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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 July 31, 1999
MERANT plc
(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.)
As of December 14, 1999, the number of MERANT's ordinary shares outstanding was
145,831,827.
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TABLE OF CONTENTS*
------------------
PART I - FINANCIAL INFORMATION Page
Item 1 Financial statements 1
Item 2 Management's discussion and analysis of 7
financial condition and results of operations
Item 3 Quantitative and qualitative disclosures about market risk 17
PART II - OTHER INFORMATION
Item 1 Legal proceedings 17
Item 2 Changes in securities and use of proceeds 18
Item 3 Defaults upon senior securities 18
Item 4 Submission of matters to a vote of security holders 18
Item 5 Other information 18
Item 6 Exhibits 18
Signatures 19
*The item numbers in this Report of Foreign Issuer on Form 6-K correspond to
those of Form 10-Q.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income
(in thousands, except per share and per ADS data)
(unaudited)
Three months ended
July 31, July 31,
1999 1998
- --------------------------------------------------------------------------------
Net revenue
License fees $42,526 $50,726
Maintenance subscriptions 25,380 24,508
Training and consulting 19,689 20,041
- --------------------------------------------------------------------------------
Total net revenue 87,595 95,275
- --------------------------------------------------------------------------------
Cost of revenue
Cost of license fees 2,555 2,762
Cost of maintenance subscriptions 5,694 6,203
Cost of training and consulting 14,916 17,316
- --------------------------------------------------------------------------------
Total cost of revenue 23,165 26,281
- --------------------------------------------------------------------------------
Gross profit 64,430 68,994
- --------------------------------------------------------------------------------
Operating expenses
Research and development 14,492 15,480
Sales and marketing 40,830 36,076
General and administrative 7,812 7,078
- --------------------------------------------------------------------------------
Total operating expenses 63,134 58,634
- --------------------------------------------------------------------------------
Income before goodwill amortization 1,296 10,360
Goodwill amortization 978 769
- --------------------------------------------------------------------------------
Income from operations 318 9,591
Interest income, net 1,013 1,410
- --------------------------------------------------------------------------------
Income before income taxes 1,331 11,001
Income taxes (479) (3,772)
- --------------------------------------------------------------------------------
Net income $852 $7,229
- --------------------------------------------------------------------------------
Net income per share: basic $0.01 $0.05
Net income per ADS: basic $0.03 $0.26
- --------------------------------------------------------------------------------
Shares used in computing basic net income per share 143,792 137,823
Shares used in computing basic net income per ADS 28,758 27,565
- --------------------------------------------------------------------------------
Net income per share: diluted $0.01 $0.05
Net income per ADS: diluted $0.03 $0.25
- --------------------------------------------------------------------------------
Shares used in computing diluted net income per share 148,606 145,618
Shares used in computing diluted net income per ADS 29,721 29,124
- --------------------------------------------------------------------------------
Note: Each American depositary share, or ADS, represents five shares.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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Condensed Consolidated Balance Sheets
(in thousands)
July 31, April 30,
1999 1999
(unaudited) (audited)
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $103,145 $86,580
Short-term investments 20,995 34,804
Accounts receivable, net 99,819 111,317
Prepaid expenses and other assets 13,485 11,139
- --------------------------------------------------------------------------------
Total current assets 235,098 246,186
- --------------------------------------------------------------------------------
Fixed assets:
Property, plant and equipment, net 46,142 46,090
Goodwill, net 9,420 10,239
Software product assets, net 15,862 17,007
Other assets 4,545 3,560
- --------------------------------------------------------------------------------
Total assets $311,067 $323,082
- --------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Bank loans $4,360 $ 2,716
Accounts payable 10,934 12,150
Accrued employee compensation 16,665 24,352
Income taxes payable 18,805 18,325
Deferred revenue 64,261 69,155
Other current liabilities 26,477 29,869
- --------------------------------------------------------------------------------
Total current liabilities 141,502 156,567
Deferred income taxes 15,222 14,304
- --------------------------------------------------------------------------------
Total liabilities 156,724 170,871
- --------------------------------------------------------------------------------
Shareholders' equity:
Ordinary shares 4,704 4,691
Additional paid-in capital and other reserves 155,994 154,868
Treasury stock (7,453) (7,552)
Retained earnings 9,702 8,850
Accumulated other comprehensive loss (8,604) (8,646)
- --------------------------------------------------------------------------------
Total shareholders' equity 154,343 152,211
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $311,067 $323,082
- --------------------------------------------------------------------------------
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>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Three months Three months
ended ended
July 31, July 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------
Operating activities
Net income $852 $7,229
Adjustments to reconcile net income to cash provided by operations:
Depreciation of fixed assets 3,108 3,251
Amortization of software product assets and other intangibles 3,481 4,566
Changes in operating assets and liabilities (4,330) (9,351)
Other items (582) 1,398
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,652 4,970
- -----------------------------------------------------------------------------------------------------------
Investing activities
Purchases of property, plant & equipment (3,303) (2,794)
Software product assets and other intangibles (1,517) (1,919)
Acquisition of subsidiaries, net of cash balances acquired - (4,451)
Available-for-sale securities 13,809 (2,826)
- -----------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 8,989 (11,990)
- -----------------------------------------------------------------------------------------------------------
Financing activities
Issuance of ordinary shares, net of expenses 1,139 3,643
Own shares - 335
Repayment of borrowings 1,644 2,907
Repayment of capital leases - (19)
- -----------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities 2,783 6,866
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 141 (160)
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 16,565 (314)
Cash at beginning of period 86,580 86,459
- -----------------------------------------------------------------------------------------------------------
Cash at end of period $103,145 $86,145
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
MERANT plc is a United Kingdom corporation and is registered in England and
Wales. This submission on Form 6-K is furnished on a voluntary basis, because
MERANT is not required to report quarterly financial information to the SEC as a
foreign private issuer.
