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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-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended April 30, 1998
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 July 10, 1998 was
80,279,722.
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The item numbers in this Report of Foreign Issuer on Form 6-K correspond to the
those of Form 10-Q.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share, ADS, per share and per ADS data)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months
Ended ended
April 30, 1998 April 30, 1997
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<S> <C> <C>
Net revenue
Product revenue $29,542 $17,892
Maintenance revenue 13,015 12,683
Service revenue 6,093 1,958
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Total net revenue 48,650 32,533
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Cost of revenue
Cost of product revenue 2,116 2,177
Cost of maintenance revenue 3,438 2,823
Cost of service revenue 4,243 2,310
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Total cost of revenue 9,797 7,310
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Gross profit 38,853 25,223
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Operating expenses
Research and development 8,378 8,527
Sales and marketing 19,217 11,987
General and administrative 4,267 2,178
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Total operating expenses 31,862 22,692
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Income from operations 6,991 2,531
Interest income, net 1,096 983
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Income before income taxes 8,087 3,514
Income taxes (2,750) (1,139)
Net income $5,337 $2,375
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Net income per share: basic $0.07 $0.03
Net income per ADS: basic $0.34 $0.15
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Weighted average number of shares outstanding: basic (thousands) 79,483 77,767
Shares converted to ADS equivalent (thousands) 15,897 15,553
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Net income per share: diluted $0.06 $0.03
Net income per ADS: diluted $0.32 $0.15
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Weighted average number of shares outstanding: diluted (thousands) 84,191 80,755
Shares converted to ADS equivalent (thousands) 16,838 16,151
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Note: Shares and per-share data for all periods presented above reflect the 5-for-1 stock split of the
Company's ordinary shares, which was effective as of the close of business on March 13, 1998. The Company's
American Depositary Shares ("ADSs") did not split. Instead the conversion rights of such ADSs were adjusted
such that each ADS now represents five ordinary shares. Per share earnings also are shown on an ADS
equivalent basis.
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 30, 1998 January 31,
1998
(Unaudited)
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $52,377 $48,174
Short-term investments 40,448 36,316
Accounts receivable, net 39,074 47,798
Inventories 421 519
Prepaid expenses and other assets 3,787 2,833
Total current assets 136,107 135,640
Fixed assets:
Property, plant and equipment, net 40,224 39,083
Goodwill, net 4,883 5,346
Software product assets, net 19,824 20,328
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Total assets $201,038 $200,397
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Liabilities and shareholders' equity
Current liabilities:
Bank loans $1,663 $1,652
Accounts payable 6,346 6,957
Accrued employee compensation 7,568 12,383
Income taxes payable 12,926 10,459
Deferred revenue 29,208 32,848
Other current liabilities 11,643 12,085
Total current liabilities 69,354 76,384
Long-term debt and other liabilities 18 20
Deferred income taxes 9,463 9,159
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Total liabilities $78,835 $85,563
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Shareholders' equity:
Ordinary shares: 2 pence (GB) par value,
112,500,000 shares authorized, 79,682,213
outstanding (79,417,000 at January 31, 1998) 2,547 2,546
Additional paid-in capital 34,731 33,362
Unrealized (loss) gain on available-for-sale securities, net of tax (28) 44
Treasury stock (7,769) (7,769)
Retained earnings 94,356 89,019
Currency translation adjustment (1,634) (2,368)
Total shareholders' equity 122,203 114,834
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Total liabilities and shareholders' equity $201,038 $200,397
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months
ended ended
April 30, 1998 April 30, 1997
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<S> <C> <C>
Operating activities
Net income $5,337 $2,375
Adjustments to reconcile net income to cash provided by operations
Depreciation of fixed assets 2,896 1,968
Amortization of software product assets 2,782 3,121
Amortization of goodwill 464 0
Loss on sale of fixed assets (4) (3)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 8,818 (1,710)
Decrease in inventories 92 104
(Increase) in prepaid expenses and other assets (1,037) (822)
Increase (decrease) in accounts payable (559) 144
Increase in product royalties payable 6 453
Increase (decrease) in accrued employee compensation (4,678) 315
