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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OR 15D-15 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
Micro Focus Group Public Limited Company
(Translation of Registrant's Name Into English)
The Lawn, Old Bath Road, Newbury, England RG14 1QN
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F.)
Form 20-F __X__ Form 40-F _____
(Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes __X__ No _____
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2 (b): 82-795.)
The number of the Company's ordinary shares outstanding as of August 31, 1997
was 15,406,000.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three months ended Six months ended
July 31, 1997 July 31, 1996 July 31, 1997 July 31, 1996
=============================================================================================================
<S> <C> <C> <C> <C>
NET REVENUE
Product revenue $22,937 $16,349 $39,287 $29,240
Service revenue 14,389 11,739 28,153 23,017
.............................................................................................................
TOTAL NET REVENUE 37,326 28,088 67,440 52,257
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COST OF REVENUE
Cost of product revenue 2,457 2,786 4,861 4,911
Cost of service revenue 6,192 4,907 11,145 9,600
.............................................................................................................
TOTAL COST OF REVENUE 8,649 7,693 16,006 14,511
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GROSS MARGIN 28,677 20,395 51,434 37,746
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OPERATING EXPENSES
Research and development 7,721 8,729 15,420 17,860
Sales and marketing 14,188 11,429 24,914 23,189
General and administrative 3,324 2,200 5,182 4,406
Non-recurring charges - - - 8,000
.............................................................................................................
TOTAL OPERATING EXPENSES 25,233 22,358 45,516 53,455
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INCOME (LOSS) FROM OPERATIONS 3,444 (1,963) 5,918 (15,709)
Interest income 1,031 688 1,973 1,352
Interest expense (34) (4) (37) (17)
.............................................................................................................
INCOME (LOSS) BEFORE INCOME TAXES 4,441 (1,279) 7,854 (14,374)
Income taxes (1,466) 72 (2,592) 72
.............................................................................................................
NET INCOME (LOSS) $2,975 ($1,207) $5,262 ($14,302)
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE $0.18 ($0.08) $0.33 ($0.94)
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Weighted average number of shares outstanding 16,270 15,153 16,017 15,149
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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<TABLE>
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<CAPTION>
July 31, 1997 January 31, 1997
(Unaudited)
============================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $40,589 $71,560
Short-term investments 35,444 -
Accounts receivable, net 26,616 20,275
Inventories 683 774
Prepaid expenses and other assets 2,047 2,490
............................................................................................
TOTAL CURRENT ASSETS 105,379 95,099
............................................................................................
FIXED ASSETS:
Property, plant and equipment, net 34,747 32,868
Goodwill, net 6,315 -
Software product assets, net 21,986 23,344
............................................................................................
TOTAL ASSETS $168,427 $151,311
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loans $1,620 $ -
Accounts payable 6,151 4,886
Accrued employee compensation 6,992 5,811
Income taxes payable 6,464 4,142
Deferred revenue 28,509 26,635
Other current liabilities 9,062 11,047
............................................................................................
TOTAL CURRENT LIABILITIES 58,798 52,521
............................................................................................
LONG-TERM DEBT AND OTHER LIABILITIES 22 24
DEFERRED INCOME TAXES 10,173 9,983
SHAREHOLDERS' EQUITY:
Ordinary shares: 10 pence (GB) par value,
22,500,000 shares authorized;
15,372,000 and 15,168,000 outstanding 2,429 2,389
Additional paid-in capital 31,903 27,468
Unrealized loss on available-for-sale securities,
net of tax 22 -
Treasury stock (8,249) (8,959)
Currency translation adjustment (2,208) (2,391)
Retained earnings 75,537 70,276
............................................................................................
TOTAL SHAREHOLDERS' EQUITY 99,434 88,783
............................................................................................
