<PAGE>
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 March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For Transition Period From _______ To ______.
Commission File Number: 0-22667
MERCATOR SOFTWARE, INC.
(Exact Name 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)
Registrants 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 Sections 13 and 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 March 31, 2000, the Registrant had 28,518,191 shares of Common Stock, $.01
par value outstanding.
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MERCATOR SOFTWARE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART 1 FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of March 31, 2000 (unaudited) 3
and December 31, 1999
Consolidated Condensed Statements of Operations for the Three Months Ended 5
March 31, 2000 and 1999 (unaudited)
Consolidated Condensed Statements of Cash Flows for the Three Months Ended 6
March 31, 2000 and 1999 (unaudited)
Notes to Consolidated Condensed Financial Statements 8
Item 2 - Managements' Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS 26
SIGNATURES
</TABLE>
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MERCATOR SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,177,200 $ 9,237,100
Marketable securities 4,107,000 5,648,400
Accounts receivable, less allowances of $1,224,200
and $1,766,400 40,150,300 38,270,500
Deferred tax assets 10,378,700 10,378,700
Prepaid expenses and other current assets 2,662,100 2,984,500
------------ ------------
Total current assets 72,475,300 66,519,200
Furniture, fixtures and equipment, net 7,774,200 6,516,700
Intangible assets, net 142,307,300 153,227,700
Other assets 566,000 551,800
------------ ------------
Total assets $223,122,800 $226,815,400
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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MERCATOR SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,538,100 $ 3,936,700
Accrued expenses 11,445,100 8,175,800
Current portion of deferred revenue 15,173,100 14,737,700
------------- ------------
Total current liabilities 31,156,300 26,850,200
------------- ------------
Long-term deferred tax liability 11,487,200 12,253,500
Deferred revenue, less current portion 49,500 58,600
------------- ------------
Total Liabilities $ 42,693,000 39,162,300
------------- ------------
Stockholders' equity:
Convertible preferred stock ($.01 par value; authorized
5,000,000 shares, no shares issued and outstanding) -- --
Common stock (70,000,000 shares authorized, $.01 par value;
28,518,191 and 27,834,350 shares issued and outstanding) $ 285,200 $ 278,200
Additional paid-in capital 208,484,700 205,420,900
Accumulated deficit (26,543,000) (16,667,800)
Cumulative foreign currency translation adjustment (1,148,100) (495,000)
Deferred compensation (649,000) (883,200)
------------- ------------
Total stockholders' equity 180,429,800 187,653,100
------------- ------------
Total liabilities and stockholders' equity $ 223,122,800 $226,815,400
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MERCATOR SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Software licensing $18,307,200 $ 9,799,400
Service, maintenance and other 12,945,100 7,436,600
----------- -----------
Total revenues 31,252,300 17,236,000
----------- -----------
Cost of revenues:
Software licensing 285,100 436,100
Service, maintenance and other 7,051,000 4,231,100
----------- -----------
Total cost of revenues 7,336,100 4,667,200
----------- -----------
Gross profit 23,916,200 12,568,800
Operating expenses:
Product development 4,970,500 2,210,300
Selling and marketing 13,178,600 6,633,000
General and administrative 3,001,200 2,062,400
Amortization of intangibles 10,976,600 2,324,000
----------- -----------
Total operating expenses 32,126,900 13,229,700
----------- -----------
Operating loss (8,210,700) (660,900)
Other income, net 154,200 511,100
----------- -----------
Loss before income taxes (8,056,500) (149,800)
Provision for income taxes 1,818,700 69,700
----------- -----------
Net loss
$(9,875,200) $ (219,500)
=========== ===========
Net loss per share - Basic $(0.35) $(0.01)
Net loss per share - Diluted $(0.35) $(0.01)
Weighted average number of common
and common equivalent shares outstanding
Net loss per share - Basic 28,207,140 22,838,864
Net loss per share - Diluted 28,207,140 22,838,864
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MERCATOR SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
REPRESENTING INCREASES (DECREASES) IN CASH
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities 3,862,600 $ 772,900
Cash flows from investing activities:
