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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 October 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*
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PART I - FINANCIAL INFORMATION Page
----
Item 1 Financial statements 1
Item 2 Management's discussion and analysis of
financial condition and results of operations 7
Item 3 Quantitative and qualitative disclosures about
market risk 17
PART II - OTHER INFORMATION
Item 1 Legal proceedings 18
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 19
Item 6 Exhibits 19
Signatures 20
*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)
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Net revenue
License fees $46,542 $42,878 $89,068 $93,604
Maintenance subscriptions 26,639 25,203 52,019 49,711
Training and consulting 18,986 19,078 38,675 39,119
- -------------------------------------------------------------------------------------------------------------------
Total net revenue 92,167 87,159 179,762 182,434
- -------------------------------------------------------------------------------------------------------------------
Cost of revenue
Cost of license fees 2,273 2,942 4,828 5,704
Cost of maintenance subscriptions 6,010 6,427 11,704 12,630
Cost of training and consulting 14,731 16,517 29,647 33,833
- -------------------------------------------------------------------------------------------------------------------
Total cost of revenue 23,014 25,886 46,179 52,167
- -------------------------------------------------------------------------------------------------------------------
Gross profit 69,153 61,273 133,583 130,267
- -------------------------------------------------------------------------------------------------------------------
Operating expenses
Research and development 15,417 15,249 29,909 30,729
Sales and marketing 39,268 37,722 80,098 73,798
General and administrative 6,807 7,398 14,619 14,476
One time charges - 49,662 - 49,662
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 61,492 110,031 124,626 168,665
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before goodwill amortization 7,661 (48,758) 8,957 (38,398)
Goodwill amortization 1,746 739 2,724 1,508
- -------------------------------------------------------------------------------------------------------------------
Income from operations 5,915 (49,497) 6,233 (39,906)
Interest income, net 778 1,619 1,791 3,029
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 6,693 (47,878) 8,024 (36,877)
Income taxes (2,410) 5,574 (2,889) 1,802
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $4,283 ($42,304) $5,135 ($35,075)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) per share: basic $0.03 ($0.29) $0.04 ($0.25)
Net income (loss) per ADS: basic $0.15 ($1.47) $0.18 ($1.23)
- -------------------------------------------------------------------------------------------------------------------
Shares used in computing basic net income (loss) per share 144,220 143,642 144,006 143,130
Shares used in computing basic net income (loss) per ADS 28,844 28,728 28,801 28,626
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) per share: diluted $0.03 ($0.29) $0.03 ($0.25)
Net income (loss) per ADS: diluted $0.14 ($1.47) $0.17 ($1.23)
- -------------------------------------------------------------------------------------------------------------------
Shares used in computing diluted net income (loss) per share 150,554 143,642 149,580 143,130
Shares used in computing diluted net income (loss) per ADS 30,111 28,728 29,916 28,626
- -------------------------------------------------------------------------------------------------------------------
Note: Each American Depositary Share, or ADS, represents five ordinary shares.