These condensed consolidated financial statements are stated in U.S.
dollars and are prepared under U.S. generally accepted accounting principles
(GAAP) for interim financial information. They have been prepared in accordance
with SEC instructions and should be read in conjunction with the audited
consolidated financial statements and notes for the year ended April 30, 1999,
included in MERANT's Annual Report on Form 20-F submitted to the SEC on November
2, 1999.
The financial information at July 31, 1999 and for the three-month periods
ended July 31, 1999 and 1998 is unaudited, but includes all normal, recurring
adjustments which are, in management's opinion, necessary for a fair
presentation of our results for the interim periods presented. The year-end
balance sheet at April 30, 1999 has been derived from the audited balance sheet
as of April 30, 1999, but does not include all disclosures required by U.S.
GAAP. Other information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted,
as permitted by SEC regulations. MERANT believes that the disclosures are
adequate to ensure that the information presented is not misleading.
Results for the three-month period ended July 31, 1999 are not necessarily
indicative of results that may be expected for the fiscal year ending April 30,
2000 or any future interim or full-year period.
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 April 30, 1999 are based on the audited
financial statements which have been filed with the UK Registrar of Companies.
The auditors' reports on both the U.S. and UK financial statements for that year
were unqualified.
Effective beginning the fiscal quarter ended July 31, 1999, we made two
presentational changes to our Income Statement. Revenue is analyzed between
license fee revenue, maintenance subscriptions, and training and consulting.
These new descriptions have replaced the previous descriptions of product
revenue, maintenance revenue and service revenue, respectively, and do not
represent any changes to the actual numbers presented. Also, the presentation of
operating costs has been amended, relative to previous quarters, to separately
identify amortization of goodwill, which previously was included in general and
administrative costs. Prior year data has been restated to conform to the
revised presentation. None of these presentational changes affects net income.
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2. Earnings per share
The following table discloses the numerators and denominators used in the
computation of net income per ordinary share and net income per ADS equivalent.
Each ADS represents five ordinary shares.
- --------------------------------------------------------------------------------
Three Three
months months
ended ended
July 31, July 31,
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Net income per share:
Numerator for basic and diluted net income per share:
Net income $852 $7,229
- --------------------------------------------------------------------------------
Denominator for basic net income per share:
Weighted average shares outstanding 143,792 137,823
Dilutive share options 4,814 7,795
- --------------------------------------------------------------------------------
Denominator for diluted net income per share: 148,606 145,618
- --------------------------------------------------------------------------------
Net income per ADS:
Numerator for basic and diluted net income per ADS:
Net income $852 $7,229
- --------------------------------------------------------------------------------
Denominator for basic net income per ADS:
Weighted average ADS equivalents outstanding 28,758 27,565
Dilutive share options 963 1,559
- --------------------------------------------------------------------------------
Denominator for diluted net income per ADS: 29,721 29,124
- --------------------------------------------------------------------------------
3. Comprehensive Income
MERANT's total comprehensive income was as follows:
- --------------------------------------------------------------------------------
(in thousands) Three Three
months months
ended ended
July 31, July 31,
1999 1998
- --------------------------------------------------------------------------------
Net income $852 $7,229
Currency translation adjustment 42 (1,798)
Unrealised (gain) loss on available-for-sale securities, - (5)
net of tax
- --------------------------------------------------------------------------------
Comprehensive income (loss) $894 $5,426
- --------------------------------------------------------------------------------
4. Segments
MERANT operates in four solution areas. There have been no differences
since MERANT's last annual report in the basis of measuring solution area profit
or loss, nor have there been any material changes in the amount of assets for
any solution area. Revenue and operating income for each solution area is as
shown below.
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- --------------------------------------------------------------------------------
Three Three
months months
ended ended
July 31, July 31,
1999 1998
- --------------------------------------------------------------------------------
Net revenue
Application Creation and Transformation $37,217 $48,004
Application Development Management 29,705 25,968
Enterprise Data Connectivity 10,432 12,232
Enterprise Consulting Solutions 10,241 8,547
Discontinued - 524
- --------------------------------------------------------------------------------
$87,595 $95,275
- --------------------------------------------------------------------------------
Income from operations
Application Creation and Transformation 6,285 13,068
Application Development Management 7,891 2,864
Enterprise Data Connectivity 1,386 3,352
Enterprise Consulting Solutions 1,534 1,404
Discontinued - (384)
- --------------------------------------------------------------------------------
$17,096 $20,304
- --------------------------------------------------------------------------------
The following table reconciles the combined income from operations of the
solution areas to income before income taxes:
- --------------------------------------------------------------------------------
Three months Three months
ended Ended
July 31, July 31,
1999 1998
- --------------------------------------------------------------------------------
Solution area income from operations $17,096 $20,304
Corporate non-allocated costs (16,778) (10,713)
Interest income, net 1,013 1,410
- --------------------------------------------------------------------------------
Income before income taxes $1,331 $11,001
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5. Contingent liability
In December 1998 and January 1999, seven class action securities complaints
were filed in the U.S. District Court for the Southern District of New York
against MERANT and certain of its officers and directors. The Court ordered the
seven cases consolidated, appointed lead plaintiffs and lead counsel, and
ordered the filing of a consolidated complaint, which was filed on June 9, 1999.
The lead plaintiffs seek to have the matter certified as a class action of
purchasers of the ADSs of MERANT during the period from June 17, 1998 to
November 12, 1998, including the former shareholders of INTERSOLV who acquired
ADSs in connection with the merger involving the two companies. The consolidated
complaint alleges various violations of the federal securities laws and seeks
unspecified compensatory damages for alleged failure to disclose material
nonpublic information concerning MERANT's business condition and prospects.
