UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934. For The Quarterly Period Ended March 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For Transition Period From _______ To ______.
Commission File Number: 0-22667
MERCATOR SOFTWARE, INC.
(Exact Name as Specified in its Charter)
Delaware 06-1132156
(State or other jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or organization)
45 Danbury Road, Wilton, CT 06897
(Address of Principal Executive Offices) (Zip Code)
Registrants telephone number including area code
203-761-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 and 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
As of March 31, 2000, the Registrant had 28,518,191 shares of Common Stock, $.01
par value outstanding.
1
MERCATOR SOFTWARE, INC.
TABLE OF CONTENTS
PAGE
PART 1 FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000 (unaudited) 3
and December 31, 1999
Consolidated Statements of Operations for the Three Months Ended 5
March 31, 2000 and 1999 (unaudited)
Consolidated Condensed Statements of Cash Flows for the Three Months Ended 6
March 31, 2000 and 1999 (unaudited)
Notes to Consolidated Condensed Financial Statements 8
Item 2 - Managements' Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 25
ITEM 6. EXHIBITS 26
SIGNATURES
2
MERCATOR SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,177,200 $ 9,237,100
Marketable securities 4,107,000 5,648,400
Accounts receivable, less allowances of $1,224,200
and $1,766,400 40,150,300 38,270,500
Deferred tax assets 10,378,700 10,378,700
Prepaid expenses and other current assets 2,431,800 2,984,500
------------ ------------
Total current assets 72,245,000 66,519,200
Furniture, fixtures and equipment, net 7,774,200 6,516,700
Intangible assets, net 142,307,300 153,227,700
Other assets 566,000 551,800
------------ ------------
Total assets $222,892,500 $226,815,400
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,538,100 $ 3,936,700
Accrued expenses 12,836,400 8,175,800
Current portion of deferred revenue 15,173,100 14,737,700
------------ ------------
Total current liabilities 32,547,600 26,850,200
------------ ------------
Long-term deferred tax liability 11,487,200 12,253,500
Deferred revenue, less current portion 49,500 58,600
------------ ------------
Total Liabilities $ 44,084,300 39,162,300
------------ ------------
Stockholders' equity:
Convertible preferred stock ($.01 par value; authorized
5,000,000 shares, no shares issued and outstanding) -- --
Common stock (70,000,000 shares authorized, $.01 par value;
28,518,191 and 27,834,350 shares issued and outstanding) $ 285,200 $ 278,200
Additional paid-in capital 208,484,700 205,420,900
Accumulated deficit (28,164,600) (16,667,800)
Cumulative foreign currency translation adjustment (1,148,100) (495,000)
Deferred compensation (649,000) (883,200)
------------ ------------
Total stockholders' equity 178,808,200 187,653,100
------------ ------------
Total liabilities and stockholders' equity $222,892,500 $226,815,400
============ ============
See accompanying notes to condensed consolidated financial statements.
3
MERCATOR SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
2000 1999
----------- -----------
Revenues:
Software licensing $ 18,307,200 $ 9,799,400
Service, maintenance and other 12,945,100 7,436,600
------------ -----------
Total revenues 31,252,300 17,236,000
------------ -----------
Cost of revenues:
Software licensing 285,100 436,100
Service, maintenance and other 7,127,000 4,231,100
------------ -----------
Total cost of revenues 7,412,100 4,667,200
------------ -----------
Gross profit 23,840,200 12,568,800
Operating expenses:
Product development 5,089,100 2,210,300
Selling and marketing 13,782,300 6,633,000
General and administrative 3,529,900 2,062,400
Amortization of intangibles 10,976,600 2,324,000
------------ -----------
Total operating expenses 33,377,900 13,229,700
------------ -----------
Operating loss (9,537,700) (660,900)
Other income, net 154,200 511,100
------------ -----------
Loss before income taxes (9,383,500) (149,800)
Provision for income taxes 2,113,300 69,700
------------ -----------
Net loss $(11,496,800) $ (219,500)
============ ===========
Net loss per share - Basic and Diluted $(0.41) $ (0.01)
Weighted average number of common
and common equivalent shares outstanding
- -Basic and Diluted 28,207,140 22,838,864
See accompanying notes to condensed consolidated financial statements.
4
MERCATOR SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months
Ended March 31,
----------------
2000 1999
----------- ------------
Cash flows from operating activities:
Net cash provided by operating activities 3,862,600 $ 772,900
Cash flows from investing activities:
Purchase of furniture fixtures and equipment (2,034,800) (1,448,200)
Acquisition, net of cash -- (27,736,100)
Sales of marketable securities 1,540,900 20,191,700
Other (56,200) (294,300)
----------- ------------
Net cash (used in) provided by investing activities (550,100) (9,286,900)
Cash flows from financing activities:
Payments under capital leases -- (2,600)
Proceeds from exercise of stock options 1,992,800 203,700
Proceeds from issuance of stock under employee stock purchase 1,190,400 598,300
plan
Net cash provided by financing activities 3,183,200 799,400
----------- ------------
Effect of exchange rate changes on cash (556,000) (44,200)
----------- ------------
Net change in cash 5,939,700 (7,758,800)
Cash at beginning of period 9,237,500 15,132,700
----------- ------------
Cash at end of period $15,177,200 $ 7,373,900
=========== ============
See accompanying notes to consolidated condensed financial statements
5
MERCATOR SOFTWARE, INC)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months
Ended March 31,
----------------------
2000 1999
---- ----
Supplemental information:
Cash paid for:
Interest $ 25,000 $ 15,300
Income taxes 346,300 403,000
Non cash investing and finance activities:
Issuance of stock in connection with the
Acquisition of Braid -- $63,723,500
Warrants exercised on a net exercise basis -- 2,300
See accompanying notes to consolidated condensed financial statements.
MERCATOR SOFTWARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated interim condensed financial statements contained
herein are unaudited, but, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of financial position, results of operations and cash flows for the periods
presented. Results of operations for the periods presented herein are not
necessarily indicative of results of operations for the entire year.
Reference should be made to Mercator Software Inc.'s 1999 Annual Report on Form
10-K, which includes audited financial statements for the year ended December
31, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations.
