<PAGE> 1
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 July 31, 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 September 18, 1998
was 80,575,827.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars, except share, ADS, per share and per ADS data)
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three months ended Six months ended
July 31, 1998 July 31, 1997 July 31, 1998 July 31, 1997
- -----------------------------------------------------------------------------------------------------------------
Net revenue
Product revenue $29,850 $23,898 $59,392 $41,790
Maintenance revenue 12,958 11,700 25,973 24,383
Service revenue 5,559 3,580 11,652 5,538
Total net revenue 48,367 39,178 97,017 71,711
- -----------------------------------------------------------------------------------------------------------------
Cost of revenue
Cost of product revenue 1,879 2,222 3,995 4,399
Cost of maintenance revenue 3,972 3,000 7,410 5,823
Cost of service revenue 4,759 3,392 9,002 5,702
Total cost of revenue 10,610 8,614 20,407 15,924
- -----------------------------------------------------------------------------------------------------------------
Gross profit 37,757 30,564 76,610 55,787
- -----------------------------------------------------------------------------------------------------------------
Operating expenses
Research and development 8,499 8,481 16,877 17,008
Sales and marketing 18,237 15,392 37,454 27,379
General and administrative 4,456 3,884 8,723 6,062
Total operating expenses 31,192 27,757 63,054 50,449
- -----------------------------------------------------------------------------------------------------------------
Income from operations 6,565 2,807 13,556 5,338
Interest income, net 1,174 1,042 2,270 2,025
Income before income taxes 7,739 3,849 15,826 7,363
Income taxes (2,630) (1,301) (5,380) (2,440)
Net income $5,109 $2,548 $10,446 $4,923
- -----------------------------------------------------------------------------------------------------------------
Net income per share: basic $0.06 $0.03 $0.13 $0.06
Net income per ADS: basic $0.32 $0.16 $0.65 $0.31
- -----------------------------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding: basic (thousands) 80,133 78,750 79,808 78,259
Shares converted to ADS equivalent (thousands) 16,027 15,750 15,962 15,652
- -----------------------------------------------------------------------------------------------------------------
Net income per share: diluted $0.06 $0.03 $0.12 $0.06
Net income per ADS: diluted $0.31 $0.15 $0.62 $0.30
- -----------------------------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding: diluted (thousands) 83,449 83,290 83,820 82,023
Shares converted to ADS equivalent (thousands) 16,690 16,658 16,764 16,405
- -----------------------------------------------------------------------------------------------------------------
Note:
Share and per-share data for all periods presented above reflects 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, although the conversion rights of such ADSs have been adjusted
such that each ADS represents five ordinary shares. Per share earnings are also shown on an ADS equivalent basis.
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 3
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<S> <C> <C>
July 31, 1998 January 31, 1998
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $52,569 $48,174
Short-term investments 43,274 36,316
Accounts receivable, net 39,492 47,798
Inventories 448 519
Prepaid expenses and other assets 6,171 2,833
Total current assets 141,954 135,640
Fixed assets:
Property, plant and equipment, net 40,368 39,083
Goodwill, net 8,646 5,346
Software product assets, net 18,866 20,328
Total assets $209,834 $200,397
- ----------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Bank loans $1,679 $1,652
Accounts payable 6,506 6,957
Accrued employee compensation 8,010 12,383
Income taxes payable 15,174 10,459
Deferred revenue 27,134 32,848
Other current liabilities 13,894 12,085
Total current liabilities 72,397 76,384
Long-term debt and other liabilities - 20
Deferred income taxes 9,272 9,159
Total liabilities $81,669 $85,563
- ----------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Ordinary shares 2,669 2,508
Additional paid-in capital 36,586 33,362
Unrealized gain on available-for-sale securities, net of tax 39 44
Treasury stock (7,434) (7,769)
Retained earnings 99,465 89,019
Currency translation adjustment (3,160) (2,330)
Total shareholders' equity 128,165 114,834
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $209,834 $200,397
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
<TABLE>
<S> <C> <C>
Six months ended
July 31, 1998 July 31, 1997
- -----------------------------------------------------------------------------------------------------------------
Operating activities
Net income $10,446 $4,923
Adjustments to reconcile net income to cash provided by operations
Depreciation of fixed assets 4,166 3,756
Amortization of software product assets 5,701 6,241
Amortization of goodwill 1,150 464