In June 1999, MERANT filed a motion to transfer the matter to the Northern
District of California, and the Court granted MERANT's motion in November 1999.
MERANT intends to move to dismiss the action at the appropriate time. MERANT
intends to defend all of its litigation vigorously. However, due to the inherent
uncertainties of litigation, MERANT cannot accurately predict the ultimate
outcome of the litigation. Any unfavorable outcome of litigation could have an
adverse impact on MERANT's business, financial condition and results of
operations.
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6. Subsequent events
On August 3, 1999, MERANT completed the acquisition of Essential Software,
Inc., an e-commerce professional services firm based in Raleigh, North Carolina,
which did business as The Marathon Group. The consideration for the transaction
was approximately $15 million, payable in cash. The transaction will be
accounted for using the purchase method of accounting.
On November 23, 1999, MERANT completed the acquisition of EnterpriseLink
Technology Corporation, a privately-held supplier of enterprise extension
software based in Campbell, California. The consideration for this transaction
is expected to be approximately $22 million, payable in cash. MERANT also
assumed EnterpriseLink stock options outstanding as of the closing which
converted into stock options to acquire up to approximately 516,500 MERANT
ordinary shares. It is anticipated that this transaction will be accounted for
using the purchase method of accounting.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with:
o the condensed consolidated financial statements and notes
included in this Part I; and
o the audited consolidated financial statements in U.S. format for
the fiscal year ended April 30, 1999, included in the Annual
Report on Form 20-F submitted to the SEC on November 2, 1999.
RESULTS OF OPERATIONS
Revenue
Total net revenue for the first quarter of fiscal 2000 decreased by 8% to
$87.6 million, from $95.3 million in the first quarter of fiscal 1999. Total net
revenue in the first quarter was negatively impacted by a decline in our Year
2000 business, which continued to decrease because of declining demand for our
product and services in this area.
Revenue by solution area: Our Application Development Management and
Enterprise Consulting solution areas reported significant revenue growth for the
first quarter of fiscal 2000 relative to the same quarter of fiscal 1999, but
this growth was more than offset by revenue declines in our Application Creation
and Transformation and Enterprise Data Connectivity solution areas, which have
suffered from the decrease in Year 2000 business. Enterprise Data Connectivity
declined primarily due to new revenue recognition policies adopted by the
company.
Revenue by geography: North American revenue for the first quarter of
fiscal 2000 declined by 12% relative to the comparable quarter last year and
accounted for 58% of our total revenue, compared to 61% in the first quarter of
last year. The decline in North America revenue is mainly attributable to lower
revenues from our Year 2000 remediation product offerings. International revenue
for the current quarter matched the levels achieved during the comparable period
last year, with a slight decrease through Europe offset by gains in our
Asia/Pacific region.
Revenue by product type: License fee revenue for the first quarter of
fiscal 2000 decreased by 16% relative to the comparable prior year period. This
decline is attributable to lower revenues from our Year 2000 product offerings.
Maintenance subscriptions for the quarter were up 3% from the comparable prior
year period. Training and consulting revenue, which includes our Year 2000
consulting business, was essentially unchanged from the first quarter of last
year.
There can be no assurance that the market for our products and services
will grow in future periods at their historical rates of growth, that certain
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segments of our business will not decline, or that we will be able to increase
or maintain our market share in the future or achieve our historical revenue
growth rates.
Gross Profit
For the first quarter of fiscal 2000, gross profit as a percentage of total
net revenue increased to 74%, which compares to 72% in the first quarter of the
prior year. This increase is primarily the result of improved margins in our
service business, which were 24% in the current quarter, compared to 14% in the
first quarter of last year.
Our 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 decline if we expand our consulting organization and
are unable to deploy the increased capacity to revenue generating projects. As a
result of the above factors, gross margin may be difficult to predict, and may
fluctuate from current levels in future periods.
Operating Expenses
Research and development expenses for the first quarter of fiscal 2000 were
6% lower than those reported in the first quarter of fiscal 1999, but
represented 17% of total net revenue compared to 16% in the first quarter of
fiscal 1999. Lower expenditures were due to savings made from the INTERSOLV
merger. We believe that ongoing development of new products and features is
required to maintain and enhance our competitive position. Accordingly, while we
intend to continue to control expenses where possible, we anticipate that
research and development 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 first quarter of fiscal 2000 were 13%
higher than the first quarter of fiscal 1999, and represented 47% of total net
revenue, compared to 38% for the comparable prior year period. The increase in
sales and marketing expenses reflected sales force expansion, higher
commissions, and higher advertising and marketing expenses. We believe that
continued investment in sales, marketing, customer support and promotional
activities is essential to maintaining our competitive position. In addition, we
are expanding our sales and support staffs. Accordingly, we anticipate that
sales and marketing expenses will be higher in future periods.
General and administrative expenses for the first quarter of fiscal 2000
were 10% higher than the first quarter of fiscal 1999 and represented 9% of net
revenue, compared to 7% for the comparable prior year period. The increase
reflects investments in MERANT's infrastructure. We anticipate savings in
general and administrative expenses to result from the elimination of duplicate
costs, including the consolidation of sales offices in countries which
previously had both MERANT and INTERSOLV representation. However, we are
investing to further strengthen MERANT's infrastructure and we anticipate that
general and administrative expenses will increase in future quarters.
MERANT's tax rate for the first quarter of fiscal 2000 was 36%, compared to
34% in the first quarter of fiscal 1999. The increase reflects changes in the
sources of our taxable profits among the tax jurisdictions in which we operate.
The income tax expense for the first quarter of fiscal 2000 is based on our
estimate of the effective tax rate for the full year.
