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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2000.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____.
Commission File Number: 0-22667
MERCATOR SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1132156
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
45 Danbury Road, Wilton, CT 06897
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
203-761-8600
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.
[X] Yes [_] No
As of September 30, 2000, Registrant had 29,743,937 outstanding shares of Common
Stock, $.01 par value.
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MERCATOR SOFTWARE, INC.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
PART 1 FINANCIAL INFORMATION
ITEM 1 - Consolidated Condensed Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2000 (unaudited) and 1999 (unaudited) 4
Consolidated Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 2000 (unaudited) and 1999 (unaudited) 5
Notes to Consolidated Condensed Financial Statements 6-9
ITEM 2 - Managements' Discussion and Analysis of Financial
Condition and Results of Operations 9-25
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 25
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
EXHIBIT LIST
</TABLE>
2
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Mercator Software, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 20,971,100 $ 9,237,100
Marketable securities 3,512,500 5,648,400
Accounts receivable, less allowances of
$ 3,367,400 and $1,766,400 29,905,000 38,270,500
Prepaid expenses and other current assets 3,067,900 2,984,500
Deferred tax assets 10,378,700 10,378,700
------------ ------------
Total current assets 67,835,200 66,519,200
Furniture, fixtures and equipment, net 8,113,000 6,516,700
Intangible assets, net 132,603,500 153,227,700
Other assets 552,300 551,800
------------ ------------
Total assets $209,104,000 $226,815,400
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,193,600 $ 3,936,700
Accrued expenses 12,772,100 8,175,800
Current portion of deferred revenue 15,103,700 14,737,700
------------ ------------
Total current liabilities 32,069,400 26,850,200
Long-term deferred tax liability 5,994,200 12,253,500
Deferred revenue, less current portion 912,500 58,600
------------ ------------
Total liabilities 38,976,100 39,162,300
------------ ------------
Stockholders' equity:
Convertible preferred stock: $.01 par value;
authorized 5,000,000 shares, no shares
issued and outstanding -- --
Common Stock: $.01 par value; authorized
190,000,000 shares; issued and outstanding 29,743,937 shares and
27,834,350 shares 297,400 278,200
Additional paid-in capital 226,864,900 205,420,900
Deferred compensation (487,000) (883,200)
Accumulated deficit (54,591,400) (16,667,800)
Cumulative translation adjustment (1,956,000) (495,000)
------------ ------------
Total stockholders' equity 170,127,900 187,653,100
------------ ------------
Total liabilities and stockholders' equity $209,104,000 $226,815,400
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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Mercator Software, Inc.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues
Software licensing $ 16,689,100 $14,846,100 $ 55,393,500 $37,193,200
Service, maintenance and other 15,514,300 11,885,200 43,758,400 30,418,300
------------ ----------- ------------ -----------
Total revenues 32,203,400 26,731,300 99,151,900 67,611,500
------------ ----------- ------------ -----------
Cost of revenues:
Software licensing 182,400 207,000 835,300 1,024,300
Service, maintenance and other 8,376,000 5,472,400 22,834,800 14,939,400
------------ ----------- ------------ -----------
Total cost of revenue 8,558,400 5,679,400 23,670,100 15,963,700
------------ ----------- ------------ -----------
Gross profit 23,645,000 21,051,900 75,481,800 51,647,800
Operating expenses:
Product development 5,532,100 4,144,300 15,740,900 10,072,900
Selling and marketing 17,175,500 11,237,900 48,335,600 27,840,500
General and administrative 7,601,200 2,250,000 15,963,200 6,268,700
Amortization of intangibles 11,828,700 6,934,300 35,056,600 16,305,600
------------ ----------- ------------ -----------
Total operating expenses 42,137,500 24,566,500 115,096,300 60,487,700
------------ ----------- ------------ -----------
Operating loss (18,492,500) (3,514,600) (39,614,500) (8,839,900)
Other income, net 159,800 118,800 453,500 860,800
------------ ----------- ------------ -----------
Loss before income taxes (18,332,700) (3,395,800) (39,161,000) (7,979,100)
Provision (benefits) for income taxes (9,693,800) 71,900 (1,237,400) 244,000
------------ ----------- ------------ -----------
Net loss $ (8,638,900) $(3,467,700) $(37,923,600) $(8,223,100)
============ =========== ============ ===========
Net loss per share-Basic and diluted $ (0.29) $ (0.14) $ (1.31) $ (0.33)
Weighted average number of common and
common equivalent shares outstanding:
Basic and diluted 29,529,630 25,624,921 28,945,516 24,612,447
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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Mercator Software, Inc.
Consolidated Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
------------------------ ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net cash (used in) provided by operating activities $ 8,838,500 $ (7,111,000)
Cash flows from investing activities:
Purchase of furniture fixtures and equipment (4,361,100) (3,415,000)
Acquisition, net of cash -- (22,820,000)
Sales of marketable securities 2,136,000 25,786,100
Other (154,800) (302,600)
----------- ------------
Net cash (used in) investing securities (2,379,900) (751,500)
Cash flows from financing activities:
Payments under capital leases -- (5,200)
Proceeds from exercise of stock options 3,096,200 846,000
Proceeds from employee stock plan 2,846,300 1,267,400
Exercise of warrants -- (4,500)
----------- ------------
Net cash provided by financing activities 5,942,500 2,103,700
Effect of exchange rate changes on cash and cash (667,100) 36,400
equivalents
Net change in cash 11,734,000 (5,722,400)
Cash at the beginning of period 9,237,100 15,132,700
----------- ------------
Cash at end of period $20,971,100 $ 9,410,300
=========== ============
Supplemental information:
Cash paid for:
Interest $ 39,000 $ 17,100
Income taxes $ 864,900 $ 1,492,100
Non cash investing and finance activities:
Issuance of stock in connection with the acquisition of $15,633,700 $ 63,723,500
Braid
Warrants exercised on a net exercise basis -- $ 2,300
Issuance of stock in connection with the acquisition of
Novera -- $ 56,152,800
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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MERCATOR SOFTWARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated interim condensed financial statements contained
herein are unaudited, but, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the financial position, results of operations and cash flows for the periods
presented. Results of operations for the periods presented herein are not
necessarily indicative of results of operations for the entire year.
Reference should be made to Mercator's 1999 Annual Report on Form 10-K and the
notes thereto, (filed under the Company's prior name, TSI International
Software, Ltd.) which includes audited financial statements for the year ended
December 31, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations.
(2) BUSINESS COMBINATIONS
In March 1999, Mercator Software, Inc. ("Mercator") acquired Braid Group Ltd., a
leading provider of integration software products for straight-through
processing of financial transactions in the international banking and securities
markets. Mercator purchased all of the outstanding capital stock of Braid for
approximately $110.2 million, excluding approximately $20 million of contingent
consideration to be paid in cash or common stock upon the achievement of certain
operating results. The purchase price included $30 million in cash, 2,207,258
shares of Mercator common stock and the issuance of 434,622 stock options. The
transaction was accounted for under the purchase method of accounting and the
excess purchase price is being amortized on a straight-line basis over a five-
year period. During April 2000, Mercator determined that the operating targets
for contingent consideration had been achieved. Mercator elected to pay the
$20,000,000 contingent consideration by issuing common shares and, in accordance
with the terms of the contract, the number of shares to be issued were
determined to be 218,302. These shares are recorded in Mercator's financial
statements at a value of $71.615 per share, the closing price of the stock on
the date of issuance. In September 2000 Mercator approved an additional $1.7
million cash payment to the shareholders of Braid as the final component of
contingent consideration. This payment was made in October, 2000.
In September 1999, Mercator acquired Novera Software, Inc., a developer of Web
application integration solutions. Mercator purchased all of the outstanding
shares of capital stock of Novera for approximately $58.2 million, which
included the issuance of 1,789,916 shares of Mercator common stock and the
issuance of 369,142 stock options. The transaction was accounted for under the
purchase method of accounting and the excess purchase price is being amortized
on a straight-line basis over a three-year period.
(3) EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS
137 and 138 is effective for fiscal years beginning after June 15, 2000. These
statements are not expected to effect Mercator, as the Company currently does
not have any significant derivative instruments or hedging activities.
6
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Statement of Position (SOP) 98-9, "Software Revenue Recognition with Respect to
Certain Transactions", which amended (SOP) 97-2 " Software Revenue Recognition"
and clarified the specification of what was considered vendor specific evidence
of fair value for the various elements in a multiple element arrangement was
adopted by the company beginning January 1, 2000. The adoption of the
provisions of this statement has not had a material impact on Mercator's
operating results, financial position or cash flows.
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101). SAB 101 as amended is
required to be adopted no later than October 1, 2000. The company does not
expect that the adoption of SAB 101 as amended will have a material impact on
Mercator's operating results, financial position or cash flows.
FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" (FIN 44) provides guidance for applying APB Opinion No. 25,
"Accounting for Stock Issued to Employees." With certain exceptions, FIN 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000. Mercator believes that the implementation of FIN 44
could have an effect on our results of operations in future periods in
connection with stock awards.
Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates are either not applicable or are not
significant to the financial statements of Mercator.
(4) STOCK ACTIVITIES
Effective April 5, 1999, Mercator completed a 2 for 1 common stock split in the
form of a stock dividend. The accompanying financial statements have been
retroactively adjusted to reflect this common stock split.
On June 19, 2000, Mercator increased the number of authorized shares of common
stock from 70 million to 190 million. Also on this date, the Equity Incentive
Stock Option plan was amended to increase the number of options Mercator may
grant to its employees from 4,750,000 to 6,700,000 shares.
During September 2000, Mercator's Board of Directors approved a policy of
granting options annually during the first quarter of each year, and a special
grant accelerating the 2001 options. On September 25, 2000, a total of
1,451,620 options were granted to employees, at a market price of $16.50. Half
of these options will vest quarterly and will be fully vested one year from the
date of grant. The second half of the options will vest quarterly on a multi-
year schedule. The first twenty-five percent will vest quarterly over eighteen
months, with the balance vesting over the following three years. Board members,
including Mercator's President and Chief Executive Officer, were excluded from
the grant.
On November 2, 2000 Mercator's Board of Directors approved an offer to exchange
the first half of the September 25, 2000 grant (725,810 options) for an equal
amount of options priced at the market price of $5.063 per option. The new
options will vest quarterly over a 12 month period. In accordance with Financial
Accounting Standards Board Interpretation No. 44, any November 2 options issued
will be subject to variable accounting treatment.
During the third quarter the Company's new Chairman was granted 300,000 options
at fair market value. In addition the Company granted 258,400 options, net of
cancellations, at fair market value to certain employees in the normal course of
business.
(5) COMPREHENSIVE INCOME
Mercator adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" during 1998. SFAS 130 requires Mercator to report comprehensive income
in its financial statements, in addition to its net income. Comprehensive income
(loss) consists of net income (loss) and foreign currency translation
adjustments. Comprehensive loss was ($39.4 million) and ($8.2 million) for the
nine months ended September 30, 2000 and 1999, respectively.
(6) EARNINGS PER SHARE
Earnings per share is presented in accordance with the provisions of SFAS No.
128, "Earnings Per Share" (SFAS 128) and SAB No. 98. Under SFAS 128, basic
earnings per share ("EPS") excludes dilution for
7
<PAGE>
common stock equivalents and is computed by dividing income or loss available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
and resulted in the issuance of common stock.
Diluted loss per share has not been presented separately for the three and nine
months ended September 30, 2000, as the outstanding stock options and warrants,
representing an aggregate of 2,375,476 shares of common stock equivalents, are
antidilutive.
(7) SEGMENT INFORMATION
In the fourth quarter of 1998, Mercator adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments. It also establishes standards for related
disclosures about products and services. The method for determining what
information to report is based on the way that management organizes the
operating segments within Mercator for making operational decisions and
assessments of financial performance.
Mercator classifies its business activities into two reportable segments:
Domestic and International. These segments are organized, managed and analyzed
geographically. Information regarding Mercator's operations in these two
operating segments are set forth below. There are no significant corporate
overhead allocations or intersegment sales or transfers between the segments for
the periods presented.
<TABLE>
<CAPTION>
(Amounts in 000's)
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Domestic $ 20,872 $17,574 $ 61,981 $ 48,080
International 11,331 9,157 37,171 19,532
-------- ------- -------- --------
Total $ 32,203 $26,731 $ 99,152 $ 67,612
======== ======= ======== ========
Operating income (loss) before
amortization of intangibles:
Domestic $ (7,435) $ 3,191 $ (9,346) $ 6,495
International 771 229 4,788 971
-------- ------- -------- --------
Total (6,664) 3,420 (4,558) 7,466
Amortization of intangibles (11,829) (6,934) (35,057) (16,306)
Other income, net 160 119 454 861
Provision (benefit) for income
taxes (9,694) 72 (1,237) 244
-------- ------- -------- --------
Net loss $ (8,639) $(3,467) $(37,924) $ (8,223)
======== ======= ======== ========
Capital expenditures:
Domestic $ 892 $ 765 $ 3,578 $ 2,882
International $ 144 $ 214 $ 783 $ 533
Depreciation expense:
Domestic $ 752 $ 427 $ 1,998 $ 1,083
International $ 207 $ 234 $ 620 $ 520
</TABLE>
8
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(8) COMMITMENTS AND CONTINGENCIES
The Company and its chief executive officer have been named as defendants in
several private securities class action lawsuits. The complaints allege
violations of United States federal securities law. Mercator believes that the
allegations in the complaints are without merit and intends to contest them
vigorously. However, there can be no guarantee as to the ultimate outcome as to
these pending litigation matters. See Item 1 in Part II of this filing for
further information.
The Company recently signed a 12 year lease agreement for 57,860 square feet of
office space in Wilton, Connecticut. The lease commences no earlier than July 1,
2001 and no later than January 1, 2002. The lease agreement calls for annual
base rents beginning at $1,273,000 for the first five years, increasing to
$1,504,000 for the next 5 years and $1,678,000 for the last two years. The lease
requires a security deposit of $2,481,000 in the form of cash or an acceptable
letter of credit. As of September 30, 2000 the Company has prepaid the first
month's base rent and provided the landlord with half of the security deposit in
the form of a letter of credit.
During the third quarter the Company completed employment agreements with its
Chairman and its Chief Executive Officer. The agreements generally continue
until terminated by the executive or the Company and provide for severance
payments under certain circumstances. The agreements include a covenant against
competition with the Company, which extends for a period of time after
termination for any reason. As of September 30, 2000, if both executives were to
be terminated without good cause (as defined) under these contracts, the
Company's liability would be approximately $800,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations contains forward-looking statements that involve risks and
uncertainties. When used in the filing, the words "intend," "anticipate,"
"believe," "estimate," "plan" and "expect" and similar expressions as they
relate to Mercator Software Inc. are included to identify forward-looking
statements. 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 document.
OVERVIEW
Mercator Software, Inc. is a leading provider of integration broker software and
services that enable companies to build the infrastructure necessary to achieve
business-to-business (B2B) commerce. This includes integrating applications
both within the enterprise, what we call application-to-application (A2A)
integration as well as B2B integration, which means the ability to integrate
transactions and applications with business partners over the Internet or
private networks. With Mercator products, companies can reduce the time, cost
and effort of creating an integrated applications infrastructure while
eliminating the need for costly programming. In today's rapidly changing
information technology environment, this is important because time to market is
becoming a critical success factor for many businesses in the Internet economy.
Our software enables companies to not only reduce upfront application
integration costs, but it also reduces the cost of long-term interface
maintenance as well.
Revenue from the company's Mercator family of products represents a large
majority of the company's total revenues today. In January of 2000, we
introduced the new Mercator E-Business Broker suite of products for application-
to-application (A2A), consumer-to-business (C2B) and business-to-business (B2B)
application integration. Mercator believes that future growth in revenues, if
any, will be mainly attributed to this new suite of products, in particular its
B2B integration product. However, we are not able to accurately predict the
amount of revenues that will be attributable to this product line or the life of
such products. If the Mercator products do not maintain continued market
acceptance, the business could be adversely affected.
9
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The Mercator E-business Broker Suite of Products
Mercator Commerce Broker enables customers - traditional brick and mortar type
companies as well as dotcoms and Net markets -- to integrate business processes,
transactions and applications with their customers and partners over the
Internet or private networks. Mercator Commerce Broker provides companies with
capabilities for real-time integration and transformation of XML and EDI
formatted transactions with business partners as well as back office systems,
creating complex B2B integration solutions. Our software helps customers do
this quickly, easily and cost-effectively, while leveraging their existing IT
infrastructure for new B2B e-commerce initiatives.
Mercator Enterprise Broker facilitates the A2A integration of companies'
internal applications and business processes -- no matter how complex they are
and no matter where they run. Mercator Enterprise Broker can reduce the time,
cost and effort of integrating applications, such as enterprise resource
planning (ERP), customer relationship management (CRM) and supply chain
management by eliminating the need to create and maintain hand-coded interfaces.
Mercator Web Broker enables the real time integration of transactions from
consumers - (i.e., orders for products) - coming in to a company over the Web,
from customer call centers, or retail store environments with back office
applications for order processing and inventory management, as well as payment
processing. Mercator Web Broker enables Mercator customers to reduce the time,
cost and effort of creating an integrated application environment that is more
responsive to customers.
