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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 quarter ended October 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 November 30, 1997
was 15,477,000.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
<TABLE>
Three months ended Nine months ended
Oct. 31, 1997 Oct. 31, 1996 Oct. 31, 1997 Oct. 31, 1996
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<S> <C> <C> <C> <C>
Net revenue
Product revenue 26,178 16,435 65,465 45,675
Service revenue 14,814 11,850 42,967 34,867
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Total net revenue 40,992 28,285 108,432 80,542
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Cost of revenue
Cost of product revenue 2,924 2,156 7,785 7,067
Cost of service revenue 7,053 4,527 18,198 14,127
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Total cost of revenue 9,977 6,683 25,983 21,194
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Gross profit 31,015 21,602 82,449 59,348
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Operating expenses
Research and development 8,162 8,167 23,582 26,027
Sales and marketing 15,393 9,935 40,307 33,124
General and administrative 2,756 2,399 7,938 6,805
Non-recurring charges - - - 8,000
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Total operating expenses 26,311 20,501 71,827 73,956
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Income (loss) from operations 4,704 1,101 10,622 (14,608)
Interest income 1,050 626 3,023 1,978
Interest expense (36) (12) (73) (29)
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Income (loss) before taxes 5,718 1,715 13,572 (12,659)
Income taxes (1,887) (635) (4,479) (563)
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Net income (loss) 3,831 1,080 9,093 (13,222)
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Net income (loss) per share 0.24 0.07 0.57 (0.87)
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Weighted average number of
shares outstanding 16,240 15,162 16,091 15,162
=====================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
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Consolidated Balance Sheets
(in thousands, except share and per share amounts)
October 31, 1997 January 31, 1997
(unaudited)
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Assets
Current assets:
Cash and cash equivalents 40,096 71,560
Short-term investments 37,710 -
Accounts receivable, net 29,751 20,275
Inventories 577 774
Prepaid expenses and other assets 2,977 2,490
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Total current assets 111,111 95,099
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Fixed assets:
Property, plant and equipment, net 38,669 32,868
Goodwill, net 5,810 -
Software product assets, net 21,482 23,344
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Total assets 177,072 151,311
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Liabilities and shareholders' equity
Current liabilities:
Bank loans 1,718 -
Accounts payable 6,397 4,886
Accrued employee compensation 9,387 5,811
Income taxes payable 8,008 4,142
Deferred revenue 26,624 26,635
Other current liabilities 9,087 11,047
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Total current liabilities 61,221 52,521
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Long-term debt and other liabilities 21 24
Deferred income taxes 10,425 9,983
Shareholders' equity:
Ordinary shares: 10 pence (GB) par value, 2,440 2,389
22,500,000 shares authorized; 15,476,000 and
15,168,000 outstanding
Additional paid-in capital 32,705 27,468
Unrealized gain on available-for-sale
securities, net of tax 17 -
Treasury stock (7,822) (8,959)
Cumulative exchange (loss) (1,261) (2,391)
Retained earnings 79,326 70,276
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Total shareholders' equity 105,405 88,783
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Total liabilities and shareholder's equity 177,072 151,311
========================================================================
The accompanying notes are integral part of
these consolidated financial statements
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Consolidated Statements of Cash Flow
(in thousands)
(unaudited)
<TABLE>
Nine Months Ended
October 31, 1997 October 31, 1996
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<S> <C> <C>
Operating activities
Net income (loss) $ 9,093 $(13,222)
Adjustments to reconcile net income(loss) to cash provided by operations:
Depreciation of fixed assets 5,212 6,776
Amortization of software product assets 9,354 9,508
Amortization of goodwill 927 -
Loss on sale of fixed assets 117 92
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (9,988) 7,060
Decrease in inventories 207 949
(Increase) in prepaid expenses and other assets (504) (205)
Increase (decrease) in accounts payable 1,817 (4,536)
Increase in product royalties payable 937 46
Increase (decrease) in accrued employee compensation 3,559 (1,675)
Increase in accrued payroll taxes 278 126
Increase in income taxes payable 3,722 1,782
(Decrease) in deferred revenue (77) (3,035)
(Decrease) increase in other current liabilities (2,577) 4,405
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,077 8,071
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Investing activities
Purchases of property, plant and equipment (11,266) (2,878)
Capitalization of software product assets (6,827) (6,041)
Acquisition of subsidiary, net of cash acquired (3,437) -
Purchases of available-for-sale securities, net (37,710) -
Disposals of property, plant and equipment 755 317
- ----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (58,485) (8,602)
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Financing activities
Bank borrowings 1,718 -
Issuance of ordinary shares 1,975 185
Sale of treasury shares 1,137 -
Repayment of capital leases (71) (188)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,759 (3)
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Effect of exchange rate changes on cash 185 413
Decrease in cash (31,464) (121)
Cash at beginning of period 71,560 58,848
- ----------------------------------------------------------------------------------------------------------
Cash at end of period $40,096 $58,727
==========================================================================================================
</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 report on
Form 6-K is furnished on a voluntary basis as the Company is not required to
report quarterly financial information to the U.S. Securities and Exchange
Commission (the "SEC").
