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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, 2000
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 October 31, 2000, the number of MERANT's ordinary shares outstanding was
134,945,083.
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TABLE OF CONTENTS*
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PART I - FINANCIAL INFORMATION PAGE
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Item 1 Financial statements 1
Item 2 Management's discussion and analysis of financial condition and results of 6
operations
Item 3 Quantitative and qualitative disclosures about market risk 15
PART II - OTHER INFORMATION
Item 1 Legal proceedings 15
Item 2 Changes in securities and use of proceeds 16
Item 3 Defaults upon senior securities 16
Item 4 Submission of matters to a vote of security holders 16
Item 5 Other information 16
Item 6 Exhibits 16
SIGNATURES 17
</TABLE>
*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)
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Three months ended
JULY 31, July 31,
2000 1999
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NET REVENUE
License fees $30,611 $42,526
Maintenance subscriptions 27,954 25,380
Training and consulting 14,251 19,689
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TOTAL NET REVENUE 72,816 87,595
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COST OF REVENUE
Cost of license fees 2,375 2,555
Cost of maintenance subscriptions 5,390 5,694
Cost of training and consulting 15,095 14,916
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TOTAL COST OF REVENUE 22,860 23,165
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GROSS PROFIT 49,956 64,430
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OPERATING EXPENSES
Research and development 14,770 14,492
Sales and marketing 38,112 40,830
General and administrative 6,249 7,812
Goodwill amortization 3,121 978
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TOTAL OPERATING EXPENSES 62,252 64,112
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(LOSS) INCOME FROM OPERATIONS (12,296) 318
Interest income, net 1,583 1,013
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(LOSS) INCOME BEFORE INCOME TAXES (10,713) 1,331
Income taxes - (479)
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NET (LOSS) INCOME (10,713) $852
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NET (LOSS) INCOME PER SHARE: BASIC ($0.07) $0.01
Net (loss) income per ADS: basic ($0.36) $0.03
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Shares used in computing basic net (loss) income per share 149,355 143,792
Shares used in computing basic net (loss) income per ADS 29,871 28,758
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NET (LOSS) INCOME PER SHARE: DILUTED ($0.07) $0.01
Net (loss) income per ADS: diluted ($0.36) $0.03
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Shares used in computing diluted net (loss) income per share 149,355 148,606
Shares used in computing diluted net (loss) income per ADS 29,871 29,721
</TABLE>
Note: Each American depositary share, or ADS, represents five ordinary shares.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
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CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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JULY 31, April 30,
2000 2000
(UNAUDITED) (audited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $101,556 $106,140
Short-term investments 17,162 19,538
Accounts receivable, net 73,680 92,840
Prepaid expenses and other assets 11,980 10,127
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TOTAL CURRENT ASSETS 204,378 228,645
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FIXED ASSETS:
Property, plant and equipment, net 45,436 47,518
Goodwill, net 41,746 44,297
Software product assets, net 4,883 5,569
Other assets 3,255 2,987
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TOTAL ASSETS $299,698 $329,016
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loans $2,644 $2,785
Accounts payable 10,525 12,208
Accrued employee compensation 14,358 20,088
Income taxes payable 8,334 7,601
Deferred revenue 64,288 69,830
Other current liabilities 35,174 41,945
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TOTAL CURRENT LIABILITIES 135,323 154,457
DEFERRED INCOME TAXES 14,724 13,157
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TOTAL LIABILITIES 150,047 167,614
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SHAREHOLDERS' EQUITY:
Ordinary shares 4,878 4,876
Additional paid-in capital and other reserves 172,924 172,892
Treasury stock (9,646) (11,742)
Retained (deficit) earnings (4,271) 6,442
Accumulated other comprehensive loss (14,234) (11,066)
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TOTAL SHAREHOLDERS' EQUITY 149,651 161,402
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $299,698 $329,016
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
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THREE MONTHS ENDED
JULY 31, July 31,
2000 1999