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $168,427 $151,311
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
July 31, 1997 July 31, 1996
========================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $5,262 $(14,302)
Adjustments to reconcile net income (loss) to cash
provided by operations
Depreciation of fixed assets 3,518 4,835
Amortization of software product assets 6,241 6,383
Amortization of goodwill 464 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (7304) 4,514
Decrease in inventories 96 413
Decrease in prepaid expenses and other assets 347 787
Increase (decrease) in accounts payable 1,639 (2,835)
Increase (decrease) in product royalties payable 558 (78)
Increase (decrease) in accrued employee compensation 1,269 (1,588)
Increase in accrued payroll taxes 224 147
Increase in income taxes payable 2,251 559
Increase (decrease) in deferred revenue 2,175 (1,944)
(Decrease) increase in other current liabilities (2,367) 4,108
........................................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,373 999
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,278) (2,022)
Capitalization of software product assets (4,602) (4,344)
Acquisition of subsidiary, net of cash acquired (3,424) -
Purchases of available-for-sale securities (35,444) -
Disposals of property, plant and equipment 106 -
........................................................................................
NET CASH USED FOR INVESTING ACTIVITIES (48,642) (6,366)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Bank borrowings 1,630 -
Issuance of ordinary shares 1,162 137
Sale of treasury shares 710 -
Repayment of capital leases - (131)
.........................................................................................
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,502 6
- ----------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (204) 195
- ----------------------------------------------------------------------------------------
DECREASE IN CASH (30,971) (5,166)
CASH AT BEGINNING OF PERIOD 71,560 58,848
........................................................................................
CASH AT END OF PERIOD $40,589 $53,682
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
Micro Focus Group Plc (the "Company") is incorporated in England and Wales.
Where applicable, the term "Company" also includes the direct and indirect
subsidiaries of Micro Focus Group Plc. The consolidated financial statements
shown herein are stated in U.S. dollars and are prepared under U.S. generally
accepted accounting principles for interim financial information. This 6-K
filing is furnished on a voluntary basis as the Company is not required to
report quarterly financial information by the U.S. Securities and Exchange
Commission (the "SEC").
The financial information at July 31, 1997 and for the quarters and six months
ended July 31, 1997 and 1996 is unaudited but includes all adjustments which the
Company considers necessary for a fair presentation of its financial position at
such date and the operating results and cash flows for such periods. The
year-end balance sheet at January 31, 1997 was derived from audited financial
statements, but does not include all disclosures required by U.S. generally
accepted accounting principles. Results for the three-month and six-month
periods ended July 31, 1997 are not necessarily indicative of results that may
be expected for the fiscal year ending January 31, 1998 or any future interim or
full-year period. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted pursuant to SEC
regulations. Management believes that the disclosures are adequate to make the
information presented herein not misleading. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended January 31, 1997
included in the Company's Annual Report on Form 20-F which was filed with the
SEC on May 2, 1997, as well as the condensed consolidated financial statements
and the notes thereto for the quarter ended April 30, 1997 included on Form 6-K
which was filed with the SEC on June 13, 1997.
The financial information contained in this quarterly report does not constitute
statutory accounts as defined in section 240 of the U.K. Companies Act of 1985.
The figures for the year ended January 31, 1997 are based on the audited
financial statements which have been filed with the U.K. Registrar of Companies;
the auditors' reports on both the U.S. and U.K. financial statements for the
year ended January 31, 1997 were unqualified.
Cash and Cash Equivalents - Short-Term Investments
Cash and cash equivalents include cash placed on short-term deposit and
short-term money market instruments with original maturities of less than three
months.
The Company invests its excess cash in accordance with an investment policy
approved by the Board of Directors and implemented as of the beginning of the
current fiscal year. This policy authorizes investment in U.S. government
securities, municipal bonds, certificates of deposit with highly-rated financial
institutions and other specified money market instruments of similar liquidity
and credit quality. In accordance with Financial Accounting Standards Board
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," management of the Company determines the appropriate classification
of debt securities at the time of purchase and re-evaluates such designation at
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each balance sheet date. Debt securities that the Company has the intent and the
ability to hold until maturity are classified as held-to-maturity, and all other
debt securities are classified as available-for-sale.
The Company has determined that all of its investment securities are to be
classified as available-for-sale. Such securities are stated at amounts which
approximate fair value, based on quoted market prices, with the unrealized gains
and losses reported as a separate component of shareholders' equity.
Available-for-sale securities with original maturities of less than three months
are classified as cash equivalents.