The financial information at October 31, 1997 and for the quarters and nine
months ended October 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 dates 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
nine-month periods ended October 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, as well as the condensed consolidated financial statements and the
notes thereto for the quarters ended April 30, 1997 and July 31, 1997 included
in the Company's Reports of Foreign Issuer on Form 6-K which were furnished to
the SEC on June 13, 1997 and September 12, 1997, respectively.
The financial information contained in this quarterly report does not constitute
statutory accounts as defined in section 240 of the UK 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 UK Registrar of Companies,
and the auditors' reports on both the U.S. and UK financial statements for the
year ended January 31, 1997 were unqualified.
Fiscal Year
The Company has previously referred to its 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 Company's current fiscal year ending January 31, 1998
is referred to as "fiscal year 1998", "fiscal 1998", "1998", "current fiscal
year", and "current year" in this report.
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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
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.
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 basic 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
nine months of 1998 would have been $0.59 based on 15,329,000 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):
<TABLE>
Three Months Ended Nine Months Ended
------------------ -----------------
Oct. 31, 1997 Oct. 31, 1996 Oct. 31, 1997 Oct. 31, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $1,167 $487 $3,267 $1,022
Income (loss) from operations (68) (93) 127 (223)
</TABLE>
5
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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, as well as the condensed consolidated financial
statements and the notes thereto for the quarters ended April 30, 1997 and July
31, 1997 included in the Company's Reports of Foreign Issuer on Form 6-K which
were furnished to the SEC on June 13, 1997 and September 12, 1997, respectively.
RESULTS OF OPERATIONS
Net income for the third quarter of 1998 was $3.8 million, or $0.24 per share,
as compared to net income of $1.1 million, or $0.07 per share, for the
comparable quarter of the prior fiscal year. For the first nine months of 1998,
net income was $9.1 million, or $0.57 per share, as compared to a loss of $13.2
million, or $0.87 per share, for the same period of the prior year. The prior
year's results for the first nine months included a restructuring charge of $8.0
million before taxes. The following summarizes the significant factors reflected
in the Company's results of operations.
Revenue
Net revenue for the third quarter of 1998 was 45% above the corresponding
quarter of the prior fiscal year and 10% above the second quarter of 1998. Net
revenue for the first nine months of 1998 increased 35% over the corresponding
prior year period.
The increase in third quarter net revenue reflected increased sales across all
of the Company's major product lines and included initial sales of the Company's
SmartFind/2000(TM) products. Third quarter sales to U.S. customers grew by 50%
and sales to non-U.S. customers grew 38% from the same period of the prior
fiscal year. The increase in net revenue from the second quarter reflected
increased market acceptance of the Company's Year 2000 products and higher
product licensing revenue from the Company's other principal product lines.
Product licensing revenue for the first nine months of 1998 was 43% above the
comparable prior year period. Consistent with the third quarter, the
year-over-year increase in the Company's revenue reflected higher sales of
SmartFind/2000 products, Workbench(TM) and other product lines. Service revenue
for the first nine months of 1998 increased 23% from the comparable prior year
period primarily as a result of increased software maintenance revenue, growth
in the Company's service business and additional revenue from the acquisition of
Millennium. Revenue from U.S. customers for the first nine months of 1998 was
33% higher than in the comparable prior year period reflecting increased revenue
from each of the Company's major product lines. Sales to customers outside the
U.S. during the first nine months of 1998 increased 37% over the prior year
largely because of higher sales in Germany, India, and Japan.
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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.