Purchase of furniture fixtures and equipment (2,034,800) (1,448,200)
Acquisition, net of cash -- (27,736,100)
Sales of marketable securities 1,540,900 20,191,700
Other (56,200) (294,300)
----------- ------------
Net cash (used in) provided by investing activities (550,100) (9,286,900)
Cash flows from financing activities:
Payments under capital leases -- (2,600)
Proceeds from exercise of stock options 1,992,800 203,700
Proceeds from issuance of stock under employee stock purchase 1,190,400 598,300
plan
Net cash provided by financing activities 3,183,200 799,400
----------- ------------
Effect of exchange rate changes on cash (556,000) (44,200)
----------- ------------
Net change in cash 5,939,700 (7,758,800)
Cash at beginning of period 9,237,500 15,132,700
----------- ------------
Cash at end of period $15,177,200 $ 7,373,900
=========== ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
6
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MERCATOR SOFTWARE, INC)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
REPRESENTING INCREASES (DECREASES) IN CASH
(unaudited)
Three Months
Ended March 31,
---------------
2000 1999
---- ----
Supplemental information:
Cash paid for:
Interest $ 25,000 $ 15,300
Income taxes 346,263 403,000
Non cash investing and finance activities:
Issuance of stock in connection with the
Acquisition of Braid -- $63,723,500
Warrants exercised on a net exercise basis -- 2,300
See accompanying notes to consolidated condensed financial statements.
7
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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 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 Software Inc.'s 1999 Annual Report on
Form 10K, 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. 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 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.
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) NEWLY ADOPTED ACCOUNTING STANDARDS
In June 1998 the FASB issued SFAS No.133 "Accounting for Derivative
Instruments and Hedging Activities." (SFAS 133) 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 (Accounting for Derivative Instruments and
Hedging Activities - Deferral of the effective date of SFAS No. 133 - an
Amendment of SFAS No. 133) is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. This statement is not expected to effect
Mercator, as Mercator does not have any significant derivative instruments or
hedging activities.
8
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SOP 97-2 was amended in February 1998 by SOP 98-4 "Deferral of the
Effective Date of a provision of SOP 97-2" and was amended again in December
1998 by SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions." Those amendments deferred and then clarified
the specification of what was considered vendor specific objective evidence of
fair value for the various elements in a multiple element arrangement. Mercator
adopted the provisions of SOP 97-2 and SOP 98-4 as of January 1, 1998. The
adoption has not had a material impact on the Mercator's results of operations,
financial position or cash flows for the quarters ended March 31, 1999 or 1998.
SOP 98-9 is effective beginning January 1, 2000. The adoption of the provisions
of this statement is not expected to have a material impact on the Mercator's
operating results, financial position or cash flows.
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 the Company.
(4) STOCK ACTIVITIES
Effective April 5, 1999, Mercator completed a two for one common stock
split in the form of a stock dividend. The accompanying financial statements
have been retroactively adjusted to reflect this common stock split.
(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), which includes all changes in equity during a period from non-owner
sources. Mercator's comprehensive income (loss) consists of net income (loss)
and foreign currency translation adjustments. Total comprehensive income (loss)
was ($10.5) million and ($265,200) million for the three months ended March 31,
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 SEC Staff Accounting Bulletin No.
98. Under SFAS 128, basic earnings per share ("EPS") excludes dilution for
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
months ended March 31, 2000, as the outstanding stock options and warrants,
representing an aggregate of 4,193,370 shares of common stock equivalents, are
anti-dilutive.
(7) SEGMENT INFORMATION
In the fourth quarter of 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 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 the Company for making operational
decisions and assessments of financial performance.