The Marketplace
Today, almost all companies face the challenge of including the Internet in
their business models. Brick and mortar companies are rapidly moving to
transform their businesses into e-businesses, almost overnight. In addition,
new companies built almost entirely on Internet technology are emerging to
provide the applications and services needed to support B2B e-commerce. The
need for companies to rapidly adapt to changing environments in order to speed
time to market for new B2B initiatives is driving the requirement for B2B
integration. This represents a substantial market opportunity for Mercator.
Mercator has customers across a wide variety of industries, including
telecommunications, financial services, high-technology manufacturing,
pharmaceutical, insurance, healthcare, retail, consumer products goods, and
automotive. In addition, the introduction of the new Mercator E-business Broker
suite of products has attracted a new class of customers to the company. Today
we are building our customer base of dotcoms and leading business-to-business
companies.
Distribution Channels
It is our strategy to achieve the broadest distribution of our products to
maximize revenue opportunity. Mercator licenses its products directly to end-
user customers, as well as through indirect channels, such as value added
resellers, independent software vendors, software integrators or other third
parties who resell, embed or otherwise bundle Mercator products with their
products. Sales through distributors and resellers represent approximately 50%
of license revenue.
Mercator is predominantly a software company, with the majority of revenues
derived from the licensing of our software products. However, we also offer
customers and derive revenue from professional services. We intend to continue
to increase the scope of our professional service offerings, such as training in
support of license revenues from Mercator products. We believe that software
licensing revenue will continue to account for a larger portion of total
revenues than service, maintenance and other revenues.
Revenue Recognition Policy
10
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Mercator generally recognizes revenue from software license fees upon delivery.
In a certain number of situations there are significant post-delivery
obligations, in which case revenues are recognized ratably as these obligations
are satisfied.
For multiple element arrangements, SOP 97-2 specifies that the license fee
should be allocated to the separate elements based on vendor-specific objective
evidence of fair values. Mercator maintains multiple-element software
arrangements which include explicit rights to post-contract customer support.
In these arrangements, the total fees are allocated among the elements based on
vendor-specific objective evidence of fair value. The fair value of post-
contract customer support is determined by reference to the price that the
customer would be required to pay when it is sold separately. The portion of
the fee allocated to post-contract customer support is recognized as revenue on
a straight-line basis over the term of the support arrangement.
Maintenance contract revenues are recognized ratably over the terms of the
contracts, which are generally for one year. The unrecognized portion of
maintenance revenue is classified as deferred maintenance revenue in the
accompanying consolidated balance sheets. Consulting and training revenues are
recognized as services are performed. Revenues arising from time and material
service agreements are recognized as the services are provided. Revenues from
fixed price professional service agreements are recognized on a percentage of
completion basis in direct proportion to the services provided.
The size of transactions for Mercator products can range from a few thousand
dollars to over $1,000,000. While we generally have a varied mix among the size
of transactions in any given quarter, the loss or delay of large individual
orders could have a significant impact on revenue and other quarterly results.
In addition, we generally recognize a substantial portion of our quarterly
software licensing revenues in the last month of each quarter, and as a result,
revenue for any particular quarter may be difficult to predict in advance.
Because operating expenses are generally fixed, a delay in recognition of
revenue from a limited number of license transactions could cause significant
variations in operating results from quarter to quarter and could result in
significant losses. If these expenses precede, or are not subsequently followed
by, increased revenue, our operating results for any particular period would be
materially and adversely affected. As a result of these and other factors,
operating results for any quarter are subject to variation, and period-to-period
comparisons of results of operations are not necessarily meaningful and should
not be relied upon as indications of future performance.
11
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items from our statements of operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
2000 1999 2000 1999
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Software licensing 51.8% 55.5% 55.9% 55.0%
Service, maintenance and other 48.2 44.5 44.1 45.0
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
Software licensing 0.6 0.8 0.8 1.5
Service, Maintenance and other 26.0 20.5 23.1 22.1
------ ------ ------ ------
Total cost of revenues 26.6 21.3 23.9 23.6
------ ------ ------ ------
Gross profit 73.4 78.7 76.1 76.4
------ ------ ------ ------
Operating expenses:
Product development 17.2 15.5 15.9 14.9
Selling and marketing 53.3 42.1 48.7 41.2
General and administrative 23.6 8.4 16.1 9.3
Amortization of intangibles 36.7 25.9 35.4 24.1
------ ------ ------ ------
Total operating expenses 130.8 91.9 116.1 89.5
------ ------ ------ ------
Operating loss (57.4) (13.2) (40.0) (13.1)
Other income expense, net 0.5 0.5 0.5 1.3
------ ------ ------ ------
Loss before taxes (56.9) (12.7) (39.5) (11.8)
Income tax expense ( benefit) (30.1) 0.3 (1.2) 0.4
------ ------ ------ ------
Net Loss (26.8)% (13.0)% (38.3)% (12.2)%
====== ====== ====== ======
Gross profit:
Software licensing 98.9% 98.6% 98.5% 97.2%
Service, maintenance and other 46.0% 54.0% 47.8% 50.9%
</TABLE>
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES:
Total Revenues. Mercator's revenues are derived principally from two sources:
(i) license fees for the use of Mercator products and (ii) service fees for
maintenance, consulting services and training related to software products.
Mercator's total revenues increased 20% to $32.2 million in the third quarter of
2000 from $26.7 million in the comparable period of 1999. This increase
resulted primarily from increased license fees as well as from increased
billings for professional services.
Software Licensing. Software licensing revenues increased 12% to $16.7 million
in the third quarter of 2000 from $14.8 million in the comparable period of
1999, primarily due to an increase in Mercator license revenues. Domestic
software licensing revenues increased 22% to $12.0 million in the third quarter
of 2000 from $9.8 million in the comparable period of 1999, primarily due to an
increase in Mercator license revenues as a result of a larger customer base and
increases in pricing. International software licensing revenues decreased 7% to
$4.7 million in the third quarter of 2000 from $5.0 million in the comparable
period of 1999. This decrease was the result of several factors. A significant
decline in revenues in Europe was partially offset by gains in Asia Pacific.
Fees in the United Kingdom remained flat as the Company began to focus on the
commercial market and partner channels requiring the recruitment and training of
new sales personnel.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 31% to $15.5 million in the third quarter of 2000 from $11.9 million
in the comparable period of 1999, primarily due to increased professional
consulting services associated with sales of Mercator, and, to a lesser extent,
an increase in Mercator maintenance revenue, partially offset by a decrease
attributable to declining maintenance revenues for our KEY/MASTER product.
Domestic service, maintenance and other revenues increased 15% to $8.9 million
in the third quarter of 2000 from $7.7 million in the comparable period of 1999.
This increase was a result of increased professional service needs of our
Mercator customers and the related hiring of service personnel to address them,
as well as additional maintenance revenues on Mercator's licenses, partially
offset by a decrease attributable to the continued declined in KEY/MASTER
maintenance revenues. International service, maintenance and other revenues
increased 60% to $6.6 million in the third quarter 2000 from $4.1 million in the
comparable period of 1999. This increase is primarily attributed to several
large professional services contracts as well as an expanding license base
requiring maintenance.
COST OF REVENUES
Cost of Revenues. Cost of software licensing revenues consists primarily of
media, manuals, distribution costs and the cost of third party software that
Mercator imbeds in its products. Cost of service, maintenance and other
revenues consists primarily of personnel-related costs in connection with
providing maintenance, technical support, consulting and training to customers.
Gross margin on software licensing revenues is higher than gross margin on
service, maintenance and other revenues, reflecting the low materials, packaging
and other costs of software products compared with the relatively high personnel
costs associated with providing maintenance, technical support, consulting and
training services. Cost of service, maintenance and other revenues also varies
based upon the mix of maintenance, technical support, consulting, and training
services.
Total Cost of Revenues. Total cost of revenues increased 51% to $8.6 million in
the third quarter of 2000 from $5.7 million in the comparable period of 1999.
Cost of Software Licensing. Cost of software licensing revenues decreased 12%
to $182,400 in the third quarter of 2000 from $207,000 in the comparable period
of 1999. The decrease is primarily due to the increase of distribution of
product and documentation on CD Rom and electronic transmission of product over
the WEB. Software licensing gross margin was 99% for both periods.
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Cost of Service, Maintenance and Other. Cost of service, maintenance and other
revenues increased 53% to $8.4 million in the third quarter of 2000 from $5.5
million for the same period in 1999. Gross margin on costs of service,
maintenance and other was 46% for the third quarter of 2000 compared to 54% for
the same period in 1999. Cost of service, maintenance and other for domestic
operations increased to $5.2 million for the third quarter of 2000 compared to
$3.3 million for the same period in 1999. This increase is primarily due to the
increase in services performed for Mercator customers along with costs of
training services purchased by our increased customer base. Gross margin on
domestic service, maintenance and other, was 41% for the third quarter of 2000
and 57% for the same period of 1999. The decrease is related to lower margins
on professional services due to incremental non-billable expenses in connection
with recruiting and training new personnel. Cost of service, maintenance and
other for international operations increased to $3.2 million in the third
quarter of 2000 from $2.2 million in the same period of 1999. This increase was
the result of our international expansion. Gross margin on service, maintenance
and other for international operations was 52% for the third quarter of 2000,
compared to 48% for the same period in 1999.