Earnings Per Share
On March 3, 1997, the Financial Accounting Standards Board issued Statement No.
128 ("FAS 128"), "Earnings Per Share," which is required to be adopted in
financial statements issued for periods ending on or after December 15, 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Early adoption is
not permitted. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. On a basis
consistent with FAS 128 reporting requirements, earnings per share for the first
six months of 1998 would have been $0.34 based on 15,273,000 shares outstanding.
Acquisition
The Company acquired Millennium UK Limited ("Millennium"), a Year 2000
consulting firm, on April 30, 1997 for $6.4 million paid in a combination of
$3.2 million in cash and the issuance of 149,142 ordinary shares. The
transaction has been accounted for as a purchase with the Company recording $6.6
million of goodwill as of April 30, 1997, which the Company intends to amortize
over five years. The following are Millennium's recent operating results (in
thousands):
Three Months Ended Six Months Ended
July 31, 1997 July 31, 1996 July 31, 1997 July 31, 1996
Revenue $1,146 $246 $2,100 $535
Income (loss) from
Operations 204 (98) 195 (130)
Fiscal Year
The Company has previously referred to the current fiscal year ending January
31, 1998 as "fiscal year 1997." In the future, the Company will designate each
fiscal year as the calendar year in which the last month of the fiscal year
occurs. Accordingly, the current fiscal year ending January 31, 1998 is referred
to as "fiscal year 1998", "1998" and "current year" in this report.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this Part I, and
with the Company's audited consolidated financial statements in U.S. format for
the fiscal year ended January 31, 1997 included in the Company's Annual Report
on Form 20-F filed with the SEC on May 2, 1997, as well as the condensed
consolidated financial statements for the quarter ended April 30, 1997 included
on Form 6-K which was filed with the SEC on June 13, 1997.
RESULTS OF OPERATIONS
Net income for the second quarter of 1998 was $3.0 million, or $0.18 per share,
as compared with a net loss of $1.2 million, or $0.08 per share, for the
comparable quarter of the prior fiscal year. For the first six months of 1998,
net income was $5.3 million, or $0.33 per share, as compared with a loss of
$14.3 million, or $0.94 per share, for the same period of the prior year. The
prior year's results for the first six months included a restructuring charge of
$8.0 million. The following summarizes the significant factors reflected in the
Company's results of operations.
Revenue
Net revenue for the second quarter of 1998 was 33% above the corresponding
quarter of the prior fiscal year and 24% above the first quarter of 1998. Net
revenue for the first six months of 1998 increased 29% over the same period of
the prior fiscal year.
The increase in second quarter net revenue over the comparable prior year period
primarily reflected higher world-wide sales of the Company's Year 2000 products,
increased Workbench(TM) and other product sales and revenue from Millennium
which was acquired on April 30, 1997 in a transaction accounted for as a
purchase. Second quarter sales to U.S. customers grew by 20% and sales to
non-U.S. customers grew 53% from the same period of the prior fiscal year. The
increase in net revenue from the first quarter reflected both the seasonal
increase from the first quarter, which is typically the Company's lowest revenue
period, higher product licensing revenue from the Company's principal product
lines, and revenue from the operation of Millennium.
Product licensing revenue for the first six months of 1998 was 34% above the
comparable prior year period. Consistent with the second quarter, the
year-over-year increase in the Company's revenue reflected higher sales of Year
2000 products, Workbench(TM) and other product lines. Service revenue for the
first six months of 1998 increased 22% from the prior year's period primarily as
a result of increased software maintenance revenue and revenue from the
operation of Millennium. Current year sales to U.S. customers for the first six
months were 23% higher than in the comparable prior year period reflecting the
above factors and changes in the Company's product bundling and sales discount
structure. Sales to customers outside the U.S. during the first six months of
1998 increased 38% over the prior year largely because of sales increases in
Germany, India and Japan. There can be no assurance that the market for the
Company's products will grow in future periods at its historical rate of growth,
that certain segments will not decline, or that the Company will be able to
increase or maintain its market share in the future or achieve its historical
revenue growth rates.
