overhead costs. During the year ended December 31,
2004, general and administrative expenses decreased 8% or
$2.6 million, to $28.2 million from $30.8 million
in 2003. This change is the net result of four principal
factors. First, the transition costs related to the wind down of
our database business decreased by $3.1 million compared to
2003. During 2004, our transition expenses of $0.1 million
consisted of a credit of $0.3 million for the reversal of
accruals for estimated database liabilities that were no longer
required offset by $0.1 million of costs of resolving
disputes associated with the historical database operations and
$0.3 million of administrative and liquidation costs
associated with the closure of subsidiaries. During 2003,
database transition costs totaled $3.2 million and
consisted of $3.2 million in legal expenses associated with
the litigation and settlement of disputes associated with the
historical database operations and $1.4 million of
administrative and liquidation costs associated with the closure
of subsidiaries and transitioning personnel. These costs were
offset by $1.4 million in reductions to expense related to
the reversal of accruals for estimated database liabilities that
were resolved for amounts less than had been originally
estimated. Second, legal costs declined due principally to the
inclusion, in 2003, of $1.1 million of costs associated
with the settlement of a legal matter. Third, Mercator
transition costs declined by $2.0 million. Fourth, these
declines were offset by increased personnel and related overhead
costs due to a 40% increase in headcount in general and
administrative functions from June 30, 2003 to
December 31, 2004 as well as an increase in the cost of
subcontracted resources and professional fees in order to scale
our infrastructure to support our expanded operations following
the Mercator acquisition, and to address new and enhanced
regulatory requirements, including the Sarbanes-Oxley Act.
During the year ended December 31, 2003, general and
administrative expenses decreased 25%, or $10.3 million, to
$30.8 million from $41.1 million for 2002. This
decrease is a result of five principal factors. First,
transition costs associated with the wind down of the database
business decreased by $9.4 million. Second, bad debt
expense decreased $1.9 million as a result of improvement
in the aging of accounts receivable balances and the resolution
of reserved balances associated with the content management
business. Days sales outstanding was 59 days at
December 31, 2003 compared to 72 days at
December 31, 2002. Third, costs associated with temporary
and subcontracted help as well as professional fees for audit
and tax services declined a total of $1.0 million after the
completion of the integration of the former Informix west coast
and our east coast finance departments following the IBM
Transaction. Fourth, personnel and related overhead costs
declined $1.1 million as a result of the closure of
facilities and cost control efforts. Fifth, these declines were
offset by a $0.6 million increase in legal costs relating
to defense and settlement of claims and other matters and a
$2.5 million increase in costs that will not recur
associated with transitional activities for Mercator.
30
Merger, realignment and other costs. The following table
summarizes merger, realignment and other charges recorded in the
years ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Severance and employment related costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter 2003 realignment
|
|
$ |
— |
|
|
$ |
0.9 |
|
|
$ |
— |
|
|
Third quarter 2003 realignment
|
|
|
— |
|
|
|
1.1 |
|
|
|
— |
|
|
Third quarter 2002 realignment
|
|
|
— |
|
|
|
— |
|
|
|
6.8 |
|
|
Second quarter 2002 realignment
|
|
|
— |
|
|
|
— |
|
|
|
5.7 |
|
|
First quarter 2002 realignment
|
|
|
— |
|
|
|
— |
|
|
|
1.6 |
|
|
Third quarter 2001 realignment
|
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total severance and employment related costs
|
|
|
— |
|
|
|
2.0 |
|
|
|
13.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Facilities and equipment costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IBM Transaction
|
|
|
1.0 |
|
|
|
1.9 |
|
|
|
4.3 |
|
|
Third quarter 2002 realignment
|
|
|
— |
|
|
|
— |
|
|
|
3.0 |
|
|
Second quarter 2002 realignment
|
|
|
— |
|
|
|
— |
|
|
|
1.2 |
|
|
First quarter 2002 realignment
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
|
2000 strategic realignment
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
(0.3 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total facilities and equipment costs
|
|
|
1.0 |
|
|
|
1.9 |
|
|
|
9.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
Other exit costs
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total other
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
0.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total merger, realignment and other charges
|
|
$ |
0.8 |
|
|
$ |
3.9 |
|
|
$ |
23.7 |
|
| |
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2004 we recorded merger
realignment and other costs totaling $0.8 million. The
charges are for revised assumptions for facility and equipment
charges resulting from the IBM Transaction totaling
$1.0 million and a reversal of $0.2 million relating
principally to estimated exit costs accrued in our third quarter
2002 realignment that were no longer required because of the
resolution of the associated obligations for amounts less than
amounts originally estimated.
During the year ended December 31, 2003 we recorded a total
of $2.0 million of severance and related costs to terminate
22 employees in connection with the consolidation and
integration of our operations following the Mercator
acquisition. We also recorded realignment charges totaling $1.9
consisting entirely of adjustments to facility reserves to
reflect updated estimates of remaining obligations on vacated
facilities based on current market conditions, net of
anticipated sublease income.
During the year ended December 31, 2002 we recorded a total
of $23.7 million of merger realignment and other costs. The
following discussion details the components of those charges:
Severance and employment related costs totaling
$13.7 million were recorded. During 2002, we approved plans
to realign our Ascential business operations to reduce costs,
integrate Vality into our existing operations and terminate our
content management product line. The approval of these plans
resulted in a charge of $12.1 million in connection with a
worldwide workforce reduction of 298 employees. Our third
quarter 2002 realignment plan included the termination of 159
employees, consisting of 142 employees to reduce overall
infrastructure costs and seventeen employees previously
associated with our content management product line, and
resulted in a charge of $6.8 million. Our second quarter
2002 realignment plan included the termination of
31
135 employees, consisting of 91 employees made redundant by
the integration of Vality operations into our existing
operations and 44 employees previously associated with our
content management product line, and resulted in a charge of
$5.4 million. Our first quarter 2002 realignment plan
included the termination of four employees in an effort to
reduce costs by consolidating certain offices in Europe and
resulted in a charge of $0.3 million. During 2002, we also
reversed $0.4 million of costs associated with our third
quarter 2001 realignment plan as certain employees terminated
employment voluntarily. Additionally, during 2002, we approved
plans to continue to eliminate costs from our Informix Software
business that resulted in the termination of 39 employees and a
charge of $1.6 million.
Facilities and equipment costs totaling $9.2 million were
recorded. Realignment plans approved in 2002 related to
the Ascential Software operations resulted in a
$1.1 million charge for facilities and equipment costs and
primarily consisted of a $0.8 million charge in connection
with our second quarter 2002 realignment plan for the impairment
of computer equipment related to the termination of our content
management product line. During 2002, we approved realignment
plans related to the Informix database business that included
revised estimates to exit facilities related to the IBM
Transaction and write-off of abandoned fixed assets that
resulted in a charge of $8.1 million. We recorded a charge
of $4.3 million to revise estimates to exit facilities
related to the IBM Transaction consisting of
$9.3 million for the revision of reserve assumptions to
reflect current market conditions and $2.0 million to
assume additional leases, partially offset by $7.0 million
related to the release from lease obligations of certain
facilities. We recorded a charge of $2.7 million related to
our third quarter 2002 realignment plan to write-off abandoned
fixed assets primarily at vacated facilities. We recorded a
charge of $0.4 million related to our second quarter 2002
realignment primarily for costs to manage facilities being
exited. We also recorded a charge of $0.8 million related
to our first quarter 2002 realignment plan for facility lease
management and other lease obligation costs and
$0.2 million related to our 2000 realignment plan for
revised sublease assumptions due to a change in market
conditions. During 2002 we reversed $0.3 million of costs
related to the IBM Transaction, primarily for the refund of a
facility deposit that had been previously reserved.
Other realignment costs totaling $0.8 million were
recorded. These costs consisted of $0.6 million of other
exit costs, including $0.3 million related to our third
quarter 2002 realignment plan and $0.3 million related to
our second quarter 2002 realignment plan. Additionally,
$0.4 million was incurred as part of our second quarter
2002 realignment plan for professional fees to terminate our
content management product line. During 2002, we also approved
plans to eliminate costs from our Informix Software business
that resulted in $0.2 million of charges for other exit
costs and reversed $0.4 million related primarily to the
Ardent acquisition since reserves were no longer required as
obligations were settled for amounts less than the recorded
estimates.
Write-off of acquired in-process research and
development. The value of In-process Research and
Development (“IPRD”) is determined using an income
approach. This approach takes into consideration earnings
remaining after deducting from cash flows related to the
in-process technology the market rates of return on contributory
assets, including assembled workforce, customer accounts and
existing technology. The cash flows are then discounted to
present value at an appropriate rate. Discount rates are
determined by an analysis of the risks associated with each of
the identified intangible assets.
In connection with the Mercator acquisition in September 2003,
we recorded a charge of $2.0 million, or approximately 1%
of the $149.4 million in total purchase price, for IPRD.
The value allocated to the Mercator project identified as IPRD
was charged to operations during the three months ended
September 30, 2003.
In connection with the Vality acquisition in April 2002, we
recorded a charge of $1.2 million, or approximately 1% of
the $98.3 million in total consideration and liabilities
assumed, for IPRD. The value allocated to the projects
identified as IPRD was charged to operations during the three
months ended June 30, 2002.
32
|
|
| V. |
Other Income (Expense) |
The following table depicts the components of other income and
expense for Ascential Software Corporation for the years ended
December 31, 2004, 2003 and 2002, in thousands:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Interest income
|
|
$ |
9.1 |
|
|
$ |
11.1 |
|
|
$ |
20.2 |
|
|
Interest expense
|
|
$ |
(0.2 |
) |
|
$ |
(0.2 |
) |
|
$ |
(0.1 |
) |
|
Gain on sale of database business, net of adjustments
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3.0 |
|
|
Impairment of long-term investments
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(2.2 |
) |
|
Other income, net
|
|
$ |
1.5 |
|
|
$ |
2.5 |
|
|
$ |
(0.9 |
) |
Interest income — years ended December 31,
2004, 2003 and 2002. Interest income for the year ended
December 31, 2004 decreased by $2.0 million, or 18%,
from 2003. This decrease is principally attributable to a
decline in average cash balances during 2004 as compared to 2003
mainly as a result of the use of cash paid to acquire Mercator
and cash used to buy back shares of our common stock.
Interest income for the year ended December 31, 2003
decreased by $9.1 million, or 45%, to $11.1 million
from $20.2 million during 2002. This decrease is
attributable to three factors. First, the year ended
December 31, 2002 includes $6.2 million of interest
income on the IBM Holdback (see Note 13 to the Consolidated
Financial Statements). The IBM Holdback was paid in full in
January 2003, at which time the related interest income, which
accrued at a rate of 6% per annum, was no longer payable.
Second, the annual composite rate of return on cash and
investments declined by approximately 30 basis points as a
result of the general economic environment and prevailing
interest rates. Third, average cash balances declined in 2003
principally as a result of the cash paid in connection with the
Mercator acquisition.
Interest expense — years ended December 31,
2004, 2003 and 2002. Interest expense for the years ended
December 31, 2004, 2003 and 2002 relates principally to
interest on capital leases.
Gain on sale of database business, net of
adjustments — years ended December 31, 2004, 2003
and 2002. During the quarter ended September 30, 2001,
we completed the IBM Transaction. In connection with this
sale of our database business assets to IBM, a gain of
$865.7 million was recorded in the year ended
December 31, 2001. During 2002, we recorded a net increase
of $3.0 million to the gain on sale of database business.
The $3.0 million net increase was comprised of a
$7.3 million increase due to the completion of the final
audit of the working capital transferred to IBM partially offset
by a $3.2 million payment to IBM to resolve informal
matters raised by IBM related to the IBM Transaction, a
$0.9 million decrease for administrative and professional
fees required to dissolve subsidiaries rendered as inactive as a
consequence of the IBM Transaction and a $0.2 million
decrease related to adjustments to the working capital
transferred to IBM. There were no adjustments to the gain during
2004 or 2003.
Impairment of long-term investments — years ended
December 31, 2004, 2003 and 2002. In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we periodically review
long-lived assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. Each impairment test is
based on a comparison of the undiscounted cash flows to the
recorded value of the asset. If impairment is indicated, the
asset is written down to its estimated fair value based on a
discounted cash flow analysis. As a result of our assessments,
we realized a loss of $2.2 million during 2002 for declines
in value that were considered other-than-temporary.
As of December 31, 2004, the remaining book value of
long-term investments was approximately $3.3 million. We
did not realize a loss due to these long-term investments in
2004 or 2003, however, given the rapid changes occurring in the
business sectors in which we make our strategic investments,
additional impairment charges are possible in the future.
Other, net — years ended December 31, 2004,
2003 and 2002. Other income, net, for the year ended
December 31, 2004 consists of approximately
$0.5 million of realized gains on investments and
$1.0 million of
33
foreign exchange gains including $0.6 million of gains due
to the liquidation of two subsidiaries. We continue to liquidate
various subsidiaries that were active prior to the IBM
Transaction but that are no longer required for our ongoing
operations and continue to evaluate our subsidiary structure as
deemed appropriate to match business needs. As these
subsidiaries become substantially liquidated, the cumulative
translation adjustment that has been recorded on our balance
sheet in connection with the historical monthly revaluation of
their assets and liabilities will be recorded as other income or
expense.
Other, net, for the year ended December 31, 2003 totaled
income of $2.5 million and consists of $1.7 million in
income associated with a reversal of severance-related
liabilities recorded in connection with the IBM Transaction that
were determined to no longer be required; and $1.7 million
in gains realized on investments offset by $0.9 million in
net foreign exchange losses, including a $0.3 million
credit of cumulative translation adjustment recorded to other
income related to the liquidation of a subsidiary.
Other, net for the year ended December 31, 2002 totaled a
loss of $0.9 million. The most significant contributing
factors consisted of $4.1 million in net foreign exchange
losses related principally to the revaluation of the balance
sheets of foreign subsidiaries whose functional currencies are
the U.S. dollar (primarily Argentina, Mexico and Brazil),
$0.5 million in net realized gains on short-term
investments and $2.7 million in income from the proceeds
received in connection with the favorable outcome of litigation
during the year.
VI. Income Taxes —
Ascential Software Corporation
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions, other than | |
| |
|
percentages) | |
|
Income (loss) before income taxes
|
|
$ |
16.5 |
|
|
$ |
(0.5 |
) |
|
$ |
(81.4 |
) |
|
Income tax expense (benefit)
|
|
$ |
1.6 |
|
|
$ |
(16.3 |
) |
|
$ |
(17.8 |
) |
|
Effective tax rate
|
|
|
10 |
% |
|
|
* |
|
|
|
21.9 |
% |
|
|
| * |
Not meaningful as a result of the large benefit recorded in
relation to the loss before taxes. |
For the year ended December 31, 2004, a tax provision of
$1.6 million was recorded on income of $16.5 million
This provision is net of a benefit of approximately
$2.4 million resulting from adjustments that were recorded
to reflect the impact of closed tax audits and changes in
estimates resulting from new or additional information related
to certain tax accruals. The effective rate without regard to
this benefit (approximately 24%) is lower than the composite
U.S. federal and state statutory rate as a result of income
generated in jurisdictions with lower tax rates and utilization
of net operating loss carry-forwards. In addition, in the year
ended December 31, 2004 we filed our tax return for 2003
and the actual tax liability for 2003 was less than the amount
we had previously estimated. We are currently being audited by
the Internal Revenue Service in the United States for our 2001
and 2002 tax years. The completion of the audit may result in
the adjustment of our tax reserves to reflect the resolution of
outstanding items in connection with the audit. We do not
believe that this audit will have a material adverse effect on
our business or financial condition.
For the year ended December 31, 2003, a tax benefit of
$16.3 million was recorded. This amount includes a benefit
of $25.2 million resulting from adjustments that were
recorded to reflect the impact of closed tax audits, expiring
statutes of limitations for the assessment of tax, and changes
in estimates resulting from additional or new information
related to certain tax accruals. The total tax benefit recorded
is net of an accrual for state income taxes and a change in the
valuation allowance on deferred tax assets. Additionally, during
2003, we incurred a $2.0 million charge for in-process
research and development associated with the Mercator
acquisition that is nondeductible for tax purposes.
During 2002, we realized a tax benefit on losses generated at a
rate that was less than the statutory rate of approximately 40%.
This was due to the impact of the U.S. alternative minimum
tax on the carryback of U.S. net operating losses and the
impact of income taxes and withholding taxes owed in foreign
jurisdictions.
34
Liquidity and Capital Resources — Ascential
Software Corporation
Total liquidity at December 31, 2004 was
$480.7 million and consists of cash and cash equivalents
(“Cash”) and short-term investments. At
December 31, 2004, Cash was $166.4 million and
short-term investments were $314.3 million. At
December 31, 2003, Cash and short-term investments totaled
$516.2 million and consisted of $198.7 million in cash
and $317.5 million of short-term investments. The
$35.5 million decrease in Cash and short-term investments
for the year ended December 31, 2004 consists of net use of
cash in financing activities of $25.7 million, cash used in
operations of $2.5 million, other uses of cash of
$10.8 million, offset by the positive effect of exchange
rates on cash of $3.5 million.
The net use of cash of $25.7 million for financing
activities consisted of $31.6 million used to acquire
1.9 million shares of our common stock less
$6.6 million of proceeds received through the issuance of
approximately 0.6 million shares of our common stock
primarily for options exercised and for purchases under our
employee stock purchase plan, net of $0.6 million of
payments on capital leases.
Cash used for operations during 2004 included cash payments of
$18.6 million related to merger, realignment and other
costs. These payments consist of $14.5 million of cash
payments related to the Mercator acquisition, $3.4 million
of cash payments related to the IBM Transaction and
$0.7 million due to various restructuring actions we took
during 2002 and 2003. During the year ended December 31,
2004, cash payments for severance paid to former Mercator
employees totaled $8.8 million and cash payments related to
Mercator facilities that are no longer in use amounted to
$5.7 million. Barring unforeseen circumstances, we
anticipate that substantially all severance payments and related
employee costs of $0.3 million due to the purchase of
Mercator will be paid out by the end of 2005. If we are unable
to negotiate termination of our lease obligations for the
Mercator facilities before the end of the respective lease
terms, the Mercator facility exit costs will continue until the
termination of the leases which expire at various dates through
2012. Barring unforeseen circumstances, we do not expect future
charges related to undiscounted Mercator lease obligations,
excluding estimated sublease income, to exceed
$18.3 million, the maximum remaining unaccrued obligation
under existing contractual lease terms. In addition, during the
year ended December 31, 2004, we made $3.4 million in
cash payments, net of cash received from sublease arrangements,
for facilities costs related to the Company’s vacant, or
partially vacant facilities as a result of the IBM Transaction.
These payments are expected to continue until we can negotiate
termination of the lease obligations or until the leases expire
at various dates from 2005 through 2008. Cash payments of
$0.7 million related to our restructuring actions taken
during 2002 and 2003. Remaining severance for these actions is
expected to be paid by the end of 2005.
On June 30, 2004, we entered into a non-recourse
receivables purchase agreement with a financial institution,
providing for the sale of up to $10.0 million of trade
accounts receivable. In the year ended December 31, 2004,
we received approximately $14.6 for the sale of accounts
receivable under this agreement, which positively impacted our
days sales outstanding (DSO). This arrangement is a means of
accelerating cash collections in a manner that we believe is
more cost-effective than offering early payment discounts. Trade
receivables that were sold during the year ended
December 31, 2004, and not yet collected, amounted to
$7.2 million and are excluded from our trade accounts
receivable at December 31, 2004. The fees, losses and other
amounts related to the Company’s sale and subsequent
servicing of these receivables were not material to the
Company’s consolidated financial statements.
The net $10.8 million of other uses of Cash and short term
investments during 2004 related primarily to cash expenditures
of $4.6 million for property and equipment, additions to
software development costs of $9.6 million and purchases of
strategic investments of $1.1 million and other items
totaling $2.3 million. These uses were offset by cash
received of $6.8 million in connection with the sale of the
rights to our Key/ Master data entry software product line,
formerly owned by Mercator (see Note 12 to the Consolidated
Financial Statements).
During the year ended December 31, 2004, capital
expenditures totaled $4.6 million. We currently plan to
continue to invest in research and development activities as
well as sales and marketing and product support. Our investment
in property and equipment is expected to continue, barring
unforeseen circumstances, as we purchase computer systems for
research and development, sales and marketing, and support and
administrative staff.
35
As of December 31, 2004, we did not have any significant
long-term debt or significant commitments for capital
expenditures. We believe that our current Cash and short-term
investments balances will be sufficient to meet our working
capital requirements and fund our research and development
initiatives for at least the next twelve months. We also believe
that we will have sufficient resources to continue to fund any
repurchases of common stock under the announced
$350.0 million stock repurchase program, and to fund the
costs of current and future facilities, severance and other
obligations associated with the IBM Transaction in addition to
current and future restructuring initiatives.
The following table presents our contractual obligations as of
December 31, 2004 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Payments Due By Period | |
| |
|
|
|
| |
| |
|
|
|
Less Than | |
|
1-3 | |
|
4-5 | |
|
After 5 | |
| Contractual Obligations |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Long-term debt
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital lease obligations
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
Operating leases
|
|
|
87.8 |
|
|
|
19.4 |
|
|
|
28.8 |
|
|
|
16.2 |
|
|
|
23.4 |
|
|
Unconditional purchase obligations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other long-term obligations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
88.4 |
|
|
$ |
19.9 |
|
|
$ |
28.9 |
|
|
$ |
16.2 |
|
|
$ |
23.4 |
|
Obligations under operating leases exclude $48.7 million of
minimum lease payments for a 200,000 square foot facility
in Santa Clara, California that we leased in November 1996.
We assigned this lease to Network Associates, Inc., an unrelated
third party, in the fourth quarter of 1997. We remain
contingently liable for minimum lease payments through March
2013 under this assignment which are included in the table of
commercial commitments below.
The following table presents our other commercial commitments as
of December 31, 2004 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Commitment | |
| |
|
|
|
Expiration Per Period | |
| |
|
|
|
| |
| |
|
|
|
Less Than | |
|
1-3 | |
|
4-5 | |
|
After | |
| Other Commercial Commitments |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Standby letters of credit
|
|
$ |
4.1 |
|
|
$ |
— |
|
|
$ |
1.4 |
|
|
$ |
— |
|
|
$ |
2.7 |
|
|
Guarantees
|
|
|
48.7 |
|
|
|
5.3 |
|
|
|
11.2 |
|
|
|
11.6 |
|
|
|
20.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
52.8 |
|
|
$ |
5.3 |
|
|
$ |
12.6 |
|
|
$ |
11.6 |
|
|
$ |
23.3 |
|
In May 2002 and November 2003, we entered into standby letters
of credit that expire by May 2006 and November 2007,
respectively, and guarantee $1.4 million of potential tax
payments related to certain payments made to two of our former
officers. These potential tax payments, which have been
partially reserved based on management’s assessment of the
potential payments relate to severance paid to these former
officers in accordance with a change in control agreement that
was triggered as part of the IBM Transaction. Payment under the
standby letter of credit would be due upon final assessment of
this tax liability. In addition, we were also required to enter
into standby letters of credit to guarantee approximately
$0.2 million of lease payments for certain facilities in
Europe. These guarantees do not have expiration dates and would
allow landlords to obtain lease payments from our bank if we
were to default on our lease payment obligations.
During 2003 the Company issued a $2.5 million standby
letter of credit to guarantee certain lease obligations pursuant
to the lease between Mercator and the landlord of an office
facility located in Wilton, Connecticut. The letter of credit is
automatically extended annually, but not beyond July 1,
2013.
Disclosures About Market
Rate Risk
Market Rate Risk. 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 or trading purposes.
36
Interest Rate Risk. Our exposure to market rate risk for
changes in interest rates relates primarily to our investment
portfolio. We maintain an 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
seek to 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 decrease in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly
by 10 percent from levels at December 31, 2004, the
fair value of the portfolio would decline by approximately
$1.3 million. Although we intend to utilize our fixed
income investments to fund operations and acquisitions as
needed, we currently have the ability to hold our fixed income
investments until maturity and believe that the effect, if any,
of potential 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 percent would have an immaterial impact on the value of
these securities in 2004.
Foreign Currency Exchange Rate Risk. We enter into
foreign currency forward exchange contracts to reduce our
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
potential settlement date of the underlying transactions. As
these contracts are not designated as hedges, as defined by
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, 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
Eastern Europe and Asia/ Pacific and are winding down operations
in Latin America where there are limited forward foreign
currency exchange markets and thus we may have un-hedged
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
in our pricing strategy, there would be a time lapse between any
sudden or significant exchange rate movements and our
implementation of a revised pricing structure. In addition, we
cannot predict the effect of exchange rate fluctuations on our
future operating results because of the length of our average
sales cycle which depends 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.
The table below provides information about our foreign currency
forward exchange contracts. The information is provided in
U.S. dollar equivalents and presents the notional amount
(contract amount) and the contract forward exchange rates. Since
these contracts were entered into on the last day of 2004 the
contract forward rate and the market forward rate are the same.
All contracts mature within three months. In addition to the
contracts listed below, at December 31, 2004, we had
accrued, as a component of other current assets on our
consolidated balance sheet, a gain of $1.4 million related
to the fair market value of forward currency contracts that had
closed as of December 31, 2004 but were not settled until
January 4 and January 5, 2005.
37
Forward Contracts
| |
|
|
|
|
|
|
|
|
|
| |
|
Contract | |
|
Contract | |
| At December 31, 2004 |
|
Amount | |
|
Rate | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Forward currency to be sold under contract:
|
|
|
|
|
|
|
|
|
| |
Swiss Franc
|
|
$ |
4,374 |
|
|
|
1.1284 |
|
| |
Singapore Dollar
|
|
|
1,651 |
|
|
|
1.6328 |
|
| |
Korean Won
|
|
|
2,107 |
|
|
|
1039.00 |
|
| |
Norwegian Krone
|
|
|
1,984 |
|
|
|
6.0228 |
|
| |
Brazilian Real
|
|
|
1,399 |
|
|
|
2.7950 |
|
| |
Euro
|
|
|
3,874 |
|
|
|
1.363 |
|
| |
Czech Koruna
|
|
|
1,984 |
|
|
|
22.352 |
|
| |
|
|
|
|
|
|
|
Total
|
|
|
17,373 |
|
|
|
|
|
|
Forward currency to be purchased under contract:
|
|
|
|
|
|
|
|
|
| |
British Pound
|
|
|
20,141 |
|
|
|
1.91991 |
|
| |
British Pound
|
|
|
19,111 |
|
|
|
1.91100 |
|
| |
Other (individually less than $1 million)
|
|
|
1,814 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Total
|
|
|
41,066 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Grand Total
|
|
$ |
58,439 |
|
|
|
|
|
| |
|
|
|
|
|
|
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a
description of recent accounting pronouncements.
Subsequent Event
On March 13, 2005, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with IBM
and Ironbridge Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of IBM (“Sub”) pursuant to
which IBM will acquire all the Company’s outstanding equity
interests. In accordance with the Merger Agreement, the Company
will merge (the “Merger”) with and into Sub, with the
Company continuing as the surviving corporation. The merger
consideration will consist of $18.50 in cash per share of the
Company’s Common Stock, par value $0.01 per share,
issued and outstanding immediately prior to the Effective Time
(other than shares held by the Company or IBM which will be
canceled and retired, Appraisal Shares and Restricted Shares,
each as defined in the Merger Agreement).
The transaction has been approved by the Company’s board of
directors and is subject to stockholder approval, regulatory
approvals and other customary closing conditions. Following the
merger, the Company will delist from the Nasdaq National Market
and deregister, and no longer file reports, under the Securities
Exchange Act of 1934, as amended. The Company expects the
transaction to close in the second quarter of 2005.
Factors That May Affect Future Results
|
|
|
Changes in stock option accounting rules may have a
significant adverse affect on our operating results. |
We have a history of using broad based employee stock option
programs to hire, provide incentives to and retain our workforce
in a competitive marketplace. Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based
Compensation,” allows companies the choice of either using
a fair value method of accounting for options that would result
in expense recognition for all options granted, or using an
intrinsic value method, as prescribed by Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) with a pro forma
disclosure of the impact on net income (loss) of using the fair
38
value option expense recognition method. We have elected to
apply APB 25 and accordingly we generally have not
recognized any expense with respect to employee stock options as
long as such options are granted at exercise prices equal to the
fair value of our common stock on the date of grant.