Loss on sale of fixed assets 25 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 11,226 (6,617)
Decrease in inventories 43 96
(Increase) decrease in prepaid expenses and other assets (5,114) 566
(Decrease) increase in accounts payable (735) 867
Increase in product royalties payable 141 558
(Decrease) increase in accrued employee compensation (4,179) 1,376
Increase in accrued payroll taxes 865 224
Increase in income taxes payable 4,513 1,661
(Decrease) increase in deferred revenue (6,308) 2,987
Increase (decrease) in other current liabilities 405 (2,881)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,345 14,221
- -----------------------------------------------------------------------------------------------------------------
Investing activities
Property, plant and equipment (5,483) (5,278)
Capitalization of software product assets (4,238) (4,602)
Acquisition of subsidiary, net of cash acquired (4,451) (3,424)
Available-for-sale securities (6,958) (35,548)
Disposals of property, plant and equipment - 106
- -----------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (21,130) (48,746)
- -----------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of ordinary shares 3,347 1,630
Bank borrowings 27 2,662
Issuance of ordinary shares, net of expenses 335 710
Repayment of capital leases (20) -
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,689 5,002
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (509) (208)
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 4,395 (29,731)
Cash at beginning of period 48,174 73,119
- -----------------------------------------------------------------------------------------------------------------
Cash at end of period $52,569 $43,388
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
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 July 31, 1998 and for the three and six month
periods ended July 31, 1998 and 1997 is unaudited but includes all adjustments
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, 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 and
six-month periods ended July 31, 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, as well as the condensed consolidated financial
statements and the notes thereto for the quarter ended April 30, 1998 included
in the Company's Quarterly Report on Form 6-K submitted to the SEC on July 15,
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.
5
<PAGE> 6
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.
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 quoted 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 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, which was a privately held corporation based in
Columbia, Maryland, is a provider of DB2 database development, maintenance and
connectivity solutions.
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 was accounted for as a purchase.
On June 17, 1998, the Company announced that it had reached a definitive
agreement to acquire INTERSOLV, Inc. ("Intersolv"). Under the terms of the
agreement, each common share of Intersolv will be exchanged for 0.55 Micro Focus
ADSs. In addition, each outstanding option or right to purchase or acquire
shares of Intersolv stock will be assumed by the Company and become an option or
right to purchase or acquire Micro Focus ADSs, with appropriate adjustments to
the price and number of shares based on the exchange ratio of 0.55 ADSs per
Intersolv share. The definitive agreement has been approved by the board of
directors for both companies and has received clearance by U.K. and U.S.
regulatory authorities. The merger requires approval of the shareholders of both
companies. Meetings for that purpose have been called for September 23, 1998,
6
<PAGE> 7
and the parties anticipate that the closing will occur on September 24, 1998. It
is anticipated that the acquisition will be accounted for as a pooling of
interests under U.S. generally accepted accounting principles. The merger is
structured as a tax-free reorganization under U.S. tax law. Micro Focus expects
to issue approximately 15.1 million new Micro Focus ADSs (representing
approximately 75.4 million new Micro Focus ordinary shares) in exchange for
Intersolv's common stock and share equivalents outstanding, which will represent
approximately 46% of Micro Focus' share capital on a fully-diluted basis.
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, as well as the
condensed consolidated financial statements and the notes thereto for the
quarter ended April 30, 1998 included in the Company's Quarterly Report on Form
6-K submitted to the SEC on July 15, 1998.
RESULTS OF OPERATIONS
Net revenue for the second quarter of fiscal 1999 increased 23% to $48.4
million, compared with $39.2 million in the second quarter of fiscal 1998. Net
income for the quarter grew 101% to $5.1 million compared with $2.5 million for
the second quarter of fiscal 1998, and diluted earnings per ordinary share were
$0.06 per share compared with $0.03 for the second quarter of fiscal 1998.