As a result of recent international aquisitions and expansion, the Company
has changed its internal structure resulting in the classification of its
business activities into two reportable segments: Domestic and
International. These segments are organized, managed and analyzed
geographically. Information regarding the Company'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.
Quarter Ended March 31,
2000 1999
----------- -----------
Revenue:
Domestic 19.0 14.7
International 12.3 2.5
-----------------------------
Total 31.3 17.2
Operating Income before
Amortization of Intangible:
Domestic 1.0 1.8
International 1.7 (0.1)
-----------------------------
Total 2.7 1.7
Amortization of Intangible (10.9) (2.3)
Other Income net 0.1 0.5
Provisions for Taxes 1.8 0.1
-----------------------------
(9.9) (0.2)
Capital Expenditures:
Domestic 1.8 1.3
International 0.2 0.1
-----------------------------
Total 2.0 1.4
Depreciation Expense:
Domestic 0.5 0.2
International 0.2 0.1
-----------------------------
Total 0.7 0.3
9
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations contains forward-looking statements 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 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., was incorporated in Connecticut in 1985, as TSI
International Software Ltd. and reincorporated in Delaware in September 1993.
The name change to Mercator Software, Inc. became effective on April 3, 2000.
Mercator has derived a majority of its revenues from products other than
Mercator, primarily our Trading Partner family of products and the KEY/MASTER
product. However, revenue related to the Mercator family of products has grown
significantly in each of the last three years and has increased as a percentage
of total revenues. Mercator believes that future growth in revenues, if any,
will be mainly attributed to the Mercator suite of products. Mercator believes
it cannot accurately predict the amount of revenues that will be attributable to
this product line or the life of such products. To the extent our Mercator
products do not maintain continued market acceptance, the business will be
adversely affected.
Mercator generally recognizes revenue from software license fees upon
delivery, unless there are significant post-delivery obligations, in which case
revenues are recognized when these obligations are satisfied. This is the case
with certain customers who have purchased a financial services solution whereby
Mercator recognizes revenue using the percentage-of-completion method as
services are performed. The KEY/MASTER product is licensed under term-use
contracts rather than for a one-time license fee and Mercator software
recognizes revenue from these arrangements on a present-value basis at the
inception of the contract. Mercator does not actively market new term-use
contracts for KEY/MASTER but continues to receive maintenance revenues. As a
result, KEY/MASTER accounts for a larger proportion of maintenance revenues than
license revenues and increases the percentage of Mercator's total revenues
represented by service, maintenance and other revenues. Mercator intends to
continue to increase the scope of service offerings insofar as it supports the
sale of license revenues from sales of Mercator products. We believe that
software licensing revenue will continue to account for a larger portion of
total revenues that service, maintenance and other revenues.
Mercator can be used by information technology professionals as well as
value added resellers, independent software vendors, software integrators or
other third parties who resell, embed or otherwise bundle Mercator with their
products. License fee revenues are derived from direct sales of software
products through our direct sales force and indirect third parties. Sales
through distributors and resellers represented approximately 31% of domestic
license revenue in the first quarter of 2000.
10
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International revenue accounted for 39.2% of total revenues for the three
months ended March 31, 2000 as compared to 14.5 % of total revenues for the
three months ended March 31, 1999. The increase is primarily attributed to the
purchase of Braid in March of 1999 and the addition of a sales office in
Frankfurt, Germany.
The size of orders can range from a few thousand dollars to over $300,000
per order. The loss or delay of large individual orders, therefore, can have a
significant impact on revenue and other quarterly results. In addition,
Mercator generally recognizes a substantial portion of its 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. To the extent such expenses precede, or are not subsequently followed
by, increased revenue, operating results 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.