Increase in accrued payroll taxes 461 204
Increase in income taxes payable 2,471 1,099
Increase (decrease) in deferred revenue (3,782) 2,246
Decrease) in other current liabilities (452) (2,671)
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Net cash provided by operating activities 12,815 6,823
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Investing activities
Property, plant & equipment, net of capital lease obligations (4,085) (1,223)
incurred
Software product assets (1,999) (2,168)
Acquisition of subsidiary, net of cash balances acquired 0 (3,208)
Available-for-sale securities (4,132) (36,629)
Disposals of property, plant and equipment 13 566
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Net cash (used) by investing activities (10,203) (42,662)
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Financing activities
Issuance of ordinary shares, net of expenses 1,408 (281)
Borrowings (17) 263
Repayment of capital leases (1) (10)
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Net cash provided by financing activities 1,390 8
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Effect of exchange rate changes on cash 201 (44)
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Increase (decrease) in cash 4,203 (35,875)
Cash at beginning of period 48,174 73,119
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Cash at end of period $52,377 $37,244
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. 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 condensed 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
submission 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 April 30, 1998 and for the quarters ended April 30,
1998 and 1997 is unaudited but includes all adjustments 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, 1998 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 period ended April 30, 1998 are not
necessarily indicative of results that may be expected for the fiscal year
ending January 31, 1999 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, 1998 included in the Company's Annual Report on
Form 20-F which was filed with the SEC on May 29, 1998.
The financial information contained in this quarterly report does not constitute
statutory accounts as defined in section 240 of the UK Companies Act 1985. The
figures for the year ended January 31, 1998 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, 1998 were unqualified.
2. 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 fiscal
1998. 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
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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.
Available-for-sale securities with original maturities of less than three months
are classified as cash equivalents.
3. Earnings Per Share
The Company's ordinary shares have been listed on the London Stock Exchange
since 1983 under the symbol MICF. Since 1992, the Company's ordinary shares also
have been listed on the Nasdaq Stock Market in the U.S. in the form of American
Depositary Shares ("ADSs"), as evidenced by American Depositary Receipts, under
the symbol MIFGY. Effective as of the close of business on March 13, 1998, the
Company undertook a subdivision (or stock split) of its ordinary shares on a
5-for-1 basis. The conversion ratio of the Company's ADSs has been adjusted such
that each ADS represents 5 ordinary shares. All share and per-share references
included in this report have been restated to reflect the impact of the
above-mentioned stock split. In addition, share and per share data have been
shown in the Condensed Consolidated Statement of Income on a basis consistent
with reporting prior to the stock split.
4. Acquisitions
On April 30, 1997, the Company acquired all the share capital of Millennium UK
Limited ("Millennium") for total consideration of approximately $6.5 million,
which consisted of a payment of $3.25 million in cash and the issuance of
745,710 ordinary shares of the Company with a value of approximately $3.25
million on the date the acquisition was completed. The transaction was accounted
for as a purchase. Millennium provided consulting and project management
services and had specialized expertise in the estimating, planning and
management of Year 2000 compliance projects for large scale systems. Effective
January 31, 1998, Millennium's consulting services were integrated with the
professional service operations of the Company.
On January 20, 1998, the Company acquired all the share capital of XDB Systems,
Inc. ("XDB") for total consideration of approximately $18.6 million on the date
of the acquisition, which consisted of the issuance of 2,084,825 ordinary shares
of the Company (including up to 192,850 ordinary shares to be issued to holders
of XDB options upon exercise of such options). The transaction was accounted for
as a pooling of interests. XDB, a privately held corporation based in Columbia,
Maryland, is a provider of DB2 database development, maintenance and
connectivity solutions.
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5. Subsequent Events
On May 15, 1998 Micro Focus acquired all the share capital of its Italian
distributor, Micro Focus Italia, s.r.l., for total cash consideration of $4.3
million. The transaction will be accounted for as a purchase.