In December 2004, the Financial Accounting Standards Board
published “Share-Based Payment”
(“Statement 123(R)”). Statement 123(R)
requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity
instruments issued. In determining the fair value of options and
other equity-based awards, companies are required, under
Statement 123(R), to use one of two valuation models that
may involve extensive and complex analysis.
Statement 123(R) will be effective for us beginning on
July 1, 2005, which is the first day of the third quarter
of our 2005 fiscal year. We are in the process of reviewing
Statement 123(R) to determine which model is more
appropriate for us. While we continue to evaluate the effect
that the adoption of Statement 123(R) will have on our
financial position and results of operations, we currently
expect that our adoption of Statement 123(R) will adversely
affect our operating results in future periods. For example, if
Statement 123(R) had applied to our operating results for
2004, we would have recognized additional expense of
approximately $33.7 million, which would have decreased our
diluted net earnings (loss) per common share for 2004 from $0.25
to $(0.18).
|
|
|
Failure to maintain effective internal controls could have
a material adverse effect on our business, operating results and
stock price. |
We must continue to document and test our internal control
procedures in order to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act, which requires
annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our
Independent Auditors addressing these assessments. During the
course of our documentation and testing we may identify
deficiencies that we may not be able to remediate in time to
meet the deadlines imposed by the Sarbanes-Oxley Act for
continuing compliance with the requirements of Section 404.
If we fail to maintain the adequacy of our internal controls, as
such standards are modified, supplemented or amended from time
to time, we and/or our independent registered public accounting
firm may not be able to conclude at each fiscal year-end that we
have effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act. In
addition, we may incur increased costs in order to address the
requirements of Section 404 and other provisions of the
Sarbanes-Oxley Act, as well as other newly proposed or enacted
rules of the Securities and Exchange Commission and the NASDAQ
stock market. The extent and timing of incurrence of any such
costs is difficult to predict. Moreover, effective internal
controls, particularly those related to revenue recognition, are
necessary for us to produce reliable financial reports and are
important to helping prevent financial fraud. If, in any year,
we and/or our independent auditors cannot attest that we have
effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act, our
business and operating results could be harmed and result in a
negative market reaction.
|
|
|
If we do not make effective use of the proceeds of our
substantial cash resources, our financial results could suffer
and the value of our common stock could decline. |
Our ability to increase stockholder value is dependent, in part,
on our effective use of the cash proceeds from the sale of our
database business assets to IBM. We intend to use these funds to
continue to operate our business, repurchase shares of our
common stock and to finance any strategic acquisitions. We
cannot ensure that these measures will improve our financial
results or increase stockholder value.
|
|
|
If we are unable to increase revenue from, and expand the
market share of, our products, our financial results will be
materially adversely affected. |
If we do not increase sales of our enterprise data integration
products, our financial results will be materially adversely
affected. Our revenue is currently derived almost entirely from
our Enterprise Data Integration Suite. In order to increase
revenues and grow our business, we must be able to increase
sales of these products and our share of the enterprise data
integration market. We cannot ensure that our current
39
customers will continue to purchase our data integration product
offerings and related services and that new customers will
choose our solutions over our competitors’ product
offerings.
|
|
|
If the enterprise data integration market declines or does
not grow, we may sell fewer products and services and our
business may be unable to sustain its current level of
operations. |
If the growth rates for the enterprise data integration market
decline for any reason, there will be a decrease in demand for
our products and services, which would have a material adverse
effect on our financial results. We have invested substantial
resources in developing data integration products and services
to compete in this market. The market for these products and
services is evolving, and its growth depends upon an increasing
need to store and manage complex data and upon broader market
acceptance of our products as a solution for this need.
Declining demand for our products and services could threaten
our ability to sustain our present level of operations and meet
our expectations for future growth. There can be no assurance
that our investments in research and development to address
changing market requirements will yield the desired results.
|
|
|
Intense competition could adversely affect our ability to
sell our products and services. |
We may not be able to compete successfully against current and
future competitors which could impair our ability to sell our
products. The market for our products and services is highly
competitive, diverse and subject to rapid change. In particular,
we expect that the technology underlying our products and
services will continue to change rapidly. It is possible that
our products and solutions will be rendered obsolete by
technological advances achieved by our competitors.
The enterprise integration software market is extremely
competitive and subject to rapid technological change with
frequent new product introductions and enhancements. Our primary
competitors in the market include in-house hand-coded solutions,
vendors that develop and market certain aspects of the data
integration requirement such as Informatica and Pervasive
Software and certain business intelligence vendors who have
embedded limited data transformation and loading capabilities
into their offerings such as SAS (DataFlux) and Business
Objects. Other vendors that offer ETL functionality include,
among others, Microsoft and Oracle. We also face competition
from private companies such as ETI, as well as various
enterprise software vendors who have embedded ETL capabilities
such as SAP, and companies’ own internal development
resources. Competitors for Ascential ProfileStage, our data
profiling offering, include Trillium, which was purchased by
Harte-Hanks, CSI, which recently purchased Evoke, and SAS, which
has built profiling capabilities around their DataFlux product
line, among others. Competitors for Ascential QualityStage, our
data quality offering, include Firstlogic, Group One, SAS
DataFlux and Trillium, among others. We believe that there is no
single competitor that competes across the full range of our
enterprise data integration platform at present. We believe that
we are a strong competitor in the market with each of our data
integration component products, and a recognized leader in
providing end-to-end enterprise data integration. On occasion we
also compete with combinations of vendors, as they seek to match
the scope of the Ascential Enterprise Integration Suite. These
competitors may be able to respond more quickly than we can to
new or emerging technologies, evolving markets and changes in
customer requirements. In addition, market consolidations could
create more formidable competitors.
|
|
|
Competition may affect the pricing of our products or
services and changes in product mix may occur, either of which
may reduce our profit margins. |
Existing and future competition or changes in our product or
service offerings or pricing could result in an immediate
reduction in the prices of our products or services. In
addition, a significant change in the mix of software products
and services that we sell, including the mix between higher
margin software and maintenance products and lower margin
consulting and education, could materially adversely affect our
operating results for future periods. Services margin could be
negatively impacted by a reduction in the availability of
appropriately skilled lower cost external resources. In
addition, the pricing strategies of competitors in the software
industry have historically been characterized by aggressive
price discounting to
40
encourage volume purchasing by customers. We may not be able to
compete effectively against competitors who continue to
aggressively discount the prices of their products.
|
|
|
Our current strategy contemplates possible future
acquisitions, which will require us to incur substantial costs
for which we may never realize the anticipated benefits. |
On November 28, 2001 we completed the acquisition of
Torrent, on April 3, 2002 we completed the acquisition of
Vality, and on September 12, 2003 we completed the
acquisition of Mercator. In addition, we acquired certain
technology from Metagenix Inc. on March 31, 2002, and on
October 1, 2004, we acquired the assets of iNuCom (India)
Limited and its affiliate iNuCom.com, Inc. We consummated each
transaction with the expectation that it would result in mutual
benefits including, among other things, expanded and
complementary product offerings, increased market opportunity,
new technology and the addition of strategic personnel. Our
business strategy contemplates the possibility of future
acquisitions of complementary companies or technologies. Any
potential acquisition may result in significant transaction
expenses, increased interest and amortization expense, increased
depreciation expense and increased operating expense, any of
which could have a material adverse effect on our operating
results. In addition, if we were to make a cash acquisition of
substantial scale, it could reduce our cash reserves and affect
our liquidity and capital resources.
Achieving the benefits of any acquisition will depend in part on
our ability to integrate an acquired business with our business
in a timely and efficient manner. Our consolidation of
operations following any acquisition may require significant
attention from our management. The diversion of management
attention and any difficulties encountered in the transition and
integration process could have a material adverse effect on our
ability to achieve expected net sales, operating expenses and
operating results for any acquired business. We cannot ensure
that we will realize any of the anticipated benefits of any
acquisition, and if we fail to realize these anticipated
benefits, our operating performance could suffer.
|
|
|
Our financial results are subject to fluctuations caused
by many factors that could result in our failing to achieve
anticipated financial results. |
Our quarterly and annual financial results have varied
significantly in the past and are likely to continue to vary in
the future due to a number of factors, many of which are beyond
our control. In particular, if a large number of the orders that
are typically booked at the end of a quarter are not booked, our
net income for that quarter could be substantially below
expectations. In addition, the failure to meet market
expectations could cause a sharp drop in our stock price. These
and any one or more of the factors listed below or other factors
could cause us not to achieve our revenue or profitability
expectations. These factors include:
|
|
|
| |
• |
Changes in demand for our products and services, including
changes in growth rates in the software industry as a whole and
in the enterprise data integration market, |
| |
| |
• |
The size, timing and contractual terms of large orders for our
software products and services, |
| |
| |
• |
Possible delays in or inability to recognize revenue as the
result of revenue recognition rules, |
| |
| |
• |
The budgeting cycles of our customers and potential customers, |
| |
| |
• |
Any downturn in our customers’ businesses, in the domestic
economy or in international economies where our customers do
substantial business, |
| |
| |
• |
Changes in our pricing policies resulting from competitive
pressures, such as aggressive price discounting by our
competitors, or other factors, |
| |
| |
• |
Our ability to develop and introduce on a timely basis new or
enhanced versions of our products and services, |
| |
| |
• |
Unexpected needs for capital expenditures or other unanticipated
expenses, |
| |
| |
• |
Changes in the mix of revenues attributable to domestic and
international sales, and |
| |
| |
• |
Seasonal fluctuations in buying patterns. |
41
|
|
|
Our recognition of deferred revenue is subject to future
performance obligations and may not be representative of
revenues for succeeding periods. |
The timing and ultimate recognition of our deferred revenue
depends on our performance of various service obligations.
Because of the possibility of customer changes in development
schedules, delays in implementation and development efforts and
the need to satisfactorily perform product support services,
deferred revenue at any particular date may not be
representative of actual revenue for any succeeding period.
|
|
|
Our common stock has been and likely will continue to be
subject to substantial price and volume fluctuations that may
prevent stockholders from reselling their shares at or above the
prices at which they purchased their shares. |
Fluctuations in the price and trading volume of our common stock
may prevent stockholders from selling their shares at or above
the prices at which they purchased their shares. Stock prices
and trading volumes for many software companies fluctuate widely
for a number of reasons, including some reasons that may be
unrelated to the companies’ businesses or financial
results. This market volatility, as well as general domestic or
international economic, market and political conditions,
including threats of terrorism, could materially adversely
affect the market price of our common stock without regard to
our operating performance. In addition, our operating results
may be below the expectations of public market analysts and
investors, which could cause a drop in the market price of our
common stock. The market price of our common stock has
fluctuated significantly in the past and may continue to
fluctuate significantly for a number of reasons, including:
|
|
|
| |
• |
Market uncertainty about our business prospects or the prospects
for the enterprise data integration market, |
| |
| |
• |
Revenues or results of operations that do not meet or exceed
analysts’ and investors’ expectations, |
| |
| |
• |
The introduction of new products or product enhancements by us
or our competitors, |
| |
| |
• |
Any challenges integrating people, operations or products
associated with recent acquisitions, |
| |
| |
• |
General business conditions in the software industry, the
technology sector, or in the domestic or international
economies, and |
| |
| |
• |
Uncertainty and economic instability resulting from terrorist
acts and other acts of violence or war. |
|
|
|
Our financial success depends upon our ability to maintain
and leverage relationships with strategic partners. |
We may not be able to maintain our strategic relationships or
attract sufficient additional strategic partners who are able to
market our products and services effectively. Our ability to
increase the sales of our products and our future success
depends in part upon maintaining and expanding relationships
with strategic partners. In addition to our direct sales force,
we rely on relationships with a variety of strategic partners,
including systems integrators, resellers and distributors in the
United States and abroad. Further, we have become more reliant
upon resellers in international areas in which we do not have a
direct sales team. Our strategic partners may offer products of
several different companies, including, in some cases, products
that compete with our products. In addition, our strategic
partners may acquire businesses or product lines that compete
with our products. We have limited control, if any, as to
whether these strategic partners devote adequate resources to
promoting, selling and implementing our products. If our
strategic partners do not devote adequate resources for
implementation of our products and services, we could incur
substantial additional costs associated with hiring and training
additional qualified technical personnel to implement solutions
for our customers. In addition, our relationships with our
strategic partners may not generate enough revenue to offset the
cost of the significant resources used to develop and support
these relationships.
42
|
|
|
We may not be able to retain our key personnel and attract
and retain the new personnel necessary to grow our businesses,
which could materially adversely affect our ability to develop
and sell our products, support our business operations and grow
our business. |
The competition for experienced, well-qualified personnel in the
software industry is intense. Our future success depends on
retaining the services of key personnel in all functional areas
of our company, including engineering, sales, marketing,
consulting and corporate services. For instance, we may be
unable to continue to develop and support technologically
advanced products and services if we fail to retain and attract
highly qualified engineers, and to market and sell those
products and services if we fail to retain and attract
well-qualified marketing and sales professionals. We may be
unable to retain key employees in all of these areas and we may
not succeed in attracting new employees. In addition, from time
to time we may acquire other companies. In order to achieve the
anticipated benefits of any acquisition we may need transitional
or permanent assistance from key employees of the acquired
company. If we fail to retain, attract and motivate key
employees, including those of companies that we acquire, we may
be unable to develop, market and sell new products and services,
which could materially adversely affect our operating and
financial results.
|
|
|
Fluctuations in the value of foreign currencies could
result in currency transaction losses. |
Despite efforts to manage foreign exchange risk, our hedging
activities may not adequately protect us against the risks
associated with foreign currency fluctuations, particularly in
hyper-inflationary countries where hedging is not available or
practical. As a consequence, we may incur losses in connection
with fluctuations in foreign currency exchange rates. Most of
our international revenue and expenses are denominated in local
currencies. Due to the substantial volatility of currency
exchange rates, among other factors, we cannot predict the
effect of exchange rate fluctuations on our future operating
results. Although we take into account changes in exchange rates
in our pricing strategy, there would be a time lapse between any
sudden or significant exchange rate movements and our
implementation of a revised pricing structure.
Accordingly, we may have substantial pricing exposure as a
result of foreign exchange volatility during the period between
pricing reviews. In addition, as noted previously, the sales
cycles for our products are relatively long. Foreign currency
fluctuations could, therefore, result in substantial changes in
the financial impact of a specific transaction between the time
of initial customer contact and revenue recognition. We have a
foreign exchange hedging program that is intended to hedge the
value of intercompany accounts receivable or intercompany
accounts payable denominated in foreign currencies against
fluctuations in exchange rates until such receivables are
collected or payables are disbursed.
|
|
|
A portion of our product development is outsourced
offshore, which poses significant risks. |
Certain of our technical and product development initiatives are
conducted using offshore consultants in India, Sri Lanka, and
elsewhere, and using employees in India. We currently plan to
increase the proportion of development performed offshore in
order to take advantage of cost efficiencies and a broader
talent pool. However, we may not achieve significant cost
savings or other benefits that we anticipate from this program
and we may not be able to locate sufficient overseas staff with
appropriate skill sets to meet our evolving needs. We have a
heightened risk of exposure to changes in the economic, security
and political conditions of India and other regions. Economic
and political instability, military actions, and other
unforeseen occurrences overseas could impair our ability to
develop and introduce new software applications and
functionality in a timely manner. Moreover, legislation may be
adopted at the federal, state, or local level within the United
States or elsewhere restricting acquisition of products or
services with a significant offshore component, or customers may
individually adopt policies favoring technology developed using
local labor forces. In such cases, our competitive positioning
may be impaired. Further risks include:
|
|
|
| |
• |
difficulties in managing, operating, and staffing offshore
operations; |
| |
| |
• |
difficulties in obtaining or maintaining regulatory approvals or
complying with foreign laws; |
| |
| |
• |
reduced or less certain protection for intellectual property
rights; |
| |
| |
• |
differing technological advances, preferences or requirements; |
43
|
|
|
| |
• |
trade restrictions; and |
| |
| |
• |
foreign currency fluctuations. |
|
|
|
If we do not respond adequately to our industry’s
evolving technology standards or do not continue to meet the
sophisticated needs of our customers, revenues from our products
and solutions may decline. |
Our future success will depend on our ability to address the
increasingly sophisticated needs of our customers by supporting
existing and emerging hardware, software, database and
networking platforms. We will have to develop and introduce
commercially viable enhancements to our existing and acquired
products and services on a timely basis to keep pace with
technological developments, evolving industry standards and
changing customer requirements. If we do not enhance our
products and services to meet these evolving needs, we will not
license or sell as many products and services and our position
in existing, emerging or potential markets could be eroded
rapidly by other product advances. In addition, commercial
acceptance of our products and services also could be adversely
affected by critical or negative statements or reports by
brokerage firms, industry and financial analysts and the media
about us or our products or business, or by the advertising or
marketing efforts of competitors, or by other factors that could
adversely affect consumer perception.
Our product development efforts will continue to require
substantial financial and operational investment. We may not be
able to internally develop new products and services quickly
enough to respond to market forces. As a result, we may have to
acquire technology or access to products or services through
mergers and acquisitions, investments and partnering
arrangements, any of which may require us to use significant
financial resources. Alternatively, we may not be able to forge
partnering arrangements or strategic alliances on satisfactory
terms, or at all, with the companies of our choice.
|
|
|
Our future revenue and our ability to make investments in
developing our products is substantially dependent upon our
installed customer base continuing to license our products and
renew our service agreements. |
We depend on our installed customer base for future revenue from
services and licenses of additional products. If our customers
fail to renew their maintenance agreements, our revenue will
decline. Our maintenance agreements are generally renewable
annually at the option of the customers and there are no minimum
payment obligations or obligations to license additional
software. Therefore, current customers may not necessarily
generate significant maintenance revenue in future periods. In
addition, customers may not necessarily purchase or license
additional products or services. Our services revenue and
maintenance revenue also depends upon the continued use of these
services by our installed customer base, including the customers
of acquired companies. Any downturn in software license revenue
could result in lower services revenue in current or future
quarters.
|
|
|
Seasonal trends in sales of our software products could
adversely affect our quarterly operating results, and our
lengthy sales cycles for products makes our revenues susceptible
to fluctuations. |
Our sales of software products and services have been affected
by seasonal purchasing trends that materially affect our
quarter-to-quarter operating results. We expect these seasonal
trends to continue in the future. Revenue and operating results
in our first quarter are typically lower relative to other
quarters because many customers make purchase decisions for the
fourth quarter based on their calendar year-end budgeting
requirements, and as a new year begins start planning for, but
not implementing, new information technology spending until
later in the year. In addition, revenue and operating results in
our third quarter may be adversely affected by scheduling
conflicts due to vacations and holidays, particularly abroad.
Our sales cycles typically take many months to complete and vary
depending on the product or service that is being sold. The
length of the sales cycle may vary depending on a number of
factors over which we have little or no control, including the
size of a potential transaction and the level of competition
that we encounter in our selling activities. The sales cycle can
be further extended for sales made through resellers and
third-party distributors.
44
|
|
|
The success of our international operations is dependent
upon many factors that could adversely affect our ability to
sell our products internationally and could affect our
profitability. |
International sales represent approximately 53% of our total
revenue for the year ended December 31, 2004. Our
international operations are, and any expanded international
operations will be, subject to a variety of risks associated
with conducting business internationally that could adversely
affect our ability to sell our products internationally and,
therefore, our profitability, including the following:
|
|
|
| |
• |
Difficulties in staffing and managing international operations, |
| |
| |
• |
Problems in collecting accounts receivable, |
| |
| |
• |
Longer payment cycles, |
| |
| |
• |
Fluctuations in currency exchange rates, |
| |
| |
• |
Seasonal reductions in business activity during the summer
months in Europe and certain other parts of the world, |
| |
| |
• |
Uncertainties relative to regional, political, economic and
environmental circumstances, |
| |
| |
• |
Recessionary environments in domestic or foreign
economies and |
| |
| |
• |
Increases in tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers imposed by
countries, and other changes in applicable foreign laws. |
|
|
|
If we fail to protect our intellectual property rights,
competitors may be able to use our technology or trademarks
which would weaken our competitive position, reduce our revenue
and increase costs. |
Our business success will continue to be heavily dependent upon
proprietary technology. We rely primarily on a combination of
patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect
our proprietary rights. These means of protecting proprietary
rights may not be adequate, and the inability to protect
intellectual property rights may adversely affect our business
and/or financial condition. We currently hold a number of United
States patents and pending applications. There can be no
assurance that any other patents covering our inventions will be
issued or that any patent, if issued, will provide sufficiently
broad protection or will prove enforceable in actions against
alleged infringements. Our ability to sell or license our
products and services and to prevent competitors from
misappropriating our proprietary technology and trade names is
dependent upon protecting our intellectual property. Our
products are generally licensed to end users on a
“right-to-use” basis under a license that restricts
the use of the products for the customer’s internal
business purposes.
Despite such precautions, it may be possible for unauthorized
third parties to copy aspects of our current or future products
or to obtain and use information that we regard as proprietary.
In addition, we have licensed the source code of our products to
certain customers under certain circumstances and for restricted
uses. We also have entered into source code escrow agreements
with a number of our customers that generally require release of
our source code to the customer in the event of bankruptcy,
insolvency, or discontinuation of our business or support of a
product line, in each case where support and maintenance of the
product line is not assumed by a third party. We may also be
unable to protect our technology because:
|
|
|
| |
• |
Competitors may independently develop similar or superior
technology, |
| |
| |
• |
Policing unauthorized use of software is difficult, |
| |
| |
• |
The laws of some foreign countries do not protect proprietary
rights in software to the same extent as do the laws of the
United States, |
| |
| |
• |
“Shrink-wrap” and/or “click-wrap” licenses
may be wholly or partially unenforceable under the laws of
certain jurisdictions, and |
| |
| |
• |
Litigation to enforce intellectual property rights, to protect
trade secrets, or to determine the validity and scope of the
proprietary rights of others could result in substantial costs
and diversion of resources. |
45
|
|
|
Our software may have defects and errors, which may lead
to a loss of revenue or product liability claims. |
Software products are internally complex and occasionally
contain defects or errors, especially when first introduced or
when new versions or enhancements are released. Despite
extensive testing, we may not detect errors in our new products,
platforms or product enhancements until after we have commenced
commercial shipments. If defects and errors are discovered in
our existing or acquired products, platforms or product
enhancements after commercial release, then potential customers
may delay or forego purchases; our reputation in the marketplace
may be damaged; we may incur additional service and warranty
costs; and we may have to divert additional development
resources to correct the defects and errors. If any or all of
the foregoing occur, we may lose revenues or incur higher
operating expenses and lose market share, any of which could
severely harm our financial condition and operating results.
|
|
|
Claims by others that we infringe their intellectual
property rights could harm our business and financial
condition. |
The software industry is characterized by an increasing
prevalence of patents and litigation regarding patent and other
intellectual property rights. We cannot be certain that our
products do not and will not infringe issued patents, patents
that may issue in the future, or other intellectual property
rights of third parties. From time to time we may face
assertions by third parties that our products or technology
infringe their patents or other intellectual property rights.
Any claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is invalid,
and could distract the attention of our management. If any of
our products is found to violate third-party proprietary rights,
we may be required to pay substantial damages. In addition, we
may be required to re-engineer our products or obtain licenses
from third parties to continue to offer our products. There are
no assurances that any efforts to re-engineer our products or
obtain licenses on commercially reasonable terms would be
successful and, if not, such circumstances could have a material
adverse effect on our business, financial condition and results
of operations.
|
|
|
The loss of our rights to use software licensed to us by
third parties could harm our business. |
In order to provide a complete product suite, we occasionally
license software from third parties, and sub-license this
software to our customers. In addition, we license software
programs from third parties and incorporate these programs into
our own software products. By utilizing third party software in
our business, we incur risks that are not associated with
developing software in-house. For example, these third party
providers may discontinue or alter their operations, terminate
their relationship with us, impose license restrictions or
generally become unable to fulfill their obligations to us. If
any of these circumstances were to occur, we may be forced to
seek alternative technology that may not be available on
commercially reasonable terms. In the future, we may be forced
to obtain additional third party software licenses to enhance
our product offerings and compete more effectively. We may not
be able to obtain and maintain licensing rights to needed
technology on commercially reasonable terms, which would harm
our business and operating results.
|
|
|
We have substantial real estate lease commitments for
unoccupied space and restoration obligations, and if we are
unable to sublet this space on acceptable terms our operating
results and financial condition could be adversely
affected. |
We are party to real estate leases worldwide for a total of
approximately 498,000 square feet. At December 31,
2004, we actively utilized approximately 56% of this space, or
278,000 square feet. We retain unoccupied space as a result
of the IBM Transaction and the Mercator acquisition. At
December 31, 2004 approximately 32%, or 157,000 square
feet is currently unoccupied. Approximately 12% or
63,000 square feet of this unoccupied space is sublet to a
third party.
At December 31, 2004, we had a restructuring reserve of
$32.3 million associated with these leases comprised of
$30.3 million for lease obligations and $2.0 million
for restoration costs related to the disposition of this space
as of December 31, 2004. In establishing this reserve, we
assumed that we will be able to sublet
46
the available space and receive approximately $24.7 million
of sublease income relating to this space, $3.7 million for
properties already sublet and $21.0 million from properties
where a sublet is anticipated. We may not be able to sublet this
space on the assumed terms and restoration costs may exceed our
estimates. If we are unable to sublet this space on the assumed
terms, or if restoration costs exceed our estimates, there may
be an adverse effect on our operating results of up to
$19.9 million resulting from additional restructuring costs.
|
|
|
Provisions in our charter documents may discourage
potential acquisition bids and prevent changes in our management
that our stockholders may favor. This could adversely affect the
market price for our common stock. |
Provisions in our charter documents could discourage potential
acquisition proposals and could delay or prevent a change in
control transaction that our stockholders may favor. The
provisions include:
|
|
|
| |
• |
Elimination of the right of stockholders to act without holding
a meeting, |
| |
| |
• |
Certain procedures for nominating directors and submitting
proposals for consideration at stockholder meetings and |
| |
| |
• |
A board of directors divided into three classes, with each class
standing for election once every three years. |
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 which has the
effect of requiring cooperation with our Board of Directors.
This may also prevent an increase in the market price of our
common stock resulting from actual or rumored takeover attempts.
The rights agreement could also discourage potential acquirers
from making unsolicited acquisition bids.
|
|
|
Provisions in our charter documents with respect to
undesignated preferred stock may discourage potential
acquisition bids. |
Our Board of Directors is authorized to issue up to
approximately four million shares of undesignated preferred
stock in one or more series. Our Board of Directors can fix the
price, rights, preferences, privileges and restrictions of such
preferred stock without any further vote or action by our
stockholders. However, the issuance of shares of preferred stock
may delay or prevent a change in control transaction without
further action by our stockholders. As a result, the market
price of our common stock and the voting and other rights of the
holders of our common stock may be adversely affected. The
issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of our
common stock, including the loss of voting controls to others.
|
|
|
Delaware law may inhibit potential acquisition bids, which
may adversely affect the market price for our common stock and
prevent changes in our management that our stockholders may
favor. |
We are incorporated in Delaware and are subject to the
anti-takeover provisions of the Delaware General Corporation
Law, which regulates corporate acquisitions. Delaware law
prevents certain Delaware corporations, including us, whose
securities are listed for trading on the NASDAQ National Market,
from engaging,
47
under certain circumstances, in a “business
combination” 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 have not and do not intend to
“opt out” of these anti-takeover provisions of
Delaware law.
|
|
|
Terrorist attacks, such as the attacks that occurred in
New York and Washington, D.C. on September 11, 2001,
and other acts of violence or war, may affect the markets in
which we operate, our operations and our profitability. |
Terrorist attacks may negatively disrupt and negatively impact
our operations. We are unable to predict whether there will be
future terrorist attacks against the United States or United
States businesses, or against other countries or businesses
located in those countries. These attacks may directly impact
our physical facilities and those of our suppliers or customers.
Furthermore, these attacks may make the travel of our employees
more difficult and expensive and ultimately may affect our sales.