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:
Three Months Period Ending
--------------------------
March 31,
---------
2000 1999
Revenues: ---- ----
Software licensing 58.6% 56.9%
Service, maintenance and other 41.4 43.1
------ -----
Total revenue 100.0% 100.0%
------ -----
Cost of revenues:
Software licensing 0.9 2.5
Service, Maintenance and other 22.6 24.5
------ -----
Total cost of revenues 23.5 27.0
------ -----
Gross profit 76.5 73.0
------ -----
Operating expenses:
Product development 15.9 12.8
Selling and marketing 42.2 38.5
General and administrative 9.6 12.0
Amortization of intangibles 35.1 13.5
------ -----
Total operating expenses 102.8 76.8
------ -----
Operating loss (26.3) (3.8)
Other income expense, net 0.5 3.0
------ -----
Loss before taxes (25.8) (.8)
Income tax expense 5.8 .4
------ -----
Net Loss (31.6)% (1.2)%
====== =====
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Three Months Period Ending
--------------------------
March 31,
---------
1999 2000
Gross profit:
Software licensing 98.4% 95.5%
Service, maintenance and other 45.5 43.1
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED WITH THREE MONTH PERIOD ENDED
MARCH 31, 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.
Total revenues increased 81% to $31.3 million in the first quarter of 2000 from
$17.2 million in the same period in 1999.
Software License. Total software licensing revenues increased 87% to $18.3
million for the three months ended 2000 from $9.8 million for the same period in
1999. Domestic software licensing revenues increased $2.4 million to $11.3
million in 2000 from $8.9 million in 1999, primarily due to an increase in
Mercator license revenues as a result of a larger customer base. International
software licensing revenues increased 682% to $7.0 million in the first quarter
of 2000 from $893,900 in the same period 1999. This increase was the result of
the Braid acquisition and the larger salesperson base available to sell our
Mercator products. International licensing revenues from Braid products and
Mercator products were $1.9 million and 9.4 million, respectively.
Service, Maintenance and Other. Service, maintenance and other revenues
increased to $12.9 million for the three months ending 2000 from $7.4 million
for the same period in 1999. Domestic service, maintenance and other revenues
increased 32% to $7.7 million in 2000 from $5.8 million in 1999. This increase
was a result of increased service demands from our Mercator customers and the
related acquisition of service personnel to address those needs, as well as
additional maintenance revenues on the Mercator license sales. International
service, maintenance and other revenues increased $3.6 million to $5.2 million
in the first quarter 2000 from $1.6 million in the same period in 1999. This
increase is primarily attributed to the larger service component of the
traditional Braid financial services product as well as increased services on
our Mercator product sales.
COST OF REVENUES
Cost of software licensing revenues consists primarily of CD-ROMs, manuals,
distribution costs and the cost of third-party software that Mercator resells.
Cost of service, maintenance and other revenues consists primarily of personnel-
related costs in 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, training and professional
consulting services.
12
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Cost of Software Licensing. Total cost of software licensing revenues
decreased to $285,100 in the first quarter of 2000 from $436,100 for the same
period in 1999. This decrease was due to a decrease in costs of distribution.
The majority of products are sold on a single CD-ROM, which includes all
documentation and other materials, thereby reducing the costs of packaging and
materials as well as shipping charges. Software licensing gross margin increased
to 98% for the first quarter of 2000 over 96% for the same period in 1999, due
to the volume of sales and low cost of software distribution. Cost of software
licensing revenues for domestic operations decreased to $139,100 in the first
quarter of 2000 from $425,400 for the same period in 1999 and gross margin on
software licensing domestic increased to 99% in 2000 from 95% in 1999 as a
result of the low cost of distribution and the resulting economies of scale on
the larger number of transactions. The cost of software licensing from
international operations was $146,000 in the first quarter of 2000 versus
$10,700 for the same period in 1999. The increase in these costs was due to the
purchase of Braid in March of 1999 and the inclusion of a full quarter of costs
in the quarter ended March 31, 2000 and the increase in international sales of
Braid's traditional financial services products as well as the increased sales
of Mercator products. Gross margin on software licensing international was 98%
for first quarter of 2000.
