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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ...........
Commission file number: 0-19696
MERANT plc
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14 1QN, England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares of 2p each.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None.
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the Annual
Report: 143,672,697 Ordinary Shares of 2p each.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 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.
Yes X No ___
------
Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 __ Item 18 X
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TABLE OF CONTENTS
Page
General Introduction...........................................................1
PART I
Item 1. Description of Business..............................................2
Item 2. Description of Property.............................................12
Item 3. Legal Proceedings...................................................13
Item 4. Control of Registrant...............................................13
Item 5. Nature of Trading Market............................................14
Item 6. Exchange Controls and Other Limitations Affecting Security Holders..15
Item 7. Taxation............................................................15
Item 8. Selected Financial Data.............................................18
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................19
Item 9A. Quantitative and Qualitative Disclosures About Market Risk..........19
Item 10. Directors and Officers of Registrant................................19
Item 11. Compensation of Directors and Officers..............................22
Item 12. Options to Purchase Securities from Registrant or Subsidiaries......22
Item 13. Interest of Management in Certain Transactions......................23
PART II
Item 14. Description of Securities to be Registered..........................23
PART III
Item 15. Defaults Upon Senior Securities.....................................34
Item 16. Changes in Securities and Changes in Security for Registered
Securities and Use of Proceeds......................................35
PART IV
Item 17. Financial Statements................................................35
Item 18. Financial Statements................................................35
Item 19. Financial Statements and Exhibits...................................35
Signatures....................................................................42
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GENERAL INTRODUCTION
This annual report contains translations of certain amounts from GB pounds
to U.S. dollars. These translations have been made at the noon buying rates
published by the Federal Reserve Bank of New York on the relevant dates. They
should not be construed as representations that the GB pound amounts actually
represent the U.S. dollar amounts or could be converted into U.S. dollars at the
rates indicated or at any other rate. In its consolidated financial statements
MERANT uses exchange rates which are published at the close of business in
London, and which therefore may differ from the noon buying rates. For
additional information on exchange rates, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Exchange Rate
Fluctuations" on pages 29 and 70 of the MERANT Annual Report Detail included in
MERANT's Annual Report to Shareholders for the year ended April 30, 1999
contained in the Report of Foreign Issuer on Form 6-K furnished to the SEC on
August 27, 1999, which sections are incorporated in this Form 20-F by reference.
On April 30, 1999, the noon buying rate was $1.61 per GBP 1.
We publish annual reports containing annual audited consolidated financial
statements and opinions on the financial statements by independent public
accountants. Financial statements are prepared in accordance with U.S. GAAP,
expressed in U.S. dollars, and also in accordance with U.K. GAAP, expressed in
GB pounds. U.K. GAAP differs from U.S. GAAP in, amongst other areas, the
treatment of mergers, of goodwill and other intangibles acquired in connection
with the purchase of subsidiaries, in the methods of computing earnings per
share, and in other disclosures and presentation.
We also publish quarterly updates and semi-Annual Reports containing
unaudited financial information prepared on the same basis as the audited
consolidated financial statements.
Each of these reports is furnished to The Bank of New York as depositary
under a deposit agreement (see Item 14). The depositary generally will mail
these reports to record-holders of American depositary receipts, or ADRs. MERANT
also furnishes to the depositary all notices of shareholders' meetings and other
reports and communications that are made generally available to MERANT
shareholders. The depositary makes these communications available for inspection
by ADR record-holders and mails notices of shareholders' meetings to them.
As a foreign private issuer in the United States, we are not required to
file quarterly reports with the SEC. However, we began furnishing quarterly
reports to the SEC on Form 6-K on a voluntary basis in June 1997. These reports
include the results for the applicable fiscal quarter in a format similar to
that of a Form 10-Q. Also, we are not currently required to file electronically
with the SEC but as of March 1997, we began voluntarily submitting our filings
electronically to the SEC.
The Financial Statements and other financial information in this Form 20-F
do not comprise "statutory accounts" within the meaning of Section 240 of the
Companies Act 1985 of Great Britain. Statutory accounts for the years ended
April 30, 1999, January 31, 1998 and January 31, 1997 have been delivered to the
Registrar of Companies for England and Wales. The auditor's reports on these
accounts were unqualified.
On November 30, 1998, MERANT changed its fiscal year end and accounting
reference date to April 30 from January 31. In this Form 20-F and the financial
statements incorporated in this Form 20-F by reference we use the terms fiscal
years 1999, 1998 and 1997 and the 1998 transition period to mean the fiscal
years ended April 30, 1999, January 31, 1998 and January 31, 1997 and the
three-month period ended April 30, 1998. MERANT submitted a Transition Report on
Form 20-F to the SEC on February 26, 1999 covering the 1998 transition period.
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DataDirect, Micro Focus and PVCS are registered trademarks, and MERANT and
Egility are trademarks, of MERANT. Certain other trademarks belonging to other
companies appear in this annual report and are the property of their respective
owners.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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MERANT plc was incorporated in England in March 1983 as a public limited
company under the Companies Acts 1948 to 1981 of Great Britain under its
original name, Micro Focus Group plc. In May 1983, the company obtained a
quotation on the Unlisted Securities Market of the London Stock Exchange, and in
June 1984 became a fully listed company on the London Stock Exchange. In May
1992, the company became listed on the Nasdaq National Market. On February 16,
1999, the company changed its name from Micro Focus Group plc to MERANT plc.
MERANT designs and develops computer software for business application
development and provides related support services. Our solutions permit
developers to develop, deploy, maintain and test software applications for use
on a wide range of hardware and software platforms, from the Internet to
personal computer workstations and mainframe computers throughout the
enterprise.
Industry Background
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The computer software industry is divided into many categories, including:
* operating systems such as UNIX and Windows;
* end-user software applications for the average desktop user such as
spreadsheet and word processing programs,
* application development tools such as compilers and rapid application
development tools,
* enterprise-wide packaged software applications which are sold as
packages and then customized for each enterprise based upon the needs
of the individual user, such as accounting software, and
* custom applications which may address a wide variety of needs but are
typically created for a single enterprise to meet unique corporate
objectives.
Within that industry, MERANT's core business is to provide enterprise
application development solutions. We provide application development tools that
are used to create and improve the computing applications of an enterprise, and
related support and training services. Our solutions enable businesses to:
* transform enterprise applications for the changing technology and
business requirements of the e-business environment,
* manage the application development process,
* provide integrated data connectivity across the enterprise,
* extend legacy applications to the Internet, and
* create an e-business strategy and develop e-commerce applications.
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Solutions
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MERANT operates in four business segments, as indicated below. The
solutions provided by each segment are marketed throughout the world. The
segments are:
APPLICATION CREATION AND TRANSFORMATION, or ACT - This includes the MERANT
Micro Focus range of products and services, which enables customers to
accelerate e-business by maintaining, transforming and extending business
applications. The product lines are:
* Application Extension: designed to enable customers to extend their
COBOL assets to the web and other distributed platforms.
* Mainframe Development: designed to enable customers to maintain legacy
applications and increase productivity by extending their development
environment to the workstation.
* Application Transformation: designed to transform legacy applications
for euro-readiness and Year 2000 compliance, including remediation,
verification, testing, due diligence and reporting requirements
APPLICATION DEVELOPMENT MANAGEMENT, or ADM - MERANT's ADM solution helps
provide quality throughout the application development process. It consists of
the PVCS series, a series of products that enable software developers to manage
software configuration and change in a team development environment, such as on
a LAN or the Internet. The PVCS series includes tools for software configuration
management, process automation, issue management, web content management and web
application development. The ADM solution leverages team development on the
local area network or the Web, while supporting multi-operating systems and
multi-tool environments.
ENTERPRISE DATA CONNECTIVITY, or EDC - MERANT's EDC solutions address
enterprise data access, connectivity and integration. MERANT DataDirect helps
customers integrate corporate data assets across new and existing systems, from
the mainframe to the Internet. DataDirect provides organizations with an
information platform, permitting flexible response to market dynamics and
preservation of investment in existing resources. It supports widely accepted
standards, including ODBC, JDBC and OLE DB, and major operating systems and data
sources. DataDirect offerings also include solutions to deploy cross-platform
applications accessing multiple data sources.
ENTERPRISE CONSULTING SOLUTIONS, or ECS - MERANT's enterprise consulting
solutions are a flexible suite of customizable solutions designed to meet the
full spectrum of an organization's transformation to e-business, remaining Year
2000 compliance requirements, validation and verification efforts, euro currency
conversion and other mass change initiatives. ECS provides support for
companies' strategic technology-related business initiatives, including
developing e-business strategies and deploying e-commerce intranet, extranet and
Internet applications, and helping development organizations improve their
processes and operations to attain software development standards.
MERANT EGILITY - This is the MERANT framework for rapidly enabling existing
businesses to compete in e-business, and provides solutions for creating
e-business strategy, building e-business and e-commerce intranet, extranet and
Internet sites, extending legacy applications, integrating data and
applications, managing web content and developing web applications.
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Support and Training Services
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MERANT offers its customers a wide variety of support services which are
intended to help customers gain the benefits from the solutions that MERANT
delivers. Customers who purchase maintenance services benefit from MERANT
SupportNet, which provides technical support, and product maintenance releases
and updates, a web-based customer community for sharing information regarding
MERANT products and other support services.
MERANT also provides comprehensive fee-paid education and training
solutions through MERANT University. Training offerings include both on-site
training and training at a MERANT training center and are focused primarily on
the use of MERANT solutions.
Sales and marketing
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MERANT markets and distributes its products on a worldwide basis through
multiple channels. Sales are made directly, using a combination of field,
telesales, third parties distribution and the Internet. We have local sales and
marketing operations in the U.K., the U.S., Australia, Belgium, Canada, France,
Germany, India, Italy, Japan, the Netherlands, Portugal, Singapore, Spain and
South Africa. Our direct sales effort is augmented with a network of independent
software vendors, dealers, distributors, original equipment manufacturers and
value added resellers in 40 countries around the world.
During the last fiscal year, sales by geographic region were distributed as
follows: 60% in the U.S., 19% in the U.K., 6% in Germany, 10% in the rest of
Europe (excluding the U.K. and Germany), 1% in Canada, 2% in Japan and 2% in the
rest of the world. As of April 30, 1999, MERANT's sales and sales support
organization consisted of 225 people in the United States, 193 people in Europe
and 30 people located in other countries. MERANT has distributors representing
its products throughout the world.
Our end-user customers consist of corporate data processing centers,
independent software vendors, individual software developers, value-added
resellers and computer equipment manufacturers worldwide. The customer base is
broad, and no individual customer accounted for more than 10% of total revenue
in fiscal years 1999, 1998 or 1997. Additionally, MERANT's business does not
concentrate on any specific industry.
Telesales
Telesales representatives concentrate on sales at the project level and to
smaller accounts, selling to individual developers and project managers.
Telesales representatives concentrate their efforts on one solution area.
Telesales are supported by mailings to lists of prospective customers and
advertising in selected trade magazines. MERANT also offers special promotions
and incentives from time to time aimed at introducing MERANT's products to new
users.
Field Sales
Our field sales personnel are located in several major cities in the U.S.
and throughout the world, offering local sales and technical support to
customers and prospects. Field sales personnel also concentrate their efforts on
one solution area within a defined geographical region. Field sales builds
long-term relationships with our largest customers and prospects. Field sales
personnel assist prospective and current customers in evaluating needs and
solutions and guide them in the evaluation and use of MERANT products. Field
sales personnel focus their efforts primarily on large corporate prospects and
customers.
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Third Parties
In addition to our own field sales and telesales organizations, we market
our technologies and products through a global network of third parties,
including:
* independent software vendors, or ISVs
* value-added resellers, or VARs
* original equipment manufacturers, or OEMs
* other dealers and distributors.
Through third party alliances, MERANT enables selected ISVs and OEMs to embed
and sell MERANT technologies in their own products. Alliances with other ISVs
include joint development and marketing arrangements. We also have arrangements
with VARs, dealers and distributors to resell our products in markets which we
cannot cost effectively serve on a direct basis.
Internet
We also use the Internet as a marketing and sales channel. We promote our
products and services and offer demonstration and evaluation versions of
products on a trial basis. We also conduct prospect identification and lead
generation programs over the Internet. We intend to continue to embrace Internet
technology to develop and deliver new products and to provide better and faster
service to customers.
Research and Development
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MERANT has a policy of consistently updating its software products for the
various operating systems consistent with customer demand. Each new release adds
greater functionality and more features to the products. Research and
development expenditures in fiscal 1999, the three-month 1998 transition period,
and fiscal years 1998 and 1997, represented approximately 14%, 12%, 15%, and 21%
of MERANT's revenue. Those expenditures are quantified in the following table,
which also discloses the costs capitalized and the amounts of amortization of
capitalized costs for each period.
In millions of U.S. dollars Year Three Year Year
ended months ended ended
April 30, ended January 31, January 31,
1999 April 30, 1998 1997
1998
R&D expenditures, before capitalization $53.6 $13.7 $56.2 $60.6
Costs capitalized as software product assets (8.5) (2.5) (10.3) (17.7)
Amortization of previously capitalized software 14.8 3.3 14.9 21.4
R&D charge $59.9 $14.5 $60.8 $64.3
MERANT has signed license and distribution arrangements that enable it to
sell products developed by third parties. We pay license fees to these third
parties, which typically have a continuing obligation to improve and maintain
the products supplied to us. For the year ended April 30, 1999, revenue from
these products accounted for approximately 2% of our total net revenue.
The products that we ship are comprised primarily of printed material on
paper and software programs copied onto diskettes, tape media or CD-ROM. These
raw materials are widely available.
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Employees
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As of April 30, 1999, MERANT had 2,018 employees, of whom 484 were located
in the U.K., 1,119 were in the U.S. and 415 in other countries. None of our
employees is represented by a labor union. MERANT has experienced no work
stoppages and believes its relations with its employees are good.
MERANT has adopted policies with regard to issuance of share options to its
employees. We have an ongoing policy of paying cash bonuses based upon our
financial performance relative to plan. These policies, together with our sales,
marketing and financial practices, are designed to encourage employee
performance and minimize employee turnover, although there can be no assurance
that these policies and practices will be successful.
Recent Acquisitions or Dispositions
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During fiscal 1999, MERANT completed three business combinations.
On May 15, 1998, we acquired all the share capital of our Italian
distributor, Micro Focus Italia, s.r.l., for total cash consideration of $4.6
million. On August 13, 1998, we acquired all the share capital of our Australian
distributor, Advanced Software Engineering Pty Ltd., for total cash
consideration of $2.5 million. These transactions were accounted for as
purchases under U.S. GAAP.
On September 24, 1998, we completed a merger with INTERSOLV, Inc, a
Rockville, Maryland-based provider of software solutions that facilitate the
development, delivery and deployment of business information systems. The
transaction was accounted for as a pooling of interests under U.S. GAAP. Under
the terms of the agreement, each share of INTERSOLV common stock was exchanged
for 0.55 MERANT ADSs. In addition, each outstanding option or right to purchase
or acquire shares of INTERSOLV common stock was assumed by MERANT and became an
option or right to purchase or acquire MERANT ADSs with appropriate adjustments
to the price and number of shares based on the exchange ratio of 0.55 ADSs per
INTERSOLV share. The merger was structured as a tax-free reorganization under
U.S. tax law. MERANT issued approximately 12.6 million new ADSs (representing
approximately 63.1 million new ordinary shares) in exchange for INTERSOLV's
common stock and share equivalents outstanding, which at the time of the
completion of the merger represented approximately 46% of MERANT's share capital
on a fully-diluted basis. Prior to the merger, INTERSOLV was a public company
listed on the Nasdaq National Market.
Since the end of the current fiscal year, on August 3, 1999, MERANT
acquired all the share capital of Essential Software Inc., for total cash
consideration of up to $15 million, subject to the terms of the acquisition
agreement. Essential Software, Inc. was an Internet professional services firm
based in Raleigh, North Carolina, which did business as The Marathon Group. This
transaction is intended to be accounted for as a purchase under U.S. GAAP.
Risk Factors
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MERANT'S OPERATING RESULTS MAY FLUCTUATE, AND ANY FLUCTUATIONS COULD ADVERSELY
AFFECT THE PRICE OF MERANT SECURITIES
MERANT's future operating results are subject to quarterly and annual
fluctuations. If MERANT fails to meet the expectations of securities analysts
and investors as a result of any future fluctuations in its 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,
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* 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,
* 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
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, and our ability
to fill, orders received in that quarter. 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 the timing of sales and license fees
difficult to predict. Because our staffing and operating expenses are based on
anticipated total revenue levels, and a high percentage of our costs are fixed
in the short term and do not vary with revenue, small variations between
anticipated orders and actual orders, as well as non-recurring or large orders,
can cause disproportionate variations in our operating results from quarter to
quarter. As a result, and due to the typical size of customers' orders, MERANT's
quarterly operating results and cash flow would suffer from a lost or delayed
sale. Moreover, if significant sales occur earlier than expected, operating
results for later quarters may suffer.
MERANT'S REVENUE COULD DECLINE IF CUSTOMERS DEFER SPENDING UNTIL AFTER TURN OF
THE CENTURY
Many of MERANT's existing and potential customers could implement policies
that prohibit or strongly discourage making changes or additions to their
internal computer systems prior to or shortly after the turn of the millennium.
If existing or potential customers delay purchasing products and services as a
result of Year 2000 issues, we could experience lower revenues until customers
resume more normal buying patterns. We anticipate that demand in the Year 2000
product and service market will decline, perhaps rapidly, in anticipation of or
shortly following the Year 2000. We also anticipate that demand for our Year
2000 compliance products and services may decline significantly as a result of
new technologies, competition or other factors.
SEASONALITY CAN CAUSE MERANT'S OPERATING RESULTS TO FLUCTUATE
MERANT's 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 revenues could decline if there is a decline in the demand for or use
of the COBOL language or mainframe computers
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A substantial portion of MERANT's net revenue is derived from products and
related services for mainframe application development in the COBOL language and
COBOL compilers running on workstations and personal computers. We expect that a
substantial portion of our net revenue will be derived from these products and
services in the future. As a result, our future operating results depend upon
continued market acceptance and use of the COBOL language. Any decline in the
demand for or market acceptance or use of the COBOL language or mainframes as a
result of competition, technological change or other factors could cause
MERANT's revenues to decline.
IF MERANT FAILS TO ADDRESS YEAR 2000 ISSUES ADEQUATELY, IT MAY LOSE REVENUE OR
INCUR SIGNIFICANT ADDITIONAL COSTS
MERANT's products are used in IT systems containing third-party hardware
and software, some of which may not be Year 2000 compliant. Many of our
customers use legacy computer systems that are expected to be particularly
susceptible to Year 2000 compliance issues. Various commentators have predicted
that a significant amount of litigation may arise out of Year 2000 compliance
issues. Customers or former customers may bring claims or lawsuits against us
seeking compensation for losses allegedly associated with Year 2000-related
failures.
Although we believe that our Year 2000 readiness efforts are designed to
appropriately identify and address those Year 2000 issues that are within our
control, our efforts may not be fully effective. The novelty and complexity of
the issues presented and our dependence on the preparedness of third parties are
among the factors that could cause our efforts to be less than fully effective.
Moreover, Year 2000 issues present many risks that are beyond our control, such
as the potential effects of Year 2000 issues on the economy in general and on
our business partners and customers in particular. In addition, we may
experience significant additional expenses for unforeseen Year 2000 issues,
including those out of our reasonable control.
IF OUR NEW PRODUCTS OR PRODUCT ENHANCEMENTS FAIL TO ACHIEVE CUSTOMER ACCEPTANCE,
OR IF WE FAIL TO MANAGE PRODUCT TRANSITIONS, OUR BUSINESS REPUTATION AND
FINANCIAL PERFORMANCE WOULD SUFFER
MERANT is in a market that is subject to rapid technological change. We
must continually adapt to that change by improving our products and introducing
new products, technologies and services. Our growth and financial performance
will depend in part on our ability to develop and introduce enhancements of
existing products and new products that accommodate the latest technological
advances and standards, customer requirements and market conditions on a timely
and cost-effective basis. This depends in part on our ability to attract and
retain qualified employees. In the past, we have experienced delays and
increased expenses in developing new products. We may not be successful in
marketing, on a timely basis or at all, competitive products, product
enhancements and new products that respond to technological change, changes in
customer requirements and emerging industry standards.
PRODUCT DEFECTS CAN BE EXPENSIVE TO FIX AND CAN CAUSE MERANT TO LOSE CUSTOMERS
Software products as complex as those offered by MERANT may contain
undetected errors or failures when first introduced or as new versions are
released. Despite our testing, as well as testing and use by current and
potential customers, errors might be found in new products after commencement of
commercial shipments. The occurrence of errors could result in loss of or delay
in market acceptance of our products.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED, WHICH MAY AFFECT MERANT'S
COMPETITIVE POSITION
MERANT's success depends upon its proprietary software technology. Despite
the precautions we take to protect our proprietary rights, it may be possible
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for a third party to copy or otherwise to 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 ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES,
WHICH MAY RESULT IN LAWSUITS AND PREVENT MERANT FROM SELLING OUR PRODUCTS
There are currently no notices or pending claims that MERANT's 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 of its
products. 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, discontinue the use and sale of infringing
products, expend significant resources to develop non-infringing technology or
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 MERANT initiates 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 MERANT competes. 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 in our product and service markets 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, MERANT 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.
MERANT IS SUSCEPTIBLE TO GENERAL ECONOMIC CONDITIONS
MERANT's revenue and results of operations are subject to fluctuations in
general economic conditions. If there were a general economic downturn or a
recession in the United States or other significant markets, we believe that
current or prospective customers might reduce or delay their purchases of our
products or services, leading to a reduction in our revenue.
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INTERNATIONAL SALES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR TOTAL REVENUE,
WHICH EXPOSES MERANT TO THE BUSINESS AND ECONOMIC RISKS OF GLOBAL OPERATIONS
In fiscal years 1999, 1998 and 1997, sales to customers outside of the
United States represented approximately 40%, 35% and 37%, respectively, of total
revenue. MERANT intends to continue to expand its 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.
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,
including the Chief Executive Officer and Chief Financial Officer, 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 that ensure their continued
employment, and we do not maintain key person life insurance on any of these
persons.
IF MERANT IS UNABLE TO MANAGE GROWTH EFFECTIVELY, OUR OPERATIONS WOULD BE
DISRUPTED
MERANT has recently experienced a period of rapid growth, which has placed
a significant strain on our financial, management, operational and other
resources. If this rapid growth is maintained, these strains will continue. Our
management, personnel, systems, procedures and controls may not be adequate to
support existing and future operations.
MARKET VOLATILITY MAY CAUSE THE PRICE OF OUR SECURITIES TO DECLINE
The market price of MERANT's securities has experienced significant price
volatility, particularly since the announcement in June 1998 of the merger with
INTERSOLV, and volatility may occur in the future. Factors that may have a
significant impact on the market price of our securities include:
* 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
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* adoption of new accounting standards affecting the software industry
* 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 MERANT's
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 acquisitions of INTERSOLV in September 1998 and of Essential
Software, Inc. in August 1999. We may complete additional acquisitions in the
future. The process of integrating an acquired company's business into our
operations may result in unforeseen operating difficulties and expenditures. It
may also absorb significant management attention that would otherwise be
available for the ongoing development and operation of our business. Moreover,
the anticipated benefits of an acquisition might not be realized. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurring of debt and contingent liabilities, and amortization
expenses 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 the acquired company.
THE RIGHTS OF MERANT'S SHAREHOLDERS MAY DIFFER FROM THE SHAREHOLDER RIGHTS OF A
U.S. CORPORATION
The right of shareholders and, therefore, certain of the rights of holders
of ADRs, are governed by English law, including the Companies Act 1985, and
by MERANT's Memorandum and Articles of Association. These rights differ in
many respects from the rights of shareholders in typical U.S. corporations.
U.S. JUDGMENTS MAY NOT BE ENFORCEABLE AGAINST MERANT
MERANT is a public limited company organized under the laws of England and
Wales. Judgments of U.S. courts, including judgments against MERANT, predicated
on the civil liability provisions of the federal securities laws of the United
States, may not be enforceable in English courts.
EXCHANGE RATE FLUCTUATIONS CAN CAUSE OUR OPERATING RESULTS TO FLUCTUATE
The majority of our net revenue arises in U.S. dollars, while our costs are
incurred approximately equally in U.S. dollars and other currencies,
predominantly GB pounds. Consequently, fluctuations in exchange rates,
particularly between the U.S. dollar and the GB pound, may have a significant
impact on our operating results, notably when expressed in GB pounds. During
fiscal 1999, fluctuations between the U.S. dollar and the GB pound were not
significant, and net exchange rate gains or losses on operational transactions
were immaterial.
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Forward-Looking Statements
- - --------------------------
This Form 20-F contains, and incorporates by reference, forward-looking
statements that are based on the beliefs of MERANT's management, as well as
assumptions made by and information currently available to it. Forward-looking
statements are subject to the safe harbor created by the U.S. Private Securities
Litigation Reform Act of 1995, which provides that MERANT can be exempt from
liability for making forward-looking statements if cautionary language is
included along with the statements. When used in this report and in the
documents incorporated in this report by reference, words such as anticipate,
believe, estimate, expect, intend and similar expressions, are intended to
identify forward-looking statements. These statements reflect the current views
of MERANT or its management with respect to future events and are subject to
risks, uncertainties and assumptions. In addition, statements concerning future
matters and other statements that are not historical are forward-looking
statements. These might include:
* the features, benefits and advantages of our products,
* the development of new products, enhancements or technologies,
* business and sales strategies,
* developments in our target markets,
* matters relating to distribution channels, proprietary rights,
facilities needs, competition, litigation and our Year 2000 readiness,
* future gross margins and operating expense levels, and
* capital needs.
These statements reflect the current views of MERANT or its management with
respect to future events and are subject to risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, our actual results, performance
or achievements in fiscal 2000 and beyond could differ materially from those
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to material differences include, but are not limited
to, those discussed above in Part I, Item 1 of this report under the heading
"Risk Factors", as well as those discussed elsewhere in this report and in the
documents incorporated in this report by reference. You should not regard the
inclusion of forward-looking information as a representation by us or any other
person that the future events, plans or expectations contemplated by us will be
achieved. MERANT undertakes no obligation to release publicly any updates or
revisions to any forward-looking statements that may reflect events or
circumstances occurring after the date of this Form 20-F.
ITEM 2. DESCRIPTION OF PROPERTY
MERANT owns its worldwide headquarters, which consists of approximately
80,000 square feet of office space located on an 8-acre site in Newbury,
England.
MERANT also leases office space for its sales, distribution and development
operations. Major facility leases include the following:
Location Purpose Facility size (square feet)
- - -------- ------- ---------------------------
Mountain View, CA U.S. West Coast 56,000
Rockville, MD U.S. East Coast 74,000
Beaverton, OR Sales & development 48,000
Philadelphia, PA Sales & development 26,000
Morrisville, NC Sales & development 39,000
St. Albans, U.K. Sales & development 20,000
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MERANT also maintains facilities, principally sales and distribution
offices around the world. In the U.S. these are located in Boston, MA; Chicago,
IL; Gaithersburg, MD; Greensboro, NC; Irvine, CA; Rutherford, NJ; New York, NY;
and Raleigh, NC. Outside the U.S., MERANT maintains offices in Toronto and
Montreal, Canada; Paris, France; Munich, Germany; Barcelona and Madrid, Spain;
Lisbon, Portugal; Tokyo, Japan; Bangalore, India; Melbourne and Sydney,
Australia; Duffel, Belgium; Amersfoort, Netherlands; Rome and Milan, Italy; and
Singapore.
The total of rental payments for all facilities for fiscal 1999 was $12.1
million. All leases are subject to renewal clauses and rent increase provisions,
which are typical of similar leases in the relevant geographic areas.
MERANT believes that its premises are generally suitable and adequate for
the purposes for which they are used.
ITEM 3. 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.
MERANT has filed a motion to transfer the matter to the Northern District of
California. MERANT has also filed a motion to dismiss the consolidated
complaint. Plaintiffs' opposition to this motion is due shortly. The Court has
not yet ruled on either the motion to transfer or the motion to dismiss. MERANT
intends to defend all of its litigation vigorously. However, due to the inherent
uncertainties of litigation, MERANT cannot accurately predict the ultimate
outcome of the litigation. Any unfavorable outcome of litigation could have an
adverse impact on MERANT's business, financial condition and results of
operations.
ITEM 4. CONTROL OF REGISTRANT
As far as is known to MERANT, the company is not directly or indirectly
owned or controlled by one or more corporations or a foreign government.
The following table discloses the numbers of shares held as of October 5,1999,
by:
* any person who is known by MERANT to be the owner of more than 10% of
its shares; and
* all directors and officers as a group.
Identity of person or group Amount owned Percent of class
- - --------------------------- ------------ ----------------
Fidelity Corporation 15,875,645 11.0%
Bank of New York (1) 31,337,530 21.7%
All directors and officers as a 354,765 0.2%
group (14 persons)
(1) Held beneficially as the depositary of MERANT's ADSs for which ADRs have
been issued.
MERANT knows of no arrangements the operation of which may at a subsequent
date result in a change of control of MERANT.
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ITEM 5. NATURE OF TRADING MARKET
MERANT's ordinary shares are listed on the London Stock Exchange and ADSs,
each representing five ordinary shares, are traded in the United States. The
ADSs are evidenced by ADRs issued by the depositary under the terms and
conditions of the deposit agreement.
In 1992, MERANT listed its ADSs on the Nasdaq National Market where they
currently trade under the symbol MRNT. When MERANT obtained its listing, it
received a waiver of Nasdaq's corporate governance requirements that were not
then commonly observed by companies organized in the U.K. (which include
requirements for at least two external directors and an audit committee).
The following table presents for the periods indicated -
* the high and low middle market quotations for the ordinary shares, as
derived from the Daily Official List of the London Stock Exchange, and
* the equivalent U.S. dollar prices translated at the noon buying rate
on the date of each high and low quotation.
High Low High Low
(in GB pounds) (in U.S. dollars)
----------------------- -----------------------
Fiscal year ended January 31, 1998:
First quarter 2.75 2.04 $4.46 $3.29
Second quarte 3.85 2.65 6.45 4.30
Third quarter 4.66 3.27 7.55 5.35
Fourth quarter 5.66 3.88 9.44 6.52
Three months ended April 30, 1998 7.18 5.10 11.76 8.59
Fiscal year ended January 31, 1999:
First quarter 6.75 4.27 10.99 7.15
Second quarter 4.80 1.90 7.89 3.23
Third quarter 2.40 0.97 3.98 1.64
Fourth quarter 1.52 1.06 2.48 1.71
The table below shows the highest and lowest bid prices for the ADSs in
U.S. dollars as reported by the Nasdaq National Market for the periods
indicated.
High Low
(in U.S. dollars)
-----------------
Fiscal year ended January 31, 1998:
First quarter $22.50 $16.38
Second quarter 33.38 21.25
Third quarter 39.13 26.25
Fourth quarter 47.50 32.88
Three months ended April 30, 1998 60.63 39.13
Fiscal year ended January 31, 1999:
First quarter 57.25 32.00
Second quarter 39.38 15.25
Third quarter 19.63 7.90
Fourth quarter 12.56 8.13
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The following table provides detail of shares and ADSs held in the United
States. Since certain of these shares and ADSs were held by brokers or other
nominees, the number of record holders in the United States is not
representative of the number of beneficial holders or of where the beneficial
holders are resident.
Ordinary shares ADSs
--------------- ---------
Held of record in the United States 2,056,208 6,267,506
Percent of ordinary shares outstanding 1.4% 21.8%
Record holders 79 146
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no U.K. laws, decrees or regulations that restrict the
export or import of capital, including foreign exchange controls, or that affect
the remittance of dividends, interest or other payments to non-U.K. resident
shareholders or ADS holders. There are no limitations under English law or in
MERANT's Memorandum and Articles of Association relating to the right to hold or
exercise voting rights attaching to the shares or ADSs that apply only to
non-U.K. shareholders. However, English law currently forbids ownership of
shares or ADSs by, or payment of dividends to, the governments of Iraq or Libya,
persons exercising public functions in Iraq or Libya, or any resident of Iraq or
any person treated as a resident.
ITEM 7. TAXATION
The following is a general summary that does not address all tax
consequences of the ownership of MERANT's ordinary shares or ADSs. This summary
is based on U.S. federal income tax law and administrative practice and the laws
and practice of the United Kingdom in effect on the date of this Form 20-F.
Future legislation, regulations, administrative interpretations or court
decisions could change these laws either prospectively or retroactively.
Shareholders or ADS holders should consult their own tax advisors as to the
particular tax consequences to them of ownership of MERANT's ordinary shares or
ADSs.
In particular, this summary:
* does not address U.S. estate, gift, state or local tax laws
* does not address foreign law other than that of the United Kingdom as
it would affect U.S. holders (persons resident in the United States
and not resident in the United Kingdom, under the current double
taxation convention between the United States and the United Kingdom).
Non-U.S. holders may experience significantly different tax
consequences and should consult their own tax advisors.
* does not take into account the specific circumstances of any
particular shareholders (such as tax-exempt entities, certain
insurance companies, broker dealers, shareholders liable for
alternative minimum tax, shareholders that actually or constructively
own 10% or more of MERANT's voting shares, shareholders that hold
shares or ADSs as part of a straddle or a hedging or conversion
transaction, or shareholders whose functional currency is not the U.S.
dollar), some of which may be subject to special rules.
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U.K. Income Taxation of Dividends
- - ---------------------------------
No dividends have ever been paid by MERANT. However, in the event dividends
were to be paid in cash and denominated in dollars, the following would apply.
MERANT will not be required to account for advance corporation tax in
respect of dividends, nor will it be required to withhold tax at source when
paying a dividend.
Individual shareholders resident in the United Kingdom for tax purposes
should generally be entitled to a tax credit in respect of any dividend, which
they can offset against their total income tax liability. The amount of the tax
credit is equal to 10% of the total of the dividend and the tax credit (the
"gross dividend"), which is also equal to one-ninth of the amount of the net
cash dividend. The gross dividend is included in computing the income of the
individual holder for U.K. tax purposes.
For taxpayers liable to income tax at rates not exceeding the basic rate
the rate of income tax on dividends will be 10% of the gross dividend, and the
tax credit will discharge the income tax liability on the dividend. Higher rate
taxpayers will be liable to tax on the dividend at the rate of 32.5% of the
gross dividend; the tax credit will be set against but not fully match their tax
liability on the dividend and they will have to account for additional tax equal
to 22.5% of the gross dividend (which is also equal to 25% of the net cash
dividend received) to the extent that the gross dividend, when treated as the
top slice of their income, falls above the threshold for higher rate income tax.
U.K. resident taxpayers who are not liable to U.K. tax on the dividends
will not be entitled to claim repayment of the tax credit attaching to dividends
paid by MERANT. Tax credits on dividends paid in respect of shares held in
personal equity plans or individual savings accounts will be repayable until
April 5, 2004.
A U.K. resident corporate shareholder will not normally be liable to
corporation tax in respect of any dividend received, and will not be able to
claim repayment of tax credits attaching to dividends.
A shareholder who is not resident in the United Kingdom for tax purposes
will generally not benefit from any entitlement to a refund of any part of the
tax credit. Special rules apply in the case of U.S. corporate shareholders that
are:
* resident in the United Kingdom, or
* corporations at least 25% of the capital of which is held, directly or
indirectly, by persons that are not individual residents or nationals
of the United States and that satisfy certain other conditions.
Further special rules may apply if the shareholder:
* is a partnership, an estate or a trust that is a resident of the
United States,
* is exempt from taxation in the United States on dividends paid by
MERANT, or
* owns 10% or more of the class of shares of MERANT paying the dividend.
US Federal Income Taxation of Dividends
- - ---------------------------------------
Under the current double income tax convention between the United Kingdom
and the United States and domestic U.S. federal income tax law, an eligible U.S.
holder will be subject to U.S. federal income tax on the sum of the cash
dividend paid by MERANT plus a tax credit amount to which the U.S. holder would
be entitled if it were a U.K. taxpayer. Dividends paid out of current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes) will generally be taxable to a U.S. holder as foreign source dividend
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income, and will not be eligible for the dividends received deduction allowed to
corporations. Subject to certain conditions and limitations, a U.S. holder will
generally be entitled to a credit against its U.S. federal income tax liability,
or a deduction in computing its U.S. federal taxable income, for all or part of
the tax credit amount. The rules relating to the determination of the foreign
tax credit are complex and eligible U.S. holders should consult their tax
advisers to determine whether and to what extent a tax credit would be
available.