Also, as a result of terrorism or for other reasons, the United
States may enter into an armed conflict that could have a
further impact on our sales and our ability to deliver products
to our customers. Political and economic instability in some
regions of the world may also negatively impact our business
generated in those regions. The consequences of any of these
armed conflicts are unpredictable, and we may not be able to
foresee events that could have an adverse effect on our business.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
The information required by this item is set forth in the
section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations captioned
“Disclosures About Market Rate Risk.”
|
|
| Item 8. |
Financial Statements and Supplementary Data |
The information required by this item is set forth in our
Financial Statements and Notes thereto beginning at
page F-1 of this report, as set forth in the index at
Item 15(a)(1) below.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. Our
management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures as of
December 31, 2004. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that
information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Our management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of December 31, 2004,
48
our chief executive officer and chief financial officer
concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
Management’s report on our internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) and the independent registered public
accounting firm’s related audit report are included in our
Financial Statements and Notes thereto beginning at
page F-2 and are incorporated herein by reference.
Changes in Internal Control over Financial Reporting.
During the quarter ended December 31, 2004 the following
changes in internal control over financial reporting were made
that materially affect, or are reasonably likely to materially
affect, our internal control over financial reporting:
Internal controls surrounding the calculation of pro forma stock
compensation expense in accordance with SFAS 123 were
improved. The following procedures were implemented and operated
effectively in the fourth quarter of 2004; as a result, certain
adjustments to our previously reported pro forma stock
compensation amounts were identified (See Note 1 to the
Consolidated Financial Statements):
|
|
|
| |
• |
Completed review of all cumulative vesting data included in the
pro forma stock compensation calculations |
| |
| |
• |
Formalized policy with respect to the method utilized to
calculate the after tax pro forma stock compensation |
| |
| |
• |
Expanded review and analysis of assumptions used in the
calculation |
| |
| |
• |
Tested arithmetic accuracy of the calculations |
Internal controls surrounding accounting for international tax
obligations were improved. The following procedures were
implemented and operated effectively in the fourth quarter of
2004:
|
|
|
| |
• |
Formalized tax payment reporting by foreign subsidiaries to the
Corporate Tax Manager |
| |
| |
• |
Expanded tax reporting packages submitted by foreign
subsidiaries to the US |
| |
| |
• |
Improved communication and reporting of differences between
estimated tax provisions and actual tax obligations when tax
returns are filed. |
Except as set forth above, there was no change in our internal
control over financial reporting that occurred during the
quarter ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
|
|
| Item 9B. |
Other Information |
None.
PART III
Certain information required by Part III of this
Form 10-K is omitted because we will file a definitive
proxy statement pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this
Form 10-K, and certain information to be included
therein is incorporated herein by reference.
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
Certain information regarding executive officers is included in
Part I of this Form 10-K under the section captioned
“Executive Officers.” The remaining information
required by Item 10 of this Form 10-K is incorporated
by reference to our definitive proxy statement under the
captions “Election of Directors”, “Board and
Committee Meetings”, “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Code of Business
Conduct and Ethics”.
49
|
|
| Item 11. |
Executive Compensation |
The information required by Item 11 of this Form 10-K
is incorporated herein by reference to our definitive proxy
statement under the caption “Executive Compensation”.
The information specified in Item 402(k) and (l) of
Regulation S-K and set forth in our definitive proxy
statement is not incorporated by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
|
|
|
Equity Compensation Plan Information |
The following table provides information about common stock
authorized for issuance under our equity compensation plans as
of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(a) | |
|
(b) | |
|
(c) | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
Number of Securities | |
| |
|
Number of Securities | |
|
|
|
Remaining Available for | |
| |
|
to Be Issued Upon | |
|
Weighted Average | |
|
Future Issuance under | |
| |
|
Exercise of | |
|
Exercise Price of | |
|
Equity Compensation | |
| |
|
Outstanding Options, | |
|
Outstanding | |
|
Plans (Excluding | |
| |
|
Warrants and | |
|
Options, Warrants | |
|
Securities Reflected | |
| Plan Category |
|
Rights(1) | |
|
and Rights | |
|
in Column (a))(2) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders
|
|
|
4,405,801 |
|
|
$ |
22.04 |
|
|
|
3,790,587 |
(3) |
|
Equity compensation plans not approved by security holders
|
|
|
5,655,215 |
|
|
$ |
16.51 |
|
|
|
2,587,426 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,061,016 |
|
|
$ |
18.93 |
|
|
|
6,378,013 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
This table excludes an aggregate of 1,588,242 shares
issuable upon exercise of outstanding options that were assumed
in connection with various acquisition transactions. The
weighted-average exercise price of the excluded options is
$23.45. |
| |
| (2) |
In addition to being available for future issuance upon exercise
of options that may be granted after December 31, 2004,
1,650,000 shares under the 1994 Plan and 1,625,000 under
the 1998 Plan may be used for the award of restricted stock. |
| |
| (3) |
Includes 1,169,854 shares issuable under our 1997 Employee
Stock Purchase Plan as of December 31, 2004. |
Equity Compensation Plans Not Approved by Stockholders
Presently, the Company grants stock option awards under two
equity compensation plans that are not approved by the
stockholders — the 1997 Non-Statutory Stock Option
Plan (as amended, the “1997 Plan”) and the Amended and
Restated 1998 Non-Statutory Stock Option and Award Plan (the
“1998 Plan”). The following descriptions of the
material terms of the plans are qualified in their entirety by
reference to the 1997 Plan and the 1998 Plan.
1997 Non-Statutory Stock Option Plan
In July 1997, the Board of Directors adopted the 1997 Plan for
the purposes of granting non-statutory stock option awards to
attract and retain the best available personnel for positions of
substantial responsibility, providing additional incentives to
employees and promoting the success of the Company’s
business. Under the 1997 Plan, we are currently authorized to
grant non-statutory stock options to purchase an aggregate of
425,000 shares of common stock.
50
The 1997 Plan is administered by a committee of the Board of
Directors (the “1997 Committee”). The members of the
1997 Committee are appointed from time to time by, and serve at
the pleasure of, the Board of Directors. At present, the 1997
Committee is made up of the members of our Compensation
Committee.
Subject to the terms of the 1997 Plan, the 1997 Committee has
all discretion and authority necessary or appropriate to control
and manage the operation and administration of the 1997 Plan.
The 1997 Committee may, among other things, determine the per
share exercise price of options granted, the term of the option
and the vesting period and the acceptable form of payment upon
exercise of an option. All determinations and interpretations of
the 1997 Committee are final and binding on the holders of
options granted under the 1997 Plan.
The 1997 Plan provides that non-statutory stock options may be
granted to employees (including officers and directors who are
also employees) and consultants (including advisors) of the
Company and its subsidiaries; provided, however, that options
may only be granted to officers and employee directors of the
Company as an inducement essential to their entering into an
employment contract with the Company.
|
|
|
Amendment and Termination |
Subject to the relevant requirements of The Nasdaq Stock Market
regarding shareholder approval, the Board of Directors may, in
its discretion, amend, alter, suspend or terminate the 1997 Plan
or any part of it; however, no such amendment, alteration,
suspension or termination may impair the rights of any option
holder without the consent of the option holder. The 1997 Plan
is effective for a term of 10 years and will terminate on
July 22, 2007, unless terminated earlier by the Board of
Directors.
|
|
|
Changes in Capital Structure |
In the event of a stock dividend, stock split, reverse stock
split, combination, reclassification or similar event, the
number of shares authorized for issuance under the 1997 Plan,
the outstanding options and the exercise price of such options
will be proportionately adjusted.
In the event of a dissolution or liquidation, the 1997 Committee
may accelerate the vesting of then-unvested options until
10 days prior to such transaction. In the event of any
merger or asset sale, outstanding options shall be assumed or an
equivalent option substituted by the successor corporation. In
the event that the successor corporation refuses to assume the
options, the options shall fully vest and become exercisable.
Amended and Restated 1998 Non-Statutory Stock Option and
Award Plan
In July 1998, the Board of Directors adopted the 1998 Plan for
the purposes of granting non-statutory stock option awards to
attract and retain the best available personnel for positions of
substantial responsibility, providing additional incentive to
employees and consultants and promoting the success of the
Company’s business. In June 2003, the 1998 Plan was amended
to provide for the issuance of restricted stock awards to
employees and consultants of the Company. Under the 1998 Plan
8,125,000 shares of common stock are authorized for
issuance.
The 1998 Plan is presently administered by a committee of the
Board of Directors (the “1998 Committee”). The members
of the 1998 Committee are appointed from time to time by, and
serve at the pleasure of, the Board of Directors. At present,
the Compensation Committee administers the 1998 Plan. The
Compensation Committee has delegated authority to administer the
1998 Plan to a Stock Option Committee of which the
Company’s Chairman of the Board of Directors and Chief
Executive Officer, Peter Gyenes, is the sole member. The Stock
Option Committee has the authority to select the employees,
other than officers (as defined) and directors, to whom options
may be granted under the 1998 Plan. At each regularly scheduled
meeting of the Board of Directors and of the Compensation
Committee, all such option grants by the Stock Option Committee
issued since the prior scheduled meeting are reviewed. In
addition, the Company’s current
51
practice is to have the Compensation Committee and/or the Board
of Directors determine, authorize and approve annual executive
option grants.
Subject to the terms of the 1998 Plan, the 1998 Committee has
all discretion and authority necessary or appropriate to control
and manage the operation and administration of the 1998 Plan.
The 1998 Committee may, among other things, determine the per
share exercise price of options granted, the term of the option
and the vesting period and the acceptable form of payment upon
exercise of an option. All determinations and interpretations of
the 1998 Committee are final and binding on the holders of
options granted under the 1998 Plan.
The 1998 Plan provides that non-statutory stock options and
restricted stock may be granted to employees (including
officers) and consultants (including advisors).
|
|
|
Amendment and Termination |
Subject to the relevant requirements of The Nasdaq Stock Market
regarding shareholder approval, the Board of Directors may, in
its discretion, amend, alter, suspend or terminate the 1998 Plan
or any part it; however, no such amendment, alteration,
suspension or termination shall impair the rights of any option
holder without the consent of the option holder. The 1998 Plan
is effective for a term of 10 years and will terminate on
July 17, 2008, unless terminated earlier by the Board of
Directors.
|
|
|
Changes in Capital Structure |
In the event of a stock dividend, stock split, reverse stock
split, combination, reclassification or similar event, the
number of shares authorized for issuance under the 1998 Plan,
the outstanding options and awards and the exercise price of
such options will be proportionately adjusted.
In the event of any merger, direct or indirect purchase,
consolidation, or otherwise, of all or substantially all of the
business and/or assets of the Company, all obligations of the
Company under the 1998 Plan, with respect to the options granted
under the 1998 Plan, shall be binding on any successor to the
Company.
The remaining information required by Item 12 of this
Form 10-K is incorporated herein by reference to our
definitive proxy statement.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information required by Item 13 of Form 10-K is
incorporated herein by reference to our definitive proxy
statement under the section captioned “Certain
Relationships and Related Transactions.”
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information required by Item 14 of this Form 10-K
is incorporated herein by reference to our definitive proxy
statement under the captions “Audit Fees” and
“Pre-Approval Policy and Procedures”.
52
PART IV
|
|
| Item 15. |
Exhibits, and Financial Statement Schedules |
The following are filed as a part of this Annual Report and
included in Item 8:
|
|
| (a)(1) |
Financial Statements |
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Managements Report on Internal Control Over Financial Reporting
|
|
|
F-2 |
|
|
Report of Independent Registered Public Accounting
Firm — PricewaterhouseCoopers LLP
|
|
|
F-3 |
|
|
Report of Independent Registered Public Accounting
Firm — KPMG LLP
|
|
|
F-5 |
|
|
Consolidated Balance Sheets
|
|
|
F-6 |
|
|
Consolidated Statements of Operations
|
|
|
F-7 |
|
|
Consolidated Statements of Cash Flows
|
|
|
F-8 |
|
|
Consolidated Statements of Stockholders’ Equity
|
|
|
F-9 |
|
|
Consolidated Statements of Comprehensive Income (Loss)
|
|
|
F-10 |
|
|
Notes to Consolidated Financial Statements
|
|
|
F-11 |
|
|
|
| (a)(2) |
Financial Statements Schedules |
All schedules are not submitted because they are not applicable,
not required, or the information is included in our Consolidated
Financial Statements and related Notes to Consolidated Financial
Statements.
(a)(3) Exhibits
| |
|
|
|
|
| |
2 |
.1(2) |
|
Agreement and Plan of Merger, dated as of August 2, 2003,
by and among Ascential Software Corporation, Greek Acquisition
Corporation and Mercator Software, Inc. |
| |
2 |
.2(14) |
|
Merger Agreement, dated as of March 12, 2002, among the
Registrant, Venus Acquisition Corporation and Vality Technology
Incorporated |
| |
2 |
.3(24) |
|
Agreement and Plan of Merger, dated as of March 13, 2005,
among International Business Machines Corporation, Ironbridge
Acquisition Corp., and Ascential Software Corporation |
| |
3 |
.1(3) |
|
Restated Certificate of Incorporation, as amended |
| |
3 |
.2(22) |
|
Certificate of Amendment to Restated Certificate of
Incorporation, as amended |
| |
3 |
.3(4) |
|
Second Amended and Restated Bylaws of Ascential Software
Corporation |
| |
3 |
.4(5) |
|
Certificate of Designation of Series B Convertible
Preferred Stock |
| |
4 |
.1(6) |
|
First Amended and Restated Rights Agreement, dated as of
August 12, 1997, between the Registrant and BankBoston
N.A., including the form of Rights Certificate attached thereto
as Exhibit A |
| |
4 |
.2(6) |
|
Amendment, dated as of November 17, 1997, to the First
Amended and Restated Rights Agreement between the Registrant and
BankBoston, N.A. |
| |
4 |
.3(7) |
|
Amendment No. 2 to the First Amended and Restated Rights
Agreement, dated as of April 26, 2002, between the
Registrant and EquiServe Trust Company, N.A. |
| |
4 |
.4(25) |
|
Amendment No. 3 to the First Amended and Restated Rights
Agreement, dated March 13, 2005, between the Registrant and
EquiServe Trust Company, N.A. |
| |
10 |
.1(4)(†) |
|
Change in Control Agreement, dated as of April 22, 2003,
between the Registrant and Peter Gyenes |
| |
10 |
.2(4)(†) |
|
Change in Control Agreement, dated as of April 22, 2003,
between the Registrant and Peter Fiore |
| |
10 |
.3(4)(†) |
|
Change in Control Agreement, dated as of April 22, 2003,
between the Registrant and Scott N. Semel |
53
| |
|
|
|
|
| |
10 |
.4(4)(†) |
|
Change in Control Agreement, dated as of April 22, 2003,
between the Registrant and Robert C. McBride |
| |
10 |
.5(8)(†) |
|
Form of Indemnity Agreement to which the Registrant is a party
with each of its directors and executive officers |
| |
10 |
.6(9)(†) |
|
Part-Time Employment and Transition Agreement between the
Registrant and Peter Gyenes |
| |
10 |
.7(10)(†) |
|
Offer of Employment Letter, dated July 31, 2000, between
the Registrant and Peter Gyenes |
| |
10 |
.8(11) |
|
Settlement Agreement, effective January 11, 2000, between
the Registrant and the Securities and Exchange Commission |
| |
10 |
.9(12)(†) |
|
Offer of Employment Letter, dated June 13, 2001, between
the Registrant and Robert C. McBride |
| |
10 |
.10(12)(†) |
|
Offer of Employment Letter, effective July 25, 2001,
between the Registrant and Scott Semel |
| |
10 |
.11(12)(†) |
|
Form of Offer of Employment Letter for officers of the Registrant |
| |
10 |
.12(13) |
|
Master Purchase Agreement, dated as of April 24, 2001,
among Informix Corporation, Informix Software, Inc. and
International Business Machines Corporation |
| |
10 |
.13(12) |
|
Lease, dated May 3, 1994, between VMark Software, Inc. and
50 Washington Street Associates L.P. for office space at 50
Washington Street, Westborough, Massachusetts |
| |
10 |
.14(12) |
|
Amendment of Lease, dated March 27, 1998, between Ardent
Software, Inc. (formerly VMark Software, Inc.) and Fifty
Washington Street Limited Partnership for office space at 50
Washington Street, Westborough, Massachusetts |
| |
10 |
.15(12) |
|
Agreement, dated March 12, 2001, among the Registrant,
Informix Software, Inc., Ascential Software, Inc. and Fifty
Washington Street Limited Partnership regarding Lease for office
space at 50 Washington Street, Westborough, Massachusetts |
| |
10 |
.16(15)(†) |
|
Second Restated 1994 Stock Option and Award Plan |
| |
10 |
.17(15)(†) |
|
Second Restated 1989 Outside Directors Stock Option Plan |
| |
10 |
.18(15)(†) |
|
Second Restated 1997 Employee Stock Purchase Plan |
| |
10 |
.19(15)(†) |
|
Amended and Restated 1998 Non-Statutory Stock Option and Award
Plan |
| |
10 |
.20(18)(†) |
|
1997 Non-Statutory Stock Option Plan |
| |
10 |
.21(20)(†) |
|
Amendment to 1997 Non-Statutory Stock Option Plan |
| |
10 |
.22(17)(†) |
|
TSI International Software Inc. 1993 Stock Option Plan |
| |
10 |
.23(17)(†) |
|
1996 Novera Software Inc. Stock Option Plan |
| |
10 |
.24(17)(†) |
|
Mercator Software, Inc. 1997 Equity Incentive Plan |
| |
10 |
.25(21)(†) |
|
Amended and Restated Change of Control and Severance Agreement,
dated as of May 1, 2002, between the Registrant and Peter
Gyenes |
| |
10 |
.26(21)(†) |
|
Amended and Restated Change of Control and Severance Agreement,
dated as of May 1, 2002, between the Registrant and Peter
Fiore |
| |
10 |
.27(21)(†) |
|
Amended and Restated Change of Control and Severance Agreement,
dated as of March 8, 2002, between the Registrant and
Robert C. McBride |
| |
10 |
.28(23)(†) |
|
Form of Stock Option Agreement pursuant to Second Restated 1994
Stock Option and Award Plan |
| |
10 |
.29(23)(†) |
|
Form of Nonqualified Stock Option Agreement pursuant to Second
Restated 1989 Outside Directors Stock Option Plan |
| |
10 |
.30(23)(†) |
|
Form of Stock Option Agreement pursuant to Amended and Restated
1998 Non-Statutory Stock Option and Award Plan |
| |
10 |
.31(1)(†) |
|
Form of Notice of Restricted Stock Grant |
| |
21 |
.1(1) |
|
Subsidiaries of the Registrant |
| |
23 |
.1(1) |
|
Consent of PricewaterhouseCoopers LLP |
| |
23 |
.2(1) |
|
Consent of KPMG LLP |
| |
24 |
.1 |
|
Power of Attorney (set forth on signature page) |
54
| |
|
|
|
|
| |
31 |
.1(1) |
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended |
| |
31 |
.2(1) |
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended |
| |
32 |
.1(1) |
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
32 |
.2(1) |
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
99 |
.1(16) |
|
Stock Tender Agreement, dated as of August 2, 2003, by and
among Ascential Software Corporation, Greek Acquisition
Corporation and certain directors and executive and other
officers of Mercator Software, Inc. set forth therein |
| |
99 |
.2(16) |
|
Common Stock Option Agreement, dated as of August 2, 2003,
by and among Ascential Software Corporation, Greek Acquisition
Corporation and Mercator Software, Inc. |
|
|
|
| |
(1) |
Filed herewith. |
| |
| |
(2) |
Incorporated by reference to exhibit filed with the
Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission (the “Commission”)
on August 5, 2003 (File No. 000-15325) |
| |
| |
(3) |
Incorporated by reference to exhibit filed with the
Registrant’s quarterly report on Form 10-Q filed with
the Commission on August 14, 2003 (File No. 000-15325) |
| |
| |
(4) |
Incorporated by reference to exhibit filed with the
Registrant’s quarterly report on Form 10-Q filed with
the Commission on May 15, 2003 (File No. 000-15325) |
| |
| |
(5) |
Incorporated by reference to exhibit filed with the
Registrant’s current report on Form 8-K filed with the
Commission on December 4, 1997 (File No. 000-15325) |
| |
| |
(6) |
Incorporated by reference to exhibit filed with the amendment to
the Registrant’s registration statement on Form 8-A/ A
filed with the Commission on September 3, 1997 (File
No. 000-15325) |
| |
| |
(7) |
Incorporated by reference to exhibit filed with Amendment
No. 5 to the Registrant’s registration statement on
Form 8-A/ A filed with the Commission on May 1, 2002
(File No. 000-15325) |
| |
| |
(8) |
Incorporated by reference to exhibit filed with the
Registrant’s annual report on Form 10-K filed with the
Commission on March 27, 2003 (File No. 000-15325) |
| |
| |
(9) |
Incorporated by reference to exhibit filed with the
Registrant’s quarterly report on Form 10-Q filed with
the Commission on May 15, 2000 (File No. 000-15325) |
|
|
| (10) |
Incorporated by reference to exhibit filed with the
Registrant’s quarterly report on Form 10-Q filed with
the Commission on November 14, 2000 (File
No. 000-15325) |
| |
| (11) |
Incorporated by reference to exhibit filed with the
Registrant’s current report on Form 8-K filed with the
Commission on January 19, 2000 (File No. 000-15325) |
| |
| (12) |
Incorporated by reference to exhibit filed with the
Registrant’s annual report on Form 10-K filed with the
Commission on April 1, 2002 (File No. 000-15325) |
| |
| (13) |
Incorporated by reference to Annex A to the
Registrant’s Definitive Proxy Statement on
Schedule 14A filed with the Commission on May 10, 2001
(File No. 000-15325) |
| |
| (14) |
Incorporated by reference to exhibit filed with the
Registrant’s quarterly report on Form 10-Q filed with
the Commission on May 15, 2002 (File No. 000-15325) |
| |
| (15) |
Incorporated by reference to exhibit filed with the
Registrant’s registration statement on Form S-8 filed
with the Commission on December 5, 2003 (File
No. 333-110970) |
| |
| (16) |
Incorporated by reference to exhibit filed with the
Registrant’s current report on Form 8-K filed with the
Commission on August 5, 2003 (File No. 000-15325) |
| |
| (17) |
Incorporated by reference to exhibit filed with the
Registrant’s Registration Statement on Form S-8 filed
with the Commission on September 12, 2003 (File
No. 333-108782) |
55
|
|
| (18) |
Incorporated by reference to exhibit filed with the
Registrant’s annual report on Form 10-K filed with the
Commission on March 31, 1998 (File No. 000-15325) |
| |
| (19) |
Incorporated by reference to exhibit filed with the
Registrant’s current report on Form 8-K filed with the
Commission on April 3, 2003 (File No. 000-15325) |
| |
| (20) |
Incorporated by reference to exhibit filed with the
Registrant’s annual report on Form 10-K filed with the
Commission on March 16, 2004 (File No. 000-15325) |
| |
| (21) |
Incorporated by reference to exhibit filed with the
Registrant’s quarterly report on Form 10-Q filed with
the Commission on August 14, 2002 (File No. 000-15325) |
| |
| (22) |
Incorporated by reference to exhibit filed with the
Company’s quarterly report on Form 10-Q filed with the
Commission on August 9, 2004 (File No. 000-15325) |
| |
| (23) |
Incorporated by reference to exhibit filed with the
Company’s quarterly report on Form 10-Q filed with the
Commission on November 9, 2004 (File No. 000-15325) |
| |
| (24) |
Incorporated by reference to exhibit filed with the
Registrant’s current report on Form 8-K filed with the
Commission on March 14, 2005 (File No. 000-15325) |
| |
| (25) |
Incorporated by reference to exhibit filed with Amendment
No. 6 to the Registrant’s registration statement on
Form 8-A/A filed with the Commission on March 14, 2005
(File No. 000-15325) |
|
|
|
|
(†) |
|
Management contract or compensation plan or arrangement required
to be filed as an exhibit pursuant to Item 15(c) of
Form 10-K |
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
| |
Ascential Software
Corporation
|
|
|
| |
|
| |
Peter Gyenes |
| |
Chief Executive Officer and |
| |
Chairman of the Board of Directors |
Date: March 16, 2005
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Peter
Gyenes and Robert McBride and each one of them, acting
individually and without the other, as his attorney-in-fact,
each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Annual Report
on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, this Annual Report on Form 10-K has
been signed on behalf of the Registrant and in the capacities
and on the dates indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Peter Gyenes
Peter
Gyenes |
|
Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer) |
|
March 16, 2005 |
| |
/s/ Robert C. McBride
Robert
C. McBride |
|
Vice President and Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) |
|
March 16, 2005 |
| |
/s/ Robert M. Morrill
Robert
M. Morrill |
|
Director |
|
March 16, 2005 |
| |
/s/ John J. Gavin, Jr.
John
J. Gavin, Jr. |
|
Director |
|
March 16, 2005 |
| |
/s/ David J. Ellenberger
David
J. Ellenberger |
|
Director |
|
March 16, 2005 |
| |
/s/ William J. Weyand
William
J. Weyand |
|
Director |
|
March 16, 2005 |
57
ASCENTIAL SOFTWARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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F-2 |
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F-3 |
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F-5 |
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F-6 |
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F-7 |
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F-8 |
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F-9 |
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F-10 |
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F-11 |
|
F-1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004.
In making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control — Integrated
Framework. Based on our assessment using those criteria, we
concluded that our internal control over financial reporting was
effective as of December 31, 2004.
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears on
page F-3 of this Annual Report on Form 10-K.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ascential Software Corporation:
We have completed an integrated audit of Ascential Software
Corporation’s 2004 consolidated financial statements and of
its internal control over financial reporting as of
December 31, 2004 and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated Financial Statements
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Ascential
Software Corporation and its subsidiaries at December 31,
2004 and 2003, and the results of their operations and their
cash flows for each of the two years in the period ended
December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal Control Over Financial Reporting
Also, in our opinion, management’s assessment, included in
Management’s Report on Internal Control Over Financial
Reporting appearing on page F-2, that the Company maintained
effective internal control over financial reporting as of
December 31, 2004 based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), is fairly stated, in all material
respects, based on those criteria. Furthermore, in our opinion,
the Company maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued
by the COSO. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express
opinions on management’s assessment and on the
effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the
F-3
company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
|
|
| |
/s/ PRICEWATERHOUSECOOPERS LLP |
Boston, Massachusetts
March 16, 2005
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Ascential Software Corporation
We have audited the consolidated statements of operations,
stockholders’ equity, and cash flows for the year ended
December 31, 2002. The consolidated financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated results of operations and cash flows of Ascential
Software Corporation for the year ended December 31, 2002
in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets.