Gross Profit
For the third quarter and the first nine months of 1998, gross profit as a
percentage of net revenue was 76%. This equaled the gross profit percentage
reported for the third quarter of the prior year and was above the 74% reported
for the first nine months of the prior year. The improvement over the prior
year's first nine months primarily reflected proportionately higher product
sales which carry higher margins and savings attributable to the replacement of
printed software documentation with electronic versions. Gross profit as a
percent of net revenue for the third quarter of 1998 was below the 77% margin
reported in the second quarter of 1998 due to higher production costs in the
U.S. and costs associated with expansion of the Company's services business.
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 capacity to
revenue generating 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 quarter were approximately equal
to the third quarter of the prior year and represented 20% of net revenue as
compared to 29% for the prior year period. Third quarter R&D costs were 6% above
those reported in the second quarter of 1998 when they represented 21% of
revenue primarily as a result of increased software product amortization. R&D
expenses represented 22% of net revenue for the first nine months of 1998 and
were 9% below the comparable prior year period when they represented 32% of net
revenue. The 9% decrease in year-to-date R&D expenses reflected lower costs
resulting primarily from the Company's restructuring of operations during the
prior fiscal year. 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 55% above the third quarter of
the prior year and 9% above the second quarter of 1998. Such expenses
represented 38%, 35%, and 38% of net revenue for the quarter, the third quarter
of the prior year, and the second quarter of 1998, respectively. The increases
in sales and marketing expenses reflected sales force expansion, higher
commissions, and higher advertising and marketing expenses, including those
associated with new product launches. For the first nine months of 1998, sales
and marketing expenses represented 37% of net revenue as compared to 41% in the
same period of the prior year. The year-over-year increase in this expense is
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attributable to the previously mentioned factors associated with the revenue
gains to date. 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.
General and administrative (G&A) expenses for the quarter were 15% above the
third quarter of the prior fiscal year and 17% below the second quarter. G&A
expenses represented 7%, 8% and 9% of net revenue in the three periods,
respectively. The increase in G&A expenses over the comparable prior year period
reflected staff additions, higher bonus accruals, and goodwill amortization
associated with the Millennium acquisition. G&A expenses for the second quarter
of 1998 included costs for consulting and a management transition, which were
not repeated during the third quarter. For the first nine months of 1998, G&A
expenses were 17% above the comparable prior year period because of the cost
increases noted above. G&A expenses represented 7% of net revenue during the
first nine months of 1998 compared with 8% for the comparable prior year period.
The Company is investing to strengthen its infrastructure and anticipates that
G&A expenses will increase in future quarters.
Interest income for the first nine months 1998 was 53% above the comparable
prior year period and in the third quarter interest income was 68% above the
third quarter of the prior year. The increase in interest income reflected
higher average cash balances and higher investment yields resulting from
investing funds in money market instruments instead of bank certificates of
deposit.
The Company's tax rate was 33% for the first nine months of 1998 as compared to
25% on the loss recorded for the year ended January 31, 1997. In the prior 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 $22.1 million in cash from operating activities in the
first nine months of 1998, primarily from income before depreciation and
amortization and increases in accounts payable, accrued liabilities and income
taxes payable, offset in part by higher accounts receivable and payments of
amounts provided in restructuring charges in the prior year.
The Company had $77.8 million in cash, cash equivalents and short-term
investments at October 31, 1997. This balance was $1.8 million higher than at
July 31, 1997 and $6.2 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 ($8.3 million at October 31, 1997) unsecured
revolving multi-currency LIBOR loan facility. This line of credit expires in
January 2001. The interest rate on outstanding borrowings under this facility is
equal to 0.75% 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
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credit line at October 31, 1997 were the equivalent of $1.7 million, and were
incurring interest at the rate of 4.6% per annum.
During the first nine months of 1998, the Company spent $11.3 million for
capital and leasehold improvements largely on upgrades and expansions of its
information systems and in connection with the relocation of certain U.S.
facilities. For the current year, the Company expects to spend approximately
$12.5 million for capital and leasehold improvements. The Company may finance a
portion of these expenditures through leasing arrangements.
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
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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
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
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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
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, while 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
None.
ITEM 5 - OTHER INFORMATION
Effective December 2, 1997, the Company appointed J. Sidney Webb as a
non-executive director of the Company. Mr. Webb is Chairman of the Board of The
Titan Corporation, a position he has held since May 1984. In addition, Mr. Webb
serves as a director of EIP Microwave, Inc., Plantronics, Inc. and Visigenics
Software, Inc.
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: December 12, 1997 By: /s/ Anthony R. Muller
---------------------------
Anthony R. Muller
Senior Vice President
Chief Financial Officer
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