Total Cost of Service, Maintenance and Other. Cost of service, maintenance
and other revenues increased 67% to $7.1 million in the first quarter of 2000
from $4.2 million for the same period in 1999. Gross margin on costs of service,
maintenance and other was 46% and 43%, respectively. Cost of service,
maintenance and other for domestic operations increased to $4.1 million for the
three months period ending March 31, 2000 compared to $3.6 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 47% in 2000 and 38% in 1999. Gross margin for the professional
service component was 19%. The difference is related to lower margins on
professional services than on maintenance services. Cost of service, maintenance
and other for international operations increased to $3.0 million in 2000 from a
minimal cost in 1999. This increase was the result of the acquisition of Braid
and related services personnel. In addition, Braid's traditional financial
service products have a larger professional service component than the Mercator
product suite. Accordingly, international gross margin in 2000 was 15.0% for
professional services, as compared to domestic gross margin of 19.4%. Gross
margins on service, maintenance and other for international operations was 44%
for three months ending March 31, 2000.
OPERATING EXPENSES
Product Development. Product Development expenses include expenses
associated with the development of new products and enhancements to existing
products. These expenses consist primarily of salaries, recruiting, and other
personnel-related costs, depreciation of development equipment, supplies, travel
and allocated facilities and communication costs.
Product Development expenses increased 125% to $5.0 million for the three
months ending March 31, 2000, from $2.2 million for the same period in 1999,
primarily due to increased headcount associated with the development of new
Mercator based products and the acquisition of Braid in March 1999 and Novera in
September 1999. Product development expenses represented 16% and 13% of total
revenues for 2000 and 1999, respectively. International product development
expenses were $1.7 million for the first quarter of 2000.
13
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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 dollar amount of research and
development expenses will continue to increase, particularly in the United
States. To date, all research and development expenditures are expensed as
incurred.
Selling and Marketing. Selling and marketing expenses consist of sales and
marketing personnel costs, including sales commissions, recruiting, travel,
advertising, public relations, seminars, trade shows, product descriptive
literature, and allocated facilities and communications costs.
Selling and marketing expenses increased 99% to $13.2 million for the three
months ended March 31, 2000, from $6.6 million for the same period in 1999. This
increase was primarily due to the acquisitions in 1999 and the increased number
of sales and marketing personnel hired to pursue Mercator marketing
opportunities and programs. Selling and marketing expenses represented 42% and
38% of total revenues for the first quarter of 2000 and 1999, respectively.
During 1999, the acquisition of Braid resulted in an increase in headcount
of 27 salespeople. These individuals sold both the traditional Braid financial
services products as well as the Mercator product line. Selling and marketing
costs for international operations were $14.3 million for the three month period
ending March 31, 2000.
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
legal, tax services, and audit fees.
General and administrative expenses increased 46% to $3.0 million in the
first quarter of 2000 from $2.1 million in 1999. The increase was primarily due
to increased number of employees, the cost of management, information system
staff, as well as increased depreciation expenses for related equipment and
software. The acquisition of Braid in March of 1999 and the establishment of a
German sales office increased both headcount and expense in the administrative
area. International administrative costs were $1.4 million for 1999. General and
administrative expenses were 10% and 12% of total revenues for the three months
ending March 31, 2000 and 1999, respectively.
Mercator believes that the dollar amount of its general and administrative
expenses will increase in the future as Mercator continues to expand its
administrative staff and incurs additional costs to enhance its systems and
administrative processes.
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 $10,976,000 for the three month period
ending March 31, 2000 from $2,324,000 for the same period in 1999 as a result of
the acquisitions of Braid in March 1999 and Novera in September 1999. As a
result of these acquisitions, as of March 31, 2000 and 1999, Mercator had net
intangible assets of $142.3 million and $113.5 million,
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respectively.