Boston, Massachusetts
January 29, 2003
F-5
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
share and per share data) | |
|
ASSETS |
|
Current assets
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
166,355 |
|
|
$ |
198,668 |
|
| |
Short-term investments
|
|
|
314,351 |
|
|
|
317,581 |
|
| |
Accounts receivable, net
|
|
|
56,607 |
|
|
|
42,034 |
|
| |
Recoverable income taxes
|
|
|
3,642 |
|
|
|
1,276 |
|
| |
Deferred income taxes
|
|
|
732 |
|
|
|
— |
|
| |
Other current assets
|
|
|
16,035 |
|
|
|
22,035 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
557,722 |
|
|
|
581,594 |
|
|
Property and equipment, net
|
|
|
10,009 |
|
|
|
11,186 |
|
|
Software development costs, net
|
|
|
16,542 |
|
|
|
14,794 |
|
|
Long-term investments
|
|
|
3,314 |
|
|
|
2,301 |
|
|
Goodwill
|
|
|
325,457 |
|
|
|
324,327 |
|
|
Intangible assets, net
|
|
|
11,453 |
|
|
|
19,863 |
|
|
Deferred income taxes
|
|
|
— |
|
|
|
1,392 |
|
|
Other assets
|
|
|
10,576 |
|
|
|
10,622 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
935,073 |
|
|
$ |
966,079 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
10,715 |
|
|
$ |
16,878 |
|
| |
Accrued expenses
|
|
|
22,474 |
|
|
|
14,433 |
|
| |
Accrued employee compensation
|
|
|
21,322 |
|
|
|
24,207 |
|
| |
Income taxes payable
|
|
|
48,405 |
|
|
|
62,327 |
|
| |
Deferred revenue
|
|
|
45,295 |
|
|
|
41,106 |
|
| |
Accrued merger, realignment and other charges
|
|
|
32,856 |
|
|
|
46,705 |
|
| |
Deferred income taxes
|
|
|
— |
|
|
|
594 |
|
| |
Other current liabilities
|
|
|
2,224 |
|
|
|
1,585 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
183,291 |
|
|
|
207,835 |
|
|
Other long term liabilities
|
|
|
709 |
|
|
|
558 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
184,000 |
|
|
|
208,393 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
| |
Preferred stock, par value $.01 per share —
5,000,000 shares authorized; no shares issued or
outstanding at both December 31, 2004 and December 31,
2003
|
|
|
— |
|
|
|
— |
|
| |
Common stock, par value $.01 per share —
125,000,000 shares authorized; 69,078,000 and
68,478,000 shares issued and 58,820,000 and
60,085,000 shares outstanding at December 31, 2004 and
2003, respectively
|
|
|
691 |
|
|
|
685 |
|
| |
Additional paid-in capital
|
|
|
655,764 |
|
|
|
647,199 |
|
| |
Treasury stock, 10,258,000 and 8,393,000 shares at
December 31, 2004 and 2003, respectively, at cost
|
|
|
(130,069 |
) |
|
|
(98,454 |
) |
| |
Retained earnings
|
|
|
232,999 |
|
|
|
218,048 |
|
| |
Deferred compensation
|
|
|
(361 |
) |
|
|
(1,779 |
) |
| |
Accumulated other comprehensive loss
|
|
|
(7,951 |
) |
|
|
(8,013 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
751,073 |
|
|
|
757,686 |
|
| |
|
|
|
|
|
|
| |
|
|
Total liabilities and stockholders’ equity
|
|
$ |
935,073 |
|
|
$ |
966,079 |
|
| |
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Licenses
|
|
$ |
110,241 |
|
|
$ |
92,550 |
|
|
$ |
59,611 |
|
| |
|
Services
|
|
|
161,638 |
|
|
|
93,036 |
|
|
|
53,407 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
271,879 |
|
|
|
185,586 |
|
|
|
113,018 |
|
| |
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost of licenses
|
|
|
16,833 |
|
|
|
15,291 |
|
|
|
18,350 |
|
| |
|
Cost of services
|
|
|
70,098 |
|
|
|
40,050 |
|
|
|
33,089 |
|
| |
|
Sales and marketing
|
|
|
110,646 |
|
|
|
79,950 |
|
|
|
73,080 |
|
| |
|
Research and development
|
|
|
39,259 |
|
|
|
27,515 |
|
|
|
24,044 |
|
| |
|
General and administrative
|
|
|
28,168 |
|
|
|
30,838 |
|
|
|
41,054 |
|
| |
|
Write-off of acquired in-process research and development
|
|
|
— |
|
|
|
2,000 |
|
|
|
1,170 |
|
| |
|
Merger, realignment and other charges
|
|
|
823 |
|
|
|
3,857 |
|
|
|
23,669 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
265,827 |
|
|
|
199,501 |
|
|
|
214,456 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Operating income (loss)
|
|
|
6,052 |
|
|
|
(13,915 |
) |
|
|
(101,438 |
) |
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest income
|
|
|
9,124 |
|
|
|
11,129 |
|
|
|
20,194 |
|
| |
|
Interest expense
|
|
|
(169 |
) |
|
|
(207 |
) |
|
|
(84 |
) |
| |
|
Gain on sale of database business
|
|
|
— |
|
|
|
— |
|
|
|
3,040 |
|
| |
|
Impairment of long-term investments
|
|
|
— |
|
|
|
— |
|
|
|
(2,187 |
) |
| |
|
Other, net
|
|
|
1,514 |
|
|
|
2,502 |
|
|
|
(929 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) before income taxes
|
|
|
16,521 |
|
|
|
(491 |
) |
|
|
(81,404 |
) |
| |
|
Income tax expense (benefit)
|
|
|
1,570 |
|
|
|
(16,296 |
) |
|
|
(17,831 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
14,951 |
|
|
$ |
15,805 |
|
|
$ |
(63,573 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
0.25 |
|
|
$ |
0.27 |
|
|
$ |
(1.03 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Diluted
|
|
$ |
0.25 |
|
|
$ |
0.26 |
|
|
$ |
(1.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
|
59,208 |
|
|
|
58,409 |
|
|
|
61,931 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Diluted
|
|
|
60,633 |
|
|
|
59,703 |
|
|
|
61,931 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-7
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
14,951 |
|
|
$ |
15,805 |
|
|
$ |
(63,573 |
) |
|
Adjustments to reconcile net income (loss) to cash and cash
equivalents provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
14,327 |
|
|
|
10,008 |
|
|
|
10,013 |
|
| |
Amortization of capitalized software development costs
|
|
|
7,815 |
|
|
|
7,109 |
|
|
|
6,557 |
|
| |
Write-off of long-term investments
|
|
|
— |
|
|
|
— |
|
|
|
2,188 |
|
| |
Write-off of capitalized software development costs
|
|
|
— |
|
|
|
— |
|
|
|
5,200 |
|
| |
Write-off of acquired in process research and development
|
|
|
— |
|
|
|
2,000 |
|
|
|
1,170 |
|
| |
Foreign currency transaction (gains) losses
|
|
|
2,940 |
|
|
|
(1,242 |
) |
|
|
1,561 |
|
| |
Gain on sales of available for sale securities
|
|
|
(387 |
) |
|
|
(1,884 |
) |
|
|
— |
|
| |
(Gain) loss on disposal of property and equipment
|
|
|
(8 |
) |
|
|
49 |
|
|
|
800 |
|
| |
Provisions (recoveries) for losses on accounts receivable
|
|
|
(364 |
) |
|
|
971 |
|
|
|
2,426 |
|
| |
Merger, realignment and other charges
|
|
|
823 |
|
|
|
3,857 |
|
|
|
23,669 |
|
| |
Gain on sale of database business
|
|
|
— |
|
|
|
— |
|
|
|
(3,040 |
) |
| |
Stock-based employee compensation
|
|
|
907 |
|
|
|
1,045 |
|
|
|
245 |
|
|
Changes in operating assets and liabilities, net of impact of
acquisitions and disposals:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts receivable
|
|
|
(12,140 |
) |
|
|
(2,370 |
) |
|
|
396 |
|
| |
Other assets
|
|
|
(512 |
) |
|
|
3,282 |
|
|
|
7,513 |
|
| |
Accounts payable, accrued expenses and other liabilities
|
|
|
(31,069 |
) |
|
|
(51,236 |
) |
|
|
(81,025 |
) |
| |
Deferred income taxes
|
|
|
(2,192 |
) |
|
|
(4,283 |
) |
|
|
(6,252 |
) |
| |
Deferred revenue
|
|
|
2,392 |
|
|
|
2,121 |
|
|
|
1,662 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash and cash equivalents used in operating activities
|
|
|
(2,517 |
) |
|
|
(14,768 |
) |
|
|
(90,490 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments of excess cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of available-for-sale securities
|
|
|
(718,151 |
) |
|
|
(958,091 |
) |
|
|
(552,994 |
) |
| |
Maturities of available-for-sale securities
|
|
|
463,856 |
|
|
|
571,314 |
|
|
|
341,364 |
|
| |
Sales of available-for-sale securities
|
|
|
255,621 |
|
|
|
357,013 |
|
|
|
195,965 |
|
|
Purchases of long term investments
|
|
|
(1,125 |
) |
|
|
(1,375 |
) |
|
|
— |
|
|
Purchases of property and equipment
|
|
|
(4,639 |
) |
|
|
(3,549 |
) |
|
|
(2,950 |
) |
|
Proceeds from sale of a product line and the database business
|
|
|
6,800 |
|
|
|
109,328 |
|
|
|
11,000 |
|
|
Additions to software development costs
|
|
|
(9,563 |
) |
|
|
(7,779 |
) |
|
|
(10,962 |
) |
|
Business combinations, net of cash acquired
|
|
|
(478 |
) |
|
|
(94,947 |
) |
|
|
(100,473 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash and cash equivalents used in investing activities
|
|
|
(7,679 |
) |
|
|
(28,086 |
) |
|
|
(119,050 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
6,550 |
|
|
|
27,737 |
|
|
|
2,638 |
|
|
Acquisition of common stock
|
|
|
(31,615 |
) |
|
|
— |
|
|
|
(74,162 |
) |
|
Extinguishment of debt
|
|
|
— |
|
|
|
(9,081 |
) |
|
|
— |
|
|
Fees paid to execute one-for-four reverse stock split
|
|
|
— |
|
|
|
(203 |
) |
|
|
— |
|
|
Principal payments on capital leases
|
|
|
(593 |
) |
|
|
(389 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash and cash equivalents provided by (used in) financing
activities
|
|
|
(25,658 |
) |
|
|
18,064 |
|
|
|
(71,524 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
3,541 |
|
|
|
6,907 |
|
|
|
8,308 |
|
| |
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(32,313 |
) |
|
|
(17,883 |
) |
|
|
(272,756 |
) |
|
Cash and cash equivalents at beginning of year
|
|
|
198,668 |
|
|
|
216,551 |
|
|
|
489,307 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
166,355 |
|
|
$ |
198,668 |
|
|
$ |
216,551 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
See supplemental cash flow data in Note 1 to Consolidated
Financial Statements.
F-8
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Retained | |
|
|
|
Other | |
|
|
| |
|
Common Stock | |
|
Additional | |
|
Treasury Stock | |
|
Earnings | |
|
|
|
Comprehensive | |
|
|
| |
|
| |
|
Paid-In | |
|
| |
|
(Accumulated | |
|
Deferred | |
|
Income | |
|
|
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Shares | |
|
Amount | |
|
Deficit) | |
|
Compensation | |
|
(Loss) | |
|
Totals | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at December 31, 2001
|
|
|
65,948 |
|
|
$ |
659 |
|
|
$ |
598,307 |
|
|
|
(1,860 |
) |
|
$ |
(25,464 |
) |
|
$ |
265,816 |
|
|
$ |
(549 |
) |
|
$ |
(18,973 |
) |
|
$ |
819,796 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,573 |
) |
|
|
|
|
|
|
|
|
|
|
(63,573 |
) |
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314 |
|
|
|
|
|
|
|
314 |
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,600 |
|
|
|
7,600 |
|
|
Exercise of stock options
|
|
|
148 |
|
|
|
2 |
|
|
|
1,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,249 |
|
|
Common stock issued under employee stock purchase plan
|
|
|
190 |
|
|
|
2 |
|
|
|
1,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,386 |
|
|
Tax benefit from issuances under employee stock benefit plans
|
|
|
|
|
|
|
|
|
|
|
586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
586 |
|
|
Stock issued to former Vality Chief Executive Officer under
restricted stock agreement
|
|
|
75 |
|
|
|
1 |
|
|
|
989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
990 |
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,633 |
) |
|
|
(74,162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,162 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
66,361 |
|
|
$ |
664 |
|
|
$ |
602,513 |
|
|
|
(8,493 |
) |
|
$ |
(99,626 |
) |
|
$ |
202,243 |
|
|
$ |
(235 |
) |
|
$ |
(11,373 |
) |
|
$ |
694,186 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,805 |
|
|
|
|
|
|
|
|
|
|
|
15,805 |
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,360 |
|
|
|
3,360 |
|
|
Exercise of stock options
|
|
|
2,054 |
|
|
|
20 |
|
|
|
25,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,889 |
|
|
Common stock issued under employee stock purchase plan
|
|
|
164 |
|
|
|
2 |
|
|
|
1,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,848 |
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690 |
|
|
Tax benefit from issuances under employee stock benefit plans
|
|
|
|
|
|
|
|
|
|
|
1,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,952 |
|
|
Adjustment associated with one-for-four reverse stock split,
cost of execution, and repurchase of fractional shares
|
|
|
(1 |
) |
|
|
|
|
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203 |
) |
|
Deferred compensation as a result of the Mercator acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,421 |
) |
|
|
|
|
|
|
(2,421 |
) |
|
Fair value of stock options exchanged in Mercator acquisition
|
|
|
|
|
|
|
|
|
|
|
15,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,703 |
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
827 |
|
|
|
|
|
|
|
827 |
|
|
Adjustment to deferred compensation as a result of employee
terminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
50 |
|
|
Retirement of treasury stock at average cost
|
|
|
(100 |
) |
|
|
(1 |
) |
|
|
(1,171 |
) |
|
|
100 |
|
|
|
1,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
68,478 |
|
|
$ |
685 |
|
|
$ |
647,199 |
|
|
|
(8,393 |
) |
|
$ |
(98,454 |
) |
|
$ |
218,048 |
|
|
$ |
(1,779 |
) |
|
$ |
(8,013 |
) |
|
$ |
757,686 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,951 |
|
|
|
|
|
|
|
|
|
|
|
14,951 |
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
62 |
|
|
Exercise of stock options
|
|
|
394 |
|
|
|
4 |
|
|
|
3,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,716 |
|
|
Common stock issued under employee stock purchase plan
|
|
|
206 |
|
|
|
2 |
|
|
|
2,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,834 |
|
|
Tax benefit from issuances under employee stock benefit plans
|
|
|
|
|
|
|
|
|
|
|
2,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,242 |
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
907 |
|
|
|
|
|
|
|
907 |
|
|
Adjustment to deferred compensation as a result of employee
terminations
|
|
|
|
|
|
|
|
|
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511 |
|
|
|
|
|
|
|
290 |
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,865 |
) |
|
|
(31,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,615 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
69,078 |
|
|
$ |
691 |
|
|
$ |
655,764 |
|
|
|
(10,258 |
) |
|
$ |
(130,069 |
) |
|
$ |
232,999 |
|
|
$ |
(361 |
) |
|
$ |
(7,951 |
) |
|
$ |
751,073 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-9
ASCENTIAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Net income (loss)
|
|
$ |
14,951 |
|
|
$ |
15,805 |
|
|
$ |
(63,573 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities, net
of tax benefit of $197, tax benefit of $169, and tax expense of
$1,119 for the years ended December 31, 2004, 2003 and
2002, respectively
|
|
|
(1,819 |
) |
|
|
(253 |
) |
|
|
1,366 |
|
|
Reclassification adjustment for realized (gains) losses
included in net income (loss), net of tax expense of $122, tax
expense of $753 and tax benefit of $641 for the years ended
December 31, 2004, 2003 and 2002, respectively
|
|
|
(387 |
) |
|
|
(1,131 |
) |
|
|
1,602 |
|
|
Change in cumulative foreign currency exchange translation
adjustment
|
|
|
2,268 |
|
|
|
4,744 |
|
|
|
4,632 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
62 |
|
|
|
3,360 |
|
|
|
7,600 |
|
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
15,013 |
|
|
$ |
19,165 |
|
|
$ |
(55,973 |
) |
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-10
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| Note 1 — |
Background of Business and Summary of Significant Accounting
Policies |
|
|
| |
Organization and Operations. |
Ascential Software Corporation (“Ascential” or the
“Company”) was incorporated in Delaware in 1986 and,
until the third quarter of 2001, operated under the name
“Informix Corporation.” During the third quarter of
2001, the Company sold to International Business Machines
Corporation (“IBM”) substantially all of the assets
relating to its database management systems business, including
the name “Informix,” for a purchase price of
$1.0 billion in cash (the “IBM
Transaction” — see Note 13). In connection
with the IBM Transaction, the Company changed its name to
Ascential Software Corporation.
Ascential is a global provider of enterprise integration
software and services. Ascential designs, develops, markets and
supports enterprise data integration software products and
solutions to allow its worldwide customers, mid-sized and large
organizations and governmental institutions, to turn vast
amounts of disparate, unrefined data into reliable, reusable
information assets. The Company also offers to its customers a
variety of services such as consulting, including implementation
assistance and project planning and deployment, support, and
education.
The principal geographic markets for the Company’s products
are North America, Europe, and Asia/Pacific. Customers include
businesses ranging from medium-sized corporations to Global
2000 companies, principally in the financial services and
banking, insurance, healthcare, retail, manufacturing, consumer
packaged goods, telecommunications and government sectors.
Reverse Stock Split. On June 17, 2003, the Company
effected a one-for-four reverse stock split of its common stock.
Accordingly, all share and earnings per share figures of the
Company have been restated as though the reverse split had been
in effect for all periods presented.
Auction Rate Securities. In connection with preparation
of the accompanying financial statements, the company concluded
that it was appropriate to classify its investments in auction
rate securities as marketable securities. Previously, such
investments were classified as cash and cash equivalents.
Accordingly, the company has revised the classification to
exclude from cash and cash equivalents $3.9 million at
December 31, 2003 and to include such amounts as marketable
securities. In addition, the company has made corresponding
adjustments to the accompanying statement of cash flows to
reflect the gross purchases and sales of these securities as
investing activities. As a result, cash used in investing
activities increased by $3.9 million in 2003. This change
in classification does not affect previously reported cash flows
from operations or from financing activities and did not impact
the financial statements as of and for the year ended
December 31, 2002.
Use of Estimates. The Company’s consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
that the Company make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent liabilities. On an ongoing
basis, the Company evaluates its estimates, including those
related to revenue recognition, provision for doubtful accounts
and returns, fair value of investments, fair value of goodwill,
fair value and useful lives of intangible assets, net realizable
value and useful lives of capitalized software costs, property
and equipment, in-process research and development costs, income
taxes, and contingencies and litigation, among others. The
Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities, and the recognition of revenue and expenses, that
are not readily apparent from other sources. Actual results
could differ from the estimates made by management with respect
to these items and other items that require management’s
estimates.
F-11
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Principles of Consolidation. The consolidated financial
statements include the accounts of Ascential Software
Corporation and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation.
Foreign Currency Translation. For foreign operations with
the local currency as the functional currency, assets and
liabilities are translated at year-end exchange rates, and
statements of operations are translated at the average exchange
rates during the year. Exchange gains or losses arising from
translation of such foreign entity financial statements are
included in other comprehensive income (loss), a separate
component of stockholders’ equity.
For foreign operations with the U.S. dollar as the
functional currency, monetary assets and liabilities are
re-measured at the year-end exchange rates as appropriate and
non-monetary assets and liabilities are re-measured at
historical exchange rates. Statements of operations are
re-measured at the average exchange rates during the year.
Foreign currency transaction gains and losses are included in
other income (expense), net. The Company recorded net foreign
currency transaction gains of $1.0 million for the year
ended December 31, 2004, and foreign currency transaction
losses of $0.9 million and $4.0 million for the years
ended December 31, 2003 and 2002, respectively.
Derivative Financial Instruments. The Company enters into
foreign currency forward exchange contracts to reduce its
exposure to foreign currency risk due to fluctuations in
exchange rates underlying the value of intercompany accounts
receivable and payable denominated in foreign currencies until
such receivables are collected and payables are disbursed. A
foreign currency forward exchange contract obligates the Company
to exchange predetermined amounts of specified foreign
currencies at specified exchange rates on specified dates or to
make an equivalent U.S. dollar payment equal to the value
of such exchange. These foreign currency forward exchange
contracts are denominated in the same currency in which the
underlying foreign currency receivables or payables are
denominated and bear a contract value and maturity date which
approximate the value and expected settlement date of the
underlying transactions. As the Company’s contracts are not
designated as hedges as defined in Statement of Financial
Accounting Standard (“SFAS”) No. 133,
Accounting for Derivative Instruments and Hedging
Activities, and are economic hedges in nature for financial
reporting, discounts or premiums (the difference between the
spot exchange rate and the forward exchange rate at inception of
the contract) are recognized immediately in earnings as a
component of other income (expense), net and changes in market
value of the underlying contract are recorded in earnings as
foreign exchange gains or losses. The Company operates in
certain countries in Eastern Europe and Asia/Pacific, and is
winding down operations in Latin America where there are limited
forward currency exchange markets and thus the Company may have
unhedged exposures in these currencies.
Most of the Company’s international revenue and expenses
are denominated in local currencies. Due to the substantial
volatility of currency exchange rates, among other factors, the
Company cannot predict the effect of exchange rate fluctuations
on the Company’s future operating results. Although the
Company takes into account changes in exchange rates over time
in its pricing strategy, there would be a time lapse between any
sudden or significant exchange rate movements and implementation
of a revised pricing structure. This results in substantial
pricing exposure due to foreign exchange volatility during the
period between pricing reviews. In addition, the sales cycle for
the Company’s products is relatively long, depending on a
number of factors including the level of competition and the
size of the transaction. Notwithstanding the Company’s
efforts to manage foreign exchange risk, there can be no
assurances that the Company’s hedging activities will
adequately protect the Company against the risks associated with
foreign currency fluctuations.
Revenue Recognition. While the Company applies the
guidance of Statement of Position (“SOP”)
No. 97-2, Software Revenue Recognition, and SOP
No. 98-9, Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions,
both issued by the American Institute of Certified Public
Accountants, as well as SEC Staff Accounting Bulletin 104,
Revenue Recognition in Financial Statements, the
application of these standards requires the Company to exercise
judgment and use
F-12
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
estimates in connection with the determination of the amounts of
software license and services revenues recognized in each
accounting period.
The Company’s software license arrangements do not include
significant modification or customization of the underlying
software, and as a result, we recognize license revenue when:
(1) persuasive evidence of an arrangement exists,
(2) delivery has occurred (generally, FOB origin or
electronic distribution), (3) the fee is fixed or
determinable, and (4) collection is probable.
The Company’s software is distributed primarily through its
direct sales force; however, the Company’s indirect
distribution channel continues to expand through alliances with
resellers. Revenue arrangements with resellers are recognized
when the above criteria are met and only when the Company
receives evidence that the reseller has an order from an
end-user customer. The Company typically does not offer
contractual rights of return, stock balancing or price
protection to its resellers, and actual product returns from
them have been insignificant to date. As a result, the Company
does not maintain reserves for product returns and related
allowances.
At the time of each sale transaction, the Company makes an
assessment of the collectibility of the amount due from the
customer. Revenue is only recognized at that time if management
deems that collection is probable. In making this assessment,
the Company considers customer credit-worthiness and historical
payment experience. At the same time, the Company assesses
whether fees are fixed or determinable and free of contingencies
or significant uncertainties. If the fee is not fixed or
determinable, revenue is recognized only as payments become due
from the customer, provided that all other revenue recognition
criteria are met. In assessing whether the fee is fixed or
determinable, the Company considers the payment terms of the
transaction and its collection experience in similar
transactions without making concessions, among other factors.
The Company’s software license arrangements generally do
not include customer acceptance provisions. However, if an
arrangement includes an acceptance provision, the Company
records revenue only upon the earliest of (1) receipt of a
written acceptance, (2) expiration of the acceptance period
or (3) final payment.
The Company’s software arrangements often include
implementation and consulting services that are sold separately
under consulting engagement contracts or as part of the software
license arrangement. When the Company determines that such
services are not essential to the functionality of the licensed
software and qualify as “service transactions” under
SOP 97-2, the Company records revenue separately for the
license and service elements of these arrangements. Generally,
the Company considers that a service is not essential to the
functionality of the software when the services may be provided
by independent third parties experienced in providing such
consulting and implementation in coordination with dedicated
customer personnel. In rare instances where an arrangement does
not qualify for separate accounting of the license and service
elements, then license revenue is recognized together with the
consulting services using the percentage-of-completion method of
contract accounting.
The Company uses the residual method as prescribed in
SOP 98-9 to recognize revenues from arrangements that
include one or more elements to be delivered at a future date,
when evidence of the fair value of all undelivered elements
exists. Under the residual method, the fair value of the
undelivered elements (e.g., maintenance, consulting and
education services) based on vendor-specific objective evidence
(“VSOE”) is deferred and the remaining portion of the
arrangement fee is allocated to the delivered elements (i.e.,
software license). If evidence of the fair value of one or more
of the undelivered services does not exist, all revenues are
deferred and recognized when delivery of all of those services
has occurred or when fair values can be established. The Company
determines VSOE of the fair value of maintenance services based
on a substantive maintenance renewal clause, if any, within a
customer contract. Otherwise, the Company determines VSOE of the
fair value of maintenance and services revenues based upon our
recent pricing for those services when sold separately. The
Company’s current pricing practices are influenced
primarily by market conditions, product type, purchase volume,
maintenance term and customer location. The Company
F-13
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
reviews services revenues sold separately and maintenance
renewal rates on a periodic basis and updates, when appropriate,
the Company’s VSOE of fair value for such services to
ensure that it reflects our recent pricing experience.
Significant incremental discounts offered in multiple-element
arrangements that would be characterized as separate elements
are infrequent and are allocated to software license revenues
under the residual method.
Maintenance services include rights to unspecified upgrades
(when and if available), telephone and internet-based support,
updates and bug fixes. Maintenance revenue is recognized ratably
over the term of the maintenance contract on a straight-line
basis. It is uncommon for the Company to offer a specified
upgrade to an existing product; however, in such instances, all
revenue of the arrangement is deferred until the specified
upgrade is delivered.
When consulting is sold separately or qualifies for separate
accounting, consulting revenues under time and materials billing
arrangements are recognized as the services are performed.
Consulting revenues under fixed-priced contracts are generally
recognized using the percentage-of-completion method. Under the
percentage-of-completion method, the Company estimates the stage
of completion of contracts with fixed or “not to
exceed” fees based on hours or costs incurred to date as
compared with estimated total project hours or costs at
completion. If the Company does not have a sufficient basis to
measure progress towards completion, revenue is recognized upon
completion of the contract. When total cost estimates exceed
revenues, the Company accrues for the estimated losses
immediately. The use of the percentage-of-completion method of
accounting requires significant judgment relative to estimating
total contract costs, including assumptions relative to the
length of time to complete the project, the nature and
complexity of the work to be performed, and anticipated changes
in salaries and other costs. When adjustments in estimated
contract costs are determined, such revisions may have the
effect of adjusting in the current period the earnings
applicable to performance in prior periods. If there is a
significant uncertainty about the project completion or receipt
of payment for the consulting services, revenue is deferred
until the uncertainty is sufficiently resolved. Reimbursements
of out-of-pocket expenditures incurred in connection with
providing consulting services are included in services revenue,
with the offsetting expense recorded in cost of services revenue.
Education and training services include on-site training,
classroom training, and computer-based training and assessment.
Education and training revenues are recognized as the related
training services are provided.
Deferred revenue and the corresponding accounts receivable on
certain service agreements billed during the last month of the
year are not recorded because they are attributable to future
periods.
Allowance for Doubtful Accounts. The Company makes
judgments as to its ability to collect outstanding receivables
and provides allowances when collection becomes doubtful.
Provisions are made based upon a specific review of all
significant outstanding invoices. For those invoices not
specifically reserved, allowances for doubtful accounts are
provided for based on historical collection experience.
Software Development Costs. The Company accounts for its
software development costs in accordance with
SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed. This
statement requires that, once technological feasibility of a
developing product has been established, all subsequent costs
incurred in developing that product to a commercially acceptable
level must be capitalized and amortized ratably over the
expected economic life of the product. The Company typically
uses the completion of a detailed program design as the
milestone in determining technological feasibility. In
accordance with SFAS 86, the Company achieves technological
feasibility for each product upon completion of a detailed
program in which (1) the Company has established that the
necessary skills, hardware and software technology are available
to the Company to produce the product, (2) the completeness
of the detailed program design has been confirmed by
documentation and tracing the design to product specifications,
and (3) the detailed program design has been reviewed for
high-risk development issues (for example, novel, unique,
unproven function and features or technological innovations),
and any uncertainties related to
F-14
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
identified high-risk development issues have been resolved
through coding and testing. Capitalized software costs also
include amounts paid for purchased software and outside
development on products that have reached technological
feasibility. All capitalized software development costs are
amortized as cost of licenses on a straight-line basis, or on
the basis of each product’s projected revenue, whichever
results in greater amortization, over the remaining estimated
economic life of the product, which is generally estimated to be
three years. The Company recorded amortization of
$7.8 million, $7.1 million and $6.6 million in
2004, 2003 and 2002, respectively, in cost of licenses. The
Company assesses the recoverability of capitalized software
costs by comparing the cost capitalized for all products to the
net of estimated future gross revenues for all products less the
estimated future cost of completing, maintaining, supporting and
disposing of all products. No impairment charges were booked in
2004 or 2003 in conjunction with the Company’s
recoverability assessments. During 2002, the Company terminated
two products resulting in impairment charges totaling
$5.2 million related to software development costs that
were previously capitalized (see Note 14).