Taxation on Capital Gains
- - -------------------------
Under the current double income tax convention between the United Kingdom
and the United States, each country generally may tax capital gains in
accordance with the provisions of its domestic law. Under present U.K. law,
residents of the United States who are not resident or ordinarily resident in
the United Kingdom will not be liable for U.K. capital gains tax on capital
gains made on the disposal of shares unless they were held in connection with a
trade carried on in the U.K. through a permanent establishment. An individual
shareholder who has on or after March 17, 1998, ceased to be resident or
ordinarily resident for tax purposes in the United Kingdom for a period of five
years and who disposes of shares during that period may also be liable to U.K.
taxation on capital gains (subject to any available exemption or relief). U.S.
residents who are also liable for U.K. tax may be liable for both U.K. and U.S.
tax in respect of a gain on the disposal of ADSs. However, subject to certain
limitations, these persons may be entitled to a tax credit against their federal
tax liability for the amount of the U.K. tax paid in respect of the gain. A U.S.
resident holder of an ADR will be liable for U.S. federal income tax on the
gains to the same extent as on any other gains from sales of shares.
U.K. Inheritance Tax
- - --------------------
Under the current double estates and gift taxation convention between the
United States and the United Kingdom, shares held by an individual shareholder
who is domiciled for the purpose of the convention in the United States and is
not for the purposes of the convention a U.K. national will not (provided any
tax chargeable in the United States is paid) be subject to U.K. inheritance tax
on the disposal of shares by way of gift or upon the individual's death unless
the shares are part of the business property of a permanent establishment of the
individual in the United Kingdom or, in the case of a shareholder who performs
independent personal services, pertain to a fixed base situated in the United
Kingdom. In the exceptional case where the shares are subject both to U.K.
inheritance tax and to U.S. federal gift or estate tax, the convention generally
provides for double taxation to be relieved by means of credit relief.
U.K. Stamp Duty and Stamp Duty Reserve Tax
- - ------------------------------------------
Charges to U.K. stamp duty and/or stamp duty reserve tax ("SDRT") may be
imposed in respect of, inter alia, the following transactions:
* the transfer of an ADS,
* the transfer of a share,
* the deposit of a share with the custodian and the subsequent issue of
an ADR, and
* the transfer of a share on surrender of an ADS.
This section discusses in turn each possible charge.
No U.K. stamp duty will be payable on any transfer of an ADS provided that
the instrument or transfer is executed and remains outside the United Kingdom,
nor will there be any liability to SDRT in respect of any agreement for the
transfer of ADSs.
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Ad valorem stamp duty will be charged on conveyances or transfers of shares
at the rate of 1/2% of the consideration, if any, for the transfer.
SDRT will be imposed, at the rate of 1/2% of the consideration for the
transaction, if an agreement is made for the sale of shares, unless a share
transfer instrument in favor of the purchaser or its nominee is executed and
duly stamped. SDRT is in general payable by the purchaser of the shares, but
regulations have been made which provide for collection from other persons in
certain circumstances.
Ad valorem stamp duty will be imposed on any instrument transferring shares
to a nominee or agent for a depositary which then issues depositary receipts
(such as the ADRs). Where the instrument is liable to stamp duty as a
"conveyance on sale", because it completes a sale of shares or ADSs, then the
rate of duty will be 1 1/2% of the consideration for the sale implemented by the
instrument. Where the transfer instrument is not stampable as a conveyance on
sale, then the rate of duty will be 1 1/2% of the market value of the security
transferred by the instrument.
There is also a potential charge to SDRT which will apply where shares are
transferred to a nominee or agent for the depositary under an arrangement under
which the depositary issues ADRs. SDRT will be payable by the depositary at a
rate of 1 1/2% of the consideration for the transfer, or where there is no
consideration, 1 1/2% of the market value of the securities transferred. The
charge to SDRT will, however, be reduced by the amount, if any, of ad valorem
stamp duty paid on the share transfer instrument.
A transfer of shares from the depositary or its agent or nominee to an ADR
holder, or a person designated by the holder, on cancellation of an ADS which is
liable to duty as a "conveyance of sale" because it completes a sale of the
shares, will be liable to ad valorem stamp duty, payable by the purchaser, at
the rate of 1/2% of the consideration, if any, for the transfer. Transfers not
liable to duty as a "conveyance on sale" will be liable to a fixed stamp duty of
50p.
Other U.S. Issues
- - -----------------
As of October 5, 1999, MERANT is not a controlled foreign corporation
("CFC"), a passive foreign investment company ("PFIC"), or a foreign personal
holding company ("FPHC"), and MERANT does not anticipate becoming a CFC, PFIC or
FPHC. Neither MERANT nor its advisers have a duty or will undertake to inform
U.S. shareholders of changes in circumstances which would cause MERANT to become
a CFC, PFIC or a FPHC. U.S. shareholders should consult their own tax advisers
concerning the status of MERANT as a CFC, PFIC or FPHC.
ITEM 8. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
- - ------------------------------------
The Selected Consolidated Financial Data in U.S. Format on page 16 and the
Selected Consolidated Financial Data in U.K. Format on page 57 of the MERANT
1999 Annual Report Detail are incorporated in this Form 20-F by reference.
Exchange Rates
- - --------------
The following table shows the noon buying rates for GB pounds in U.S.
dollars per GBP 1.
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Fiscal period Average * High Low Period-end
Year ended January 31, 1995 1.55 1.64 1.46 1.58
Year ended January 31, 1996 1.57 1.61 1.51 1.51
Year ended January 31, 1997 1.58 1.71 1.49 1.60
Year ended January 31, 1998 1.64 1.70 1.58 1.63
Quarter ended April 30, 1998 1.66 1.69 1.62 1.67
Year ended April 30, 1999 1.65 1.71 1.59 1.61
* The average of the exchange rates on the last day of each calendar
month during the period.
On October 5, 1999, the Noon Buying Rate was $1.65 per GBP 1.
Fluctuations in the U.S. dollar/GB pound exchange rate will affect the U.S.
dollar amounts received by ADR holders on conversion by the depositary of
dividends paid in GB pounds on the shares represented by the ADRs. These
fluctuations may also affect the relative market prices of the ADSs in the U.S.
and the shares in the U.K.
For information on the effect of exchange rate fluctuations on MERANT's
results of operations, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Exchange Rate Fluctuations" on pages 29 and
70 of the MERANT 1999 Annual Report Detail, which sections are incorporated in
this Form 20-F by reference.
Dividends
- - ---------
MERANT has never paid cash dividends on its shares. MERANT has investigated
the possibility of paying dividends and reviews the issue from time to time.
If dividends were paid, they would probably be paid in GB pounds. Exchange
rate fluctuations would affect the U.S. dollar amounts that shareholders, or in
the case of ADR holders the depositary, would receive on conversion of dividend
payments into U.S. dollars.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Results of Operations and Financial
Condition for fiscal years 1999, 1998 and 1997, and for the three-month period
ended April 30, 1998, which is contained on pages 17 through 30 and pages 58
through 71 of the MERANT 1999 Annual Report Detail, is incorporated in this Form
20-F by reference.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information on market risks to which MERANT's business is exposed, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Market Risk" on page 30 of the MERANT 1999 Annual Report Detail,
which section is incorporated in this Form 20-F by reference.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
MERANT's Memorandum and Articles of Association provide that there must
always be at least two directors, unless otherwise determined by ordinary
resolution of MERANT. At each annual general meeting, one-third of the directors
who are subject to retirement by rotation (rounded down where the number of
directors does not divide by three) retires from office. Executive officers are
not subject to this rule, but have always retired by rotation, even though not
required to do so.
Executive officers serve at the discretion of the Board of Directors.
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The directors and executive officers, effective October 5, 1999, are as
follows:
Board of Directors
- - ------------------
Name Position Date Elected or Appointed
- - ---- -------- -------------------------
Michel Berty Director September 1998
Kevin Burns Director September 1998
Gary Greenfield Director September 1998
President and Chief Executive Officer December 1998
J. Michael Gullard Director and Chairman May 1995
Harold Hughes Director December 1993
Barry Lynn Director September 1999
Executive Officers
- - ------------------
Name Position Date Appointed
- - ---- -------- --------------
Ken Sexton Senior Vice President; Chief December 1998
Financial Officer and Secretary
Panos Anastassiadis Executive Vice President, September 1998
Worldwide Distribution
Greg Gehring Senior Vice President and September 1998
Chief Information Officer
Dean Genge Senior Vice President, September 1998
Corporate Marketing
Buff Jones Senior Vice President and December 1998
General Manager, MERANT PVCS
Richard Van Hoesen Senior Vice President, and General December 1998
Manager, MERANT Micro Focus
Andrew Weiss Chief Technology Officer May 1999
Gary Wright Senior Vice President, September 1998
MERANT Consulting
Biographical information for the directors and officers is shown below.
Mr. Berty has been a non-executive director of MERANT since September 1998.
Prior to that date, he was a non-executive director of INTERSOLV. He is a
founder of MBY Consultants, Inc.
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Mr. Burns has been a non-executive director of MERANT since September
1998. Prior to that date he was Chairman of INTERSOLV. He is a Managing
Principal of Lazard Technology Partners.
Mr. Greenfield became a director of MERANT in September 1998. From
1996 until that date, he had been Chief Executive Officer of INTERSOLV. In
December 1998, he became MERANT's Chief Executive Office and President.
Mr. Gullard has been a non-executive director of MERANT since May
1995. He was elected Chairman in March 1996. He is General Partner of the
venture capital firm of Cornerstone Management.
Mr. Hughes has been a non-executive director of MERANT since December
1993. He is Chief Executive Officer of Pandesic LLC.
Mr. Lynn became a non-executive director of MERANT in September 1999.
He is the Chief Executive Officer of Be eXceL Inc. and the Principal of
Where Eagles Soar Inc.
Mr. Sexton joined MERANT in December 1998 as its Senior Vice
President, Finance & Administration, Chief Financial Officer and Secretary.
Previously, he was Senior Vice President, Finance & Administration and
Chief Financial Officer of INTERSOLV.
Mr. Anastassiadis joined MERANT in September 1998 as its Senior Vice
President, Worldwide Distribution upon the completion of MERANT's merger
with INTERSOLV, and became MERANT's Executive Vice President, Worldwide
Distribution in May 1999. Previously, he was Senior Vice President and
General Manager of INTERSOLV's Data Connectivity business unit.
Mr. Gehring joined MERANT in September 1998 as its Senior Vice
President and Chief Information Officer upon the completion of MERANT's
merger with INTERSOLV. Previously, he was Senior Vice President and Chief
Information Officer for INTERSOLV.
Mr. Genge joined MERANT in September 1998 as its Senior Vice
President, Corporate Marketing upon the completion of MERANT's merger with
INTERSOLV. Previously, he was Senior Vice President, Corporate Marketing
for INTERSOLV.
Ms. Jones joined MERANT in March 1998 as its Senior Vice President,
Business Development. In December 1998, she became its Senior Vice
President and General Manager, MERANT PVCS.
Mr. Van Hoesen joined MERANT in March 1998 as its Senior Vice
President and Chief Financial Officer. In May 1998, Mr. Van Hoesen also
became the Secretary of MERANT. In December 1998, he became its Senior Vice
President and General Manager, MERANT Micro Focus.
Mr. Weiss joined MERANT in May 1999 as its Chief Technology Officer.
Mr. Wright joined MERANT in September 1998 as its Senior Vice
President, MERANT Consulting upon the completion of MERANT's merger with
INTERSOLV. Previously, he was Senior Vice President and General Manager of
INTERSOLV's Enterprise Application Renewal business unit.
There are no family relationships between any of the directors or
executive officers. There are no arrangements or understandings between any
executive officer or director and any other person under which an executive
officer or director was or is to be selected to such position.
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ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
For the fiscal year ended April 30, 1999, the total amount of
compensation paid to directors and officers of MERANT (a total of 22
persons) was as follows:
In thousands: U.S. dollars GB pounds
------------ ---------
Salary 2,397 1,453
Bonus 1,325 804
Directors' fees 236 143
Compensation for loss of office 4,149 2,514
Pension, retirement and similar benefits 117 71
Other benefits 189 114
------------ ---------
TOTAL 8,413 5,099
Chairman 166 101
Bonuses were payable under three different cash bonus programs. Each program
sets operating plans, and bonus amounts are paid based upon MERANT's performance
against the operating plan. Further compensation information is provided under
"Remuneration Committee's Report - Executive Directors' Remuneration Policy" on
pages 12 through 15 of the MERANT 1999 Annual Report Detail, which compensation
information is incorporated in this Form 20-F by reference.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
MERANT currently operates four share option plans:
* the 1991 Share Option Plan
* the 1994 Group Employee Benefit Trust
* the 1996 Share Option Plan
* the 1998 Share Option Plan
These MERANT plans provide for the granting of options to purchase ordinary
shares in MERANT to MERANT employees and consultants. MERANT currently has the
authority to grant share options under the 1998 Share Option Plan.
When MERANT merged with INTERSOLV, it adopted INTERSOLV's 1982 Stock Option
Plan, 1992 Stock Option Plan and 1997 Employee Stock Option Plan, and the option
plans previously assumed by INTERSOLV from companies which it had acquired.
Under the merger agreement, each outstanding option or right to purchase or
acquire shares of INTERSOLV stock was assumed by MERANT and became an option or
right to purchase or acquire ADSs in MERANT, with appropriate adjustments to the
price and number of shares based on the exchange ratio of 0.55 ADSs per
INTERSOLV share. No further options have been or will be granted under these
INTERSOLV plans.
When MERANT acquired XDB Systems, Inc, it assumed XDB's 1992 Stock Option
Plan and 1996 Stock Option Plan. In accordance with the acquisition agreement,
the outstanding options under these XDB Plans were converted into options to
acquire MERANT shares. No further options have been or will be granted under the
XDB Plans.
At October 5, 1999, there were outstanding stock options under the MERANT
plans, INTERSOLV plans and XDB plans to purchase a total of 15,589,381 ordinary
shares with exercise prices ranging from GBP 1.05 to GBP 7.15 and expiration
dates ranging from July 2001 to September 2009. At the same date, the following
directors (and directors and officers as a group) held options to purchase the
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number of shares presented opposite their names in the following table:
Number of shares Option price, in GBP Expiration date
---------------- -------------------- ---------------
Michel Berty 50,415* 3.49 October 5, 2007
10,000 2.94 September 16, 2009
Kevin Burns 546,565* 5.02 February 15, 2006
10,000 2.94 September 16, 2009
Gary Greenfield 2,819,550* 6.42 May 1, 2008
3,250,000 1.05 January 4, 2009
J. Michael Gullard 50,000 2.13 June 2, 2004
250,000 1.67 June 21, 2006
20,000 2.94 September 16, 2009
Harold Hughes 50,000 3.00 August 19, 2002
10,000 2.40 June 16, 2004
10,000 2.94 September 16, 2009
Barry Lynn 10,000 2.94 September 16, 2009
Directors and officers as a group 8,538,075* 3.91 May 1, 2008
3,250,000 1.05 January 4, 2009
3,725,000 1.06 December 15, 2008
250,000 1.67 June 21, 2006
50,000 2.13 June 2, 2004
10,000 2.40 June 16, 2004
60,000 2.94 September 16, 2009
50,000 3.00 August 19, 2002
* Asterisked items represent the share equivalents of options issued by
INTERSOLV, which were converted into options to acquire MERANT ADSs.
Options were issued by INTERSOLV at various prices and dates; the table
discloses average grant prices and the latest expiration dates. These
options are denominated in U.S. dollars, and for the above disclosures have
been converted to pounds sterling using the noon buying rate as of April
30, 1999 ($1.61 = GBP 1.00).
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
The information required by this item is incorporated by reference from
"Remuneration Committee's Report-Executive Directors' Remuneration" on pages 12
through 15 of the MERANT 1999 Annual Report Detail.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
The Registrant has elected to respond to this item.
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Description of ordinary shares
- - ------------------------------
The rights of MERANT's shareholders are determined by the Memorandum and
Articles of Association and by current English law. This summary does not
purport to be complete and is qualified by reference to the Memorandum and
Articles of Association, which are incorporated by reference in this annual
report.
The authorised share capital of MERANT is GBP 4,240,000 divided into
212,000,000 ordinary shares of 2p each, of which 143,672,697 ordinary shares
were outstanding on April 30, 1999. Each of the issued shares is fully paid and
not subject to any further calls or assessments. There are no conversion rights,
redemption provisions or sinking fund provisions related to the shares. The
shares are issued in registered form.
In the following description, a shareholder is the person registered in
MERANT's register of members as the holder of the relevant share. The depositary
for MERANT's ADSs is the shareholder for shares represented by ADSs against
which ADRs have been issued.
Dividends
All dividends will be declared and paid according to the amount paid up on
the shares, but no dividend will be declared in excess of the amount recommended
by the directors. The directors may from time to time pay interim dividends to
shareholders if it appears to the directors to be justified by the profits
available for distribution. Final dividends may be declared by resolution of the
members on the recommendation of the Board. There are no fixed dates on which
entitlement to dividends arises on the shares.
Any dividend unclaimed 12 years after the date when it became due for
payment will, if the directors so resolve, be forfeited and cease to remain
owing by MERANT.
Rights in a Winding Up
In the event of a winding-up or reduction of MERANT's capital involving
repayment, the assets available for distribution among the members will be
divided between the shareholders according to the respective number of shares
held by them and in accordance with the provisions of The Companies Act 1985 of
Great Britain. The liquidator may, with the sanction of an extraordinary
resolution and subject to the Companies Act, divide among the members in specie
the whole or any part of MERANT's assets.
Voting
Voting at any general meeting of shareholders is by a show of hands unless
a poll is duly demanded by:
* the chairman of the meeting,
* at least two shareholders entitled to vote at the meeting,
* any shareholder or shareholders representing at least one-tenth of the
total voting rights of all shareholders entitled to vote at the
meeting, or
* any shareholder or shareholders holding shares conferring a right to
vote at the meeting on which the paid up sums are at least one-tenth
of the total sum paid up on all the shares conferring that right.
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On a show of hands, every shareholder who is present in person at a general
meeting will have one vote, and on a poll, every shareholder who is present in
person or by proxy will have one vote per share. The necessary quorum for a
shareholder meeting is two persons entitled to vote on the business to be
transacted. A resolution proposed at a meeting may be either:
* an ordinary resolution (e.g., for the election of directors, the
approval of financial statements, the declaration of final dividends,
the appointment of auditors, the increase of authorized share capital
or the grant of authority to allot shares). An ordinary resolution
requires the affirmative vote of a majority of the votes cast at a
meeting at which there is a quorum.
* a special resolution (e.g., relating to certain matters concerning an
alteration of the Memorandum or Articles of Association or a
winding-up).
* an extraordinary resolution (e.g., modifying the rights of any class
of shares at a meeting of the holders of the class), which requires
the affirmative vote of not less than three-fourths of the votes cast.
Unless specified by law or MERANT's Articles of Association, voting in
a general meeting is by ordinary resolution. Meetings are generally
convened upon advance notice of 21 or 14 clear days, depending on the
nature of the business to be transacted.
Pre-Emptive Rights
Under Part III of the Companies Act, a company cannot allot equity
securities which are to be paid for wholly in cash (except shares held under an
employees' share scheme) unless it has made an offer to existing shareholders to
allot the equity securities to them on the same or more favorable terms and in
proportion to their shareholdings. In this context, equity securities generally
means, in relation to MERANT, ordinary shares, that is shares with no
restrictions on the amounts receivable in a distribution of dividends or capital
and all rights to subscribe for or convert into shares.
This statutory pre-emption right does not, however, apply where the right
has been disapplied by a special resolution of the shareholders. A special
resolution was passed at MERANT's annual general meeting on September 16, 1999,
disapplying the statutory pre-emption right in respect of the allotment of
equity securities for cash in connection with:
* a rights issue in favor of ordinary shareholders where the equity
securities respectively attributable to the interests of all ordinary
shareholders are proportionate (as nearly as may be) to the respective
numbers of shares held by them but subject to any exclusions which the
directors may consider appropriate to deal with fractional
entitlements or holders of shares outside the U.K., or
* the allotment of equity securities up to an aggregate nominal value of
GBP 144,087.98.
This disapplication will, unless extended or renewed, expire on the date of
MERANT's annual general meeting in 2000, or, if earlier, on December 16, 2000.
Variation of Rights and Share Capital
MERANT may, by passing an ordinary resolution:
* increase its share capital
* consolidate and divide all or any of its shares into shares of larger
amounts
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* subdivide its shares into shares of smaller amount or cancel shares
which have not been taken or agreed to be taken by any person (subject
to the provisions of the Companies Act).
MERANT may, by passing a special resolution (and subject to the provisions
of the Companies Act):
* reduce its share capital, capital redemption reserve and any share
premium account , or
* purchase its own shares
Subject to the provisions of the Companies Act, the rights attached to any class
of shares may be varied either:
* with the consent in writing of the holders of three-fourths in nominal
value of the issued shares of that class, or
* with the sanction of an extraordinary resolution passed at a separate
meeting of the holders of the shares of that class.
At any separate general meeting, the necessary quorum is one or more
persons holding or representing by proxy not less than one-third in nominal
amount of the issued shares of the class in question (but at any adjourned
meeting, any person holding shares of the class or his proxy will be a quorum).
Disclosure of Interests
The Companies Act gives MERANT power to require persons who it knows are,
or has reasonable cause to believe to be, or to have been within the previous
three years, interested in its issued share capital to disclose prescribed
particulars of those interests. Sanctions may be imposed against the holder of
the relevant shares for failure to provide the information requested in a timely
manner. MERANT's Articles of Association impose the withdrawal of voting rights
of these shares and restrictions on the rights to receive dividends on and to
transfer these shares. In this context, shares includes ADSs. The Companies Act
also requires any person who acquires (alone or, in specified circumstances,
with others) a direct or indirect interest in excess of the "notifiable
percentage" (currently 3% of the issued share capital of a company or 10% for
certain types of interest) to disclose prescribed information to the company in
respect of those shares within a period of two business days. An obligation of
disclosure also arises where the person's interest subsequently falls below the
notifiable percentage or where, above that level, that person's interest in the
issued share capital (expressed in whole percentages) increases or decreases.
Miscellaneous
There are currently no U.K. foreign exchange controls on the payment of
dividends or the conduct of MERANT's operations. There are no restrictions under
the Articles of Association or under English law that limit the right of
non-resident or foreign owners to hold or vote MERANT's shares.
Description of American Depositary Receipts
- - -------------------------------------------
American depositary receipts, or ADRs, are issued by a depositary as
evidence of the ownership of American depositary shares, or ADSs. Each ADS
represents five of MERANT's ordinary shares. The rules and regulations by which
ADRs are issued, held and withdrawn are governed by a deposit agreement between
MERANT, the ADR holders, and the Bank of New York, which acts as the depositary.
The following is a summary of the principal terms of the deposit agreement.
These statements are subject to the terms and conditions of the deposit
agreement. Copies of the deposit agreement and MERANT's Memorandum and Articles
of Association are available for inspection at:
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* The depositary's Corporate Trust Office, at 101 Barclay Street, New
York, NY 10286, and
* The depositary's London office, at 46 Berkeley Street, London W1X 6AA,
England, which acts as custodian under the terms of the deposit
agreement.
The depositary's principal executive office is at 48 Wall Street, New York,
NY 10286.
The depositary and MERANT will only treat as owners those persons in whose
names ADRs are registered on the depositary's books.
Deposit, Transfer and Withdrawal
The depositary has agreed that on delivery of ordinary shares to the
custodian (or evidence of rights to receive ordinary shares), the depositary
will execute and deliver at its Corporate Trust Office an ADR or ADRs.
Delivery of the ordinary shares must be accompanied by any appropriate
instruments of transfer or endorsement in a form satisfactory to the custodian,
and any other documents required by the depositary or the custodian in
accordance with the deposit agreement. Execution and delivery of an ADR or ADRs
will depend on payment of the depositary's fee and of all taxes and governmental
charges and fees. The delivery at its Corporate Trust Office will be to, or upon
the order of, the person or persons named in the notice of the custodian
delivered to the depositary or requested by the person depositing the ordinary
shares with the depositary. The ADR or ADRs will be registered in the name or
names of the person (or persons), and will represent any authorized number of
ADSs requested by that person (or persons).
The depositary has no obligation to accept ordinary shares for deposit from
any person or entity identified by MERANT as holding restricted securities,
except upon compliance with the provisions of the deposit agreement.
The term "Restricted Securities" means ordinary shares, or ADRs
representing ordinary shares, which are acquired directly or indirectly from
MERANT or its affiliates, as defined in Rule 144 to the Securities Act of 1933,
* that are issued in a transaction or chain of transactions not
involving any public offering, or which are subject to resale
limitations under Regulation D under the Securities Act or both,
* that are held by an officer, director or other affiliate of MERANT, or
* that are subject to other restrictions on sale or deposit under the
laws of the United States or England, or under a shareholder agreement
or MERANT's Memorandum and Articles of Association.
To withdraw the deposited securities represented by an ADR, the owner must:
* surrender the ADR at the depositary's Corporate Trust Office
* pay the depositary's fee for the surrender of ADRs and all taxes and
governmental charges and fees, and
* bear the risk and expense for the forwarding of share certificates and
other proper documents of title.
The owner of the ADR will then be entitled to delivery, to him or upon his
order, of the amount of deposited securities at the time represented by the ADR.
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The depositary may deliver, or pre-release, ADRs before the receipt of
ordinary shares. The depositary may also deliver ordinary shares upon the
receipt and cancellation of ADRs which have been pre-released, whether or not
cancellation is before the termination of the pre-release or the depositary
knows that the ADR has been pre-released.
The depositary may receive ADRs instead of ordinary shares in satisfaction of a
pre-release. Each pre-release must be
* preceded or accompanied by a written representation from the person to
whom the ADRs are to be delivered that that person, or its customer,
owns the ordinary shares or ADRs to be remitted, as the case may be,
* at all times fully collateralized with cash or other collateral as the
depositary deems appropriate,
* terminable by the depositary on not more than five business days'
notice, and
* subject to further indemnities and credit regulations as the
depositary deems appropriate.
Dividends, Other Distributions and Rights
When the depositary receives cash dividends and other cash distributions
denominated in a currency other than U.S. dollars, in respect of the deposited
ordinary shares, it is required to arrange for the conversion of the funds into
U.S. dollars, subject to:
* any restrictions imposed by English law, regulations or applicable
permits,
* its judgment that it can do so on a reasonable basis, and
* its judgment that it can transfer the resulting dollars to the United
States.
On conversion, it must then distribute the resulting dollar amount (net of
reasonable and customary expenses incurred in converting the foreign currency)
to the owners entitled to the cash, in proportion to the number of ADSs
representing the deposited securities held by them. The amount distributed to
the owners will be reduced by any taxes to be withheld by MERANT or the
depositary. See "Liability of owner for taxes." If this conversion or
distribution can be effected only with the approval or license of any government
or government agency, the depositary will apply for approval or license, if any,
as it deems desirable.
The depositary may distribute the foreign currency it receives to, or in
its discretion may hold it for the respective accounts of, the owners entitled
to receive it, if:
* in its judgment it cannot convert any received foreign currency on a
reasonable basis into dollars transferable to the United States,
* any approval or license of any government or government agency that is
required for the conversion is denied, or in the opinion of the
depositary is not obtainable, or
* any approval or license is not obtained within a reasonable period as
determined by the depositary.
If the conversion of foreign currency, in whole or in part, cannot be
effected for distribution to some of the owners entitled to the cash, the
depositary may convert and distribute the funds in U.S. dollars to the extent
permissible to the owners entitled to the cash, and distribute the balance of
the foreign currency received to, or hold the balance for, the accounts of the
owners entitled to the cash.
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If MERANT declares a dividend in, or free distribution of, ordinary shares,
the depositary may, and will if MERANT requests, distribute to the owners
additional ADRs for a total number of ADSs representing the amount of ordinary
shares received as the dividend or free distribution. This distribution would be
in proportion to the number of ADSs held by them. Instead of delivering ADRs for
fractional ADSs in the event of dividend or free distribution, the depositary
will sell the amount of ordinary shares represented by the total of the
fractions and distribute the net proceeds in accordance with the deposit
agreement. If additional ADRs are not distributed, each ADS will then also
represent the additional ordinary shares distributed upon the deposited
securities represented by the ADRs.
If MERANT offers or causes to be offered to the holders of any deposited
securities any rights to subscribe for additional ordinary shares or any other
rights, the depositary will have discretion as to the procedure for making those
rights available to any owners, or in disposing of these rights on behalf of any
owners and making the net proceeds available in U.S. dollars to the owners. If,
for any reason, the depositary may not either make the rights available to any
owners or dispose of the rights and make the net proceeds available to the
owners, then the depositary will allow the rights to lapse.
The depositary may reasonably determine that it is lawful and feasible to
make rights available to all owners, or to certain owners but not to other
owners. In this event, the depositary must distribute to any owner to whom it
determines the distribution to be lawful and feasible, in proportion to the
number of ADSs held by that owner, warrants or other instruments for the rights.
If:
* the depositary reasonably determines that it is not lawful and
feasible to make the rights available to certain owners, or
* the rights represented by the warrants or other instruments are not
exercised and appear about to lapse,
the depositary may sell the rights, warrants or other instruments in proportion
to the number of ADSs held by the owners to whom it has determined it may not
lawfully or feasibly make the rights available, and allocate the net proceeds of
the sales for the account of the owners that would have been entitled to the
rights, warrants or other instruments, upon an averaged or other practical basis
without regard to any distinctions among the owners because of exchange
restrictions or the date of delivery of any ADR or ADRs, or otherwise.
If an owner requests the distribution of warrants or other instruments in
order to exercise the rights, in circumstances in which rights would not
otherwise be distributed, the depositary will make the rights available to the
owner upon written notice from MERANT to the depositary that:
* MERANT has elected in its sole discretion to permit the rights to be
exercised, and
* the owner has signed any documents that MERANT determines in its sole
discretion are reasonably required under applicable law.
The depositary will, on behalf of an owner, exercise the rights and
purchase the ordinary shares:
* upon instruction from the owner to exercise the rights,
* upon payment by the owner of the purchase price of the ordinary shares
to be received upon exercise of the rights, and
* upon payment of the depositary's fees as provided in the warrants or
other instruments
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and MERANT will arrange for the ordinary shares purchased to be delivered to the
depositary on behalf of the owner. As agent for the owner, the depositary will
arrange for the purchased ordinary shares to be deposited, and will execute and
deliver restricted ADRs to the owner.
If registration under the Securities Act of the securities to which any
rights relate is required in order for MERANT to offer the rights to owners and
sell the securities represented by the rights, MERANT or the depositary are not
required to offer the rights to owners -
* unless and until a registration statement is in effect, or
* unless the offering and sale of the securities to the owners are
exempt from registration under the Securities Act.
The deposit agreement does not create any obligation on the part of MERANT
to file a registration statement covering the rights or underlying securities or
to endeavor to have a registration statement declared effective.
Whenever the depositary receives any distribution other than cash or
ordinary shares upon any deposited securities, it will cause the securities or
property it receives to be distributed to the owners-
* after deduction or upon payment of any fees of the depositary or any
taxes or other governmental charges or fees,
* in proportion to the number of ADSs representing the deposited
securities held by them, and
* in any manner that the depositary considers fair and practicable for
accomplishing the distribution.
However, if the depositary decides that a distribution cannot be made
proportionately among the owners, or if for any other reason (including any
requirement that MERANT or the depositary withhold an amount on account of
taxes) the depositary decides that a distribution is not feasible, then it may
make the distribution in any way it considers fair and practicable. This might
include the public or private sale of all or any part of the securities or
property received, and distribution of the net proceeds of the sale to the
owners.
If the depositary determines that any distribution in property (including
ordinary shares and rights to subscribe for them) is subject to any tax which
the depositary is obligated to withhold, the depositary may, by public or
private sale, dispose of all or a portion of the property as it considers
necessary and practicable to pay the taxes. In this event the depositary will
distribute the net proceeds of any sale after deduction of the taxes to the
owners in proportion to the number of ADSs held by them.
Upon any change in nominal or par value, split-up, consolidation or any
other reclassification of deposited securities, or upon any recapitalization,
reorganization, merger or consolidation or sale of assets affecting MERANT or to
which it is a party, any securities that are received by the depositary or
custodian in exchange for, in conversion of, or in respect of deposited
securities will be treated as new deposited securities under the deposit
agreement. From then on, the ADSs will represent the new deposited securities
received in exchange or conversion unless additional ADRs are delivered. The
depositary may, upon consultation with MERANT, and must if MERANT requests,
execute and deliver additional ADRs as in the case of a dividend on ordinary
shares, or call for the surrender of outstanding ADRs to be exchanged for new
ADRs specifically describing the new deposited securities.
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Record Dates
Whenever the depositary receives notice of the fixing of a record date by
MERANT, the depositary, in consultation with MERANT, will fix a record date for
the determination of the owners of ADRs.
Voting of deposited securities
When the depositary receives notice of any meeting or solicitation of
consents or proxies of shareholders or holders of other deposited securities, it
will, as soon as practicable, mail to all owners a notice containing:
* the information included in the notice of meeting,
* a statement that each owner at the close of business on a specified
record date will be entitled, subject to applicable law and the
provisions of MERANT's Memorandum and Articles of Association and the
provisions of or governing deposited securities, to instruct the
depositary in writing as to the exercise of the owner's voting rights,
if any, and
* a statement on how owners must give voting instructions.
When the depositary receives voting instructions from an owner who is entitled
to vote within the time established by the depositary, it will endeavor to vote
the deposited securities or cause them to be voted in accordance with any
nondiscretionary proxy. The depositary will not exercise any voting discretion
over any deposited securities.
If the depositary does not receive instructions from an owner within the
time established by the depositary, it will deliver a discretionary proxy for
the deposited securities in the form provided by MERANT. However, the depositary
will not give a proxy for any matter as to which MERANT informs the depositary
that:
* MERANT does not wish a proxy given,
* substantial opposition exists, or
* the matter materially and adversely affects the rights of
shareholders.
Owners generally, and any owner in particular, may not receive notice
sufficiently in advance of the date established by the depositary for the
receipt of instructions to ensure that the depositary will vote the ordinary
shares or deposited securities.
Reports and Other Communications
The depositary will make available for inspection by owners at its
Corporate Trust Office any reports and communications, including any proxy
soliciting material, received from MERANT, which are both:
* received by the depositary as the holder of the deposited securities,
and
* made generally available to the holders of deposited securities by
MERANT.
The depositary will also send copies of reports to the owners when furnished by
MERANT.
Amendment and Termination of the Deposit Agreement
MERANT and the depositary, may, by written agreement, amend the form of
ADRs and any provisions of the deposit agreement at any time and in any respect
which they consider necessary or desirable. Any amendment that imposes or
increases any fees or charges, other than taxes and other governmental charges,
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registration fees, cable, telex or facsimile transmission costs, delivery costs
or other similar expenses, or that otherwise prejudices any substantial existing
right of owners of ADRs, will, however, not take effect as to outstanding ADRs
until three months after notice of the amendment has been given to the owners of
outstanding ADRs. Every owner who continues to hold ADRs at the time any
amendment becomes effective, will be treated as having consented and agreed to
the amendment and will be bound by the deposit agreement as amended. In no event
will any amendment impair the right of the owner to surrender an ADR and receive
the deposited securities it represents. If the depositary resigns or is removed
and a successor depositary is appointed, the successor depositary will notify
owners of outstanding ADRs.
Upon the resignation or removal of the depositary, either in accordance
with the deposit agreement, or at any time at the direction of MERANT, the
depositary will terminate the deposit agreement by mailing notice of termination
to the owners. The notice will be sent at least 30 days before the date fixed
for termination. On and after the date of termination, the owner will, upon
* surrender of the ADR at the Corporate Trust Office,
* payment of the depositary's fee for the surrender of ADRs as provided
in the deposit agreement, and
* payment of any applicable taxes or governmental charges,
be entitled to delivery to the owner or upon the owner's order of the amount of
deposited securities represented by the ADR. If any ADRs remain outstanding
after the date of termination of the deposit agreement, the depositary:
* will discontinue the registration of transfers of ADRs,
* will suspend the distribution of dividends to the owners, and
* will not give any further notices or perform any further acts under
the deposit agreement,
except for
* the collection of dividends and other distributions pertaining to
the deposited securities, and
* the sale of rights and the delivery of deposited securities,
together with any dividends or other distributions related to
them and the net proceeds of the sale of any rights or other
property in exchange for surrendered ADRs (after deducting, in
each case, its fee for the surrender of ADRs, any expenses set
forth in the deposit agreement and any applicable taxes or
governmental charges).