OTHER INCOME (EXPENSE), NET
Interest income decreased to $154,200 in the first quarter of 2000 from
$511,100 for the same period in 1999, primarily due to the use of cash in the
acquisitions of Braid and Novera during 1999 and the subsequent reduction of
interest bearing investments. Borrowing expenses were $25,000 in 2000 due to the
acquisition of a new line of credit in the first quarter of 2000.
TAXES
Income tax expense was $1.8 million for the quarter ended March 31, 2000 as
compared to $69,700 for the same period in 1999. The difference between the
company's effective tax rate and the U.S. Statory rate is primarily attributable
to goodwill amortization of $8.9 million and $2.3 million for the quarters ended
March 31, 2000 and March 31, 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2000, Mercator had net working capital of $41.3 million, which
included cash and marketable securities of $19.3 million. Working capital at
March 31, 1999 was $20.3 million, which included cash and marketable securities
of $20.0 million. In the first quarter of 2000, cash provided by operations was
$ 3.9 million compared to cash provided of $772,900 in 1999.
Net accounts receivable were $40.2 million for the quarter ended in March
31, 2000 compared to $20.8 million at March 31, 1999. The number of days of
average revenues in accounts receivable was 116 at March 31, 2000 compared to
109 at March 31, 1999. The increase in accounts receivable is due to the large
percentage of sales billed during the last month of the quarter, the increase in
deferred revenue and the granting of extended terms for certain customers. In
response to the increase in days sales outstanding, Mercator has dedicated
additional resources to the collection of outstanding receivables. Capital
expenditures have been, and future capital expenditures are anticipated to be,
primarily for facilities, equipment and computer software to support expansion
of the companies operations. Additions to property plant and equipment accounted
for $2.0 million and $ 712,600 of expenditures for the three months ending March
31, 2000 and 1999, respectively. As of March 31, 2000, Mercator had no material
commitments for capital expenditures.
Mercator believes that its current cash and cash equivalent balances, and
future cash generated by operations, are sufficient to meet its anticipated cash
needs for working capital, capital expenditures and business expansion for a
least a six month period. Thereafter, if cash generated by operations is
insufficient to satisfy operating requirements, Mercator has established a three
year $20 million dollar line of credit with Fleet Bank.
In addition, in an effort to best utilize its working capital, Mercator
Software intends to pursue the development and acquisition of additional
products or businesses, which support the current business needs. Mercator
Software has no agreements or understandings with respect to any material
acquisitions.
YEAR 2000 DISCLOSURE
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Mercator was aware of the issues associated with the programming code in
existing computer systems. Mercator Software's business is dependent on both the
operation of its software it sells to customers, its internal systems and the
buying patterns and state of Information Technology systems of its customer
base. In preparation for the Year 2000, Mercator Software tested all of its
products, evaluated and updated all of its internal systems and communicated the
status of product and upgrade requirements to its customers. Mercator did not
encounter any problems in regard to its products or internal systems as of March
31, 2000.
In addition, Mercator's business did not appear to be impacted by its
customers purchasing patterns as of March 31, 2000, either in regards to
purchase or return activity.
The total cost of Year 2000 compliance activities was not material to
Mercator's results of operations and financial condition, and was handled by
individuals responsible for the specific areas in the ordinary course of
business. There were no accruals made in 1999 or 2000 for loss contingencies
relating to Year 2000 issues.
CONVERSION TO A SINGLE EUROPEAN CURRENCY
Mercator has sales in a number of foreign countries. However, as the
majority of foreign sales are in the United Kingdom, conversion to a single
European currency would not have 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:
. 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 professional
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;
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. 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;
. the buying patterns and budgeting cycles of customers;
. 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; and
. general economic conditions.
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;
. 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.
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
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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 a large portion 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 business could be harmed.
We may experience seasonal fluctuations in our revenues or results of operations
While we have not historically experienced any significant 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 Mercator 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 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 will depend, 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.
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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 by 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.
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. 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
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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.