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OPERATING ACTIVITIES
Net (loss) income ($10,713) $852
Adjustments to reconcile net (loss) income to cash (used) provided by
operating activities:
Depreciation of fixed assets 3,470 3,251
Amortization of software product assets and other intangibles 3,117 3,481
Changes in operating assets and liabilities (1,912) (4,330)
Other items - 1,398
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NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (6,038) 4,652
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INVESTING ACTIVITIES
Purchases of property, plant & equipment (2,665) (3,303)
Software product assets and other intangibles (98) (1,517)
Available-for-sale securities, net 2,376 13,809
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Net cash (used) provided by investing activities (387) 8,989
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FINANCING ACTIVITIES
Issuance of ordinary shares, net of expenses 2,377 1,139
Own shares (847) -
Repayment of borrowings - 1,644
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Net cash provided by financing activities 1,530 2,783
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Effect of exchange rate changes on cash 311 141
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(DECREASE) INCREASE IN CASH (4,584) 16,565
Cash at beginning of period 106,140 86,580
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CASH AT END OF PERIOD $101,556 $103,145
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
1. BASIS OF PRESENTATION
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, 2000, included in
MERANT's Annual Report on Form 20-F which was submitted to the SEC on October
31, 2000.
The financial information at July 31, 2000 and for the three-month periods
ended July 31, 2000 and 1999 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, 2000 has been derived from the audited balance sheet
as of April 30, 2000, 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, 2000 are not necessarily
indicative of results that may be expected for the fiscal year ending April 30,
2001 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 U.K. Companies
Act 1985. The figures for the year ended April 30, 2000 are based on the audited
financial statements which will be filed with the U.K. Registrar of Companies
following MERANT's annual meeting of shareholders on November 29, 2000. The
auditors' reports on both the U.S. and U.K. financial statements for that year
were unqualified.
2. EARNINGS PER SHARE
The following table discloses the numerators and denominators used in the
computation of net (loss) income per ordinary share and net (loss) income per
ADS equivalent. Each ADS represents five ordinary shares.
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THREE MONTHS ENDED
JULY 31, July 31,
(in thousands) 2000 1999
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Net (loss) income per ordinary share:
Numerator for basic and diluted net (loss) income per ordinary share:
Net (loss) income ($10,713) $852
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Denominator for basic net (loss) income per share:
Weighted average shares outstanding 149,355 143,792
Dilutive share options - 4,814
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Denominator for diluted net (loss) income per share: 149,355 148,606
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Net (loss) income per ADS:
Numerator for basic and diluted net (loss) income per ADS:
Net (loss) income ($10,713) $852
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</TABLE>
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<TABLE>
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Denominator for basic net (loss) income per ADS:
Weighted average ADS equivalents outstanding 29,871 28,758
Dilutive share options - 963
Denominator for diluted net (loss) income per ADS: 29,871 29,721
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3. COMPREHENSIVE INCOME
MERANT's total comprehensive (loss) income was as follows:
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(in thousands) THREE MONTHS ENDED
JULY 31, July 31,
2000 1999
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NET (LOSS) INCOME ($10,713) $852
Currency translation adjustment (3,238) 42
Unrealised loss on available-for-sale securities, net of tax 70 -
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COMPREHENSIVE (LOSS)
INCOME ($14,021) $894
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</TABLE>
4. SEGMENTS
Effective May 1, 2000, the beginning of this fiscal quarter, MERANT changed
the basis of its internal reporting. The four solution areas into which MERANT
previously analyzed its operations were consolidated into two solution areas,
namely E-solutions and I-solutions. The E-solutions business represents the
segment previously referred to as Enterprise Consulting Solutions, and
I-solutions is a grouping of the other three former business segments. The
following tables, which analyze revenue and operating income (loss) for each
segment, reflect this change.