In August 2000, our audit committee became aware of questions concerning the
accounting for certain expense items. The audit committee, with the assistance
of our auditors, initiated a review of these items and performed certain
additional procedures. As a result of these procedures, it was determined that
certain expenses were not properly recorded in the first and second quarters of
2000 and, accordingly, it was determined that the financial statements for the
quarter ending March 31, 2000 should be restated. The impact of this
restatement on our results of operations for the three months ending March 31,
2000 was as follows:
As Restated As Previously Reported
Total revenues $ 31,252,300 $ 31,252,300
============ ============
Gross profit 23,840,200 23,916,200
Operating expense (33,377,900) (32,126,900)
------------ ------------
Operating loss $ (9,537,700) $ (8,210,700)
============ ============
Net loss $(11,496,800) $ (9,875,200)
============ ============
Net loss per share, basic and diluted $ (0.41) $ (0.35)
In addition, this restatement resulted in a decrease in total assets of $230,300
to $222,892,500; an increase in total liabilities of
6
$1,391,300 to $44,084,300; and a reduction in shareholders' equity of $1,621,600
to $178,808,200.
(2) BUSINESS COMBINATIONS
In March 1999, Mercator Software, Inc. acquired Braid Group Limited, a leading
provider of integration software products for straight-through processing of
financial transactions in the international banking and securities markets.
Mercator purchased all of the outstanding capital stock of Braid for
approximately $110.2 million, excluding approximately $20 million of contingent
consideration to be paid upon the achievement of certain operating results. The
purchase price included $30 million in cash, 2,207,258 shares of Mercator common
stock and the issuance of 434,622 stock options. The transaction was accounted
for under the purchase method of accounting and the excess purchase price is
being amortized on a straight-line basis over a five-year period.
In September 1999, Mercator acquired Novera Software, Inc., a developer of Web
application integration solutions. Mercator purchased all of the outstanding
shares of capital stock of Novera for approximately $58.2 million, which
included the issuance of 1,789,916 shares of Mercator common stock and the
issuance of 369,142 stock options. The transaction was accounted for under the
purchase method of accounting and the excess purchase price is being amortized
on a straight-line basis over a three-year period.
(3) NEWLY ADOPTED ACCOUNTING STANDARDS
In June 1998 the FASB issued SFAS No.133 "Accounting for Derivative Instruments
and Hedging Activities." (SFAS 133) which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No.133, as amended by SFAS
137 (Accounting for Derivative Instruments and Hedging Activities - Deferral of
the effective date of SFAS No. 133 - an Amendment of SFAS No. 133) is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. This
statement is not expected to effect Mercator, as Mercator does not have any
significant derivative instruments or hedging activities.
SOP 97-2 was amended in February 1998 by SOP 98-4 "Deferral of the Effective
Date of a provision of SOP 97-2" and was amended again in December 1998 by SOP
98-9 "Modification of SOP 97-2, Software Recognition with Respect to Certain
Transactions." Those amendments deferred and then clarified the specification of
what was considered vendor specific objective evidence of fair value for the
various elements in a multiple element arrangement. Mercator adopted the
provisions of SOP 97-2 and SOP 98-4 as of January 1, 1998. The adoption has not
had a material impact on Mercator's results of operations, financial position or
cash flows for the quarters ended March 31, 2000 or 1999. SOP 98-9 is effective
beginning January 1, 2000. The adoption of the provisions of this statement did
not have a material impact on Mercator's operating results, financial position
or cash flows.
Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates are either not applicable or are not
significant to Mercator's financial statements.
(4) STOCK ACTIVITIES
Effective April 5, 1999, Mercator completed a two for one common stock split in
the form of a stock dividend. The accompanying financial statements have been
retroactively adjusted to reflect this common stock split.
(5) COMPREHENSIVE INCOME
Mercator adopted the provisions of SFAS No 130 "Reporting Comprehensive Income"
during 1998. SFAS 130 requires Mercator to report comprehensive income in its
financial statements. In addition to its net income, comprehensive income (loss)
which includes all changes in equity during a period from non-owner sources.
Mercator's comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments. Total comprehensive income (loss) was ($12.1)
million and ($265,200) for the three months ended March 31, 2000 and 1999,
respectively.
(6) EARNINGS PER SHARE
Earnings per share is presented in accordance with the provisions of SFAS No.
128 "Earnings Per Share" (SFAS 128) and SEC Staff Accounting Bulletin No. 98.
Under SFAS 128, basic earnings per share ("EPS") excludes dilution for common
stock equivalents and is computed by dividing income or loss available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
and resulted in the issuance of common stock.
Diluted loss per share has not been presented separately for the three months
ended March 31, 2000, as the outstanding stock options and warrants,
representing an aggregate of 4,193,370 shares of common stock equivalents, are
anti-dilutive.
7
(7) SEGMENT INFORMATION
In the fourth quarter of 1998, Mercator adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments. It also establishes standards for related
disclosures about products and services. The method for determining what
information to report is based on the way that management organizes the
operating segments within Mercator for making operational decisions and
assessments of financial performance.
As a result of recent international acquisitions and expansion, Mercator has
changed its internal structure resulting in the classification of its business
activities into two reportable segments: Domestic and International. These
segments are organized, managed and analyzed geographically. Information
regarding Mercator's operations in these two operating segments are set forth
below. There are no significant corporate overhead allocations or intersegment
sales or transfers between the segments for the periods presented.
Quarter Ended March 31,
2000 1999
---- ----
Revenue:
Domestic 19.0 14.7
International 12.3 2.5
----- ----
Total 31.3 17.2
Operating income (loss) before
amortization of intangible:
Domestic (0.3) 1.8
International 1.7 (0.1)
----- ----
Total 1.4 1.7
Amortization of intangible (10.9) (2.3)
Other income, net 0.1 0.5
Provision for taxes 2.1 0.1
----- ----
(11.5) (0.2)
Capital expenditures:
Domestic 1.8 1.3
International 0.2 0.1
----- ----
Total 2.0 1.4
Depreciation expense:
Domestic 0.5 0.2
International 0.2 0.1
----- ----
Total 0.7 0.3
8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations contains forward-looking statements that involve risks and
uncertainties. When used in the filing, the words "intend," "anticipate,"
"believe," "estimate," "plan" and "expect" and similar expressions as they
relate to Mercator are included to identify forward-looking statements. Our
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors including those set forth
under "Factors That may Affect Future Results" and elsewhere in this document.