For a period of up to one year from the date of termination, the depositary
may sell the deposited securities then held under the deposit agreement and hold
the net proceeds of the sale, uninvested, together with any other cash,
unsegregated and without liability for interest, for the pro rata benefit of the
owners that have not surrendered their ADRs. These owners are treated as general
creditors of the depositary with respect to these net proceeds. After making the
sale, the depositary will be discharged from all obligations under the deposit
agreement, except to account for net proceeds and other cash, after deducting,
in each case, its fee for the surrender of ADRs, any expenses set forth in the
deposit agreement and any applicable taxes or governmental charges.
Charges of depositary
MERANT will pay the fees and reasonable expenses of the depositary and
those of any registrar. MERANT will not pay or be liable for:
* the fees of the depositary for the execution and delivery of ADRs,
transfers, the surrender of ADRs and the making of any distribution,
32
35
* taxes and other governmental charges,
* fees for the registration of transfers of ordinary shares on the share
register of MERANT or its appointed agent which apply to transfers of
ordinary shares to the depositary or its nominee or the custodian or
its nominee on the making of deposits or withdrawals under the deposit
agreement,
* any cable, telex and facsimile transmission expenses that are
expressly provided in the deposit agreement to be at the expense of
persons depositing ordinary shares or owners, and
* expenses incurred by the depositary in the conversion of foreign
currency.
The depositary will charge a fee of $5.00 or less per 100 ADSs (or portion
of 100) to anyone to whom ADRs are issued or who surrenders ADRs. In this
context, issuance includes, without limitation, a stock dividend or stock split
declared by MERANT, an exchange of stock regarding the ADRs or deposited
securities, or a distribution of ADRs. In addition, the depositary will charge
the same fee to owners and holders of ADRs for the distribution of proceeds
under the deposit agreement. This fee will be deducted from the proceeds.
The depositary may own and deal in any class of securities of MERANT and
its affiliates and in ADRs.
Liability of owner for taxes
The owner is liable to pay any tax or other governmental charge that
becomes payable with respect to any ADR, or any deposited securities represented
by any ADR. Until payment is made, the depositary may:
* refuse to effect any transfer of the ADR or any withdrawal of
deposited securities,
* withhold any dividends or other distributions,
* sell for the account of the owner any part or all of the deposited
securities represented by the ADR, and
* apply dividends or other distributions or the proceeds of any sale to
pay any tax or other governmental charge.
The owner will remain liable for any deficiency.
General
Neither the depositary nor MERANT will be liable to any owner, if either or
both of them is prevented from, or subjected to any civil or criminal penalty
for, doing any action that is provided for in the deposit agreement because of
any present or future law of any country or governmental authority, or any
provision, present or future, of MERANT's Memorandum and Articles of
Association, or any act of God or war or other circumstances beyond its control.
Neither the depositary nor MERANT will be liable to any owner for any
nonperformance or delay, from these same causes, in the performance of their
obligations in the deposit agreement, or for any exercise of, or failure to
exercise, any discretion provided for in the deposit agreement. If a
distribution or offering may not be made available to owners, and the depositary
33
36
may not dispose of the distribution or offering on behalf of the owners and make
the net proceeds available to them, then the depositary will not make the
distribution or offering, and will allow any rights, if applicable, to lapse.
MERANT and the depositary assume no obligation nor will they be subject to
any liability under the deposit agreement to owners or holders of ADRs, except
that they agree to perform their obligations in the deposit agreement without
negligence or bad faith.
The ADRs are transferable on the books of the depositary. However, the
depositary may close the transfer books at any time in the performance of its
duties. Before the depositary executes and delivers any ADR, registers any ADR
for transfer, split-up, combination or surrender or withdraws any deposited
securities, the depositary or the custodian may require the depositor of the
ordinary shares or the presenter of the ADR to reimburse it for any tax or other
governmental charge and any stock transfer or registration fee (including any
tax or charge and fee due for ordinary shares being deposited or withdrawn) and
to pay any fees provided for in the deposit agreement. The depositary may, and
if requested by MERANT must, refuse to deliver ADRs, to register the transfer of
any ADR, to make any distribution on, or related to, ordinary shares or to
deliver any deposited securities until it has received information,
certificates, representations and warranties such as proof of citizenship or
residence or exchange control approval as it reasonably considers to be
necessary or proper. The delivery, transfer or registration of transfer of ADRs
may be suspended during any period when the transfer books of the depositary are
closed or at any time as the depositary or MERANT may consider necessary or
advisable. The surrender of outstanding ADRs and the withdrawal of deposited
securities may not be suspended, subject only to:
* temporary delays caused by closing the transfer books of the
depositary or MERANT or the deposit of ordinary shares in connection
with voting at a shareholders' meeting or the payment of dividends,
* the payment of fees, taxes and similar charges, and
* compliance with any laws or governmental regulations relating to the
ADRs or to the withdrawal of the deposited securities.
The depositary will keep books, at its Corporate Trust Office, for the
registration and transfer of ADRs, which at all reasonable times will be open
for inspection by the owners. However, inspection must not be for the purpose of
communicating with owners in the interest of a business or object other than the
business of MERANT or a matter related to the deposit agreement or the ADRs.
The depositary may appoint one or more co-transfer agents at designated
transfer offices. In carrying out its functions, a co-transfer agent may require
holders or owners or persons entitled to ADRs to provide evidence of authority
and compliance with applicable laws and other requirements. Co-transfer agents
are also entitled to protection and indemnity to the same extent as the
depositary.
Listing
The ADSs are quoted on the Nasdaq National Market under the trading symbol
MRNT.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
34
37
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
None.
PART IV
ITEM 17. FINANCIAL STATEMENTS
See Item 18.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements filed
as part of this annual report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
---------------------
1. The following audited consolidated financial statements, together with
the related reports of Ernst & Young, are incorporated in this annual report by
reference from the MERANT 1999 Annual Report Detail:
US Format
---------
Audited Financial Statements
Consolidated Statements of Income for the year ended April 30,
1999, the three-month period ended April 30, 1998, the year
ended January 31, 1998 and the year ended January 31, 1997
Consolidated Balance Sheets at April 30, 1999 and April 30, 1998
Consolidated Statements of Cash Flow for the for the year ended
April 30, 1999, the three-month period ended April 30,
1998, the year ended January 31, 1998 and the year ended
January 31, 1997
Consolidated Statements of Shareholders' Equity for the year
ended April 30, 1999, the three-month period ended
April 30, 1998, the year ended January 31, 1998 and the
year ended January 31, 1997
Notes to Consolidated Financial Statements
Report of the Independent Auditors
UK Format
---------
Audited Financial Statements
Consolidated Profit and Loss Account for the years ended April
30, 1999, January 31, 1998 and January 31, 1997
Consolidated Balance Sheet at April 30, 1999 and January 31, 1998
Consolidated Cash Flow Statement for the years ended April 30,
1999, January 31, 1998 and January 31, 1997
Notes to Consolidated Cash Flow Statement for the years ended
April 30, 1999, January 31, 1998 and January 31, 1997
Company Balance Sheet at April 30, 1999 and January 31, 1998
Statement of Total Recognized Gains and Losses for the years
ended April 30, 1999, January 31, 1998 and January 31, 1997
35
38
Movement in Shareholders' Funds for the years ended April 30,
1999, January 31, 1998 and January 31, 1997
Notes to the Financial Statements
2. The following financial statement schedules and reports have been filed
as part of this annual report:
US Format
---------
Schedule for the year ended April 30, 1999, the three-month
period ended April 30, 1998, the year ended January 31, 1998 and
the year ended January 31, 1997
Schedule II - Valuation and Qualifying Accounts
Report of Ernst & Young, Independent Auditors
Report of PriceWaterhouseCoopers LLP, Independent Accountants
UK Format
---------
Schedule for the years ended April 30, 1999, January 31, 1998 and
January 31, 1997
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is
not significant or is not applicable.
(b) Exhibits.
---------
Exhibit 2.01(1) Memorandum of Association of MERANT dated as of March 28, 1983,
as amended and restated to date.
Exhibit 2.02* Articles of Association of MERANT adopted as of June 19, 1996,
as amended and restated to date.
Exhibit 2.03* Form of Specimen Certificate for MERANT's ordinary shares at
GBP 0.02 each.
Exhibit 2.04(1) Amended and Restated Deposit Agreement dated as of March 16,
1998 among MERANT, the Bank of New York and all owners and
holders from time to time of American Depositary Receipts.
Exhibit 2.05(2)+ MERANT's 1994 Employee Benefit Trust.
Exhibit 2.06*+ MERANT's 1998 Share Option Plan, as amended.
Exhibit 2.07*+ MERANT's 1998 Inland Revenue Approved Share Option Scheme.
Exhibit 2.08*+ MERANT's 1999 Employee Share Purchase Plan.
Exhibit 2.09(1) Form of Indemnification Agreement entered into by MERANT with
36
39
each of its directors and certain executive officers.
Exhibit 2.10(1) Form of Indemnity Agreement entered into by MERANT
Incorporated, a subsidiary of MERANT ("MERANT Incorporated"),
with each of its directors and certain executive officers of
MERANT and MERANT Incorporated.
Exhibit 2.11(3) Agreement and Plan of Reorganization among Micro Focus Group
plc, Tower Merger Sub, Inc. and INTERSOLV, Inc. dated June 17,
1998.
Exhibit 13.01* The portions of the MERANT 1999 Annual Report Detail
incorporated in this Form 20-F by reference.
Exhibit 23.01* Consent of Ernst & Young, Independent Auditors, dated October
29, 1999.
Exhibit 23.02* Consent of PriceWaterhouseCoopers LLP, Independent Accountants,
dated October 29, 1999.
____________________
(1) Filed on May 29, 1998 as an exhibit to MERANT's Annual Report on Form
20-F (File No.000-19696), and incorporated in this Form 20-F by
reference.
(2) Filed on April 9, 1997 as an exhibit to MERANT's Registration Statement
on Form S-8 (File No. 333-24867), and incorporated in this Form 20-F by
reference.
(3) Filed on August 24, 1998 as an exhibit to MERANT's Registration
Statement on Form F-4 (File No. 333-62095), and incorporated in this
Form 20-F by reference.
+ Indicates a management contract or compensatory plan or arrangement.
* Filed with this Form 20-F.
37
40
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (U.S. FORMAT)
- - ------------------------------------------------------------
MERANT PLC
In thousands of U.S. dollars
- - --------------------------- ----------------- ------------------ ------------------------- ---------------- -----------
Balance at Charged Charged Deductions Balance
beginning of to costs and to/credited from other at end of
Description period expenses accounts (*) period
- - --------------------------- ----------------- ------------------ ------------------------- ---------------- -----------
Provision for bad and doubtful debts
Years ended January 31:
1997 4,559 4,587 (21) (3,265) 5,860
1998 5,860 3,065 706 **(4,770) 4,861
Quarter ended April 30:
1998 4,861 196 29 47 5,133
Year ended April 30:
1999 5,133 5,269 (29) (5,588) 4,785
- - ----------------------------------------------------------------------------------------------------------------------
(*) Includes exchange rate adjustments
(**) Adjusted for INTERSOLV movements previously reported
38
41
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (U.K. FORMAT)
- - ------------------------------------------------------------
MERANT PLC
- - --------------------------- ----------------- ----------------- ------------------------ ---------------- ---------------
Balance at Charged Charged Deductions Balance
beginning of to costs and to/credited from other GBP '000 at end of
Description period expenses accounts (*) period
GBP '000 GBP '000 GBP '000 GBP '000
- - --------------------------- ----------------- ----------------- ------------------------ ---------------- ---------------
Provision for bad and doubtful debts
Years ended January 31:
1997 942 458 (68) (251) 1,081
1998 1,081 358 405 (381) 1,463
Fifteen months ended April 30:
1999 1,463 2,839 1,087 (2,416) 2,973
- - -------------------------------------------------------------------------------------------------------------------------
(*) Includes exchange rate adjustments
39
42
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
US FORMAT
To the Board of Directors and Shareholders
of MERANT plc
We have audited the balance sheets of MERANT plc and the consolidated
balance sheets of MERANT plc and subsidiaries as of April 30, 1999 and January
31, 1998, and the related consolidated profit and loss accounts, statements of
recognised gains and losses and cash flow statements for the fifteen months
ended April 30, 1999 and for each of the two years in the period ended January
31, 1998 on pages 72 to 102 of the 1999 Annual Report Detail. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with United Kingdom auditing
standards which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MERANT plc and the consolidated financial position of MERANT plc and
subsidiaries at April 30, 1999 and January 31, 1998, and the consolidated
results of their operations and consolidated cash flows for the fifteen months
ended April 30, 1999 and for each of the two years in the period ended January
31, 1998, in conformity with accounting principles generally accepted in the
United Kingdom.
/s/ Ernst & Young
Ernst & Young
Reading, England
August 4, 1999
40
43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
INTERSOLV, Inc.
In our opinion, the consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of
INTERSOLV, Inc. and its subsidiaries at April 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the two years in the period
ended April 30, 1998 and the three month period ended April 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 13 to the INTERSOLV, Inc. financial statements,
INTERSOLV, Inc. signed an agreement to merge with Micro Focus Group, plc.
subsequent to year end.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
McLean, Virginia
June 17, 1998
41
44
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 1, 1999 MERANT plc
By: /s/ Kenneth A. Sexton
----------------------
Kenneth A. Sexton
Senior Vice President, Chief
Financial Officer and Secretary
42
45
EXHIBIT INDEX
-------------
Exhibit No. Description
- - ----------- -----------
Exhibit 2.02 Articles of Association of MERANT adopted as of June 19, 1996,
as amended and restated to date.
Exhibit 2.03 Form of Specimen Certificate for MERANT's Ordinary Shares at GBP
0.02 each.
Exhibit 2.06 MERANT's 1998 Share Option Plan, as amended.
Exhibit 2.07 MERANT's 1998 Inland Revenue Approved Share Option Scheme.
Exhibit 2.08 MERANT's 1999 Employee Share Purchase Plan.
Exhibit 13.01 The portions of the MERANT 1999 Annual Report Detail
incorporated in this Form 20-F by reference.
Exhibit 23.01 Consent of Ernst & Young, Independent Auditors, dated October
29, 1999.
Exhibit 23.02 Consent of PriceWaterhouseCoopers LLP, Independent Accountants,
dated October 29, 1999.
46
EXHIBIT 2.02
No: 01709998
THE COMPANIES ACTS 1985 TO 1989
________________________________________________
A PUBLIC COMPANY LIMITED BY SHARES
________________________________________________
A R T I C L E S O F A S S O C I A T I O N
(adopted by Special Resolution passed on June 19 1996 and amended by Special
Resolution passed on September 16 1999)
-of -
MERANT Plc
MEMERY CRYSTAL
31 Southampton Row
London WC1B 5HT
Tel: 0171-242 5905
Fax: 0171-242 2058
Ref:JPD:60161V1
47
NO: 01709998
THE COMPANIES ACTS 1985 TO 1989
________________________________________________
A PUBLIC COMPANY LIMITED BY SHARES
________________________________________________
A R T I C L E S O F A S S O C I A T I O N
(adopted by Special Resolution passed on June 19 1996 and amended by Special
Resolution passed on September 16 1999)
- of -
*MERANT Plc
1. No regulations set out in any schedule to any statute concerning companies
shall apply as regulations or articles of the Company.
2. 2.1 In these articles if not inconsistent with the subject or context, the
following words shall bear the following meanings:-
"the Acts"
means every statute from time to time in force concerning
companies insofar as the same applies to the Company;
- - ----------
*The name of the Company was changed from Micro Focus Group Plc on February 15,
1999.
48
"the Uncertificated Securities Regulations"
means the Uncertificated Securities Regulations 1995 in so far as
the same applies to the Company and includes:
(i) any enactment or subordinate legislation which amends
or supersedes those Uncertificated Securities
Regulations;
(ii) any applicable rules made under those Uncertificated
Securities Regulations or any such enactment or
subordinate legislation for the time being in force;
"CREST"
means the relevant system operated by Crest Co. Limited in terms
of the Uncertificated Securities Regulations, which enables title
to shares or other securities to be evidenced and transferred
without a written instrument.
"these articles"
means these articles of association of the Company as originally
adopted or from time to time altered;
"executed"
includes any mode of execution whether under seal or under hand;
"office"
means the registered office of the Company;
"the holder"
in relation to shares means the member whose name is entered in
the register of members as the holder of the shares;
"the seal"
means the common seal of the Company (if any) and includes the
official seal (if any) kept by the Company by virtue of the Acts;
"secretary"
means any person appointed to perform the duties of the secretary
of the Company; and
"the Group"
means the Company and any subsidiary or subsidiaries for the time
being of the Company.
"the London Stock Exchange"
means The London Stock Exchange Limited.
2.1 included for numbering purposes only
2.2 References to writing shall include typewriting, printing, lithography,
photography and any other modes of representing or reproducing words in a
legible and non-transitory form.
49
2.3 Where for any purpose an ordinary resolution of the Company is required a
special or extraordinary resolution shall also be effective and where for
any purpose an extraordinary resolution of the Company is required a
special resolution shall be effective.
2.4 Unless the context otherwise requires, words or expressions contained in
these articles bear the same meaning as in the Acts or the Uncertificated
Securities Regulations (as the case may be) or any statutory modification
or re-enactment of it or them in force when these regulations become
binding on the Company.
2.5 A reference to shares in "uncertificated form" means shares, the title to
which is recorded in the register of members as being held in such form and
which by virtue of the Uncertificated Securities Regulations may be
transferred by means of a relevant system and reference to shares in
"certificated form" means shares, the title to which is not and may not be
transferred. SHARE CAPITAL
3. included for numbering purposes only
3.1 *The share capital of the Company is 2,250,000 divided into 22,500,000
Ordinary Shares of 10 pence each ("Ordinary Shares").
3.2 The Ordinary Shares shall rank pari passu in all respects and the holders
of the Ordinary Shares shall be entitled to attend and vote at any general
meeting of the Company.
4. Subject to the provisions of the Acts and in particular to those conferring
rights of pre-emption and without prejudice to any rights attached to any
shares for the time being in issue, any share may be issued with or have
attached thereto such rights or restrictions as the Company may by ordinary
resolution determine or have attached thereto or if there has not been any
such determination or so far as the same shall not make specific provision,
as the directors may determine.
5. Subject to the provisions of the Acts and to any special rights conferred
on the holders of any shares or class of shares, any shares may with the
sanction of a special resolution be issued which are to be redeemed or are
to be liable to be redeemed at the option of the Company or the holder.
* By Ordinary Resolution passed on March 12 1998 each Ordinary Share of 10p
was sub-divided into 5 Ordinary Shares of 2p each. By Special Resolution
passed on September 23 1998 the share capital of the Company was increased
to 4,240,000 divided into 212,000,000 Ordinary Shares of 2p each.
50
6. Subject to the provisions of the Acts, the Company is hereby authorised to
enter into any contract for the purchase of all or any of its shares of any
class (including any redeemable shares) and any contract under which it
may, subject to any conditions, become entitled or obliged to purchase all
or any of such shares. Every contract entered into in pursuance of this
article shall be authorised by such resolution of the Company as may be
required by the Acts, but subject thereto the directors shall have full
power to determine or approve the terms of any such contract. Any contract
which the Company is hereby authorised to enter into may be or provide for
the purchase of shares by private treaty, on a stock exchange or otherwise
and neither the Company nor the directors shall be required to select the
shares in question rateably or in any other particular manner as between
the holders of shares of the same class or as between them and the holders
of shares of any other class or in accordance with the rights as to
dividends or capital conferred by any class of shares. Subject to the
provisions of the Acts the Company may agree to the variation of any
contract entered into in pursuance of this article and to release any of
its rights or obligations under any such contract. Notwithstanding anything
to the contrary contained in these articles, the rights and privileges
attached to any class of shares shall be deemed not to be modified or
abrogated by anything done by the Company in pursuance of this article.
7. The Company may exercise the powers of paying commissions conferred by the
Acts. Subject to the provisions of the Acts, the commission may be
satisfied by the payment of cash or by the allotment of fully or partly
paid shares or partly in one way and partly in the other. The Company may
also on any issue of share capital pay such brokerage as may be lawful.
8. Except as required by law, no person shall be recognised by the Company as
holding any share upon any trust and (except as by these articles or by law
otherwise provided) the Company shall not be bound by or to recognise (even
when having notice thereof) any interest in any share except an absolute
right to the entirety thereof in the holder.
51
VARIATION OF RIGHTS
-------------------
9. Subject to the Acts, all or any of the special rights for the time being
attached to any class of shares for the time being issued may from time to
time (whether or not the Company is being wound-up) be altered or abrogated
with the consent in writing of the holders of not less than three-fourths
of the issued shares of that class or with the sanction of an extraordinary
resolution passed at a separate general meeting of the holders of such
shares. To any such separate general meeting all the provisions of these
articles as to general meetings of the Company shall mutatis mutandis
apply, but so that the necessary quorum shall be one or more persons
holding or representing by proxy not less than one-third of the issued
shares of the class, that every holder of shares of the class shall be
entitled on a poll to one vote for every such share held by him, that any
holder of shares of the class present in person or by proxy may demand a
poll and that at any adjourned meeting of such holders one holder present
in person or by proxy (whatever the number of shares held by him) shall be
a quorum.
10. The special rights conferred upon the holders of any shares or class of
shares shall not, unless otherwise expressly provided in the rights
attaching to or the terms of issue of such shares, be deemed to be altered
by the creation or issue of further shares ranking pari passu therewith.
SHARE CERTIFICATES
------------------
11. Every person (except a stock exchange nominee in respect of whom the
Company is not by law required to complete and have ready for delivery a
certificate) whose name is entered as a holder of any shares in the
register of members of the Company shall be entitled, without payment, to
receive within two months after allotment or lodgment of a transfer to him
of the shares in respect of which he is so registered (or within such other
period as the terms of issue shall provide) one certificate for all such
shares of any one class or several certificates each for one or more of
such shares of such class upon payment for every certificate after the
first of such reasonable out-of-pocket expenses as the directors may from
time to time determine. In the case of a share held jointly by several
persons, delivery of a certificate to one or several joint holders shall be
sufficient delivery to all. A member (except such a nominee as aforesaid)
who has transferred part of the shares comprised in his registered holding
shall be entitled to a certificate for the balance without charge.
52
12. All forms of certificate for shares/or loan capital or other securities of
the Company (other than letters of allotment, scrip certificates and other
like documents) shall, except to the extent that the terms and conditions
for the time being relating thereto otherwise provide, be issued under seal
affixed only with the authority of the Board or in such other manner as the
Board having regard to the terms of issue, the Acts and the regulations of
the London Stock Exchange may authorise. The directors may by resolution
determine, either generally or in any particular case or cases, that any
signatures on any such certificates need not be autographic but may be
affixed to such certificates by some mechanical means or may be printed
thereon or that such certificates need not be signed by any person.
13. included for numbering purposes only
13.1 If a share certificate is defaced, worn-out, lost or destroyed, it may be
replaced without fee but on such terms (if any) as to evidence and
indemnity and payment of the exceptional out of pocket expenses incurred by
the Company in investigating such evidence and preparing such indemnity as
the directors may determine and where it is defaced or worn out, after
delivery up of the old certificate to the Company and in any event no
replacement of a lost certificate will be issued unless the Company is
satisfied beyond reasonable doubt that the original has been destroyed.
13.2 Notwithstanding the terms of articles 11, 12 and 13.1 above, where, in
accordance with the terms of Article 13.3 hereof, any shares or other
securities of the Company are issued, transferred, registered or otherwise
dealt with in uncertificated form, any references in these articles
requiring title to shares or other securities to be evidenced by or
transferred by reference to share certificates or any other form of written
instrument shall not apply and the holding, transfer, recording of title to
and, registration of, uncertificated securities issued by the Company will
be governed by reference to the provisions of Article 13.3 hereof.
(a) Nothing in these articles shall preclude any share or other security
of the Company from being issued, held, registered, converted,
transferred or otherwise dealt with in an uncertificated form in
accordance with the Uncertificated Securities Regulations and any
rules or requirements laid down from time to time by CREST or any
other relevant system operated pursuant to the Uncertificated
Securities Regulations.
53
(b) In relation to any share or other security which is in uncertificated
form, the articles of association shall have effect subject to the
provisions of the Uncertificated Securities Regulations and (so far as
consistent with them) to the following provisions:
(i) the Company shall not be obliged to issue a certificate
evidencing title to shares and all references to a certificate in
respect of any shares or securities held in uncertificated form
in these articles shall be deemed inapplicable to such shares or
securities which are in uncertificated form and furthermore shall
be interpreted as a reference to such form of evidence of title
to uncertificated shares or securities as the Uncertificated
Securities Regulations prescribe or permit;
(ii) the registration of title to and transfer of any shares or
securities in an uncertificated form shall be effected in
accordance with the Uncertificated Securities Regulations and
there shall be no requirement for a written instrument of
transfer;
(iii)a properly authenticated dematerialised instruction given in
accordance with the Uncertificated Securities Regulations shall
be given effect in accordance with the Uncertificated Securities
Regulations;
(iv) any communication required or permitted by these articles to be
given by a person to the Company may be given in accordance with
and in any manner (whether or not in writing) prescribed or
permitted by the Uncertificated Securities Regulations;
(v) if a situation arises where any provision of these articles is
inconsistent in any respect with the terms of the Uncertificated
Securities Regulations in relation to shares or securities of the
Company which are in an uncertificated form then:-
(i) the Uncertificated Securities Regulations will be given
effect thereto in accordance with their terms; and
(ii) the directors shall have power to implement any procedures
they may think fit and as may accord with the Uncertificated
Securities Regulations for the recording and transferring of
title to shares and securities in uncertificated form and
for the regulation of those proceedings and the persons
responsible for or involved in their operation;
54
(iii)the directors shall have the specific powers to elect,
without further consultation with the holders of any shares
or securities of the Company (except where such shares or
securities are constituted by virtue of some other deed,
document or other source), that any single or all classes of
shares and securities of the Company become capable of being
traded in uncertificated form in accordance with the
Uncertificated Securities Regulations on CREST or any other
Operator of a relevant system.
DESTRUCTION OF DOCUMENTS
------------------------
14. The Company may destroy:-
14.1 any share certificate which has been cancelled at any time after the expiry
of one year from the date of such cancellation;
14.2 any dividend mandate or any variation or cancellation thereof or any
notification of change of name or address at any time after the expiry of
two years from the date such mandate variation cancellation or notification
is recorded by the Company;
14.3 any instrument of transfer of shares which has been registered at any time
after the expiry of six years from the date of registration; and
14.4 any other documents on the basis of which any entry in the register of
members is made at any time after the expiry of twelve years from the date
an entry in the register of members was first made in respect of it;
and it shall conclusively be presumed in favour of the Company that every share
certificate so destroyed was a valid certificate duly and properly cancelled and
that every instrument of transfer so destroyed was a valid and effective
instrument duly and properly registered and that every other document destroyed
hereunder was a valid and effective document in accordance with the recorded
particulars thereof in the books or records of the Company: PROVIDED ALWAYS
that:
55
(a) the foregoing provisions of this article shall apply only to the
destruction of a document in good faith and without express notice to
the Company that the preservation of such document was relevant to a
claim,
(b) nothing contained in this article shall be construed as imposing upon
the Company any liability in respect of the destruction of any such
document earlier than as aforesaid or in any case where the conditions
of proviso (i) above are not fulfilled, and
(c) references in this article to the destruction of any document include
references to its disposal in any manner.
UNTRACED SHAREHOLDERS
---------------------
15. The Company shall be entitled to sell the shares of a member or the shares
to which a person is entitled by death, bankruptcy or operation of law by
instructing a member of the London Stock Exchange to sell them at best if
and PROVIDED THAT:-
15.1 during a period of 12 years all warrants and cheques in respect of at least
3 dividends declared by the Company in respect of the member's shares sent
by the Company through the post in a prepaid letter addressed to the member
at his registered address or to the person so entitled at the address shown
in the register of members as his address and have become payable and
remain unclaimed and uncashed or have been returned undelivered; and
15.2 the Company shall insert advertisements in a national daily newspaper and a
newspaper circulated in the area in which the last known address of the
member or the address at which service of notices in the manner authorised
by these articles may be effected, giving notice of its intention to sell
the said shares; and
15.3 during the said period of 12 years and the period of 3 months following the
said advertisements the Company has had no indication that such member or
person can be traced; and
15.4 where any shares in the capital of the Company are listed or dealt in on
the London Stock Exchange notice is first given to the London Stock
Exchange of its intention so to do.
56
(a) To give effect to such sale the Company may appoint any person to
execute an instrument of transfer of the share or in the case of
shares for the time being in uncertificated form to take such other
steps in the name of the holder as may be necessary to transfer the
shares sold, then the instrument or steps (as the case may be) shall
be as effective as if it had been executed or they had been taken by
the registered holder of, or person entitled by transmission to, the
share. The Company shall account to the member or other person
entitled to such shares for the net proceeds of such sale and shall be
deemed to be his debtor and not a trustee for him in respect of the
same and no interest shall be payable by the Company to the member or
other person entitled to such shares.
(b) Any moneys not accounted for to the member or other person entitled to
such shares shall be carried to a separate account and shall be a
permanent debt of the Company. Moneys carried to such separate
accounts may either be employed in the business of the Company or
invested in such investments (other than shares of the Company or its
holding Company if any) as the directors may from time to time think
fit.
15.5 If on two consecutive occasions dividend warrants and/or Notices have been
sent through the post to any member at his registered address or his
address for the service of Notices but have been left uncashed and/or
returned undelivered or if, after one such occasion reasonable enquiries
have failed to establish any new address of the registered member, such
member shall not thereafter be entitled to receive dividend warrants and/or
Notices by post from the Company until he shall have communicated with the
Company and supplied in writing to the office a new registered address or
address within the United Kingdom for service of the Notices.
LIEN
----
16. The Company shall have a first and paramount lien on every share (not being
a fully paid share) for all moneys (whether presently payable or not)
payable at a fixed time or called in respect of that share. The directors
may at any time declare any share to be wholly or in part exempt from the
provisions of this regulation. The Company's lien on a share shall extend
to all moneys payable in respect of it.
57
17. The Company may sell in such manner as the directors determine any shares
on which the Company has a lien if a sum in respect of which the lien
exists is presently payable and is not paid within fourteen days after
notice has been given to the holder of the share or the person entitled to
it by reason of the death or bankruptcy of the holder demanding payment of
the sum presently payable and stating that if the notice is not complied
with the shares may be sold.
18. To give effect to a sale the directors may authorise some person to execute
an instrument of transfer of the shares sold, or in the case of shares for
the time being in uncertificated form to take such other steps in the name
of the holder as may be necessary to transfer the shares sold to, or in
accordance with the directions of, the purchaser. The purchaser shall be
registered as the holder of the share and he shall not be bound to see the
application of the purchase money. The title of the transferee to the
shares shall not be affected by any irregularity in or invalidity of the
proceedings in reference to the sale.
19. The net proceeds of the sale, after payment of the costs, shall be applied
in payment of so much of the sum for which the lien exists as is presently
payable, and any residue shall, in the case of shares in certificated form
(upon surrender to the Company for cancellation of the certificate for the
shares sold and subject to a like lien for any moneys not presently payable
as existed upon the shares before the sale) be paid to the person entitled
to the shares immediately before the date of the sale.
CALLS ON SHARES AND FORFEITURE
------------------------------
20. Subject to the provisions of these articles and to the terms of issue, the
directors may make calls upon the members in respect of any moneys unpaid
on their shares and not by the terms of issue thereof made payable at a
date fixed by or in accordance with such terms of issue (whether in respect
of nominal value or premium) and each member shall (subject to receiving at
least fourteen clear days' notice specifying when and where payment is to
be made) pay to the Company as required by the notice the amount called on
his shares. A call may be required to be paid by instalments. A call may,
before receipt by the Company of a sum due thereunder, be revoked in whole
or in part and payment of a call may be postponed in whole or part. A
member shall remain liable for calls made upon him notwithstanding the
subsequent transfer of the shares in respect whereof the call was made.
58
21. A call shall be deemed to have been made at the time when the resolution of
the directors authorising the call was passed.
22. The joint holders of a share shall be jointly and severally liable to pay
all calls in respect thereof.
23. If a call remains unpaid after it has become due and payable the person
from whom the sum is due shall pay interest on the unpaid sum from the day
it became due until it is paid at the rate fixed by the terms of allotment
of the share or in the notice of the call or, if no rate is fixed, at such
rate not exceeding 15 per cent. per annum as the directors may determine
but the directors may waive payment of the interest wholly or in part. The
Company may also recover any costs, charges and expenses incurred by reason
of the non-payment of any call.
24. A sum payable in respect of a share on allotment or at any fixed date,
whether in respect of nominal value or premium or as an instalment of a
call, shall be deemed to be a call and if it is not paid the provisions of
these articles shall apply as if that sum had become due and payable by
virtue of a call.
25. Subject to the terms of allotment the directors may on the issue of shares
differentiate between the allottees or holders as to the amount of calls to
be paid and the times of payment.
26. The directors may receive from any member willing to advance the same all
or any part of the money unpaid upon the shares held by him beyond the sums
actually called up thereon as a payment in advance of calls, and such
payment in advance of calls shall extinguish, so far as the same shall
extend, the liability upon the shares in respect of which it is advanced,
and the Company may pay interest upon the money so received, or so much
thereof as from time to time exceeds the amount of the calls then made upon
the shares in respect of which it has been received, at such rate as the
member paying such sum and the directors agree; but provided that any such
payment in advance of calls shall not entitle the holder of the shares to
participate in respect thereof in a dividend subsequently declared by
reference to a record date earlier than the due date for the call. The
directors may repay any amount paid in advance of call, upon giving the
member concerned at least three months' notice in writing.
59
27. If a call or instalment of a call remains unpaid after it has become due
and payable the directors may give to the person from whom it is due not
less than fourteen clear days' notice requiring payment of the amount
unpaid together with any interest which may have accrued. The notice shall
name the place where payment is to be made and shall state that if the
notice is not complied with the shares in respect of which the call was
made or instalment is payable will be liable to be forfeited.
28. If the notice is not complied with any share in respect of which it was
given may, before the payment required by the notice has been made, be
forfeited by a resolution of the directors and the forfeiture shall include
all dividends or other moneys payable in respect of the forfeited shares
and not paid before the forfeiture. Where any share has been forfeited in
accordance with the articles of association, the Company will serve a
notice of forfeiture on the person who was the holder of the share before
forfeiture. The accidental omission to give notice or the non-receipt of
notice will not invalidate the forfeiture.
29. Subject to the provisions of the Acts, a forfeited share may be sold,
re-allotted or otherwise disposed of on such terms and in such manner as
the directors determine either to the person who was before the forfeiture
the holder or to any other person upon such terms and in such manner as the
directors think fit and at any time before a sale, re-allotment or other
disposition the forfeiture may be annulled by the directors on such terms
as they think fit. Where for the purposes of its disposal a forfeited share
is to be transferred to any person the directors may authorise some person
to execute an instrument of transfer of the share, or in the case of a
share for the time being in uncertificated form to take such steps in the
name of the holder as may be necessary to transfer the share to that
person.
30. A person any of whose shares have been forfeited shall cease to be a member
in respect of them and, in the case of shares in certificated form shall
surrender to the Company for cancellation the certificate for the shares
forfeited but shall remain liable to the Company for all moneys which at
the date of forfeiture were presently payable by him to the Company in
respect of those shares with interest at such rate as may be fixed by the
terms of allotment of the share or in the notice of the call or, if no rate
is fixed, at the appropriate rate (as defined in the Acts) from the date of
forfeiture until payment but the directors may waive payment wholly or in
part or enforce payment without any allowance for the value of the shares
60
at the time of forfeiture or for any consideration received on their
disposal. Forfeiture of a share shall extinguish all interest and all
claims and demands against the Company in respect of that share.
31. A statutory declaration by a director or the secretary that a share has
been forfeited on a specified date shall be conclusive evidence of the
facts stated in it as against all persons claiming to be entitled to the
share and the declaration shall (subject to the execution of an instrument
of transfer if necessary) constitute a good title to the share and the
person to whom the share is disposed of shall not be bound to see to the
application of the consideration, if any, nor shall his title to the share
be affected by any irregularity in the proceedings in reference to the
forfeiture or disposal of the share.