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
1
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Condensed Consolidated Balance Sheets
(in thousands)
- --------------------------------------------------------------------------------
October 31, April 30,
1999 1999
(unaudited) (audited)
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $86,666 $86,580
Short-term investments 24,949 34,804
Accounts receivable,
net 98,784 111,317
Prepaid expenses and other assets 11,549 13,485
- --------------------------------------------------------------------------------
Total current assets 221,948 246,186
- --------------------------------------------------------------------------------
Fixed assets:
Property, plant and equipment, net 48,726 46,090
Goodwill, net 23,945 10,239
Software product assets, net 14,979 17,007
Other assets 3,134 3,560
- --------------------------------------------------------------------------------
Total assets $312,732 $323,082
- --------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Borrowings $1,520 $2,716
Accounts payable 8,942 12,150
Accrued employee compensation 19,536 24,352
Income taxes payable 18,369 18,325
Deferred revenue 59,710 69,155
Other current 24,166 29,869
- --------------------------------------------------------------------------------
Total current liabilities 132,243 156,567
Deferred income taxes 16,625 14,304
- --------------------------------------------------------------------------------
Total liabilities 148,868 170,871
- --------------------------------------------------------------------------------
Shareholders' equity:
Ordinary shares 4,715 4,691
Additional paid-in capital and other reserves 157,017 154,868
Treasury stock (7,393) (7,552)
Retained earnings 13,985 8,850
Accumulated other comprehensive loss (4,460) (8,646)
- --------------------------------------------------------------------------------
Total shareholders' equity 163,864 152,211
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $312,732 $323,082
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Six months Six months
ended ended
October 31, October 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $5,135 ($35,075)
Adjustments to reconcile net income (loss) to cash
provided
by operations:
Depreciation of fixed assets 5,000 5,084
Amortization of software product assets and other intangibles 8,796 8,657
Changes in operating assets and liabilities (7,329) 30,601
Other items 3,129 6,047
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,731 15,314
- ----------------------------------------------------------------------------------------------------------------
Investing activities
Purchases of property, plant & equipment (7,636) (4,803)
Software product assets and other intangibles (4,044) (4,799)
Acquisition of subsidiaries, net of cash balances acquired (14,978) (7,082)
Available-for-sale securities 9,855 (5,461)
Disposals of property, plant & equipment - (13)
Other items 426 -
- ----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (16,377) (22,158)
- ----------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of ordinary shares, net of expenses 2,173 4,824
Own shares 159 335
Repayment of borrowings (1,196) (1,417)
Repayment of capital leases - (19)
- ----------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities 1,136 3,723
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 596 (82)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 86 (3,203)
Cash at beginning of period 86,580 86,459
- ----------------------------------------------------------------------------------------------------------------
Cash at end of period $86,666 $83,256
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
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Notes to 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:
o the audited consolidated financial statements and notes for the year
ended April 30, 1999, included in the Annual Report on Form 20-F
submitted to the SEC on November 2, 1999, and
o the condensed consolidated financial statements and notes for the
quarter ended July 31, 1999, included in the quarterly report on Form
6-K submitted to the SEC on December [xx], 1999.
The financial information at October 31, 1999 and for the three-month and
six-month periods ended October 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 and six-month periods ended October 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 the first quarter of fiscal 2000, 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 was amended to separately identify amortization of goodwill, which
previously had been 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.
2. Business combinations
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 has been
accounted for using the purchase method of accounting. Essential Software's
revenue and net income, which have been included in MERANT's results for the
quarter, are not material.
4
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Subsequent to the end of the quarter, 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.
3. Earnings per share
The following table discloses the numerators and denominators used in the
computation of net income (loss) per ordinary share and net income (loss) per
ADS equivalent. Each ADS represents five ordinary shares.
<TABLE>
<S> <C> <C> <C> <C>
(in thousands)
- ----------------------------------------------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Numerator for basic and diluted net income (loss) per share:
Net income (loss) $4,283 ($42,304) $5,135 ($35,075)
- ----------------------------------------------------------------------------------------------------------------
Denominator for basic net income (loss) per share:
Weighted average shares outstanding 144,220 143,642 144,006 143,130
Dilutive share options 6,334 - 5,574 -
- ----------------------------------------------------------------------------------------------------------------
Denominator for diluted net income (loss) per share: 150,554 143,642 149,580 143,130
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) per ADS:
Numerator for basic and diluted net income (loss) per ADS:
Net income (loss) $4,283 ($42,304) $5,135 ($35,075)
- ----------------------------------------------------------------------------------------------------------------
Denominator for basic net income (loss) per ADS:
Weighted average ADS equivalents outstanding 28,844 28,728 28,801 28,626
Dilutive share options 1,267 - 1,115 -
- ----------------------------------------------------------------------------------------------------------------
Denominator for diluted net income (loss) per ADS: 30,111 28,728 29,916 28,626
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
4. Comprehensive Income
MERANT's total comprehensive income was as follows:
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
(in thousands) Three Three Six Six
months months months months
ended ended ended ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $4,283 ($42,304) $5,135 ($35,075)
Currency translation adjustment 3,915 6,380 3,957 4,582
Unrealised loss (gain) on available-for-sale securities, net 229 (23) 229 (28)
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $8,427 ($35,947) $9,321 ($30,521)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
5. 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.