On June 17, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") providing for the merger of INTERSOLV,
Inc. ("INTERSOLV") with and into a wholly owned subsidiary of the Company.
Pursuant to the Merger Agreement, all of the outstanding shares of INTERSOLV
common stock, par value $0.01 per share ("INTERSOLV Common Stock"), will be
converted into the right to receive 0.55 ADSs of the Company, with each ADS
representing five ordinary shares of the Company. In addition, each outstanding
option or right to purchase shares of INTERSOLV Common Stock and note
convertible into shares of INTERSOLV Common Stock will be assumed by the Company
and become an option or right to purchase, and note convertible into, ADSs of
the Company, with appropriate adjustments made to the price and number of shares
issuable upon exercise of such options and rights and conversion of such notes
based on the exchange ratio of 0.55 ADSs per share. Effectuation of the merger
requires approval by the shareholders of the Company and the stockholders of
INTERSOLV. The closing is also subject to clearance by U.K. and U.S. regulatory
authorities, and other conditions as more fully set out in the Merger Agreement.
The Company expects to account for the merger as a pooling of interests and to
issue approximately 14.8 million ADSs on a fully diluted basis, representing
approximately 74.0 million ordinary shares, in exchange for INTERSOLV's
outstanding Common Stock and options, warrants and convertible notes, which will
represent approximately 46% of the Company's share capital on a fully diluted
basis. The closing of the merger is expected to occur in September 1998.
INTERSOLV, a public company listed on the Nasdaq National Market and based in
Rockville, Maryland, is a provider of software solutions that facilitate the
development, delivery and deployment of business information systems.
INTERSOLV's products and services are focused primarily in the areas of
automated software quality, data connectivity and enterprise application
renewal.
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
condensed 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, 1998 included in the Company's
Annual Report on Form 20-F filed with the SEC on May 29, 1998.
RESULTS OF OPERATIONS
Net revenue for the first quarter of fiscal 1999 increased 50% to $48.7 million,
compared with $32.5 million in the first quarter of fiscal 1998. Net income for
the quarter grew 125% to $5.3 million compared with $2.4 million for the first
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quarter of fiscal 1998 and diluted earnings per ordinary share were $0.06 per
share compared with $0.03 for the first quarter of 1998. Diluted earnings per
ADS were $0.32 compared with $0.15 for the first quarter of 1998. The following
summarizes the significant factors reflected in the Company's results of
operations.
Revenue
Net revenue for the first quarter of fiscal 1999 was 50% above the corresponding
quarter of the prior fiscal year and was 6% below the fourth quarter of fiscal
1998. The fiscal fourth quarter historically is the Company's strongest sales
quarter and typically is followed by a first fiscal quarter with sequentially
lower revenues. The 6% sequential decline from the fourth quarter of fiscal 1998
to the first quarter of fiscal 1999 was smaller than the 13% decrease the
Company experienced between the fourth quarter of 1997 and the first quarter of
1998.
The increase in first quarter net revenue over the comparable prior year period
reflected a balanced contribution from all product segments and territories, and
substantial year-over-year growth in both the Company's application
transformation product and consulting business. The Company's application
transformation business includes licensing of Year 2000 and Euro currency
conversion products. First quarter net revenue from North American customers
grew by 40% and net revenue from international customers grew 62% from the same
period of the prior fiscal year.
Product licensing revenue for the first quarter of 1999 was 65% above the
comparable prior year period, primarily reflecting increased revenue from
application transformation products. Service revenue for the first quarter of
1999 increased 211% from the prior year period primarily as a result of growth
in the Company's consulting and training business and revenue contributed from
the Millennium consulting business, which was acquired in the first quarter of
fiscal 1998. Maintenance revenue growth of 3% did not keep pace with the
percentage increase in product licensing revenue due to a decrease in
maintenance renewal rates and a shift in the Company's overall sales mix to
consulting and application transformation products licensed on a line of code
basis, neither of which includes maintenance.