The Company accounts for the costs of computer software
developed or obtained for internal use in accordance with the
SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement
requires that certain costs incurred to develop software for
internal use are capitalized. During the years ended
December 31, 2004, 2003 and 2002, the Company capitalized
$0.1 million, $0.6 million and $0.6 million,
respectively, under SOP 98-1. Costs capitalized in 2004,
2003 and 2002 are amortized over the estimated useful life of
the software developed, which is generally three years. The net
book value of costs capitalized under SOP 98-1 was
$0.3 million as of December 31, 2004.
Property and Equipment. Property and equipment are stated
at cost less accumulated depreciation and amortization, which is
calculated using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives of 36 to
48 months are used on computer equipment, and an estimated
useful life of seven years is used for furniture and fixtures.
Depreciation and amortization of leasehold improvements is
computed using the shorter of the remaining lease term or the
useful life of the improvements. Property under capital leases
is amortized over the life of the respective lease or the
estimated useful life of the assets, whichever is shorter.
Maintenance and repairs are charged to expense when incurred and
expenditures related to additions and improvements are
capitalized as incurred. When an item is sold or retired, the
related accumulated depreciation is relieved and the resulting
gain or loss net of cash received, if any, is recognized in the
income statement.
Businesses Acquired. The Company accounts for business
combinations in accordance with SFAS No. 141,
Business Combinations. The purchase price of businesses
acquired, accounted for as purchase business combinations, is
allocated to the tangible and identifiable intangible assets
acquired based on their estimated fair values with any amount in
excess of such allocations designated as goodwill. Intangible
assets have typically included customer relationships and
existing technology, which are amortized on a straight-line
basis over their estimated useful lives of three to five years
and covenants not to compete, which are amortized on a
straight-line basis over the life of the covenant.
On September 12, 2003, the Company completed the
acquisition of Mercator Software, Inc. (“Mercator”)
pursuant to the Agreement and Plan of Merger dated as of
August 2, 2003 (“Merger Agreement”). On
April 3, 2002, the Company acquired Vality Technology
Incorporated (“Vality”). These acquisitions are
discussed further in Note 12. The acquisitions have been
accounted for under the purchase method of accounting, and
accordingly, the results of operations of Mercator and Vality
have been included in the Company’s consolidated financial
statements since the respective date of acquisition.
Impairment of Long-Lived Assets. The Company accounts for
goodwill and intangible assets in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. These assets are evaluated for impairment annually
on December 1, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Factors
we consider important which could trigger an impairment review
include significant underperformance relative to historical or
projected future operating results, significant changes in
F-15
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
our use of the acquired assets or the strategy for our overall
business, significant negative industry or economic trends, a
significant decline in our stock price for a sustained period
and a reduction of our market capitalization relative to net
book value. To conduct these impairment tests of goodwill and
indefinite-lived intangible assets, the fair value of the
applicable reporting unit is compared to its carrying value. If
the reporting unit’s carrying value exceeds its fair value,
we record an impairment loss to the extent that the carrying
value of goodwill exceeds its implied fair value.
Long-lived assets primarily include property and equipment and
intangible assets with finite lives (purchased software
technology, capitalized software development costs, and customer
relationships) and long term investments. In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we periodically review
certain long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the
useful lives of those assets are no longer appropriate. Each
impairment test is based on a comparison of the undiscounted
cash flows to the recorded value of the asset. If impairment is
indicated, the asset is written down to its estimated fair value
based on a discounted cash flow analysis.
Income Taxes. The Company accounts for income taxes in
accordance with SFAS No. 109, Accounting for Income
Taxes. Significant management judgment is required in
determining the provision for income taxes, deferred income
taxes and liabilities and any valuation allowance recorded
against net deferred tax assets. In preparing the consolidated
financial statements, income taxes are estimated in each of the
jurisdictions in which the Company operates. This process
involves estimating the actual current tax liability, together
with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. Reserves are
maintained related to prior years’ income taxes for
uncertainties in the tax treatment of certain items in various
tax jurisdictions, particularly as they relate to disposed
operations. These tax reserves are maintained until such time as
the Company resolves the tax treatment of these items via the
completion of tax audits, expiration of the statute of
limitations for the assessment of tax, or additional factual
development or discovery which results in a change in estimate.
Stock-Based Compensation. In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide
alternative methods of transition for entities that elect to
voluntarily change to the fair value based method of accounting
for stock based employee compensation. SFAS 148 also
requires prominent disclosures in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The Company implemented the provisions
of SFAS 148 effective December 31, 2002 and has
elected to continue to account for stock-based awards to
employees in accordance with the intrinsic value provisions of
Accounting Principles Board Opinion (“APB”)
No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. Under APB 25, the Company
generally recognizes no compensation expense with respect to
stock based awards granted to employees under the terms of the
Company’s various stock option plans and issued under the
Company’s Employee Stock Purchase Plan (“ESPP”).
All options granted under stock option plans were for a fixed
number of shares and had an exercise price equal to the market
value of the underlying common stock on the date of grant.
In December 2004, the FASB issued SFAS 123(R), which
replaces SFAS 123, and supersedes APB 25.
SFAS 123(R) requires compensation costs relating to
share-based payment transactions be recognized in financial
statements. The pro forma disclosure previously permitted under
SFAS 123 will no longer be an acceptable alternative to
recognition of expenses in the financial statements.
SFAS 123(R) is effective as of the beginning of the first
reporting period that begins after June 15, 2005, with
early adoption encouraged. The Company will adopt
SFAS 123(R) starting from the third quarter of 2005. The
Company expects the adoption of SFAS 123(R) to have a
material adverse impact on our net income and net income per
share and
F-16
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
is currently in the process of evaluating the extent of such
impact. However, the pro forma disclosure below approximates
what would have been the impact of applying SFAS 123(R) to
the historical periods presented.
Pro forma information regarding the net income (loss) and net
income (loss) per share is required by SFAS 148, as if the
Company had accounted for its stock based awards to employees
under the fair value method of SFAS 123. The fair value of
the Company’s stock-based awards to employees was estimated
using a Black-Scholes option-pricing model.
The fair value of the Company’s stock-based awards was
estimated assuming no expected dividends and the following
weighted-average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options | |
|
ESPP | |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Dividend rate
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Expected life (years)
|
|
|
4.5 |
|
|
|
4.5 |
|
|
|
4.5 |
|
|
|
0.25 |
|
|
|
0.25 |
|
|
|
0.25 |
|
|
Expected volatility
|
|
|
78 |
% |
|
|
81 |
% |
|
|
85 |
% |
|
|
57 |
% |
|
|
82 |
% |
|
|
85 |
% |
|
Risk-free interest rate
|
|
|
3.4 |
% |
|
|
3.0 |
% |
|
|
3.5 |
% |
|
|
1.4 |
% |
|
|
1.0 |
% |
|
|
1.4 |
% |
For pro forma purposes, the estimated fair value of the
Company’s stock-based awards is amortized over the
award’s vesting period (for options) and the three-month
purchase period (for stock purchases under the ESPP). The
following table illustrates the effect on net income (loss) and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based
employee compensation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except for per share | |
| |
|
information) | |
|
Net income (loss) as reported
|
|
$ |
14,951 |
|
|
$ |
15,805 |
|
|
$ |
(63,573 |
) |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Stock based compensation recognized in net income (loss), net of
related tax effect
|
|
|
689 |
|
|
|
732 |
|
|
|
245 |
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
|
|
(26,315 |
) |
|
|
(22,303 |
) |
|
|
(28,811 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(10,675 |
) |
|
$ |
(5,766 |
) |
|
$ |
(92,139 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic, as reported
|
|
$ |
0.25 |
|
|
$ |
0.27 |
|
|
$ |
(1.03 |
) |
| |
Basic, pro forma
|
|
$ |
(0.18 |
) |
|
$ |
(0.10 |
) |
|
$ |
(1.49 |
) |
| |
Diluted, as reported
|
|
$ |
0.25 |
|
|
$ |
0.26 |
|
|
$ |
(1.03 |
) |
| |
Diluted, pro forma
|
|
$ |
(0.18 |
) |
|
$ |
(0.10 |
) |
|
$ |
(1.49 |
) |
The tax rate used to calculate the pro forma stock-based
employee compensation expense, net of related tax effects above,
was 24%, 30% and 22% in 2004, 2003 and 2002, respectively. The
rates used represent the Company’s actual effective tax
rate adjusted for infrequent tax items such as the impact of
in-process research and development charges and significant tax
accrual adjustments. The amount of pro forma net loss for the
year ended December 31, 2003 presented above differs from
the amount previously reported of $(2,340) as a result of a
change in the estimated tax rate applied to the pro forma
stock-based compensation to be consistent with the method
applied in the other years presented.
F-17
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The weighted-average fair value of the options granted during
2004, 2003 and 2002 were $13.53, $10.59 and $7.33 per
share, respectively. The weighted-average fair value of employee
stock purchase rights granted under the 1997 ESPP during 2004,
2003 and 2002 were $5.12, $4.15 and $3.80 per share,
respectively.
Concentration of Credit Risk. The Company designs,
develops, manufactures, markets, and supports computer software
systems to customers in diversified industries and in
diversified geographic locations. The Company performs ongoing
credit evaluations of its customers’ financial condition
and generally requires no collateral. No single customer
accounted for 10% or more of the consolidated net revenues of
the Company in 2004 and 2003. In 2002, IBM was responsible for
11% of total revenues and no other single customer accounted for
more than 10% of total revenues.
Cash, Cash Equivalents, Short-Term Investments, and Long-Term
Investments. The Company considers liquid investments
purchased with an original remaining maturity of three months or
less to be cash equivalents. Investments with an original
remaining maturity of more than three months but less than
twelve months or investments with maturity of more than twelve
months that the Company intends to sell within one year to fund
current operations or acquisitions are considered to be
short-term investments. All other investments are considered
long-term investments. Short-term and long-term investments are
classified as available-for-sale and are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a
component of other comprehensive income (loss). The amortized
cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains
and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are
included in other income (expense), net. The company’s
investments in auction rate securities are recorded at cost,
which approximates fair value due to their variable interest
rates. The interest rates generally reset every 28 days.
Despite the long-term nature of their stated contractual
maturities, the company has the ability to quickly liquidate
investments in auction rate securities. All income generated
from these investments has been recorded as interest income. The
cost of securities sold is based on the specific identification
method. Interest on securities classified as available-for-sale
is included in interest income. The Company also maintains
investments in certain publicly traded marketable equity
securities and also classifies these as available for sale. The
Company realized net gains of approximately $0.4 million,
$1.1 million and $0.6 million on the sale of
available-for-sale short term investments during 2004, 2003 and
2002, respectively.
In 2004 and 2003, the Company did not recognize any gains or
losses related to other than temporary declines in the market
value of its available-for-sale marketable equity securities.
The Company did however realize pretax losses of
$2.2 million related to other than temporary declines in
the market value of its available-for-sale marketable equity
securities during 2002. These losses had previously been
recognized as a component of accumulated other comprehensive
income.
The Company invests its excess cash in accordance with its
current investment policy, which is approved by the board of
directors. The policy authorizes the investment of excess cash
in government securities, municipal bonds, time deposits,
certificates of deposit with approved financial institutions,
commercial paper rated A-1/P-1, and other specific money market
instruments of similar liquidity and credit quality. The Company
has not experienced any significant losses related to these
investments.
The Company maintains investments in equity instruments of
certain privately held, information technology companies for
business and strategic purposes. These investments are included
in long-term investments and are accounted for under the cost
method when ownership is less than 20% and the Company does not
otherwise have significant influence over the investee. For
these non-marketable investments, the Company’s policy is
to periodically review for impairment based on market
conditions, the industry sectors in which the investment entity
operates, the viability and prospects of each entity and the
continued strategic importance of the investment to the Company.
When the Company determines that a decline in fair value
F-18
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
below the cost basis is other than temporary, the related
investment is written down to fair value. No impairment losses
were recorded in 2004, 2003 and 2002.
Fair Value of Financial Instruments. Fair values of cash,
cash equivalents, short and long term investments and foreign
currency forward contracts are based on quoted market prices.
The carrying value of these financial instruments approximates
fair value.
Reclassifications. Certain prior period amounts have been
reclassified to conform to the current period presentation.
Supplemental Cash Flow Data. The Company paid income
taxes in the net amount of $11.3 million and
$4.5 million in 2004 and 2003, respectively, and received
income tax refunds in the net amount of $23.3 million
during 2002. The Company paid interest in the amount of
$0.2 million, $0.2 million and $0.1 million
during 2004, 2003 and 2002, respectively.
The Company recorded no additions to capital leases during the
year ended December 31, 2004. During 2003,
$0.5 million of non-cash charges were recorded for
additions to capital leases. Non-cash asset write-offs of
$9.1 million were recorded by the Company during the year
ended December 31, 2002.
|
|
|
New Accounting Pronouncements. |
In December 2004, the FASB issued SFAS 123(R), which
replaces SFAS 123 “Accounting for Stock-Based
Compensation”, and supersedes APB 25,
“Accounting for Stock Issued to Employees.” The
requirements set forth by SFAS 123(R) and their financial
statement impact are discussed above in the Stock-Based
Compensation section of this Note 1.
In December 2004, FASB Staff Position No. FAS 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP FAS 109-2”)
was issued, providing guidance under SFAS 109,
“Accounting for Income Taxes” for recording the
potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004, enacted on October 22, 2004. FSP
FAS 109-2 allows time beyond the financial reporting period
of enactment to evaluate the effects of the Jobs Act before
applying the requirements of FSP FAS 109-2. Accordingly,
the Company is evaluating the potential effects of the Jobs Act
and have not adjusted its tax expense or deferred tax liability
to reflect the requirements of FSP FAS 109-2.
In March 2004, the FASB issued EITF 03-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments”, which provided new guidance
for assessing impairment losses on investments. Additionally,
EITF 03-1 includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of
EITF 03-1; however the disclosure requirements remained
effective for annual periods ending after June 15, 2004.
The Company will evaluate the impact of EITF 03-1 once
final guidance is issued.
F-19
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 2 — |
Balance Sheet Components |
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
| |
Receivables
|
|
$ |
59,863 |
|
|
$ |
46,751 |
|
| |
Less: allowance for doubtful accounts
|
|
|
(3,256 |
) |
|
|
(4,717 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
56,607 |
|
|
$ |
42,034 |
|
| |
|
|
|
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
| |
Computer equipment
|
|
$ |
25,408 |
|
|
$ |
23,120 |
|
| |
Furniture and fixtures
|
|
|
6,993 |
|
|
|
8,037 |
|
| |
Assets under capital leases
|
|
|
2,916 |
|
|
|
3,410 |
|
| |
Leasehold improvements
|
|
|
7,562 |
|
|
|
7,801 |
|
| |
|
|
|
|
|
|
| |
|
|
42,879 |
|
|
|
42,368 |
|
| |
Less: accumulated depreciation
|
|
|
(30,849 |
) |
|
|
(29,485 |
) |
| |
Less: accumulated amortization on capital leases
|
|
|
(2,021 |
) |
|
|
(1,697 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
10,009 |
|
|
$ |
11,186 |
|
| |
|
|
|
|
|
|
|
Software development costs, net:
|
|
|
|
|
|
|
|
|
| |
Capitalized software development costs
|
|
$ |
47,258 |
|
|
$ |
37,695 |
|
| |
Less: accumulated amortization
|
|
|
(30,716 |
) |
|
|
(22,901 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
16,542 |
|
|
$ |
14,794 |
|
| |
|
|
|
|
|
|
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
| |
Cumulative foreign exchange translation adjustment
|
|
$ |
(6,040 |
) |
|
$ |
(8,308 |
) |
| |
Unrealized gains (losses) on available-for-sale securities
|
|
|
(1,911 |
) |
|
|
295 |
|
| |
|
|
|
|
|
|
| |
|
$ |
(7,951 |
) |
|
$ |
(8,013 |
) |
| |
|
|
|
|
|
|
Accounts receivable and the corresponding deferred revenue on
certain service agreements billed during the last quarter of the
year of $3.8 million and $2.4 million and remaining
outstanding at December 31, 2004 and 2003, respectively,
were not recorded because they are attributable to future
periods. On June 30, 2004, the Company entered into a
non-recourse receivables purchase agreement with a financial
institution, providing for the sale of trade receivables of up
to $10.0 million outstanding. The transfer of the accounts
receivable are recorded as sales and accounted for in accordance
with SFAS 140 “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities”. In the year ended December 31, 2004,
the Company sold $14.9 million of accounts receivable to
the financial institution. This arrangement is a means of
accelerating cash collections in a manner that the Company
believes is more cost-effective than offering early payment
discounts. Trade receivables that were sold during the year
ended December 31, 2004, and not yet collected, amounted to
$7.2 million and are excluded from trade accounts
receivable at December 31, 2004. The fees, losses and other
amounts related to the Company’s sale and subsequent
servicing of these receivables were not material to the
Company’s consolidated financial statements.
Depreciation expense for the years ended December 31, 2004,
2003 and 2002 was $5.9 million, $3.6 million and
$5.2 million, respectively. Assets under capital lease
consist primarily of computer equipment and software.
F-20
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth the activity related to the
allowance for doubtful accounts for the years ended
December 31, 2004, 2003 and 2002. Included in other
adjustments in the year ended December 31, 2004 is an
increase of $0.1 million of foreign exchange revaluation,
with the offsetting amount related to Mercator reserves no
longer deemed necessary. In the year ended December 31,
2003, other adjustments consist of an increase of
$1.9 million due to the acquisition of Mercator.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
|
|
|
|
|
|
Balance | |
| |
|
Beginning | |
|
Costs and | |
|
Charged to | |
|
|
|
|
|
at End | |
| |
|
of Year | |
|
Expenses | |
|
Revenues | |
|
Write Offs | |
|
Other | |
|
of Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Year ended December 31, 2004
|
|
$ |
4,717 |
|
|
$ |
(364 |
) |
|
$ |
304 |
|
|
$ |
(1,320 |
) |
|
$ |
(81 |
) |
|
$ |
3,256 |
|
|
Year ended December 31, 2003
|
|
$ |
3,758 |
|
|
$ |
971 |
|
|
$ |
— |
|
|
$ |
(1,948 |
) |
|
$ |
1,936 |
|
|
$ |
4,717 |
|
|
Year ended December 31, 2002
|
|
$ |
8,451 |
|
|
$ |
2,426 |
|
|
$ |
47 |
|
|
$ |
(7,166 |
) |
|
$ |
— |
|
|
$ |
3,758 |
|
|
|
| Note 3 — |
Financial Instruments |
The following is a summary of available-for-sale debt and
marketable equity securities:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Available-for-Sale | |
|
|
| |
|
|
|
Securities | |
|
|
| |
|
|
|
| |
|
|
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
|
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(In thousands) | |
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$ |
41,252 |
|
|
$ |
— |
|
|
$ |
(391 |
) |
|
$ |
40,861 |
|
|
Euro dollar Time Deposit
|
|
|
2,352 |
|
|
|
— |
|
|
|
— |
|
|
|
2,352 |
|
|
Commercial paper, corporate bonds and medium-term notes
|
|
|
190,746 |
|
|
|
63 |
|
|
|
(910 |
) |
|
|
189,899 |
|
|
U.S. government agency bonds
|
|
|
165,622 |
|
|
|
4 |
|
|
|
(677 |
) |
|
|
164,949 |
|
|
Money Market Funds
|
|
|
3,007 |
|
|
|
— |
|
|
|
— |
|
|
|
3,007 |
|
|
Marketable equity securities
|
|
|
63 |
|
|
|
— |
|
|
|
— |
|
|
|
63 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
403,042 |
|
|
$ |
67 |
|
|
$ |
(1,978 |
) |
|
$ |
401,131 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in cash and cash equivalents
|
|
|
86,655 |
|
|
|
63 |
|
|
|
(1 |
) |
|
|
86,717 |
|
|
Amounts included in short-term investments
|
|
|
316,324 |
|
|
|
4 |
|
|
|
(1,977 |
) |
|
|
314,351 |
|
|
Amounts included in long-term investments
|
|
|
63 |
|
|
|
— |
|
|
|
|
|
|
|
63 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
403,042 |
|
|
$ |
67 |
|
|
$ |
(1,978 |
) |
|
$ |
401,131 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-21
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Available-for-Sale | |
|
|
| |
|
|
|
Securities | |
|
|
| |
|
|
|
| |
|
|
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
|
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(In thousands) | |
|
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$ |
31,958 |
|
|
$ |
10 |
|
|
$ |
(175 |
) |
|
$ |
31,793 |
|
|
Money market mutual funds
|
|
|
75,241 |
|
|
|
— |
|
|
|
— |
|
|
|
75,241 |
|
|
Commercial paper, corporate bonds and medium-term notes
|
|
|
162,070 |
|
|
|
674 |
|
|
|
— |
|
|
|
162,744 |
|
|
U.S. government agency bonds
|
|
|
138,796 |
|
|
|
25 |
|
|
|
(122 |
) |
|
|
138,699 |
|
|
Euro dollar time deposits
|
|
|
2,593 |
|
|
|
— |
|
|
|
— |
|
|
|
2,593 |
|
|
Marketable equity securities
|
|
|
97 |
|
|
|
79 |
|
|
|
— |
|
|
|
176 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
410,755 |
|
|
$ |
788 |
|
|
$ |
(297 |
) |
|
$ |
411,246 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in cash and cash equivalents
|
|
$ |
93,489 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
93,489 |
|
|
Amounts included in short-term investments
|
|
|
317,169 |
|
|
|
709 |
|
|
|
(297 |
) |
|
|
317,581 |
|
|
Amounts included in long-term investments
|
|
|
97 |
|
|
|
79 |
|
|
|
— |
|
|
|
176 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
410,755 |
|
|
$ |
788 |
|
|
$ |
(297 |
) |
|
$ |
411,246 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of debt securities at market value at
December 31, 2004 are as follows (in thousands):
| |
|
|
|
|
|
Mature in one year or less
|
|
$ |
137,360 |
|
|
Mature after one year through five years
|
|
|
263,771 |
|
| |
|
|
|
| |
|
$ |
401,131 |
|
|
|
| Note 4 — |
Derivative Financial Instruments |
The Company enters into foreign currency forward exchange
contracts primarily as an economic hedge against the value of
intercompany accounts receivable or accounts payable denominated
in foreign currencies against fluctuations in exchange rates
until such receivables are collected or payables are disbursed.
The purpose of the Company’s foreign exchange exposure
management policy and practices is to attempt to minimize the
impact of exchange rate fluctuations on the value of the foreign
currency denominated assets and liabilities being hedged. These
transactions and other forward foreign exchange contracts do not
meet the accounting rules established under
SFAS No. 133 to qualify for recording of the
unrecognized after-tax gain or loss portion of the fair value of
the contracts in other comprehensive income (loss), and the
Company has not designated the instruments as hedges for
accounting purposes. Therefore, the related fair value of the
derivative hedge contract is recognized in earnings.
The table below summarizes by currency the contractual amounts
of the Company’s foreign currency forward exchange
contracts at December 31, 2004 and 2003. The information is
provided in U.S. dollar equivalents and presents the
notional amount (contract amount). Since these contracts were
entered into on the last day of 2004 and 2003, respectively, the
contract forward rate and the market forward rate are the same.
The Company’s foreign currency forward contracts are not
accounted for as hedges, but are derivative financial
instruments and are carried at fair value. All contracts mature
within three months. In addition to the contracts listed below,
at December 31, 2004, the Company has accrued, as a
component of other current assets on the consolidated balance
sheet, a gain of $1.4 million related to the fair market
value of forward currency contracts that had closed as of
December 31, 2004 but were not settled until January 4 and
January 5, 2005. During the year ended December 31,
2004, the Company recognized gross losses on foreign
F-22
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
currency transactions of $1.8 million, gross gains on
foreign currency transactions of $2.2 million and
cumulative translation gains of $0.6 million as a result of
complete or substantially complete liquidation of investments in
foreign entities.
| |
|
|
|
|
|
| |
|
Contract | |
| |
|
Amount | |
| |
|
| |
| |
|
(In thousands) | |
|
At December 31, 2004
|
|
|
|
|
|
Forward currency to be sold under contract:
|
|
|
|
|
| |
Swiss Franc
|
|
$ |
4,374 |
|
| |
Euro
|
|
|
3,874 |
|
| |
Korean Won
|
|
|
2,107 |
|
| |
Norwegian Krone
|
|
|
1,984 |
|
| |
Czech Koruna
|
|
|
1,984 |
|
| |
Singapore Dollar
|
|
|
1,651 |
|
| |
Brazilian Real
|
|
|
1,399 |
|
| |
|
|
|
| |
|
|
17,373 |
|
| |
|
|
|
|
Forward currency to be purchased under contract:
|
|
|
|
|
| |
British Pound
|
|
|
39,252 |
|
| |
Other (individually less than $1 million)
|
|
|
1,814 |
|
| |
|
|
|
| |
|
|
41,066 |
|
| |
|
|
|
|
Total
|
|
$ |
58,439 |
|
| |
|
|
|
|
At December 31, 2003
|
|
|
|
|
|
Forward currency to be sold under contract:
|
|
|
|
|
| |
Swiss Franc
|
|
$ |
3,603 |
|
| |
Singapore Dollar
|
|
|
2,059 |
|
| |
Korean Won
|
|
|
2,052 |
|
| |
Norwegian Krone
|
|
|
1,697 |
|
| |
Brazilian Real
|
|
|
1,662 |
|
| |
Australian Dollar
|
|
|
1,412 |
|
| |
Slovak Koruna
|
|
|
1,244 |
|
| |
Other (individually less than $1 million)
|
|
|
2,101 |
|
| |
|
|
|
| |
|
|
15,830 |
|
| |
|
|
|
|
Forward currency to be purchased under contract:
|
|
|
|
|
| |
British Pound
|
|
|
44,056 |
|
| |
Euro
|
|
|
1,740 |
|
| |
Other (individually less than $1 million)
|
|
|
2,571 |
|
| |
|
|
|
| |
|
|
48,367 |
|
| |
|
|
|
|
Total
|
|
$ |
64,197 |
|
| |
|
|
|
While the contract amounts provide one measure of the volume of
these transactions, they do not represent the amount of the
Company’s exposure to credit risk. The amount of the
Company’s credit risk exposure (arising from the possible
inabilities of counter parties to meet the terms of their
contracts) is
F-23
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
generally limited to the amounts, if any, by which the counter
parties’ obligations exceed the obligations of the Company
as these contracts can be settled on a net basis at the option
of the Company.
As of December 31, 2004 and 2003, other than foreign
currency forward exchange contracts discussed above, the Company
does not currently invest in or hold any other derivative
financial instruments.
|
|
| Note 5 — |
Stockholders’ Equity |
The Board of Directors has authorized 5,000,000 shares of
preferred stock with a par value of $0.01 per share.
During 2001, the Board of Directors authorized a
$350.0 million stock repurchase program. The Company may
repurchase outstanding shares of its common stock from time to
time in the open market and through privately negotiated
transactions. During 2004 and 2002, the Company repurchased
approximately 1.9 million and 6.6 million shares of
common stock for an aggregate purchase price of approximately
$31.6 and $74.2 million, respectively. The Company
repurchased no shares in 2003. The Company retired
100,000 shares in 2003. As of December 31, 2004, the
Company has repurchased 17.0 million shares under the
program, at a total cost of $248.8 million.
In connection with its acquisition of Mercator, the Company
assumed certain outstanding warrants convertible into
203,395 shares of common stock with exercise prices ranging
from $18.77 to $50.03. On October 20, 2003 the warrants
issued to Vector Capital II LP convertible into
18,848 shares of common stock were exercised upon payment
to Vector of $430,000. This payment has been recorded in
purchase accounting as a component of goodwill associated with
the Mercator acquisition. During 2004 warrants convertible into
76,547 shares of common stock expired, unexercised. At
December 31, 2004 warrants convertible into
108,000 shares of common stock are outstanding at exercise
prices ranging from $40.00 to $50.03 per share.