5
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<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Net revenue
Application Creation and Transformation $41,695 $42,964 $78,912 $90,968
Application Development Management 29,725 26,336 59,430 52,304
Enterprise Data Connectivity 11,295 9,344 21,727 21,576
Enterprise Consulting Solutions 9,452 7,556 19,693 16,103
Discontinued - 959 - 1,483
- ---------------------------------------------------------------------------------------------------------------
$92,167 $87,159 $179,762 $182,434
- ---------------------------------------------------------------------------------------------------------------
Income from operations
Application Creation and Transformation $9,942 $7,087 $16,227 $20,155
Application Development Management 6,923 3,391 14,814 6,255
Enterprise Data Connectivity 2,727 392 4,113 3,744
Enterprise Consulting Solutions 696 (2,277) 2,230 (873)
Discontinued - 950 566
- ---------------------------------------------------------------------------------------------------------------
$20,288 $9,543 $37,384 $29,847
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reconciles the combined income from operations of the
reported solution areas to income (loss) before income taxes:
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
October October October October
31, 31, 31, 31,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Solution area income from operations $20,288 $9,543 $37,384 $29,847
Corporate non-allocated costs (14,373) (9,378) (31,151) (20,091)
Non-recurring charges - (49,662) - (49,662)
Interest income, net 778 1,619 1,791 3,029
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $6,693 ($47,878) $8,024 ($36,877)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
6. 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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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;
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; and
o the condensed consolidated financial statements and notes for the
quarter ended July 31, 1999 included in the quarterly report on Form
6-K submitted to the SEC on December 15, 1999.
RESULTS OF OPERATIONS
Revenue - Second fiscal quarter
Total net revenue for the second quarter of fiscal 2000 rose to $92.2
million, an increase of 6% relative to the second quarter of fiscal 1999.
Excluding net revenue from Year 2000 products and services, total net revenue
increased by 16% over the comparable prior year period.
Revenue by solution area: Our Application Development Management,
Enterprise Consulting Solutions and Enterprise Data Connectivity solution areas
all reported significant growth for the second quarter of fiscal 2000 relative
to the same quarter of fiscal 1999. Our Application Creation and Transformation
solution area was relatively flat, reflecting the decrease in demand for Year
2000 products and services. Revenues from Year 2000 products and services
represented 8% of total revenue for the second quarter of fiscal 2000, down from
17% in the comparable prior year quarter.
Revenue by geography: North American revenue for the second quarter of
fiscal 2000 was level with that of the prior fiscal year. Increases in most
areas of our business were offset by a decline in revenue from our Year 2000
remediation products and services. International revenue for the current quarter
increased by 15% relative to one year ago. Significant growth in European
markets in this quarter has been partially offset by weakness in our Asia
Pacific region.
Revenue by product type: License fee revenue for the second quarter of
fiscal 2000 increased by 8% over the comparable prior year period, and by 9%
over the first quarter. Excluding the decline in Year 2000 revenue, license fee
revenue increased 24% over last year's second quarter. Maintenance subscriptions
for the second quarter of fiscal 2000 were up 7% from the comparable prior year
period. Training and consulting, which includes our Year 2000 consulting
business, was essentially unchanged from the second quarter of fiscal 1999.
Revenue - First six months
Total net revenue for the first six months of fiscal 2000 was $179.8
million, a decrease of 1% compared to the first six months of fiscal 1999.
Revenue by solution area: Each of our solution areas, except Application
Creation and Transformation (or "ACT"), reported revenue increases in the first
six months of fiscal 2000. The decrease in ACT is principally attributable to
the decline in revenue generated by our Year 2000 products and services, which
represented 9% of total net revenue, down from 17% for the first six months of
last year.
Revenue by geography: North American net revenue for the first six months
of fiscal 2000 was 6% lower than the comparable prior year period and accounted
for 57% of MERANT's total net revenue, compared to 60% of total net revenue in
the first six months of last year. The decline in North America revenue is
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mainly attributable to lower revenues from our Year 2000 remediation product
offerings. International revenue grew by 6%, with particularly strong growth
reported in Europe.
Revenue by product type: License fee revenue was 5% lower than in the first
six months of fiscal 1999. Maintenance subscriptions increased 5%, and training
and consulting revenue was static.
There can be no assurance that the market for MERANT's products and
services will continue to grow as it has in the past, or that MERANT will be
able to increase or maintain its share of that market in the future or achieve
its own historical rates of revenue growth.