6
<PAGE> 8
Gross Profit
Gross profit increased as a percentage of net revenue to 77% for the quarter
from 73% for the quarter ended July 31, 1996. Gross profit for the first six
months increased as a percentage of net revenue to 76% from 72% in the same
period of the prior year. These increases primarily reflected reduced product
discounting in the United States, proportionately higher product sales which
carry higher margins, and savings attributable to the replacement of printed
software documentation with electronic versions. Gross profit increased as a
percent of net revenue from 76% in the first quarter of 1998 as a result of a
sales mix change favoring higher margin product licensing revenue and a shift
toward electronic documentation.
The Company's gross margin can be affected by a number of factors, including
changes in product or distribution channel mix, the mix of product and service
revenue, and competitive pressures on pricing. Gross margin is also dependent on
discounts selectively provided to customers in competitive sales situations. In
addition, gross margin may also be adversely affected by expansion of the
Company's consulting organization and the ability to deploy its consulting
capacity to billable projects. As a result of the above factors, gross margin
fluctuations are difficult to predict, and gross margins may decline from
current levels in future periods.
Operating Expenses
Research and development (R&D) expenses for the second quarter of 1998 were 12%
below the prior year period and represented 21% of net revenue as compared to
31% for the comparable prior year period. R&D expenses for the quarter were
approximately equal to the first quarter of 1998 when they represented 26% of
net revenue. R&D expenses represented 23% of net revenue for the first six
months of 1998 and were 14% below the comparable prior year period when they
represented 34% of net revenue. The comparisons with the prior year periods
largely reflected savings resulting from a restructuring of operations, which
included staff reductions. The Company believes that ongoing development of new
products and features is required to maintain and enhance its competitive
position. Accordingly, while the Company will continue to control expenses where
possible, the Company anticipates that aggregate R&D expenses will increase over
time, and may not be directly related to the level of revenue realized in future
quarters.
Sales and marketing expenses for the quarter were 24% above the second quarter
of the prior year and 32% above the first quarter of 1998. Such expenses
represented 38% , 41%, and 36% of net revenue for the quarter, the second
quarter of the prior year, and the first quarter of 1998, respectively. These
increases in sales and marketing expenses reflected higher advertising and
marketing expenses, including those associated with new product launches, and
sales force expansion in connection with Year 2000 sales programs. For the first
six months of 1998 sales and marketing expenses were 7% above the prior year
period, and were 37% of net revenue as compared to 44% in the prior year period.
This increase in expenses reflected factors similar to those noted in the
quarterly comparisons. The Company believes that continued investments in sales,
marketing, customer support and promotional activities are essential to
maintaining its competitive position. In addition, the Company is expanding its
sales and support staffs. Accordingly, the Company anticipates that sales and
marketing expenses will be higher in future periods.
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General and administrative (G&A) expenses for the quarter were 51% higher than
in the second quarter of the prior fiscal year and 79% above the preceding
quarter. G&A expenses represented 9%, 8% and 6% of net revenue in the three
periods, respectively. The increase in G&A expenses in the quarter over the two
comparison periods reflected increased use of consulting services, larger bonus
accruals, staff additions, and goodwill amortization associated with the
Millennium acquisition. For the first six months of 1998, G&A expenses were 18%
higher than the comparable prior year period because of the expense increases
noted above. G&A expenses represented 8% of net revenue during the first six
months of 1998. The Company is investing to strengthen its infrastructure and
anticipates that G&A expenses will increase in future quarters.
Interest income for the first six months 1998 was 46% above the prior year
period and in the second quarter interest income was 50% above the prior year
period. The increase in interest income reflected higher average cash balances
and higher investment yields resulting from investing funds in money market
instruments in place of bank certificates of deposit.
The Company's tax rate was 33% for the first six months of 1998 as compared to
25% on the loss recorded for the year ended January 31, 1997. In the prior
fiscal year, the tax rate was affected by the distribution of taxable profits
and losses among the tax jurisdictions in which the Company operates and by
restructuring charges which were not tax deductible.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $14.4 million in cash from operating activities in the
first six months of 1998, primarily from income before depreciation and
amortization and increases in accounts payable, accrued liabilities, deferred
revenue and income taxes payable, offset in part by higher accounts receivable
and payments of amounts provided in restructuring charges in the prior fiscal
year.