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THREE MONTHS ENDED
JULY 31, July 31,
2000 1999
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NET REVENUE
I-solutions:
Application Creation and Transformation $27,852 $37,217
Application Development Management 30,691 29,705
Enterprise Data Connectivity 10,342 10,432
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$68,885 $77,354
E-solutions 3,931 10,241
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$72,816 $87,595
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INCOME (LOSS) FROM OPERATIONS
I-solutions:
Application Creation and Transformation 3,435 6,285
Application Development Management 3,419 7,891
Enterprise Data Connectivity 1,515 1,386
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8,369 15,562
E-solutions (3,409) 1,534
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$4,960 $17,096
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</TABLE>
The following table reconciles the combined income (loss) from operations of
the solution areas to (loss) income before income taxes:
5
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<TABLE>
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THREE MONTHS ENDED
JULY 31, July 31,
2000 1999
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<S> <C> <C>
SOLUTION AREA INCOME FROM OPERATIONS $4,960 $17,096
Corporate non-allocated costs (17,256) (16,778)
Interest income, net 1,583 1,013
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(LOSS) INCOME BEFORE INCOME TAXES ($10,713) $1,331
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</TABLE>
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 May 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.
The action was transferred in December 1999 to the Northern District of
California. After the action was transferred to California, plaintiffs again
amended their complaint alleging the same claims as described in the prior
amended complaint but without the 1934 Act claims or the class period. MERANT
filed a motion to dismiss the newly-amended complaint in June 2000. A hearing on
the motion took place on September 20, 2000 and the court has taken the parties'
arguments under submission.
MERANT intends to defend this 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.
MERANT and its subsidiaries are also involved in legal proceedings, claims
and litigation arising in the ordinary course of business. Although the ultimate
results of these legal proceedings, claims and litigation are not currently
determinable, in the opinion of management these matters will not materially
affect MERANT's financial position, results of operations, or liquidity.
6. SUBSEQUENT EVENTS
On August 24, 2000, MERANT purchased for cancellation 14,408,798 ordinary
shares at 95 pence (sterling) per share for an aggregate consideration of Pound
Sterling13,688,000 ($20,258,000 based on the exchange rate on August 24, 2000).
Authority to make this purchase was granted by shareholders at the annual
general meeting held on September 16, 1999. The purchase represented 9.7% of the
issued share capital as of the date of the transaction. The shares were
purchased on the London Stock Exchange and were cancelled effective September 1,
2000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with:
- the condensed consolidated financial statements and notes included in
this Part I; and
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<PAGE> 9
- the audited consolidated financial statements in U.S. format for the
fiscal year ended April 30, 2000, included in the Annual Report on
Form 20-F which was submitted to the SEC on October 31, 2000.
RESULTS OF OPERATIONS
REVENUE
Total net revenue for the first quarter of fiscal 2001 decreased by 17% or
$14.8 million, from $87.6 million in the first quarter of fiscal 2000. Total net
revenue in the first quarter was negatively impacted by a decline in demand for
our Year 2000 and traditional COBOL businesses, reflecting an industry-wide
decline in demand for COBOL and mainframe products. Revenues generated by our
Egility e-business software solutions grew by 7%, but did not accelerate as much
as had been anticipated during the first quarter.
Revenue by solution area: I-Solutions reported an 11% decline in revenue for
the first quarter of fiscal 2001 relative to the first quarter of fiscal 2000.
Our Application Development Management solution area reported a 3% increase in
revenue, and contributed 42% of total net revenue, compared to 34% for the first
quarter of fiscal 2000. This revenue growth was more than offset by a 25%
decline in our Application Creation and Transformation solution area, which
contributed 38% of total net revenue, compared to 42% for the comparable prior
year period. ACT revenues have declined as a result of the significant decrease
in Year 2000 business and reduced demand for our traditional COBOL products and
services. Revenues from our Enterprise Data Connectivity solution area matched
reported revenues in the equivalent prior year period. E-Solutions revenue
declined significantly as a result of a decrease in demand for Year 2000 and
other consulting services.