Net income excluding goodwill amortization was $1.8 million in the first
quarter of fiscal 2000, compared to $8.0 million in the first quarter of the
prior year. Net income, including goodwill amortization, was $0.9 million in the
first quarter of fiscal 2000, compared to $7.2 million in the first quarter of
the prior year. Diluted earnings per ordinary share were $0.01 for the first
quarter of fiscal 2000, compared to $0.05 in the comparable prior year quarter,
and diluted earnings per ADS were $0.03 compared with $0.25 in the prior year
quarter.
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LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, cash, cash equivalents and short-term investments totaled
$124.0 million compared with $121.4 million at April 30, 1999, an increase of
$2.6 million during the quarter. Cash of $4.7 million generated from operating
activities was supplemented by other funding of $2.8 million, offset by $4.8
million which was invested in the business.
Investment in property, plant and equipment for the quarter totaled $3.3
million, compared to $2.8 million in the first quarter of last year. Investment
included costs for the upgrade and expansion of our information systems. We also
invested $1.5 million in capitalized software in the first quarter of fiscal
2000, compared to $1.9 million in the first quarter of fiscal 1999. In the first
quarter of fiscal 1999, we spent $4.5 million on the acquisition of our Italian
distributor. The combined effect of these investing activities was an outflow of
$4.8 million in the first quarter of fiscal 2000, compared to an outflow of $9.1
million in last year's first quarter.
For the first quarter of fiscal 2000, financing activities produced cash of
$1.1 million from the exercise of employee share options and $1.6 million from
the utilization of existing borrowing facilities. Equivalent figures for the
first quarter of last year were $4.0 million and $2.9 million, respectively.
MERANT has a line of credit under which unsecured financing of up to $8.0
million is available until January 2001. At July 31, 1999 borrowings totaling
$1.6 million had been made against this line of credit, compared to $2.7 million
at the beginning of the quarter.
We believe that existing balances of cash, cash equivalents and short-term
investments in combination with our available bank line of credit and leasing
facilities will be sufficient to meet our operating cash requirements.
YEAR 2000 CONSIDERATIONS
The Year 2000 problem is the result of the widespread practice since the
early days of computing of using only two digits to refer to a year (such as
"98" for "1998") instead of four digits in computer systems. When the Year 2000
arrives or the computer system refers to dates after December 31, 1999, computer
systems will interpret the two digits "00" as "1900" as opposed to "2000".
Failure to address this problem could cause results ranging from system failures
to erroneous calculations in date-dependent operations for dates falling after
December 31, 1999. MERANT has instituted various projects to become Year 2000
ready. "Year 2000 ready" as used in this report means that the performance or
functionality of our internal systems will not be significantly affected by the
dates prior to, during and after the Year 2000.
State of Readiness
MERANT has developed and implemented an enterprise-wide plan to analyze and
address potential Year 2000 issues affecting its internal systems, its
interaction with third party vendors and suppliers, and its products and
services.
We have established a Year 2000 Project Team to implement a comprehensive
Year 2000 readiness plan addressing the Year 2000 readiness of our internal
systems. This plan is comprised of four phases (inventory, analysis, remediation
and validation), and covers:
o IT systems (desktop, laptop, servers, routers, hubs, switches, and
remote access systems, operating systems, software and critical
business systems)
o non-IT embedded systems (telephone, voice messaging, teleconferencing,
data services and equipment, fax, copiers and similar equipment)
o facilities (elevators, security systems, card access systems and
similar systems)
o our vendors and suppliers
As of September 30, 1999, we substantially completed the four phases of the
plan in all material respects with respect to our material internal systems,
although we will need to continue to address internal Year 2000 readiness issues
on an ongoing basis with respect to newly-acquired systems and suppliers,
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regularly-scheduled system updates and upgrades, and internal operations. As
part of the inventory phase, we sought confirmation from our material suppliers
on the current Year 2000 readiness of their systems and/or their intended time
schedule for achieving Year 2000 readiness. We have also completed contingency
and disaster recovery plans and have prepared a detailed action plan for our
crossover into the next millennium. We will continue to review and update these
plans as appropriate.
Each of MERANT's product business units has completed a Year 2000
assessment of its currently offered software products. In preparing for the Year
2000 date change, MERANT has adopted the Year 2000 compliance standard published
by the British Standards Institute - BSI DISC PD2000-1 "A Definition of Year
2000 Conformity Requirements." As a result of this assessment, we believe that
the vast majority of our currently offered products are Year 2000 compliant, and
we expect virtually all of our remaining currently offered products to become
compliant during calendar 1999 through new releases. In any event, we expect
that all the then current versions of our offered products will be Year 2000
compliant before the end of calendar 1999. Because Year 2000 compliance is
generally integrated into our normal product development activities, we have not
incurred and do not expect to incur any significant incremental expenses in
addressing this issue in our product lines. We believe that a small number of
customers who receive product support from us are operating product versions
that may not be Year 2000 compliant or products that we have replaced or intend
to replace with comparable Year 2000 compliant products. We believe that the
vast majority of customers are migrating and will continue to migrate to
compliant versions and products through new releases, which we are strongly
encouraging. Former customers may be operating non-compliant versions of
products in respect of which our agreed-upon product support and warranty
periods have expired. We have not undertaken, and do not plan to undertake in
the future, an assessment of whether these former customers are taking
appropriate steps to address any related Year 2000 issues.
MERANT does not expect customers who license or migrate to Year 2000
compliant versions of its products to experience any material Year 2000 failures
caused by those products. We believe that our licenses and other agreements
contain customary and appropriate limitations on our obligations with respect to
any Year 2000 failures that may be caused by our current or former products.