Gross Profit
For the second quarter of fiscal 2000, gross profit as a percentage of
total net revenue increased to 75%, compared to 70% reported in the comparable
quarter of fiscal 1999. Through the first six months of fiscal 2000, MERANT's
gross profit margin was 74% compared with 71% for the first six months of fiscal
1999. As anticipated, operating margins improved as we began to realize the full
cost savings from our merger consolidation program.
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 second quarter of fiscal 2000
were 1% higher than those reported in the second quarter of fiscal 1999 and
represented a constant 17% of total net revenue. For the first half of fiscal
2000, research and development expenses were 3% lower than those recorded in the
first half of fiscal 1999. The essentially unchanged levels of expenditure
relative to the comparable prior year period was due to savings made from the
INTERSOLV merger and negligible growth in compensation expenses and overhead. 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 quarter ended October 31, 1999 were 4%
higher than the second quarter of fiscal 1999. For the first six months of the
current year, sales and marketing expenses were 9% higher than the comparable
prior year period, and represented 45% of net revenue, compared to 40% one year
ago. 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 quarter ended October 31, 1999
were 8% lower than the second quarter of fiscal 1999. Savings have been created
by the elimination of duplicate costs, including the consolidation of sales
offices in countries which previously had both MERANT and INTERSOLV
representation. We are investing to strengthen MERANT's infrastructure and we
anticipate that general and administrative expenses will increase in future
quarters.
Charges for the amortization of goodwill have increased, relative to the
prior year, to $2.7 million for the first six months of fiscal 2000, compared
with $1.5 million for the first six months of fiscal 1999. The current charge
for amortization includes appropriate provisions against the goodwill which
arose on the acquisitions of our Australian distributor in August 1998, and
Essential Software, Inc in August, 1999. Amortization charges are expected to
rise in the second half of the current year as a result of fiscal 2000
acquisitions, including the EnterpriseLink transaction completed in November
1999.
8
<PAGE> 11
Income
Pre-tax income in the second quarter of fiscal 2000 was $6.7 million. In
the quarter ended October 31, 1998, MERANT reported a non-recurring charge of
$49.7 million for costs in connection with the INTERSOLV merger. MERANT's tax
rate for the first six months of fiscal 2000 was 36%. In the prior year, the tax
rate for the first six months was 11%, a rate significantly distorted by the
inclusion of the non-recurring merger costs. Excluding those non-recurring
charges, the tax rate in the prior year was 37%. The income tax expense is based
on our estimate of the effective tax rate for the full year.
Net income in the second quarter of fiscal 2000 (excluding goodwill
amortization and one time charges) was $6.0 million, compared to $1.9 million in
the second quarter of the prior year. For the first six months of fiscal 2000,
net income (excluding goodwill amortization and one time charges) was $7.9
million, compared to $9.9 million in the first six months of fiscal 1999.
Net income, including goodwill amortization and one time charges, was $4.3
million in the second quarter of fiscal 2000, compared to a net loss of $42.3
million in the second quarter of the prior year. Diluted earnings per ordinary
share were $0.03 for the first quarter of fiscal 2000, compared to a loss per
share of $0.29 in the comparable prior year quarter, and diluted earnings per
ADS were $0.14 compared with a loss per ADS of $0.25 in the prior year quarter.
For the first six months of fiscal 2000, net income was $5.1 million, compared
to a net loss of $35.1 million in the first six months of fiscal 1999. Diluted
earnings per ordinary share were $0.03, compared to a loss of $0.25 in the first
six months of fiscal 1999, and diluted earnings per ADS were $0.17 compared with
a loss per ADS of $1.23.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, cash, cash equivalents and short-term investments
totaled $111.6 million, compared to $121.4 million at April 30, 1999, a decrease
of $9.8 million. This compares to an increase of $3.2 million in the first six
months of the previous year. In the current six-month period, cash of $14.7
million generated from operating activities was offset by investments of $26.2
million (including approximately $15 million for the acquisition of The Marathon
Group).