F-24
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 6 — |
Net Income (Loss) Per Common Share |
The following table sets forth the computation of basic and
diluted net income (loss) per common share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
14,951 |
|
|
$ |
15,805 |
|
|
$ |
(63,573 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Denominator for basic net income (loss) per common
share — Weighted-average shares outstanding
|
|
|
59,208 |
|
|
|
58,409 |
|
|
|
61,931 |
|
| |
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee stock options
|
|
|
1,425 |
|
|
|
1,294 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Denominator for diluted net income (loss) per common
share — adjusted weighted-average shares and assumed
conversions
|
|
|
60,633 |
|
|
|
59,703 |
|
|
|
61,931 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$ |
0.25 |
|
|
$ |
0.27 |
|
|
$ |
(1.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$ |
0.25 |
|
|
$ |
0.26 |
|
|
$ |
(1.03 |
) |
| |
|
|
|
|
|
|
|
|
|
Options to purchase shares of the Company’s common stock
with exercise prices below the average market price for the year
ended December 31, 2002 totaling 0.2 million have been
excluded from the diluted calculation as the potential common
shares associated with these options are anti-dilutive due to
the net loss for the period.
The Company excluded other potential common shares for the years
ended December 31, 2004, 2003 and 2002 from its diluted net
income (loss) per share computation because the exercise prices
of these securities were equal to or exceeded the average market
value of the common stock for the same periods and, therefore,
these securities were anti-dilutive. The following is a summary
of the excluded potential common shares and the related
exercise/conversion features:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(In thousands) | |
|
|
|
Potentially dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Stock options
|
|
|
5,774 |
|
|
|
3,744 |
|
|
|
7,200 |
|
| |
Range of exercise prices
|
|
$ |
17.14-$233.29 |
|
|
$ |
16.76-$341.58 |
|
|
$ |
0.20-$89.00 |
|
| |
Expiring through
|
|
|
April 2014 |
|
|
|
December 2013 |
|
|
|
December 2012 |
|
| |
| |
Warrants
|
|
|
108 |
|
|
|
185 |
|
|
|
— |
|
| |
Range of exercise prices
|
|
$ |
40.00-$50.03 |
|
|
$ |
22.28-$50.03 |
|
|
|
— |
|
| |
Expiring through
|
|
|
December 2008 |
|
|
|
December 2008 |
|
|
|
— |
|
Options outstanding during the year ended December 31, 2002
included options to purchase 3.2 million shares of the
Company’s common stock, the terms of which were extended in
2001 in conjunction with the IBM Transaction. These options were
exercised or expired as of October 29, 2002 and had
exercise prices ranging from $0.80 to $112.40 per share.
F-25
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 7 — |
Employee Benefit Plans |
In February 1989, the Company adopted the 1989 Outside Directors
Stock Option Plan (as amended and restated, the “1989
Plan”), whereby non-employee directors are automatically
granted 20,000 non-qualified stock options upon election to the
Board of Directors and 15,000 non-qualified stock options
annually thereafter. One-third of the options vest and become
exercisable in each full year of the outside director’s
continuous service as a director of the Company and are issued
with an exercise price equal to fair market value of the
Company’s common stock determined as of the date of grant.
On June 17, 2003, stockholders of the Company approved an
amendment to increase the number of shares available for
issuance under the 1989 Plan from 400,000 shares to
650,000 shares, of which 248,750 shares are reserved
for future issuance as of December 31, 2004.
In March 1994, the Company adopted the 1994 Stock Option and
Award Plan (as amended and restated, the “1994 Plan”).
Incentive stock options, nonqualified stock options, restricted
shares, or a combination thereof, can be granted to employees,
at not less than the fair market value on the date of grant and
generally vest in annual installments over two to four years.
The Board or a committee made up solely of outside directors,
and not less than two directors, administers the 1994 Plan. At
present, the compensation committee of the Board of Directors
administers and grants awards under the 1994 Plan, provided that
during any fiscal year of the Company, no participant shall
receive stock options exercisable for more than
500,000 shares of common stock. No more than 20% of the
maximum number of shares authorized for issuance under the 1994
Plan may be issued pursuant to restricted stock awards. However,
the compensation committee may grant options exercisable for up
to 1,000,000 shares of common stock during any fiscal year
of the Company in which the individual first becomes an employee
and/or is promoted from a position as a non-executive officer
employee to a position as an executive officer. In April 2000,
the Company’s Board of Directors approved an amendment to
the 1994 Plan whereby the options are generally not exercisable
until one year from the date of grant. On June 17, 2003,
the stockholders of the Company approved an amendment to
increase the number of shares available for issuance under the
1994 Plan from 6,000,000 shares to 8,250,000 shares,
of which 2,371,983 shares are reserved for future issuance
as of December 31, 2004.
In July 1997, the Company adopted the 1997 Non-Statutory Stock
Option Plan (as amended the “1997 Plan”), authorizing
the grant of non-statutory stock options to employees and
consultants. Terms of each option are determined by the Board of
Directors or committee delegated such duties by the Board of
Directors. A total of 425,000 shares have been authorized
for issuance under the 1997 Plan, of which 296,250 shares
are reserved for future issuance as of December 31, 2004.
In July 1998, the Company adopted the 1998 Non-Statutory Stock
Option Plan (as amended and restated, the “1998
Plan”). Options and restricted shares can be granted to
employees and consultants with terms designated by the Board of
Directors or committee delegated such duties by the Board of
Directors. On June 27, 2003, the Board of Directors
adopted an amendment to increase the number of shares available
for issuance under the 1998 Plan from 5,125,000 shares to
8,125,000 shares, of which 2,291,176 shares are
reserved for future issuance as of December 31, 2004. These
options are issued at fair market value and generally vest over
a four year period with 25% of the option shares vesting after
one year and the remaining 75% of the option shares vesting in
monthly increments over the following three years.
As a result of its acquisition of Mercator in September 2003,
the Company assumed all outstanding Mercator stock options. Each
Mercator stock option so assumed is subject to the same terms
and conditions as the original grant and generally vests over
four years and expires ten years from date of grant. Each option
was adjusted at a ratio of approximately 0.1795 shares of
common stock for each one share of Mercator common stock, and
the exercise price was adjusted by dividing the exercise price
by approximately 0.1795. At the date of acquisition the fair
value of the options to purchase shares of common stock of
Ascential exchanged for
F-26
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Mercator stock options were valued utilizing the Black-Scholes
valuation model and $15.7 million was recorded as
additional paid in capital in purchase accounting. Additionally,
the intrinsic value of the unvested options to purchase common
stock of Ascential that were issued for Mercator stock options
was valued at $2.4 million and recorded in deferred
compensation as discussed in Note 12.
Following is a summary of activity for all stock option plans
for the three years ended December 31, 2004:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
| |
|
Number of | |
|
Average | |
| |
|
Shares | |
|
Exercise Price | |
| |
|
| |
|
| |
|
Outstanding at December 31, 2001
|
|
|
10,532,038 |
|
|
$ |
22.64 |
|
|
Options granted
|
|
|
2,392,498 |
|
|
|
11.08 |
|
|
Options exercised
|
|
|
(147,670 |
) |
|
|
8.40 |
|
|
Options canceled
|
|
|
(5,576,872 |
) |
|
|
24.72 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
7,199,994 |
|
|
|
17.48 |
|
|
Options assumed
|
|
|
1,832,760 |
|
|
|
23.34 |
|
|
Options granted
|
|
|
1,963,943 |
|
|
|
16.65 |
|
|
Options exercised
|
|
|
(2,054,193 |
) |
|
|
12.60 |
|
|
Options canceled
|
|
|
(645,109 |
) |
|
|
26.65 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
8,297,395 |
|
|
|
19.07 |
|
|
Options granted
|
|
|
4,777,183 |
|
|
|
21.65 |
|
|
Options exercised
|
|
|
(373,821 |
) |
|
|
9.93 |
|
|
Options canceled
|
|
|
(1,051,499 |
) |
|
|
28.76 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
11,649,258 |
|
|
|
19.55 |
|
| |
|
|
|
|
|
|
The following table summarizes information about options
outstanding at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
Number | |
|
Weighted | |
|
|
|
Number | |
|
|
| |
|
Outstanding | |
|
Average | |
|
Weighted | |
|
Exercisable | |
|
Weighted | |
| |
|
as of | |
|
Remaining | |
|
Average | |
|
as of | |
|
Average | |
| |
|
December 31, | |
|
Contractual | |
|
Exercise | |
|
December 31, | |
|
Exercise | |
| Range of Exercise Prices |
|
2004 | |
|
Life | |
|
Price | |
|
2004 | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$0.19 to $2.18
|
|
|
11,272 |
|
|
|
2.53 |
|
|
$ |
0.21 |
|
|
|
11,272 |
|
|
$ |
0.21 |
|
|
$3.23 to $4.62
|
|
|
19,322 |
|
|
|
5.48 |
|
|
|
4.53 |
|
|
|
18,283 |
|
|
|
4.53 |
|
|
$5.24 to $7.74
|
|
|
284,351 |
|
|
|
6.99 |
|
|
|
6.42 |
|
|
|
196,842 |
|
|
|
6.44 |
|
|
$7.91 to $11.64
|
|
|
2,042,015 |
|
|
|
6.94 |
|
|
|
10.39 |
|
|
|
1,115,659 |
|
|
|
10.47 |
|
|
$11.88 to $17.48
|
|
|
3,701,303 |
|
|
|
8.35 |
|
|
|
15.12 |
|
|
|
1,218,833 |
|
|
|
15.20 |
|
|
$18.00 to $27.88
|
|
|
5,078,356 |
|
|
|
7.74 |
|
|
|
23.60 |
|
|
|
1,973,995 |
|
|
|
20.41 |
|
|
$28.21 to $38.17
|
|
|
216,207 |
|
|
|
4.76 |
|
|
|
34.48 |
|
|
|
216,039 |
|
|
|
34.49 |
|
|
$42.25 to $57.86
|
|
|
148,350 |
|
|
|
6.27 |
|
|
|
50.38 |
|
|
|
148,327 |
|
|
|
50.38 |
|
|
$67.03 to $95.23
|
|
|
114,299 |
|
|
|
5.32 |
|
|
|
69.88 |
|
|
|
114,299 |
|
|
|
69.88 |
|
|
$115.60 to $169.92
|
|
|
15,834 |
|
|
|
4.58 |
|
|
|
119.77 |
|
|
|
15,834 |
|
|
|
119.77 |
|
|
$217.62 to $233.29
|
|
|
17,949 |
|
|
|
5.39 |
|
|
|
221.54 |
|
|
|
17,949 |
|
|
|
221.54 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,649,258 |
|
|
|
7.66 |
|
|
$ |
19.55 |
|
|
|
5,047,332 |
|
|
$ |
19.94 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003 and 2002, respectively, 4,334,801 and
3,555,057 options were exercisable in connection with all stock
option plans.
F-27
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In May 1997, the Company’s stockholders approved the 1997
Employee Stock Purchase Plan (as amended and restated, the
“ESPP”). A total of 2,000,000 shares have been
authorized for issuance under the ESPP. The ESPP permits
eligible employees to purchase common stock through payroll
deductions of up to 10 percent of an employee’s
compensation, including commissions, overtime, bonuses and other
incentive compensation. The price of Common Stock purchased
under the ESPP is equal to 85 percent of the lower of the
fair market value of the Common Stock at the beginning or at the
end of each calendar quarter in which an eligible employee
participates. The ESPP qualifies as an employee stock purchase
plan under Section 423 of the Internal Revenue Code of
1986, as amended. During 2004, 2003 and 2002, the Company issued
205,562 shares, 164,080 shares and
190,250 shares, respectively, under the ESPP. On
June 18, 2004 and June 17, 2003, the stockholders of
the Company approved amendments to increase the number of shares
available for issuance under the ESPP from 2,250,000 shares
to 3,250,000 shares, and from 2,000,000 shares to
2,250,000, respectively. There were 1,169,854 shares
available for grant under the ESPP at December 31, 2004.
Subsequent to December 31, 2004, the Company issued 819,000
restricted shares to certain employees and executive officers
for a nominal amount. Transferability of the shares is
restricted until the earlier of the achievement of specified
financial growth performance milestones, a change in control or
five years. Accordingly, the Company will record
$11.5 million of deferred compensation in 2005 to be
amortized to compensation expense as the transfer restrictions
lapse.
The Company has a 401(k) plan covering substantially all of its
U.S. employees. Under this plan, participating employees
may defer up to 15 percent of their pre-tax earnings,
subject to the Internal Revenue Service annual contribution
limits. The Company matches 50 percent of each
employee’s contribution up to a maximum of $2,500 annually.
The Company’s matching contributions to this 401(k) plan
for 2004, 2003 and 2002 were $1.1 million,
$0.8 million and $1.0 million, respectively.
The Company maintains a “split dollar” life insurance
arrangement, assumed in a previous acquisition, with respect to
three current and certain former executive officers and
employees. Pursuant to these arrangements, the recipients may
borrow against the excess cash surrender values of their
policies over cumulative paid-in premiums. The Company is
entitled to recover the amount of premiums paid by the Company
upon termination of the policy or death of the recipient.
Following the passage of the Sarbanes-Oxley Act of 2002, the
Company ceased paying premiums on policies held by its executive
officers under the split dollar plan, however the Board of
Directors has voted to reimburse them for the annual premium
cost. The Company has established an investment account, the
future value of which is sufficient to pay the annual remaining
premiums for plan participants other than the two executive
officers, which are due on various dates through 2006. The
Company has no plans to expand these arrangements or offer
similar arrangements to additional executive officers or
employees.
The Company accounts for these policies as a defined
contribution plan and expenses premiums on the policies as
incurred, which represents the compensation element of the plan.
In addition, since the Company controls its share of the cash
surrender value of the policies at all times, it accounts for
any changes in cash surrender value in accordance with the
guidance provided in FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance. Accordingly,
increases or decreases in cash surrender value are recognized
each period and the asset recorded on the Company’s books
represents the lesser of the Company’s share of cash
surrender value or the cumulative premiums paid on the policies.
The investment account is recorded at
F-28
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the current market value. The total of the cash surrender value
and the investment account is included in other long-term assets
was $7.2 million and $7.2 million at December 31,
2004 and 2003, respectively.
|
|
| Note 8 — |
Commitments and Contingencies |
Operating and Capital Leases. The Company leases certain
of its office facilities and equipment under non-cancelable
operating leases and total rent expense, excluding amounts
charged to “Accrued merger, realignment and other
charges”, was $8.6 million, $7.9 million and
$8.6 million in 2004, 2003 and 2002, respectively. Assets
recorded under capital leases totaled $2.9 million, net of
accumulated depreciation of $2.0 million, and are included
in property and equipment at December 31, 2004. The
remaining obligation under capital leases was $0.6 million
and $1.5 million at December 31, 2004 and 2003,
respectively.
Future minimum payments by year and in the aggregate, under
non-cancelable operating and capital leases, excluding the
assigned lease for the Santa Clara, California facility
mentioned below, but including amounts which will be charged to
“Accrued merger, realignment and other charges” (see
Note 15), as of December 31, 2004, are as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
| Year Ending December 31 |
|
Operating Leases | |
|
Capital Leases | |
| |
|
| |
|
| |
|
2005
|
|
|
19,373 |
|
|
$ |
504 |
|
|
2006
|
|
|
15,706 |
|
|
|
143 |
|
|
2007
|
|
|
13,086 |
|
|
|
— |
|
|
2008
|
|
|
10,386 |
|
|
|
— |
|
|
2009
|
|
|
5,835 |
|
|
|
— |
|
|
Thereafter
|
|
|
23,375 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Total payments
|
|
|
87,761 |
|
|
|
647 |
|
| |
Less: Non-cancelable sublease income
|
|
|
3,699 |
|
|
|
— |
|
| |
Less: Amount representing interest
|
|
|
— |
|
|
|
81 |
|
| |
|
|
|
|
|
|
|
Total payments, net
|
|
|
84,062 |
|
|
$ |
566 |
|
| |
|
|
|
|
|
|
In November 1996, the Company leased approximately
200,000 square feet of office space in Santa Clara,
California. The lease term extends through March 2013 and the
remaining minimum lease payments amount to approximately
$48.7 million. The Company assigned this lease to Network
Associates, Inc., an unrelated third party, in the fourth
quarter of 1997. The Company remains contingently liable for
minimum lease payments under this assignment.
Guarantees. In November 2002, the FASB issued
FIN No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34. FIN 45 requires that a
guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken by
issuing the guarantee and requires additional disclosures to be
made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees it has
issued. The adoption of FIN 45 in 2003 did not have a
material effect on the Company’s financial position or
results of operations. The following is a summary of our
agreements that we have determined are within the scope of
FIN 45.
The Company generally warrants that its unmodified software
products, when used as specified, will substantially conform to
the applicable user documentation for a specified period of time
(generally 90 days in the United States, and longer in
jurisdictions with applicable statutory requirements).
Additionally, the Company generally warrants that its consulting
services will be performed in a professional and workmanlike
manner. In general, liability for these warranties is limited to
the amounts paid by the customer. If necessary, the Company
would provide for the estimated cost of product and service
warranties based on specific
F-29
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
warranty claims and claim history; however, the Company has
never incurred significant expense under its product or services
warranties. As a result, the Company believes the estimated fair
value of these agreements is immaterial. The Company also
generally offers indemnification with respect to certain types
of intellectual property claims and, occasionally, other matters.
As part of the IBM Transaction, the Company agreed to indemnify
IBM for certain representations and warranties that were made
under the terms of the IBM Transaction agreements. IBM had
retained $100.0 million of the sale proceeds as a holdback
to satisfy any indemnification obligations that might arise for
any representations or warranties made by the Company as part of
the IBM Transaction. The agreement with IBM provided that the
Company would indemnify IBM and its affiliates against any loss,
claim, damage, liability or other expense incurred in connection
with (i) any failure of any representation or warranty of
the Company to be true and correct in all respects; provided,
however, that any such liability, in the aggregate, exceeds on a
cumulative basis $10.0 million (and only to the extent of
any such excess); (ii) any breach of any obligation of the
Company; (iii) any of the Excluded Liabilities, as defined
in the agreement; or (iv) the operation or ownership of the
Excluded Assets, as defined in the agreement. The Company
received the $100.0 million holdback payment from IBM, plus
accrued interest, in January 2003. No formal indemnification
claims have been made by IBM from the time that the Company
received the holdback payment through the date of this filing.
Indemnification obligations of the Company with respect to
certain representations and warranties under the agreement with
IBM terminated on July 1, 2003 as discussed further in
Note 13.
The Company is obligated to indemnify certain prior directors
and officers for various matters arising from their actions
during the period they were employed or associated with the
Company. In the past, the Company has paid the legal fees of
some former officers, which payments were not believed to have a
material adverse effect on the Company’s financial
condition. The Company’s indemnification obligations are
defined by indemnification agreements and the Company’s
charter and by-laws. Subsequent to December 31, 2004, we
paid $0.2 million related to the resolution of an
indemnification matter involving a person who was an officer of
the Company prior to the IBM Transaction. The Company is insured
for other costs and losses that could be incurred by virtue of
its future indemnification obligations. In May 2002 and November
2003, the Company entered into standby letters of credit that
expire by May 2006 and November 2007, respectively, which
guarantee a total of $1.4 million of potential tax payments
related to certain payments made to two former officers of the
Company. These potential tax payments, which have been partially
reserved based on management’s assessment of the potential
payments and relate to severance paid to these former officers
in accordance with a change in control agreement that was
triggered by the IBM Transaction as discussed further in
Note 13. Payment under the standby letter of credit may be
due upon final determination of this tax liability.
The Company has agreed to indemnify and hold KPMG LLP
(KPMG) harmless against and from any and all legal costs
and expenses incurred by KPMG in successful defense of any legal
action or proceeding that arises as a result of KPMG’s
consent to the inclusion of its audit report on the
Company’s consolidated statements of operations,
stockholders’ equity and cash flows for the year ended
December 31, 2002 included in this annual report on
Form 10-K.
During 2003 the Company issued a $2.5 million standby
letter of credit to guarantee certain lease obligations pursuant
to the lease between Mercator and the landlord of an office
facility located in Wilton, Connecticut. The letter of credit is
automatically extended annually, but not beyond July 1,
2013.
The Company was also required to enter into standby letters of
credit to guarantee approximately $0.2 million of lease
payments for certain facilities in Europe. These guarantees do
not have expiration dates and would allow landlords to obtain
lease payments from the Company’s bank if the Company
defaulted on its lease payment obligations.
F-30
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Litigation. From time to time, in the ordinary course of
business, the Company is involved in various other legal
proceedings and claims, including but not limited to those
related to the operations of the former database business and/or
asserted by former employees of the Company relating to their
employment or compensation by the Company. The Company does not
believe that any of these other proceedings and claims will have
a material adverse effect on the Company’s business or
financial condition.
|
|
| Note 9 — |
Business Segments |
The Company has two segments that report to its Chief Executive
Officer (the “Chief Operating Decision Maker”). The
first segment, Ascential Software, develops and markets data
integration software and related services worldwide. The second
segment, Informix Software, provided database management systems
for data warehousing, transaction processing, and e-business
applications. “We”, the “Company” or
“Ascential Software Corporation” refers to Ascential
Software and Informix Software on a combined basis. Segment
operating performance is evaluated primarily on income before
taxes. The Company completed the IBM Transaction during the
third quarter of 2001. Accordingly, the Company has derived no
revenue from operations associated with the Informix Software
segment after 2001, and the only remaining operating segment
subsequent to the IBM Transaction is Ascential Software.
Expenses continued to be incurred by the Informix Software
segment related to the winding down of issues with respect to
the sale of that business. Below is a summary of the results of
operations based on the two operating businesses for the years
ended December 31, 2004, 2003 and 2002 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Ascential | |
|
Informix | |
|
|
| |
|
Software | |
|
Software | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net revenues from unaffiliated customers
|
|
$ |
271,879 |
|
|
$ |
— |
|
|
$ |
271,879 |
|
| |
Operating income (loss)
|
|
|
6,912 |
|
|
|
(860 |
) |
|
|
6,052 |
|
| |
Income (loss) before income taxes
|
|
|
16,743 |
|
|
|
(222 |
) |
|
|
16,521 |
|
| |
Depreciation and amortization
|
|
|
14,327 |
|
|
|
— |
|
|
|
14,327 |
|
| |
Identifiable tangible assets at December 31, 2004
|
|
|
581,621 |
|
|
|
— |
|
|
|
581,621 |
|
| |
Capital expenditures
|
|
|
4,639 |
|
|
|
— |
|
|
|
4,639 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net revenues from unaffiliated customers
|
|
$ |
185,586 |
|
|
$ |
— |
|
|
$ |
185,586 |
|
| |
Operating loss
|
|
|
(8,815 |
) |
|
|
(5,100 |
) |
|
|
(13,915 |
) |
| |
Income (loss) before income taxes
|
|
|
2,620 |
|
|
|
(3,111 |
) |
|
|
(491 |
) |
| |
Depreciation and amortization
|
|
|
10,008 |
|
|
|
— |
|
|
|
10,008 |
|
| |
Identifiable tangible assets at December 31, 2003
|
|
|
607,095 |
|
|
|
— |
|
|
|
607,095 |
|
| |
Capital expenditures
|
|
|
3,549 |
|
|
|
— |
|
|
|
3,549 |
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net revenues from unaffiliated customers
|
|
$ |
113,018 |
|
|
$ |
— |
|
|
$ |
113,018 |
|
| |
Operating loss
|
|
|
(78,522 |
) |
|
|
(22,916 |
) |
|
|
(101,438 |
) |
| |
Loss before income taxes
|
|
|
(64,032 |
) |
|
|
(17,372 |
) |
|
|
(81,404 |
) |
| |
Depreciation and amortization
|
|
|
10,013 |
|
|
|
— |
|
|
|
10,013 |
|
| |
Identifiable tangible assets at December 31, 2002
|
|
|
718,386 |
|
|
|
— |
|
|
|
718,386 |
|
| |
Capital expenditures
|
|
|
2,950 |
|
|
|
— |
|
|
|
2,950 |
|
F-31
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The accounting policies of the segments are the same as those
described above in Note 1. The difference between the
operating income (loss) of the Company’s reportable
operating segments and the consolidated income (loss) before
income taxes represents other income, net.
In addition to the segment information above, information as to
the Company’s operations in different geographical areas is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Tangible long-lived assets:
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
20,609 |
|
|
$ |
20,952 |
|
| |
Other
|
|
|
21 |
|
|
|
16 |
|
| |
|
|
|
|
|
|
| |
|
North America Total
|
|
|
20,630 |
|
|
|
20,968 |
|
|
Europe
|
|
|
1,597 |
|
|
|
1,993 |
|
|
Asia/ Pacific
|
|
|
1,672 |
|
|
|
1,148 |
|
| |
|
|
|
|
|
|
|
Total tangible long-lived assets
|
|
$ |
23,899 |
|
|
$ |
24,109 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenue from unaffiliated customers(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
127,945 |
|
|
$ |
99,842 |
|
|
$ |
60,801 |
|
| |
Other
|
|
|
9,091 |
|
|
|
1,675 |
|
|
|
1,050 |
|
| |
|
|
|
|
|
|
|
|
|
| |
North America Total
|
|
|
137,036 |
|
|
|
101,517 |
|
|
|
61,851 |
|
|
Europe
|
|
|
106,594 |
|
|
|
65,272 |
|
|
|
33,908 |
|
|
Asia/ Pacific
|
|
|
28,249 |
|
|
|
18,797 |
|
|
|
13,520 |
|
|
Latin America(2)
|
|
|
— |
|
|
|
— |
|
|
|
3,739 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total revenue from unaffiliated customers
|
|
$ |
271,879 |
|
|
$ |
185,586 |
|
|
$ |
113,018 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
For those customer contracts entered into by the United States,
the Company allocates revenue to the geographic territories
where the license is installed or the service is delivered. |
| |
| (2) |
In late 2002, the Company closed its operations in Latin
America. During 2003 and 2004, all Latin sales activity was
managed by sales professionals in North America through
resellers. |
In the above table, Europe includes primarily United Kingdom,
France, Germany, and Italy; Asia/ Pacific includes primarily
Australia, Korea, China and Japan; and Latin America includes
primarily Mexico, Brazil, and Argentina.