However, there can be no assurance that our expectations and beliefs as to these
matters will prove to be accurate. Moreover, our products are used in IT systems
containing third-party hardware and software, some of which may not be Year 2000
compliant. Many of our customers use legacy computer systems that are expected
to be particularly susceptible to Year 2000 compliance issues. Various
commentators have predicted that a significant amount of litigation may arise
out of Year 2000 compliance issues. While we have not been subject to any Year
2000 product claims or lawsuits to date, there can be no assurance that
customers or former customers will not bring claims or lawsuits against us
seeking compensation for losses associated with Year 2000-related failures. A
material adverse outcome in a Year 2000 claim or lawsuit could have a material
adverse effect on our business, financial condition and results of operations.
A small number of the products we sell are licensed from third parties.
Although the current versions of these products have generally been warranted to
us as being Year 2000 compliant, they have generally not been subjected to the
same extensive testing as those products which we have developed or acquired. We
are therefore working with these third party suppliers to obtain assurance of
Year 2000 compliance.
MERANT has designated its website as our "Year 2000 Internet Website" under
the terms of the Year 2000 Information and Readiness Disclosure Act (S.2392).
The information provided on past and present pages on this website regarding the
Year 2000 compliance of our products has been designated as "Year 2000 Readiness
Disclosures." The pages on this website have been and will continue to be our
primary means for communicating to customers regarding the Year 2000 compliance
of our products.
Demand for Year 2000 Remediation Products and Services
We anticipate that demand in the Year 2000 product and service market will
continue to decline, perhaps rapidly, in anticipation of or following the Year
2000. The demand for our Year 2000 compliance products and services may also
decline significantly as a result of new technologies, competition or other
factors. In the quarter ended October 31, 1998, our Year 2000 business was
affected by customers moving to the later stages of their remediation processes,
for which we did not have the appropriate products generally available until
November 1998. If these factors were to continue, our license revenue and
professional service fees could be materially and adversely affected.
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Costs and Risks Associated with Year 2000 Issues; Contingency Plans
MERANT currently does not expect to incur material operating expenses or be
required to invest heavily in internal system improvements as a result of Year
2000 readiness issues. In addition, we have not incurred and do not currently
expect to incur any significant incremental expenses in addressing this issue in
our product and services. We do not expect total expenditures related to the
Year 2000 readiness of our internal systems, excluding personnel costs of
existing staff, to be material. However, there can be no assurance that we will
not experience significant additional expenses for unforeseen Year 2000 issues,
including those out of our reasonable control.
Although we believe that our Year 2000 readiness efforts are designed to
appropriately identify and address those Year 2000 issues that are within our
control, there can be no assurance that our efforts will be fully effective or
that Year 2000 issues will not have a material adverse effect on our business,
financial condition or results of operations. The novelty and complexity of the
issues presented and our dependence on the preparedness of third parties are
among the factors that could cause our efforts to be less than fully effective.
Moreover, Year 2000 issues present many risks that are simply beyond our
control, such as the potential effects of Year 2000 issues on the economy in
general and on our business partners and customers in particular. We intend to
continue to evaluate both existing and newly identified Year 2000 risks and to
develop and implement such further responsive measures as we deem appropriate.
MERANT has developed a contingency plan and a disaster recovery plan, as
well as an action plan for our crossover into the next millennium. These plans
seek to minimize the impact of the Year 2000 problem on our business, financial
condition and results of operations. We will continue to review and update these
plans as appropriate.
EURO CONSIDERATIONS
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the euro as their legal currency. On that date, the
participating countries established fixed euro conversion rates between their
existing sovereign currencies and the euro. The euro now trades on currency
exchanges and is available for non-cash transactions. As of May 1, 1999,
MERANT's internal systems have the ability to price and invoice customers in the
euro. We are also engaging in foreign exchange and hedging activities in the
euro. We will continue to modify the internal systems that will be affected by
this conversion during fiscal 2000, and do not expect the costs of further
system modifications to be material. There can be no assurance, however, that we
will be able to complete such modifications to comply with euro requirements,
which could have a material adverse effect on our business, financial condition
and results of operations. We will continue to evaluate the impact of the euro's
introduction on our foreign exchange and hedging activities, functional currency
designations and pricing strategies in the new economic environment. In
addition, we face risks to the extent that banks, vendors and suppliers upon
whom we rely are unable to make appropriate modifications to support our
operations with respect to euro transactions. While we will continue to evaluate
the impact of the euro, management does not believe its introduction will have a
material adverse effect upon our business, financial condition or results of
operations.
FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS
MERANT operates in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. This section of the discussion
highlights some of these risks and their possible impact on future results of
operations.
The factors discussed below as well as statements made elsewhere in this
quarterly report contain forward-looking statements that are based on the
beliefs of MERANT's management, as well as assumptions made by, and information
currently available to it. Our actual results, performance or achievements in
fiscal 2000 and beyond could differ materially from those expressed in, or
implied by, these forward-looking statements. Factors that could cause or
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contribute to material differences include, but are not limited to, those
discussed in this section and elsewhere in this quarterly report. MERANT
undertakes no obligation to release publicly any updates or revisions to any
forward-looking statements contained in this quarterly report that may reflect
events or circumstances occurring after the date of this quarterly report. For
more information on forward-looking statements, see "Forward Looking Statements"
below in this Part I, Item 2.