OPERATING EXPENSES
Product Development. Product development expenses include expenses associated
with the development of new products and enhancements to existing products and
consist primarily of salaries, recruiting and other personnel-related expenses,
depreciation of development equipment, supplies, travel, and allocated
facilities and communications costs.
Product development costs increased 33% to $5.5 million in the third quarter of
2000 from $4.1 million in the same quarter of 1999, primarily due to increased
product development activities related to Mercator's product line as well as the
acquisition of Novera. Product development expenses as a percentage of total
revenue increased to 17% in the third quarter of 2000 from 16% in the third
quarter of 1999. As mentioned earlier in this report, Mercator introduced three
new products in the first half of 2000, with enhancements for next generation
products continuing to be developed. In addition, we announced in June the
future delivery of a new product enhancement, Mercator Web Integrator, which
began beta testing in September 2000. These products are key to the company's
continued success; therefore, Mercator believes that a significant level of
research and development expenditures is required to remain competitive.
Accordingly, Mercator anticipates that it will continue to devote substantial
resources to research and development. Mercator expects that the absolute dollar
amount of research and development expenses will increase through at least the
remainder of 2000. To date, all research and development expenditures have been
expensed as incurred.
Selling and Marketing. Selling and marketing expenses consist of sales and
marketing personnel costs, including sales commissions, recruiting, travel,
advertising, lead generation, public relations, seminars, trade shows, product
descriptive literature and allocated facilities and communications costs.
In a rapidly growing market environment, it is imperative that Mercator
continues to invest in sales and marketing to provide for increased revenue
opportunities in future periods. These investments include sales force hires,
as well as marketing programs intended to increase their productivity and leads.
Selling and marketing costs increased 53% to $17.2 million in the third quarter
of 2000 from $11.2 million in the same quarter of 1999, primarily due to the
increased number of sales personnel, related recruitment costs and sales
incentives. During the third quarter of 2000, Mercator hired additional sales
representatives and experienced sales managers in the US, Europe, and Asia
Pacific, ending the third quarter with 107 field sales personnel, excluding
telesales, sales management and administration. This is an increase from the 99
we reported for the second quarter of 2000 and 73 at the end of the third
quarter of 1999. Selling and marketing expenses as a percentage of total
revenues increased to 53% in the third quarter of 2000 from 42% in the same
quarter of 1999. Mercator expects to continue hiring additional sales and
marketing personnel and to increase expenses through the remainder of 2000 to
drive awareness and opportunities for the Mercator E-business Broker suite of
products.
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General and Administrative. General and administrative expenses consist
primarily of salaries, recruiting and other personnel-related expenses for
Mercator's administrative, executive and finance personnel as well as outside
professional fees.
General and administrative expenses increased 238% to $7.6 million in the third
quarter of 2000 from $2.2 million in the same quarter of 1999, primarily due to
approximately $2.4 million of incremental legal, accounting and consulting fees
related to the restatement of Mercator's first and second quarter earnings and
costs related to additional senior management personnel. During the quarter
ended September 30, 2000, Mercator made significant additions to its senior
management team. New management positions included a new Chairman of the Board
of Directors, a Vice President of Corporate Communications and an interim Chief
Financial Officer. General and administrative expenses as a percentage of total
revenues increased to 24% for the third quarter of 2000 from 8% for the same
quarter of 1999. While Mercator expects to incur incremental costs into 2001 in
connection with the restatement noted above, the Company believes that its
general and administrative expenses, as a percentage of revenues, will decrease
in the future, but will not return to 1999 levels as it expands to support the
Company's worldwide growth.
Amortization of intangibles. Intangible assets are comprised of the excess of
the purchase price and related costs of an acquired business over the value
assigned to tangible assets. The acquisitions made by Mercator were accounted
for under the purchase method of accounting. The purchase prices were allocated
to the tangible and identifiable intangible assets based on their estimated fair
values with any excess designated as goodwill. Intangible assets, including
goodwill, are amortized over their estimated useful lives, which range from
three to five years.
Amortization expense increased to $11.8 million for the third quarter of 2000
from $6.9 million for the same period in 1999 as a result of the acquisition of
Novera in September 1999 and contingent consideration related to Braid earlier
in 2000. As of September 30, 2000 and 1999, Mercator had net intangible assets
of $132.6 million and $168.1 million, respectively.
OTHER INCOME (EXPENSE) NET
Other income (expense) net represents income earned on Mercator's cash balances
and interest on term contracts. Net interest income increased to $159,800 in
the third quarter of 2000 from $118,800 in the comparable period of 1999, due to
a higher level of cash equivalents and marketable securities as well as higher
returns on investments. Borrowing expenses were insignificant during the third
quarter of 2000 as there were no outstanding debt obligations of the company.
INCOME TAXES
The provision (benefit) for income taxes for the three months ended September
30, 2000 and 1999 are based on the anticipated effective tax rates and taxable
income for the full year, taking into account each jurisdiction in which the
Company operates, and the estimated effective tax rates recorded in the previous
quarter.
The Company's effective tax rate for both 2000 and 1999 is impacted by the fact
that the majority of its amortization of intangibles is not deductible for
income tax purposes. The income tax (benefit) of ($9.7 million) for the three
months ending September 30, 2000 is primarily the result of a decrease in the
expected earnings of its United States operations in 2000, which resulted in
the reversal of the tax expense recorded through June 30, 2000.
The income tax provision of $71,900 for the three months ended September 30,
1999 reflects the fact that the majority of the Company's amortization of
intangibles is not deductible for income tax purposes.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
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15
<PAGE>
As noted earlier under "Business Combinations", Mercator significantly expanded
its international operations in March 1999 by purchasing Braid Group Ltd.
Consequently, year-to-date international results for 2000 include nine months of
related activity as opposed to six months of related activity in 1999.
REVENUES:
Total Revenues. Mercator's total revenues increased 47% to $99.2 million for the
nine months ended September 30, 2000 from $67.6 million in the comparable period
of 1999. This increase resulted from increased license revenue as well as
increased billings for professional services and maintenance.
Software Licensing. Software license revenues increased 49% to $55.4 million for
the nine months ended September 30, 2000 from $37.2 million in the comparable
period of 1999, primarily due to an increase in Mercator license revenues.
Domestic software license revenues increased 33% to $36.6 million for the nine
months ended September 30, 2000 from $27.5 million in the comparable period of
1999, primarily due to the increased market acceptance of the Mercator product
suite. International software license revenues increased 94% to $ 18.8 million
for the nine months ended September 30, 2000 from $9.7 million in the comparable
period of 1999. This increase was the result of Mercator's focus on growing our
international channels, the larger salesperson base available to market our
products, and the continuing opportunity to sell the Mercator suite of products
into both the former Braid organization's financial services customer base, as
well as new European and Asia Pacific customers.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 44% to $43.7 million for the nine months ended September 30, 2000 from
$30.4 million in the comparable period of 1999, due to increased licensing of
our products which produced greater professional services engagements and higher
related maintenance billings. Domestic service, maintenance and other revenues
increased 24% to $25.4 million for the nine months ended September 30, 2000 from
$20.6 million in the comparable period of 1999. International service,
maintenance and other revenues increased 86% to $18.3 million in the first nine
months of 2000 from $9.8 million in the same period in 1999.
COST OF REVENUES:
Total Cost of Revenues. Total cost of revenues increased 48% to $23.7 million
in the first nine months of 2000 from $16.0 million in the comparable period of
1999.
Cost of Software Licensing. Cost of software licensing revenues decreased 18%
to $.8 million in the first nine months of 2000 from $1.0 million in the
comparable period of 1999. The decrease is primarily due to the increase in
distribution of product and documentation on CD ROM and electronic
transmission of product over the WEB. Software licensing gross margin was 98%
and 97% for the nine-month periods ended September 30, 2000 and 1999,
respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and other
revenues increased 53% to $22.8 million for the first nine months of 2000 from
$14.9 million in the comparable period of 1999, primarily due to the increase in
professional services employee headcount and related recruitment and training
costs. Service, maintenance and other gross margin was 48% for the nine months
ended September 30, 2000 and 51% for the same period 1999. Domestic and
international gross margins were 46% and 50%, respectively for the nine months
ended September 30, 2000.
OPERATING EXPENSES
Product Development. Product development costs increased 56% to $15.7 million
for the nine months ended September 30, 2000 from $10.1 million in the
comparable period of 1999, primarily due to increased product development
activities related to the Mercator E-business Broker Suite, as well as the
acquisition of Novera in September 1999. Product development expenses as a
percentage of total revenue increased to 16% for the first nine months of 2000
as compared to 15% for the same period in 1999. Mercator believes
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16
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that a significant level of research and development expenditures is required to
remain competitive. Accordingly, Mercator anticipates that it will continue to
devote substantial resources to research and development.