There can be no assurance that the market for the Company's products and
services will grow in future periods at their historical rates of growth, that
certain products or services 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 first quarter of 1999, gross profit as a percentage of net revenue was
80%. This was two percentage points higher than the 78% gross profit margin
reported for both the first quarter and the fourth quarter of fiscal 1998. The
increase in gross profit margin compared with such prior quarters primarily
reflected the accelerated growth of high margin product sales.
The Company's gross profit 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 also is
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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 percentages may be difficult to predict, and gross margins may fluctuate
from current levels in future periods.
Operating Expenses
Research and development (R&D) expenses for the quarter were 2% lower than first
quarter of fiscal 1998 and represented 17% of net revenue as compared to 26% of
net revenue for the prior year period. R&D expenses for the quarter decreased 9%
from the fourth quarter of fiscal 1998 for which such expenses represented 18%
of net revenue. The decrease in year-over-year R&D expenses reflected lower
software product amortization expense and negligible growth in compensation
expense and overhead.
The decrease in R&D expenses for the quarter versus the fourth quarter of fiscal
1998 was due to lower variable compensation accruals. The Company believes that
ongoing development of new products and features is required to maintain and
enhance its competitive position. Accordingly, while the Company intends to
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 60% above the first quarter of
fiscal 1998 and 4% above the fourth quarter of fiscal 1998. Such expenses
represented 40%, 37% and 35% of net revenue for the quarter, the first quarter
of fiscal 1998 and the fourth quarter of fiscal 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 the Company's user conference. The Company believes that
continued investment 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 96% above the
first quarter of the prior fiscal year and 31% below the fourth quarter of the
prior fiscal year. G&A expenses represented 9%, 7% and 12% of net revenue in the
first quarter of fiscal 1999, the first quarter of fiscal 1998 and the fourth
quarter of fiscal 1998, respectively. The increase in G&A expenses for the first
quarter of fiscal 1999 over the comparable prior year period reflected
professional fees associated with recent acquisitions, staff additions, costs
associated with executive recruitment and goodwill amortization associated with
the Millennium acquisition. G&A expenses for the fourth quarter of fiscal 1998
included proportionately higher variable compensation costs associated with the
Company's financial performance. The Company is investing to strengthen its
infrastructure and anticipates that G&A expenses will increase in the aggregate
in future quarters.
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Interest income for the first quarter of fiscal 1999 was 11% above the
comparable prior year period, and 6% below the fourth quarter of the prior year.
The year-over-year increase in interest income reflected higher average cash
balances. The decrease for the quarter from the fourth quarter of fiscal 1998
resulted from lower average investment yields from funds invested in money
market instruments.
The Company's tax rate was 34% for the quarter as compared to the 33% rate
recorded for the year ended January 31, 1998. The marginal increase in the
current year's tax rate reflected a decrease in the utility of operating losses
incurred in prior years. The Company's tax rate is dependent upon the regulatory
environment of the countries in which it operates, as well as the balance of
income reported in each statutory territory. While the Company monitors the
impact of business fluctuations on its tax structure, influences beyond the
Company's control may cause a change in the tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $12.8 million in cash from operating activities in the
first quarter of 1999, primarily from income before depreciation and
amortization and an $8.8 million decrease in accounts receivable since the end
of the prior fiscal year. These factors were offset in part during the quarter
by a $4.7 million decrease in accrued employee compensation and a $1.0 million
increase in prepaid expenses and other assets.
The Company had $92.8 million in cash, cash equivalents and short-term
investments at April 30, 1998. This balance was $8.3 million higher than at
January 31, 1998, reflecting cash provided by operating activities and proceeds
from the issuance of shares upon the exercise of employee stock options, offset
in part by cash used for capital and software expenditures.
The Company has a GBP 5.0 million ($8.3 million at April 30, 1998) unsecured
revolving multi-currency LIBOR loan facility as a means of hedging currency
exposures against the French Franc. 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.