MERANT's operating results may fluctuate, and any fluctuations could adversely
affect the price of MERANT securities
Our future operating results are subject to quarterly and annual
fluctuations. If we fail to meet the expectations of securities analysts and
investors as a result of any future fluctuations in our quarterly operating
results, the market price of MERANT securities would likely decrease. We expect
that our results may fluctuate in the future due to a variety of factors,
including:
o demand for our products,
o the size and timing of customer orders and the lengthy sales cycle,
o product life cycles,
o our ability to introduce and market new and enhanced versions of our
products on a timely basis,
o the introduction and acceptance of new products and product
enhancements by us or by our competitors,
o customer order deferrals in anticipation of new or enhanced products
or technologies,
o the timing of product introductions or enhancements by us or by our
competitors,
o technological changes in the software industry,
o changes in the mix of distribution channels through which our products
are offered,
o purchasing patterns of distributors and retailers, including customer
budgeting cycles,
o the quality of products sold,
o price and other competitive conditions in the industry,
o changes in our level of operating expenses,
o changes in our sales incentive plans,
o our ability to acquire and effectively integrate companies and
solutions,
o the cancellation of licenses during the warranty period,
o non-renewal of maintenance agreements,
o the effects of extended payment terms (particularly for international
customers),
o economic conditions generally or in various geographic areas, and
o other factors discussed in this section.
MERANT's insignificant backlog and long sales cycle combined with costs that are
fixed, make it difficult for us to predict future revenue and compensate for a
revenue shortfall
Historically, we have operated with little product backlog, because we
generally ship our products when we receive an order. As a result, our product
revenue in any quarter will depend on the volume and timing of orders received
in that quarter, and our ability to fill those orders. In addition, the purchase
process of our customers typically ranges from a few weeks to several months or
longer from initial inquiry to order, which makes it difficult to predict the
timing of sales and license fees. Because our staffing and operating expenses
are based on anticipated revenue levels, and because a high percentage of our
costs is fixed in the short term and does not vary with revenue, small
variations between anticipated orders and actual orders, as well as
non-recurring or large orders, can cause disproportionate variations in our
operating results from quarter to quarter. As a result, and due to the typical
size of customers' orders, our quarterly operating results and cash flow would
suffer from a lost or delayed sale. Moreover, if significant sales occur earlier
than expected, operating results for later quarters may suffer.
MERANT's revenue could decline if customers defer spending until after turn of
the century
Many of our existing and potential customers could implement policies that
prohibit or strongly discourage making changes or additions to their internal
computer systems prior to or shortly after the turn of the millennium. If
existing or potential customers delay purchasing products and services as a
result of Year 2000 issues, we could experience lower revenues until customers
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resume more normal buying patterns. We anticipate that demand in the Year 2000
product and service market will continue to decline, perhaps rapidly, in
anticipation of or shortly following the Year 2000. We also anticipate that
demand for our Year 2000 compliance products and services may decline
significantly as a result of new technologies, competition or other factors.
Seasonality can cause MERANT's operating results to fluctuate
Our 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, we have historically experienced lower revenue for the
first quarter of a fiscal year than in the fourth quarter of the prior fiscal
year. We typically recognize a high proportion of quarterly revenue during the
last month of a fiscal quarter and significant fluctuations in new order revenue
can occur due to the timing of customer orders. Quarterly results therefore can
vary to the extent that sales for a quarter are delayed, particularly since a
relatively high proportion of our expenses do not vary with revenue.
MERANT's revenue could decline if there is a decline in the demand for or use of
the COBOL language or mainframe computers
A substantial portion of our revenue is derived from products and related
services for mainframe application development in the COBOL language and for
COBOL compilers running on workstations and personal computers. We expect that a
substantial portion of our revenue will continue to be derived from these
products and services in the future. As a result, our future operating results
depend upon continued demand for, and market acceptance and use of, the COBOL
language. Any decline in that market as a result of competition, technological
change or other factors could cause our revenues to decline.
If MERANT fails to address Year 2000 issues adequately, it may lose revenue or
incur significant additional costs
Our products are used in IT systems containing third-party hardware and
software, some of which may not be Year 2000 compliant. Many of our customers
use legacy computer systems that are expected to be particularly susceptible to
Year 2000 compliance issues. Various commentators have predicted that a
significant amount of litigation may arise out of Year 2000 compliance issues.
Customers or former customers may bring claims or lawsuits against us seeking
compensation for losses allegedly associated with Year 2000-related failures.
Although we believe that our Year 2000 readiness efforts are designed to
appropriately identify and address those Year 2000 issues that are within our
control, our efforts may not be fully effective. The novelty and complexity of
the issues presented and our dependence on the preparedness of third parties are
among the factors that could cause our efforts to be less than fully effective.
Moreover, Year 2000 issues present many risks that are beyond our control, such
as the potential effects on the economy in general and on our business partners
and customers in particular. In addition, we may experience significant
additional expenses for unforeseen Year 2000 issues, including those out of our
reasonable control.
If our new products or product enhancements fail to achieve customer acceptance,
or if we fail to manage product transitions, our business reputation and
financial performance would suffer
MERANT is in a market that is subject to rapid technological change. We
must continually adapt to that change by improving our products and introducing
new products, technologies and services. Our growth and financial performance
will depend in part on our ability to develop and introduce enhancements of
existing products and new products that accommodate the latest technological
advances and standards, customer requirements and market conditions on a timely
and cost-effective basis. This depends in part on our ability to attract and
retain qualified employees. In the past, we have experienced delays and
increased expenses in developing new products. We may not be successful in
marketing, on a timely basis or at all, competitive products, product
enhancements and new products that respond to technological change, changes in
customer requirements and emerging industry standards.
Product defects can be expensive to fix and can cause MERANT to lose customers
Software products as complex as those we offer may contain undetected
errors or failures when first introduced or as new versions are released.
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Despite our testing, as well as testing and use by current and potential
customers, errors might be found in new products after commencement of
commercial shipments. The occurrence of errors could result in loss of or delay
in market acceptance of our products.