The following discussion has been amended to reflect the impact of the
restatement of Mercator's financial statements for the three months ended March
31, 2000 as discussed in note 1 of the unaudited notes to the consolidated
condensed financial statements included in Item 1.
OVERVIEW
Mercator Software, Inc., was incorporated in Connecticut in 1985 as TSI
International Software Ltd. and reincorporated in Delaware in September 1993.
The name change to Mercator Software, Inc. became effective on April 3, 2000.
Mercator has derived a majority of its revenues from products other than
Mercator, primarily our Trading Partner family of products and the KEY/MASTER
product. However, revenue related to the Mercator family of products has grown
significantly in each of the last three years and has increased as a percentage
of total revenues. Mercator believes that future growth in revenues, if any,
will be mainly attributed to the Mercator suite of products. Mercator believes
it cannot accurately predict the amount of revenues that will be attributable to
this product line or the life of such products. To the extent our Mercator
products do not maintain continued market acceptance, the business will be
adversely affected.
Mercator generally recognizes revenue from software license fees upon delivery,
unless there are significant post-delivery obligations, in which case revenues
are recognized when these obligations are satisfied. This is the case with
certain customers who have purchased a financial services solution whereby
Mercator recognizes revenue using the percentage-of-completion method as
services are performed. The KEY/MASTER product is licensed under term-use
contracts rather than for a one-time license fee and Mercator software
recognizes revenue from these arrangements on a present-value basis at the
inception of the contract. Mercator does not actively market new term-use
contracts for KEY/MASTER but continues to receive maintenance revenues. As a
result, KEY/MASTER accounts for a larger proportion of maintenance revenues than
license revenues and increases the percentage of Mercator's total revenues
represented by service, maintenance and other revenues. Mercator intends to
continue to increase the scope of service offerings insofar as it supports the
sale of license revenues from sales of Mercator products. We believe that
software licensing revenue will continue to account for a larger portion of
total revenues than service, maintenance and other revenues.
Mercator can be used by information technology professionals as well as value
added resellers, independent software vendors, software integrators or other
third parties who resell, embed or otherwise bundle Mercator with their
products. License fee revenues are derived from direct sales of software
products through our direct sales force and indirect third parties. Sales
through distributors and resellers represented approximately 31% of domestic
license revenue in the first quarter of 2000.
International revenue accounted for 39.2% of total revenues for the three months
ended March 31, 2000 as compared to 14.5 % of total revenues for the three
months ended March 31, 1999. The increase is primarily attributed to the
purchase of Braid in March of 1999 and the addition of a sales office in
Frankfurt, Germany.
The size of orders can range from a few thousand dollars to over $300,000 per
order. The loss or delay of large individual orders, therefore, can have a
significant impact on revenue and other quarterly results. In addition,
Mercator generally recognizes a substantial portion of its quarterly software
licensing revenues in the last month of each quarter, and as a result, revenue
for any particular quarter may be difficult to predict in advance. Because
operating expenses are generally fixed, a delay in recognition of revenue from a
limited number of license transactions could cause significant variations in
operating results from quarter to quarter and could result in significant
losses. To the extent such expenses precede, or are not subsequently followed
by, increased revenue, operating results would be materially and adversely
affected. As a result of these and other factors, operating results for any
quarter are subject to variation, and period-to-period comparisons of results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items from our statements of operations:
9
Three Months Ended
--------------------
March 31,
--------
2000 1999
------ ------
Revenues:
Software licensing 58.6% 56.9%
Service, maintenance and other 41.4 43.1
------ -----
Total revenue 100.0% 100.0%
------ -----
Cost of revenues:
Software licensing 0.9 2.5
Service, Maintenance and other 22.8 24.5
------ -----
Total cost of revenues 23.7 27.0
------ -----
Gross profit 76.3 73.0
------ -----
Operating expenses:
Product development 16.3 12.8
Selling and marketing 44.1 38.5
General and administrative 11.3 12.0
Amortization of intangibles 35.1 13.5
------ -----
Total operating expenses 106.8 76.8
------ -----
Operating loss (30.5) (3.8)
Other income (expense), net 0.5 3.0
------ -----
Loss before taxes (30.0) (.8)
Income tax expense 6.8 .4
------ -----
Net Loss (36.8)% (1.2)%
====== =====
Gross profit:
Software licensing 95.5% 98.4%
Service, maintenance and other 43.1 44.9
10
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED WITH THREE MONTH PERIOD ENDED
MARCH 31, 1999
REVENUES
Total Revenues. Mercator's revenues are derived principally from two sources:
(i) license fees for the use of Mercator products and (ii) service fees for
maintenance, consulting services and training related to software products.
Total revenues increased 81% to $31.3 million in the first quarter of 2000 from
$17.2 million in the same period in 1999.
Software License. Total software licensing revenues increased 87% to $18.3
million for the three months ended March 31, 2000 from $9.8 million for the same
period in 1999. Domestic software licensing revenues increased $2.4 million to
$11.3 million in the first quarter 2000 from $8.9 million in the same period in
1999, primarily due to an increase in Mercator license revenues as a result of a
larger customer base. International software licensing revenues increased 682%
to $7.0 million in the first quarter of 2000 from $893,900 in the same period
1999. This increase was the result of the Braid acquisition and the larger
salesperson base available to sell our Mercator products. International
licensing revenues from Braid products and Mercator products were $1.9 million
and $5.1 million, respectively.
Service, Maintenance and Other. Service, maintenance and other revenues
increased to $12.9 million for the three months ending March 31, 2000 from $7.4
million for the same period in 1999. Domestic service, maintenance and other
revenues increased 32% to $7.7 million in the first quarter 2000 from $5.8
million in the same period in 1999. This increase was a result of increased
service demands from our Mercator customers and the related acquisition of
service personnel to address those needs, as well as additional maintenance
revenues on the Mercator license sales. International service, maintenance and
other revenues increased $3.6 million to $5.2 million in the first quarter 2000
from $1.6 million in the same period in 1999. This increase is primarily
attributed to the larger service component of the traditional Braid financial
services product as well as increased services on our Mercator product sales.
COST OF REVENUES
Cost of software licensing revenues consists primarily of CD-ROMs, manuals,
distribution costs and the cost of third-party software that Mercator resells.
Cost of service, maintenance and other revenues consists primarily of personnel-
related costs in providing maintenance, technical support, consulting and
training to customers.