Investment in property, plant and equipment totaled $7.6 million in the
first six months of fiscal 2000, compared to $4.8 million in the first six
months of fiscal 1999. We also invested $4.0 million in capitalized software in
the first six months of fiscal 2000, compared to $4.8 million in the first six
months of fiscal 1999. During the current period, we funded the approximately
$15 million acquisition of The Marathon Group. Financing activities in the first
six months of fiscal 2000 produced cash of $2.3 million from the exercise of
employee share options, compared to $5.2 million in the first six months of last
year.
MERANT has a line of credit under which unsecured financing of up to $8.0
million is available until January 2001. At October 31, 1999 borrowings totaling
$1.5 million had been made against this line of credit, compared to $1.6 million
at the beginning of the quarter.
MERANT 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.
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.
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<PAGE> 12
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,
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.
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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.
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
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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
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 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.
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ERANT'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
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 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
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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.
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
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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.
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.
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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.
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.
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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
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 October 31,
1999 the fair value of our financial instruments with exposure to interest rate
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risk was $24.9 million. A hypothetical 50 basis point increase in interest rates
would result in an approximate $124,000 decrease in the fair value of our
securities. This sensitivity analysis is performed on our financial positions at
October 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 October
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
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
MERANT held its annual general meeting of shareholders on September 16,
1999. As permitted by MERANT's Articles of Association, the following
resolutions were approved by a show of hands of those shareholders (or persons
holding proxies) voting in person at the meeting:
Ordinary Resolutions
1. Adoption of the Directors' Report and audited financial statements of
MERANT for the period ended April 30, 1999.
2. Re-election of J. Michael Gullard, who retires by rotation and is eligible
for re-appointment, as a director of MERANT.
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3. Re-appointment of Michel Berty as a director.
4. Re-appointment of Kevin J Burns as a director.
5. Re-appointment of Gary Greenfield as a director.
6. Re-appointment of Ernst & Young as the auditors of MERANT, and the
authorization of the directors to determine the auditors' remuneration.
7. Appointment of Barry X. Lynn as a director.
8. Amendment of the MERANT 1998 Share Option Plan (formerly the Micro Focus
1998 Share Option Plan) as set out in the printed document marked "A"
produced to the meeting.
9. Adoption of the MERANT plc 1999 Employee Share Purchase Plan as set out in
the printed document marked "B" produced to the meeting.
Special Resolutions
10. Empowerment of the directors of MERANT to allot equity securities for cash
up to an aggregate nominal value of GBP 144,087.98 (representing 5% of the
issued share capital of MERANT as at August 1, 1999), with such authority
to expire (unless previously renewed, varied or revoked by MERANT in a
general meeting) on the earlier to occur of December 16, 2000 or the date
of the 2000 annual general meeting of MERANT.
11. Authorization of MERANT, generally and unconditionally, to make market
purchases of MERANT ordinary shares up to a maximum of 14,408,798 ordinary
shares (representing 10% of the MERANT issued share capital as at August 1,
1999), provided that:
o the minimum price per share which may be paid for an ordinary share is
2 pence (exclusive of expenses) and
o the maximum price per share is an amount (exclusive of expenses) equal
to 105% of the average of the middle market quotations for an ordinary
share as derived from the London Stock Exchange Daily Official List
for the 10 business days immediately preceding the date of purchase.
Such authority shall expire (unless previously renewed, varied or revoked
by MERANT in a general meeting) on the earlier to occur of March 16, 2001
or the date of the 2000 annual general meeting of MERANT.
12. Amendment of MERANT's Articles of Association as set out in the printed
document marked "C" produced to the meeting.
The exact number of votes cast (in person or by proxy) for, against or
withheld with respect to any resolution was not tabulated. Nor were the numbers
of abstentions and brokers non-votes for each resolution tabulated. Proxy voting
figures were announced to the meeting after the show of hands for each
resolution. This procedure is in accordance with MERANT's Articles of
Association and U.K. practice. As a foreign private issuer, MERANT is not
subject to the proxy solicitation rules specified in Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Item 5 - Other Information
Effective September 16, 1999, Martin Waters resigned as a director of
MERANT plc.
Item 6 - Exhibits
No exhibits are submitted with this quarterly report.
19
<PAGE> 22
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 16, 1999 By: /s/ Kenneth A. Sexton
-------------------------------
Kenneth A. Sexton
Senior Vice President and Chief
Financial Officer
20