DISCLOSURE OF INTEREST
----------------------
32. included for numbering purposes only
32.1 No member shall, unless the Directors otherwise determine, be entitled in
respect of any share held by him to vote (either in person or by
representative or proxy) at any general meeting or at any separate meeting
of the holders of any class of shares, or to exercise any other right
conferred by membership in relation to any such meeting if he or any other
person appearing to be interested in the share(s) has been given a notice
under Section 212 of the Companies Act 1985 ("a Section 212 notice") and
has failed to give the Company the information thereby required within 14
days from the date of the notice.
32.2 Without prejudice to the provisions of sub-clause 1 of this article, no
member holding shares representing 0.25 per cent or more in nominal value
of the issued shares of any class of capital in the Company shall, unless
the Directors otherwise determine, be entitled:
(a) in respect of any such shares, to vote (either in person or by
representative or proxy) at any general meeting or at any separate
meeting of the holders of any class of shares, or to exercise any
other right conferred by membership in relation to any such meeting;
or
(b) to receive payment of any dividend (including shares in lieu of
dividend) or other distribution payable in respect of any such shares;
or
(c) to transfer any such shares otherwise than:
61
(i) pursuant to acceptance of a take-over offer;
(ii) through a recognised investment exchange or other recognised
market; or
(iii)in any other manner which the Directors are satisfied is bona
fide and at arm's length; (in each case hereinafter referred to
as an "arm's length sale") if he or any person appearing to be
interested in such shares has been given a Section 212 notice and
has failed to give the Company the information thereby required
within 14 days from the date of the notice provided that upon
receipt by the Company of notice that the shares have been
transferred pursuant to any arm's length sale or upon all
information required by the Section 212 notice being given, such
restrictions shall cease to apply in respect of such shares and
any dividend withheld shall be paid.
32.3 For the purposes of this article:
(a) a person other than the member holding a share shall be treated as
appearing to be interested in that share if the member has informed
the Company that the person is, or may be, so interested, or if the
Company (after taking account of any information obtained from the
member or, pursuant to a Section 212 notice, from anyone else) knows
or has reasonable cause to believe that the person is, or may be, so
interested;
(b) "interested" shall be construed as it is for the purpose of Section
212 of the Companies Act 1985;
(c) "take-over offer" shall have the meaning ascribed to it in Part XIII A
of the Companies Act 1985;
(d) "recognised investment exchange" shall have the meaning ascribed to it
in Section 207(1) of the Financial Services Act 1986; and
(e) "at arm's length" means a transfer to a person who is unconnected with
the members and with any other person appearing to be interested in
the shares; and
62
(f) reference to a person having failed to give the Company the
information required by a Section 212 notice includes (i) reference to
his having failed or refused to give all or any part of it and (ii)
reference to his having given information which he knows to be false
in a material particular or having recklessly given information which
is false in a material particular.
32.4 Where on the basis of information obtained from a member in respect of any
share held by him, the Company gives a Section 212 notice to any other
person, it shall at the same time send a copy of the notice to the member,
but the accidental omission to do so, or the non-receipt by the member of
the copy, shall not invalidate or otherwise affect the application of
sub-clauses 1 and 2 of this article.
32.5 Any sanctions imposed upon a shareholding in respect of a person having
failed to give the Company the information required by a section 212 notice
will cease to apply 7 days after the earlier of:-
(a) receipt by the Company of notice that the shareholding has been sold
to a third party in the manner described above; and
(b) due compliance to the satisfaction of the Company, with the notice
under section 212.
32.6 Nothing in these articles shall limit the powers of the Company under
Section 216 of the Companies Act 1985 or any other powers whatsoever.
TRANSFER OF SHARES
------------------
33. included for numbering purposes only
33.1 Subject to such of the restrictions of these articles as may be applicable,
any member may transfer all or any of his shares. The instrument of
transfer of a share in certificated form may be in any usual form or in any
other form which the directors may approve and shall be executed by or on
behalf of the transferor and, unless the share is fully paid, by or on
behalf of the transferee.
33.2 Nothing in these articles shall require title to any securities of the
Company to be evidenced or transferred by a written instrument, the
regulations from time to time made under the Acts so permitting. The Board
shall have power to implement any arrangements it may think fit for such
evidencing and transfer which accord with those regulations.
63
34. *The directors may, in their absolute discretion and without giving any
reason, refuse to register the transfer of a share in certificated form
which is not fully paid or of a share on which the Company has a lien
provided that any such refusal does not prevent dealings in the shares from
taking place on an open and proper basis.
35. included for numbering purposes only
35.1 The directors may also decline to recognise an instrument of transfer in
respect of shares in certificated form unless:-
(a) it is lodged duly stamped at the office or at such other place as the
directors may appoint and is accompanied by the certificate for the
shares to which it relates and such other evidence as the directors
may reasonably require to show the right of the transferor to make the
transfer;
(b) it is in respect of only one class of share; and
(c) it is in favour of not more than four transferees.
35.2 In the case of shares for the time being in uncertificated form transfers
shall be registered only in accordance with the terms of the Uncertificated
Securities Regulations but so that the directors may refuse to register a
transfer which would require shares to be held jointly by more than four
persons.
36. If the directors decline to register a transfer they shall within two
months after the date on which the transfer was lodged with the Company or
in the case of uncertificated shares the Operator-instruction was received
by the Company send to the transferee notice of the refusal.
37. The registration of transfers of shares or debentures or of any class of
shares or debentures may be suspended at such times and for such periods
(not exceeding thirty days in any year) as the directors may determine but
so that such a suspension shall only apply to uncertificated shares with
the prior consent of the Operator.
38. No fee shall be charged for the registration of any instrument of transfer
or other document or instructions relating to or affecting the title to any
- - ----------
* Amended by Special Resolution passed September 16 1999.
64
share or for otherwise making any entry in the register of members relating
to any share.
39. Subject to article 14, all instruments of transfer which are registered
shall be retained by the Company, but any instrument of transfer which the
directors refuse to register shall be returned to the person depositing it.
40. Nothing in these articles shall preclude the directors from recognising a
renunciation of the allotment of any share by the allottee in favour of
some other person.
TRANSMISSION OF SHARES
----------------------
41. If a member dies the survivor or survivors where he was a joint holder, and
his personal representatives where he was a sole holder or the only
survivor of joint holders, shall be the only persons recognised by the
Company as having any title to his interest; but nothing herein contained
shall release the estate of a deceased member from any liability in respect
of any share held by him solely or which had been jointly held by him.
42. A person becoming entitled to a share in consequence of the death or
bankruptcy of a member or otherwise by operation of law may, upon such
evidence being produced as the directors may properly require, elect to
become the holder of the share or in the case of certificated shares
alternatively elect to have some person nominated by him registered as the
transferee. If he elects to become the holder he shall give notice to the
Company to that effect. If he elects to have another person registered he
shall execute an instrument of transfer of the share to that person. All
the provisions of these articles relating to the transfer of shares shall
apply to the notice or instrument of transfer as if it were an instrument
of transfer signed by the member and the death or bankruptcy of the member
had not occurred. Nothing in these articles shall preclude the transfer of
shares or other securities of the Company in uncertificated form in
accordance with the terms of Article 13.3 hereof, and any references
contained in these Articles in relation to the execution of any instrument
of transfer or the registration of any transfer of shares or other
securities of the Company in uncertificated form shall be read in
accordance with the terms of Article 13.3 hereof.
43. A person becoming entitled to a share by reason of the death or bankruptcy
65
of a member or otherwise by operation of law shall (upon such evidence
being produced as may from time to time be required by the directors as to
his entitlement) have the rights to which he would be entitled if he were
the holder of the share, except that he shall not, before being registered
as the holder of the share, be entitled in respect of it to attend or vote
at any meeting of the Company or at any separate meeting of the holders of
any class of shares in the Company. The Board may at any time give notice
requiring the person to elect either to be registered himself or to
transfer the share and if the Notice is not complied with within 60 days
the Board may withhold payment of all dividends and other monies payable in
respect of the share until the requirements of the Notice have been
complied with.
STOCK
-----
44. The Company may by ordinary resolution convert any paid up shares into
stock, and re-convert any stock into paid up shares of any denomination.
After the passing of any resolution converting all the fully paid up shares
of any class in the capital of the Company into stock, any shares of that
class which subsequently become fully paid up and rank pari passu in all
other respects with such shares shall by virtue of this article and such
resolution be converted into stock transferable in the same units as the
shares already converted.
45. The holders of stock may transfer the same or any part thereof in the same
manner, and subject to the same regulations, as would have applied to the
shares from which the stock arose if they had not been converted, or as
near thereto as circumstances admit, but the directors may from time to
time, if they think fit, fix the minimum amount of stock transferable, but
so that such minimum shall not exceed the nominal amount of each of the
shares from which the stock arose.
46. The holders of stock shall, according to the amount of the stock held by
them, have the same rights, privileges and advantages in all respects as if
they held the shares from which the stock arose provided that no such
privilege or advantage (except participation in dividends and profits of
the Company and in the assets on a winding up) shall be conferred by an
amount of stock which would not, if existing in shares, have conferred such
privilege or advantage.
47. All the provisions of these articles applicable to paid up shares shall
apply to stock and in all such provisions the words "share" and "member"
66
shall include "stock" and "stockholder" respectively.
ALTERATION OF CAPITAL
---------------------
48. The Company may from time to time by ordinary resolution:-
(a) increase the share capital by new shares of such amount as the
resolution prescribes;
(b) consolidate and divide all or any of its shares into shares of a
larger amount than its existing shares;
(c) subject to the provisions of the Acts, sub-divide its shares, or any
of them, into shares of smaller amount than is fixed by the Memorandum
of Association (subject nevertheless to the Acts) and the resolution
may determine that, as between the holders of the shares resulting
from the sub-division, one or more of the shares may have any such
preferred or other special rights over, or may have such deferred
qualified rights or be subject to any such restrictions as compared
with, the others as the Company has power to attach to unissued or new
shares; and
(d) cancel shares which, at the date of the passing of the resolution,
have not been taken or agreed to be taken by any person, and diminish
the amount of its share capital by the amount of the shares so
cancelled.
49. Whenever as a result of a consolidation of shares any members would become
entitled to fractions of a share, the directors may, on behalf of those
members, sell the shares representing the fractions for the best price
reasonably obtainable to any person (including the Company) and distribute
the proceeds of sale in due proportion among those members, and the
directors may authorise some person to execute an instrument of transfer of
the shares, or in the case of shares for the time being in uncertificated
form to take such other steps in the name of the holder as may be necessary
to transfer shares sold to, or in accordance with the directions of, the
purchaser. The transferee shall not be bound to see to the application of
the purchase money nor shall his title to the shares be affected by any
irregularity in or invalidity of the proceedings in reference to the sale.
50. Subject to the provisions of the Acts, the Company may by special
resolution reduce its authorised or issued share capital, any capital
67
redemption reserve, and any share premium account in any way.
GENERAL MEETINGS
----------------
51. All general meetings other than annual general meetings shall be called
extraordinary general meetings.
52. The directors may call general meetings. If at any time there are not
within the United Kingdom sufficient Directors capable of acting to form a
quorum, any Director or any two members of the Company may convene an
extraordinary general meeting in the same manner as nearly as possible as
that in which meetings may be convened by the Directors.
NOTICE OF GENERAL MEETINGS
--------------------------
53. Subject to the provisions of the Acts, an annual general meeting and an
extraordinary general meeting for the passing of a special resolution or a
resolution appointing a person as a director shall be called by twenty-one
days' notice at the least, and all other extraordinary general meetings
shall be called by fourteen days' notice at the least. The notice shall be
exclusive of the day on which it is served, or deemed to be served, and of
the day for which it is given. Every notice shall be in writing and shall
specify the place, the day and the time of meeting, and (in the case of
special business) the general nature of such business, and in the case of
an annual general meeting shall specify the meeting as such and the notice
convening a meeting to pass a special or extraordinary resolution shall
specify the intention to propose the resolution as a special or
extraordinary resolution as the case may be. Notices shall be given in
manner hereinafter mentioned to all the members, other than those who under
the provisions of these articles or under the rights attached to the shares
held by them are not entitled to receive the notice, and to the auditors
for the time being of the Company. Notwithstanding that a meeting of the
Company is called by shorter notice than that specified in this article, it
shall be deemed to have been duly called if it is so agreed:-
(a) in the case of a meeting called as an annual general meeting, by all
the members entitled to attend and vote thereat; and
(b) in the case of any other meeting, by a majority in number of the
members having a right to attend and vote at the meeting, being a
majority together holding not less than 95 per cent. in nominal value
68
of the shares giving that right.
54. The Board may convene an Extraordinary General Meeting whenever it thinks
fit and, upon receipt of a requisition of members pursuant to the
provisions of the Acts, shall forthwith convene such a meeting for a date
not later than 28 days after the date of the Notice convening the meeting.
55. included for numbering purposes only
55.1 The accidental omission to give notice of a meeting or (in cases where
instruments of proxy are sent out with the notice) the accidental omission
to send such instrument of proxy to, or the non-receipt of notice of a
meeting or such instrument of proxy by, any person entitled to receive
notice shall not invalidate the proceedings at that meeting.
55.2 The directors may determine that persons entitled to receive notices of
meetings are those persons entered on the register of members at the close
of business on a day determined by the directors being not more than 21
days before the day that the notices are sent and may specify in the notice
of the meeting a time, not more than 48 hours before the time fixed for the
meeting, by which a person must be entered on the register of members in
order to have the right to attend or vote at the meeting. Changes to
entries on the register of members after the time so specified shall be
disregarded in determining the rights of any person to attend or vote at
the meeting.
PROCEEDINGS AT GENERAL MEETINGS
-------------------------------
56. All business shall be deemed special that is transacted at an extraordinary
general meeting. All business that is transacted at an annual general
meeting shall also be deemed special, with the exception of declaring
dividends, the consideration of the accounts and balance sheet and the
reports of the directors and auditors and other documents required to be
annexed to the balance sheet, the appointment of directors in the place of
those retiring by rotation or otherwise and the reappointment of the
retiring auditors (other than retiring auditors who have been appointed by
the directors to fill a casual vacancy) and the fixing of or the
determining of the method of fixing the remuneration of the auditors and
the directors.
57. No business shall be transacted at any meeting unless a quorum is present
but the absence of a quorum shall not preclude the appointment, choice or
election of a chairman which shall not be treated as part of the business
69
of the meeting. Two persons entitled to vote upon the business to be
transacted, each being a member or a proxy for a member or a duly
authorised representative of a corporation, shall be a quorum.
58. If a quorum is not present within five minutes (or such longer time not
exceeding one hour as the chairman of the meeting may determine to wait)
from the time appointed for the meeting, or if during a meeting a quorum
ceases to be present, the meeting if convened on the requisition of, or by
members, shall be dissolved. In any other case it shall stand adjourned to
such other day not being less than fourteen nor more than twenty-eight days
thereafter and at such other time and place as the directors may determine.
At such adjourned meeting one member present in person or proxy (whatever
the number of shares held by him) shall be a quorum. The Company shall give
not less than seven days' notice in writing of any meeting adjourned
through want of a quorum and such notice shall state that one member
present in person or by proxy (whatever the number of shares held by him)
shall be a quorum.
59. The directors may make arrangements for simultaneous attendance and
participation in general meetings by members and proxies entitled to attend
such meetings at places other than the place specified in the notice
convening the meeting ("the specified place"). Any arrangements for
simultaneous attendance at other places shall operate so that any members
and proxies excluded from attendance at the specified place are able to
attend at one or more of the other places. For the purpose of all other
provisions of these articles any such meeting shall be treated as being
held and taking place at the specified place. The right of any member or
proxy otherwise entitled to attend a general meeting at the specified place
shall be subject to any arrangements that the directors may at their
discretion make from time to time (whether before or after the date of the
notice convening the meeting) for facilitating the organisation and
administration of any general meeting by requiring any such person
(selected on such basis as the directors may at their discretion decide) to
attend the meeting at one or more of the other places.
60. included for numbering purposes only
60.1 The chairman, if any, of the board of directors or in his absence the
deputy-chairman, or in the absence of both the chairman and the
deputy-chairman some other director nominated by the directors shall
preside as chairman of the meeting, but if neither the chairman nor the
deputy-chairman nor such other director (if any) be present within five
70
minutes after the time appointed for holding the meeting, or if present is
unwilling to act, the directors present shall elect one of their number to
be chairman.
60.2 If no director is willing to act as chairman, or if no director is present
within five minutes after the time appointed for holding the meeting, the
members present and entitled to vote shall choose one of their number to be
chairman, and will remain chairman for the duration of the relevant
meeting.
61. included for numbering purposes only
61.1 A director shall, notwithstanding that he is not a member, be entitled to
attend and speak at any general meeting and at any separate meeting of the
holders of any class of shares in the Company.
61.2 Where shares are held by nominee shareholders the directors may make
arrangements for the holders of the beneficial interest in shares to attend
and speak (but not vote) at general meetings notwithstanding that the names
do not appear on the Register of Members. Any person invited by the
Chairman to do so may attend and speak at any general meeting.
62. The chairman may, with the consent of a meeting at which a quorum is
present (and shall if so directed by the meeting), adjourn the meeting from
time to time and from place to place.
In addition, the Chairman may at any time without the consent of the meeting,
adjourn any meeting to another time or place if it appears to the Chairman
that:-
(a) The number of persons wishing to attend cannot be conveniently
accommodated in the place(s) appointed for the meeting, or
(b) The unruly conduct of persons attending the meeting prevents or is
likely to prevent the orderly continuation of the business of the
meeting, or
(c) An adjournment is otherwise necessary so that the business of the
meeting may be properly conducted.
No business shall be transacted at an adjourned meeting other than business
which might lawfully have been transacted at the meeting from which the
adjournment took place.
71
63. included for numbering purposes only
63.1 included for numbering purposes only
(a) In the case of a Resolution duly proposed as a Special or
Extraordinary Resolution, no amendment thereto (other than an
amendment to correct a patent error) may be considered or voted upon
and in the case of a Resolution duly proposed as an Ordinary
Resolution, no amendment thereto (other than an amendment to correct a
patent error) may be considered or voted upon unless at least 48 hours
prior to the time appointed for holding the meeting or adjourned
meeting at which such Resolution is to be proposed notice in writing
of the terms of the amendment and intention to vote to move the same
have been lodged at the office.
(b) If an amendment shall be proposed to any resolution under
consideration but shall in good faith be ruled out of order by the
Chairman of the meeting, the proceedings on the substantive resolution
shall not be invalidated by any error in such ruling.
63.2 A resolution put to the vote of a meeting shall be decided on a show of
hands unless (before or on the declaration of the result of the show of
hands or on the withdrawal of any other demand for a poll) a poll is duly
demanded. Subject to the provisions of the Acts, a poll may be demanded:-
(a) by the chairman of the meeting; or
(b) by at least two members having the right to vote at the meeting; or
(c) by a member or members representing not less than one-tenth of the
total voting rights of all the members having the right to vote at the
meeting; or
(d) by a member or members holding shares conferring a right to vote at
the meeting being shares on which an aggregate sum has been paid up
equal to not less than one-tenth of the total sum paid up on all the
shares conferring that right;
and a demand by a proxy for a member shall be the same as a demand by a member.
64. Unless a poll is duly demanded and the demand is not withdrawn a
declaration by the chairman that a resolution has, on a show of hands, been
carried or carried unanimously, or by a particular majority, or lost, or
not carried by a particular majority shall be final and an entry to that
72
effect in the minutes of the meeting shall be conclusive evidence of the
fact without proof of the number or proportion of the votes recorded in
favour of or against the resolution.
65. The demand for a poll may, before the poll is taken, be withdrawn with the
consent of the chairman and a demand so withdrawn shall not be taken to
have invalidated the result of a show of hands declared before the demand
was made.
66. A poll on any question other than the election of the Chairman shall be
taken as the chairman directs, including the use of ballot or voting papers
or tickets, and he may appoint scrutineers (who need not be members) and
fix a time and place for declaring the result of the poll. The result of
the poll shall be deemed to be the resolution of the meeting at which the
poll was demanded.
67. In the case of an equality of votes, whether on a show of hands or on a
poll, the chairman shall be entitled to a second or casting vote in
addition to any other vote he may have.
68. A poll demanded on the election of a chairman or on a question of
adjournment shall be taken forthwith. A poll demanded on any other question
shall be taken either forthwith or at such time and place as the chairman
directs not being more than thirty days from the conclusion of the meeting.
The demand for a poll shall not prevent the continuance of a meeting for
the transaction of any business other than the question on which the poll
was demanded, and it may be withdrawn with the consent of the chairman at
any time before the close of the meeting or the taking of the poll,
whichever is the earlier. If a poll is demanded before the declaration of
the result of a show of hands and the demand is duly withdrawn, the meeting
shall continue as if the demand had not been made. 69. No notice need be
given of a poll not taken forthwith if the time and place at which it is to
be taken are announced at the meeting in respect of which it is demanded.
In any other case at least seven clear days' notice shall be given
specifying the time and place at which the poll is to be taken.
VOTES OF MEMBERS
----------------
70. Subject to any rights or restrictions attached to any shares, on a show of
hands every member who (being an individual) is present in person or (being
73
a corporation) is present by a duly authorised representative, not being
himself a member entitled to vote, shall have one vote, and on a poll every
member present in person or by proxy shall have one vote for each share of
which he is the holder.
71. In the case of joint holders the vote of the senior who tenders a vote,
whether in person or by proxy, shall be accepted to the exclusion of the
votes of the other joint holders; and seniority shall be determined by the
order in which the names of the holders stand in the register of members.
72. A member in respect of whom an order has been made by any competent court
or official on the ground that he is or may be suffering from mental
disorder or is otherwise incapable of managing his affairs may vote,
whether on a show of hands or on a poll, by his receiver or other person
authorised in that behalf and such person may vote on a poll by proxy.
Evidence to the satisfaction of the directors of the authority of the
person claiming to exercise the right to vote shall be deposited at the
office or at such other place as is specified in accordance with the
articles for the deposit of instruments of proxy, not less than 48 hours
before the time appointed for holding the meeting or adjourned meeting at
which the right to vote is to be exercised and in default the right to vote
shall not be exercisable.
73. Unless the directors otherwise determine, no member shall be entitled to
receive notice of or to vote at any general meeting, either in person or by
proxy, in respect of any share held by him unless all moneys presently
payable by him in respect of that share have been paid.
74. No objection shall be raised to the qualification of any voter except at
the meeting or adjourned meeting at which the vote objected to is tendered,
and every vote not disallowed at the meeting shall be valid. Any objection
made in due time shall be referred to the chairman whose decision shall be
final and conclusive.
75. On a poll votes may be given either personally or by proxy. A member
entitled to more than one vote need not, if he votes, use all his votes or
cast all the votes he uses the same way.
76. The instrument appointing a proxy shall be in writing in any usual form or
in any other form which the directors may approve and for the avoidance of
74
doubt may be in the form of a two way proxy form and shall be executed by
or on behalf of the appointor. A corporation may execute a form of proxy
under the hand of a duly authorised officer. A member may appoint more than
one proxy (who need not be a member) to attend on the same occasion.
Deposit of an instrument of proxy shall not preclude a member from
attending and voting at the meeting or at any adjournment thereof.
77. The instrument appointing a proxy and any authority under which it is
executed or a copy certified notarially or in some other way approved by
the directors shall be deposited by physical delivery either by post or by
hand at the office (or at such other place within the United Kingdom as is
specified in the notice convening the meeting or on any notice or any
adjustment or, in either case, in any document sent therewith) not less
than 48 hours before the time for holding the meeting or adjourned meeting
at which the person named in the instrument proposes to vote or, in the
case of a poll taken subsequently to the date of a meeting, not less than
24 hours before the time appointed for the taking of the poll, and in
default the instrument of proxy shall be invalid. When two or more valid
but differing instruments of proxy are delivered in respect of the same
share for use at the same meeting, the one which is last delivered
(regardless of its date or of the date of its execution) shall be treated
as replacing and revoking the others as regards that share: If the Company
is unable to determine which was last delivered, none of them shall be
treated as valid in respect of that share.
78. A vote given or poll demanded by proxy or by the duly authorised
representative of a corporation shall be valid notwithstanding the previous
determination of the authority of the person voting or demanding a poll
unless notice of the determination was received by the Company at the
office or at such other place in the United Kingdom as may be specified for
the delivery of instruments of proxy in the notice convening the meeting or
other document sent therewith one hour at least before the commencement of
the meeting or adjourned meeting at which the vote is given or the poll
demanded or (in the case of a poll taken otherwise than on the same day as
the meeting or adjourned meeting) the time appointed for taking the poll.
79. included for numbering purposes only
79.1 The instrument appointing a proxy to vote at a meeting shall be deemed also
to confer authority (a) to demand or join in demanding a poll (and for the
purposes of article 62 a demand by a person as proxy for a member shall be
75
the same as a demand by the member); and (b) to vote on a poll on the
election of a chairman and on a motion to adjourn a meeting.
79.2 No instrument appointing a proxy shall be valid after the expiration of
twelve months from the date named in it as the date of its execution,
except at an adjourned meeting or on a poll demanded at a meeting or an
adjourned meeting in cases where the meeting was originally held within
twelve months from such date.
80. If any votes are counted which ought not to have been counted, or might
have been rejected, the error shall not vitiate the result of the voting
unless it is pointed out at the same meeting, or at any adjournment
thereof, and it is in the opinion of the chairman of the meeting of
sufficient magnitude to vitiate the result of the voting.
REPRESENTATION OF CORPORATIONS
------------------------------
81. Any Corporation being a member may, by resolution of its directors or other
governing body, authorise such person as it thinks fit to act as its
representative (or, as the case may be, representatives) at any general
meeting of the Company or any class meeting of the members of the Company.
A person so authorised shall be entitled to exercise the same powers on
behalf of the grantor as the Grantor could exercise if it were an
individual member of the Company and each person so authorised shall, if
present at any such meeting, for the purpose of these Articles be deemed to
be a member present in person at such meeting.
NUMBER AND QUALIFICATION OF DIRECTORS
-------------------------------------
82. Unless otherwise determined by ordinary resolution the number of directors
(other than alternate directors) shall be not less than two in number. The
Company may from time to time by ordinary resolution fix a maximum number
of directors and from time to time vary that maximum number. No
shareholding qualification for directors shall be required.
ALTERNATE DIRECTORS
-------------------
83. Any director (other than an alternate director) may appoint any other
director, or any other person approved by the directors, to be an alternate
director and may remove from office an alternate director so appointed by
him. An alternate
76
him. An alternate director shall be entitled to receive notices of all
meetings of directors, to attend and vote at any such meeting at which the
director appointing him is not personally present, and generally to perform
all the functions of his appointor as a director in his absence. An
alternate director shall cease to be an alternate director if his appointor
ceases to be a director; but, if a director retires by rotation or
otherwise but is reappointed or deemed to have been re-appointed at the
meeting at which he retires, any appointment of an alternate director made
by him which was in force immediately prior to his retirement shall
continue after his reappointment. Every appointment and removal of an
alternate director shall be in writing executed by the director making or
revoking the appointment and (in the case of an appointment) by the person
appointed and shall be deposited at the office or tendered at a meeting of
the directors or in any other manner approved by the directors.
84. Every person acting as an alternate director shall (save as regards the
power to appoint an alternate director and remuneration) be subject in all
respects to the provisions of these articles relating to directors and
shall alone be responsible for his own acts and defaults and he shall not
be deemed to be the agent of the director appointing him. The remuneration
of any alternate director shall be payable out of the remuneration payable
to the director appointing him, and shall consist of such part (if any) of
the last-mentioned remuneration as shall be agreed between the alternate
director and the director appointing him.
POWERS OF DIRECTORS
-------------------
85. Subject to the provisions of the Acts and these articles and to any
directions given by special resolution, the directors may exercise all the
powers of the Company. No alteration of the articles and no such direction
shall invalidate any prior act of the directors which would have been valid
if that alteration had not been made and that direction had not been given.
The powers given by this article shall not be limited by any special power
given to the directors by the articles and a meeting of directors at which
a quorum is present may exercise all powers exercisable by the directors.
86. included for numbering purposes only
86.1 The directors may exercise all the powers of the Company to borrow money
and to mortgage or charge its undertaking, property and assets (present and
future) and uncalled capital, or any part thereof, and subject to the Acts
to issue debentures and other securities whether outright or as collateral
77
security for any debt liability or obligation of the Company or of any
third party. The directors shall restrict the borrowings of the Company and
exercise all voting and other rights or powers of control exercisable by
the Company in relation to its subsidiaries (if any) so as to secure (as
regards subsidiaries so far as by such exercise they can secure) that, save
with the previous sanction of an ordinary resolution, no money shall be
borrowed if the aggregate principal amount (including any premium payable
on final repayment) outstanding of all moneys borrowed by the Group
(excluding amounts borrowed by any member of the Group from any other
member of the Group) then exceeds or would as a result of such borrowing
exceed an amount equal to four times the aggregate of:-
(a) the amount paid up or credited as paid up on the share capital of the
Company; and
(b) the total of the capital and revenue reserves of the Group (including
any share premium account, capital redemption reserve and credit
balance on the combined profit and loss account) but excluding sums
set aside for taxation and amounts attributable to outside
shareholders in subsidiaries of the Company and deducting any debit
balance on the combined profit and loss account except to the extent
that such deductions have already been made
all as shown in the then latest audited balance sheet of the Group, but adjusted
as may be necessary in respect of any variation in the paid up share capital or
share premium account or capital redemption reserve of the Company since the
date of its latest audited balance sheet.
86.2 For the purposes of this article:-
(a) the amount outstanding in respect of acceptances by any member of the
Group or by any bank or accepting house under any acceptance credit
opened on behalf of any member of the Group (not being acceptances in
relation to the purchase of goods in the ordinary course of business)
shall be taken into account as moneys borrowed;
(b) moneys borrowed for the purpose of repaying the whole or any part of
any moneys previously borrowed and then outstanding (including any
premium payable on final repayment thereof) and applied for that
purpose within four months of such borrowing shall not, pending such
78
application, be taken into account as moneys borrowed; and
(c) the principal amount (including any premium payable on final
repayment) of any debentures issued in whole or in part for a
consideration other than cash shall be taken into account as moneys
borrowed by the member of the Group issuing the same.
86.3 Where the aggregate principal amount of borrowings required to be taken
into account for the purposes of this article on any particular date is
being ascertained any of such moneys denominated or repayable in a currency
other than sterling shall be converted for the purpose of calculating the
sterling equivalent at the rate of exchange prevailing on such date in
London provided that any of such moneys shall be converted at the rate of
exchange prevailing in London six months before such date if thereby such
aggregate amount would be less (and so that for this purpose the rate of
exchange shall be taken as the middle market rate as at the close of
business).
86.4 A certificate or report by the Auditors for the time being of the Company
as to the amount of the adjusted capital and reserves or the amount of any
borrowings or to the effect that the limit imposed by this article has not
been or will not be exceeded at any particular time or times shall be
conclusive evidence of such amount or fact for the purposes of this
article.
86.5 No debt incurred or security given in respect of moneys borrowed or to be
taken into account as moneys borrowed in excess of the aforesaid limit
shall be invalid or ineffectual except in the case of express notice to the
lender or the recipient of the security at the time when the debt was
incurred or security given that the limit hereby imposed had been or was
thereby exceeded, but no lender or other person dealing with the Company
shall be concerned to see or enquire whether such limit is observed.
87. If any uncalled capital of the Company is included in or charged by any
mortgage or other security, the directors may delegate to the person in
whose favour such mortgage or security is executed, or to any other person
in trust for him, the power to make calls on the members in respect of such
uncalled capital, and to sue in the name of the Company or otherwise for
the recovery of moneys becoming due in respect of calls so made and to give
valid receipts for such moneys, and the power so delegated shall subsist
during the continuance of the mortgage or security, notwithstanding any
79
change of directors, and shall be assignable if expressed so to be.
88. All cheques, promissory notes, drafts, bills of exchange, and other
instruments whether negotiable or transferable or not, and all receipts for
moneys paid to the Company shall be signed, drawn, accepted, endorsed or
otherwise executed, as the case may be, in such manner as the directors may
from time to time by resolution determine.
DELEGATION OF DIRECTORS' POWERS
-------------------------------
89. The directors may delegate any of their powers:-
(a) to any Managing Director or any director holding any other executive
office; and
(b) to any committee consisting of one or more directors or to any
committee consisting of directors and co-opted persons not being
directors.
Subject to the above the delegation may be made subject to any conditions the
directors may impose, and either collaterally with or to the exclusion of their
own powers and may be varied or revoked. Subject to any such conditions and the
above, the proceedings of a committee with two or more members shall be governed
by the articles regulating the proceedings of directors so far as they apply.
90. The directors may from time to time, and at any time, appoint any
corporation, firm or person, or any fluctuating body of persons, whether
nominated directly or indirectly by the directors, to be the agent of the
Company for such purposes and with such powers, authorities and discretions
(not exceeding those vested in or exercisable by the directors under these
articles) and for such period and subject to such conditions as they may
think fit, and any such appointment may contain such provisions for the
protection and convenience of persons dealing with any such agent as the
directors may think fit, and may also authorise any such agent to
sub-delegate all or any of the powers, authorities and discretions vested
in him.
91. The directors may cause to be kept in any part of Her Majesty's Dominions
outside the United Kingdom, the Channel Islands or the Isle of Man in which
the Company transacts business a branch register or registers of members
resident in such part of the said Dominions, and the directors may (subject
80
to the provisions of the Acts) make and vary such regulations as they may
think fit respecting the keeping of any such register.
APPOINTMENT AND RETIREMENT OF DIRECTORS
---------------------------------------
92. *(a) At the annual general meeting in every year, any director who is still
in office at the start of the annual general meeting which falls
nearest to the third anniversary of the annual general meeting at
which he was appointed or was last re-appointed shall retire by
rotation.
(b) Subject to paragraph (a) above, at the annual general meeting in every
year, one third of all the directors shall retire by rotation but if
that number is not a multiple of three, then the number shall be
rounded down to the nearest whole number.
(c) Subject to article 98, a director retiring at a meeting aforesaid
shall retain office until the dissolution of that meeting.
93. Subject to the provisions of the Acts, the directors to retire by rotation
shall be those who have been longest in office since their last appointment
or reappointment, but as between persons who became or were last
reappointed directors on the same day those to retire shall (unless they
otherwise agree among themselves) be determined by lot.
94. If the Company, at the meeting at which a director retires by rotation,
does not fill the vacancy the retiring director shall, if willing to act,
be deemed to have been reappointed unless at the meeting it is resolved not
to fill the vacancy or unless a resolution for the reappointment of the
director is put to the meeting and lost.
95. No person other than a director retiring at a meeting shall, unless
recommended by the directors, be appointed or reappointed a director at any
general meeting unless, not less than seven nor more than a maximum of
forty-two days before the date appointed for the meeting, notice executed
by a member qualified to vote at the meeting (not being the person to be
proposed) has been given to the Company of the intention to propose that
- - ----------
* Amended by Special Resolution passed September 16 1999.
81
person for appointment or reappointment stating the particulars which
would, if he were so appointed or reappointed, be required to be included
in the Company's register of directors together with notice executed by the
person being proposed of his willingness to be appointed.
96. Subject to article 95 the Company may by ordinary resolution appoint a
person to be a director either to fill a vacancy or as an additional
director and may also determine the rotation in which any additional
directors are to retire.
97. The directors may appoint a person to be a director, either to fill a
vacancy or as an additional director, provided that the appointment does
not cause the number of directors to exceed any number fixed by or in
accordance with the articles as the maximum number of directors. A director
so appointed shall hold office only until the next following annual general
meeting and, if not then reappointed, shall vacate office and shall not be
taken into account in determining the directors or the number of directors
who are to retire by rotation at the meeting.
98. Subject to the provisions of these articles, the Company at the meeting at
which a director retires in manner aforesaid may fill the vacated office by
electing a person thereto and in default the retiring director shall, if
willing to continue to act, be deemed to have been re-elected, unless at
such meeting it is expressly resolved not to fill such vacated office or
unless a resolution for the re-election of such director shall have been
put to the meeting and lost.
99. included for numbering purposes only
99.1 Any contract of employment entered into by a director with the Company
shall not include a term that it is to be for a period exceeding five years
unless such term is first approved by ordinary resolution.
99.2 *Any provisions of the Acts which but for this Article, would have the
effect of rendering any person ineligible for appointment as a Director or
liable to vacate office as a Director on account of his having reached any
specified age, or of requiring special notice or any other special
formality in connection with the appointment of any Director over a
specified age, shall not apply to the Company save that any Director who
has attained the age of 70 shall be required to offer himself or
re-election at each annual general meeting.