Selling and Marketing. Selling and marketing costs increased 74% to $48.3
million in the nine months ended September 30, 2000 from $27.8 million in the
comparable period of 1999, primarily due to the increased number of sales and
marketing personnel as a result of Mercator's growth from 1999 to 2000, and
increased expenditures on advertising and marketing programs. Selling and
marketing expenses as a percentage of total revenues increased to 49% in the
first nine months of 2000 from 41% in the comparable period of 1999. Mercator
anticipates that sales and marketing expenses will continue to increase in
absolute dollar amount as the company grows so that the company can maximize its
revenue opportunity in the market.
General and Administrative. General and administrative expenses increased 155%
to $16.0 million in the first nine months of 2000 from $6.3 million in the first
nine months of 1999, primarily due to incremental legal, accounting and
consulting fees related to the restatement of Mercator's first and second
quarter earnings and costs relating to additional senior management personnel,
as well as increased headcount and other administrative costs to support
Mercator's growth. General and administrative expenses as a percentage of total
revenues increased to 16% for the nine months ended September 30, 2000 from 9%
for the same period of 1999. Mercator will continue to incur general and
administrative expenses at levels appropriate to support our worldwide
expansion.
Amortization of intangibles. Amortization expense increased to $35.1 million for
the nine-month period ending September 30, 2000 from $16.3 million for the same
period in 1999 as a result of the acquisition of Braid in March 1999 and Novera
in September 1999. As of September 30, 2000 and 1999, Mercator had net
intangible assets of $132.6 million and $168.1 million, respectively.
OTHER INCOME (EXPENSE) NET
Net interest income decreased to $453,500 in the first nine months of 2000 from
$860,800 in the comparable period of 1999, due to lower cash balances resulting
from the acquisitions of Braid and Novera and the subsequent reduction of
interest-bearing investments offset partially by higher rates of return on these
investments.
INCOME TAXES
The provision (benefit) for income taxes for the nine months ended September 30,
2000 and 1999 are based on the anticipated effective tax rates and taxable
income for the full year taking into account each jurisdiction in which the
Company operates.
The Company's effective tax rate for both 2000 and 1999 is impacted by the fact
that the majority of its amortization of intangibles is not deductible for
income tax purposes. The Company's tax benefit for the nine months ended
September 30, 2000 reflects the Company's expectation of no tax expense or
benefit in the United States in 2000 due to decreased earnings, offset by a
small benefit in its foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2000, Mercator had net working capital of $35.8 million, which
included cash and marketable securities of $24.5 million. Operating activities
provided (used) net cash of $ 8.8 million and ($7.1 million) during the nine
months ended September 30, 2000 and 1999, respectively. The cash provided in
the nine months ended September 30, 2000 was due primarily to a decrease in
accounts receivable and an increase in accrued expenses.
Investing activities (used) net cash of ($2.4 million) during the nine months
ended September 30, 2000. The reduction in cash was due to the purchase of
furniture, fixtures, and equipment to support Mercator's
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17
<PAGE>
growth, offset by the sale of marketable securities. Investing activities (used)
net cash of ($0.7 million) during the nine months ended September 30, 1999 due
primarily to the purchase of Braid Ltd., offset by the sale of marketable
securities.
Financing activities provided net cash of $5.9 million and $2.1 million for the
nine months ended September 30, 2000 and 1999, respectively. The cash provided
for 2000 and 1999 was due to proceeds from sale of stock through employee stock
option exercises and employee stock purchase plan purchases.
Net accounts receivable decreased to $29.9 million at September 30, 2000 from
$33.4 million at September 30, 1999. This decrease occurred despite an increase
in billings and was primarily due to a change in payment terms from "net 30" to
"due upon receipt", the improved collection of outstanding balances and a net
increase in the allowance for doubtful accounts. The number of days sales in
accounts receivable was 84 at September 30, 2000 compared to 113 at September
30, 1999.
Capital expenditures have been, and future capital expenditures are anticipated
to be primarily for facilities, equipment and computer software to support
expansion of Mercator's operation. As of September 30, 2000, Mercator had
commitments for capital expenditures in the amount of $2.3 million through June
30, 2001.
Mercator believes that its current cash and cash equivalent balances and any net
cash generated by operations will be sufficient to meet its anticipated cash
needs for working capital, capital expenditures and business expansion for at
least the next twelve months.
In April 2000, Mercator entered into a three year agreement with Fleet Bank for
a $20 million line of credit. Since inception no amounts have been borrowed
under this agreement. At September 30, 2000 there is a $1.24 million letter of
credit outstanding against the facility in connection with a new headquarters
facility lease in Connecticut. This letter of credit reduces the availability
under the agreement to $18.76 million. The line of credit requires us to comply
with certain financial covenants. As of September 30, 2000 Mercator was not in
compliance with certain covenants. The Company is currently in discussions with
Fleet Bank to receive waivers and amend the agreement. If the Company cannot
receive the necessary waivers or amend the agreement, it may be restricted in
its ability to borrow amounts under the agreement.
CONVERSION TO A SINGLE EUROPEAN CURRENCY
Mercator has sales in a number of foreign countries, but at the present time
they are not significant and the conversion to a single European currency has
not had a material impact on Mercator's financial results.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our quarterly and annual operating results are volatile and difficult to predict
and may cause our stock price to fluctuate.
Our quarterly and annual operating results have varied significantly in the past
and are expected to do so in the future. We believe that you should not rely on
period to period comparisons of our results of operations, as they are not
necessarily indications of our future performance. In some future periods, our
results of operations may be below the expectation of public market analysts and
investors. In this case, the price of our common stock would likely decline.
Our revenues and results of operations are difficult to forecast and depend on a
variety of factors. These factors include the following:
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18
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. personnel changes, our ability to attract and retain qualified sales,
professional services and research and development personnel and the rate
at which this personnel becomes productive;
. general economic conditions;
. the size, timing and terms of individual license transactions;
. the sales cycle for our products;
. demand for and market acceptance of our products and related services,
particularly our Mercator products;
. our ability to expand, and market acceptance of, our services business;
. the timing of our expenditures in anticipation of product releases or
increased revenue;
. the timing of product enhancements and product introductions by us and our
competitors;
. market acceptance of enhanced versions of our existing products and of new
products;
. changes in pricing policies by our competitors and us;
. variations in the mix of products and services sold by us;
. the mix of channels through which our products and services are sold;
. our success in penetrating international markets; and
. the buying patterns and budgeting cycles of customers.
We have historically derived a substantial portion of our revenues from the
licensing of our software products, and we anticipate that this trend will
continue for the foreseeable future. Software license revenues are difficult to
forecast for a number of reasons, including the following:
. we typically do not have a material backlog of unfilled orders, and
revenues in any quarter substantially depend on orders booked and shipped
in that quarter;
. the length of the sales cycles for our products can vary significantly from
customer to customer and from product to product and can be as long as nine
months or more;
. the terms and conditions of individual license transactions, including
prices and discounts, are often negotiated based on volumes and
commitments, and may vary considerably from customer to customer; and
. we have generally recognized a substantial portion of our quarterly
software licensing revenues in the last month of each quarter.
Accordingly, the cancellation or deferral of even a small number of purchases of
our products could harm our business.
Our employees, investors, customers and vendors may react adversely to the
restatement of our first quarter earnings and the adjustment to previously
disclosed second quarter results.
Our future success depends in large part on the support of our key employees,
investors, customers, and vendors who may react adversely to the restatement of
our first quarter earnings and the adjustment to previously disclosed second
quarter results. The restatement of our first quarter earnings and the
adjustment to previously disclosed second quarter results has resulted in
negative publicity about us and we believe that this publicity may have caused
some of our potential customers to defer purchases of our software or to do
business with other vendors. We may not be able to retain key employees and
customers if they lose confidence in us and our vendors may reexamine their
willingness to do business with us. In addition, investors may lose confidence,
which may cause the trading price of our common stock to decrease further. If
we lose the services of our key employees or are unable to retain and attract
our existing and new customers and vendors, our business, operating results and
financial condition could be materially adversely affected.
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19
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Our future success depends on retaining our key personnel and attracting and
retaining additional highly qualified employees.
Our future success depends in large part on the continued service of our key
sales, professional services and research and development personnel, as well as
senior management. Other than the Chairman and the Chief Executive Officer, all
employees are employed at-will and we have no fixed-term employment agreements
with our employees, which prevents them from terminating their employment at any
time. The loss of the services of any of one or more of our key employees could
harm our business.
Our future success also depends on our ability to attract, train and retain
highly qualified sales, research and development, professional services and
managerial personnel, particularly sales, professional services and research and
development personnel with expertise in enterprise resource planning systems.