Borrowings denominated in French Francs under the credit line at April 30, 1998
were the equivalent of $1.7 million, and were incurring interest at the rate of
4.4% per annum.
During the first quarter of fiscal 1999, the Company spent $4.1 million for
capital and leasehold improvements largely on upgrades and expansions of its
information systems. For the current year, the Company expects to spend
approximately $15.5 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 operating cash requirements
and the cash requirements of the INTERSOLV acquisition through fiscal 1999.
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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 of 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 1999 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.
Fluctuations in Operating Results; Absence of Significant Backlog. 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 and the lengthy sales cycle, product life cycles, the
ability of the Company to 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 new or enhanced products or technologies, the
timing of product introductions or enhancements by the Company or its
competitors, technological changes in the software industry, changes in the mix
of distribution channels through which the Company's products are offered,
purchasing patterns of distributors and retailers, including customer budgeting
cycles, the quality 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, the cancellation of licenses during the
warranty period, non-renewal of maintenance agreements, the effects of extended
payment terms (particulary for international customers), delays of orders by
customers, customers' delay in or failure to pay accounts receivable, economic
conditions generally or in various geographic areas, and other factors discussed
in this section.
A high percentage of the Company's operating expenses is fixed over the short
term and if anticipated revenue for a fiscal quarter does not occur or is
delayed, the operating results for that quarter would 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.
Seasonality of Operating Results. The Company's revenue also is affected by
seasonal fluctuations resulting from lower sales that typically occur during the
summer months in Europe and other parts of the world. In addition, the Company
has experienced lower revenue for the first quarter of a year than in the fourth
quarter of the prior fiscal year. Due to all of the foregoing factors, it is
possible that in some future quarters the Company's operating results will
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be below the expectations of stock market analysts and investors and that the
Company's share price would likely be materially adversely affected.
Product Concentration. Substantially all of the Company's total net revenue is
derived from products and related services for mainframe applications
development in the COBOL language and COBOL compilers running on workstations
and personal computers. The Company expects that a substantial portion of its
total net revenue will be derived from such products and services in the future.
As a result, the Company's future operating results depend upon continued market
acceptance and use of the COBOL language. Any decline in the demand for or
market acceptance or use of the COBOL language or mainframes as a result of
competition, technological change or other factors could have a material adverse
effect on the Company's business, results of operations and financial condition.
Year 2000 Business and Compliance Issues. The Company markets certain of its
products and services to customers for managing the maintenance and
redevelopment of mission-critical computer software systems. In addition, an
increasing portion of the Company's business is devoted to providing solutions
for the Year 2000 problem, which affects the performance and reliability of many
mission-critical systems. The Company's customer agreements 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, in anticipation of or following Year 2000, and the
demand for the Company's Year 2000 solutions and products may also decline
significantly 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.
The Company is in the process of reviewing its major internal corporate systems
for any potential Year 2000 compliance issues and intends to take appropriate
corrective action based on the results of such review. The Company does not
currently anticipate that it will incur material operating expenses or be
required to invest heavily in internal system improvements as a result of Year
2000 compliance issues. In addition, the Company believes that the current
versions of its software products are Year 2000 compliant. Notwithstanding the
foregoing, there can be no assurance that the Year 2000 problem will not have an
adverse effect on the Company's business, financial condition or results of
operations.
Dependence on New Products; Rapid Technological Change. 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 in part on its ability, on a timely and cost-effective
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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 in part on
its ability to attract and retain qualified employees. In the past, the Company
has experienced delays and increased expenses in developing certain new
products. 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 on a timely basis and with an adequate level of
performance and functionality, or to attract and retain qualified employees
could materially adversely affect the Company's business, results of operations
and financial condition.
Competition. The markets in which the Company competes are characterized by
rapid technological change and aggressive competition. 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 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 in the future in the professional services
market and, particularly, in the Year 2000 professional services market.