Protection of our intellectual property is limited, which may affect MERANT's
competitive position
Our success depends upon our proprietary software technology. Despite the
precautions we take to protect our proprietary rights, it may be possible for a
third party to copy or otherwise obtain and use our products or technology
without authorization, or to develop similar technology independently. Policing
unauthorized use of our products is difficult, and while we are unable to
determine the extent to which software piracy of our products exists, software
piracy can be expected to be a persistent problem. In addition, effective
protection of intellectual property rights may be unavailable or limited in some
foreign countries. Patents have been granted on fundamental technologies in
software, and patents may issue that relate to fundamental technologies
incorporated into our products.
Our products may infringe the intellectual property rights of third parties,
which may result in lawsuits and prevent MERANT from selling our products
There are currently no material notices or pending claims that our
products, trademarks or other proprietary rights infringe the proprietary rights
of third parties. However, third parties could assert infringement claims
against us in the future. If it is necessary or desirable, we may seek licenses
under disputed third party intellectual property rights. However, these licenses
may not be available on reasonable commercial terms, if at all. The failure to
obtain a license from a third party for technology that we use could cause us to
incur substantial liabilities and to suspend the production and sale of certain
products. With regard to those technologies that we license from third parties,
we must rely upon those third parties for information on the ownership of the
licensed technologies. As a result, our exposure to infringement claims may
increase. We generally obtain representations as to the ownership of licensed
technology and indemnification to cover any breach of these representations.
However, representations may not be accurate and indemnification may not provide
adequate compensation or protection for breach of the representations.
In addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish their validity.
Litigation to determine the validity of any claims could result in significant
expense and divert the efforts of our technical and management personnel from
operating activities, whether or not the litigation is determined in our favor.
In the event of an adverse ruling in any litigation, we may be required to pay
substantial damages, to discontinue the use and sale of infringing products, to
expend significant resources to develop non-infringing technology or to obtain
licenses to the infringed technology. Our failure to develop or license a
substitute technology could prevent us from selling our products. As the number
of software products in the industry increases and the functionality of these
products further overlaps, we believe that software developers may become
increasingly subject to infringement claims. Any claims against us, with or
without merit, as well as claims we initiate against third parties, can be time
consuming and expensive to defend or prosecute and to resolve.
Competition can lead to pricing pressures and loss of market share
Rapid technological change and aggressive competition characterize the
markets in which we compete. We expect competition to increase in the future
from existing competitors and from other companies that may enter our existing
or future markets with similar or substitute solutions that may be less costly
or provide better performance or functionality than our products. Some of our
current and prospective competitors have greater financial, marketing or
technical resources 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 we can. Other companies may 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 with technological,
marketing or other competitive advantages may emerge and rapidly acquire market
share. Furthermore, we may not be able to compete effectively in the future in
the professional services market. If price competition increases significantly,
competitive pressures could cause us to reduce the prices of our products and
services, which would result in reduced profit margins and could harm our
ability to provide adequate service to our customers.
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International sales account for a significant portion of our total revenue,
which exposes MERANT to the business and economic risks of global operations
In fiscal years 1999, 1998 and 1997, sales to customers outside of the
United States represented approximately 40%, 35% and 37%, respectively, of our
revenue. We intend to continue to expand our operations outside of the United
States and enter additional international markets, and commit significant time
and resources to developing international sales and support channels. The risks
inherent in conducting international business generally include:
o exposure to exchange rate fluctuations
o longer payment cycles
o greater difficulties in accounts receivable collection and enforcing
agreements
o tariffs and other restrictions on foreign trade
o U.S. export requirements
o economic and political instability
o withholding and other tax consequences
o restrictions on repatriation of earnings
o the burdens of complying with a wide variety of foreign laws
o general economic conditions.
If we lose key personnel or are unable to hire additional qualified personnel as
necessary, we may not be able to manage our business successfully or sell our
products
Several of our senior management personnel are relatively new to MERANT and
our success will depend in part on the successful assimilation and performance
of these individuals. Competition for qualified personnel in the software
industry is intense, and we may not be able to attract and retain a sufficient
number of qualified personnel to conduct our business in the future. Our success
depends to a significant degree upon the continued contributions of our key
management, marketing, product development, professional services and
operational personnel, including key personnel of acquired companies. We do not
have employment agreements with most of our key personnel to ensure their
continued employment, and we do not maintain key person life insurance on any of
these persons.
If MERANT were unable to manage growth effectively, our operations would be
disrupted
MERANT has recently experienced a period of rapid growth, which has placed
a significant strain on our financial, management, operational and other
resources. If this rapid growth is maintained, these strains will continue. Our
management, personnel, systems, procedures and controls may not be adequate to
support existing and future operations.
Market volatility may cause the price of our securities to decline
The market price of MERANT's securities has experienced significant price
volatility, particularly since the announcement in June 1998 of the merger with
INTERSOLV, and volatility may occur in the future. Factors that may have a
significant impact on the market price of our securities include:
o actual or anticipated fluctuations in our operating results,
o changes in financial estimates by securities analysts,
o announcements of technological innovations,
o new products or new contracts by us or by our competitors,
o developments with respect to patents, copyrights or proprietary
rights,
o conditions and trends in the software and other technology industries,
o adoption of new accounting standards affecting the software industry,
and
o general market conditions.
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 cause the market price of our securities to
be volatile.
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If we engage in future business combinations, we may fail to integrate acquired
businesses effectively, which could disrupt our ongoing business and generate
negative publicity
We have completed a number of business combinations in recent years, most
recently the merger with INTERSOLV in September 1998, and the acquisitions of
Essential Software, Inc. in August 1999 and EnterpriseLink Technology
Corporation in November 1999. We may complete additional acquisitions in the
future. The process of integrating an acquired company's business into our
operations may result in unforeseen operating difficulties and expenditures. It
may also absorb significant management attention that would otherwise be
available for the ongoing development and operation of our business. Moreover,
the anticipated benefits of an acquisition might not be realized. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurring of debt and contingent liabilities, and amortization
provisions related to goodwill and other intangible assets. In addition,
acquisitions involve numerous risks, including:
o difficulties in the assimilation of the operations, technologies and
products of the acquired companies,
o difficulties in managing diverse geographic sales and research and
development operations,
o the diversion of management attention from other business concerns,
o risks of entering markets in which we have no or limited direct prior
experience, and
o the potential loss of key employees of MERANT or the acquired company.