The Company had $76.0 million in cash, cash equivalents and short-term
investments at July 31, 1997. This balance was $4.5 million higher than at
January 31, 1997, reflecting cash provided by operating activities and bank
borrowings undertaken to hedge foreign currency exposures, offset in part by
capital and software purchases and the acquisition of Millennium.
The Company has a GBP 5.0 million ($8 million) at July 31, 1997 unsecured bank
line of credit in the form of a revolving multi-currency LIBOR loan facility.
This line of credit expires in December 1997. The interest rate on outstanding
borrowings under this facility is equal to 1% above the LIBOR rate for the
currency in which the borrowings are made. The loan agreement requires the
Company to maintain a certain minimum level of net tangible assets. French Franc
borrowings outstanding under the credit line at July 31, 1997 were the
equivalent of $1.6 million, and were incurring interest at the rate of 4.4% per
annum.
The Company has revised its capital spending plans for 1998 and expects to spend
approximately $12.5 million for capital equipment and leasehold improvements
during fiscal 1998, in particular for upgrades and expansions to its information
systems and in connection with the planned relocation of certain U.S.
facilities. The Company may finance a portion of these expenditures through
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leasing arrangements. During the first six months of 1998 the Company spent $5.3
million for capital equipment and leasehold improvements.
The Company believes that existing balances of cash, cash equivalents and
short-term investments in combination with its available bank line of credit and
leasing facilities will be sufficient to meet its cash requirements through
fiscal 1999.
FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. This section of the
discussion highlights some of these risks and the possible impact of these
factors on future results from operations.
The factors set forth below as well as statements made elsewhere in this
quarterly report contain certain forward looking statements that are based on
the beliefs of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. The Company's
actual results, performance or achievements in the remainder of fiscal 1998 and
beyond could differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in this
section below, as well as those discussed elsewhere in this Form 6-K. The
Company undertakes no obligation to release publicly any updates or revisions to
any such forward-looking statements that may reflect events or circumstances
occurring after the date of this Form 6-K. For more information regarding
forward-looking statements, see "Special Note on Forward-Looking Statements"
below in this Part I, Item 2.
The Company's future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders, product life cycles, the
ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis, the introduction and
acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of enhancements or new
products, changes in the mix of distribution channels through which the
Company's products are offered, purchasing patterns of distributors and
retailers, quality control of products sold, price and other competitive
conditions in the industry, changes in the Company's level of operating
expenses, changes in the Company's sales incentive plans, budgeting cycles of
its customers, the cancellation of licenses during the warranty period,
non-renewal of maintenance agreements, economic conditions generally or in
various geographic areas, and other factors discussed in this section.
A high percentage of the Company's operating expenses are fixed over the short
term and if anticipated revenue does not occur or is delayed, the operating
results for that quarter will be immediately and adversely affected. In
addition, a substantial portion of the Company's revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter. Furthermore, although historically the Company's
business has not been subject to seasonal variations, the Company's customers
tend to make product purchase decisions in the fourth quarter of their fiscal
year as a result of purchase cycles related to expiration of budgetary
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authorizations. As a result, the Company has historically experienced lower
revenue for the first quarter of a fiscal year than in the fourth quarter of the
prior fiscal year.
The Company's revenue is also affected by seasonal fluctuations resulting from
lower sales that typically occur during the summer months in Europe and other
parts of the world. Due to all of the foregoing factors, it is possible that in
some future quarters the Company's operating results will be below the
expectations of stock market analysts and investors and that the Company's share
price would likely be materially adversely affected.
The Company is in a market that is subject to rapid technological change. The
Company must continually adapt to that change by improving its products and
introducing new products, technologies and services. The growth and financial
performance of the Company will depend upon its ability, on a timely and
cost-effective basis, to develop and introduce enhancements of existing products
and new products that accommodate the latest technological advances and
standards, customer requirements and market conditions. The Company's ability to
develop and market enhancements of existing products and new products depends
upon its ability to attract and retain qualified employees. In the past, the
Company has experienced delays and increased expenses in developing new products
and services. Any failure by the Company to anticipate or respond adequately to
changes in technology and market conditions, to complete product development and
introduce new products and services on a timely basis or to attract and retain
qualified employees could materially adversely affect the Company's business,
results of operations and financial condition.