- - ----------
* Amended by Special Resolution passed September 16 1999.
82
DISQUALIFICATION AND REMOVAL OF DIRECTORS
-----------------------------------------
100. Without prejudice to the provisions of the Acts, the Company may, by
special resolution or by ordinary resolution of which special notice has
been given in accordance with the Acts, remove a director before the
expiration of his period of office (but such removal shall be without
prejudice to any claim such director may have for breach of any contract of
service between him and the Company) and may, by ordinary resolution,
appoint another person in his stead. The person so appointed shall be
subject to retirement at the same time as if he had become a director on
the day on which the director in whose place he is appointed was last
appointed or reappointed a director.
101. Without prejudice to the provisions for retirement by rotation contained
herein the office of a director shall be vacated if:-
(a) he ceases to be a director by virtue of any provision of the Acts or
is removed from office pursuant to these articles; or
(b) he becomes prohibited by law from being a director; or
(c) he becomes bankrupt or makes any arrangement or composition with his
creditors generally; or
(d) an order is made by a court of competent jurisdiction by reason of his
mental disorder for his detention or for the appointment of any person
to exercise powers with respect to his property or affairs; or
(e) not being a director whose contract of employment precludes
resignation, he resigns his office by notice to the Company; or
(f) he shall for more than six months have been absent without permission
of the directors from meetings of directors held during that period
and his alternate director (if any) shall not during that period have
attended any such meeting in his stead and the directors resolve that
his office be vacated; or
*(g) if he shall be removed from office by notice in writing served upon
- - ----------
* Amended by Special Resolution passed September 16 1999.
83
him signed by three-quarters his co-directors and all of the other
directors are not less than three in number, but so that if he holds
an appointment to an executive office which thereby automatically
determines such removal shall be deemed to be an act of the Company
and shall have effect without prejudice to any claim for damages for
breach of any contract of service between him and the Company.
REMUNERATION OF DIRECTORS
-------------------------
102. +The directors shall be entitled to directors' fees in aggregate not
exceeding GBP 250,000 per annum, or such other higher amount as the Company
by ordinary resolution may from time to time determine, which shall (unless
otherwise determined by the resolution by which it is voted) be divided
between the directors as they may agree or, failing agreement, equally. The
directors' remuneration shall be deemed to accrue from day to day. The
directors shall also be entitled to be paid all travelling, hotel and other
expenses properly incurred by them in connection with the business of the
Company, or in attending and returning from meetings of the directors or of
committees of the directors or general meetings.
103. Any director who serves on any committee or who devotes special attention
to the business of the Company, or who otherwise performs services which in
the opinion of the directors are outside the scope of the ordinary duties
of a director, may be paid such extra remuneration by way of salary,
participation in profits or otherwise as the directors may determine.
DIRECTORS' APPOINTMENTS AND INTERESTS
-------------------------------------
104. The directors may from time to time appoint any one or more of their body
to be a Managing Director or to be the holder of any other executive office
on such terms as they think fit, and may revoke or vary any such
appointment. The appointment of a Managing Director or of a director to any
executive office as aforesaid shall automatically be terminated if in
either case he ceases for any reason to be a director. Any revocation or
termination of any such appointment shall be without prejudice to any claim
- - ----------
+ Increased to GBP250,000 with effect from February 1 1998, by Ordinary
Resolution passed September 23 1998.
84
for breach of any contract between the director and the Company. A Managing
Director or a director appointed to such other executive office as
aforesaid shall receive such remuneration (whether by way of salary,
commission, participation in profits and partly in one way and partly in
another or others, or otherwise) as the directors may determine.
105. The directors may entrust to and confer upon any director appointed to any
such executive office any of the powers exercisable by them as directors,
other than the power to make calls or forfeit shares, upon such terms and
conditions and with such restrictions as they think fit, and either
collaterally with or to the exclusion of their own power, and may from time
to time revoke, withdraw, alter or vary all or any of such powers.
106. A director, including an alternate director, may hold any other office or
place of profit under the Company (other than the office of auditor of the
Company or any subsidiary of the Company) in conjunction with his office of
director for such period and upon such terms as the directors may
determine, and may act in a professional capacity to the Company, on such
terms as to tenure of office, remuneration and otherwise as the directors
may determine.
107. Subject to the Acts and to the provisions of these articles, no director or
intending director, including an alternate director, shall be disqualified
by his office from contracting with the Company either with regard to his
tenure of any other office or place of profit, or as vendor, purchaser or
otherwise, nor shall any such contract, or any contract or arrangement
entered into by or on behalf of the Company in which any director is in any
way, whether directly or indirectly, interested, be liable to be avoided,
nor shall any director so contracting or being so interested be liable to
account to the Company for any remuneration, profit or other benefit
realised by any such contract or arrangement, by reason of such director
holding that office or of the fiduciary relation thereby established.
108. Any director, including an alternate director, may continue to be or become
a director or other officer or member of or otherwise interested in any
other company promoted by the Company or in which the Company may be
interested, as a member or otherwise, or which is a holding company of the
Company or a subsidiary of any such holding company, and no such director
shall be accountable for any remuneration or other benefits received by him
85
as a director or other officer or member of, or from his interest in, any
such other company. The directors may exercise the voting power conferred
by the shares of any other company held or owned by the Company or
exercisable by them as directors of any such holding company or subsidiary
in such manner in all respects as they think fit (including the exercise
thereof in favour of any resolution appointing themselves or any of them
directors or other officers of such company, or voting or providing for the
payment of remuneration to the directors or other officers of such
company).
109. A director, including an alternate director, who is to his knowledge in any
way, whether directly or indirectly, interested in a contract or
arrangement or proposed contract or arrangement with the Company shall
declare the nature of his interest at a meeting of directors. In the case
of a proposed contract or arrangement the declaration shall be made at the
meeting of the directors at which the question of entering into the
contract is first taken into consideration if he knows his interest then
exists, or, if the director was not at the date of that meeting interested
in the proposed contract or arrangement, at the next meeting of directors
held after he became so interested if he knows his interest then exists. In
a case where the director becomes interested in a contract or arrangement
after it is made or becomes aware of his interest the declaration shall be
made at the first meeting of the directors held after the director becomes
so interested or knows that he is or has become so interested. In a case
where the director is interested in a contract or arrangement which has
been made before he was appointed a director the declaration shall be made
at the first meeting of the directors held after he is so appointed.
110. For the purposes of the last preceding article a general notice given to
the directors by any director to the effect that:-
110.1he is a member of any specified company or firm and is to be regarded as
interested in any contract or arrangement which may, after the date of the
notice, be made with the Company or firm; or
110.2he is to be regarded as interested in any contract or arrangement which
may after the date of the notice be made with a specified person who is
connected with him
(if such director shall give the same at a meeting of the directors or shall
take reasonable steps to secure that it is brought up and read at the
86
next meeting of the directors after it is given) shall be deemed a
sufficient declaration of interest in relation to any contract so made.
DIRECTORS' GRATUITIES AND PENSIONS
----------------------------------
111. The directors may establish and maintain, or procure the establishment and
maintenance of, any pension or superannuation funds (whether contributory
or otherwise) for the benefit of, and give or procure the giving of
donations, gratuities, pensions, allowances and emoluments to, any persons
who are or were at any time in the employment or service of the Company, or
of any company which is a subsidiary of the Company or is allied to or
associated with the Company or any such subsidiary or of any of the
predecessors in business of the Company or any such other company as
aforesaid, or who may be or have been directors or officers of the Company
or of any such other company as aforesaid and who hold or have held
executive positions or agreements for service with the Company or any such
other company as aforesaid,and the wives, widows, families, connections and
dependants of any such persons, and also establish, subsidise and subscribe
to any institutions, associations, societies, clubs or funds calculated to
be for the benefit of, or to advance the interests and well-being of the
Company or of any such other company as aforesaid, or of any such person as
aforesaid, and make payments for or towards the insurance of any such
person as aforesaid and subscribe or guarantee money for charitable or
benevolent objects, or for any exhibition or for any public, general or
useful object, and do any of the matters aforesaid either alone or in
conjunction with any such other company as aforesaid. Subject to
particulars with respect to the proposed payment being disclosed to the
members of the Company and to the proposal being approved by the Company by
ordinary resolution, if the Acts shall so require, any director who holds
or has held any such executive position or agreement for services shall be
entitled to participate in and retain for his own benefit any such
donation, gratuity, pension, allowance or emolument.
PROCEEDINGS OF DIRECTORS
------------------------
112. The directors may regulate their proceedings as they think fit. A director
may, and the secretary at the request of a director shall, call a meeting
of the directors. It shall not be necessary to give notice of a meeting to
a director who is absent from the United Kingdom. Any director may waive
87
notice of any meeting and such waiver may be retrospective. Questions
arising at a meeting shall be decided by a majority of votes. In case of an
equality of votes, the chairman of the meeting shall have a second or
casting vote. Every person acting as an alternate director shall have one
vote for each director for whom he acts as alternate (in addition to his
own vote if he is also a director). The signature of an alternate director
to any resolution in writing of the directors or a committee of the
directors shall, unless the notice of his appointment provides to the
contrary, be as effective as the signature of his appointor.
113. The quorum for the transaction of the business of the directors may be
fixed by the directors and unless so fixed at any other number shall be
two. An alternate director who is not himself a director shall be counted
in the quorum. Any director or member of a committee of the directors may
participate in a meeting of the directors or such committee by means of
conference telephone or similar communications equipment whereby all
persons participating in the meeting can hear each other and participation
in the meeting in such manner shall be deemed to constitute presence in
person at such meeting and that person shall be entitled to vote or be
counted in a quorum accordingly. Such meeting shall be deemed to take place
where the largest group of those participating is assembled, or, if there
is no such group, where the Chairman of the meeting then is.
114. The continuing directors or a sole continuing director may act
notwithstanding any vacancies in their number, but, if the number of
directors is less than the number fixed by or in accordance with these
articles, the continuing directors or director, notwithstanding that the
number of directors is below the number fixed by or in accordance with
these articles as the quorum or that there is only one continuing director,
may act only for the purpose of filling vacancies or of calling a general
meeting of the Company but not for any other purpose.
115. The directors may appoint one or more of their number to be the chairman or
the deputy chairman of the board of directors and may at any time remove
any director so appointed from office and appoint another director in his
place. The director appointed as chairman, or, in his absence, as deputy
chairman shall preside at every meeting of directors at which he is
present, but if there is no director holding either such office, or if no
director holding either such office is present within five minutes after
the time appointed for the meeting the directors present may appoint one of
88
their number to be chairman of the meeting.
116. All acts done by a meeting of directors, or of a committee of directors, or
by a person acting as a director or member of a committee of directors
shall, notwithstanding that it be after- wards discovered that there was a
defect in the appointment of any director or that any of them were
disqualified from holding office, or had vacated office, or were not
entitled to vote, be as valid as if every such person had been duly
appointed and was qualified and had continued to be a director or member of
a committee of directors and had been entitled to vote.
117. included for numbering purposes only
117.1A resolution in writing executed by all the directors for the time being
entitled to receive notice of a meeting of directors or by all the members
for the time being of a committee of directors (not being less, in either
case, than a quorum) shall be as valid and effectual as if it had been
passed at a meeting of directors or (as the case may be) a committee of
directors duly convened and constituted. Such resolution may be contained
in one document or in several documents in the like form each signed by one
or more directors or members of the committee concerned.
117.2All or any of the members of the Board or any committee of the Board may
participate in a meeting of the Board or that committee by means of a
conference telephone or any communication equipment which allows all
persons participating in the meeting to hear each other. A person so
participating shall be deemed to be present in person at the meeting and
shall be entitled to vote or be counted in a quorum accordingly. Such a
meeting shall be deemed to take place where the largest group of those
participating has assembled, or, if there is no such group, where the
Chairman of the meeting then is.
118. included for numbering purposes only
118.1Save as otherwise provided by these articles, a director shall not vote
(nor be counted in the quorum) on any resolution of the directors or a
committee of the directors in respect of any contract or arrangement in
which he (together with any persons connected with him) is to his knowledge
materially interested, and if he shall do so his vote shall not be counted,
but this prohibition shall not apply to any of the following matters,
namely:-
(a) any contract or arrangement for giving to such director any security,
guarantee or indemnity in respect of money lent by him or obligations
89
undertaken by him at the request of or for the benefit of the Company
or any of its subsidiary undertakings;
(b) any contract or arrangement for the giving by the Company of any
security to a third party in respect of a debt or obligation of the
Company or any of its subsidiary undertakings which the director has
himself guaranteed or secured in whole or in part;
(c) any contract or arrangement by a director to subscribe for shares,
debentures or other securities of the Company issued or to be issued
pursuant to any offer or invitation to members or debenture holders of
the Company or any class thereof or to the public or any section
thereof, or to underwrite any shares, debentures or other securities
of the Company;
(d) any contract or arrangement in which he is interested by virtue of his
interest in shares or debentures or other securities of the Company or
by reason of any other interest in or through the Company;
(e) any contract or arrangement concerning any other company (not being a
company in which the director and any persons connected with him do
not to his knowledge hold an interest in shares, as that term is used
in sections 198 to 211 Companies Act 1985 representing one per cent or
more of any class of the equity share capital of, or the voting rights
in, such company) in which he is interested directly or indirectly
whether as an officer, share- holder, creditor or otherwise howsoever;
(f) any proposal concerning the adoption, modification or operation of a
pension fund or retirement death or disability benefits scheme which
relates both to directors and employees of the Company or of any of
its subsidiaries and does not provide in respect of any director as
such any privilege or advantage not accorded to the employees to which
such scheme or fund relates;
(g) any arrangement for the benefit of employees of the Company or of any
of its subsidiaries under which the director benefits in a similar
manner as the employees and which does not accord to any director as
such any privilege or advantage not accorded to the employees to whom
such arrangement relates;
90
(h) any proposal, contract, transaction or arrangement concerning the
purchase or maintenance of insurance for the benefit of the directors
or for the benefit of persons who include directors.
118.2A company shall be deemed to be a company in which a director owns one per
cent. or more if and so long as (but only if and so long as) he is (either
directly or indirectly) the holder of or beneficially interested in one per
cent. or more of any class of the equity share capital of such company or
of the voting rights available to members of such company. For the purpose
of this paragraph there shall be disregarded any shares held by a director
as bare or custodian trustee and in which he has no beneficial interest,
any shares comprised in a trust in which the director's interest is in
reversion or remainder if and so long as some other person is entitled to
receive the income thereof, and any shares comprised in an authorised unit
trust scheme in which the director is interested only as a unit holder.
118.3Where a company in which a director holds one per cent. or more is
materially interested in a transaction, then that director shall also be
deemed materially interested in such transaction.
119. A director shall not be counted in the quorum present at a meeting in
relation to a resolution on which he is not entitled to vote.
120. *The Company may by ordinary resolution ratify any transactions not duly
authorised by reason of a contravention of these articles.
121. Where proposals are under consideration concerning the appointment
including the arrangement or variation of the terms thereof or the
termination thereof of two or more directors to offices or employments with
the Company or any body corporate in which the Company is interested the
proposals may be divided and considered in relation to each director
separately and (provided he is not for another reason precluded from
voting) each of the directors concerned shall be entitled to vote and be
counted in the quorum in respect of each resolution except that concerning
his own appointment or the arrangement or variation of the terms thereof or
the termination thereof.
- - ----------
* Amended by Special Resolution passed September 16 1999.
91
122. If a question arises at a meeting of directors or of a committee of
directors as to the right of a director other than the chairman of the
meeting to vote or be counted in a quorum, the question may, before the
conclusion of the meeting, be referred to the chairman of the meeting and
his ruling in relation to any director other than himself shall be final
and conclusive except in a case where the nature or extent of the interest
of the director concerned as known to such director has not been fairly
disclosed to the directors. If any question as aforesaid shall arise in
respect of the chairman of the meeting such question shall be decided by a
resolution of the directors (for which purpose such chairman shall be
counted in the quorum but shall not vote thereon) and such resolution shall
be final and conclusive except in a case where the nature or extent of the
interest of such chairman as known to such chairman has not been fairly
disclosed to the directors.
MINUTES
-------
123. The directors shall cause minutes to be made in books kept for the
purpose:-
(a) of all appointments of officers made by the directors;
(b) of the names of the directors present at each meeting of directors and
of any committee of directors;
(c) of all resolutions and proceedings at meetings of the Company and of
the holders of any class of shares in the Company and of the directors
and of committees of directors.
SECRETARY
---------
124. The secretary shall be appointed by the directors for such term, at such
remuneration and upon such conditions as they think fit and any secretary
so appointed may be removed by the directors.
125. Anything by the Acts required or authorised to be done by or to the
secretary may, if the office is vacant or there is for any other reason no
secretary capable of acting, be done by or to any assistant or deputy
secretary or, if there is no assistant or deputy secretary capable of
acting, by or to any officer of the Company authorised generally or
specially in that behalf by the directors: provided that any provision of
the Acts or of these articles requiring or authorising a thing to be done
92
by or to a director and secretary shall not be satisfied by its being done
by or to the same person acting both as director and as, or in the place
of, the secretary.
THE SEAL
--------
126. The Company may have a seal if it so resolves. In such case the directors
shall provide for the custody of every seal. The seal shall only be used by
the authority of the directors or of a committee of directors authorised by
the directors in that behalf. The directors may determine who shall sign
any instrument to which the seal is affixed and unless otherwise so
determined it shall be signed by a director and by the secretary or by a
second director. Any instrument to which an official seal is affixed need
not, unless the directors for the time being otherwise determine or the law
otherwise requires be signed by any person.
DIVIDENDS
---------
127. Subject to the provisions of the Acts the Company may by ordinary
resolution declare dividends to be paid to members in accordance with the
respective rights and their interests in the profits available for
distribution, but no dividend shall exceed the amount recommended by the
directors.
128. Subject to the provisions of the Acts and of these articles, the directors
may pay interim dividends if it appears to them that they are justified by
the profits of the Company available for distribution. If the share capital
is divided into different classes, the directors may pay interim dividends
on shares which confer deferred or non-preferred rights with regard to
dividend as well as on shares which confer preferential rights with regard
to dividend, but no interim dividend shall be paid on shares carrying
deferred or non-preferred rights if, at the time of payment, any
preferential dividend is in arrear. The directors may also pay at intervals
settled by them any dividend payable at a fixed rate if it appears to them
that the profits available for distribution justify the payment. Provided
the directors act in good faith they shall not incur any liability to the
holders of shares conferring preferred rights for any loss they may suffer
by the lawful payment of an interim dividend on any shares having deferred
or non-preferred rights.
129. Except as otherwise provided by the rights attached to or the terms of
issue of shares, all dividends shall be declared and paid on the Ordinary
93
Share capital according to the amounts paid up on such shares otherwise
than in advance of calls on which the dividend is paid. Subject as
aforesaid, all dividends shall be apportioned and paid proportionately to
the amounts paid up on the shares otherwise than in advance of calls during
any portion or portions of the period in respect of which the dividend is
paid.
130. The directors may deduct from any dividend or other moneys payable to any
member on or in respect of any share any moneys presently payable by him to
the Company on account of calls or otherwise in respect of shares of the
Company.
131. included for numbering purposes only
131.1A general meeting declaring a dividend may, upon the recommendation of the
directors, direct that it shall be satisfied wholly or partly by the
distribution of specific assets and in particular of paid-up shares or
debentures of any other company and, where any difficulty arises in regard
to the distribution, the directors may settle the same and in particular
may issue fractional certificates or authorise any person to sell and
transfer any fractions or may ignore fractions altogether and may fix the
value for distribution purposes of any such specific assets and may
determine that cash shall be paid to any member upon the footing of the
value so fixed in order to secure equality of distribution and may vest any
such specific assets in trustees.
(a) The Directors may, with the sanction of an Ordinary Resolution of the
Company, offer holders of Ordinary Shares the right to elect to
receive in respect of all or part of their holdings of Ordinary Shares
additional Ordinary Shares in the Company, credited as fully paid,
instead of cash in respect of all or part of such dividend or
dividends whether interim or final and (subject to the following
provisions of this article) upon such terms and conditions and in such
manner as may be specified in such Ordinary Resolution and otherwise
as the Directors may determine. Any such resolution may specify a
particular dividend and/or all of any dividends (or part of such
dividends) declared or paid within a specified period, but no such
period may end later than the beginning of the Annual General Meeting
in the calendar year next following the date on which such Ordinary
Resolution is passed.
(b) When any such right of election is offered to the holders of Ordinary
Shares pursuant to this Article, the Directors shall make such offer
94
to such holders in writing (conditionally if the necessary Ordinary
Resolution has yet to be passed, upon such resolution being passed)
and shall make available to or provide such holders with forms of
election (in such form as the Directors may approve) whereby such
holders may exercise such right and shall notify such holders of the
procedure to be followed and of the place at which and the latest date
and time by which, duly completed forms of election must be lodged in
order to be effective.
(c) Each holder of Ordinary Shares who elects to receive additional
Ordinary Shares in the Company under a right offered to him pursuant
to this Article shall be entitled to receive such whole number of
additional Ordinary Shares as is as nearly as possible equal in value
(calculated on the basis of the Market Value of an additional Ordinary
Share in the Company) to (but not in excess of) the cash amount that
such holder would otherwise have received by way of dividend. For the
purposes of this Article, the "Market Value" of an additional Ordinary
Share in the Company shall be the average of the prices at which
business is done in the Ordinary Shares (derived from the Daily
Official List of the London Stock Exchange) on such five consecutive
dealing days as the Directors shall determine (save that the first of
such dealing days shall be on or after the day when the issued
Ordinary Shares in the Company are first quoted "ex" the relevant
dividend, unless no business is done during such dealing days, when in
that case the first of such dealing days should be the latest
practicable date at least five days prior to the date when the issued
Ordinary Shares in the Company are first quoted "ex" the relevant
dividend when business is done in the Ordinary Shares) or the nominal
value of an Ordinary Share in the Company (whichever is the higher).
(d) Following an election by holders of Ordinary Shares in accordance with
this article, the relevant dividend (or that part of a dividend in
respect of which a right of election has been offered) shall not be
payable on the Ordinary Shares issued pursuant to the election but in
lieu thereof, the Directors shall capitalise out of any undistributed
profits of the Company not required for paying any preferential
dividend (whether or not they are available for distribution) or out
of any sum standing to the credit of the Company's share premium
95
account or capital reserves (including any capital redemption
reserve), as the Directors may determine a sum equal to the aggregate
nominal value of the number of additional Ordinary Shares required to
be allotted to the holders of Ordinary Shares who have made such
election and shall apply such sum in paying up in full such number of
additional Ordinary Shares and shall allot and distribute the same to
and amongst such holders on the basis set out in sub-clause 3 of this
article save that the foregoing provisions of this paragraph shall be
subject to any right of the Directors under these articles to retain
any dividend or other monies payable on or in respect of the Ordinary
Shares of a particular member.
(e) The additional new Ordinary Shares so allotted shall rank pari passu
with the fully paid Ordinary Shares in the Company then in issue save
that they shall not be entitled to participate in the dividend in
relation to which the relevant election was made.
(f) A resolution of the Directors capitalising any part of the reserves or
profits hereinbefore mentioned shall have the same effect as if such
capitalisation had been declared by Ordinary Resolution of the Company
in accordance with these Articles and in relation to any such
capitalisation the Directors may exercise all the powers, other than
the powers to allot fractional shares, conferred on them by Article
136 without the need for any such Ordinary Resolution.
(g) The Directors may at their discretion make any rights of election
offered pursuant to this Article subject to such exclusions or
arrangements as they may consider necessary or expedient to deal with
any legal or other difficulties which would or may otherwise arise
under laws of, or the requirements of any recognised regulatory body
or any stock exchange in, any territory.
(h) Every duly effected election shall be binding on every successor in
title to the Ordinary Shares or any of the members who have effected
the same.
132. Any dividend or other monies payable in cash or in respect of a share may
be paid by cheque, or other instrument sent through the post to the
registered address of the person entitled or, if two or more persons are
the holders of the share or are jointly entitled to it by reason of the
96
death or bankruptcy of the holder, to the registered address of that one of
those persons who is first named in the register of members or to such
person and to such address as the person or persons entitled may in writing
direct. Every such cheque, warrant or other instrument shall be made
payable to or to the order of the person or persons entitled or to such
other person as the person or persons entitled may in writing direct. Any
such cheque, warrant or other instrument may be crossed "account payee
only" although the Company shall not be obliged to do so. Any such dividend
or other monies may also be paid by any bank or other funds transfer system
as the directors may consider appropriate and to or through such person as
the person or persons entitled thereto may in writing director and the
Company shall have no responsibility for any such dividend or other monies
lost or delayed in the course of such transfer or when it is acted upon
such direction. Payment of the cheque, warrant or other instrument by the
bank upon whom it is drawn or transfer of the funds by the bank instructed
to make the same shall be a good discharge to the Company. Every such
cheque, warrant or other instrument shall be sent and every such transfer
of funds shall be made at the risk of the person or persons entitled to the
money represented thereby. If any such cheque, warrant or other instrument
has or shall be alleged to have been lost, stolen or destroyed, the
directors may at the request of the person entitled thereto issue a
replacement cheque, warrant or other instrument subject to compliance with
such conditions as to evidence and indemnity and the payment of such out of
pocket expenses incurred by the Company in connection with the request as
the directors may think fit.
133. All unclaimed dividends or other moneys payable on or in respect of a share
may be invested or otherwise made use of by the directors for the benefit
of the Company until claimed. No dividend or other moneys payable in
respect of a share shall bear interest against the Company unless otherwise
provided by the rights attached.
134. Any dividend which has remained unclaimed for twelve years from the date of
declaration of such dividend or (if later) the date such dividend became
due for payment shall, if the directors so resolve, be forfeited and shall
revert to the Company and the payment by the directors of any unclaimed
dividend, interest or other sum payable on or in respect of a share into a
separate account shall not constitute the Company a trustee in respect
thereof.
97
RESERVES
--------
135. The directors may before recommending any dividend, whether preferential or
otherwise, carry to reserve out of the profits of the Company (including
any premiums received upon the issue of debentures or other securities of
the Company) such sums as they think proper as a reserve or reserves, which
shall, at the discretion of the directors, be applicable for any purpose to
which the profits of the Company may properly be applied and, pending such
application, may at the like discretion either be employed in the business
of the Company or be invested in such investments (subject to the
provisions of the Acts) as the directors may from time to time think fit.
The directors may also, without placing the same to reserve, carry forward
any profits which they may think prudent not to distribute.
CAPITALISATION OF PROFITS
-------------------------
136. The directors may with the authority of an ordinary resolution of the
Company:-
(a) subject as hereinafter provided, resolve to capitalise any
undistributed profits of the Company not required for paying any
preferential dividend (whether or not they are available for
distribution) or any sum standing to the credit of the Company's share
premium account or capital redemption reserve;
(b) appropriate the sum resolved to be capitalised to the members in
proportion to the nominal amounts of the shares (whether or not fully
paid) held by them respectively which would entitle them to
participate in a distribution of that sum if it were then
distributable and it were distributed by way of dividend and apply
such sum on their behalf either in or towards paying up the amounts,
if any, for the time being unpaid on any shares held by them
respectively, or in paying up in full unissued shares or debentures of
the Company of a nominal amount equal to that sum, and allot the
shares or debentures credited as fully paid to those members, or as
they may direct, in those proportions, or partly in one way and partly
in the other but the share premium account, the capital redemption
reserve, and any profits which are not available for distribution may
for the purposes of this regulation, only be applied in paying up
98
unissued shares to be issued to members credited as fully paid;
(c) resolve that any shares so allotted to any member in respect of a
holding by him of any partly paid shares shall so long as such shares
remain partly paid rank for dividend only to the extent that the
latter shares rank for dividend;
(d) where any difficulty arises in regard to any distribution under this
article the directors may settle the same as they think expedient and
in particular may issue fractional certificates or authorise any
person to sell and transfer any fractions or may resolve that the
distribution should be as nearly as may be practicable in the correct
proportion but not exactly so or may ignore fractions altogether, and
may determine that cash payments shall be made to any members in order
to adjust the rights of all parties, as may seem expedient to the
directors.
(e) authorise any person to enter on behalf of all the members concerned
into an agreement with the Company providing for the allotment to them
respectively, credited as fully paid, of any further shares or
debentures to which they are entitled upon such capitalisation, any
agreement made under such authority being binding on all such members;
and
(f) generally do all acts and things required to give effect to such
resolution as aforesaid.
NOTICES
-------
137. Any notice to be given pursuant to the articles shall be in writing and the
Company may give any such notice to a member either personally or by
sending it by post in a prepaid envelope addressed to the member at his
registered address or by leaving it at that address. In the case of joint
holders of a share, all notices shall be given to the joint holder whose
name stands first in the register of members in respect of the joint
holding and notice so given shall be sufficient notice to all the joint
holders.
138. A member whose registered address is not within the United Kingdom and who
gives to the Company an address within the United Kingdom at which notices
may be given to him shall be entitled to have notices given to him at that
99
address, but otherwise no such member shall be entitled to receive any
notice from the Company.
139. A member present, either in person or by proxy, at any meeting of the
Company or of the holders of any class of shares in the Company shall be
deemed to have received notice of the meeting and, where requisite, of the
purposes for which it was called.
140. Every person who becomes entitled to a share shall be bound by any notice
which, before his name is entered in the register of members, has been
given to the person from whom he derives his title.
141. If at any time by reason of the suspension or curtailment of postal
services within the United Kingdom or any part thereof the Company is
unable effectively to convene a general meeting by notices sent through the
post, a general meeting may be convened by a notice advertised on the same
date in at least one leading national daily newspapers with appropriate
circulation and such notice shall be deemed to have been duly served on all
members entitled thereto and persons entitled by transmission who are
entitled to have notice of the meeting served upon them at noon on the day
when the advertisement appears. In any such case the Company shall send
confirmatory copies of the notice by post if at least seven days prior to
the meeting the posting of notices to addresses throughout the United
Kingdom or such part thereof again becomes practicable.
142. A notice sent by the Company by first-class post shall be deemed to have
been given at the expiration of 24 hours after the envelope containing it
was posted and if sent by second class post shall be deemed to have been
given at the expiration of 72 hours after the envelope containing it was
posted and proof that the envelope containing the notice was properly
addressed, prepaid and posted shall be conclusive evidence that the notice
was given. A notice given by advertisement shall be deemed to have been
served on the day on which the advertisement appears. Any notice delivered
or left at a registered address otherwise than by post shall be deemed to
have been given on the day it was so delivered or left.
143. A notice or other document delivered or sent by post to the registered
address of a member pursuant to the articles shall, notwithstanding that
the member be then dead, bankrupt, mentally disordered or that any other
100
event has occurred and whether or not the Company has notice of the death,
bankruptcy mental disorder or other event be deemed to have been given in
respect of any share registered in the name of such member as sole or joint
holder unless before the day of posting (or if it is not sent by post
before the day of service or delivery) of the notice or document, his name
has been removed from the Register as the holder of the share, and such
service or delivery of such notice or document. A notice so given shall be
deemed a sufficient notice to all persons interested (whether jointly with
or as claiming through or under the member) in the share.
RECORD DATES
------------
144. Notwithstanding any other provision of these articles but subject always to
the Act, the Company or the directors may by resolution specify any date
("the Record Date") as the date at the close of business (or such other
time as the Directors may determine) on which persons registered as the
holders of shares or other securities shall be entitled to receipt of any
dividend, distribution, interest, allotment, issue notice, information,
document or circular and such Record Date may be on or at any time before
the date on which the same is paid or made or (in the case of any dividend,
distribution, interest, allotment or issue) at any time after the same is
recommended, resolved, declared or announced, but without prejudice to the
rights inter se in respect of the same of transferors and transferees of
any such shares or other securities.
ACCOUNTS
--------
145. The accounting records shall be kept at the office, or (subject to the
provisions of the Acts) at such other place as the directors think fit, and
shall always be open to inspection by the officers of the Company. No
member (other than a director) shall have any right of inspection of any
account or book or document of the Company except as conferred by statute
or authorised by the directors or by the Company in general meeting.
146. A printed copy of the directors' and auditors' reports accompanied by
printed copies of the balance sheet, profit and loss account and other
documents required by the Acts to be annexed to the balance sheet shall,
not less than twenty-one days before the general meeting before which they
are to be laid, be delivered or sent by post to the registered address of
every member and holder of debentures of the Company, and to the auditors
for the time being of the Company, and, if all or any of the shares in or
debentures of the Company are for the time being listed on any stock
exchange, there shall at the same time be forwarded to the secretary of
such stock exchange such number of copies of each of these documents as may
be required by the regulations for the time being of such stock exchange.
101
Provided that the Company need not, subject to the provisions of the Acts
and the regulations of the London Stock Exchange so permitting and if the
Board so decides, send the copies of such documents to members, but instead
send them a summary financial statement derived from the Company's annual
accounts and the directors' report, in such form and containing such
information as may be required by the Acts and provided further that copies
of the Company's annual accounts (together with the directors' report for
the financial year and the auditor's report on those accounts) shall be
sent to any Member who wishes to receive them and the Company shall comply
with any provisions of the Acts as to the manner in which it is to
ascertain whether a Member wishes to receive them.
WINDING UP
----------
147. If the Company is wound up, the liquidator may, with the sanction of an
extraordinary resolution of the Company and any other sanction required by
the Acts, divide among the members in specie the whole or any part of the
assets of the Company and whether or not the assets consist of property of
one kind or of properties of different kinds may, for that purpose value
any assets and determine how the division shall be carried out as between
the members or different classes of members. The liquidator may, with the
like sanction, vest the whole or any part of the assets in trustees upon
such trusts for the benefit of the members as he with the like sanction
determines, but no member shall be compelled to accept any assets upon
which there is a liability.
INDEMNITY
---------
148. *Subject to the provisions of the Acts, every director or other officer of
the Company shall be indemnified out of the assets of the Company against
all costs, charges, expenses, losses and liabilities which he may sustain
or incur in or about the execution of his office or otherwise in relation
thereto. Pursuant to the provisions of Section 310(3) of the Companies Act
1985 (as amended by the Companies Act 1989) the Company may for the
purposes of this Article purchase and maintain insurance to indemnify any
past or present director, officer, or manager of the Company, or any
company which is a member of the Group.
- - ----------
* Amended by Special Resolution passed September 16 1999.
102
EXHIBIT 2.03
Ordinary Shares
Certificate No. Account No. Transfer No. Date Number of Shares
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
of 2p Each
[MERANT logo]
MERANT (TM)
____________________________plc ____________________________
(Incorporated in England under the companies acts 1948 to 1981 No. 1709998)
This is to certify that the
undermentioned is/are the registered holder(s)
of Ordinary Shares of 2p each fully paid in
the Capital of this Company as shown herein, subject to
the Memorandum and Articles of Association.
Name(s) of Holder(s) Number of Ordinary Shares of 2p Each
- - -------------------- ------------------------------------
Given under the
official seal of
The Company
This certificate should be kept in a safe place. It will be needed when you sell
or transfer the shares.
[SEAL]
The registrar's address is: Lloyds TSB Registrars, The Causeway, Worthing, West
Sussex BN99 6DA and the relevant reference for correspondence in No. 260.
103
EXHIBIT 2.06
Rules of the 1998 Merant Share Option Plan ("the Plan")
1. Definitions
In this Plan:
(a) "Board" means the board of directors of the Company;
(b) "Code" means the United States Internal Revenue Code of 1986 (as
amended);
(c) "The Company" means Merant Public Limited Company incorporated in
England with number 1709998;
(d) "Control" means the definition thereof contained in section 840 of the
UK Income and Corporation Taxes Act 1988;
(e) "Date of Grant" means in relation to any Option, the date on which
such option is granted in accordance with Rule 9;
(f) "Employer Corporation" means any company within the Group for which an
Eligible Person who has been granted an Option under this Plan
performs services;
(g) "Eligible Person" means a person to whom an Option may be granted as
defined in Rule 2 below;
(h) "Effective Date" means the completion date of the Merger;
(i) "Group" means the Company and every other company of which the Company
has direct or indirect Control;
(j) "Incentive Stock Option" means an Option which qualifies as an
incentive stock option within the meaning of Section 422 of the Code;
(k) "ISO Group" means the Company and any other Company which is a Parent
Corporation or Subsidiary Corporation of the Company;
104
(l) "Merger" means the merger of Intersolv, Inc. with and into Tower
Merger Sub Inc., a Subsidiary Corporation of the Company.1
(m) "Non-Executive Director" means a director of any member of the Group
who has been appointed as a non-executive director;
(n) "Option" means a right granted by the Company in accordance with this
Plan to subscribe for Shares;
(o) "Parent Corporation" means any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if, at the
time in question, each of the corporations other than the Company owns
stock (or shares) possessing 50% or more of the total combined voting
power of all classes of stock (or shares) in one of the other
corporations in such chain;
(p) "Shares" means fully paid ordinary shares in the capital of the
Company;
(q) "Subsidiary Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the
Company if, at the time in question, each of the corporations other
than the last corporation in the unbroken chain owns stock (or shares)
possessing 50% or more of the total combined voting power of all
classes of stock (or shares) in one of the other corporations in such
chain;
(r) "10% Shareholder" means a person who owns shares representing more
than 10% of the total combined voting power of all classes of shares
in any company which is a member of the ISO Group at the Date of Grant
of an Option;
(s) "fair market value" means the average of the middle market quotations
of a share as derived from the Daily Official List of The London Stock
Exchange on the three business days immediately preceding the Date of
Grant.