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. We have also
acquired the assets of Software Consulting Partners in November 1998, 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. For example, we noted an increase
in quarterly days sales outstanding from March 31, 1999 to March 31, 2000 from
approximately 109 days to approximately 116 days, and an increase in net
accounts receivable from to $20.8 million to $40.2 million.
To deal with these concerns, we have recently implemented, or are in the
process of implementing and will be required to 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. The failure of our management to respond to, and 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 15% of
our total revenues for the first quarter of 1999 and 39% for the first quarter
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;
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. 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, and 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 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
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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 business may be indirectly
affected by our clients who may be subject to such legislation. 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
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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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mercator is exposed to market risk primarily through its investment in
marketable securities. Mercator's investment policy calls for investment in
short term, low risk instrument. As of March 31, 2000, investments in marketable
securities were $4.1 million. Due to the nature of these investments, any
decrease in rates would not have material impact on the Company'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 Assocation, Inc.
----------------------------------------
and FloorLINK, L.L.C. v. TSI International Software, Ltd., Civil Action No.
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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 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 the 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
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Software, Ltd. (d/b/a Mercator Software) v. Carpet Co-op of America Assocation,
- -------------------------------------------------------------------------------
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's complaint in the Connecticut Action
alleges that the defendants have failed to pay the more than $1.7 million still
owed to the Mercator under the contract, and that, during the course of the
project, the defendants fraudulently misappropriated certain of the 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 the Mercator's copyrighted software, trademarks or other trade secrets or
proprietary information.
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ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
On April 13, 2000 Mercator distributed 218,302 shares of common stock at an
average price of $91.62 based on the achievement of operating results in
accordance with the Stock Purchase Agreement by and among Mercator Software,
Inc. and the Stockholders of Braid Group Limited dated March 18, 1999. The
shares issued to the Braid Stockholders were issued in reliance on the
exemptions for non-public offerings provided by Rule 506 and Section 4(2) of the
Securities Act of 1933. These shares constitute "restricted Securities" under
Rule 144 of the Securities Act of 1933. The provisions of Rule 144 permit
limited resale of "restricted securities" subject to mandatory holding periods,
volume limitations and other restrictions.
In September 1999 Mercator agreed to acquire Novera Software, Inc. pursuant
to an Agreement and Plan of Reorganization between Mercator and Novera. Pursuant
to the Agreement and Plan of Reorganization, Mercator issued 1,789,916 shares to
the Novera shareholders in exchange for all of the outstanding shares of Novera
capital stock. The shares issued to the Novera shareholders were issued in
reliance on the exemptions for non-public offerings provided by Rule 506 and
section 4(2) of the Securities Act of 1933. These shares constitute "restricted
securities" under Rule 144 of the Securities Act of 1933. The provisions of Rule
144 permit limited resale of "restricted securities," subject to mandatory
holding periods, volume limitations and other restrictions.
In March 1999 Mercator agreed to acquire Braid Group LTD, pursuant to a
Stock Purchase Agreement by and among Mercator and each of the stockholders of
Braid. Pursuant to the Stock Purchase Agreement, Mercator issued 2,207,258
shares to the Braid shareholders in exchange for all of the outstanding shares
of Braid capital stock. The shares issued to the Braid shareholders were issued
in reliance on the exemptions for non-public offerings' provided by Rule 506 and
section 4(2) of the Securities Act of 1933. These shares have subsequently been
registered on Form S-3 dated July 16, 1999 and are freely tradable subject to
general restrictions on transferability of shares held by affiliates of
Mercator.