The rights of MERANT's shareholders may differ from the shareholder rights of a
U.S. corporation
The right of shareholders and, therefore, certain of the rights of holders
of ADRs, are governed by English law, including the Companies Act 1985, and by
MERANT's Memorandum and Articles of Association. These rights differ in many
respects from the rights of shareholders in typical U.S. corporations.
U.S. judgments may not be enforceable against MERANT
MERANT is a public limited company organized under the laws of England and
Wales. Judgments of U.S. courts, including judgments against MERANT, predicated
on the civil liability provisions of the federal securities laws of the United
States, may not be enforceable in English courts.
Exchange rate fluctuations can cause our operating results to fluctuate
The majority of our revenue arises in U.S. dollars, while our costs are
incurred approximately equally in U.S. dollars and other currencies,
predominantly G.B. pounds. Consequently, fluctuations in exchange rates,
particularly between the U.S. dollar and the G.B. pound, may have a significant
impact on our operating results, notably when expressed in G.B. pounds. During
the current fiscal quarter, fluctuations between the U.S. dollar and the G.B.
pound were not significant, and net exchange rate gains or losses on operational
transactions were not material.
Forward-Looking Statements
This quarterly report contains forward-looking statements that are based on
the beliefs of MERANT's management, as well as assumptions made by and
information currently available to it. Forward-looking statements are subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995,
which provides that MERANT can be exempt from liability for making
forward-looking statements if cautionary language is included with the
statements. When used in this report, words such as anticipate, believe,
estimate, expect, intend and similar expressions, are intended to identify
forward-looking statements. In addition, statements concerning future matters
and other statements that are not historical are forward-looking statements.
These might include:
o the features, benefits and advantages of our products and services
o the development of new products, enhancements or technologies
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o business and sales strategies
o developments in our target markets
o matters relating to distribution channels, proprietary rights,
acquisitions, facilities needs, competition, litigation and our Year
2000 readiness
o future gross margins and operating expense levels
o capital needs
These statements reflect the current views of MERANT or its management with
respect to future events and are subject to risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, our actual results, performance
or achievements in fiscal 2000 and beyond could differ materially from those
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to material differences include, but are not limited
to, those discussed above in this Part I, Item 2 under the heading "Factors That
May Influence Future Operating Results", as well as those discussed elsewhere in
this quarterly report. You should not regard the inclusion of forward-looking
information as a representation by us or any other person that the future
events, plans or expectations contemplated by us will be achieved. MERANT
undertakes no obligation to release publicly any updates or revisions to any
forward-looking statements contained in this quarterly report that may reflect
events or circumstances occurring after the date of this quarterly report.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MERANT is exposed to financial market risks, including interest rates and
foreign currency exchange rates. We do not use derivative financial instruments
for speculative purposes.
The primary objective of our investment policy is to preserve principal
while maximizing yield without significantly increasing risk. At July 31, 1999
the fair value of our financial instruments with exposure to interest rate risk
was $21 million. A hypothetical 50 basis point increase in interest rates would
result in an approximate $105,000 decrease in the fair value of our securities.
This sensitivity analysis is performed on our financial positions at July 31,
1999 and actual results may differ materially from this analysis.
MERANT is exposed to the effects of foreign currency exchange rate
fluctuations, particularly, but not exclusively, between the U.S. dollar and
G.B. pounds sterling. We have established a hedging program utilizing foreign
currency forward contracts to hedge the value of assets and liabilities recorded
in foreign currencies against fluctuations in exchange rates. The foreign
exchange forward contracts used are non-leveraged, over-the-counter instruments
that involve little complexity, and which substantially have maturities of sixty
days or less. No foreign exchange forward contracts were outstanding at July 31,
1999.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In December 1998 and January 1999, seven class action securities complaints
were filed in the U.S. District Court for the Southern District of New York
against MERANT and certain of its officers and directors. The Court ordered the
seven cases consolidated, appointed lead plaintiffs and lead counsel, and
ordered the filing of a consolidated complaint, which was filed on June 9, 1999.
The lead plaintiffs seek to have the matter certified as a class action of
purchasers of the ADSs of MERANT during the period from June 17, 1998 to
November 12, 1998, including the former shareholders of INTERSOLV who acquired
ADSs in connection with the merger involving the two companies. The consolidated
complaint alleges various violations of the federal securities laws and seeks
unspecified compensatory damages for alleged failure to disclose material
nonpublic information concerning MERANT's business condition and prospects.
In June 1999, MERANT filed a motion to transfer the matter to the Northern
District of California, and the Court granted MERANT's motion in November 1999.
MERANT intends to move to dismiss the action at the appropriate time. MERANT
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intends to defend all of its litigation vigorously. However, due to the inherent
uncertainties of litigation, MERANT cannot accurately predict the ultimate
outcome of the litigation. Any unfavorable outcome of litigation could have an
adverse impact on MERANT's business, financial condition and results of
operations.
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
None.
Item 5 - Other Information
Effective September 16, 1999, Martin Waters resigned as a director of
MERANT plc.
Item 6 - Exhibits
No exhibits are submitted with this quarterly report.
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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.
MERANT plc
(Registrant)
Date: December 15, 1999 By: /s/ Kenneth A. Sexton
--------------------------------------
Kenneth A. Sexton
Senior Vice President, Chief Financial
Officer and Secretary
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