F-32
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The provision (benefit) for income taxes applicable to income
(loss) before income taxes consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Currently payable (receivable):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
(58 |
) |
|
$ |
(18,965 |
) |
|
$ |
(13,656 |
) |
| |
State
|
|
|
(814 |
) |
|
|
2,200 |
|
|
|
120 |
|
| |
Foreign
|
|
|
828 |
|
|
|
1,860 |
|
|
|
1,341 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(44 |
) |
|
|
(14,905 |
) |
|
|
(12,195 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Reduction in goodwill for the tax benefit from utilization of
acquired company’s tax attributes
|
|
|
1,028 |
|
|
|
990 |
|
|
|
30 |
|
| |
|
|
|
|
|
|
|
|
|
|
Charge equivalent to the federal and state tax benefit related
to employee stock options
|
|
|
2,778 |
|
|
|
1,952 |
|
|
|
586 |
|
| |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
(1,770 |
) |
|
|
(3,500 |
) |
|
|
(1,530 |
) |
| |
State
|
|
|
(422 |
) |
|
|
(833 |
) |
|
|
(4,722 |
) |
| |
Foreign
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(2,192 |
) |
|
|
(4,333 |
) |
|
|
(6,252 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,570 |
|
|
$ |
(16,296 |
) |
|
$ |
(17,831 |
) |
| |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Domestic
|
|
$ |
18,306 |
|
|
$ |
(8,660 |
) |
|
$ |
(51,019 |
) |
|
Foreign
|
|
|
(1,785 |
) |
|
|
8,169 |
|
|
|
(30,385 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
16,521 |
|
|
$ |
(491 |
) |
|
$ |
(81,404 |
) |
| |
|
|
|
|
|
|
|
|
|
The following table sets forth the activity related to the
income tax valuation allowance for the years ended
December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Charges to | |
|
(Credits)/ | |
|
Credits to | |
|
|
| |
|
Balance at | |
|
Income | |
|
Charges to | |
|
Income | |
|
Balance at | |
| |
|
Beginning | |
|
Tax | |
|
Other | |
|
Tax | |
|
End of | |
| |
|
of Year | |
|
Provision | |
|
Accounts(1) | |
|
Provision | |
|
Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Year ended December 31, 2004
|
|
$ |
167,411 |
|
|
$ |
19,596 |
|
|
$ |
(2,799 |
) |
|
$ |
(7,954 |
) |
|
$ |
176,254 |
|
|
Year ended December 31, 2003
|
|
$ |
97,125 |
|
|
$ |
20,415 |
|
|
$ |
59,737 |
|
|
$ |
(9,866 |
) |
|
$ |
167,411 |
|
|
|
| (1) |
Amount represents valuation allowance activity related to
business combinations. |
F-33
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The provision for income taxes differs from the amount computed
by applying the federal statutory income tax rate to income
(loss) before income taxes. The sources and tax effects of the
differences at December 31, 2004, 2003 and 2002 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Computed tax expense (benefit) at federal statutory rate
|
|
$ |
5,783 |
|
|
$ |
(172 |
) |
|
$ |
(28,492 |
) |
|
Valuation allowance
|
|
|
1,785 |
|
|
|
5,076 |
|
|
|
26,945 |
|
|
State income taxes, net of federal tax benefit
|
|
|
275 |
|
|
|
4,572 |
|
|
|
(4,571 |
) |
|
Foreign withholding taxes not currently creditable
|
|
|
— |
|
|
|
— |
|
|
|
977 |
|
|
Foreign tax credits
|
|
|
— |
|
|
|
(235 |
) |
|
|
— |
|
|
Foreign taxes, net
|
|
|
(3,206 |
) |
|
|
(1,358 |
) |
|
|
(1,958 |
) |
|
Non-deductible charges
|
|
|
— |
|
|
|
1,346 |
|
|
|
— |
|
|
Prior year tax benefits utilized
|
|
|
— |
|
|
|
— |
|
|
|
(17,533 |
) |
|
Reserve adjustment
|
|
|
(2,885 |
) |
|
|
(25,157 |
) |
|
|
4,925 |
|
|
Other, net
|
|
|
(182 |
) |
|
|
(368 |
) |
|
|
1,876 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total income tax expense (benefit)
|
|
$ |
1,570 |
|
|
$ |
(16,296 |
) |
|
$ |
(17,831 |
) |
| |
|
|
|
|
|
|
|
|
|
The reserve adjustments in 2004 and 2003, $2.9 million and
$25.2 million respectively, were recorded to reflect the
impact of closed tax audits, expiring statutes of limitations
for the assessment of tax and changes in estimates resulting
from additional or new information related to certain tax
accruals.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts
used for income tax purposes. Deferred taxes are not provided on
the undistributed earnings through December 31, 2004 of
approximately $131.3 million of subsidiaries operating
outside the U.S. that have been or are intended to be
permanently reinvested. The amount of unrecognized deferred tax
liability on the undistributed earnings cannot be practicably
determined at this time. The Company is currently evaluating the
impact of the repatriation provisions of the American Jobs
Creation Act to determine the amount of earnings to repatriate,
if any.
F-34
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Significant components of the Company’s deferred tax assets
and liabilities are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
| |
Reserves and accrued expenses
|
|
$ |
2,934 |
|
|
$ |
4,290 |
|
| |
Deferred revenue
|
|
|
287 |
|
|
|
610 |
|
| |
Foreign net operating loss carryforwards
|
|
|
31,680 |
|
|
|
33,501 |
|
| |
Domestic net operating loss carryforwards
|
|
|
94,718 |
|
|
|
90,590 |
|
| |
Tax credit carryforwards
|
|
|
49,753 |
|
|
|
39,732 |
|
| |
Acquisition and restructuring reserves
|
|
|
7,497 |
|
|
|
16,388 |
|
| |
Other
|
|
|
1,864 |
|
|
|
1,211 |
|
| |
|
|
|
|
|
|
| |
Total deferred tax assets
|
|
|
188,733 |
|
|
|
186,322 |
|
| |
Valuation allowance for deferred tax assets
|
|
|
(176,254 |
) |
|
|
(167,411 |
) |
| |
|
|
|
|
|
|
| |
Deferred tax assets, net of valuation allowance
|
|
|
12,479 |
|
|
|
18,911 |
|
| |
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
| |
Capitalized software development costs
|
|
|
(7,206 |
) |
|
|
(6,506 |
) |
| |
Acquisition reserves
|
|
|
(4,750 |
) |
|
|
(8,660 |
) |
| |
Deferred income
|
|
|
(136 |
) |
|
|
(2,947 |
) |
| |
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(12,092 |
) |
|
|
(18,113 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
387 |
|
|
$ |
798 |
|
| |
|
|
|
|
|
|
At December 31, 2004, the Company had approximately
$79.2 million and $236.8 million of foreign and
federal net operating loss carryforwards, respectively. The
foreign net operating loss carryforwards expire at various dates
beginning in 2005 with some of the losses having an indefinite
carryforward period. The federal net operating loss
carryforwards expire at various dates from 2007 through 2021. At
December 31, 2004, the Company had approximately
$33.3 million of various federal tax credit carryforwards
that will expire at various dates from 2005 through 2024.
Utilization of a substantial amount of the loss and credit
carryforwards is subject to an annual limitation imposed by
change in ownership provisions of United States Internal Revenue
Code Section 382.
The valuation allowance was increased by $8.8 million in
2004. In 2003, the valuation allowance was increased by
$70.3 million, primarily due to the acquisition of
Mercator. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. The Company
believes that it is more likely than not the deferred tax assets
at December 31, 2004, net of the valuation allowance, will
be realized as a result of the reversal of existing taxable
temporary differences.
Subsequently recognizable tax benefits relating to the valuation
allowance for deferred tax assets at December 31, 2004 is
as follows (in thousands):
| |
|
|
|
|
|
Income tax benefit from continuing operations
|
|
$ |
78,136 |
|
|
Goodwill and other non-current intangible assets
|
|
|
98,118 |
|
| |
|
|
|
|
Total
|
|
$ |
176,254 |
|
| |
|
|
|
F-35
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 11 — |
Goodwill and Other Intangible Assets |
As a result of adopting SFAS 142, the Company ceased
amortizing goodwill beginning January 1, 2002, and
evaluates goodwill for impairment in accordance with
SFAS 142 (see Note 1). The changes in the carrying
amount of goodwill for the year ended December 31, 2004 and
2003 are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Balance beginning of year
|
|
$ |
324,327 |
|
|
$ |
162,670 |
|
|
Additions from acquisitions
|
|
|
263 |
|
|
|
162,810 |
|
|
Adjustments
|
|
|
867 |
|
|
|
(1,153 |
) |
| |
|
|
|
|
|
|
|
Balance end of year
|
|
$ |
325,457 |
|
|
$ |
324,327 |
|
| |
|
|
|
|
|
|
During 2004, the Company recorded $0.3 million of goodwill
related to the purchase of the assets of iNuCom (India) Limited
and its affiliate iNuCom.com, Inc. (collectively referred to as
“iNuCom”) (see Note 12). Also during 2004, the
$162.8 million of goodwill related to the acquisition of
Mercator recorded during 2003 was adjusted upward in the amount
of $1.5 million. This adjustment primarily includes an
increase of $2.9 million related to finalizing estimates of
accrued merger, restructuring and other expenses in purchase
accounting, $0.6 million of adjustments to the net assets
and liabilities assumed, offset by a decrease of
$2.0 million to deferred taxes related to Mercator. In
addition, the $92.1 million of goodwill related to the
acquisition of Vality was adjusted by a decrease of
$0.4 million during 2004. This adjustment principally
includes a decrease of $0.3 million related to deferred
taxes associated with Vality and a $0.1 million reversal of
acquisition reserves that were no longer necessary. Also, during
2004, the $39.7 million of goodwill related to the
acquisition of Torrent was adjusted by a decrease of
$0.2 million to deferred taxes related to Torrent. During
2003, the Company recorded $162.8 million of goodwill
related to the acquisition of Mercator. Also during 2003, the
$93.4 million of goodwill related to the acquisition of
Vality which occurred in 2002 was adjusted by a decrease of
$1.2 million (see Note 12). This adjustment primarily
includes a $1.0 million reversal of facilities reserves
that were no longer necessary due to exiting certain facilities,
$0.7 million of adjustments to the net assets and
liabilities assumed, offset by an adjustment of
$0.5 million to deferred taxes related to Vality.
Other intangible assets amounted to $11.5 million (net of
accumulated amortization of $21.2 million) and
$19.9 million (net of accumulated amortization of
$12.8 million) at December 31, 2004 and 2003,
respectively. These intangible assets consist primarily of
customer relationships and existing technology acquired through
business combinations. During 2003 the Company acquired Mercator
(see Note 12) and assigned fair values to the identifiable
intangible assets of $15.2 million, based upon an
appraisal. These identifiable intangible assets include
$7.0 million for existing technology, $7.0 million for
customer relationships and $1.2 million for agreements not
to compete. The Company is amortizing these assets on a straight
line basis over their estimated useful lives of one year for the
agreements not to compete and five years for customer
relationships and existing technology.
There are no expected residual values related to the recorded
identifiable intangible assets. Amortization expense for the
years ended December 31, 2004, 2003 and 2002 was
$8.4 million, $6.4 million and $4.6 million,
respectively. Estimated future amortization expense for the
Company’s identifiable intangible
F-36
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
assets as of December 31, 2004, assuming no future
impairment charges or acquisitions, would be as follows (in
thousands):
| |
|
|
|
|
| |
|
Amortization | |
| Year |
|
Expense | |
| |
|
| |
|
2005
|
|
$ |
3,831 |
|
|
2006
|
|
|
2,916 |
|
|
2007
|
|
|
2,800 |
|
|
2008
|
|
|
1,906 |
|
|
2009
|
|
|
— |
|
| |
|
|
|
|
Estimated total future amortization
|
|
$ |
11,453 |
|
| |
|
|
|
|
|
| Note 12 — |
Business Combinations |
In October 2004, the Company purchased the assets of iNuCom for
$0.5 million in cash, including transaction costs. Of the
total consideration, $0.2 million was allocated to fixed
assets acquired and the residual $0.3 million was allocated
to goodwill. The strategy of the acquisition was to create a
facility dedicated primarily to research and development in
Hyderabad, India. iNuCom was an engineering services
subcontractor that the Company had previously utilized.
On September 12, 2003, the Company completed its
acquisition of Mercator. Mercator’s products addressed high
performance, real time, complex data transformation and routing
requirements in transaction oriented environments. The Company
purchased Mercator to broaden and complement its existing
enterprise data integration capabilities, increase its size and
scale, and leverage the increased customer base of the combined
companies. This acquisition also resulted in an in-place
workforce of engineering, sales and marketing talent that has
the knowledge and expertise to complement the existing Ascential
workforce.
The acquisition was accounted for under the purchase method of
accounting, and accordingly, the results of operations of
Mercator have been included in the Company’s consolidated
financial statements since the date of acquisition. The Company
paid approximately $109.3 million to acquire the
outstanding common stock of Mercator. In addition, the purchase
price includes $5.0 million for transaction costs and
$15.7 million for the fair value of options to purchase
shares of common stock of Ascential exchanged for Mercator stock
options, offset by $2.4 million recorded in deferred
compensation for the intrinsic value of unvested options to
purchase common stock of Ascential that were issued in exchange
for Mercator stock options. Of the $2.4 million recorded in
deferred compensation, $0.3 million will be amortized to
compensation expense over the remaining vesting period of the
underlying options. Of the remaining $2.1 million,
$1.1 million was amortized to compensation expense
($0.8 million in 2004 and $0.3 million in 2003),
$0.8 million was offset against the merger reserve related
to the acceleration of the vesting of certain options of
employees when they are terminated ($0.3 million in 2004
and $0.5 million in 2003 — see Note 15) and
$0.2 million was reduced against additional paid in capital
related to unvested options for employees who voluntarily
terminated.
Upon the closing of the acquisition of Mercator on
September 12, 2003, the Company began the process of
integrating Mercator and established a reserve of
$36.2 million to restructure the Mercator organization.
This restructuring reserve primarily includes the cost of
severance for certain redundant general and administrative
functions and the costs related to the closure of certain
redundant facilities as discussed further in Note 15.
F-37
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In purchase accounting, the net assets of Mercator were recorded
at their fair market value and consolidated into the net assets
of the Company. A summary of the purchase price for the Mercator
acquisition is as follows (in millions):
| |
|
|
|
|
|
|
Cash paid to acquire stock, net of cash acquired of
$14.4 million
|
|
$ |
94.9 |
|
|
Cash paid and accrued for transaction costs
|
|
|
5.0 |
|
|
Stock options exchanged
|
|
|
13.3 |
|
|
Accrued merger, restructuring and other expenses
|
|
|
36.2 |
|
| |
|
|
|
| |
Total
|
|
$ |
149.4 |
|
| |
|
|
|
The purchase price was allocated as follows:
| |
|
|
|
|
|
|
|
Accounts receivable
|
|
$ |
11.2 |
|
|
Net fixed assets
|
|
|
5.0 |
|
|
Other assets
|
|
|
4.1 |
|
| |
|
|
|
| |
Total assets acquired
|
|
|
20.3 |
|
| |
|
|
|
|
Current liabilities
|
|
|
(30.4 |
) |
|
Deferred revenue
|
|
|
(19.0 |
) |
|
Long term liabilities
|
|
|
(12.5 |
) |
| |
|
|
|
| |
Total liabilities acquired
|
|
|
(61.9 |
) |
| |
|
|
|
|
Net liabilities assumed, net of cash acquired
|
|
|
(41.6 |
) |
|
Assets held for sale
|
|
|
6.8 |
|
|
Deferred income taxes
|
|
|
4.2 |
|
|
Intangible assets:
|
|
|
|
|
| |
Existing technology
|
|
|
7.0 |
|
| |
Covenants not to compete
|
|
|
1.2 |
|
| |
Customer relationships
|
|
|
7.0 |
|
| |
Goodwill
|
|
|
162.8 |
|
| |
|
|
|
| |
|
Total intangible assets
|
|
|
178.0 |
|
|
In-process research and development
|
|
|
2.0 |
|
| |
|
|
|
| |
Total
|
|
$ |
149.4 |
|
| |
|
|
|
As of the date of the closing of the Mercator acquisition, the
Company became responsible for the then outstanding
$8.1 million principal loan balance owed by Mercator to its
lender pursuant to the terms and conditions of the term loan
facility with that lender (the “Loan Agreement”). The
acquisition of Mercator on September 12, 2003 constituted a
change in control of Mercator, which was an event of default
under the Loan Agreement. On September 18, 2003 the lender
waived the event of default subject to payment of all amounts
due under the Loan Agreement. The Company repaid the entire loan
balance prior to September 30, 2003. During October 2003
the remaining fees and the accrued interest liability of
$0.2 million related to this loan were paid and the Loan
Agreement was terminated.
The portion of the purchase price allocated to in-process
research and development costs (“IPRD”) in the
Mercator acquisition was $2.0 million, or approximately 1%
of the purchase price. At the acquisition date, Mercator’s
in-process project was Release 6.8 of the Mercator Inside
Integrator Software product. This project was approximately 37%
complete, based upon costs expended to date and estimated costs
to complete
F-38
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the project. Mercator had incurred approximately
$3.5 million in expenses related to this project at the
date of the acquisition. The key features of Release 6.8
include multiple event server functionality, enhanced support
for standard XML data and support for the latest 64-bit
hardware, operating systems and application software.
As of the Mercator acquisition date, this technology had not
reached technological feasibility and had no alternative use.
The technological feasibility of an in-process product is
established when the enterprise has completed all planning,
designing, coding and testing activities that are necessary to
establish that the product can be produced to meet its design
specifications. The value of IPRD was determined using an income
approach. This approach takes into consideration earnings
remaining after deducting from cash flows related to the
in-process technology the market rates of return on contributory
assets, including assembled workforce, customer accounts and
existing technology. The cash flows are then discounted to
present value at an appropriate rate. Discount rates are
determined by an analysis of the risks associated with each of
the identified intangible asset. Given the riskier nature of the
cash flows related to the IPRD, a higher discount was warranted,
and is based on the cost of equity plus 500 basis points.
The resulting cash flows attributable to the IPRD was discounted
at a rate of 15.0%. The net cash flows to which this discount
rate was applied are based on management’s estimates of
revenues, operating expenses, and income taxes from such
acquired technology. During 2004, the project was renamed
Ascential DataStage TX 7.5 and was released in July
2004. The costs to complete the project were consistent with
management’s estimates at the time of purchase.
The remaining identifiable intangible assets acquired, including
existing technology, customer relationships and agreements not
to compete between the Company and former Mercator executives,
were assigned fair values based upon an appraisal and amounted
to $15.2 million in the aggregate. The Company believes
that these identifiable intangible assets have no residual
value. The existing technology and customer relationships are
being amortized over five years and the covenant not to compete
is being amortized over one year. In determining the
amortization method of these intangibles, the Company considered
the guidance of SFAS 142, which requires amortization of an
intangible asset based upon the pattern in which the
asset’s economic benefits are consumed or otherwise used
up. Based upon long range forecasts and management’s
assessment of the economic benefit of these intangibles, it was
concluded that an accelerated amortization method could not be
reliably determined. Accordingly, the identifiable intangible
assets of Mercator are being amortized on a straight-line basis
over their estimated useful life. In accordance with current
accounting standards, the goodwill is not being amortized and
will be tested for impairment as required by
SFAS No. 142 (see Note 1).
The total purchase price exceeded fair value of the net assets
acquired and liabilities assumed which resulted in goodwill of
$162.8 million. The goodwill represents a significant
portion of the purchase price. The Company believes that the
majority of the benefits to be derived from this acquisition
will be experienced through synergies, such as the elimination
of redundant functions and facilities and cross selling
opportunities, which are included in goodwill. The Company
anticipates that, barring unforeseen circumstances, none of the
$178.0 million of intangible assets recorded in connection
with the Mercator acquisition will be deductible for income tax
purposes. During the year ended December 31, 2004, the
Company recorded adjustments to goodwill to reflect updated
estimates of facilities reserves and other adjustments to assets
and liabilities assumed (see Note 11).
During the three months ended December 31, 2003, the
Company commenced efforts to sell its Key/ Master data entry
software line, which was formerly owned by Mercator, and is not
part of the Company’s core enterprise data integration
offering. On January 27, 2004, the Company entered into a
software purchase agreement with Phoenix Software International,
Inc. (“Phoenix”) pursuant to which the Company sold
the rights to its Key/ Master data entry product line.
Accordingly, at December 31, 2003, this technology was
recorded as an asset held for sale, as a component of other
current assets, at its fair market value of $6.8 million.
F-39
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On April 3, 2002, the Company acquired Vality, a private
company that specialized in enterprise data quality management.
The results of Vality’s operations have been included in
the consolidated financial statements since the date of the
acquisition. The Company expects that this acquisition will
enable the Company to create a market leading offering that
integrates ETL (extraction, transformation, and load), meta data
management, and data quality and data cleansing technologies. As
of December 31, 2003, the Company had paid the net amount
of $94.5 million to acquire Vality, which consists of
$91.7 million paid to acquire 100% of the outstanding
common and preferred shares of Vality and vested stock options,
and $2.8 million for transaction costs, which is net of
$7.0 million of cash acquired from Vality. The acquisition
was accounted for using the purchase method of accounting, and a
summary of the purchase price for the acquisition is as follows
(in millions):
| |
|
|
|
|
|
Cash paid to acquire stock and options (less cash acquired of
$7.0 million)
|
|
$ |
91.7 |
|
|
Cash paid for transaction costs
|
|
|
2.8 |
|
|
Accrued merger costs
|
|
|
3.8 |
|
| |
|
|
|
|
Total
|
|
$ |
98.3 |
|
| |
|
|
|
The purchase price was allocated as follows:
| |
|
|
|
|
|
|
Net liabilities assumed, net of cash acquired
|
|
$ |
(2.9 |
) |
|
Deferred income taxes
|
|
|
(1.9 |
) |
|
Intangible assets:
|
|
|
|
|
| |
Existing technology
|
|
|
8.2 |
|
| |
Covenant not to compete
|
|
|
0.3 |
|
| |
Goodwill
|
|
|
93.4 |
|
| |
|
|
|
| |
Total intangible assets
|
|
|
101.9 |
|
|
In-process research and development
|
|
|
1.2 |
|
| |
|
|
|
|
Total
|
|
$ |
98.3 |
|
| |
|
|
|
The portion of the purchase price allocated to in-process
research and development costs (“IPRD”) in the Vality
acquisition was $1.2 million, or approximately 1% of the
total purchase price. The value allocated to the project
identified as in process was charged to operations in the second
quarter of 2002.
The remaining identified intangible assets acquired, including,
without limitation, technology and covenants not to compete
between the Company and certain former members of senior
management of Vality, were assigned fair values based upon an
independent appraisal and amounted to $8.5 million in the
aggregate. The Company believes that these identified intangible
assets have no residual value. The excess of the purchase price
over the identified tangible and intangible assets was recorded
as goodwill and amounted to approximately $93.4 million.
During the year ended December 31, 2003, the Company
recorded a decrease in accrued merger costs as a result of
settling a lease obligation earlier than anticipated and other
adjustments to the net liabilities assumed (see Note 11).
The existing technology is being amortized over three years and
the covenant not to compete has been amortized over one year. In
accordance with current accounting standards, the goodwill is
not being amortized and will be tested for impairment as
required by SFAS 142 (see Note 11). The Company
anticipates that none of the $101.9 million of the
intangible assets recorded in connection with the Vality
acquisition will be deductible for income tax purposes.
F-40
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table represents the unaudited pro forma results
of operations of the Company for the fiscal years ended
December 31, 2003 and 2002 as if the acquisitions of
Mercator and Vality had occurred as of the beginning of the
applicable fiscal year. Pro forma adjustments related to the
acquisition of iNuCom have been excluded as adjustment amounts
are not material. The pro forma financial information below
excludes IPRD charges of $2.0 million and $1.2 million
in 2003 and 2002, respectively, since it is considered a
material nonrecurring charge. The pro forma financial
information has been prepared for comparative purposes only and
does not necessarily reflect the results of operations that
would have occurred had these three companies constituted a
single entity during such periods.
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands, except for | |
| |
|
per share data) | |
|
Net revenues
|
|
$ |
244,111 |
|
|
$ |
228,898 |
|
|
Net income (loss)
|
|
$ |
(4,572 |
) |
|
$ |
(89,557 |
) |
|
Diluted net income (loss) per share
|
|
$ |
(0.08 |
) |
|
$ |
(1.45 |
) |
|
|
| Note 13 — |
Sale of the Database Business Assets |
Holdback. On July 1, 2001, the Company completed the
initial closing of the IBM Transaction, which consisted of the
sale to IBM of substantially all of the assets and certain
liabilities of the Company’s database business for
$1.0 billion in cash. The IBM Transaction was
completed on August 1, 2001, upon the closing of the sale
of the assets related to the database business in the nine
remaining countries that were not closed on July 1, 2001.
As part of the IBM Transaction, IBM retained
$100.0 million of the sale proceeds as a holdback (the
“Holdback”) to satisfy the indemnification obligations
that might have arisen under the IBM Transaction purchase
agreement (the “MPA”). The MPA provided that the
Company would indemnify IBM and its affiliates against any loss,
claim, damage, liability or other expense incurred in connection
with (i) any failure of any representation or warranty of
the Company under the MPA to be true and correct in all
respects; provided, however, that any such liability, in the
aggregate, exceeds on a cumulative basis $10.0 million (and
only to the extent of any such excess); (ii) any breach of
any obligation of the Company under the MPA; (iii) any of
the Excluded Liabilities, as defined in the MPA; or
(iv) the operation or ownership of the Excluded Assets, as
defined in the MPA. The MPA provided that IBM would retain the
Holdback until January 1, 2003, except for any funds
necessary to provide for any claims made prior to that date. The
MPA also provided that the Company would receive interest from
July 1, 2001 to the payment date of the Holdback. In
January 2003, IBM released the full amount of the Holdback to
the Company, in the amount of $109.3 million, which
included accrued interest. Indemnification obligations of the
Company with respect to certain representations and warranties
under the MPA terminated on July 1, 2003.
Working Capital Adjustment. Under the terms of the MPA,
the Company was obligated to transfer $124.0 million in net
working capital to IBM from the database business operations
(the “Working Capital Adjustment”) as of July 1,
2001. Working Capital was defined in the MPA as the sum of
(i) net accounts receivable and (ii) prepaid expenses,
minus (a) ordinary course trade payables and
(b) accrued ordinary course expenses (other than any such
expenses incurred in connection with former employees, officers,
directors, or independent contractors). These items were a
subset of the various assets and liabilities of the database
business that were transferred to IBM upon the closing of the
IBM Transaction.
On March 29, 2002, the Company was paid $11.0 million
by IBM in final settlement of the net working capital
adjustment. If the net working capital transferred to IBM on the
closing date exceeded $124.0 million, IBM was obligated to
pay the Company 50% of the excess over $124.0 million. If
the net working capital transferred to IBM was less than
$124.0 million, the Company was obligated to pay IBM an
amount equal to the shortfall. As of December 31, 2001, the
Company expected to be reimbursed at least $3.7 million from
F-41
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
IBM, which it estimated to be the minimum net working capital
adjustment. Accordingly, the Company had previously recognized
the minimum net working capital adjustment of $3.7 million
as an increase to the gain resulting from the
IBM Transaction. As a result, the Company recorded the
incremental $7.3 million received in “Gain on sale of
database business, net of adjustments” during the first
quarter of 2002.
Gain Adjustment. During 2002, the Company also recorded
reductions to the gain recorded of $0.2 million, primarily
to decrease the long-term assets sold to IBM, $3.2 million
related to the resolution of informal matters raised by IBM
related to the IBM Transaction and $0.9 million
consisting of accrued professional and administrative fees
required to dissolve subsidiaries rendered inactive as a
consequence of the IBM Transaction.
Accrued IBM Transaction Costs. As a result of the IBM
Transaction, the Company recorded a $41.9 million charge
during 2001 to accrue for costs associated with the sale of the
database business assets. The following table sets forth the
components of the accrued transaction costs and related cash
payments made during the years ended December 31, 2004,
2003 and 2002 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual | |
|
|
|
|
|
Accrual | |
| |
|
Balance at | |
|
|
|
|
|
Balance at | |
| |
|
December 31, | |
|
Charges and |
|
Cash | |
|
December 31, | |
| |
|
2003 | |
|
Adjustments |
|
Payments | |
|
2004 | |
| |
|
| |
|
|
|
| |
|
| |
|
Professional fees
|
|
$ |
0.5 |
|
|
$ |
— |
|
|
$ |
(0.2 |
) |
|
$ |
0.3 |
|
|
Severance and employment-related costs
|
|
|
1.4 |
|
|
|
— |
|
|
|
— |
|
|
|
1.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Transaction costs and related charges included in
accrued expenses
|
|
$ |
1.9 |
|
|
$ |
— |
|
|
$ |
(0.2 |
) |
|
$ |
1.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual | |
|
|
|
|
|
Accrual | |
| |
|
Balance at | |
|
|
|
|
|
Balance at | |
| |
|
December 31, | |
|
Charges and | |
|
Cash | |
|
December 31, | |
| |
|
2002 | |
|
Adjustments | |
|
Payments | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Professional fees
|
|
$ |
1.2 |
|
|
$ |
— |
|
|
$ |
(0.7 |
) |
|
$ |
0.5 |
|
|
Severance and employment-related costs
|
|
|
4.4 |
|
|
|
(1.7 |
) |
|
|
(1.3 |
) |
|
|
1.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Transaction costs and related charges included in
accrued expenses
|
|
$ |
5.6 |
|
|
$ |
(1.7 |
) |
|
$ |
(2.0 |
) |
|
$ |
1.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual | |
|
|
|
|
|
Accrual | |
| |
|
Balance | |
|
|
|
|
|
Balance | |
| |
|
December 31, | |
|
Charges/ | |
|
Cash | |
|
December 31, | |
| |
|
2001 | |
|
Adjustments | |
|
Payments | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Professional fees
|
|
$ |
3.0 |
|
|
$ |
2.1 |
|
|
$ |
(3.9 |
) |
|
$ |
1.2 |
|
|
Severance and employment-related costs
|
|
|
10.3 |
|
|
|
(0.9 |
) |
|
|
(5.0 |
) |
|
|
4.4 |
|
|
Other Charges
|
|
|
0.7 |
|
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued transaction costs and related charges included in
accrued expenses
|
|
$ |
14.0 |
|
|
$ |
0.9 |
|
|
$ |
(9.3 |
) |
|
$ |
5.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees primarily consist of fees for investment
bankers, attorneys and accountants for services provided related
to the IBM Transaction. Severance and employment-related
charges primarily consist of (i) severance payments and
related taxes for approximately 30 sales and marketing
employees and 70 general and administrative employees of
the database business who did not join IBM after the
IBM Transaction, and (ii) a $4.7 million charge
that related to the modification of vesting and exercise terms
of stock options for certain terminated executives and for
database employees who joined IBM. As discussed above, during
the third quarter of 2002, the Company accrued $0.9 million
of professional and administrative fees required to
F-42
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
dissolve subsidiaries rendered inactive as a consequence of the
IBM Transaction. During 2002, the Company reversed
$0.9 million of accrued severance and related costs, as
certain employees terminated employment voluntarily, reversed
$0.3 million of accrued transfer taxes as the Company was
ultimately required to pay less than what was originally
estimated, and accrued $1.2 million of professional fees to
reflect an increase in estimated costs to reorganize the Company
as a consequence of the IBM Transaction. The accrual balance of
$1.7 million for professional fees, severance and related
costs is expected to be paid on various dates extending through
2007. During 2003, the Company reversed $1.7 million of
taxes related to severance to other income, reflecting the
restructuring of various underlying severance agreements.