Competition for these personnel is intense. We may not be able to attract,
assimilate or retain qualified personnel. We have at times experienced, and we
continue to experience, difficulty in recruiting qualified sales and research
and development personnel, and we anticipate these difficulties will continue in
the future. Furthermore, we have in the past experienced, and in the future we
expect to continue to experience, a significant time lag between the date sales,
research and development and professional services personnel are hired and the
date these employees become fully productive.
It would be difficult for us to adjust our spending if we experience any revenue
shortfalls.
Our future revenues will also be difficult to predict and we could fail to
achieve our revenue expectations. Our expense levels are based, in part, on our
expectation of future revenues, and expense levels are, to a large extent, fixed
in the short term. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. If revenue levels are below
expectations for any reason, our operating results are likely to be harmed. Net
income may be disproportionately affected by a reduction in revenue because
large portions of our expenses are related to headcount that cannot be easily
reduced without harming our business.
In addition, we currently intend to increase our operating expenses by expanding
our research and product development staff, particularly research and
development personnel to be devoted to our Mercator product line, increasing our
sales and marketing and professional services operations, expanding distribution
channels, and hiring personnel in other operating areas. We expect to experience
a significant time lag between the date professional services, sales, and
technical personnel are hired and the date these employees become fully
productive. The timing of expansion and the rate at which new technical,
professional services, and sales personnel become productive as well as the
timing of the introduction and success of new distribution channels could cause
material fluctuations in our results of operations. Furthermore, to the extent
increased operating expenses precede or are not subsequently followed by
increased revenues, our operating results could be harmed.
We may experience seasonal fluctuations in our revenues or results of
operations.
It is not uncommon for software companies to experience strong fourth quarters
followed by weaker first quarters, in some cases with sequential declines in
revenues or operating profit. We believe that many software companies exhibit
this pattern in their sales cycles primarily due to customers' buying patterns
and budget cycles. We may display this pattern in future years.
We depend on the sales of our Mercator products and related services.
We introduced our products in 1993. In recent years, a significant portion of
our revenue has been attributable to licenses of our Mercator products and
related services, and we expect that revenue attributable to our Mercator
products and related services will continue to represent a significant portion
of our total revenue for the foreseeable future. Accordingly, our future
operating results significantly depend on the market acceptance and growth of
our Mercator product line and enhancements of these products and services.
Market acceptance of our Mercator product line may not increase or remain at
current levels, and
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we may not be able to successfully market our Mercator product line or develop
extensions and enhancements to this product line on a long-term basis. In the
event that our current or future competitors release new products that provide,
or are perceived as providing, more advanced features, greater functionality,
better performance, better compatibility with other systems or lower prices than
our Mercator product line, demand for our products and services would likely
decline. A decline in demand for, or market acceptance of, our Mercator product
line would harm our business.
We may experience difficulties in developing and introducing new or enhanced
products necessitated by technological changes.
Our future success all depends, in part, upon our ability to anticipate changes,
to enhance our current products and to develop and introduce new products that
keep pace with technological advancements and address the increasingly
sophisticated needs of our customers. Our products may be rendered obsolete if
we fail to anticipate or react to change.
Development of enhancements to existing products and new products depends, in
part, on a number of factors, including the following:
. the timing of releases of new versions of applications systems by vendors;
. the introduction of new applications, systems or computing platforms;
. the timing of changes in platforms;
. the release of new standards or changes to existing standards; and
. changing customer requirements.
Our product enhancements or new products may not adequately meet the
requirements of the marketplace or achieve any significant degree of market
acceptance. In addition, our introduction or announcement, or those of one or
more of our current or future competitors, of products embodying new
technologies or features could render our existing products obsolete or
unmarketable. Our introduction or announcement of enhanced or new product
offerings or by our current or future competitors may cause customers to defer
or cancel purchases of our existing products. Any deferment or cancellation of
purchases could harm our business.
We could experience delays in developing and releasing new products or product
enhancements.
We may experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products or product enhancements.
We have in the past experienced delays in the introduction of product
enhancements and new products and we may experience delays in the future.
Furthermore, as the number of applications, systems and platforms supported by
our products increases, we could experience difficulties in developing, on a
timely basis, product enhancements which address the increased number of new
versions of applications, systems or platforms served by our existing products.
If we fail, for technological or other reasons, to develop and introduce product
enhancements or new products in a timely and cost-effective manner or if we
experience any significant delay in product development or introduction, our
customers may delay or decide against purchases of our products, which could
harm our business.
The success of our products will also depend upon the success of the platforms
we target.
We may, in the future, seek to develop and market enhancements to existing
products or new products, which are targeted for applications, systems or
platforms that we believe, will achieve commercial acceptance. This could
require us to devote significant development, sales and marketing personnel, as
well as other resources, to these efforts, which would otherwise be available
for other purposes. We may not be able to successfully identify these
applications, systems or platforms, and even if we do so, they may not achieve
commercial acceptance or we may not realize a sufficient return on our
investment. Failure of these targeted applications, systems or platforms to
achieve commercial acceptance or our failure to achieve a sufficient return on
our investment could harm our business.
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We may not successfully expand our sales and distribution channels.
An integral part of our strategy is to expand our indirect sales channels,
including value-added resellers, independent software vendors, systems
integrators and distributors. This channel is accounting for a growing
percentage of our total revenues and we are increasing resources dedicated to
developing and expanding these indirect distribution channels. We may not be
successful in expanding the number of indirect distribution channels for our
products. If we are successful in increasing our sales through indirect sales
channels, we expect that those sales will be at lower per unit prices than sales
through direct channels, and revenue we receive for each sale will be less than
if we had licensed the same product to the customer directly.
Selling through indirect channels may also limit our contact with our customers.
As a result, our ability to accurately forecast sales, evaluate customer
satisfaction and recognize emerging customer requirements may be hindered.
Even if we successfully expand our indirect distribution channels, any new value
added resellers, independent software vendors, system integrators or
distributors may offer competing products, or have no minimum purchase
requirements of our products. These third parties may also not have the
technical expertise required to market and support our products successfully. If
the third parties do not provide adequate levels of services and technical
support, our customers could become dissatisfied, or we would have to devote
additional resources for customer support. Our brand name and reputation could
be harmed. Selling products through indirect sales channels could cause
conflicts with the selling efforts of our direct sales force.
Our strategy of marketing products directly to end-users and indirectly through
value added resellers; independent software vendors, systems integrators and
distributors may result in distribution channel conflicts. Our direct sales
efforts may compete with those of our indirect channels and, to the extent
different resellers target the same customers, resellers may also come into
conflict with each other. Although we have attempted to manage our distribution
channels to avoid potential conflicts, channel conflicts may harm our
relationships with existing value added resellers, independent software vendors,
systems integrators or distributors or impair our ability to attract new value
added resellers, independent software vendors, systems integrators and
distributors.
We may encounter difficulties in managing our growth.
Our business has grown in recent periods, with total revenues increasing from
approximately $16.1 million in 1995 to $98.6 million in 1999 and $99.2 million
for the first nine months of 2000. We acquired certain assets of Software
Consulting Partners in November 1998 and acquired Braid Limited, Inc. in March
1999, and Novera Software, Inc. in September 1999. The growth of our business
has placed, and is expected to continue to place, a strain on our
administrative, financial, sales and operational resources and increased demands
on our systems and controls.
To address this growth, we have recently implemented, or are in the process of
implementing and will implement in the future, a variety of new and upgraded
operational and financial systems, procedures and controls. In addition, we
intend to hire additional administrative personnel. We may not be able to
successfully complete the implementation and integration of these systems,
procedures and controls, or hire additional personnel, in a timely manner. Our
inability to manage our growth and changing business conditions, or to adapt our
operational, management and financial control systems to accommodate our growth
could harm our business.
We may face significant risks in expanding our international operations.
International revenues accounted for 11.8% of our total revenues for 1998;
however, as a result of the acquisitions of Braid, and the establishment of a
sales office in Germany during 1999, international revenues accounted for 29% of
our total revenues for the first nine months of 1999 and 37% for the first
________________________________________________________________________________
22
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nine months of 2000. Continued expansion of our international sales and
marketing efforts will require significant management attention and financial
resources. We also expect to commit additional time and development resources to
customizing our products for selected international markets and to developing
international sales and support channels.
International operations involve a number of additional risks, including the
following:
. impact of possible recessionary environments in economies outside the
United States;
. longer receivables collection periods and greater difficulty in accounts
receivable collection;
. unexpected changes in regulatory requirements;
. dependence on independent resellers;
. reduced protection for intellectual property rights in some countries,
tariffs and other trade barriers;
. foreign currency exchange rate fluctuations;
. difficulties in staffing and managing foreign operations;
. the burdens of complying with a variety of foreign laws;
. potentially adverse tax consequences; and
. political and economic instability.