- - ----------
1 The completion date of the Merger was September 24, 1998.
105
2. Persons to whom Options may be granted
(a) Options may only be granted to current or former employees and
directors of a Member of the Group ("Eligible Persons") and for
the avoidance of doubt, subject to Rule 5(b) below, shall include
Non-Executive Directors.
(b) Subject to Rule 6 below Incentive Stock Options may be granted to
such Eligible Persons as the Board from time to time and in its
absolute discretion may determine.
3. Non-transferability of Options
Options shall be personal to the person to whom they are granted and shall lapse
forthwith if they are purportedly transferred (otherwise than to personal
representatives upon death) assigned, mortgaged, charged or otherwise alienated
or if that person is adjudicated bankrupt or does or suffers any other act or
thing whereby he or she would or might be deprived of the legal or beneficial
ownership of the Options.
4. Number of Shares available to be put under option
(a) Subject to Rule 13 below (relating to variation in share capital), the
aggregate of (1) the total number of Shares in respect of which
Options may be granted in accordance with this Plan during the period
from the Effective Date to August 18, 2008 and (2) the total number of
Shares which may be issued under all other options granted by the
Company and which immediately prior to the completion of the Merger
remain capable of exercise may not exceed 15% of the issued share
capital of the Company, as enlarged, immediately following completion
of the Merger (or an aggregate of 25,000,000 Shares, if less).
(b) For the avoidance of doubt, where Options under this Plan or any other
share option plan or scheme established by the Company lapse or cease
to be exercisable the Shares under such options may be the subject of
new grants of Options under this Plan without being included in the
limit in paragraph (a) above. To this end, in addition to the
aforementioned limit, the total number of Shares in respect of which
Options may be granted under this Plan shall be increased to include
the number of all or any Shares which were the subject of options
106
which have lapsed or ceased to be exercisable under other plans or
schemes or former plans or schemes established by the Company.
(c) The number of shares subject to an option granted in accordance with
the Merant Inland Revenue Approved Share Option Scheme, which option
certificate provides that the source of shares subject thereto is the
pool of shares available for grant in accordance with this Plan, shall
reduce by the same amount, the number of Shares in respect of which
Options may be granted in accordance with this Plan. In accordance
with paragraph 4(b), where such Merant Inland Revenue Approved Share
Option Scheme options lapse or cease to be exercisable, the shares
under such options may be the subject of new grants of Options under
this Plan.
5. Maximum or annual number of Shares in respect of which Options may be
granted to any person
(a) Subject to Rule 13 below, the maximum number of Shares in respect of
which Options may be granted to any person (other than a Non-Executive
Director) in accordance with this Plan in the period of this authority
shall be 375,000 Shares. Save that any person (other than a
Non-Executive Director) who commences employment for the first time
(whether before or after the adoption of this Plan) with the Company
or a member of the Group shall be eligible to be granted Options in
respect of up to 1,500,000 Shares in the period of 12 months after the
commencement of his employment.
(b) In each 12 month period during his or her directorship Options shall
be granted to any person who is a Non-Executive Director in respect of
10,000 Shares or, in the case of a Non-Executive Director who is the
Chairman, 20,000 Shares. Save that any person who is a Non-Executive
Director who commences his directorship for the first time with the
Company shall be eligible to be granted Options in respect of 10,000
Shares or, in the case of a Non-Executive Director who is the
Chairman, 20,000 Shares in the period of 12 months after the
commencement of his directorship in addition to the annual
entitlement.
6. Further restrictions on the grant of Incentive Stock Options
107
(a) Incentive Stock Options may only be granted to employees (as that term
is used in Section 422 of the Code) of any company which is a member
of the ISO Group at the Date of Grant;
(b) The aggregate fair market value (determined as of the Date of Grant)
of Shares in respect of which Incentive Stock Options are exercisable
for the first time by an employee during any calendar year pursuant to
this Plan (and under any other plan permitting the granting of
Incentive Stock Options which might be established by any company in
the ISO Group) may not exceed US$100,000. If the fair market value of
shares on the Date of Grant in respect of which Incentive Stock
Options are exercisable for the first time by an employee during any
calendar year exceeds US$100,000, then the Options for the first
US$100,000 worth of Shares to become exercisable in such calendar year
will be Incentive Stock Options and the Options for the amount in
excess of US$100,000 that become exercisable in that calendar year
will not be Incentive Stock Options.
7. Payment for grant of Options
The amount, if any, payable in consideration of the grant of any Options shall
be as the Board may decide but in any event shall not be more than GBP1, which
shall not be returnable.
8. Exercise Price
The exercise price payable for any Share to be acquired upon the exercise of any
Option shall be not less than the fair market value of a Share on the Date of
Grant:
(a) In the case of an Incentive Stock Option granted to a 10% Shareholder,
the exercise price shall be not less than 110% of the fair market
value of a Share on the Date of Grant; and
(b) in any event, the exercise price shall be not less than the nominal
value of a Share.
108
9. Times at which Options may be granted
(a) Options may only be granted on or after the Effective Date and
thereafter during any of the following periods:
(i) within the period of 30 days immediately following the date of
shareholder approval of this Plan (but no earlier than the
Effective Date); or
(ii) within the period of 42 days immediately following the date on
which the Company announces its interim or preliminary annual
trading results for any period to the press and The London Stock
Exchange (provided that in respect of directors of the Company
that such date does not fall during the period of two months
prior to the announcement of interim or preliminary annual
trading results or, if shorter, the period from the relevant
financial period end up to and including the time of the
announcement); or
(iii)to any person who commences employment with a member of the
Group for the first time, within the period of 45 days
immediately thereafter (provided that in respect of directors of
the Company such date does not fall during the period of two
months prior to the announcement of interim or preliminary annual
trading results or, if shorter, the period from the relevant
financial period end up to and including the time of the
announcement).
(b) The Board may grant Options outside the periods specified in this Plan
in circumstances which the Board in its absolute discretion deem
sufficiently exceptional to justify the grant of Options at that time.
(c) Options granted to Non-Executive Directors on commencement of his
directorship (under Rule 5(b)) shall be granted as soon as practicable
during the period in Rule 9(a)(iii) or, if no grant is possible during
that period then such Options shall be granted as soon as practicable
after the next announcement of a period in Rule 9(a)(ii). Options
granted to Non-Executive Directors shall be granted in respect of
their annual entitlement (under Rule 5(b)) on the business day after
109
the Company's Annual General Meeting but if that day does not fall in
one of the periods in Rule 9(a)(ii) above then such Options shall be
granted as soon as practicable after the next commencement of a period
in Rule 9(a)(iii) provided that where a Non-Executive Director is
appointed within 90 days following the Company's Annual General
Meeting such director shall be entitled to be granted their annual
entitlement (under Rule 5(b)) on the same day as the grant of the
Options to which they are entitled following commencement of their
directorship.
10. Performance Targets
(a) The exercise of any Option may by its terms be conditional upon the
attainment of one or more objective performance targets ("Performance
Targets"). The terms of each Performance Target shall themselves be
determined by the Executive Remuneration Committee of the Board in its
discretion and shall be specified to the relevant Eligible Person at
the same time as the Date of Grant to such Eligible Person.
(b) Where an issue or reorganisation by the Company or any member of the
Group (including, without limitation, any issue of shares or
securities or any reduction of capital or sub-division or
consolidation of shares) or any other event or circumstance (including
a change in accounting policies or practice or a change in the length
of the Company's accounting period) causes the Executive Remuneration
Committee reasonably to consider that a different performance target
(including in the case of Rules 11(b) and 14, an appropriate reduction
in the period for achieving such a Performance Target) would be a more
appropriate measure of performance and that the different Performance
Target will be a fairer measure of such performance or that any
amended performance target will provide a more effective incentive to
the holders of Options, the Executive Remuneration Committee after due
consultation with the auditors of the Company may determine that a new
Performance Target shall be substituted for the existing Performance
Target applicable to such Option or Options.
(c) Where the Executive Remuneration Committee has imposed a Performance
Target under Rule 10(a) upon the grant of an Option, that Option may
not be exercised except in accordance with any such Performance
110
Target, as from time to time varied in accordance with Rule 10(b).
11. Option Period
(a) No Option shall be capable of being exercised later than 10 years
after the Date of Grant, or in the case of an Incentive Stock Option
granted to a 10% Shareholder, 5 years after the Date of Grant.
(b) Exercise of an Option shall always be subject to the following
additional provisions: (i) if the option holder ceases to provide
services to any member of the Group for any reason except the option
holder's death or disability (whether such disability is temporary or
permanent, partial or total, as determined by the Board), then the
option holder may exercise such option holder's Options only to the
extent that such Options would have been exercisable upon the
effective date of such termination no later than three months after
the effective date of such termination (or such longer or shorter time
period as may be specified in the Option), but in any event, no later
than the expiration date of the Options; and (ii) if the option holder
ceases to provide services to any member of the Group because of the
option holder's death or disability (or the option holder dies within
three months of termination for any reason other than death or
disability) then the option holder's Options may be exercised only to
the extent that such Options would have been exercisable by the option
holder on the effective date of such termination and must be exercised
by the option holder (or the option holder's legal representative or
authorised assignee) no later than 12 months after the effective date
of such termination (or such longer or shorter time period as may be
specified in the Option), but in any event no later than the
expiration date of the Options. The phrase "ceases to provide
services" shall include termination of employment.
(c) Options shall become exercisable at such times and in such increments
as shall be determined by the Board.
12. Stock Exchange Listing
All Shares allotted upon the exercise of any Option shall rank pari passu in all
respects with the Shares then in issue and the Company shall apply to the
111
Council of The London Stock Exchange for Shares allotted pursuant to any Option
to be admitted to the Official List. The Company shall provide to each person
who shall hold one or more Options a copy of the annual report of the Company as
soon as reasonably practicable after it is released by the Company.
13. Variation in share capital
(a) As provided for in the rules of The London Stock Exchange, in the
event of any increase in the number of Shares issued by way of
capitalisation or rights issue or open offer, or any sub-division,
consolidation or reduction of any other variation of share capital the
Board will make the appropriate adjustment to:-
(i) the restrictions imposed by Rules 4 and 5 above; and/or
(ii) the number of Shares which are subject to any Option; and/or
(iii)the exercise price payable for each Share under any Option;
provided that the exercise price for any Share shall not be less
than the nominal value of such Share and no adjustment shall
cause an Option to be capable of being exercised later than as
mentioned in Rule 11 above.
(b) As required by the rules of The London Stock Exchange, except in the
case of a capitalisation issue no such adjustment shall be made
without the prior written confirmation of the auditors of the Company
for the time being that it is in their opinion fair and reasonable.
(c) Written notice of any adjustment shall be given to any person granted
an Option who is affected thereby.
14. Winding-up of the Company and change of control
(a) Notwithstanding Rule 11 above, it shall be a term and condition of any
Option that in the event of notice being given to shareholders of a
resolution for the winding-up of the Company, the Option shall be
capable of exercise within the period of six months commencing on the
date of such notice and the Option shall lapse at the end of such
period or on the winding up of the Company, if earlier.
112
(b) If the Company is succeeded by a successor corporation, or if any
person ("the Offeror") obtains Control of the Company, then the
successor corporation or Offeror may assume, convert or replace any or
all outstanding Options, which action will be binding on all option
holders. In the alternative, the successor corporation or Offeror may
substitute equivalent options or provide substantially similar
consideration to option holders as was provided to shareholders (after
taking into account the existing provisions of the Options). If such
successor corporation or Offeror refuses to assume or substitute
Options, such Options shall accelerate and become exercisable in full
on such conditions as the Board shall determine prior to such
succession or change of control. Any Options not so replaced or
exercised shall lapse and cease to be exercisable.
15. Alteration of the Plan
(a) Subject to Rule 15(b) below, the Board may at any time alter or add to
all or any of the provisions of the Plan in any respect;
(b) Subject to Rule 15(c) below, no alterations or addition shall be made
to any provision of the Plan without the prior approval of
shareholders of the Company in general meeting except for: (i) minor
amendments to benefit the administration of the Plan; or (ii)
alterations or additions that are necessary or desirable in order to
comply with the laws and regulations for the time being in force in
the United Kingdom or the United States of America or to obtain or
maintain approval of the Plan from any government or other regulatory
or advisory body whether in the United Kingdom, the United States of
America or elsewhere, provided that any such alteration or addition
shall not affect the basic principles of the Plan; or (iii)
alterations or additions to ensure and maintain treatment as Incentive
Stock Options of those Options granted and to be granted that are
intended to be treated as such.
(c) No alterations or additions shall be made to an outstanding Option to
the disadvantage of the holder thereof without the prior written
consent of such holder.
113
16. Administration and Interpretation of the Plan
The Plan shall be administered by the Board or, to the extent necessary to
comply with the laws and regulations of the United Kingdom and the United States
of America, by the Executive Remuneration Committee of the Board. Subject to the
general purposes, terms and conditions of the Plan, the Board or, if applicable,
the Executive Remuneration Committee of the Board, shall have full power to
implement and carry out the Plan. Any determination made by the Board, or if
applicable, the Executive Remuneration Committee of the Board, shall be made in
its sole discretion on the Date of Grant of the Option or, unless in
contravention of any express term of the Plan or Option, at any later time, and
such determination shall be final and binding on the members of the Group and on
all persons having an interest in any Option under the Plan.
17. Duration of the Plan
The authority to grant Options under the Plan will expire on August 18, 2008,
the last day of the ten year period commencing on the date this Plan is adopted
by the Board.
114
EXHIBIT 2.07
RULES OF
--------
THE MERANT INLAND REVENUE (1998) APPROVED
-----------------------------------------
SHARE OPTION SCHEME
-------------------
These rules set out the terms and conditions governing the grant of options to
acquire shares in Merant PLC which, if exercised in accordance with this Scheme,
as it is approved by the Board of Inland Revenue, and within statutory time
limits, will qualify for favourable tax treatment under section 185 Income and
Corporation Taxes Act 1988.
Definitions
In this Scheme:
(a) "Auditors" means the auditors for the time being of
the Company;
(b) "Board" means the board of directors of the
Company;
(c) "the Company" means Merant PLC (incorporated in
England with number 1709998);
(d) "Close Company" has the same meaning as in Chapter I of
Part XI of the Income and Corporation
Taxes Act 1988 SAVE THAT in determining
whether a company is a Close Company for
the purposes of the Scheme, sections
414(a) and 415 of that Act shall be
disregarded;
(e) "Control" has the same meaning as in section 840
of the Income and Corporation Taxes Act
1988;
(f) "Date of Grant" means, in respect of any Option, the
date upon which that Option is granted;
115
(g) "Eligible Person" means a director or employee of any
Participating Company in the Group who
devotes substantially the whole of his
time to the business of the Group;
(h) "full-time" means required to work in the case of
directors for not less than 25 hours per
week and in the case of an employee
other than a director not less than 20
hours per week (excluding meal breaks);
(i) "the Group" means the Company and every other
company of which the Company has direct
or indirect Control;
(j) "market value" has the same meaning as in Part VIII of
the Taxation of Chargeable Gains Act
1992;
(k) "material interest" has the same meaning as in Chapter IV,
Part V Income and Corporation Taxes Act
1988 SAVE THAT in determining for the
purposes of this Scheme whether a person
has or has had a material interest in a
company, section 187(3) and paragraph ii
of the proviso to section 417(3) of that
Act shall have effect with the
substitution for the reference in those
provisions to 5 per cent of references
to 10 per cent;
(l) "Nominees" means Micro Focus Nominees Limited
(incorporated in England with number
1790073);
(m) "Option" means a right to acquire Shares which is
granted in accordance with this Scheme;
(n) "Option Holder" means a person who has subsisting rights
under an Option (including, upon the
death of such person, his personal
representatives);
116
(o) "Participating Company" means the Company and any Subsidiary for
the time being designated by the Board
as a Participating Company for the
purposes of this Scheme;
(p) "the Plan" means the 1998 Merant Share Option Plan
under which the Board is authorised by
shareholders of the Company to grant
rights to subscribe for shares (as
modified, extended or renewed from time
to time);
(q) "this Scheme" means the Merant Inland Revenue Approved
(1998) Share Option Scheme as amended
from time to time in accordance with
Rule 12 below which was formerly known
as the Micro Focus Group Inland Revenue
Approved (1998) Share Option Scheme;
(r) "Shares" means full paid ordinary shares in the
capital of the Company which satisfy the
requirements of paragraphs 10-14 of
Schedule 9 of the Income and Corporation
Taxes Act 1988;
(s) "Subsidiary" means a company which is under the
Control of the Company and which is a
subsidiary of the Company within the
meaning of section 736 of the Companies
Act 1985;
(t) "Subsisting Option" means an Option which has neither lapsed
nor been exercised in respect of all the
shares subject thereto;
(u) "Taxes Act" means the Income and Corporation taxes
Act 1988;
(v) "Trustees" means Micro Focus Trustees Limited
(incorporated in Jersey with number
58902).
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(w) Words and expressions not otherwise defined have the same meaning as in
section 187 of Schedule 9 of the Income and Corporation taxes Act 1988.
(x) Words denoting the masculine gender shall include the feminine.
1. Grant of Options
Options may be granted from time to time in accordance with the provisions
of this Scheme by:
(a) the Company; or
(b) Nominees; or
(c) Trustees; or
(d) any other company which is a member of the Group.
2. Eligibility
(a) Options shall only be granted to Eligible Persons who are
full-time directors or full-time employees of any Participating
Company within the Group.
(b) No Option shall be granted to nor be capable of exercise by any
such person at any time when he has, or has within the preceding
12 months, had a material interest in a Close Company being
either the Company or a company which has control of the Company
or is a member of a consortium which owns such a company.
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(c) Subject to Rules 2(a) and (b) above, Options may be granted to
such persons as the board of directors of the company granting
the Options in its absolute discretion may determine.
3. Non-transferability of Options
Options shall be personal to the person to whom they are granted and shall
lapse forthwith if they are purportedly transferred (otherwise than to
personal representatives upon death) assigned, mortgaged, charged or
otherwise alienated or if that person is adjudicated bankrupt or does or
suffers any other act or thing whereby he or she would or might be deprived
of the legal or beneficial ownership of the Options.
4. Restriction on the Grant of Options
No Option shall be granted to an Eligible Person at any time if that would
cause the aggregate market value of the Shares which he may acquire upon
the exercise of Options granted under this Scheme or under any other share
option scheme approved under Schedule 9 of the Taxes Act and established by
any associated company of the Company (and not exercised) to exceed or
further exceed GBP30,000.
5. Payment for the Grant of Options
The amount, if any, payable in consideration of the grant of an Option
shall be as the board of directors of the company granting the Option may
desire but in any event shall not be more than GBP1.00, which shall not be
returnable.
6. Exercise Price
Subject to Rule 10 below, the price payable for any Share to be acquired
upon the exercise of any Option shall not be less than:
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(a) the average of the middle market quotations of a Share as derived from
the Daily Official List of The London Stock Exchange on the 3 business
days immediately preceding the Date of Grant; and
(b) the nominal value of a Share.
7. Performance Targets
(a) The exercise of any Option may by its terms be conditional upon the
attainment of one or more objective performance targets ("Performance
Targets"). The terms of each Performance Target shall themselves be
determined by the Executive Remuneration Committee of the Board in its
discretion having first obtained the prior approval of the Inland
Revenue to such terms and shall be specified to the relevant Eligible
Person at the same time as the Date of Grant to such Eligible Person.
(b) Where an issue or reorganisation by the Company or any of its
Subsidiaries (including, without limitation, any issue of shares or
securities or any reduction of capital or sub-division or
consolidation of shares) or any other event or circumstance (including
a change in accounting policies or practice or a change in the length
of the Company's accounting period) causes the Executive Remuneration
Committee reasonably to consider that a different Performance Target
would be a more appropriate measure of performance,that the different
Performance Target will be a fairer measure of such performance
andthat any amended Performance Target will provide a more effective
incentive to the Option Holders and shall be no more difficult to
satisfy than were the original conditions when first set, the
Executive Remuneration Committee, after due consultation with the
Auditors and with the prior approval of the Inland Revenue to the
terms of such new Performance Target, may determine that a new
Performance Target shall be substituted for the existing Performance
Target applicable to such Option or Options.
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(c) Where the Executive Remuneration Committee have imposed a Performance
Target under Rule 7(a) upon the grant of an Option, that Option may
not be exercised except in accordance with any such Performance
Target, as from time to time varied in accordance with Rule 7(b).
8. Exercise of Options
No Option shall be capable of being exercised more than 10 years after the
Date of Grant.
(a) Exercise of an Option shall always be subject to the following
additional provisions:
(i) if the Option Holder's employment is terminated for any reason
except the option holder's death or disability (whether such
disability is temporary or permanent, partial or total, as
determined by the Board), then the Option Holder may exercise
such Options only to the extent that such Options would have been
exercisable upon the effective date of such termination no later
than three months after the effective date of such termination
(or such shorter or longer period as may be specified in the
Options), but in any event, no later than the expiration date of
the Options; and
(ii) if the Option Holder's employment is terminated because of
disability, then the Option Holder's Options may be exercised
only to the extent that such Options would have been exercisable
by the Option Holder on the effective date of such termination
and must be exercised by the Option Holder (or the Option
Holder's legal representative or authorised assignee) no later
than 12 months after the effective date of such termination (or
such shorter or longer period as may be specified in the
Options), but in any event, no later than the expiration date of
the Options; and
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(iii)if the Option Holder's employment is terminated because of death
(or if the Option Holder dies within three months of such
termination) then the Option Holder's options may be exercised by
the personal representatives within 12 months after the effective
date of such termination (or such shorter period or such longer
period not exceeding 12 months as may be specified in the
Options), but in any event, no later than the expiration date of
the Options.
(b) Options shall become exercisable at such times and in such increments
as shall be determined by the Board at the relevant Date of Grant.
9. Stock Exchange Listing
All Shares to be allotted upon the exercise of any Option shall be issued
within 30 days of the date of exercise and shall rank pari passu in all
respects with the Shares then in issue and the Company shall apply to the
Council of The London Stock Exchange for Shares allotted pursuant to any
Option to be admitted to the Official List. The Company shall at all times
keep available sufficient authorised and unissued Shares to satisfy the
exercise of all Subsisting Options where those Options are to be satisfied
by the issue of Shares and not the transfer of existing Shares, taking
account of any other obligations upon the Company to issue Shares.
10. Variation in Share Capital
(a) In the event of any increase in the number of Shares issued by way of
capitalisation or rights issue, or open offer, or any sub-division,
consolidation, or reduction of share capital or any other variation of
capital otherwise than for consideration, the Board will, subject to
the prior approval of the Inland Revenue, make the appropriate
adjustment to:
(i) the number of Shares which are subject to any Option; and/or
(ii) the price payable for each Share under any Option;
121
provided that the exercise price for a Share shall not be less
than the nominal value of such Share and no adjustment shall
cause an Option to be capable of being exercised later than as
mentioned in Rule 8 above.
(b) Except in the case of capitalisation issue, no such adjustment shall
be made without the prior written confirmation of the Auditors that it
is in their opinion fair and reasonable.
(c) Written notice of any adjustment shall be given to any person granted
an Option who is affected thereby.
11. Winding-up of the Company and Change of Control
(a) If any person (which shall include persons acting in concert with him
within the meaning of the City Code on Take-overs and Mergers) obtains
Control of the Company as a result of making:
(i) a general offer to acquire the whole of the issued share capital
of the Company (or the whole other than any such share capital
already held at the date of the offer by, or by a nominee for,
the offeror or any subsidiary thereof); or
(ii) a general offer to acquire all shares in the Company (or all
other than any Shares already held at the date of the offer by,
or by a nominee for, the offeror or any subsidiary thereof)
an Option Holder shall be entitled to exercise any Options then held
by him within six months of the time when the person making the offer
has obtained such control of the Company and any condition subject to
which the offer is made has been satisfied provided that any Options
not so exercised before the expiry of such period cease to be
exercisable or available for future exercise and provided further that
no Option shall be capable of exercise hereunder later than the end of
the exercise period relating thereto.
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(b) If the Court sanctions, under Section 425 of the Companies Act 1985, a
compromise or arrangement proposed for the purposes of or in
connection with a scheme for the reconstruction of the Company, or its
amalgamation with any company or companies, an Option Holder shall be
entitled to exercise any Option then held by him within six months of
the Court so sanctioning the compromise or arrangement provided that
any Options not so exercised before the expiry of such period shall
upon the expiry of such period cease to be exercisable or available
for future exercise and provided further that no Option shall be
capable of exercise hereunder later than the end of the exercise
period relating thereto.
(c) If any person becomes bound or entitled to acquire Shares under
Section 428 to 430F of the Companies Act 1985, an Option Holder shall
be entitled to exercise any Option then held by him during any period
when that person remains so bound or entitled provided that any such
Options not so exercised before the expiry of such period shall upon
expiry of such period cease to be exercisable or available for future
exercise and provided that no Option shall be capable of exercise
hereunder later than the end of the exercise period relating thereto.
(d) If notice is duly given of a resolution for a voluntary winding-up of
the Company, an Option Holder may forthwith and until the commencement
of the winding-up (or if earlier the day before the expiry of the
period within which the Option is otherwise exercisable) exercise an
Option but such exercise (save where the Option Holder is otherwise
entitled under any other provision of this Scheme to exercise any
Subsisting Option of his) shall be conditional upon the resolution
being duly passed.
(e) If as a result of any of the sets of circumstances specified in Rules
11(a) or 11(b) a company has obtained Control of the Company, or if a
company has become bound or entitled as mentioned in Rule 11(c), the
Company shall seek the agreement of that other company ("the Acquiring
Company") and if such
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agreement is obtained the Option Holder may, within the appropriate
period as defined in sub-paragraph 15(2) of Schedule 9 to the Taxes
Act release each Subsisting Option ("the Old Option") in consideration
for a new option ("the New Option") which (for the purposes of
paragraph 15 of Schedule 9 to the Taxes Act) is equivalent to the Old
Option but relates to shares in a different company (whether the
Acquiring Company itself or some other company falling within
paragraph 10(b) or (c) of Schedule 9).
(f) The New Option shall not be regarded for the purposes of Rule 11(e) as
equivalent to the Old Option unless the conditions set out in
paragraph 15(3) of Schedule 9 to the Taxes Act are satisfied but so
that the provisions of this Scheme shall for this purpose be construed
as if :
(i) the New Option was an option granted under this Scheme at
the same time as the Old Option;
(ii) except for the purposes of the definitions of "Participating
Company" and "Subsidiary", the reference to "Merant PLC" in
the definition of the "Company" were a reference to the
different company referred to in Rule 11(e);
(iii) Rule 12 was omitted.
(g) Nothing in this Rule 11 shall permit any Option to be exercised later
than any time otherwise specified in this Scheme.
12. Alteration of the Scheme
(a) Subject to Rule 12(b) below the Board may at any time alter or add to
all or any of the terms of this Scheme in any respect.
(b) After the Board of Inland Revenue has approved this Scheme pursuant to
Schedule 9 of the Taxes Act, no alteration or addition shall be made
to any provision of this Scheme without the prior approval of the
Company in general meeting
125
save for minor amendments to benefit the administration of the Scheme,
to take account of a change in legislation or to obtain or maintain
favourable tax, exchange control or regulatory treatment for
participants in the Scheme or any member of the Group and save further
to the extent that any alteration or addition is necessary or
desirable in order to comply with the laws and regulations for the
time being in force in England, or to obtain or maintain approval of
this Scheme from the Board of Inland Revenue.
(c) No such alteration or addition shall have effect until approved by the
Board of Inland Revenue.
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EXHIBIT 2.08
MERANT plc
1999 EMPLOYEE SHARE PURCHASE PLAN
Adopted September 16, 1999
1. ESTABLISHMENT OF PLAN
Merant plc (the "Company") proposes to grant options to acquire the Company's
ordinary shares of 2p each to eligible employees of the Company and its
Subsidiaries (as hereinafter defined) pursuant to this Merant plc 1999 Employee
Share Purchase Plan (this "Plan"). For purposes of this Plan, "Parent
Corporation" and "Subsidiary" (collectively, "Subsidiaries") shall have the same
meanings as "parent corporation" and "subsidiary corporation" in Sections 424(e)
and 424(f), respectively, of the US Internal Revenue Code of 1986, as amended
(the "Code"). The Company intends the Plan to qualify as an "employee stock
purchase plan" under Section 423 of the Code (including any amendments to or
replacements of such section), and the Plan shall be so construed. Any term not
expressly defined in the Plan but defined for purposes of Section 423 of the
Code shall have the same definition herein. Shares made available under the Plan
shall not be made by way of subscription. Upon the Plan's adoption up to
1,000,000 of the Company's ordinary shares may be issued to employees under the
Plan. The number of shares issuable to employees under the Plan shall be
increased annually, beginning January 1, 2001, by an amount equal to 1% of the
outstanding ordinary shares of the Company on the last day of the immediately
preceding calendar year; provided, however, that the aggregate number of shares
that may be issued under this Plan shall not exceed 20,000,000 shares. Such
numbers shall be subject to adjustments effected in accordance with Section 14
of the Plan.
2. PURPOSES
The purpose of the Plan is to provide employees of the Company and of
Subsidiaries designated from time to time by the Board of Directors of the
Company (the "Board") as eligible to participate in the Plan with a convenient
means of acquiring an equity interest in the Company through payroll deductions,
to enhance such employees' sense of participation in the affairs of the Company
and Subsidiaries, and to provide an incentive for continued employment.
3. ADMINISTRATION
This Plan may be administered by the Board or a committee appointed by the Board
(the "Committee"). As used in this Plan, references to the "Committee" shall
mean either such committee or the Board if no committee has been established.
Subject to the provisions of the Plan and the limitations of Section 423 of the
Code or any successor provision in the Code, all questions of interpretation or
application of the Plan shall be determined by the Committee and its decisions
shall be final and binding upon all participants. Members of the Committee shall
receive no compensation for their services in connection with the administration
of the Plan, other than standard fees as established from time to time by the
Board for services rendered by Board members serving on Board committees. All
expenses incurred in connection with the administration of the Plan shall be
paid by the Company.
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4. ELIGIBILITY
Any employee of the Company or the Subsidiaries is eligible to participate in an
Offering Period (as hereinafter defined) under the Plan except the following:
(a) employees who are not employed by the Company or Subsidiaries on the
first (1st) day of the month before the beginning of such Offering
Period;
(b) employees who are customarily employed for less than 30 hours per
week;
(c) employees who are customarily employed for less than 5 months in a
calendar year;
(d) employees who, together with any other person whose shares would be
attributed to such employee pursuant to Section 424(d) of the Code,
own shares or hold options to acquire ordinary shares or who, as a
result of being granted an option under the Plan with respect to such
Offering Period, would own shares or hold options to acquire shares
possessing 5 percent or more of the total combined voting power or
value of all classes of stock or shares of the Company or any of its
Subsidiaries.
5. OFFERING PERIODS
The Offering Periods of the Plan (the "Offering Period") shall be of six months
duration commencing on the dates determined by the Committee. Payroll deductions
of each participant are accumulated under the Plan during the Offering Periods.
The first business day of each Offering Period is referred to as the "Offering
Date". The last business day of each Offering Period is referred to as the
"Purchase Date". The Board shall have the power to change the duration of
Offering Periods with respect to future offerings without shareholder approval
if such change is announced prior to the scheduled beginning of the first
Offering Period to be affected.
6. PARTICIPATION IN THE PLAN
Eligible employees may become participants in an Offering Period under the Plan
on the first Offering Date after satisfying the eligibility requirements by
delivering an enrollment form to the Company's or Subsidiary's (whichever
employs such employee) payroll department (the "Payroll Department") not later
than ten (10) days prior to such Offering Date unless a later time for filing
the enrollment form authorizing payroll deductions is set by the Board for all
eligible employees with respect to a given Offering Period. An eligible employee
who does not deliver an enrollment form to the Payroll Department by such date
after becoming eligible to participate in such Offering Period shall not
participate in that Offering Period or any subsequent Offering Period unless
such employee enrolls in the Plan by filing an enrollment form with the Payroll
Department not later than ten (10) days prior to such subsequent Offering Date.
Once an employee becomes a participant in an Offering Period, such employee will
automatically participate in the Offering Period commencing immediately
following the last day of the prior Offering Period unless the employee
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withdraws from the Plan or terminates further participation in the Offering
Period as set forth in Section 11 below. Such participant is not required to
file any additional forms to continue participation in the Plan.
7. GRANT OF OPTION ON ENROLLMENT
Enrollment by an eligible employee in the Plan with respect to an Offering
Period will constitute the grant (as of the Offering Date) by the Company to
such employee of an option to acquire on the Purchase Date up to that number of
ordinary shares of the Company determined by dividing the amount accumulated in
such employee's payroll deduction account during such Offering Period, and if
applicable, as converted into Pounds Sterling at the Conversion Rate (as defined
in Section 9(g)) on the Purchase Date, by the lower of (i) eighty-five percent
(85%) of the fair market value of an ordinary share of the Company on the
Offering Date or (ii) eighty-five percent (85%) of the fair market value of an
ordinary share of the Company on the Purchase Date; provided, however, that the
number of ordinary shares of the Company subject to any option granted pursuant
to this Plan shall not exceed the lesser of the maximum number of shares
permitted under Sections 10(b) or 10(c) below with respect to the applicable
Offering Period. Fair market value of an ordinary share of the Company shall be
determined as provided in Section 8 hereof.
8. PURCHASE PRICE
The purchase price of shares acquired pursuant to this Plan shall be payable in
Pounds Sterling. The purchase price per share at which a share will be issued in
any Offering Period shall be 85 percent of the lesser of:
(a) The fair market value on the Offering Date; or
(b) The fair market value on the Purchase Date.
Notwithstanding the foregoing, the purchase price per ordinary share shall not
in any circumstances be less than the par value of an ordinary share.
For purposes of the Plan, the term "fair market value" on a given date shall
mean the fair market value of an ordinary share of the Company determined as the
closing price of a share on the day prior to the Offering Date or the Purchase
Date as quoted in Pounds Sterling on the Official List of The London Stock
Exchange Ltd. or if no such reported sale takes place on such date, the closing
price as quoted in Pounds Sterling on the next preceding trading date on which a
reported sale occurred.
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9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUE OF SHARES
(a) The purchase price of the shares is accumulated by regular payroll
deductions made during each Offering Period. The deductions are made
as a percentage of the participant's compensation (at the start of the
Offering Period) in one percent increments not less than 2 percent nor
greater than 10 percent, not to exceed the limits from time to time
imposed by the Code. Compensation for U.S. employees shall mean base
salary and commissions; provided, however, that for purposes of
determining a participant's compensation, any election by such
participant to reduce his or her regular cash remuneration under
Sections 125 or 401(k) of the Code shall be treated as if the
participant did not make such election. Compensation for non-U.S.
employees shall mean annual base salary and commissions. Payroll
deductions shall commence on the first payday following the Offering
Date and shall continue to the end of the Offering Period unless
sooner altered or terminated as provided in the Plan.
(b) A participant may lower (but not increase) the rate of payroll
deductions during an Offering Period by filing with the Payroll
Department a new authorization for payroll deductions, in which case
the new rate shall become effective for the next payroll period
commencing more than 15 days after the Payroll Department's receipt of
the authorization and shall continue for the remainder of the Offering
Period unless changed as described below. Such change in the rate of
payroll deductions may be made at any time during an Offering Period,
but not more than one change may be made effective during any Offering
Period. A participant may increase or decrease the rate of payroll
deductions for any subsequent Offering Period by filing with the
Payroll Department a new authorization for payroll deductions not
later than ten (10) days prior to the beginning of such subsequent
Offering Period.