Substantially all of the Company's revenue is currently, and is expected to
continue in the future to be, derived from products and services related to
applications development and maintenance in the COBOL language. As a result, the
Company's future operating results depend upon market acceptance of the COBOL
language. Any decline in the demand for or market acceptance of the COBOL
language or mainframe computers for which COBOL is a dominant language, as a
result of competition, technological change or other factors, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The markets in which the Company competes are characterized by rapid
technological change and aggressive competition. The Company believes that the
principal competitive factors in the Company's markets are product performance
and reliability, functionality, product quality, application portability,
product enhancement, price, training, support and the quality of service
offerings. The Company expects competition to increase in the future from
existing competitors and from other companies that may enter the Company's
existing or future markets with similar or substitute solutions, including
database vendors of tools and other programming languages that may be less
costly or provide better performance or functionality than the Company's
products. Some of the Company's current and prospective competitors in its
product and service markets have greater financial, marketing or technical
resources than the Company and may be able to adapt more quickly to new or
emerging technologies, or devote greater resources to the promotion and sale of
their products than can the Company. There can be no assurance that other
companies will not develop competitive products in the future. In addition, the
software industry is characterized generally by low barriers to entry, as a
result of which new competitors possessing technological, marketing or other
competitive advantages may emerge and rapidly acquire market share. Furthermore,
there can be no assurance that the Company will be able to compete effectively
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in the future in the professional services market and, particularly, in the Year
2000 professional services market.
The market price of the Company's securities has experienced significant price
volatility and such volatility may occur in the future. Factors such as actual
or anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products, contracts or services by the Company or
its competitors, conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software
industry, general market conditions and other factors may have a significant
impact on the market price of the Company's securities. Furthermore, the stock
market has experienced extreme volatility that has particularly affected the
market prices of equity securities of many high technology companies. These
market fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the Company's securities.
The Company's operations are subject to the general economic climate in the
various areas of the world in which it does business. The risks inherent in
conducting international business generally include exposure to exchange rate
fluctuations (see the section entitled "Exchange Rate Fluctuations" below),
longer payment cycles, greater difficulties in accounts receivable collection
and enforcing agreements, tariffs and other restrictions on foreign trade, U.S.
export requirements, economic and political instability, withholding and other
tax consequences, restrictions on repatriation of earnings, and the burdens of
complying with a wide variety of foreign laws. There can be no assurance that
the factors described above will not have an adverse effect on the Company's
future international revenue and expenses.
The Company markets certain of its products and services to customers for
managing the development and maintenance of mission-critical computer software
systems. In addition, an increasing portion of the Company's business is devoted
to addressing the Year 2000 problem which affects the performance and
reliability of many mission-critical systems. The Company's agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product and service liability claims. It is possible, however, that
the limitation of liability provisions contained in the Company's customer
agreements may not be effective as a result of existing or future federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions.
Although the Company has not experienced any material product or service
liability claims to date, the sale and support of its products and services may
entail the risk of such claims, particularly in the Year 2000 market. A
successful product or service liability claim brought against the Company could
have a material adverse effect upon the Company's business, operating results
and financial condition. Furthermore, the Company anticipates that demand in the
Year 2000 market will decline, perhaps rapidly, following the turn of the
century and the demand for the Company's Year 2000 solutions, products and
services may also decline as a result of new technologies, competition or other
factors. If this decline in demand were to occur, the Company's license revenue
and professional service fees could be materially and adversely affected.