Gross margin on software licensing revenues is higher than gross margin on
service, maintenance and other revenues, reflecting the low materials, packaging
and other costs of software products compared with the relatively high personnel
costs associated with providing maintenance, technical support, consulting and
training services. Cost of service, maintenance and other revenues also varies
based upon the mix of maintenance, technical support, training and professional
consulting services.
Cost of Software Licensing. Total cost of software licensing revenues decreased
to $285,100 in the first quarter of 2000 from $436,100 for the same period in
1999. This decrease was due to a decrease in costs of distribution. The majority
of products are sold on a single CD-ROM, which includes all documentation and
other materials, thereby reducing the costs of packaging and materials as well
as shipping charges. Software licensing gross margin increased to 98% for the
first quarter of 2000 over 96% for the same period in 1999, due to the volume of
sales and low cost of software distribution. Cost of software licensing revenues
for domestic operations decreased to $139,100 in the first quarter of 2000 from
$425,400 for the same period in 1999 and gross margin on software licensing
domestic increased to 99% in the first quarter of 2000 from 95% in the same
period in 1999 as a result of the low cost of distribution and the resulting
economies of scale on the larger number of transactions. The cost of software
licensing from international operations was $146,000 in the first quarter of
2000 versus $10,700 for the same period in 1999. The increase in these costs was
due to the purchase of Braid in March of 1999 and the inclusion of a full
quarter of costs in the quarter ended March 31, 2000 and the increase in
international sales of Braid's traditional financial services products as well
as the increased sales of Mercator products. Gross margin on international
software licensing was 98% for first quarter of 2000.
Total Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 68% to $7.1 million in the first quarter of 2000 from
$4.2 million for the same period in 1999. Gross margin on costs of service,
maintenance and other was 45% and 43%, respectively. Cost of service,
maintenance and other for domestic operations increased to $4.2 million for the
three month period ending March 31, 2000 compared to $3.6 million for the same
period in 1999. This increase is primarily due to the increase in services
performed for Mercator customers along with costs of training services purchased
by our increased customer base. Gross margin on domestic service, maintenance
and other, was 46% in the first quarter of 2000 and 38% for the same period in
1999. Gross margin for the professional service component was 17%. The
difference is related to lower margins on professional services than on
maintenance services. Cost of service, maintenance and other for international
operations increased to $3.0 million in the first quarter of 2000 from a minimal
cost for the same period in 1999. This increase was the result of the
acquisition of Braid and related services personnel. In addition, Braid's
traditional financial service products have a larger professional service
component than the Mercator product suite. Accordingly, international gross
margin in the first quarter of 2000 was 15.0% for professional services, as
compared to domestic gross margin of 17.0%. Gross margins on service,
maintenance and other for international operations was 44% for three months
ending March 31, 2000.
11
OPERATING EXPENSES
Product Development. Product Development expenses include expenses associated
with the development of new products and enhancements to existing products.
These expenses consist primarily of salaries, recruiting, and other personnel-
related costs, depreciation of development equipment, supplies, travel and
allocated facilities and communication costs.
Product Development expenses increased 130% to $5.1 million for the three months
ending March 31, 2000, from $2.2 million for the same period in 1999, primarily
due to increased headcount associated with the development of new Mercator based
products and the acquisition of Braid in March 1999 and Novera in September
1999. Product development expenses represented 16% and 13% of total revenues for
the first quarter of 2000 and 1999, respectively. International product
development expenses were $1.7 million for the first quarter of 2000.
Mercator believes that a significant level of research and development
expenditures is required to remain competitive. Accordingly, Mercator
anticipates that it will continue to devote substantial resources to research
and development. Mercator expects that the dollar amount of research and
development expenses will continue to increase, particularly in the United
States. To date, all research and development expenditures are expensed as
incurred.
Selling and Marketing. Selling and marketing expenses consist of sales and
marketing personnel costs, including sales commissions, recruiting, travel,
advertising, public relations, seminars, trade shows, product descriptive
literature, and allocated facilities and communications costs.
Selling and marketing expenses increased 108% to $13.8 million for the three
months ended March 31, 2000, from $6.6 million for the same period in 1999. This
increase was primarily due to the acquisitions in 1999 and the increased number
of sales and marketing personnel hired to pursue Mercator market opportunities
and the additional costs incurred in connection with our corporate identity
programs and e-business products. Selling and marketing expenses represented
44% and 38% of total revenues for the first quarter of 2000 and 1999,
respectively.
During 1999, the acquisition of Braid resulted in an increase in headcount of 27
salespeople. These individuals sold both the traditional Braid financial
services products as well as the Mercator product line. Selling and marketing
costs for international operations were $4.4 million for the three month period
ending March 31, 2000.
General and administrative. General and administrative expenses consist
primarily of salaries, recruiting, and other personnel related expenses for
Mercator's administrative, executive, and finance personnel as well as outside
legal, tax services, and audit fees.
General and administrative expenses increased 71% to $3.5 million in the first
quarter of 2000 from $2.1 million in 1999. The increase was primarily due to
increased number of employees, the cost of management information system staff,
increased legal and consulting costs, as well as increased depreciation expenses
for related equipment and software. The acquisition of Braid in March of 1999
and the establishment of a German sales office increased both headcount and
expense in the administrative area. International administrative costs were $1.4
million for the first quarter of 2000. General and administrative expenses were
11% and 12% of total revenues for the three months ending March 31, 2000 and
1999, respectively.
Mercator believes that the dollar amount of its general and administrative
expenses will increase in the future as Mercator continues to expand its
administrative staff and incurs additional costs to enhance its systems and
administrative processes.
Amortization of Intangibles. Intangible assets are comprised of the excess of
the purchase price and related costs of an acquired business over the value
assigned to tangible assets. The acquisitions made by Mercator were accounted
for under the purchase method of accounting. The purchase prices were allocated
to the tangible and identifiable intangible assets based on their estimated fair
values with any excess designated as goodwill. Intangible assets, including
goodwill, are amortized over their estimated useful lives, which range from
three to five years.
Amortization expense increased to $10,976,000 for the three month period ending
March 31, 2000 from $2,324,000 for the same period in 1999 as a result of the
acquisitions of Braid in March 1999 and Novera in September 1999. As a result of
these acquisitions, as of March 31, 2000 and 1999, Mercator had net intangible
assets of $142.3 million and $113.5 million, respectively.
