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Mercator Software Inc.
(NASDAQ: MCTR)
45 Danbury Rd, Wilton 06897
President and CEO: Constance Galley
Revenues (FYE December 31, 1999): $98,624,600
Net profit/loss (FYE December 31, 1999): ($16,267,600)
Employees: 626
Market capitalization: $350.4 million
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Business New Haven
10/16/2000
By: BNH
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Mercator Software Inc.
Growth is good - usually. For Mercator Software Inc. (formerly known as TSI International Software Ltd.), a provider of software that allows companies to integrate its business-to-e-business capabilities, recent growth has been significant.
News items often refer to the introduction of new products or the signing of new agreements. Mercator has increased its sales force and taken on several new customers, such as Fidelity, Kimberly Clark and Fleet Technology.
Reported revenues increased for the first six months of 2000 fiscal year by 64 percent - and the stock peaked in the spring of 2000 to just under $150.
But growth can also be shadowed by negatives - perhaps simple growing pains, little things slipping through the cracks, or worse. In July Mercator's stock started to dive after the company announced its earnings would be about half of analysts' estimates. The company attributed the discrepancy to higher marketing costs affecting the bottom line.
Following the company's announcement of second-quarter results, Mercator's audit committee became aware that there was a problem resulting from the underreporting of certain expenses. The company called upon outside auditors to assist in adjusting the first and second quarter results by properly reporting several expense items amounting to about $2.4 million.
Revenues for the first and second quarter of $31.252 million and $35.696 million, respectively, were not affected. However, first-quarter pro-forma net income, excluding amortization and intangibles with assumed 38-percent tax rate, was adjusted to $987,000 (three cents per share) - $823,000 less than initially reported. The first-quarter net loss on an as-reported basis was $11.497 million (41 cents per share), $1.621 million above previous reports.
Second quarter pro-forma net income, also excluding amortization and intangibles with assumed 38 percent tax rate, was adjusted to $500,000 (two cents per share), a decrease of $694,000 from previous reports. The net loss on an as-reported basis was $17.788 million (61 cents per share), a $1.776 million increase from previous reports.
Besides the adjustments in reporting expenses, the company took steps to strengthen its operation of corporate finance, internal controls and oversight, including creating the new position of chairman of the board. James P. Schadt, who had been a director of the company for two years and also chairman of the audit committee, was elected to the position.
The company also appointed an interim chief financial officer and controller until permanent replacements could be found. In addition, outside accountants were engaged to assist in reviewing Mercator's internal controls and make recommendations.
Problem solved? Although the company has taken action to remedy the situation, it is not out of the woods yet. Trouble is lurking in the form of a shareholder class-action lawsuit with allegations the company understated operating expenses and overstated gross profits and net income. Damages are sought for securities law violations on behalf of those investors that bought Mercator common stock during the “class period” between April 20 and August 21, 2000. The stock is currently trading in the $11 to $12 range from a 52-week high of 149 7/8.
At this point analyst recommendations are split between holds and buys. Earnings per share estimates come in at 11 cents per share for the third quarter and 14 cents per share for the fourth quarter. Estimates for the year are 33 cents per share and for next year 58 cents per share.
Aside from the recent reporting issues, business continues for the company. In September it announced its launch of a free online site for information on e-business integration: myMercator.com. The site is available to customers and partners of Mercator to obtain information and share ideas. The prototype was introduced at the Mercator Exchange 2000 in April.
Mercator also announced a new partnership with Bowstreet for enabling customers to integrate its existing applications and business processes via a customized Web site to deploy new applications over the Internet. Bowstreet has also entered into the MercatorWorld Partners Program, by which it has access to updates on Mercator products and tools.
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