The database business and the Company’s ongoing operations
were in the same line of business, and the database business did
not represent “a separate major line of business or class
of customer.” Both sold information management software to
medium-sized and large enterprises. In addition, the product
offerings of the two businesses worked together to form an
information management system. The customers of the
Company’s ongoing business needed a database in order for
the Company’s products to perform; therefore, the target
markets for the two businesses were the same. In addition, the
assets, results of operations, and activities of the database
business could not be clearly distinguished from the other
assets, results of operations and activities of the Company
prior to 2001. As such, the sale of the database business assets
to IBM represented the sale of a product line rather than the
disposal of a business segment. Accordingly, the ongoing
transition costs associated with the winding down of the
database business have been recorded as a component of
continuing operations.
Transition Services and Other. The Company and IBM
provided certain transition services to each other for a limited
period of time following the closing of the IBM Transaction.
These services mainly consisted of the performance of certain
administrative functions, hosting systems and the provision of
office space in shared facilities of which one of the parties is
the primary leaseholder. To facilitate the provision of these
services, at the time of the IBM Transaction, the Company and
IBM entered into reciprocal transitional service agreements,
under which both parties agreed to provide and utilize
transitional services at agreed established rates that the
Company believes represent the fair value of such services.
During the year ended December 31, 2002, the Company
provided to IBM and purchased from IBM transitional services
amounting to $3.8 million and $2.5 million,
respectively. The provision for shared administrative functions
and office space in shared facilities ended during the second
quarter of 2002. Effective December 31, 2002, the provision
of shared infrastructure cost was substantially completed,
except with respect to certain software support functions that
were completed on March 31, 2003.
During 2002, the Company paid IBM $13.2 million to fund the
transfer of certain employee related accruals, $2.9 million
to buy out certain lease obligations, $2.0 million to pay
for the transfer of certain long-term assets and
$2.4 million for royalties and other obligations owed to
IBM. In conjunction with the payments made to IBM, IBM paid the
Company $21.6 million to fund certain severance costs,
$11.0 million to settle the net working capital adjustment
under the Agreement and $0.8 million for taxes and other
fees.
|
|
| Note 14 — |
Termination of the Content Management Product Line |
During 2002, the Company terminated its content management
product line, except for completion of previously committed
consulting and support contracts, and recorded charges totaling
$7.8 million. Total charges consisted of $4.5 million
categorized as “Cost of software” for the impairment
of software costs previously capitalized and charges totaling
$3.3 million as “Merger, realignment, and other
charges”. The $3.3 million of “Merger,
realignment, and other charges” includes $1.7 million
of severance costs, $0.8 million of equipment impairment
costs and $0.8 million of other exit costs. In addition,
the Company recorded $1.7 million in bad debt expense for
the year ended December 31, 2002 related to the write off
of accounts receivable balances that were deemed uncollectible
as a result of the termination of this product line.
F-43
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 15 — |
Accrued Merger, Realignment and Other Charges |
The following table summarizes the balance of components of the
“Accrued merger, realignment and other charges” at
December 31, 2004 and 2003 (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Facility and equipment charges resulting from the
IBM Transaction
|
|
$ |
6.7 |
|
|
$ |
8.8 |
|
|
Facility, severance, and other accruals arising from the
Mercator acquisition
|
|
|
26.1 |
|
|
|
36.9 |
|
|
Other accrued merger and realignment charges
|
|
|
0.1 |
|
|
|
1.0 |
|
| |
|
|
|
|
|
|
|
Total accrued merger, realignment and other charges
|
|
$ |
32.9 |
|
|
$ |
46.7 |
|
| |
|
|
|
|
|
|
During the year ended December 31, 2004, the Company
recorded $1.3 million and $3.7 million of merger,
realignment and other charges related to foreign currency
translation and revised assumptions for facility and equipment
charges, net of sublease income, resulting from the IBM
Transaction and Mercator acquisition, respectively. The Company
also reversed $0.2 million other exit costs previously
recorded under the third quarter 2002 realignment plan.
During the year ended December 31, 2003, the Company
recorded $3.9 million of merger, realignment and other
charges consisting of $2.0 million related to its third
quarter 2003 realignment plan and $2.4 million related to
revised assumptions for facility and equipment charges resulting
from the IBM Transaction. The Company also reversed
$0.3 million of facility and other exit costs previously
recorded as a result of other actions initiated during 2002 and
2001, the 2000 strategic realignment, and the acquisition of
Ardent Software, Inc. (“Ardent”) and other charges.
The components of the Company’s net merger, realignment and
other charges are outlined below.
|
|
|
Facility and Equipment Charges resulting from IBM
Transaction |
As a result of the IBM Transaction (see Note 13), we
no longer required as much facility space and, accordingly,
recorded an initial charge in 2001 and adjustments during 2002,
2003 and 2004 for facilities and equipment costs related to our
vacant, or partially vacant, facilities. The accumulated charges
were comprised of reserves for residual lease obligations,
restoration costs and write-offs related to leasehold
improvements and other fixed assets at these vacated, and
partially vacated, facilities. The following table summarizes
the accrual activity for the remaining accrual consisting
entirely of residual leas obligations for the years ended
December 31, 2004, 2003 and 2002 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual Balance | |
|
|
|
|
|
Accrual Balance | |
| |
|
at Beginning | |
|
Charges/ | |
|
Cash | |
|
at End | |
| |
|
of Year | |
|
Adjustments | |
|
Payments | |
|
of Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
Year Ended December 31, 2004
|
|
$ |
8.8 |
|
|
$ |
1.3 |
|
|
$ |
(3.4 |
) |
|
$ |
6.7 |
|
|
Year Ended December 31, 2003
|
|
$ |
13.0 |
|
|
$ |
2.4 |
|
|
$ |
(6.6 |
) |
|
$ |
8.8 |
|
|
Year Ended December 31, 2002
|
|
$ |
25.0 |
|
|
$ |
4.3 |
|
|
$ |
(16.3 |
) |
|
$ |
13.0 |
|
The $6.7 million of residual lease obligations at
December 31, 2004 is comprised of $5.8 million of
lease-related payments expected to be made for these facilities
through the end of each corresponding lease term, net of rental
payments from IBM or other sublessees, and $0.9 million of
estimated restoration costs for facilities that the Company has
either exited or finalized plans to exit. The leases expire from
2005 through 2018.
On March 31, 2002, the Company paid IBM $2.9 million
for a release from lease obligations in seven facilities located
in the United States and the United Kingdom while assuming
additional lease obligations for
F-44
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
two facilities in Ireland and Germany. The result of the
negotiated release was a reduction in the Company’s accrual
for previously estimated lease obligations for the seven
facilities by an aggregate of $7.0 million while increasing
its previously estimated obligation by $2.0 million for the
facilities in Ireland and Germany, resulting in a
$5.0 million net reduction in the total charge.
Additionally, during the year ended December 31, 2002, the
Company revised the assumptions used to calculate the estimate
of residual lease obligations and restoration costs for its
other remaining properties that resulted in $9.3 million of
adjustments to the Company’s facilities accrual. The
majority of the adjustment related to decreasing market prices
for sublease rental receipts, difficulty in obtaining sublease
tenants, primarily in the United States and Europe, and
additional costs arising from negotiations to exit facilities
prior to the end of the lease term. In total the Company
estimated it would receive $11.6 million of sublease
income, $2.8 million for properties already sublet and
$8.8 million from properties where a sublet was
anticipated. The Company’s sublease estimates assumed that
no subtenants would default on rental payments and that the
Company would be able to obtain subtenants at local market rates
where market conditions were considered favorable. Sublease
assumptions also included a vacancy period from the time the
Company vacated the facility to the time the subtenant began to
pay rent. The following sets forth the components of the charges
recorded to “Merger, realignment and other charges”
during the year ended December 31, 2002 (in millions):
| |
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
2002 | |
| |
|
| |
|
Release of lease obligations
|
|
$ |
(7.0 |
) |
|
Additional assumed lease obligations
|
|
|
2.0 |
|
|
Revision of assumptions to reflect current market conditions and
negotiated
exit costs
|
|
|
9.3 |
|
| |
|
|
|
|
Net charge
|
|
$ |
4.3 |
|
| |
|
|
|
During the years ended December 31, 2004 and 2003 we
recorded charges of $1.3 million and $2.4 million,
respectively, for additional facilities and equipment costs at
both domestic and international locations as a result of foreign
currency translation and changes in the estimates of remaining
residual lease obligations and estimated sublease income.
The Company may record additional adjustments or charges in the
future due to changes in estimates arising from the size and
quantity of its facilities that are being exited and the
volatility of the real estate markets in which the
Company’s facilities are located. As of December 31,
2004, barring unforeseen circumstances, the Company does not
expect future charges related to undiscounted lease obligations
and restoration costs, excluding estimated sublease income, to
exceed $1.6 million, the maximum remaining unaccrued
obligation under existing contractual lease terms.
|
|
|
Facility, severance, and other accruals arising from the
Mercator acquisition |
At the date of acquisition, Mercator had $10.5 million in
“Accrued merger, realignment, and other” costs which
were assumed by the Company at fair value. This reserve was
recorded by Mercator prior to the acquisition for certain exit
costs related to partially occupied facilities.
As a result of restructuring actions taken in connection with
the Mercator acquisition, $33.8 million of merger related
costs were accrued in the purchase accounting for Mercator.
These charges were primarily comprised of $17.4 million
related to the closure of certain Mercator facilities as a
consequence of the transaction, $14.4 million due to
severance and related costs associated with terminating certain
Mercator employees, and $2.0 million related to the cost of
canceling certain contractual commitments. The severance and
related costs relate to approximately 158 Mercator employees
that will be terminated as a result of the acquisition. At
December 31, 2004, $0.2 million remained accrued for
severance. The $27.9 million in facility
F-45
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
exit costs accrued as of September 12, 2003, the date of
acquisition, consists primarily of lease related payments on
Mercator facilities for leases that expire at various dates
through 2015.
The following table summarizes the accrual activity for the
years ended December 31, 2004 and 2003 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual | |
|
|
|
|
|
Accrual | |
| |
|
Balance at | |
|
|
|
|
|
Balance at | |
| |
|
December 31, | |
|
Charges and | |
|
Cash | |
|
December 31, | |
| |
|
2003 | |
|
Adjustments | |
|
Payments | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Residual lease obligations
|
|
$ |
28.4 |
|
|
$ |
2.9 |
|
|
$ |
(5.7 |
) |
|
$ |
25.6 |
|
|
Severance costs
|
|
|
8.4 |
|
|
|
0.7 |
|
|
|
(8.8 |
) |
|
|
0.3 |
|
|
Other exit costs
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
36.9 |
|
|
$ |
3.7 |
|
|
$ |
(14.5 |
) |
|
$ |
26.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrued in | |
|
|
|
|
|
|
| |
|
Purchase | |
|
|
|
|
|
Accrual | |
| |
|
Accounting | |
|
|
|
|
|
Balance at | |
| |
|
September 12, | |
|
Charges and | |
|
Cash | |
|
December 31, | |
| |
|
2003 | |
|
Adjustments | |
|
Payments | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Residual lease obligations
|
|
$ |
27.9 |
|
|
$ |
1.8 |
|
|
$ |
(1.3 |
) |
|
$ |
28.4 |
|
|
Severance costs
|
|
|
14.4 |
|
|
|
0.6 |
|
|
|
(6.6 |
) |
|
|
8.4 |
|
|
Other exit costs
|
|
|
2.0 |
|
|
|
(1.0 |
) |
|
|
(0.9 |
) |
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
44.3 |
|
|
$ |
1.4 |
|
|
$ |
(8.8 |
) |
|
$ |
36.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
During the period since the acquisition through
December 31, 2003 the Company increased the Mercator merger
reserve by a net amount of $1.4 million. The increase of
$1.8 million in the facilities reserves was primarily due
to the additional costs of tenant improvements in a domestic
location, the closure of an additional foreign facility, and an
increase in the reserves required due to fluctuations in foreign
exchange rates, which resulted in a corresponding increase to
the goodwill recorded in connection with the Mercator
acquisition. The additional $0.6 million of severance costs
is due to the termination of additional Mercator employees,
which resulted in a corresponding increase to the goodwill
recorded in connection with the Mercator acquisition. The
$1.0 million decrease in other exit costs consists of a
$0.5 million non-cash write-off of deferred financing
charges related to the loan agreement that the Company repaid
and $0.5 million of amortization of deferred compensation
related to the acceleration of the vesting of certain options of
employees when they were terminated (see Note 12). The
value of these options was recorded as part of purchase
accounting.
During the year ended December 31, 2004, the Company
adjusted the reserve to record additional employee severance
costs of $0.7 million associated with the termination of
certain Mercator employees in both domestic and foreign
locations and $2.9 million as a result of a change in the
estimate of our remaining residual lease obligations. The
Company may record additional expenses in the future due to
changes in estimates arising from the size and quantity of
Mercator facilities being exited and the volatility of the real
estate markets in which the facilities are located. All
adjustments made subsequent to September 2004 were charged
against income rather than goodwill. As of December 31,
2004, barring unforeseen circumstances, the Company does not
expect future charges related to undiscounted lease obligations
and restoration costs, excluding estimated sublease income, to
exceed $18.3 million, the maximum remaining unaccrued
obligation under existing contractual lease terms.
F-46
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Other accrued Merger, realignment, and other
charges |
In addition to the actions described above, in prior periods we
recorded various merger and realignment charges as a result of
other actions initiated during 2003, 2002 and 2001.
The following table summarizes the activity related to accrued
merger, realignment and other charges for the year ended
December 31, 2004 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual | |
|
|
|
|
|
Accrual | |
| |
|
Balance at | |
|
|
|
|
|
Balance at | |
| |
|
December 31, | |
|
Charges/ | |
|
Cash | |
|
December 31, | |
| |
|
2003 | |
|
Adjustments | |
|
Payments | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Third Quarter 2003 Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment costs
|
|
$ |
0.8 |
|
|
$ |
— |
|
|
$ |
(0.7 |
) |
|
$ |
0.1 |
|
|
Third Quarter 2002 Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment costs
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
0.0 |
|
|
Other exit costs
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
0.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
0.2 |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
0.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued other merger, realignment and other charges
|
|
$ |
1.0 |
|
|
$ |
(0.2 |
) |
|
$ |
(0.7 |
) |
|
$ |
0.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The remaining severance balance of $0.1 million is expected
to be substantially paid by March 31, 2005.
The following table sets forth the activity related to accrued
merger, realignment and other charges for the year ended
December 31, 2003 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual | |
|
|
|
|
|
|
|
Accrual | |
| |
|
Balance at | |
|
|
|
|
|
|
|
Balance at | |
| |
|
December 31, | |
|
Charges/ | |
|
Non-Cash | |
|
Cash | |
|
December 31, | |
| |
|
2002 | |
|
Adjustments | |
|
Charges | |
|
Payments | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Third Quarter 2003 Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment costs
|
|
$ |
— |
|
|
$ |
2.0 |
|
|
$ |
(0.6 |
) |
|
$ |
(0.6 |
) |
|
$ |
0.8 |
|
|
Third Quarter 2002 Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment costs
|
|
|
1.3 |
|
|
|
— |
|
|
|
— |
|
|
|
(1.2 |
) |
|
|
0.1 |
|
|
Other exit costs
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
1.5 |
|
|
|
— |
|
|
|
— |
|
|
|
(1.3 |
) |
|
|
0.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Strategic Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities and equipment costs
|
|
|
0.7 |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
(0.6 |
) |
|
|
— |
|
|
Ardent Merger & Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities lease costs
|
|
|
0.5 |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued other merger, realignment and other charges
|
|
$ |
2.7 |
|
|
$ |
1.7 |
|
|
$ |
(0.6 |
) |
|
$ |
(2.8 |
) |
|
$ |
1.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth charges and activity related to
Accrued other merger, realignment and other for the year ended
December 31, 2002 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual | |
|
|
|
|
|
|
|
Accrued | |
| |
|
Balance at | |
|
|
|
|
|
|
|
Balance at | |
| |
|
December 31, | |
|
Charges/ | |
|
Non-Cash | |
|
Cash | |
|
December 31, | |
| |
|
2001 | |
|
Adjustments | |
|
Charges | |
|
Payments | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Third Quarter 2002 Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment costs
|
|
$ |
— |
|
|
$ |
6.8 |
|
|
$ |
— |
|
|
$ |
(5.5 |
) |
|
$ |
1.3 |
|
|
Facility lease costs
|
|
|
— |
|
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
— |
|
|
Other exit costs
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued merger realignment and other charges
|
|
|
— |
|
|
|
7.4 |
|
|
|
(0.1 |
) |
|
|
(5.8 |
) |
|
|
1.5 |
|
|
Abandoned fixed assets
|
|
|
— |
|
|
|
2.7 |
|
|
|
(2.7 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
10.1 |
|
|
|
(2.8 |
) |
|
|
(5.8 |
) |
|
|
1.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2002 Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment costs
|
|
|
— |
|
|
|
5.7 |
|
|
|
— |
|
|
|
(5.7 |
) |
|
|
— |
|
|
Write-off computer equipment
|
|
|
— |
|
|
|
0.8 |
|
|
|
(0.8 |
) |
|
|
— |
|
|
|
— |
|
|
Facility lease costs
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
|
Professional fees
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
|
Other exit costs
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
7.7 |
|
|
|
(0.8 |
) |
|
|
(6.9 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2002 Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment costs
|
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
|
|
(1.6 |
) |
|
|
— |
|
|
Facility lease costs
|
|
|
— |
|
|
|
0.8 |
|
|
|
— |
|
|
|
(0.8 |
) |
|
|
— |
|
|
Other exit costs
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
2.5 |
|
|
|
— |
|
|
|
(2.5 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2001 Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment costs
|
|
|
3.8 |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
(3.4 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Strategic Realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment-related costs
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
Facilities and equipment costs
|
|
|
2.1 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
(1.6 |
) |
|
|
0.7 |
|
|
Costs to exit various commitments and programs
|
|
|
3.0 |
|
|
|
— |
|
|
|
— |
|
|
|
(3.0 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
5.2 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
(4.7 |
) |
|
|
0.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ardent Merger and Other
|
|
|
1.1 |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
|
0.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other accrued merger, realignment and other charges
|
|
$ |
10.1 |
|
|
$ |
19.7 |
|
|
$ |
(3.6 |
) |
|
$ |
(23.5 |
) |
|
$ |
2.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2003 Realignment |
During September 2003, the Company approved plans to realign its
infrastructure by reducing its workforce as a result of the
acquisition of Mercator. In addition the Company made
adjustments to certain existing facility reserves. As part of
the integration of Mercator, 17 Ascential employees were
terminated and a
F-48
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
related charge of $1.1 million was recorded during the
three months ended September 30, 2003. During the three
months ended December 31, 2003, 5 additional Ascential
employees were terminated as part of the aforementioned
realignment plan and a related charge of $0.9 million was
recorded, consisting of $0.3 million of severance, and
$0.6 million of non-cash stock compensation associated with
the amendment of a single terminated employee’s existing
stock option grants. The $0.6 million charge associated
with the non-cash stock compensation was offset against
“additional paid in capital”. The preceding table sets
forth the significant components of the charge recognized during
2003 and the activity occurring during the years ended
December 31, 2004 and 2003, as well as the accrued balance
remaining at December 31, 2004.
|
|
|
Third Quarter 2002 Realignment |
During the three months ended September 30, 2002, the
Company approved a plan to further realign its infrastructure by
reducing its workforce. The Company also identified certain
assets associated with vacated facilities and headcount
reductions that no longer had value at September 30, 2002.
This plan related to a continuing effort to reduce the
Company’s infrastructure costs, the IBM Transaction (see
Note 13), and the termination of its content management
product line (see Note 14). As a result, the Company
recorded $10.1 million of “Merger, realignment and
other” charges during the six months ended
December 31, 2002. This $10.1 million charge consisted
of $6.6 million to reduce the Company’s infrastructure
costs, $3.0 million related to the IBM Transaction and
$0.5 million related to the termination of its content
management product line. The $6.6 million charge related to
realigning the Company’s infrastructure to reduce costs
consisted of $6.5 million to terminate 142 employees and
$0.1 million of other exit costs. The $3.0 million
charge related to exiting facilities in connection with the IBM
Transaction consisted of $2.7 million to write-off
abandoned fixed assets, primarily at vacated facilities and $0.3
of additional facility lease costs. The $0.5 million charge
related to the termination of the content management product
line consisted of $0.3 million to terminate
17 employees and $0.2 million of other exit costs. The
159 employees being terminated as part of the third quarter
2002 realignment included approximately 98 sales and
marketing employees, 17 general and administrative
employees, 12 research and development employees, and
32 professional services employees. The preceding table
sets forth the significant components of the charge recognized
during 2002 and the activity occurring during the years ended
December 31, 2004, 2003 and 2002, as well as the accrued
balance remaining at December 31, 2004.
|
|
|
Second Quarter 2002 Realignment |
During the three months ended June 30, 2002, the Company
approved plans to terminate its content management product line
(see Note 14), and realign its infrastructure by reducing
its workforce and closing facilities in order to reduce costs.
In addition, the Company terminated 91 employees subsequent
to the April 3, 2002 acquisition of Vality. As a result,
the Company recorded $7.7 million of “Merger,
realignment and other” charges during three months ended
June 30, 2002. This $7.7 million charge consisted of
$4.1 million of charges during the period related to the
integration of Vality, $2.8 million to terminate operations
related to the Company’s content management product line,
and $0.8 of additional costs associated with the wind down of
the database business. The $4.1 million charge to integrate
Vality consisted of $4.0 million to terminate
91 Ascential employees and $0.1 million of other
costs. The $2.8 million charge related to its content
management product line consisted of $1.4 million in
severance costs to terminate 52 employees, $0.8 million in
computer equipment impairments, $0.4 million of
professional fees incurred in the attempt to sell the product
line and $0.2 million of other exit costs. The
143 employees terminated included 60 sales and
marketing employees, nine general and administrative employees,
27 research and development employees, and
47 professional services employees. The $0.8 million
of costs associated with the database business were comprised of
$0.4 million of facilities costs, $0.3 million of
severance costs, and $0.1 million of other costs. The
preceding table sets forth the significant components of the
charge recognized during 2002 and the activity occurring during
the years ended December 31, 2003 and 2002.
F-49
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
First Quarter 2002 Realignment |
During the three months ended March 31, 2002, the Company
approved plans to continue to reduce costs from its Informix
Software business due to the IBM Transaction and consolidate
certain offices in Europe. As a result the Company recorded
$2.5 million of “Merger, realignment and other”
charges consisting of $1.6 million of severance and
employment related costs to terminate 35 sales and marketing
employees, $0.8 million for lease management and other
lease obligation costs and $0.1 million of other exit
costs. The preceding table sets forth the significant components
of the charge recognized during 2002 and the activity occurring
during the years ended December 31, 2003 and 2002.
|
|
|
Third Quarter 2001 Realignment |
During the quarter ended September 30, 2001, the Company
approved plans to reduce its worldwide headcount and as a result
recorded a $12.0 million charge to “Merger,
realignment and other” in 2001. The worldwide workforce
reduction started in the third quarter of 2001 and has included
a reduction of approximately 180 sales and marketing
employees, 20 general and administrative employees,
10 research and development employees and
50 professional services and manufacturing employees. As a
result, the Company recorded realignment and other charges of
$12.0 million during the three months ended
September 30, 2001. The preceding table sets forth the
activity occurring during the years ended December 31, 2003
and 2002.
Severance and employment-related costs primarily consisted of
termination compensation and related benefits for employees.
During the quarter ended June 30, 2002, the Company
reversed $0.4 million of the accrual related to
approximately 18 employees, as it was no longer required.
As of December 31, 2002, termination compensation and
related benefits had been paid to terminate 242 employees.
|
|
|
2000 Strategic Realignment |
During the quarter ended September 30, 2000, the Company
approved plans to realign its operations by establishing two
operating businesses and as a result recorded a charge of
$86.9 million to “Merger, realignment and other”
in 2000. The strategic realignment included a refinement of the
Company’s product strategy, consolidation of facilities and
operations to improve efficiency and a reduction in worldwide
headcount of approximately 310 sales and marketing
employees, 120 general and administrative employees,
260 research and development employees and
100 professional services and manufacturing employees. As
of December 31, 2001, termination compensation and related
benefits had been paid to terminate approximately
790 employees. During 2002 the Company recorded
$0.2 million of additional costs to exit a facility in the
United States arising from negotiations to terminate the lease
prior to the end of the lease term. The preceding table sets
forth the activity occurring during the years ended
December 31, 2003 and 2002.
As a result of the merger with Ardent Software, Inc. in March
2000 and various merger and realignment activities that occurred
prior to 2000, the Company had recorded charges to “Merger,
realignment and other” arising from decisions to exit
certain facilities. During 2003 and 2002 the Company reversed
$0.2 million and $0.4 million, respectively, of other
exit costs associated with the Ardent acquisition as they were
no longer needed.
F-50
ASCENTIAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 16 — |
Quarterly Operating Results (unaudited) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
61,389 |
|
|
$ |
64,734 |
|
|
$ |
67,593 |
|
|
$ |
78,163 |
|
|
Gross profit
|
|
|
42,409 |
|
|
|
43,333 |
|
|
|
45,232 |
|
|
|
53,974 |
|
|
Net income
|
|
$ |
2,392 |
|
|
$ |
1,212 |
|
|
$ |
2,323 |
|
|
$ |
9,024 |
|
|
Net income per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.04 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
0.15 |
|
| |
Diluted
|
|
$ |
0.04 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
0.15 |
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
35,296 |
|
|
$ |
39,929 |
|
|
$ |
45,889 |
|
|
$ |
64,472 |
|
|
Gross profit
|
|
|
24,448 |
|
|
|
27,748 |
|
|
|
31,684 |
|
|
|
46,365 |
|
|
Net income (loss)
|
|
$ |
(534 |
) |
|
$ |
695 |
|
|
$ |
(1,699 |
) |
|
$ |
17,343 |
|
|
Net income (loss) per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
(0.03 |
) |
|
$ |
0.29 |
|
| |
Diluted
|
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
(0.03 |
) |
|
$ |
0.28 |
|
|
|
| (1) |
Amounts may vary from annual totals due to rounding. |
Note 17 — Subsequent Event
On March 13, 2005, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with IBM
and Ironbridge Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of IBM (“Sub”) pursuant to
which IBM will acquire all the Company’s outstanding equity
interests. In accordance with the Merger Agreement, the Company
will merge (the “Merger”) with and into Sub, with the
Company continuing as the surviving corporation. The merger
consideration will consist of $18.50 in cash per share of the
Company’s Common Stock, par value $0.01 per share,
issued and outstanding immediately prior to the Effective Time
(other than shares held by the Company or IBM which will be
canceled and retired, Appraisal Shares and Restricted Shares,
each as defined in the Merger Agreement).
The transaction has been approved by the Company’s board of
directors and is subject to stockholder approval, regulatory
approvals and other customary closing conditions. Following the
merger, the Company will delist from the Nasdaq National Market
and deregister, and no longer file reports, under the Securities
Exchange Act of 1934, as amended. The Company expects the
transaction to close in the second quarter of 2005.
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