OTHER INCOME (EXPENSE), NET
Interest income decreased to $154,200 in the first quarter of 2000 from $511,100
for the same period in 1999, primarily due to the use of cash in the
acquisitions of Braid and Novera during 1999 and the subsequent reduction of
interest bearing investments. Borrowing expenses were $25,000 in the first
quarter of 2000 due to the acquisition of a new line of credit in the first
quarter of 2000.
12
TAXES
Income tax expense was $2.1 million for the quarter ended March 31, 2000 as
compared to $69,700 for the same period in 1999. The difference between the
company's effective tax rate and the U.S. Statutory rate is primarily
attributable to non-deductible goodwill amortization of $8.9 million and $2.3
million for the quarters ended March 31, 2000 and March 31, 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2000, Mercator had net working capital of $39.7 million, which
included cash and marketable securities of $19.3 million. Working capital at
March 31, 1999 was $20.3 million, which included cash and marketable securities
of $20.0 million. In the first quarter of 2000, cash provided by operations was
$ 3.9 million compared to cash provided of $772,900 in 1999.
Net accounts receivable were $40.2 million for the quarter ended in March 31,
2000 compared to $20.8 million at March 31, 1999. The number of days of average
revenues in accounts receivable was 116 at March 31, 2000 compared to 109 at
March 31, 1999. The increase in accounts receivable is due to the large
percentage of sales billed during the last month of the quarter, the increase in
deferred revenue and the granting of extended terms for certain customers. In
response to the increase in days sales outstanding, Mercator has dedicated
additional resources to the collection of outstanding receivables. Capital
expenditures have been, and future capital expenditures are anticipated to be,
primarily for facilities, equipment and computer software to support expansion
of the companies operations. Additions to property plant and equipment accounted
for $2.0 million and $712,600 of expenditures for the three months ending March
31, 2000 and 1999, respectively. As of March 31, 2000, Mercator had no material
commitments for capital expenditures.
Mercator believes that its current cash and cash equivalent balances, and future
cash generated by operations, are sufficient to meet its anticipated cash needs
for working capital, capital expenditures and business expansion for a least a
six month period. Thereafter, if cash generated by operations is insufficient to
satisfy operating requirements, Mercator has established a three year $20
million dollar line of credit with Fleet Bank.
In addition, in an effort to best utilize its working capital, Mercator intends
to pursue the development and acquisition of additional products or businesses,
which support the current business needs. Mercator has no agreements or
understandings with respect to any material acquisitions.
YEAR 2000 DISCLOSURE
Mercator was aware of the issues associated with the programming code in
existing computer systems. Mercator's business is dependent on both the
operation of its software it sells to customers, its internal systems and the
buying patterns and state of Information Technology systems of its customer
base. In preparation for the Year 2000, Mercator tested all of its products,
evaluated and updated all of its internal systems and communicated the status of
product and upgrade requirements to its customers. Mercator did not encounter
any problems in regard to its products or internal systems as of March 31, 2000.
In addition, Mercator's business did not appear to be impacted by its customers
purchasing patterns as of March 31, 2000, either in regards to purchase or
return activity.
The total cost of Year 2000 compliance activities was not material to Mercator's
results of operations and financial condition, and was handled by individuals
responsible for the specific areas in the ordinary course of business. There
were no accruals made in 1999 or 2000 for loss contingencies relating to Year
2000 issues.
CONVERSION TO A SINGLE EUROPEAN CURRENCY
Mercator has sales in a number of foreign countries. However, as the majority of
foreign sales are in the United Kingdom, conversion to a single European
currency would not have a material impact on Mercator's financial results.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our quarterly and annual operating results are volatile and difficult to predict
and may cause our stock price to fluctuate
Our quarterly and annual operating results have varied significantly in the past
and are expected to do so in the future. We believe that you should not rely on
period to period comparisons of our results of operations as they are not
necessarily indications of our future performance. In some future periods, our
results of operations may be below the expectation of public market analysts and
investors. In this case, the price of our common stock would likely decline. Our
revenues and results of operations are difficult to forecast and depend on a
variety of factors. These factors include the following:
13
. the size, timing and terms of individual license transactions;
. the sales cycle for our products;
. demand for and market acceptance of our products and related
services, particularly our Mercator products;
. personnel changes, our ability to attract and retain qualified
sales, professional services and research and development
personnel and the rate at which this personnel becomes
productive;
. our ability to expand, and market acceptance of, our professional
services business;
. the timing of our expenditures in anticipation of product
releases or increased revenue;
. the timing of product enhancements and product introductions by
us and our competitors;
. market acceptance of enhanced versions of our existing products
and of new products;
. changes in pricing policies by our competitors and us;
. variations in the mix of products and services sold by us;
. the mix of channels through which our products and services are
sold;
. our success in penetrating international markets;
. the buying patterns and budgeting cycles of customers; and
. general economic conditions.
We have historically derived a substantial portion of our revenues from the
licensing of our software products, and we anticipate that this trend will
continue for the foreseeable future. Software license revenues are difficult to
forecast for a number of reasons, including the following:
. we typically do not have a material backlog of unfilled orders,
and revenues in any quarter substantially depend on orders booked
and shipped in that quarter;
. the length of the sales cycles for our products can vary
significantly from customer to customer and from product to
product and can be as long as nine months or more;
. the terms and conditions of individual license transactions,
including prices and discounts, are often negotiated based on
volumes and commitments, and may vary considerably from customer
to customer;
. we have generally recognized a substantial portion of our
quarterly software licensing revenues in the last month of each
quarter.
Accordingly, the cancellation or deferral of even a small number of
purchases of our products could harm our business.
14
It would be difficult for us to adjust our spending if we experience any revenue
shortfalls
Our future revenues will also be difficult to predict and we could fail to
achieve our revenue expectations. Our expense levels are based, in part, on our
expectation of future revenues, and expense levels are, to a large extent, fixed
in the short term. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. If revenue levels are below
expectations for any reason, our operating results are likely to be harmed. Net
income may be disproportionately affected by a reduction in revenue because a
large portion of our expenses are related to headcount that cannot be easily
reduced without harming our business.