Revenue by geography: All geographic areas were impacted by the decline in
demand for our Year 2000 and traditional COBOL products and services. North
American revenue for the first quarter of fiscal 2001 declined by 10% relative
to the comparable quarter last year and accounted for 63% of our total revenue,
compared to 58% in the first quarter of last year. International revenue for the
current quarter declined by 27% relative to the comparable quarter last year.
Revenue by product type: License fee revenue for the first quarter of fiscal
2001 decreased by 28% relative to the comparable prior year period. This decline
is attributable to lower revenues from our Year 2000 and traditional COBOL
product offerings. Maintenance subscriptions for the quarter were up 10% from
the comparable prior year period. Training and consulting revenue, which
includes our Year 2000 consulting business, fell by 28%. Total COBOL revenue
declined 24%, with Cobol license fees down 43%.
There can be no assurance that the markets for our products and services
will grow in future periods at their historical rates of growth, that certain
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 2001, gross profit as a percentage of total
net revenue declined to 69%, from 74% in the first quarter of the prior year.
This decrease is primarily the result of lower consulting revenues, where the
direct costs of generating that revenue stream did not fall proportionately.
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.
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OPERATING EXPENSES
Research and development expenses for the first quarter of fiscal 2001 were
2% higher than those reported in the first quarter of fiscal 2000, and
represented 20% of total net revenue compared to 17% in the first quarter of
fiscal 2000. 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 2001 were 7%
lower than the first quarter of fiscal 2000, but represented 52% of total net
revenue, compared to 47% for the comparable prior year period. The decrease in
sales and marketing expenses reflected the impact of the measures taken at the
end of fiscal 2000 to reduce costs. However, we believe that continued
investment in sales, marketing, customer support and promotional activities is
essential to maintaining our competitive position. Accordingly, we anticipate
that sales and marketing expenses may increase in future periods.
General and administrative expenses for the first quarter of fiscal 2001
were 20% lower than the first quarter of fiscal 2000 and represented 9% of net
revenue, the same percentage as in the comparable prior year period. The
significant decrease reflects the impact of the measures taken at the end of
fiscal 2000 to reduce costs. However, we are investing to further strengthen
MERANT's infrastructure and we anticipate that general and administrative
expenses will increase in future quarters.
Goodwill amortization for the first quarter of fiscal 2001 was 219% higher
than in the first quarter of fiscal 2000 and represented 4% of net revenue,
compared to 1% for the comparable prior year period.. The significant increase
results from the goodwill capitalised during fiscal 2000 on the acquisitions
made during that year. We anticipate that goodwill amortization will remain at
least at this level in future quarters, and may increase, depending on the level
of future corporate acquisitions.
MERANT has recorded no tax charge (or credit) in the current fiscal quarter.
In the first quarter of fiscal 2000 the tax rate was 36%. The income tax expense
for the first quarter of each fiscal year is based on management's estimate of
the effective tax rate for the full year.
Net loss before taxation was $10.7 million in the first quarter of fiscal
2001, compared to a net profit before taxation of $1.3 million in the first
quarter of the prior year. Loss per ordinary share was $0.07 for the first
quarter of fiscal 2001, compared to diluted earnings per share of $0.01 in the
comparable prior year quarter, and loss per ADS was $0.36 compared with diluted
earnings per share of $0.03 in the prior year quarter.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2000, cash, cash equivalents and short-term investments totaled
$118.7 million compared with $124.0 million at April 30, 2000, a decrease of
$5.3 million during the quarter.
In the first quarter of fiscal 2001, operating activities absorbed $6.0
million. In addition, the Company invested $2.7 million in property, plant and
equipment and $0.1 million on capitalized software. Financing activities
produced cash of $1.5 million from the exercise of employee share options, net
of the cost of acquiring shares for the employee share purchase plan.
In the first quarter of fiscal 2000, MERANT generated $4.7 million from
operations. The Company invested $3.3 million in property, plant and equipment
and $1.5 million on capitalized software. Financing activities produced cash of
$1.1 million from the exercise of employee share options.