To the extent that our international operations expand, we expect that an
increasing portion of our international license and service and other revenues
will be denominated in foreign currencies, subjecting us to fluctuations in
foreign currency exchange rates. We do not currently engage in foreign currency
hedging transactions. However, as we continue to expand our international
operations, exposures to gains and losses on foreign currency transactions may
increase. We may choose to limit our exposure by the purchase of forward foreign
exchange contracts or similar hedging strategies. The currency exchange strategy
that we adopt may not be successful in avoiding exchange-related losses. In
addition, the above-listed factors may cause a decline in our future
international revenue and, consequently, may harm our business. We may not be
able to sustain or increase revenue that we derive from international sources.
Our success depends upon the widespread use and adoption of the internet and
intranets.
We believe that demand for enterprise application integration solutions, such as
those that we offer, will depend, in part, upon the adoption by businesses and
end-users of the internet and intranets as platforms for electronic commerce and
communications. The internet and intranets are new and evolving, and they may
not be widely adopted, particularly for electronic commerce and communications
among businesses. Critical issues concerning the internet and intranets,
including security, reliability, cost, ease of use and access and quality of
service remain unresolved at this time, inhibiting adoption by many enterprises
and end- users. If the internet and intranets are not widely used by businesses
and end- users, particularly for electronic commerce, this could harm our
business.
Government regulation and legal uncertainties relating to the internet could
adversely affect our business.
Congress has recently passed legislation and several more bills have recently
been sponsored in both the House and Senate that are designed to regulate
certain aspects of the internet, including on-line content, copyright
infringement, user privacy, taxation, access charges, liability for third-party
activities and jurisdiction. In addition, federal, state, local and foreign
governmental organizations are also considering other legislative and regulatory
proposals that would regulate the internet. Areas of potential regulation
include libel, pricing, quality of products and services, and intellectual
property ownership.
The laws governing the use of the internet, in general, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property; privacy, libel and taxation apply to the internet. In
addition, the growth and development of the market for online commerce may
prompt calls for more stringent consumer
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23
<PAGE>
protection laws, both in the United States and abroad. This occurrence may
impose additional burdens on companies conducting business online by limiting
how information can flow over the internet and the type of information that can
flow over the internet. The adoption or modification of laws or regulations
relating to the internet could adversely affect our business.
It is not known how courts will interpret both existing and new laws. Therefore,
we are uncertain as to how new laws or the application of existing laws will
affect our business. In addition, our clients who may be subject to such
legislation may indirectly affect our business. Increased regulation of the
internet may decrease the growth in the use of the internet, which could
decrease the demand for our services, increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition.
Capacity constraints caused by growth in the use of the internet may, unless
resolved, impede further development of the internet to the extent that users
experience delays, transmission errors and other difficulties. Further, the
adoption of the internet for commerce and communications, particularly by those
individuals and companies that have historically relied upon alternative means
of commerce and communication generally requires the understanding and
acceptance of a new way of conducting business and exchanging information. In
particular, companies that have already invested substantial resources in other
means of conducting commerce and exchanging information may be particularly
reluctant or slow to adopt a new internet-based strategy that may make their
existing personnel and infrastructure obsolete. If the necessary infrastructure,
products, services or facilities are not developed, or if the internet does not
become a viable commercial medium, our business, results of operations and
financial condition could be materially and adversely affected.
The United States Omnibus Appropriations Act of 1998 places a moratorium on
taxes levied on internet access from October 1, 1998 to October 21, 2001.
However, states may place taxes on internet access if taxes had already been
generally imposed and actually enforced prior to October 1, 1998. States which
can show they enforced internet access taxes prior to October 1, 1998 and states
after October 21, 2001 may be able to levy taxes on internet access resulting in
increased cost to access to the internet, resulting in a material adverse effect
on our business.
We face significant competition in the market for e-business integration
software.
The market for our products and services is extremely competitive and subject to
rapid change. Because there are relatively low barriers to entry in the software
market, we expect additional competition from other established and emerging
companies.
In the e-business integration market, our Mercator products and related services
compete primarily against solutions developed internally by individual
businesses to meet their specific e-business integration needs. In addition, we
face increasing competition in the e-business integration market from other
third-party software vendors.
Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, product development and marketing
resources, greater name recognition and larger customer bases than we do. Our
present or future competitors may be able to develop products that are
comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends or customer requirements, or devote
greater resources than we do to the development, promotion and sale of their
products. Accordingly, we may not be able to compete effectively in our target
markets against these competitors.
We expect that we will face increasing pricing pressures from our current
competitors and new market entrants. Our competitors may engage in pricing
practices that reduce the average selling prices of our products and related
services. To offset declining average selling prices, we believe that we must
successfully introduce and sell enhancements to existing products and new
products on a timely basis. We must also develop enhancements to existing
products and new products that incorporate features that can be sold at higher
average selling prices. To the extent that enhancements to existing products and
new
________________________________________________________________________________
24
<PAGE>
products are not developed in a timely manner, do not achieve customer
acceptance or do not generate higher average selling prices, our operating
margins may decline.
We have only limited protection for our proprietary technology.
Our success is dependent upon our proprietary software technology. We do not
currently have any patents and we rely principally on trade secret, copyright
and trademark laws, nondisclosure and other contractual agreements and technical
measures to protect our technology. We also believe that factors such as the
technological and creative skills of our personnel, product enhancements and new
product developments are essential to establishing and maintaining a technology
leadership position. We enter into confidentiality and/or license agreements
with our employees, distributors and customers, and we limit access to and
distribution of our software, documentation and other proprietary information.
The steps that we have taken may not be sufficient to prevent misappropriation
of our technology, and these protections do not preclude competitors from
developing products with functionality or features similar to our products.
Third parties could also independently develop competing technologies that are
substantially equivalent or superior to our technologies. Furthermore, effective
copyright and trade secret protection may be unavailable or limited outside of
the United States. Any failure by or inability of us to protect our proprietary
technology could harm our business.
We may become subject to infringement claims.
Although we do not believe that our products infringe the proprietary rights of
any third parties, third parties might assert infringement claims against us or
our customers in the future. Furthermore, we may initiate claims or litigation
against third parties for infringement of our proprietary rights or to establish
the validity of our proprietary rights. Litigation, either as plaintiff or
defendant, would cause us to incur substantial costs and divert management
resources from productive tasks. Any litigation, regardless of the outcome,
could harm our business. Furthermore, parties making claims against us could
secure substantial damages, as well as injunctive or other equitable relief,
which could effectively block our ability to license our products in the United
States or abroad. A large monetary judgment could harm our business.
Securities Litigation
As is outlined below in Part II, Item 1, after the restatement of our first
quarter earnings and the adjustment to previously disclosed second quarter
results, Mercator was named in a series of similar purported securities class
action lawsuits. Each complaint alleges violations of United States federal
securities law through alleged material misrepresentations and omissions and
seeks an unspecified award of damages. Mercator believes that the allegations in
each complaint are without merit and intends to contest them vigorously.
However, there can be no guarantee as to the ultimate outcome as to these
pending litigation matters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mercator is exposed to market risk primarily through its investments in
marketable securities. Mercator investment policy calls for investment in short
term, low risk instruments. As of September 30, 2000, investments in marketable
securities were $3.5 million. Due to the nature of these investments, any
decrease in rates would not have material impact on Mercator's financial
statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about February 1, 2000, Mercator was named as a defendant and served with
a complaint in an action entitled Carpet Co-Op of America Association, Inc. and
---------------------------------------------
FloorLINK, L.L.C. v. TSI International Software, Ltd., Civil Action No. 00CC-
----------------------------------------------------
00231, pending in the Circuit Court of St. Louis County, Missouri (the "Missouri
Action"). The complaint includes counts of breach of contract, fraud and
negligent
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25
<PAGE>
misrepresentation in connection with certain software implementation work
provided under contract by Mercator. The plaintiffs allege that Mercator failed
to provide and implement certain software products and designs within an alleged
time requirement and misrepresented Mercator's ability to implement the products
within that timeframe. The complaint seeks an unspecified damage amount in
excess of $2 million. On or about March 30, 2000, plaintiffs in the Missouri
Action filed an amended complaint adding a claim of negligence in connection
with the contract. On April 10, 2000, Mercator filed a motion to dismiss the
Missouri Action in its entirety, which currently is pending. Mercator believes
that the allegations in the amended complaint in the Missouri Action are without
merit and intends to contest them vigorously.
On March 30, 2000, Mercator filed an action entitled TSI International Software,
---------------------------
Ltd. (d/b/a Mercator Software Inc.) v. Carpet Co-op of America Association, Inc.