Susceptibility to General Economic Conditions. The Company is 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. In addition, the laws of certain foreign countries in which the
Company's products may be marketed may not protect the Company's intellectual
property rights to the same extent as do the laws of the United States and
Europe. There can be no assurance that the factors described above will not have
an adverse effect on the Company's future international revenue.
Volatility of Stock Price. 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, changes in financial estimates by securities analysts,
announcements of technological innovations, new products or new contracts by the
Company or its competitors, developments with respect to patents, copyrights or
proprietary rights, 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
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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.
Recent and Future Acquisitions. The Company completed two business combinations
during fiscal 1998 and completed a business combination in the second quarter of
fiscal 1999. The Company is in the process of integrating the operations
acquired in these transactions with its own. There can be no assurance that the
anticipated benefits of recently concluded business combinations will be
realized. In addition, these acquisitions could require significant additional
management attention. The Company expects to continue growing its business
through acquisitions. On June 17, 1998, the Company entered into an agreement
with INTERSOLV providing for the merger of INTERSOLV with and into a wholly
owned subsidiary of the Company. If the Company is unsuccessful in integrating
and managing the recently acquired businesses or other businesses it may acquire
in the future, the Company's business, results of operations and financial
condition could be adversely affected in future periods.
Enforceability of U.S. Judgments. The Company is a public limited company
organized under the laws of England and Wales. A significant portion of the
assets of the Company is located outside of the United States. As a result, it
may not be possible for investors to effect service of process upon the Company
within the United States or to enforce against the Company, in the United States
courts or courts outside the United States, judgments obtained in U.S. courts
predicated upon the civil liability provisions of the federal securities laws of
the United States. There is doubt as to the enforceability in England, in
original actions or in actions for enforcement of judgments of U.S. courts, of
civil liabilities predicated solely upon such securities laws.
Exchange Rate Fluctuations
Revenue, costs and expenses arising in currencies other than U.S. dollars 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 GB pounds. Consequently, fluctuations in exchange rates,
particularly between the U.S. dollar and the GB pound, may have a significant
impact on the Company's operating results, notably when expressed in GB pounds.
During the first quarter of 1999, fluctuations between the U.S. dollar and the
GB 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
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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 under Section 27A
of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S.
Securities Exchange Act of 1934, 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," "intend" 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 1999 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings and Use of Proceeds
Not applicable.
Item 2 - Changes In Securities
On March 12, 1998, the shareholders of the Company approved a 5-for-1
subdivision of the Company's ordinary shares. The subdivision became effective
as of the close of business on March 13, 1998. The Company's ADSs did not
subdivide, although the conversion rights of such ADSs have been adjusted such
that each ADS now represents 5 ordinary shares. See also Part II, Item 4 below.
Item 3 - Defaults Upon Senior Securities
Not applicable.
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Item 4 - Submission of Matters to a Vote of Security Holders
An Extraordinary General Meeting of the Company was held on March 12, 1998 (the
"Meeting"). At the Meeting, the following resolution 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 Meeting:
Ordinary Resolution - THAT each existing ordinary share of 10 pence
each in the capital of the Company, whether issued or authorized but
not issued, be subdivided into 5 ordinary shares of 2 pence each, such
subdivsion to take effect at the close of business on Friday, March 13,
1998.
At the Meeting, 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
Effective May 14, 1998, Ronald Forbes resigned as a director and the Vice
President, International Finance of the Company.
Item 6 - Exhibits
The following exhibit is filed herewith:
Exhibit 2.01 Agreement of Plan of Reorganization by and among Micro
Focus Group plc, INTERSOLV, Inc. and Tower Merger Sub
Inc. dated June 17, 1998 (incorporated by reference
to Exhibit 10.22 to the INTERSOLV, Inc. Annual Report
on Form 10-K for the fiscal year ended April 30, 1998,
File No. 000-15188).
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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: July 14, 1998
By: /s/ Richard Van Hoesen
--------------------------------------
Richard Van Hoesen
Senior Vice President, Chief Financial
Officer and Secretary