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EXCHANGE RATE FLUCTUATIONS
The Company prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates
for the applicable period. Assets and liabilities denominated in currencies
other than the reporting currency are translated at exchange rates in effect at
the balance sheet date. The majority of the Company's net revenue arises in U.S.
dollars, whereas its costs are incurred approximately equally in U.S. dollars
and other currencies, predominately G.B. pounds. Consequently, fluctuations in
exchange rates, particularly between the U.S. dollar and the G.B. pound, may
have a significant impact on the Company's operating results, notably when
expressed in G.B. pounds. During the first six months of 1998, fluctuations
between the U.S. dollar and the G.B. pound were not significant, and net
exchange rate gains or losses on operational transactions were immaterial.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
The Company is subject to various U.S. securities laws and regulations relating
to the disclosure of information. In particular, the Private Securities
Litigation Reform Act of 1995, which became effective in the United States as of
January 1, 1996 (the "Securities Litigation Reform Act"), applies to the Company
and its disclosure of information and provides that the Company can be exempt
from liability for making forward-looking statements if certain cautionary
language is included along with such statements. This quarterly report contains
certain "forward-looking statements" (as such term is defined in the rules
promulgated pursuant to the U.S. Securities Act of 1933, as amended) that are
based on the beliefs of the Company's management, as well as assumptions made by
and information currently available to the Company's management. Such
forward-looking statements are subject to the safe harbor created by the
Securities Litigation Reform Act. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. Such statements reflect the current views of the
Company or its management with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's actual results, performance or achievements in fiscal 1998 and
beyond could differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed above in
Part I hereof under the heading "Factors That May Influence Future Operating
Results", as well as those discussed elsewhere in this quarterly report. The
inclusion of such forward-looking information should not be regarded as a
representation by the Company or any other person that the future events, plans
or expectations contemplated by the Company will be achieved. The Company
undertakes no obligation to release publicly any updates or revisions to any
such forward-looking statements that may reflect events or circumstances
occurring after the date of this quarterly report.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON MAJOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual General Meeting of the Company was held on June 4, 1997. At the
Annual General Meeting, each of the following resolutions was approved, in
accordance with the Company's Articles of Association, by a show of hands of
those shareholders (or persons holding proxies) voting in person at the Annual
General Meeting:
Resolution No. 1. Adoption of the Directors' Report and Accounts of the
Company for the year ended January 31, 1997.
Resolution No. 2. Re-election of Paul Adams as a director of the Company.
Resolution No. 3. Re-election of J. Michael Gullard as a director of the
Company.
Resolution No. 4. Reappointment of Ernst & Young as the auditors of the
Company, and the authorization of the directors the Company to determine
the auditors' remuneration.
Resolution No. 5. Empowerment of the directors of the Company to allot
equity securities for cash up to an aggregate nominal value of GBP 76,709
(representing 5% of the issued share capital of the Company as at April 30,
1997), with such authority to expire (unless previously renewed, varied or
revoked by the Company in a general meeting) on the earlier to occur of
September 4, 1998 or the date of the 1998 Annual General Meeting of the
Company.
Resolution No. 6. Authorization of the Company, generally and
unconditionally, to make market purchases of ordinary shares of the Company
up to a maximum of 1,534,189 ordinary shares (representing 10% of the
issued share capital of the Company as at April 30, 1997), provided that
the minimum price per share which may be paid for an ordinary share is 10
pence (exclusive of expenses) and the maximum price per share is an amount
(exclusive of expenses) equal to 105% of the average of the middle market
quotations for an ordinary share as derived from the London Stock Exchange
Daily Official List for the 10 business days immediately preceding the date
of purchase. Such authority shall expire (unless previously renewed, varied
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or revoked by the Company in a general meeting) at the conclusion of the
1998 Annual General Meeting of the Company.
At the 1997 Annual General Meeting of the Company, in accordance with the
Company's Articles of Association and UK practice, there was not a tabulation of
the exact number of votes cast (in person or by proxy) for, against or withheld
with respect to any resolution, or the number of abstentions and brokers
non-votes as to each such resolution. As a foreign private issuer, the Company
is not subject to the proxy solicitation rules specified in Regulation 14A under
the Securities Exchange Act of 1934, as amended.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Micro Focus Group Public Limited Company
(Registrant)
Date: September 12, 1997 By: /s/ Anthony R. Muller
------------------------------------
Anthony R. Muller
Senior Vice President
Chief Financial Officer
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