In addition, we currently intend to increase our operating expenses by expanding
our finance staff, research and product development staff, particularly research
and development personnel to be devoted to our Mercator product line, increasing
our sales and marketing and professional services operations, expanding
distribution channels, and hiring personnel in other operating areas. We expect
to experience a significant time lag between the date professional services,
sales, and technical personnel are hired and the date these employees become
fully productive. The timing of expansion and the rate at which new technical,
professional services, and sales personnel become productive as well as the
timing of the introduction and success of new distribution channels could cause
material fluctuations in our results of operations. Furthermore, to the extent
increased operating expenses precede or are not subsequently followed by
increased revenues, our business could be harmed.
We may experience seasonal fluctuations in our revenues or results of operations
While we have not historically experienced any significant seasonal fluctuations
in our revenues or results of operations, it is not uncommon for software
companies to experience strong fourth quarters followed by weaker first
quarters, in some cases with sequential declines in revenues or operating
profit. We believe that many software companies exhibit this pattern in their
sales cycles primarily due to customers' buying patterns and budget cycles. We
may display this pattern in future years.
We depend on the sales of our Mercator products and related services
We introduced our Mercator products in 1993. In recent years, a significant
portion of our revenue has been attributable to licenses of our Mercator
products and related services, and we expect that revenue attributable to our
Mercator products and related services will continue to represent a significant
portion of our total revenue for the foreseeable future. Accordingly, our future
operating results significantly depend on the market acceptance and growth of
our Mercator product line and enhancements of these products and services.
Market acceptance of our Mercator product line may not increase or remain at
current levels, and we may not be able to successfully market our Mercator
product line or develop extensions and enhancements to this product line on a
long-term basis. In the event that our current or future competitors release new
products that provide, or are perceived as providing, more advanced features,
greater functionality, better performance, better compatibility with other
systems or lower prices than our Mercator product line, demand for our products
and services would likely decline. A decline in demand for, or market acceptance
of, our Mercator product line would harm our business.
We may experience difficulties in developing and introducing new or enhanced
products necessitated by technological changes
Our future success will depend, in part, upon our ability to anticipate changes,
to enhance our current products and to develop and introduce new products that
keep pace with technological advancements and address the increasingly
sophisticated needs of our customers. Our products may be rendered obsolete if
we fail to anticipate or react to change.
15
Development of enhancements to existing products and new products depends, in
part, on a number of factors, including the following:
. the timing of releases of new versions of applications systems by
vendors;
. the introduction of new applications, systems or computing
platforms;
. the timing of changes in platforms;
. the release of new standards or changes to existing standards;
and
. changing customer requirements.
Our product enhancements or new products may not adequately meet the
requirements of the marketplace or achieve any significant degree of market
acceptance. In addition, our introduction or announcement, or by one or more of
our current or future competitors, of products embodying new technologies or
features could render our existing products obsolete or unmarketable. Our
introduction or announcement of enhanced or new product offerings or by our
current or future competitors may cause customers to defer or cancel purchases
of our existing products. Any deferment or cancellation of purchases could harm
our business.
We could experience delays in developing and releasing new products or product
enhancements
We may experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products or product enhancements.
We have in the past experienced delays in the introduction of product
enhancements and new products and we may experience delays in the future.
Furthermore, as the number of applications, systems and platforms supported by
our products increases, we could experience difficulties in developing, on a
timely basis, product enhancements which address the increased number of new
versions of applications, systems or platforms served by our existing products.
If we fail, for technological or other reasons, to develop and introduce product
enhancements or new products in a timely and cost-effective manner or if we
experience any significant delay in product development or introduction, our
customers may delay or decide against purchases of our products, which could
harm our business.
Our future success depends on retaining our key personnel and attracting and
retaining additional highly qualified employees
Our future success depends in large part on the continued service of our key
sales, professional services and research and development personnel, as well as
senior management. All employees are employed at-will and we have no fixed- term
employment agreements with our employees, which prevents them from terminating
their employment at any time. The loss of the services of any of one or more of
our key employees could harm our business.
Our future success also depends on our ability to attract, train and retain
highly qualified sales, research and development, professional services and
managerial personnel, particularly sales, professional services and research and
development personnel with expertise in enterprise resource planning systems.
Competition for these personnel is intense. We may not be able to attract,
assimilate or retain qualified personnel. We have at times experienced, and we
continue to experience, difficulty in recruiting qualified sales and research
and development personnel, and we anticipate these difficulties will continue in
the future. Furthermore, we have in the past experienced, and in the future we
expect to continue to experience, a significant time lag between the date sales,
research and development and professional services personnel are hired and the
date these employees become fully productive.
We may encounter difficulties in managing our growth
Our business has grown in recent periods, with total revenues increasing from
approximately $16.1 million in 1995 to $98.6 million in 1999. We have also
acquired the assets of Software Consulting Partners in November 1998, Braid
Group Limited in March 1999, and Novera Software, Inc. in September 1999. The
growth of our business has placed, and is expected to continue to place, a
strain on our administrative, financial, sales and operational resources and
increased demands on our systems and controls. For example, we noted an increase
in quarterly days sales outstanding from March 31, 1999 to March 31, 2000 from
approximately 109 days to approximately 116 days, and an increase in net
accounts receivable from to $20.8 million to $40.2 million.
To deal with these concerns, we have recently implemented, or are in the process
of implementing and will be required to implement in the future, a variety of
new and upgraded operational and financial systems, procedures and controls. In
addition, we intend to hire additional administrative personnel. We may not be
able to successfully complete the implementation and integration of these
systems,
16
procedures and controls, or hire additional personnel, in a timely manner. The
failure of our management to respond to, and manage, our growth and changing
business conditions, or to adapt our operational, management and financial
control systems to accommodate our growth could harm our business.
The success of our products will also depend upon the success of the platforms
we target
We may, in the future, seek to develop and market enhancements to existing
products or new products, which are targeted for applications, systems or
platforms that we believe, will achieve commercial acceptance. This could
require us to devote significant development, sales and marketing personnel, as
well as other resources, to these efforts, which would otherwise be available
for other purposes. We may not be able to successfully identify these
applications, systems or platforms, and even if we do so, they may not achieve
commercial acceptance or we may not realize a sufficient return on our
investment. Failure of these targeted applications, systems or platforms to
achieve commercial acceptance or our failure to achieve a sufficient return on
our investment could harm our business.