In November of 1998, Mercator agreed to acquire substantially all of the
assets of and assumed certain liabilities of Software Consulting Partners, a
Delaware Corporation. The 67,844 shares of Mercator's common stock issued to
Software Consulting Partners under the Asset Transfer Agreement dated November
13, 1998 by and among Mercator. Software Consulting Partners and the sole
stockholder of Software Consulting Partners (50% of such shares are being held
in escrow pursuant to the terms of the Asset Agreement) were issued in
reliance on the exemptions for non-public offerings provided by Rule 506 and
section 4(2) of the Securities Act of 1933, as amended and thus have not been
registered. These shares constitute "restricted securities" under rule 144 (d)
regulated by the Securities and Exchange Commission under the Securities Act of
1933. The provisions of rule 144 permit only limited resale of "restricted
securities," including that such securities must generally be held for at least
one year from the date of their acquisition and may then be sold only if certain
other requirements are met.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On March 30, 2000 at a special meeting of the TSI International Software
Ltd. stockholders, stockholders approved the proposal listed below. Proxies were
solicited by Mercator pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
As of February 23, 2000, the record date for the special meeting, there
were approximately 28,558,679 shares of common stock outstanding and entitled to
vote, of which 23,232,071 were present in person or by proxy and voted at the
meeting. The stockholders voted upon a proposal to amend TSI International
Software Ltd.'s Certificate of Incorporation to change the name of TSI
International Software Ltd's. to Mercator Software Inc. The proposal was
approved with 23,216,061 stockholders voting for the proposal, 8060 against the
proposed, 7950 stockholders, obstaining or with no vote.
ITEM 5. OTHER INFORMATION
None
25
<PAGE>
ITEM #6 Exhibits and Reports on Form 8-K
3.1 Amended and Restated Certificate of Incorporation/(2)/
3.2 Registrant's Amended and Restated Bylaws/(3)/
3.3 Certificate of Designations specifying the terms of the
Series A Junior Participating Preferred Stock of Mercator
Software/(4)/
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
By /s/ Constance F. Galley
-----------------------
President, Chairman of the
Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Annual Report on Form
10-Q has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
- ------- ----------- ------
<S> <C> <C>
/s/ Constance F. Galley President, Chief Executive May, 2000
- -----------------------------------
Constance F. Gallley Officer and Chairman of the Board of Directors
/s/ Ira Gerard Senior Vice President, Chief Financial Officer May, 2000
- -----------------------------------
Ira A. Gerard
</TABLE>
26
<PAGE>
Exhibit Index
3.1 Amended and Restated Certificate of Incorporation/(2)/
3.2 Registrant's Amended and Restated Bylaws/(3)/
3.3 Certificate of Designations specifying the terms of the
Series A Junior Participating Preferred Stock of Mercator
Software/(4)/
<PAGE>
24.01 Power of Attorney (see signature page)
27.01 Financial Data Schedule
(2) Previously filed as an exhibit to Mercator Software's Registration
Statement on Form S-1 (File No. 333-27293) and incorporated herein by
reference.
(3) Previously filed as an exhibit to Mercator Software's Registration
Statement on Form 8-A (File No. 000-22667) filed on September 4, 1998 and
incorporated herein by reference.
(4) Previously filed as an exhibit to Mercator Software's Report on Form 8-K
filed on September 4, 1998 and incorporated herein by reference.
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 15,177,200
<SECURITIES> 4,107,000
<RECEIVABLES> 40,150,300
<ALLOWANCES> (1,224,200)
<INVENTORY> 0
<CURRENT-ASSETS> 72,475,300
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 223,122,800
<CURRENT-LIABILITIES> 31,156,300
<BONDS> 0
0
0
<COMMON> 285,200
<OTHER-SE> 180,715,000
<TOTAL-LIABILITY-AND-EQUITY> 223,122,800
<SALES> 31,252,300
<TOTAL-REVENUES> 31,252,300
<CGS> 7,336,100
<TOTAL-COSTS> 32,126,900
<OTHER-EXPENSES> 154,200
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,056,500)
<INCOME-TAX> 1,818,700
<INCOME-CONTINUING> (9,875,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,875,200)
<EPS-BASIC> (.35)
<EPS-DILUTED> (.35)
</TABLE>