--------------------------------------------------------------------------------
and FloorLink, LLC, Civil Action No. 300-CV-603 (SRU) in the United States
------------------
District Court for the District of Connecticut (the "Connecticut Action"). The
Connecticut Action asserts claims for copyright infringement, trademark
infringement, unfair competition, misappropriation of trade secrets, breach of
contract, fraud, unjust enrichment and violation of the Connecticut Unfair Trade
Practices Act, in connection with the software implementation project at issue
in the Missouri Action. The Mercator complaint in the Connecticut Action alleges
that the defendants have failed to pay the more than $1.7 million still owed to
Mercator under the contract, and that, during the course of the project, the
defendants fraudulently misappropriated certain of Mercator's copyrighted
software, trademarks and other software implementation related trade secrets. On
May 9, 2000, the court in the Connecticut Action entered a Stipulated Injunction
barring the defendants from using, copying or disclosing any of Mercator's
copyrighted software, trademarks or other trade secrets or proprietary
information. On May 12, 2000, the defendants filed a motion to dismiss the
Connecticut Action which is currently pending.
On August 23, 2000, a purported securities class action lawsuit entitled Thomas
------
Elliott, on behalf of himself and all others similarly situated v. Mercator
---------------------------------------------------------------------------
Software, Inc., et al., Civil Action No. 300CV1610 (GLG), was filed in the
----------------------
United States District Court for the District of Connecticut (the "Elliott
-------
Action"). Named as defendants are Mercator Software, Inc. ("Mercator"),
Constance Galley and Ira Gerard. Plaintiff purports to represent a class of all
persons who purchased Mercator's common stock between April 20, 2000 and August
21, 2000. Thereafter from August 23, 2000 through September 21, 2000 a series
of similar lawsuits were filed in the United States District Court for the
District of Connecticut as follows:
Sandra Balan, on behalf of herself and all others similarly situated v.
-----------------------------------------------------------------------
Mercator Software, Inc., et al., Civil Action No. 300CV1611 (GLG),
-------------------------------
defendants: Mercator, Constance Galley, Ira Gerard and Kevin McKay.
Plaintiff purports to represent the same class of persons that is alleged
in the Elliott Action.
-------
Kalpesh Sampat, on behalf of himself and all others similarly situated v.
-------------------------------------------------------------------------
Mercator Software, Inc., et al., currently pending as Civil Action No.
--------------------------------
300CV1663 (GLG), defendants: Mercator, Constance Galley, Ira Gerard and
Kevin McKay. Plaintiff purports to represent the same class of persons
that is alleged in the Elliott Action.
-------
Sanjay Joshi, on behalf of himself and all others similarly situated v.
-----------------------------------------------------------------------
Mercator Software, Inc., et al., currently pending as Civil Action No.
-------------------------------
300CV1618 (GLG), defendants: Mercator, Constance Galley and Ira Gerard.
Plaintiff purports to represent the same class of persons that is alleged
in the Elliott Action.
-------
Joshua Grabar, on behalf of himself and all others similarly situated v.
------------------------------------------------------------------------
Mercator Software, Inc., et al., currently pending as Civil Action No.
-------------------------------
300CV1619 (GLG), defendants: Mercator, Constance Galley, Ira Gerard and
Kevin McKay. Plaintiff purports to represent the same class of persons
that is alleged in the Elliott Action.
-------
Viviana Cortes, on behalf of herself and all others similarly situated v.
-------------------------------------------------------------------------
Mercator Software, Inc., et al., Civil Action No. 300CV1633 (GLG),
-------------------------------
defendants: Mercator, Constance Galley, Ira Gerard and
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26
<PAGE>
Kevin McKay. Plaintiff purports to represent the same class of persons that
is alleged in the Elliott Action.
-------
Glenn and Terri Rasmussen, individually and on behalf of all others
-------------------------------------------------------------------
similarly situated v. Mercator Software, Inc., et al., currently pending as
-----------------------------------------------------
Civil Action No. 300CV1634 (GLG), defendants: Mercator, Constance Galley
and Ira Gerard. Plaintiffs purport to represent a class of all persons who
purchased Mercator's common stock between April 24, 2000 and August 21,
2000.
Lantao Guo, on behalf of himself and all others similarly situated v.
---------------------------------------------------------------------
Mercator Software, Inc., et al., currently pending as Civil Action No.
-------------------------------
300CV1635 (CFD), defendants: Mercator, Constance Galley and Ira Gerard.
Plaintiff purports to represent the same class of persons that is alleged
in the Elliott Action.
-------
William Baumgartner, on behalf of himself and all others similarly situated
---------------------------------------------------------------------------
v. Mercator Software, Inc., et al., currently pending as Civil Action No.
----------------------------------
300CV1655 (GLG), defendants: Mercator, Constance Galley, Ira Gerard and
Kevin McKay. Plaintiff purports to represent the same class of persons
that is alleged in the Elliott Action.
-------
Jerry Parker, on behalf of himself and all others similarly situated v.
-----------------------------------------------------------------------
Mercator Software, Inc., et al., currently pending as Civil Action No.
-------------------------------
300CV1680 (GLG), defendants: Mercator, Constance Galley, Ira Gerard and
Kevin McKay. Plaintiff purports to represent the same class of persons
that is alleged in the Elliott Action.
-------
Alireza Rejaei, individually and on behalf of all others similarly situated
---------------------------------------------------------------------------
v. Mercator Software, Inc., et al., currently pending as Civil Action No.
----------------------------------
300CV1688 (GLG), defendants: Mercator, Constance Galley, Ira Gerard and
Kevin McKay. Plaintiff purports to represent a class of all persons who
purchased Mercator's common stock between April 17, 2000 and August 21,
2000.
Franklin J. Kessler, on behalf of himself and all others similarly situated
---------------------------------------------------------------------------
v. Mercator Software, Inc., et al., currently pending as Civil Action No.
----------------------------------
300CV1731 (GLG), defendants: Mercator, Constance Galley, Ira Gerard and
Kevin McKay. Plaintiff purports to represent the same class of persons
that is alleged in the Elliott Action.
-------
James Valfre, on behalf of himself and all others similarly situated v.
-----------------------------------------------------------------------
Mercator Software, Inc., et al., currently pending as Civil Action No.
-------------------------------
300CV1733 (GLG), defendants: Mercator, Constance Galley, Ira Gerard and
Kevin McKay. Plaintiff purports to represent the same class of persons
that is alleged in the Elliott Action.
-------
Stephen N. Andert, on behalf of himself and all others similarly situated
-------------------------------------------------------------------------
v. Mercator Software, Inc., et al., currently pending as Civil Action No.
----------------------------------
300CV1806 (GLG), defendants: Mercator, Constance Galley and Ira Gerard.
Plaintiff purports to represent the same class of persons that is alleged
in the Elliott Action.
-------
Each complaint alleges violations of United States federal securities law
through alleged material misrepresentations and omissions and seeks an
unspecified award of damages. Mercator believes that the allegations in each
complaint are without merit and intends to contest them vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
________________________________________________________________________________
27
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
________________________________________________________________________________
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. List of Exhibits
Exhibit Description of Exhibit
------- ----------------------
3.1 Amended and Restated Certificate of Incorporation, as amended, of the
Registrant
3.2 Registrant's Amended and Restated By-laws (1)
10.1 Lease Agreement between Registrant and Wilton Realty Investors Corp.
dated June 6, 2000
10.2 Employment Agreement between the Registrant and James P. Schadt, dated
as of August 21, 2000
10.3 Employment Agreement between the Registrant and Constance F. Galley
dated September 20, 2000
11.1 Statement re computation of per share earnings
27.1 Financial Data Schedule
(1) Previously filed as an exhibit to Mercator Software's Registration
Statement on Form 8-A (File No. 000-22667) filed on September 4, 1999,
incorporated herein by reference.
b. Reports on Form 8-K
1. Current Report on Form 8-K, dated August 22, 2000, reporting first and
second quarter earnings adjustment.
________________________________________________________________________________
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mercator Software, Inc.
Date: November 14, 2000 /s/ Constance F. Galley
---------------------------------------
Constance F. Galley
President and Chief Executive Officer
Date: November 14, 2000 /s/ Constance F. Galley
---------------------------------------
Constance F. Galley
Principal Executive Officer
________________________________________________________________________________
30
<PAGE>
Exhibit Index
Exhibit Description of Exhibit
------- ----------------------
3.1 Amended and Restated Certificate of Incorporation, as amended, of
the Registrant
3.2 Registrant's Amended and Restated By-laws (1)
10.1 Lease Agreement between Registrant and Wilton Realty Investors Corp.
dated June 6, 2000
10.2 Employment Agreement between the Registrant and James P. Schadt,
dated as of August 21, 2000
10.3 Employment Agreement between the Registrant and Constance F. Galley
dated September 20, 2000
11.1 Statement re computation of per share earnings
27.1 Financial Data Schedule
(1) Previously filed as an exhibit to Mercator Software's Registration Statement
on Form 8-A (File No. 000-22667) filed on September 4, 1999, incorporated
herein by reference.