We may not successfully expand our sales and distribution channels
An integral part of our strategy is to expand our indirect sales channels,
including value-added resellers, independent software vendors, systems
integrators and distributors. This channel is accounting for a growing
percentage of our total revenues and we are increasing resources dedicated to
developing and expanding these indirect distribution channels. We may not be
successful in expanding the number of indirect distribution channels for our
products. If we are successful in increasing our sales through indirect sales
channels, we expect that those sales will be at lower per unit prices than sales
through direct channels, and revenue we receive for each sale will be less than
if we had licensed the same product to the customer directly.
Selling through indirect channels may also limit our contact with our customers.
As a result, our ability to accurately forecast sales, evaluate customer
satisfaction and recognize emerging customer requirements may be hindered.
Even if we successfully expand our indirect distribution channels, any new value
added resellers, independent software vendors, system integrators or
distributors may offer competing products, or have no minimum purchase
requirements of our products. These third parties may also not have the
technical expertise required to market and support our products successfully. If
the third parties do not provide adequate levels of services and technical
support, our customers could become dissatisfied, or we would have to devote
additional resources for customer support. Our brand name and reputation could
be harmed. Selling products through indirect sales channels could cause
conflicts with the selling efforts of our direct sales force.
Our strategy of marketing products directly to end-users and indirectly through
value added resellers; independent software vendors, systems integrators and
distributors may result in distribution channel conflicts. Our direct sales
efforts may compete with those of our indirect channels and, to the extent
different resellers target the same customers, resellers may also come into
conflict with each other. Although we have attempted to manage our distribution
channels to avoid potential conflicts, channel conflicts may harm our
relationships with existing value added resellers, independent software vendors,
systems integrators or distributors or impair our ability to attract new value
added resellers, independent software vendors, systems integrators and
distributors.
We may face significant risks in expanding our international operations
International revenues accounted for 11.8% of our total revenues for 1998
however, as a result of the acquisitions of Braid, and the establishment of a
sales office in Germany during 1999, International revenues accounted for 15% of
our total revenues for the first quarter of 1999 and 39% for the first quarter
of 2000. Continued expansion of our international sales and marketing efforts
will require significant management attention and financial resources. We also
expect to commit additional time and development resources to customizing our
products for selected international markets and to developing international
sales and support channels.
International operations involve a number of additional risks, including the
following:
. impact of possible recessionary environments in economies outside
the United States;
. longer receivables collection periods and greater difficulty in
accounts receivable collection;
. unexpected changes in regulatory requirements;
. dependence on independent resellers;
17
. reduced protection for intellectual property rights in some
countries, tariffs and other trade barriers;
. foreign currency exchange rate fluctuations;
. difficulties in staffing and managing foreign operations;
. the burdens of complying with a variety of foreign laws;
. potentially adverse tax consequences; and
. political and economic instability.
To the extent that our international operations expand, we expect that an
increasing portion of our international license and service and other revenues
will be denominated in foreign currencies, subjecting us to fluctuations in
foreign currency exchange rates. We do not currently engage in foreign currency
hedging transactions. However, as we continue to expand our international
operations, exposures to gains and losses on foreign currency transactions may
increase. We may choose to limit our exposure by the purchase of forward foreign
exchange contracts or similar hedging strategies. The currency exchange strategy
that we adopt may not be successful in avoiding exchange-related losses. In
addition, the above-listed factors may cause a decline in our future
international revenue and, consequently, may harm our business. We may not be
able to sustain or increase revenue that we derive from international sources.
Our success depends upon the widespread use and adoption of the internet and
intranets
We believe that demand for enterprise application integration solutions, such as
those that we offer, will depend, in part, upon the adoption by businesses and
end-users of the internet and intranets as platforms for electronic commerce and
communications. The internet and intranets are new and evolving, and they may
not be widely adopted, particularly for electronic commerce and communications
among businesses. Critical issues concerning the internet and intranets,
including security, reliability, cost, ease of use and access and quality of
service, and remain unresolved at this time, inhibiting adoption by many
enterprises and end- users. If the internet and intranets are not widely used by
businesses and end- users, particularly for electronic commerce, this could harm
our business.
Government regulation and legal uncertainties relating to the internet could
adversely affect our business.
Congress has recently passed legislation and several more bills have recently
been sponsored in both the House and Senate that are designed to regulate
certain aspects of the internet, including on-line content, copyright
infringement, user privacy, taxation, access charges, liability for third-party
activities and jurisdiction. In addition, federal, state, local and foreign
governmental organizations are also considering other legislative and regulatory
proposals that would regulate the internet. Areas of potential regulation
include libel, pricing, quality of products and services, and intellectual
property ownership.
The laws governing the use of the internet, in general, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property; privacy, libel and taxation apply to the internet. In
addition, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad. This occurrence may impose additional burdens on companies
conducting business online by limiting how information can flow over the
internet and the type of information that can flow over the internet. The
adoption or modification of laws or regulations relating to the internet could
adversely affect our business.
It is not known how courts will interpret both existing and new laws. Therefore,
we are uncertain as to how new laws or the application of existing laws will
affect our business. In addition, our business may be indirectly affected by our
clients who may be subject to such legislation. Increased regulation of the
internet may decrease the growth in the use of the internet, which could
decrease the demand for our services, increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition.
Capacity constraints caused by growth in the use of the internet may, unless
resolved, impede further development of the internet to the extent that users
experience delays, transmission errors and other difficulties. Further, the
adoption of the internet for commerce and communications, particularly by those
individuals and companies that have historically relied upon alternative means
of commerce and communication generally requires the understanding and
acceptance of a new way of conducting business and exchanging information. In
particular, companies that have already invested substantial resources in other
means of conducting commerce and exchanging information may be particularly
reluctant or slow to adopt a new internet-based strategy that may make their
existing personnel and infrastructure obsolete. If the necessary infrastructure,
products, services or facilities are not developed, or if the internet does not
become a viable commercial medium, our business, results of operations and
financial condition could be materially and adversely affected.
18
The United States Omnibus Appropriations Act of 1998 places a moratorium on
taxes levied on internet access from October 1, 1998 to October 21, 2001.
However, states may place taxes on internet access if taxes had already been
generally imposed and actually enforced prior to October 1, 1998. States which
can show they enforced internet access taxes prior to October 1, 1998 and states
after October 21, 2001 may be able to levy taxes on internet access resulting in
increased cost to access to the internet, resulting in a material adverse effect
on our business.