(c) All payroll deductions made for a participant are credited to his or
her account under the Plan and are deposited with the general funds of
the Company. No interest accrues on the payroll deductions. All
payroll deductions received or held by the Company may be used by the
Company for any corporate purpose, and the Company shall not be
obligated to segregate such payroll deductions.
(d) On each Purchase Date, so long as the Plan remains in effect and
provided that the participant has not submitted a signed and completed
withdrawal form before that date, as set forth in Section 11 below,
which notifies the Company that the participant wishes to withdraw
from that Offering Period under the Plan and have all payroll
deductions accumulated in the account maintained on behalf of the
participant as of that date returned to the participant, the Company
shall apply the funds then in the participant's account (if
applicable, as converted to Pounds Sterling at the Conversion Rate on
the Purchase Date) for the acquisition of a whole number of ordinary
shares reserved under the option granted to such participant with
130
respect to the Offering Period to the extent that such option is
exercisable on the Purchase Date. The purchase price per share shall
be as specified in Section 8 of the Plan. Any cash remaining in a
participant's account after such purchase of ordinary shares shall be
refunded to such participant in cash, without interest; provided,
however, that any amount remaining in such participant's account on a
Purchase Date which is less than the amount necessary to purchase a
single ordinary share shall be carried forward, without interest, into
the next Offering Period. In the event that the Plan has been
oversubscribed, all funds not used to purchase ordinary shares on the
Purchase Date shall be returned to the participant, without interest.
No ordinary shares shall be purchased on a Purchase Date on behalf of
any employee whose participation in the Plan has terminated prior to
such Purchase Date.
(e) As promptly as practicable after the Purchase Date, the Company shall
arrange the delivery to each participant of a certificate representing
the shares issued upon exercise of his option, subject to the payment
of any stamp duty in respect of such acquisition.
(f) During a participant's lifetime, such participant's option to acquire
shares hereunder is exercisable only by him or her. The participant
will have no interest or voting right in shares covered by his or her
option until such option has been exercised. Shares to be transferred
and delivered to a participant under the Plan will be registered in
the name of the participant or in the name of the participant and his
or her spouse.
(g) "Conversion Rate" means the U.S. Federal Reserve Noon Buying Rate for
purposes of converting listed currencies other than Pounds Sterling
into Pounds Sterling.
10. LIMITATIONS ON SHARES TO BE PURCHASED
(a) In accordance with the requirements set forth in Section 423 of the
Code, for each calendar year in which the employee participates in the
Plan no employee shall be entitled to acquire shares under the Plan at
a rate which, when aggregated with his or her rights to acquire shares
under all other employee stock purchase plans of the Company or any
Subsidiary, exceeds twenty five thousand U.S. Dollars worth of
ordinary shares calculated with reference to the fair market value of
such shares determined as of the Offering Date or such other limit as
may be imposed by the Code. So as to avoid any confusion with respect
to such limitation, as the Plan provides for the purchase of shares in
an amount no greater than 85% of the fair market value of an ordinary
share on the Offering Date, an employee may not elect to have payroll
deductions applied to the purchase of shares under the Plan in excess
of twenty one thousand two hundred fifty U.S. Dollars per calendar
year and such amount shall be reduced in the event that the fair
131
market value of an ordinary share on the Purchase Date is less than
the fair market value of an ordinary share on the Offering Date.
(b) No employee shall be entitled to acquire, on any Purchase Date, more
than twice the number of shares he or she would have been eligible to
purchase if the fair market value of a share on the Purchase Date was
the same as the fair market value of a share on the Offering Date.
(c) No employee shall be entitled to acquire more than the Maximum Share
Amount (as defined below) on any single Purchase Date. Not less than
thirty days prior to the commencement of any Offering Period, the
Committee may, in its sole discretion, set a maximum number of shares
which may be acquired by any employee at any single Purchase Date
(hereinafter the "Maximum Share Amount"). In no event shall the
Maximum Share Amount exceed the amounts permitted under Section 10(b)
above. If a new Maximum Share Amount is set, then all participants
must be notified of such Maximum Share Amount prior to the
commencement of the next Offering Period. Once the Maximum Share
Amount is set, it shall continue to apply with respect to all
succeeding Purchase Dates and Offering Periods unless revised by the
Committee as set forth above.
(d) If the number of shares to be acquired on a Purchase Date by all
employees participating in the Plan exceeds the number of shares then
available for issue under the Plan, the Company will make a pro rata
allocation of the remaining shares in as uniform a manner as shall be
practicable and as the Committee shall determine to be equitable. In
such event, the Company shall give written notice of such reduction of
the number of shares to be acquired under a participant's option to
each participant affected thereby.
(e) Any payroll deductions accumulated in a participant's account which
are not used to acquire ordinary shares due to the limitations in this
Section 10 shall be returned to the participant as soon as practicable
after the end of the Offering Period, without interest.
11. WITHDRAWAL
(a) Each participant may withdraw from an Offering Period under the Plan
by signing and delivering to the Payroll Department a notice on a form
provided for such purpose. Such withdrawal may be elected at any time
at least 15 days prior to the end of an Offering Period.
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(b) Upon withdrawal from the Plan, the accumulated payroll deductions
shall be returned to the withdrawn participant, without interest, and
his or her interest in the Plan shall terminate. In the event a
participant voluntarily elects to withdraw from the Plan, he or she
may not resume his or her participation in the Plan during the same
Offering Period, but he or she may participate in any Offering Period
under the Plan which commences on a date subsequent to such withdrawal
by filing a new authorization for payroll deductions in the same
manner as set forth in Section 6 above for initial participation in
the Plan.
12. TERMINATION OF EMPLOYMENT
Termination of a participant's employment for any reason, including retirement,
death or the failure of a participant to remain an eligible employee,
immediately terminates his or her participation in the Plan. In such event, the
payroll deductions credited to the participant's account will be returned to him
or her or, in the case of his or her death, to his or her legal representative,
without interest. For purposes of this Section 12, an employee will not be
deemed to have terminated employment or failed to remain in the continuous
employ of the Company in the case of sick leave, military leave, or any other
leave of absence approved by the Board; provided that such leave is for a period
of not more than ninety (90) days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.
13. RETURN OF PAYROLL DEDUCTIONS
In the event a participant's interest in the Plan is terminated by withdrawal,
termination of employment or otherwise, or in the event the Plan is terminated
by the Board, the Company shall promptly deliver to the participant all payroll
deductions credited to his account. No interest shall accrue on the payroll
deductions of a participant in the Plan.
14. CAPITAL CHANGES
Subject to any required action by the shareholders of the Company, the number of
ordinary shares covered by each option under the Plan which has not yet been
exercised and the number of ordinary shares which have been authorized for issue
under the Plan but have not yet been placed under option (collectively, the
"Reserves"), as well as the price per ordinary share covered by each option
under the Plan which has not yet been exercised, shall be proportionately
adjusted (subject where shares are being provided by the Company's Employee
Benefit Trust ("the Trust") to the consent of the Trustees of the Trust) for any
increase or decrease in the number of issued ordinary shares resulting from any
consolidation or subdivision of ordinary shares of the Company, or any bonus or
other capitalization issue of ordinary shares or any other increase or decrease
in the number of issued ordinary shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
(subject where shares are being provided by the Trust to the consent of the
Trustees of the Trust) whose determination shall be final, binding and
133
conclusive. Except as expressly provided herein, no issue by the Company of
shares of any class, or securities convertible into shares of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of ordinary shares subject to an option.
In the event of the proposed dissolution or liquidation of the Company, the
Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that the options
under the Plan shall terminate as of a date fixed by the Board and give each
participant the right to purchase such number of whole ordinary shares of the
Company determined by dividing the amount accumulated in such employee's payroll
deduction account by the fair market value of a share on the date fixed by the
Board. In the event of a proposed sale of all or substantially all of the assets
of the Company, or the sale of the entire share capital of the Company to
another corporation, (whether for consideration in cash or in the form of
securities of any kind) (a "merger"), each option under the Plan shall be
assumed or an equivalent option shall be substituted by the purchasing
corporation or a parent or subsidiary of such purchasing corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the participant shall have the right to
exercise the option to purchase such number of whole ordinary shares of the
Company determined by dividing the amount accumulated in such employee's payroll
deduction account by the fair market value of a share on the date fixed by the
Board. If the Board makes an option exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
the participant at least twenty (20) days prior to the date the shares are to be
purchased, and the Plan will terminate immediately following such purchase.
The Board may, if it so determines in the exercise of its sole discretion, also
make provision for adjusting the Reserves, as well as the price per ordinary
share comprised in each outstanding option, in the event that the Company
effects one or more reorganisations, recapitalizations, rights offerings or
other increases or reductions of share capital, or in the event of a merger.
15. NONASSIGNABILITY
Neither payroll deductions credited to a participant's account nor any rights
with regard to the exercise of an option or to receive shares under the Plan may
be assigned, transferred, pledged or otherwise disposed of in any way (other
than by will, the laws of descent and distribution or as provided in Section 22
hereof) by the participant. Any such attempt at assignment, transfer, pledge or
other disposition shall be without effect.
134
16. REPORTS
Individual accounts will be maintained for each participant in the Plan. Each
participant shall receive promptly after the end of each Offering Period a
report of his or her account setting forth the total payroll deductions
accumulated (and if applicable, the Conversion Rate (as defined in Section 9(g))
at which such participant's payroll deductions were converted into Pounds
Sterling), the number of shares acquired, the per share price thereof and the
remaining cash balance, if any, carried forward to the next Offering Period.
17. NOTICE OF DISPOSITION
Each participant shall notify the Company if the participant disposes of any of
the shares acquired in any Offering Period pursuant to this Plan if such
disposition occurs within two years from the Offering Date or within one year
from the Purchase Date on which such shares were acquired (the "Notice Period").
Unless such participant is disposing of any of such shares during the Notice
Period, such participant shall keep the certificates representing such shares in
his or her name (and not in the name of a nominee) during the Notice Period. The
Company may, at any time during the Notice Period, place a legend or legends on
any certificate representing shares acquired pursuant to the Plan requesting the
Company's transfer agent to notify the Company of any transfer of the shares.
The obligation of the participant to provide such notice shall continue
notwithstanding the placement of any such legend on the certificates.
18. NO RIGHTS TO CONTINUED EMPLOYMENT
(a) Neither this Plan nor the grant of any option hereunder shall confer
any right on any employee to remain in the employ of the Company or
any Subsidiary, or restrict the right of the Company or any Subsidiary
to terminate such employee's employment.
(b) In the event that any person holding an option under the Plan ceases
to be employed by the Company or a Subsidiary for whatever reason, he
shall have no right to any compensation in respect of the loss of his
right to receive shares under this Plan.
19. EQUAL RIGHTS AND PRIVILEGES
All eligible employees shall have equal rights and privileges with respect to
the Plan so that the Plan qualifies as an "employee stock purchase plan" within
the meaning of Section 423 or any successor provision of the Code and the
related regulations. Any provision of the Plan which is inconsistent with
Section 423 or any successor provision of the Code shall, without further act or
amendment by the Company or the Board, be reformed to comply with the
requirements of Section 423. This Section 19 shall take precedence over all
other provisions in the Plan.
20. NOTICES
135
All notices or other communications by a participant to the Company under or in
connection with the Plan shall be deemed to have been duly given when received
in the form specified by the Company at the location, or by the person,
designated by the Company for the receipt thereof.
21. TERM; SHAREHOLDER APPROVAL
This Plan shall become effective on the date the Plan is adopted and approved by
the shareholders of the Company which shall be in any manner permitted by
applicable corporate law. No acquisition of shares pursuant to the Plan shall
occur prior to such shareholder approval. The Plan shall continue until the
earlier to occur of termination by the Board, issue of all of the ordinary
shares reserved for issue under the Plan, or ten (10) years from the adoption of
the Plan by the Board.
22. DESIGNATION OF BENEFICIARY
(a) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to
the end of an Offering Period but prior to delivery to him of such
shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such
participant's death prior to a Purchase Date.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant
and in the absence of a beneficiary validly designated under the Plan
who is living at the time of such participant's death, the Company
shall deliver such shares or cash to the executor or administrator of
the estate of the participant, or if no such executor or administrator
has been appointed (to the knowledge of the Company), the Company, in
its discretion, may deliver such shares or cash to the spouse or to
any one or more dependents or relatives of the participant, or if no
spouse, dependent or relative is known to the Company, then to such
other person as the Company may designate.
23. CONDITIONS UPON ACQUISITION OF SHARES; LIMITATION ON SALE OF SHARES
(a) Shares shall not be acquired by a participant with respect to an
option unless the exercise of such option and the transfer and
delivery of such shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange
upon which the shares may then be listed, and shall be further subject
136
to the approval of counsel for the Company with respect to such
compliance.
(b) Where the Company or any of its Subsidiaries or the Trust is obliged
to account for tax or national insurance contributions for which a
participant is liable, by virtue of the acquisition of shares under
this Plan and none of the Company or any of its Subsidiaries or the
Trust:
(i) is able to withhold the appropriate amount of tax or national
insurance from the participant's remuneration; or
(ii) has received a payment from the participant of a corresponding
amount,
then the Company or its Subsidiary or the Trust, as the case may be,
shall be entitled to discharge such liability by selling such number
of shares of those the participant is entitled to acquire to satisfy
the minimum required amount of tax and transferring the balance, if
any, of those shares to the Participant.
24. AMENDMENT OR EXTENSION OF THE PLAN
The Board may at any time amend or extend the term of the Plan, provided that no
amendment shall be made without the prior approval of the shareholders of the
Company in general meeting, except for: (a) minor amendments to benefit the
administration of the Plan; (b) alternations or additions that are necessary or
desirable in order to comply with the laws and regulations in the United Kingdom
or the United States of America or to obtain or maintain approval of the Plan
from any government or other regulatory or advisory body whether in the United
Kingdom, the United States of America or elsewhere, provided that any such
alteration or addition shall not affect the basic principles of the plan; or (c)
alterations or additions to ensure and maintain treatment of the Plan as an
employee stock purchase plan under Code Section 423. No amendment may make any
change in an option previously granted which would adversely affect the right of
any participant. In accordance with Code Section 423, no amendment may be made
by the Board without approval of the shareholders of the Company within 12
months of the adoption of such amendment if such amendment would either increase
the number of shares that may be issued under the Plan or change the designation
of the employees (or class of employees) eligible for participation in the Plan.
25. GOVERNING LAW
The Plan and all agreements, documents and instruments entered into pursuant to
the Plan shall be governed by and construed in accordance with the internal laws
of the State of California, excluding that body of law pertaining to conflict of
laws.
137
EXHIBIT 13.01
PORTIONS OF MERANT 1999 ANNUAL REPORT DETAIL
MERANT PLC
REMUNERATION COMMITTEE'S REPORT
UK FORMAT
FIFTEEN MONTHS ENDED APRIL 30 1999
The MERANT Executive Remuneration Committee consists of Mr. Burns
(Chairman), Mr. Berty and Mr. Hughes.
The Committee ensures that remuneration is appropriate to each executive
director's responsibilities, taking into consideration the overall financial and
business position of the Company, the highly competitive industry of which
MERANT is part, salary scales within the Company, and the importance of
recruiting and retaining management of the appropriate calibre.
EXECUTIVE DIRECTORS' REMUNERATION POLICY
The chief components of remuneration are as follows:
Basic salary: Salary rates for executive directors are determined by
reference to relevant market data for the countries in which the directors
perform their duties, and are normally reviewed on an annual basis. In
general, the Committee's philosophy is to have base salary rates lower than
those of others in the market, with higher rates of pay for performance. In
addition, the rates for executive directors take into account the salary
levels of staff as a whole in each country.
Performance-related pay: Executive directors are eligible for annual
performance-related bonuses, which are calculated based on fixed formulae
measuring MERANT's performance against targets set at the beginning of each
year. Such bonuses are earned on a pro-rata basis in proportion to the
level of achievement relative to the performance targets set, subject to
certain minimum thresholds.
The philosophy is to offer greater than market opportunities in terms
of bonus compensation, scaling upwards if the performance of MERANT exceeds
the targets set out at the beginning of the period. In the current period
such bonuses were based on targets measuring achievement against
performance, measured in terms of audited earnings per share. On the basis
of that achievement, executive directors could earn bonuses up to 150% of
their basic salary entitlements.
Pension contributions: The Company does not operate a pension scheme
for its directors, but has made contributions to an executive director's
own personal pension in lieu of salary entitlement.
Compensation for loss of office: The level of compensation offered by
the Company is determined by the need to provide executive directors with
competitive packages in accordance with the criteria described elsewhere in
this "Directors' Remuneration Policy" section, but would not exceed the
equivalent of two years' pay (salary plus calculated portion of bonus, or
performance-related pay).
Share options: Executive directors are eligible to participate in the
MERANT share option plans, details of which are set out in note 24 to the
financial statements on page 100. The grant of share options to directors
is designed to ensure that an element of their remuneration is directly
related to long-term growth in shareholder value.
Long term incentives: Executive directors are not eligible for any
other long-term incentive payments.
Service agreements: Upon his appointment the Chief Executive Officer
entered into a three-year service agreement with the Company, expiring on
December 1, 2001. On early termination by the Company, he is entitled to
one year's salary and bonus and a further one year salary and bonus for
services to be rendered to the Company over 18 months and for a
non-competition covenant. The agreement stipulates that in the event of a
change in control, the agreement is automatically extended for a three-year
term commencing on the date of change in control.
12
138
REMUNERATION FOR NON-EXECUTIVE DIRECTORS
Remuneration for non-executive directors is determined by the Board based
upon the advice of an independent advisor who has provided details of
comparables. Directors are not involved in any discussions or decisions about
their own remuneration.
Non-executive directors receive an annual retainer and earn additional fees
for attendance at Board meetings and for time spent on other Company-related
business. Fees are set within the limits stipulated in the Company's Articles of
Association.
Non-executive directors are eligible to participate in the MERANT share
option plans, details of which are set out in note 24 to the financial
statements on page 100.
None of the non-executive directors have a service contracts with a notice
period in excess of one year, or with provision for predetermined compensation
on termination of an amount which equals or exceeds one year's salary and
benefits.
DIRECTORS' REMUNERATION
The following table analyses the remuneration earned by each director in
the fifteen month period ended April 30, 1999 and for the year ended January 31,
1998:
PERFORMANCE- BENEFITS- COMPENSATION
SALARY RELATED PAY PENSION IN-KIND FOR LOSS TOTAL TOTAL
------- ------------ FEES CONTRIBUTIONS GBP'000 OF OFFICE 1999 1998
GBP'000 GBP'000 GBP'000 GBP'000 (b) GBP'000 GBP'000 GBP'000
------- ------------ ------- ------------- --------- ------------ ------- -------
Fifteen months ended April 30
1999
J Michael Gullard.............. 94 24 118 50
Harold Hughes.................. 27 12 39 18
J Sidney Webb (died March 24
1999)........................ 23 23 5
Martin Waters.................. 207 451 7 12 788 1,465 489
Michel Berty (appointed
September 24 1998)........... 10 12 22 --
Kevin Burns (appointed
September 24 1998)........... 11 12 121 144 --
Gary Greenfield (appointed
September 24 1998) (a)....... 195 151 1,281 1,627 --
Paul Adams (resigned September
24 1998)..................... 126 122 5 253 210
Ron Forbes (resigned May 14
1998)........................ 24 69 1 94 164
Marcelo Gumucio (resigned June
21 1997)..................... -- -- -- -- -- -- -- 629
--- --- --- -- -- ----- ----- -----
552 793 172 6 72 2,190 3,785 1,565
=== === === == == ===== ===== =====
- - - ---------------
(a) Compensation for loss of office and non-competition covenants for Mr. Burns
and Mr. Greenfield related to payments made under existing INTERSOLV
contracts assumed in the acquisition.
(b) Benefits in kind relate to the purchase of shares for the benefit of
directors.
13
139
The following table summarises directors' remuneration, including gains realised
on exercise of share options.
1999 1998
PERIODS ENDED GBP'000 GBP'000
- - ------------- ------- -------
All directors:
Aggregate emoluments........................................ 3,779 1,559
Sums paid to third parties for directors' services.......... 6 6
Gain on exercise of share options........................... 28 889
----- -----
3,813 2,454
----- -----
Highest paid director:
Aggregate emoluments........................................ 1,627 629
Gain on exercise of share options........................... -- 889
----- -----
1,627 1,518
----- -----
Gains on exercise of share options are calculated as at the date of
exercise although the shares may have been retained.
Upon Mr. Forbes' resignation as a director, the Company entered into a
consultancy agreement with an entity with which Mr. Forbes is affiliated to
provide management consulting services to the Company for a two-year period. The
agreement provided for the sum of GBP 75,800 (exclusive of VAT) to be paid in
advance. For hours worked in excess of the minimum, payment will be made by the
Company at the rate of GBP 200 per hour.
Upon the resignation of Mr. Waters as Chief Executive Officer of the
Company on December 1, 1998, the Company entered into a settlement agreement and
release with Mr. Waters, pursuant to which the Company agreed to make a payment
of U.S. $1,300,000 to Mr. Waters. In addition the Company entered into a
consultancy agreement with Mr. Waters under the terms of which Mr. Waters will
receive $200,000 for services provided over a period of one year from the date
of his resignation.
DIRECTORS' SHAREHOLDINGS
The beneficial interests of the current directors in the share capital of
MERANT are as follows:
APRIL 30 JANUARY 31
1999 1998
-------- ----------
J Michael Gullard, Chairman.............................. 77,500 5,000
Harold Hughes............................................ 110,000 100,000
Martin Waters............................................ 10,000 --
Michel Berty............................................. 10,000 --*
Kevin Burns.............................................. 60,000 --*
Gary Greenfield , Chief Executive Officer................ 25,155 --*
------- -------
- - - ---------------
* At date of appointment in the cases of Mr. Berty, Mr. Burns and Mr. Greenfield
The shareholdings quoted above have been restated to give effect to the
sub-division of the Company's ordinary shares, which took effect on March 13,
1998 (see note 25 to the financial statements on page 102). Certain of these
holdings are held in the form of ADSs. There have been no changes in these
holdings since the year end.
14
140
DIRECTORS' SHARE OPTIONS
The following table sets out the numbers of options to acquire ordinary
shares or ADSs held by each director, including the changes in holdings during
the period. The numbers and prices of the options quoted below have been
restated to give effect to the sub-division of the Company's ordinary shares.
NUMBER OF OPTIONS
OPTION ----------------------------------------------------------
DATE OF PRICE JANUARY 31 APRIL 30 LATEST
OPTION GRANT (IN GBP) 1998 (1) GRANTED EXERCISED LAPSED 1999 (2) EXERCISE DATE
----------------- -------- ---------- -------- --------- ---------- --------- --------------
J Michael Gullard.... June 2 1994 2.13 50,000 50,000 June 2 2004
June 21 1996 1.67 250,000 250,000 June 21 2006
Harold Hughes........ August 19 1992 3.00 50,000 50,000 August 19 2002
June 16 1994 2.40 10,000 10,000 June 16 2004
Martin Waters........ September 16 1997 4.20 1,187,500 (1,187,500) 0 n/a
September 16 1997 4.20 1,812,500 (1,812,500) 0 n/a
September 24,
Michel Berty......... 3.49(4) 50,415 50,415 2007
February 15,
Kevin J. Burns....... 5.02(4) 546,565 546,565 2006
Gary Greenfield...... 6.42(4) 2,819,550 2,819,550 May 1, 2008
January 4 1999 1.05 3,250,000 3,250,000 January 4 2009
- - - ---------------
(1) Or date of appointment, if later
(2) Or date of resignation, if earlier
(3) Gains on exercise of share options are calculated as at the date of exercise
although the shares may have been retained.
(4) The options held by M Berty, Mr Burns and Mr Greenfield at the date of their
appointment represent options issued to them by INTERSOLV, Inc which were
converted into options to acquire ADSs in the Company, as explained in note
24 to the financial statements. They are denominated in U.S. dollars, and
for the above disclosures have been converted to pounds sterling using the
exchange rate as at April 30, 1999 of GBP 1.00 = $1.61.
Prior to his resignation, Paul Adams exercised 8,000 options on August 7,
1998, which he had been granted in 1990 at GBP 1.084 per share. On the date of
exercise, the market price was GBP 4.62 per share, which represented a gain of
GBP 28,288. No other directors exercised any options during the period.
The market price of the shares at April 30, 1999 was GBP 1.47 and the
range during the fifteen month period was GBP 0.97 to GBP 7.18.
On behalf of the Committee
/s/ KEVIN BURNS
Kevin J. Burns
Chairman of the Executive Remuneration Committee
August 4, 1999
15
141
MERANT PLC
FINANCIAL STATEMENTS 1999
SELECTED CONSOLIDATED FINANCIAL DATA
US FORMAT
The following selected financial data should be read in conjunction with,
and is qualified in its entirety by reference to, the financial statements of
MERANT, expressed in U.S. dollars, set forth on pages 31 to 55 of this report.
THREE MONTHS
YEAR ENDED ENDED YEARS ENDED JANUARY 31,
(IN THOUSANDS OF U.S. DOLLARS -- EXCEPT PER SHARE APRIL 30, APRIL 30, -----------------------------------------
AND ADS DATA, PERCENTAGES AND EMPLOYEES) 1999 1998 1998 1997 1996 1995
- - - ------------------------------------------------- ---------- ------------ -------- -------- -------- --------
RESULTS OF OPERATIONS:
Net revenue................................. $374,202 $106,987 $362,919 $283,640 $280,097 $285,529
Income before non-recurring items........... 16,604 18,485 43,606 2,280 6,734 41,133
Non-recurring items (see note 2, below)..... (49,662) (17,292) (17,468) (37,603) (23,069) (18,265)
Income (loss) before income taxes........... (26,724) 2,344 30,073 (32,377) (11,628) 19,840
Net income (loss)........................... (28,532) 1,489 20,148 (35,856) (14,867) 7,467
Net income (loss) per share (note 3, below):
Basic................................... (0.20) 0.01 0.15 (0.27) (0.11) 0.06
Diluted................................. (0.20) 0.01 0.14 (0.27) (0.11) 0.06
Basic -- per ADS........................ (1.00) 0.05 0.73 (1.35) (0.57) 0.29
Diluted -- per ADS...................... (1.00) 0.05 0.70 (1.35) (0.57) 0.29
Weighted average number of shares outstanding, in
thousands
Basic................................... 143,130 137,823 137,351 133,002 130,602 130,893
Diluted................................. 143,130 145,618 144,326 133,002 130,602 130,893
Basic -- ADS equivalent................. 28,626 27,565 27,470 26,600 26,120 26,179
Diluted -- ADS equivalent............... 28,626 29,124 28,865 26,600 26,120 26,179
FINANCIAL POSITION AT END OF PERIOD:
Cash and short-term investments............. 121,384 126,907 118,572 95,876 92,077 121,171
Total assets................................ 323,082 333,715 333,074 257,887 272,523 302,521
Long term obligations....................... -- 648 612 1,314 3,018 1,367
Shareholders' equity........................ 152,211 179,442 172,073 123,493 157,109 175,868
FINANCIAL CONDITION:
Working capital............................. $ 89,619 $101,727 $ 94,230 $ 62,421 $ 69,005 $102,961
Current ratio............................... 1.57 1.64 1.64 1.52 1.71 2.09
Return on net revenue: excluding non-recurring
items..................................... -7.6% 12.2% 9.5% n/m -0.2% 6.9%
Return on average equity: excluding non-
recurring items (annualized).............. n/m 29.1% 23.3% n/m 0.4% 11.0%
EMPLOYEE INFORMATION:
Average number of employees................. 2,014 1,970 1,852 1,711 1,667 1,559
Number of employees at end of period........ 2,018 1,963 1,900 1,698 1,708 1,618
Net revenue per employee (annualized)....... $ 186 $ 217 $ 196 $ 166 $ 168 $ 183
- - - ---------------
n/m not a meaningful number.
NOTES:
1. Data for all periods presented has been restated to include business
combinations which have been accounted for using the pooling-of-interests
method (see note 2 to the consolidated financial statements on page 40).
2. Details of the non-recurring items are set out in note 5 to the consolidated
financial statements on page 44.
3. For years through January 31, 1998, annual amounts reflect the financial data
of INTERSOLV, Inc on an April 30 year. Financial data for the three months
ended April 30, 1998 are included in both the "Three months ended April 30,
1998" and the year ended January 31, 1998.
4. Shares and per-share data for all periods presented have been restated to
comply with SFAS 128 "Earnings per share" and to reflect the 5-for-1 stock
split of the Company's ordinary shares, which was effective as of the close
of business on March 13, 1998 (see note 14 to the consolidated financial
statements on page 54). Each American Depositary Share represents five
ordinary shares.
16
142
MERANT PLC
FINANCIAL STATEMENTS 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION US FORMAT
The following discussion should be read in conjunction with the financial
statements of MERANT plc and its subsidiaries ("MERANT" or "the Company") in
U.S. dollars, on pages 31 to 55.
This discussion contains certain "forward-looking statements" (as such term
is defined in Section 27A of the U.S. Securities Act of 1933, as amended). Such
statements involve a number of risks, uncertainties and other factors that could
cause actual results to differ materially from those indicated by the forward
looking statements as a result of the factors set forth below under the section
"Risk factors that may influence future operating results."
Effective February 16, 1999, the Company changed its corporate name from
"Micro Focus Group Plc" to "MERANT plc".
Effective November 30, 1998, the Company elected to change its fiscal year
end and accounting reference date to April 30 from January 31. The Company is
therefore reporting results for the fiscal year ended April 30, 1999 ("fiscal
1999"). References to fiscal 1998 and fiscal 1997 are to the years ended January
31, 1998 and January 31, 1997, respectively. This report also discloses results
for the three-month fiscal period ended April 30, 1998 (referred to as "the 1998
transition period"), which were the basis of a Transition Report filed with the
SEC on Form 20-F.
RESULTS OF OPERATIONS
On September 24, 1998, the Company merged with INTERSOLV, Inc in a
transaction accounted for using the pooling-of-interests method. Accordingly the
Company's financial statements for all periods prior to the merger have been
restated to reflect the merger. The consolidated financial statements at January
31, 1998, and for the years ended January 31, 1998 and 1997, have been restated
to include the financial results of INTERSOLV, Inc at April 30, 1998, and for
the years ended April 30, 1998 and 1997, respectively. Also during fiscal 1999,
the Company acquired two of its foreign distributors in transactions accounted
for as purchases. For further information on these transactions, see the
sections entitled "Business combinations" on pages 22 to 23.
MERANT reported a net loss for fiscal 1999 of $28.5 million or $1.00 per
American Depositary Share ("ADS") as compared to net income of $1.5 million or
$0.05 per ADS diluted in the 1998 transition period, net income of $20.1 million
or $0.70 per ADS diluted in fiscal 1998 and a net loss of $35.9 million or $1.35
per ADS in fiscal 1997. These results include non-recurring charges of $49.7
million, $17.3 million, $17.5 million and $37.6 million in 1999, the 1998
transition period, 1998 and 1997, respectively.
The table below sets forth results of operations as a percentage of net
revenue for fiscal 1999, the 1998 transition period and fiscal 1998 and 1997 and
also shows the percentage change between the three fiscal years.
PERCENTAGE OF NET REVENUE YEAR TO YEAR
--------------------------------------------------- PERCENTAGE CHANGE
THREE MONTHS YEAR ENDED YEAR ENDED -------------------------
YEAR ENDED ENDED JANUARY JANUARY FISCAL 1998 FISCAL 1997
APRIL 30, APRIL 30, 31, 31, TO TO
1999 1998 1998 1997 FISCAL 1999 FISCAL 1998
---------- ------------ ---------- ---------- ----------- -----------
NET REVENUE
Product revenue............. 52% 57% 55% 57% -3% 22%
Maintenance revenue......... 26% 23% 24% 27% 12% 17%
Service revenue............. 22% 20% 21% 16% 8% 67%
---- ---- ---- ---- ----- -----
TOTAL NET REVENUE........ 100% 100% 100% 100% 3% 28%
---- ---- ---- ---- ----- -----
17
143
PERCENTAGE OF NET REVENUE YEAR TO YEAR
--------------------------------------------------- PERCENTAGE CHANGE
THREE MONTHS YEAR ENDED YEAR ENDED -------------------------
YEAR ENDED ENDED JANUARY JANUARY FISCAL 1998 FISCAL 1997
APRIL 30, APRIL 30, 31, 31, TO TO
1999 1998 1998 1997 FISCAL 1999 FISCAL 1998
---------- ------------ ---------- ---------- ----------- -----------
COST OF REVENUE
Cost of product revenue..... 4% 3% 4% 4% 9% 8%
Cost of maintenance
revenue.................. 7% 5% 6% 8% 20% -11%
Cost of service revenue..... 18% 17% 17% 11% 9% 97%
---- ---- ---- ---- ----- -----
TOTAL COST OF REVENUE.... 29% 25% 27% 24% 11% 43%
---- ---- ---- ---- ----- -----
Gross profit.................. 71% 75% 73% 76% 0% 23%
---- ---- ---- ---- ----- -----
OPERATING EXPENSES
Research and development.... 16% 14% 17% 23% -2% -5%
Sales and marketing......... 42% 37% 37% 45% 16% 6%
General and
administrative........... 9% 7% 7% 8% 27% 18%
Non-recurring charges....... 13% 16% 5% 13% 184% -54%
---- ---- ---- ---- ----- -----
TOTAL OPERATING
EXPENSES............... 80% 74% 66% 89% 25% -4%
---- ---- ---- ---- ----- -----
(LOSS) INCOME FROM
OPERATIONS.................. -9% 1% 7% -12% -226% -174%
Interest income, net.......... 2% 1% 1% 1% 61% 34%
---- ---- ---- ---- ----- -----
(LOSS) INCOME BEFORE INCOME
TAXES....................... -7% 2% 8% -11% -189% -193%
Income taxes.................. -1% -1% -3% -1% -82% 185%
---- ---- ---- ---- ----- -----
NET (LOSS) INCOME............. -8% 1% 6% -13% -242% -156%
---- ---- ---- ---- ----- -----
Net revenue
The Company's products are generally licensed to end users pursuant to
license agreements.
The Company also offers its customers a broad range of services, including
maintenance, support, training and consulting. Maintenance services consist
primarily of enhancements and upgrades to products as well as telephone support
concerning the use of the Company's products. Training and consulting services
are focused on assisting customers in using the Company's products along with
assisting customers in application development needs.
The Company's product and service offerings are focused in four primary
solution areas: Application Development Management ("ADM", or MERANT PVCS
series), Enterprise Data Connectivity ("EDC", or MERANT DataDirect series),
Application Creation and Transformation ("ACT", or MERANT Micro Focus series)
and Enterprise Consulting Solutions ("ECS", or MERANT Consulting). These four
solution areas are collectively referred to as the Company's key products or
solution areas.
Revenue by Solution Area
Total net revenue for fiscal 1999 was $374.2 million, which is a 3%
increase over fiscal 1998.
ACT and ADM revenues grew due to increased license and service fee
revenues, reflecting continuing increased demand for these products. ECS revenue
growth was constant reflecting increased competition for products and services
to support Year 2000 renewal projects. These increases were partially offset by
a decrease in revenues for EDC, which declined 5% primarily due to decreased
revenue in the Asia-Pacific area caused by a downturn in the general business
climate partially offset by revenue increases in other geographic areas.
Total revenue for fiscal 1998 was $362.9 million, which was a 28% increase
over fiscal 1997. Growth was driven by increased revenue for ACT and ADM, which
grew 26% and 32%, respectively. Revenues for these solution areas grew due to
increased license and service fee revenue, reflecting increased demand for these
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products. The increase in ACT in fiscal 1998 reflected initial worldwide sales
of the Company's Softfactory 2000 and NetExpress products, increased UNIX
product sales and revenue from consulting. ECS also grew rapidly, due to
increased demand for transformation services focused on Year 2000 remediation.
Product revenue
Product revenue decreased by $5.6 million or 3% to $193.1 million in fiscal
1999 relative to fiscal 1998, having previously increased by $36.4 million or
22% to $198.8 million in fiscal 1998 relative to 1997. The decrease in revenue
in 1999 was primarily due to the weakness in North American revenue caused by a
decrease in the demand for the Company's Year 2000 products, along with
integration issues related to the INTERSOLV acquisition. The Company's North
American Year 2000 business continued to be affected by declining market prices
and declining demand for inventory and remediation product and services
offerings. The decrease in ACT product revenue was somewhat offset by the
increase in ADM product revenue.