MERANT has a line of credit under which unsecured financing of up to $8.0
million is available until January 2001. At July 31, 2000 borrowings totaling
$2.6 million had been made against this line of credit, compared to $2.7 million
at the beginning of the quarter.
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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.
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 2001 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 1.
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:
- demand for our products,
- the size and timing of customer orders and the lengthy sales cycle,
- product life cycles,
- our ability to introduce and market new and enhanced versions of our
products on a timely basis,
- the introduction and acceptance of new products and product
enhancements by us or by our competitors,
- customer order deferrals in anticipation of new or enhanced products or
technologies,
- the timing of product introductions or enhancements by us or by our
competitors,
- technological changes in the software industry,
- changes in the mix of distribution channels through which our products
are offered,
- purchasing patterns of distributors and retailers, including customer
budgeting cycles,
- the quality of products sold,
- price and other competitive conditions in the industry,
- changes in our level of operating expenses,
- changes in our sales incentive plans,
- our ability to acquire and effectively integrate companies and
solutions,
- the cancellation of licenses during the warranty period,
- non-renewal of maintenance agreements,
- the effects of extended payment terms (particularly for international
customers),
- economic conditions generally or in various geographic areas, and
- 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
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<PAGE> 12
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. Our staffing and operating expenses are based
on anticipated revenue levels, and a high percentage of our costs is fixed in
the short term and does not vary with revenue. Because of these factors, 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.
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 or a decline in the demand for
MERANT's COBOL offerings
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. Recently, our COBOL
revenues have decreased at a faster than expected rate, reflecting an
industry-wide phenomenon, and this decline could continue. MERANT plans to
reduce operating expenses in the COBOL area, which could negatively impact our
COBOL revenues in the future.
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, such as the Egility e-business software
solutions. 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.
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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
Except for a trademark infringement claim against our distributor in
Brazil, 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 2000, 1999 and 1998, sales to customers outside of the
United States represented approximately 42%, 40% and 35%, 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:
- exposure to exchange rate fluctuations
- longer payment cycles
- greater difficulties in accounts receivable collection and enforcing
agreements
- tariffs and other restrictions on foreign trade
- U.S. export requirements
- economic and political instability
- withholding and other tax consequences
- restrictions on repatriation of earnings
- the burdens of complying with a wide variety of foreign laws
- 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 change effectively, our operations would be
disrupted
MERANT has recently experienced tremendous organizational change and
significant turnover of personnel. The company plans to continue making
adjustments in such areas as the sales and marketing organization and the COBOL
business. These changes have placed a significant strain on our financial,
management, operational and other resources. These strains will continue as the
company continues its transition to an e-business software solutions company.
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:
- actual or anticipated fluctuations in our operating results,
- changes in financial estimates by securities analysts,
- announcements of technological innovations,
- new products or new contracts by us or by our competitors,
- developments with respect to patents, copyrights or proprietary rights,
- conditions and trends in the software and other technology industries,
- adoption of new accounting standards affecting the software industry,
and
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- 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, EnterpriseLink Technology
Corporation in November 1999, Trillium Software Corporation in December 1999 and
Northern Software Partners AS in January 2000. 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:
- difficulties in the assimilation of the operations, technologies and products
of the acquired companies,
- difficulties in managing diverse geographic sales and research and development
operations,
- the diversion of management attention from other business concerns,
- risks of entering markets in which we have no or limited direct prior
experience, and
- the potential loss of key employees of MERANT or the acquired company.
YEAR 2000 AND EURO ISSUES COULD STILL NEGATIVELY AFFECT OUR BUSINESS
We developed and implemented an enterprise-wide plan to analyze and
address potential Year 2000 issues affecting our internal systems, our
interaction with third party vendors and suppliers, and our products and
services. As of September 30, 1999, we completed the plan in all material
respects, although we have continued 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. To
date we have experienced no significant impact from the Year 2000 problem on our
ability to carry on normal business operations. However, there can be no
assurance that we will not experience significant unanticipated negative
consequences caused by undiscovered Year 2000 problems with our internal
systems, our third party vendors and suppliers, or our products and services.