Diluted earnings per ADS were $0.31 compared with $0.15 for the first quarter of
1998.
For the first half of fiscal 1999, net revenue of $97.0 million increased 35%
compared with $71.7 million for the prior year period. Net income increased 112%
to $10.4 million and diluted earnings of $0.12 per ordinary share were double
earnings per ordinary share of $0.06 reported in the first half of fiscal 1998.
Earnings of $0.62 per ADS were also double the $0.30 reported in the first half
of fiscal 1998.
The following summarizes the significant factors reflected in the Company's
results of operations.
Revenue
Net revenue for the second quarter of fiscal 1999 was 23% above the
corresponding quarter of the prior fiscal year and essentially flat with the
first quarter of fiscal 1999. The increase in net revenue for the second quarter
over the comparable prior year period reflected a balanced contribution from the
Company's consulting, distributed computing and application transformation
7
<PAGE> 8
businesses. Second quarter sales to North American customers grew by 10% and
sales to international customers grew 40% from the same period of the prior
fiscal year.
Product licensing revenue for the second quarter of 1999 was 25% above the
comparable prior year period, primarily reflecting increased revenue from
distributed computing products. Service revenue for the second quarter of 1999
increased 56% from the prior year period primarily as a result of growth in the
Company's consulting and training businesses in both North America and in the
UK. Maintenance revenue growth of 11% for the second quarter did not keep pace
with the increase in product licensing revenue due to a decrease in renewal
rates and a shift in the Company's overall sales mix to products and services
which do not include maintenance.
For the first half of fiscal 1999, net revenue increased 35% over the prior
year. North American revenue grew by 24% from the comparable prior year period
and accounted for 54% of the company's total revenue. International revenue grew
by 51% during the first half of the year and contributed 46% of the Company's
total net revenue. Product revenue increased 42% and service revenue increased
110% during the first half of the year. Maintenance revenue through the first
six months of the current year was up 7%.
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 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 second quarter of fiscal 1999, gross profit as a percentage of net
revenue was 78%. This percentage was the same as the gross profit percentage
reported in the comparable prior quarter and two percentage points below the 80%
gross profit margin reported for the first quarter 1999. Through the first six
months of the year, the Company's gross profit margin was 79% compared with 78%
for the first half of fiscal 1998.
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
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 of $8.5 million
essentially matched those reported in the first quarter of fiscal 1998 and
represented 18% of net revenue as compared to 22% for the prior year period. R&D
expenses for the quarter were approximately the same as those reported in the
first quarter of the current fiscal year for which such expenses represented 17%
of net revenue.
8
<PAGE> 9
For the first half of the year, R&D expenditures totaled $16.9 million, which
was 1% lower than the $17.0 million reported in the comparable prior year
period. Year to date, R&D expenditures were 17% of net revenue compared with 24%
in the prior year. The decrease in R&D expenses through the first half of 1999
when compared to the same period of fiscal 1998 reflected lower software product
amortization expenses and negligible growth in compensation expenses and
overhead.
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 18% above the second quarter
of fiscal 1998, but 5% lower than the first quarter of fiscal 1999. Such
expenses represented 38%, 39% and 40% of net revenue for the second quarter of
fiscal 1999, the second quarter of fiscal 1998 and the first quarter of fiscal
1999, respectively.
Through the first six months of the year, sales and marketing expenses totaled
$37.5 million and represented 39% of net revenue. This total was 37% higher than
the comparable prior year expense, which represented 38% of net revenue. 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, which was held in the first
quarter of fiscal 1999. 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 15% above the
second quarter of the prior fiscal year and 4% higher than the first quarter of
the current fiscal year. G&A expenses represented 9%, 10% and 9% of net revenue
in the three periods, respectively. The increase in G&A expenses for the second
quarter of 1999 over the comparable prior year period reflected staff additions,
costs associated with executive recruitment and goodwill amortization associated
with the Millennium and Italian distributor acquisitions. Through the first six
months of this fiscal year, G&A expenses have totaled $8.7 million and
represented 9% of net revenue. In the comparable prior year period, G&A expenses
totaled $6.1 million and represented 8% of net revenue. The Company is investing
to strengthen its infrastructure and anticipates that aggregate G&A expenses
will increase in future quarters.