We face significant competition in the market for e-business integration
software
The market for our products and services is extremely competitive and subject to
rapid change. Because there are relatively low barriers to entry in the software
market, we expect additional competition from other established and emerging
companies.
In the e-business integration market, our Mercator products and related services
compete primarily against solutions developed internally by individual
businesses to meet their specific e-business integration needs. In addition, we
face increasing competition in the e-business integration market from other
third-party software vendors.
Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, product development and marketing
resources, greater name recognition and larger customer bases than we do. Our
present or future competitors may be able to develop products that are
comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends or customer requirements, or devote
greater resources than we do to the development, promotion and sale of their
products. Accordingly, we may not be able to compete effectively in our target
markets against these competitors.
We expect that we will face increasing pricing pressures from our current
competitors and new market entrants. Our competitors may engage in pricing
practices that reduce the average selling prices of our products and related
services. To offset declining average selling prices, we believe that we must
successfully introduce and sell enhancements to existing products and new
products on a timely basis. We must also develop enhancements to existing
products and new products that incorporate features that can be sold at higher
average selling prices. To the extent that enhancements to existing products and
new products are not developed in a timely manner, do not achieve customer
acceptance or do not generate higher average selling prices, our operating
margins may decline.
We have only limited protection for our proprietary technology
Our success is dependent upon our proprietary software technology. We do not
currently have any patents and we rely principally on trade secret, copyright
and trademark laws, nondisclosure and other contractual agreements and technical
measures to protect our technology. We also believe that factors such as the
technological and creative skills of our personnel, product enhancements and new
product developments are essential to establishing and maintaining a technology
leadership position. We enter into confidentiality and/or license agreements
with our employees, distributors and customers, and we limit access to and
distribution of our software, documentation and other proprietary information.
The steps that we have taken may not be sufficient to prevent misappropriation
of our technology, and these protections do not preclude competitors from
developing products with functionality or features similar to our products.
Third parties could also independently develop competing technologies that are
substantially equivalent or superior to our technologies. Furthermore, effective
copyright and trade secret protection may be unavailable or limited outside of
the United States. Any failure by or inability of us to protect our proprietary
technology could harm our business.
We may become subject to infringement claims
Although we do not believe that our products infringe the proprietary rights of
any third parties, third parties might assert infringement claims against us or
our customers in the future. Furthermore, we may initiate claims or litigation
against third parties for infringement of our proprietary rights or to establish
the validity of our proprietary rights. Litigation, either as plaintiff or
defendant, would cause us to incur substantial costs and divert management
resources from productive tasks. Any litigation, regardless of the outcome,
could harm our business. Furthermore, parties making claims against us could
secure substantial damages, as well as injunctive or other equitable relief,
which could effectively block our ability to license our products in the United
States or abroad. A large monetary judgment could harm our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mercator is exposed to market risk primarily through its investment in
marketable securities. Mercator's investment policy calls for investment in
short term, low risk instrument. As of March 31, 2000, investments in marketable
securities were $4.1 million. Due to the nature of these investments, any
decrease in rates would not have material impact on the Company's financial
statements.
19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about February 1, 2000, Mercator was named as a defendant and served with
a complaint in an action entitled Carpet Co-Op of America Association, Inc. and
FloorLINK, L.L.C. v. TSI International Software Ltd., Civil Action No. 00CC-
00231, pending in the Circuit Court of St. Louis County, Missouri (the "Missouri
Action"). The complaint includes counts of breach of contract, fraud and
negligent misrepresentation in connection with certain software implementation
work provided under contract by Mercator. The plaintiffs allege that Mercator
failed to provide and implement certain software products and designs within an
alleged time requirement and misrepresented Mercator's ability to implement the
products within that timeframe. The complaint seeks an unspecified damage amount
in excess of $2 million. On or about March 30, 2000, plaintiffs in the Missouri
Action filed an amended complaint adding a claim of negligence in connection
with the contract. On April 10, 2000, Mercator filed a motion to dismiss the
Missouri Action in its entirety, which currently is pending. Mercator believes
that the allegations in the amended complaint in the Missouri Action are without
merit and intends to contest them vigorously.
On March 30, 2000, Mercator filed an action entitled TSI International Software
Ltd. (d/b/a Mercator Software) v. Carpet Co-op of America Association, Inc. and
FloorLink, LLC, Civil Action No. 300-CV-603 (SRU) in the United States District
Court for the District of Connecticut (the "Connecticut Action"). The
Connecticut Action asserts claims for copyright infringement, trademark
infringement, unfair competition, misappropriation of trade secrets, breach of
contract, fraud, unjust enrichment and violation of the Connecticut Unfair Trade
Practices Act, in connection with the software implementation project at issue
in the Missouri Action. Mercator's complaint in the Connecticut Action alleges
that the defendants have failed to pay the more than $1.7 million still owed to
Mercator under the contract, and that, during the course of the project, the
defendants fraudulently misappropriated certain of Mercator's copyrighted
software, trademarks and other software implementation related trade secrets. On
May 9, 2000, the court in the Connecticut Action entered a Stipulated Injunction
barring the defendants from using, copying or disclosing any of Mercator's
copyrighted software, trademarks or other trade secrets or proprietary
information.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On March 30, 2000 at a special meeting of Mercator stockholders, stockholders
approved the proposal listed below. Proxies were solicited by Mercator pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended.
As of February 23, 2000, the record date for the special meeting, there were
approximately 28,558,679 shares of common stock outstanding and entitled to
vote, of which 23,232,071 were present in person or by proxy and voted at the
meeting. The stockholders voted upon a proposal to amend TSI International
Software Ltd.'s Certificate of Incorporation to change the name of TSI
International Software Ltd. to Mercator Software, Inc. The proposal was approved
with 23,216,061 stockholders voting for the proposal, 8,060 against the
proposed, 7,950 stockholders, abstaining or with no vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description of Exhibit
- ------- ----------------------
27.01 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
MERCATOR SOFTWARE, INC.
Dated: August 21, 2000 By /s/ Constance F. Galley
-----------------------------
President and Chief Executive Officer
Dated: August 21, 2000 By /s/ Constance F. Galley
----------------------------
principal financial officer
20
Exhibit Index
Exhibit Description of Exhibit
- ------- ----------------------
27.01 Financial Data Schedule
21