While we have not been subject to any claims or lawsuits to date
relating to any Year 2000-related failures of our products or services, there
can be no assurance that customers or former customers will not bring claims or
lawsuits against us seeking compensation for losses associated with any such
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
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, but 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
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and hedging activities, functional currency designations and pricing strategies
in the new economic environment. In addition, we face risks to the extent that
banks and vendors 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.
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
The following statement is made in accordance with the U.S. Private
Securities Litigation Reform Act of 1995: This quarterly report contains
forward-looking statements that include statements regarding expectations for
our business strategy, our expenses in the COBOL business area, the company's
sales and marketing organization, and its prospects and growth, including the
growth of our e-business solutions business and related revenues.
Forward-looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act, 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 document, the words
"anticipate," "believe," "estimate," "expect," "plan" and similar expressions,
as they relate to MERANT or its management, are intended to identify these
forward-looking statements.
These forward-looking statements involve a number of risks and
uncertainties. Actual results could differ materially from those anticipated by
these forward-looking statements. Future results will be difficult to predict as
MERANT transforms its business strategy to provide e-business solutions and away
from certain of its past primary markets, including the market for Year 2000
products and services and the market for COBOL and mainframe-related products.
MERANT's ability to recruit and retain key personnel, especially in the sales
and business units, could materially alter financial results and plans for the
sales and business units. Other factors that could cause actual results to
differ materially include, among others, our ability to effectively manage our
costs against uncertain revenue expectations, the potential for a decrease in
revenue or a slowdown in revenue growth which may be caused by delays in the
timing of sales and the delivery of products or services, our ability to
develop, release, market and sell products and services to customers in the
highly dynamic market for enterprise application development and e-business
solutions, the potential for a shift in demand for enterprise application
development solutions and e-business solutions based on changes in technology
and customer needs, the market acceptance of our e-business solutions and
e-business solutions generally, the effect of competitors' efforts
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to enter our markets and the possible success of existing competitors in those
markets, and our ability to manage and integrate recently acquired businesses or
other businesses that we may acquire in the future.
Further information on potential factors which could affect our financial
results is included above in this Part I, Item 2 under the heading "Factors That
May Influence Future Operating Results" and elsewhere in this quarterly report
and in MERANT's Form 20-F for the year ended April 30, 2000. MERANT undertakes
no obligation to release publicly any updates or revisions to any
forward-looking statements contained in this announcement that may reflect
events or circumstances occurring after the date of this announcement.
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, 2000
the fair value of our financial instruments with exposure to interest rate risk
was $17.2 million. A hypothetical 50 basis point increase in interest rates
would result in an approximate $86,000 decrease in the fair value of our
securities. This sensitivity analysis is performed on our financial positions at
July 31, 2000 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,
2000.
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 May 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. The action was transferred in December 1999 to the Northern
District of California. After the action was transferred to California,
plaintiffs again amended their complaint alleging the same claims as described
in the prior amended complaint but without the 1934 Act claims or the class
period. MERANT filed a motion to dismiss the newly-amended
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complaint in June 2000. A hearing on the motion took place on September 20, 2000
and the court has taken the parties' arguments under submission.
MERANT intends to defend this 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.
MERANT and its subsidiaries are also involved in legal proceedings, claims
and litigation arising in the ordinary course of business. Although the ultimate
results of these legal proceedings, claims and litigation are not currently
determinable, in the opinion of management these matters will not materially
affect MERANT's financial position, results of operations, or liquidity.
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
None.
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
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(Registrant)
Date: November 20, 2000 By: /s/ Leo Millstein
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Leo Millstein
Vice President, General Counsel and Secretary
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