Interest income for the second quarter of 1999 was 13% above the comparable
prior year period, and 7% higher than the first quarter of the current fiscal
year. Through the first half of the current year, interest income totaled $2.3
million, up 12% from the comparable prior year period. The year-over-year
increase in interest income reflected higher average cash balances.
The Company's tax rate was 34% for both the quarter and first half of fiscal
year 1999, as compared to the 33% rate recorded for the prior fiscal year. 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 upon its tax structure,
influences behind the Company's control may cause a change in the tax rate.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $22.3 million in cash from operating activities in the
first half of 1999, primarily from income before depreciation and amortization,
and an $11.2 million decrease in accounts receivable during such period. These
factors were offset in part by a $5.1 million increase in prepaid expenses and
other assets and a $4.2 million decrease in accrued employee compensation during
such period. The increase in prepaid expenses is due primarily to costs
associated with the pending acquisition of Intersolv and prepaid licensing
royalties. The decrease in employee compensation was due to the payment of the
bonuses accrued in fiscal 1998 and paid in the current fiscal year.
The Company had $95.8 million in cash, cash equivalents and short-term
investments at July 31, 1998. This balance was $11.3 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 the acquisition of the Company's Italian distributor
and capital and software expenditures.
The Company has a GBP 5.0 million ($8.2 million at July 31, 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 July 31, 1998
were the equivalent of $1.7 million, and were incurring interest at the rate of
4.375% per annum.
During the first half of fiscal 1999, the Company spent $5.5 million for capital
and leasehold improvements largely on upgrades and expansions of its information
systems. This spending level is 4% higher than that of the comparable prior year
period. For the current fiscal 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.
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
10
<PAGE> 11
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), 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 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 fiscal 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 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 application 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, financial condition and results of
operations.
11
<PAGE> 12
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 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, financial condition and results of operations. Furthermore,
the Company anticipates that demand in the Year 2000 market will decline,
perhaps rapidly, in anticipation of or following the 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.
Rapid Technological Change; Dependence on New Products. 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
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, financial condition
and results of operations.
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
12
<PAGE> 13
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
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 one 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, financial condition and results of
operations could be adversely affected in future periods.
13
<PAGE> 14
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 United States
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 second quarter of fiscal 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
from liability for making forward-looking statements if certain cautionary
language is included along with such statements. This quarterly report contains,
and incorporates by reference, certain "forward-looking statements" (as such
term is defined under 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
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
14
<PAGE> 15
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
Not applicable.
Item 2 - Changes In Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
The 1998 Annual General Meeting of the Company was held on August 20, 1998. 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 audited financial
statements of the Company for the year ended January 31, 1998.
Resolution No. 2. Re-election of Harold Hughes, who retired by rotation,
as a director of the Company.
Resolution No. 3. Re-appointment of Martin Waters as a director of the
Company.
Resolution No. 4. Re-appointment of J. Sidney Webb, who attained the age
of 70 years on October 14, 1989, as a director of the Company.
Resolution No. 5. 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. 6. Empowerment of the directors of the Company to allot
equity securities for cash up to an aggregate nominal value of GBP
80,279 (representing 5% of the issued share capital of the Company as
at July 10, 1998), with such authority to expire (unless previously
renewed, varied or revoked by the Company in a general meeting) on the
earlier to occur of November 20, 1999 or the date of the 1999 Annual
General Meeting of the Company.
15
<PAGE> 16
The term of office of the following directors continued after the 1998 Annual
General Meeting of the Company: Paul Adams, J. Michael Gullard, Harold Hughes,
Martin Waters and J. Sidney Webb.
At the 1998 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
No exhibits are submitted herewith.
16
<PAGE> 17
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 21, 1998 By: /s/ Martin Waters
---------------------------------------
Martin Waters
President and Chief Executive Officer