The increase in revenue in 1998 reflected higher sales of ACT's Year 2000
and ADM products. EDC product revenue was down slightly, due to lower revenues
in the Asia-Pacific area, and the Company exited from certain non-strategic
areas.
Maintenance revenue
Maintenance revenue increased by $10.8 million or 12% to $98.9 million in
fiscal 1999 relative to fiscal 1998, and by $12.5 million or 17% to $88.0
million in fiscal 1998 relative to 1997. The increases in fiscal 1999 and 1998
resulted from a combination of growth in the installed customer base and renewal
of existing maintenance contracts for all key products.
Service revenue
Service revenue increased by $6.1 million or 8% to $82.2 million in fiscal
1999 relative to fiscal 1998, and by $30.4 million or 67% to $76.1 million in
fiscal 1998 relative to 1997. Higher demand for consulting and training services
in all solution areas in 1999 more than offset the decrease experienced in Year
2000 transformation projects. The increase in 1998 resulted mainly from
increased demand for Year 2000 renewal services and the acquisition of the
consulting organization of Millennium UK Limited.
North American revenue
In fiscal 1999, North America revenue declined 5% to $223.0 million. In
fiscal 1998 North American revenue increased 30% to $235.5 million. In fiscal
1999, the Company experienced a decline for ACT products. In fiscal 1998 the
Company had experienced growth in all key solution areas.
International revenue
In fiscal 1999, international revenue was $151.2 million or 20% greater
than fiscal 1998. The increase reflects growth within European markets including
the acquisition of certain distributors.
Cost of revenue
Cost of product revenue is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media and printing of manuals), packaging and distribution costs, and
royalties to third party software developers for the licensing of certain add-on
software products. Such costs increased by $1.1 million or 9% to $14.4 million
in fiscal 1999 relative to fiscal 1998, and by $1.0 million or 8% to $13.3
million in fiscal 1998 relative to 1997 and represented 7%, 7% and 8% of product
revenue in fiscal years 1999, 1998 and 1997, respectively.
Cost of maintenance revenue is comprised principally of compensation for
technical support personnel. Such costs increased by 20% to $24.4 million in
fiscal 1999 relative to fiscal 1998, having previously decreased by 11% to $20.5
million in fiscal 1998. Cost of maintenance revenue represented 25%, 23% and 30%
of maintenance revenue in fiscal years 1999, 1998 and 1997, respectively. The
cost increases in 1999 reflect the
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growth in maintenance revenue as well as the addition of personnel to the
telephone support functions, to support the growing customer base. The cost
decreases in fiscal 1998 were the result of lower costs resulting from the
restructuring of operations in 1997.
Cost of service revenue is comprised principally of compensation and
expenses of training and consulting personnel. Such costs increased by $5.7
million or 9% to $68.1 million in fiscal 1999 relative to fiscal 1998, and by
$30.7 million or 97% to $62.4 million in fiscal 1998 relative to 1997, and
represented 83%, 82% and 69% of service revenue in fiscal years 1999, 1998 and
1997, respectively. The increases in amount and as a percentage of revenue
during this three year period were primarily the result of increased investment
in personnel needed to support the growing demand for consulting and training
services in all solution areas. The acquisition of Millennium U.K. Limited, a
consulting organization, also contributed to the increase.
Research and development
Research and development costs consist principally of compensation for
software developers and related costs incurred, after adjusting for the
proportion of such costs capitalized (in accordance with Statement of Financial
Accounting Standard No. 86) and the amortization of previously capitalized
software costs. Research and development spending supports the development and
enhancement of new and existing products and is consistent with the Company's
strategy of investing heavily to improve and expand its product lines.
Expenditure on internal software research and development decreased by $2.6
million or 5% to $53.6 million in fiscal 1999 relative to fiscal 1998, and by
$4.5 million or 7% to $56.2 million in fiscal 1998 relative to fiscal 1997 and
represented 14%, 15% and 21% of net revenue in fiscal years 1999, 1998 and 1997,
respectively. The decreases in research and development expenditure in fiscal
1998 reflect a lower relative cost structure following the restructuring of
operations in 1997.
In fiscal 1999, 1998 and 1997, $8.5 million, $10.3 million, and $17.7
million, representing 16%, 18% and 29%, respectively, of these costs, were
capitalized as software product assets, and will be amortized over their
estimated economic lives of three or four years. Amortization in fiscal 1999,
1998 and 1997, excluding non-recurring items, amounted to $14.8 million, $14.9
million, and $21.4 million, resulting in a net charge to research and
development costs in those years of $6.2 million, $4.6 million, and $3.7
million, respectively.
The Company believes that ongoing development of new products and features
is required to maintain and enhance its competitive position. Accordingly, while
the Company will continue to control expenses where possible, the Company
anticipates that aggregate research and development expenses will increase over
time, and may not be directly related to the level of net revenue realized in
future quarters.
Sales and marketing
Sales and marketing costs include compensation, travel and facility costs
for sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows. Such costs increased by $21.0 million or 16% to
$155.7 million in fiscal 1999 relative to fiscal 1998, and by $8.0 million or 6%
to $134.7 million in fiscal 1998 relative to 1997, and represented 42%, 37% and
45% of net revenue in fiscal years 1999, 1998 and 1997, respectively. The
increase in sales and marketing costs in fiscal 1999 and 1998 reflected sales
force expansion, higher commissions and higher advertising and marketing costs,
including those associated with the new corporate name and product launches. The
increase in costs as percentage of revenue in fiscal 1999 was the result of
lower than expected revenue in the North American market relative to our
investment in the sales and marketing organizations. The decrease in costs as a
percentage of revenue in fiscal 1998 was the result of the Company's ability to
effectively focus its sales and marketing efforts on its primary solution areas
combined with savings realized in certain non-strategic areas.
The Company believes that continued investments in sales, marketing,
customer support and promotional activities are essential to maintaining its
competitive position. The Company is expanding its sales and support staffs and,
accordingly, anticipates that sales and marketing expenses will be higher in
future periods, but decrease from fiscal 1999 levels as a percentage of net
revenue.
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General and administrative
General and administrative costs include the Company's group management,
finance, legal and human resources operations. Such costs increased by $7.4
million or 27% to $35.2 million in fiscal 1999 relative to fiscal 1998, and by
$4.3 million or 18% to $27.7 million in fiscal 1998 relative to 1997, and
represented 9%, 7% and 8% of revenue in fiscal years 1999, 1998 and 1997,
respectively. The increase in 1999 was due to higher costs resulting from the
merger of INTERSOLV along with continued investment in infrastructure and
systems and higher goodwill amortization from acquisitions accounted for under
purchase accounting. Fiscal 1998 costs increased to support our rapidly
expanding business along with additional goodwill charges resulting from recent
acquisitions.
The Company anticipates that general and administrative expenses will
increase in future quarters, but decrease as a percentage of net revenue.
Non-recurring charges
The Company has recorded non-recurring charges of $49.7 million, $17.5
million and $37.6 million in fiscal 1999, 1998 and 1997, respectively.
In the second quarter of fiscal 1999, the Company recorded a charge of
$49.7 million in respect of the merger with INTERSOLV, and the subsequent
restructuring of the combined businesses. Aggregate direct transaction costs of
$24.5 million represented charges for investment bankers, employee contractual
obligations, stamp duties and listing fees associated with the issuance and
listing of new shares on the London Stock Exchange and other professional fees.
In addition, a charge of $25.2 million was recorded to reflect costs associated
with integration efforts. This charge was primarily comprised of the write-off
of redundant or impaired assets and severance costs.
In fiscal 1998, the Company recognized non-recurring costs of $17.5
million, net. This charge included a $15.7 million write off of purchased
research and development costs arising from the SQL acquisition, with the
balance principally related to costs of $2.0 million which arose when INTERSOLV
exited selected non-strategic product areas.
In fiscal 1997, the Company incurred non-recurring costs of $37.6 million.
As a result of a comprehensive business strategy review of its primary market
opportunities, INTERSOLV recorded a charge of $28.9 million to write down
capitalized and purchased software and certain related intangible assets to
their net realizable values. In addition, the Company incurred costs totalling
$8.7 million in connection with a reduction in the Company's workforce of
approximately 95 people, facility closures and consolidations, and asset
write-downs.
Interest income
Interest earned on cash short-term investments, net of interest expense,
increased by $2.4 million or 61% to $6.3 million in fiscal 1999 relative to
fiscal 1998, and by $1.0 million or 34% to $3.9 million in fiscal 1998 relative
to 1997. The increases in fiscal 1999 and 1998 represented the impact of higher
cash balances.
The Company has a hedging program to minimize foreign exchange gains or
losses, where possible, from recorded foreign-currency denominated assets and
liabilities. This program involves the use of borrowings and forward foreign
exchange contracts in certain European currencies, including the euro. The
Company does not hedge anticipated foreign currency revenues and expenses not
yet incurred.
Income taxes
The Company's reported tax rates in fiscal 1999, 1998 and 1997 were -7%,
33% and -11%, respectively, which compare to U.K. statutory rates applicable to
the Company of 31%, 31% and 33%, respectively.
The tax rate in both 1999 and 1997 was significantly affected by
non-recurring charges, certain of which were not deductible for tax purposes.
The differences between the reported tax rates and the U.K. statutory rates
principally reflect the impact of permanent differences between accounting
profits and taxable profits,
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primarily the difference in the treatment of amortisation of goodwill. The
Company's tax rate is also affected by the distribution of taxable profits and
losses among the tax jurisdictions in which the Company operates.
An analysis of the charge for income taxes, including an analysis of
differences between the effective rate and the U.K. statutory rates, is given in
note 11 to the consolidated financial statements on page 47.
The income tax returns of certain of the Company's U.S. subsidiaries for
fiscal years ended January 31, 1993 through 1997 are under examination by the
Internal Revenue Service, which has proposed increases to the amount of U.S.
income taxes due in respect of those fiscal years. Any adjustments that may
result from this examination are not expected to have a material adverse impact
on the Company's consolidated operating results or its financial position.
Business combinations
During fiscal 1999, MERANT completed three acquisitions.
On May 15, 1998, the company acquired all of the outstanding stock of its
Italian distributor, Micro Focus Italia, s.r.l., for total consideration of
approximately $4.6 million. On August 13, 1998, the Company acquired all of the
outstanding stock of its Australian distributor, Advanced Software Engineering
Pty Ltd., for total consideration of approximately $2.5 million. These
transactions have been accounted for using the purchase method. Accordingly, the
excess of the purchase price over the respective estimated fair value of the net
tangible assets of each company, which amounted to $7.3 million in the
aggregate, was allocated to goodwill, and is being amortized over its economic
life which is estimated to be four years.
On September 24, 1998, the Company completed the merger with INTERSOLV in a
transaction accounted for using the pooling-of-interests method. Under the terms
of the agreement, each common share of INTERSOLV was exchanged for 0.55 MERANT
American Depositary Shares ("ADSs"). In addition, each outstanding option or
right to purchase or acquire shares of INTERSOLV common stock was assumed by the
Company and became an option or right to purchase or acquire MERANT ADSs, with
appropriate adjustments to the price and number of shares based on the exchange
ratio of 0.55 ADSs per INTERSOLV share. The merger was structured as a tax-free
reorganization under U.S. tax law. The Company issued approximately 12.6 million
new MERANT ADSs (representing approximately 63.1 million new MERANT ordinary
shares) in exchange for INTERSOLV's common stock and share equivalents
outstanding, which at the time of the completion of the transaction represented
approximately 46% of MERANT's share capital on a fully-diluted basis. Prior to
the merger, INTERSOLV was a Rockville, Maryland-based public corporation listed
on the Nasdaq National Market. INTERSOLV was a provider of software solutions
that facilitate the development, delivery and deployment of business information
systems. INTERSOLV's products and services were focused primarily in the areas
of application development management, enterprise data connectivity and
enterprise application renewal.
During the three-month fiscal period ended April 30, 1998, INTERSOLV
acquired all of the outstanding stock of SQL Software Ltd in exchange for
1,251,450 common shares in INTERSOLV (equivalent to 3,441,488 ordinary shares in
the Company). The transaction was accounted for using the purchase method. The
cost of the acquisition was $19.2 million, of which $15.7 million was allocated
to purchased research and development and written off on completion of the
acquisition since no technological feasibility or alternative future use could
be demonstrated. Additionally, $2.4 million was allocated to goodwill and other
intangibles, and is being amortized over its economic life which is estimated to
be five years.
In fiscal 1998, the Company made two acquisitions.
On January 20, 1998, the Company acquired all of the outstanding stock of
XDB Systems, Inc. ("XDB") in exchange for 1,891,975 ordinary shares in the
Company. XDB, a privately-held corporation based in Columbia, Maryland, was a
provider of DB2 database development, maintenance and connectivity solutions.
The combination was accounted for using the pooling-of-interests method.
Also in fiscal 1998, the Company acquired all of the outstanding stock of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, in
exchange for 745,710 ordinary shares in the Company
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and a cash payment of $3.2 million. Millennium provided consulting and project
management services and had specialized expertise in the estimating, planning
and management of Year 2000 compliance projects. The transaction was accounted
for using the purchase method. Accordingly, the excess of the purchase price
over the estimated fair value of the net tangible assets, which amounted to $6.7
million, was allocated to goodwill, and is being amortised over its economic
life, which is primarily estimated to be three years.
Further informations on these transactions is given in note 2 to the
consolidated financial statements on page 40.
Year 2000 consideration.
The Year 2000 problem is the result of the widespread practice since the
early days of computing of using only two digits to refer to a year (such as
"98" for "1998") instead of four digits in computer systems. When the Year 2000
arrives or the computer system refers to dates after December 31, 1999, such
systems will interpret the two digits "00" as "1900" as opposed to "2000".
Failure to address this problem could cause results ranging from system failures
to erroneous calculations in date-dependent operations for dates falling after
December 31, 1999. The Company has instituted various projects to become Year
2000 ready. "Year 2000 ready" as used herein means that the performance or
functionality of the Company's internal systems will not be significantly
affected by the dates prior to, during and after the Year 2000.
State of Readiness
The Company has developed and implemented an enterprise-wide plan to
analyze and address potential Year 2000 issues affecting its internal systems,
its interaction with third party vendors and suppliers, and its products and
services.
The Company has established a Year 2000 Project Team to implement a
comprehensive four-phase Year 2000 readiness plan addressing the Year 2000
readiness of the Company's internal systems. The Year 2000 readiness plan is
comprised of four phases (inventory, analysis, remediation and validation
phases). The inventory, analysis and remediation stages of the Year 2000
readiness plan have been substantially completed in all material respects with
respect to the Company's material internal systems, and the Company expects to
substantially complete the validation phase of the plan in all material respects
by August 31, 1999. The Year 2000 readiness plan covers IT systems (desktop,
laptop, servers, routers, hubs, switches, and remote access systems, operating
systems, software and critical business systems), non-IT embedded systems
(telephone, voice messaging, teleconferencing, data services and equipment, fax,
copiers and similar equipment), facilities (elevators, security systems, card
access systems and similar systems), and the Company's vendors and suppliers. As
part of the inventory phase, the Company sought confirmation from its material
suppliers on the current Year 2000 readiness of their systems and/or their
intended time schedule for achieving Year 2000 readiness. During the remainder
of calendar 1999, the Company will also be completing, reviewing and updating
its contingency and disaster recovery plans and preparing a detailed action plan
for the crossover of the Company into the next millennium.
With respect to its software products, each of the Company's product
business units have completed a Year 2000 assessment of its currently offered
products. In preparing for the Year 2000 date change, the Company has adopted
the Year 2000 compliance standard published by the British Standards Institute
(BSI) -- BSI DISC PD2000-1 "A Definition of Year 2000 Conformity Requirements."
As a result of this assessment, the Company believes that the vast majority of
its currently offered products are Year 2000 compliant, and expects virtually
all of its remaining currently offed products to become compliant during
calendar 1999 through new releases. In any event, the Company expects that all
the then current versions of its offered products will be Year 2000 compliant
before the end of calendar 1999. Because Year 2000 compliance is generally
integrated into its normal product development activities, the Company has not
incurred and does not expect to incur any significant incremental expenses in
addressing this issue in its product lines. The Company believes that a small
number of customers who receive product support from the Company are operating
product versions that may not be Year 2000 compliant or products that the
Company has replaced or intends to replace with comparable Year 2000 compliant
products. The Company believes that the vast
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majority of such customers are migrating and will continue to migrate to
compliant versions and products through new releases, which the Company is
strongly encouraging. In addition, certain former customers may be operating
non-compliant versions of products in respect of which the Company's agreed-upon
product support and warranty periods have expired. The Company has not
undertaken, and does not plan to undertake in the future, an assessment of
whether these former customers are taking appropriate steps to address any
related Year 2000 issues.
The Company does not expect customers who license or migrate to Year 2000
compliant versions of its products to experience any material Year 2000 failures
caused by such products. In addition, the Company believes that its licenses and
other agreements contain customary and appropriate limitations on the Company's
obligations with respect to any Year 2000 failures that may be caused by its
current or former products. However, there can be no assurance that the
Company's expectations and beliefs as to these matters will prove to be
accurate. Moreover, the Company's products are used in IT systems containing
third-party hardware and software, some of which may not be Year 2000 compliant.
Many of the Company's customers use legacy computer systems that are expected to
be particularly susceptible to Year 2000 compliance issues. Various commentators
have predicted that a significant amount of litigation may arise out of Year
2000 compliance issues. While the Company has not been subject to any Year 2000
product claims or lawsuits to date, there can be no assurance that customers or
former customers will not bring claims or lawsuits against the Company seeking
compensation for losses associated with Year 2000-related failures. A material
adverse outcome in a Year 2000 claim or lawsuit could have a material adverse
effect on the Company's business, financial condition and results of operations.
A small number of the products the Company sells are licensed from third
parties. Although the current versions of these products have generally been
warranted to the Company as being Year 2000 compliant, these products have
generally not been subjected to the same extensive Company testing as those
products developed or acquired by the Company. The Company is therefore working
with these third party suppliers to obtain assurance of Year 2000 compliance.
The Company has designated its website as the Company's "Year 2000 Internet
Website" under the terms of the Year 2000 Information and Readiness Disclosure
Act (the "Act") (S.2392). The information provided on past and present pages on
this website regarding the Year 2000 compliance of Company products has been
designated as "Year 2000 Readiness Disclosures." The pages on this website have
been and will continue to be the Company's primary means for communicating to
customers regarding the Year 2000 compliance of its products.
Demand for Year 2000 Remediation Products and Services
The Company anticipates that demand in the Year 2000 product and service
market will decline, perhaps rapidly, in anticipation of or following the Year
2000, and the demand for the Company's Year 2000 compliance products and
services may also decline significantly as a result of new technologies,
competition or other factors. In the quarter ended October 31, 1998, the
Company's Year 2000 business was affected by customers moving to the later
stages of their remediation processes, for which the Company did not have the
appropriate products generally available until November, 1998. If these factors
were to continue, the Company's license revenue and professional service fees
could be materially and adversely affected.
Costs and Risks Associated with Year 2000 Issues; Contingency Plans
The Company currently does not anticipate that it will incur material
operating expenses or be required to invest heavily in internal systems
improvements as a result of Year 2000 readiness issues. In addition, the Company
has not incurred and does not currently expect to incur any significant
incremental expenses in addressing this issue in its product and services. Total
expenditures, excluding personnel costs of existing staff, related to the Year
2000 readiness of the Company's internal systems is not expected to be material.
However, there can be no assurance that the Company will not experience
significant additional expenses for unforeseen Year 2000 issues, including those
out of the reasonable control of the Company.
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Although the Company believes that its Year 2000 readiness efforts are
designed to appropriately identify and address those Year 2000 issues that are
within the Company's control, there can be no assurance that the Company's
efforts will be fully effective or that Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition or
results of operations. The novelty and complexity of the issues presented and
the Company's dependence on the preparedness of third parties are among the
factors that could cause the Company's efforts to be less than fully effective.
Moreover, Year 2000 issues present many risks that are simply beyond the
Company's control, such as the potential effects of Year 2000 issues on the
economy in general and on the Company's business partners and customers in
particular. The Company intends to continue to evaluate both existing and newly
identified Year 2000 risks and to develop and implement such further responsive
measures as it deems appropriate.
The Company is developing a contingency plan and a disaster recovery plan,
as well as an action plan for the crossover of the Company into the next
millennium. Such plans seek to minimize the impact of the Year 2000 problem on
the Company's business, financial condition and results of operations. During
the remainder of calendar 1999, the Company will be reviewing and updating such
plans.
Euro considerations
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the euro as their legal currency. Beginning on such 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, the Company's internal systems have the ability to price and invoice
customers in the euro. The Company is also engaging in foreign exchange and
hedging activities in the euro. The Company will continue to modify the internal
systems that will be affected by this conversion during fiscal 2000, and does
not expect the costs of further system modifications to be material. There can
be no assurance, however, that the Company will be able to complete such
modifications to comply with euro requirements, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company will continue to evaluate the impact of the introduction
of the euro on its foreign exchange and hedging activities, functional currency
designations, and pricing strategies in the new economic environment. In
addition, the Company faces risks to the extent that banks and vendors upon whom
the Company relies and their suppliers are unable to make appropriate
modifications to support the Company's operations with respect to euro
transactions. While the Company will continue to evaluate the impact of the
euro, management does not believe its introduction will have a material adverse
effect upon the Company's business, financial condition or results of
operations.
Risk Factors that may influence future operating results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. This section of
the discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
The factors set forth below as well as statements made elsewhere in the
Company's Annual Report contain certain forward-looking statements that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
Company's actual results, performance or achievements in the remainder of fiscal
2000 and beyond could differ materially from those expressed in, or implied by,
any such forward-looking statements.
Factors that could cause or contribute to such material differences
include, but are not limited to, those discussed in this section below, as well
as those discussed elsewhere in the Company's Annual Report and these financial
statements. The Company undertakes no obligation to release publicly any updates
or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of the Company's Annual Report. For more
information regarding forward-looking statements, see Further Information for
Shareholders -- Special Note on Forward-Looking Statements on page 106 of this
Report.
Year 2000 Spending Policies. Many of our customers and potential customers
could potentially implement policies that prohibit or strongly discourage making
changes or additions to their internal computer
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systems until after January 1, 2000. If companies implement such a policy, we
could experience lower revenues if potential customers who might otherwise
purchase our products or services delay purchases until after January 1, 2000 in
an effort to stabilize their internal computer systems in order to cope with the
Year 2000 problem or because their information technology budgets have been
diverted to address Year 2000 issues. If our potential customers delay
purchasing our products and services in preparation for Year 2000 problem, our
business could be seriously harmed.
Integration of INTERSOLV; Synergies. In September 1998, the Company
acquired all the share capital of INTERSOLV. The Company acquired INTERSOLV with
the expectation that the acquisition will result in long-term strategic
benefits. Realization of these anticipated benefits depends in part on whether
the operations and administration of the companies are fully integrated in an
efficient and effective manner. There can be no assurance that this will occur.
The combined company's integration efforts have yet to be fully completed and
are still ongoing. The successful integration of MERANT and INTERSOLV will
require, among other things, integration of the product offerings of the
companies, sales and marketing and research and development efforts, the
cooperation and coordination of the business managers of the two companies, and
the integration of globally dispersed operations. It is possible that this
integration will not be accomplished smoothly or successfully, and that efforts
to achieve integration may require more time, expense and management attention
than anticipated. The diversion of management's attention from day-to-day
operations and any difficulties encountered in the integration process could
have a material adverse effect on the Company's business, financial condition
and results of operations. If the integration of the Company's and INTERSOLV's
operations is not successful, if the combined companies do not achieve the
operational efficiencies and other business synergies that are anticipated or if
those synergies are not achieved as quickly as may be expected by financial
analysts or at the level expected by financial analysts, or if the effect of the
merger on earnings per share is not in line with the expectation of financial
analysts, the market price of the MERANT ordinary shares or the MERANT ADSs
could be significantly and adversely affected.
Fluctuations in Operating Results; Absence of Significant Backlog. The
Company's future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders and the lengthy sales cycle,
product life cycles, the ability of the Company to introduce and market new and
enhanced versions of the Company's products on a timely basis, the introduction
and acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of new or enhanced
products or technologies, the timing of product introductions or enhancements by
the Company or its competitors, technological changes in the software industry,
changes in the mix of distribution channels through which the Company's 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 the Company's level of
operating expenses, changes in the Company's sales incentive plans, 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.
A relatively high percentage of the Company's operating expenses is fixed
over the short term and if anticipated revenue for a fiscal quarter does not
occur or is delayed, the operating results for that quarter will be immediately
and adversely affected. The Company historically has operated with little
product backlog, because its products are generally shipped as orders are
received. As a result, revenue of the Company in any quarter will depend on the
volume and timing of, and the ability to fill, orders received in that quarter.
In addition, a substantial portion of the Company's revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter.
Seasonality of Operating Results. The Company's 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, the
Company has historically experienced lower revenue for the first quarter of a
fiscal year than in the fourth quarter of the prior fiscal year. The Company
typically has recognized a high proportion of its quarterly revenue during the
last month of a fiscal quarter and significant fluctuations in new order revenue
26
152
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 the Company's expenses do not vary with revenue.
Due to all of the foregoing factors, it is possible that in some future quarters
the Company's operating results will be below the expectations of stock market
analysts and investors and that the Company's share price would likely be
materially adversely affected.
Product Concentration. A large portion of the Company's total net revenue
is derived from products and related services for mainframe application
development in the COBOL language and COBOL compilers running on workstations
and personal computers. The Company expects that a substantial portion of its
total net revenue will be derived from such products and services in the future.
As a result, the Company's future operating results depend upon continued market
acceptance and use of the COBOL language. Any decline in the demand for or
market acceptance or use of the COBOL language or mainframes as a result of
competition, technological change or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Year 2000 Business and Compliance Issues. Information concerning the
Company's state of Year 2000 readiness, the demand for its Year 2000 remediation
products and services, the costs associated with its Year 2000 issues and its
contingency plans, and the Company's state of euro readiness is incorporated
herein by reference to the information included above in this Annual Report
Detail under the captions entitled "Year 2000 considerations" and "Euro
considerations" in the "Management's Discussion and Analysis of Results of
Operations and Financial Condition" section.
Rapid Technological Change; Dependence on New Products. The Company is in
a market that is subject to rapid technological change. The Company must
continually adapt to that change by improving its products and introducing new
products, technologies and services. The growth and financial performance of the
Company will depend in part on its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market enhancements of existing products and new products depends in part on
its ability to attract and retain qualified employees. In the past, the Company
has experienced delays and increased expenses in developing certain new
products. Any failure by the Company to anticipate or respond adequately to
changes in technology and market conditions, to complete product development and
introduce new products on a timely basis and with an adequate level of
performance and functionality, or to attract and retain qualified employees,
could materially adversely affect the Company's business, financial condition
and results of operations.
Competition. The markets in which the Company competes are characterized
by rapid technological change and aggressive competition. The Company expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets with similar
or substitute solutions that may be less costly or provide better performance or
functionality than the Company's products. Some of the Company's current and
prospective competitors in its product and service markets have greater
financial, marketing or technical resources than the Company 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 can the Company. There can be
no assurance that other companies will not 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 possessing
technological, marketing or other competitive advantages may emerge and rapidly
acquire market share. Furthermore, there can be no assurance that the Company
will be able to compete effectively in the future in the professional services
market.
Susceptibility to General Economic Conditions. The Company's revenue and
results of operations are subject to fluctuations in the general economic
conditions in the various areas of the world in which it does business. The
risks inherent in conducting international business generally include exposure
to exchange rate fluctuations (see the section entitled "Exchange rate
fluctuations" below), 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, and the burdens of complying with a wide variety of foreign laws. In
27
153
addition, the laws of certain foreign countries in which the Company's products
may be marketed may not protect the Company's intellectual property rights to
the same extent, as do the laws of the United States and Europe.
There can be no assurance that the factors described above will not have an
adverse effect on the Company's future international revenue
Dependence on Key Personnel. Several of the senior management personnel of
the Company are relatively new to the Company, including the Company's Chief
Executive Officer and Chief Financial Officer, and the Company's 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 there can be no assurance that the Company will be able to attract
and retain a sufficient number of qualified personnel to conduct its business in
the future. The Company's success depends to a significant degree upon the
continued contributions of its key management, marketing, product development,
professional services and operational personnel, including key personnel of
acquired companies. The Company will not have employment agreements with most of
its key personnel, nor does it maintain key person life insurance on any of
these persons.
Management of Growth. Both the Company and INTERSOLV have recently
experienced a period of rapid growth in net revenue. This growth has placed a
significant strain on the financial, management, operational and other resources
of the combined companies, and if it continues is expected to continue to place
a significant strain on the Company's financial, management, operational and
other resources. There can be no assurance that the Company's management
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations.
Volatility of Stock Price. The market price of the Company's securities
has experienced significant price volatility, particularly since the
announcement of the Company's proposed acquisition of INTERSOLV in June 1998,
and such volatility may occur in the future. Factors such as actual or
anticipated fluctuations in the Company's operating results, changes in
financial estimates by securities analysts, announcements of technological
innovations, new products or new contracts by the Company or its 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, general market
conditions and other factors may have a significant impact on the market price
of the Company's securities. 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 adversely affect the
market price of the Company's securities.
Recent and Future Acquisitions. The challenges of integrating the
organizations and operations of the Company and INTERSOLV have been compounded
by ongoing efforts associated with the integration of recent acquisitions by
both companies, including the acquisitions by the Company of Millennium UK
Limited in April 1997, XDB Systems, Inc. in January 1998, Micro Focus Italia
S.r.L. in May 1998 and Advanced Software Engineering Pty. Ltd. in August 1998
and the acquisition by INTERSOLV of SQL Software, Ltd. in March 1998. The
Company also acquired Essential Software, Inc. (dba The Marathon Group) in
August 1999. The Company is still in the process of integrating the operations
acquired in these transactions with its own. There can be no assurance that the
anticipated benefits of recently concluded business combinations will be
realized. In addition, these acquisitions have required significant additional
management resources and attention. The Company expects to continue growing its
business through acquisitions. If the Company is unsuccessful in integrating and
managing the recently acquired businesses or other businesses it may acquire in
the future, the Company's business, financial condition and results of
operations could be adversely affected in future periods.
Enforceability of U.S. Judgments. The Company is a public limited company
organized under the laws of England and Wales. Judgments of U.S. courts,
including judgments against the Company, predicated on the civil liability
provisions of the federal securities laws of the United States, may not be
enforceable in English courts.
28
154
Exchange rate fluctuations
MERANT prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates.
Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of the Company's net revenue arises in U.S. dollars
(approximately 60% in 1999), whereas its costs are incurred approximately
equally in U.S. dollars and other currencies, predominately 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 the Company's
operating results, notably when expressed in G.B. pounds.
In 1999, 1998 and 1997, fluctuations between the U.S. dollar and the G.B.
pound have not been significant, and net exchange rate gains or losses on
operational transactions have been immaterial.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, operating activities generated $18.3 million in cash.
Investing activities used $16.4 million, primarily due to investment of $8.5
million in capitalized and purchased software and $6.4 million in fixed assets.
Financing activities in the form of share option exercises and purchases
under the employee stock purchase plan generated $1.9 million which offset the
$3.1 million net repayment of various debt obligations. Overall cash increased
$0.1 million.
In fiscal 1998, operating activities generated $44.1 million in cash, after
spending $3.5 million for various acquisition-related costs. Investing
activities used $62.3 million, as the Company invested $10.3 million in
capitalized and purchased software and $18.3 million in fixed assets. Financing
activities in the form of share option exercises and purchases under the
employee stock purchase plan generated $11.0 million which partially offset the
$3.5 million net repayment of various debt obligations. Overall cash decreased
$11.0 million.
In fiscal 1997, operating activities generated $26.5 million in cash, after
spending $3.2 million for various acquisition-related costs.
Investing activities used $27.3 million, as the Company invested $17.7
million in capitalized and purchased software and $11.0 million, net, in fixed
assets. Financing activities in the form of share option exercises and
repurchases of Company's common stock, net, generated $1.3 million. In addition
borrowings under the line of credit increased $6.4 million. Overall cash
increased $5.6 million.
At April 30, 1999 the Company had cash and short-term investments amounting
to $121.4 million. (1998: $126.9 million).
The Company has in place a line of credit under the terms of which
unsecured financing of up to $8.0 million is available until January 2001. At
April 30, 1999, borrowings totalling $2.7 million had been made against this
line of credit compared to $1.7 million at the end of fiscal 1998 (1998: $1.7
million).
MERANT believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid money
market investments. The Company's investment policy is designed to minimize risk
while maximizing return on cash given such levels of risk, and to keep
uninvested cash at a minimum. Cash management is centralized, although some cash
is held at various subsidiaries around the world to meet local operating
requirements.
The Company believes that existing cash balances in combination with
internally generated funds and its available bank line of credit will be more
than sufficient to meet cash requirements in fiscal 2000.
29
155
MARKET RISK
The Company is exposed to financial market risks, including interest rates
and foreign currency exchange rates. The Company does not use derivative
financial instruments for speculative or trading purposes.
The primary objective of the Company's investment policy is to preserve
principal while maximising yield without significantly increasing risk. At April
30, 1999, the fair value of the Company's financial instruments with exposure to
interest rate risk was $35,000,000. A hypothetical 50 basis point increase in
interest rates would result in an approximate $174,000 decrease in the fair
value of the Company's securities. This sensitivity analysis is performed on the
Company's financial positions at April 30, 1999. Actual results may differ
materially from this analysis.
The Company 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. The Company has established a hedging program utilising
foreign currency forward contracts, which substantially have maturities of sixty
days or less, 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. No foreign currency exchange contracts were outstanding at
April 30, 1999.
30
156
MERANT PLC
FINANCIAL STATEMENTS 1999
CONSOLIDATED STATEMENTS OF OPERATIONS
US FORMAT
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND ADS DATA 1999 1998 1998 1997
- - - --------------------------------------------------- ---------- ------------ ----------- -----------
NET REVENUE
Product revenue................................. $193,144 $61,384 $198,793 $162,439
Maintenance revenue............................. 98,858 24,533 88,015 75,524
Service revenue................................. 82,200 21,070 76,111 45,677
-------- ------- -------- --------
TOTAL NET REVENUE............................ 374,202 106,987 362,919 283,640
-------- ------- -------- --------
COST OF REVENUE
Cost of product revenue......................... 14,390 3,392 13,255 12,304
Cost of maintenance revenue..................... 24,445 5,599 20,446 22,957
Cost of service revenue......................... 68,074 17,409 62,376 31,706
-------- ------- -------- --------
TOTAL COST OF REVENUE........................ 106,909 26,400 96,077 66,967
-------- ------- -------- --------
GROSS PROFIT...................................... 267,293 80,587 266,842 216,673
-------- ------- -------- --------
OPERATING EXPENSES
Research and development (note 4)............... 59,851 14,551 60,828 64,311
Sales and marketing............................. 155,680 40,137 134,671 126,642
General and administrative...................... 35,158 7,414 27,737 23,440
Non-recurring charges (note 5).................. 49,662 17,292 17,468 37,603
-------- ------- -------- --------
TOTAL OPERATING EXPENSES..................... 300,351 79,394 240,704 251,996
-------- ------- -------- --------
(LOSS) INCOME FROM OPERATIONS..................... (33,058) 1,193 26,138 (35,323)
Interest income, net.............................. 6,334 1,151 3,935 2,946
-------- ------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES................. (26,724) 2,344 30,073 (32,377)
Income taxes (note 11)............................ (1,808) (855) (9,925) (3,479)
-------- ------- -------- --------
NET (LOSS) INCOME................................. $(28,532) $ 1,489 $ 20,148 $(35,856)
-------- ------- -------- --------
Net (loss) income per share: basic (note 6)....... $ (0.20) $ 0.01 $ 0.15 $ (0.27)
Net (loss) income per ADS: basic (note 6)......... $ (1.00) $ 0.05 $ 0.73 $ (1.35)
Shares used in computing net (loss) income per
share: basic (note 6)........................... 143,130 137,823 137,351 132,327
ADSs used in computing net (loss) income per ADS:
basic (note 6).................................. 28,626 27,565 27,470 26,465
Net (loss) income per share: diluted (note 6)..... $ (0.20) $ 0.01 $ 0.14 $ (0.27)
Net (loss) income per ADS: diluted (note 6)....... $ (1.00) $ 0.05 $ 0.70 $ (1.35)
Shares used in computing net (loss) income per
share: diluted (note 6)......................... 143,130 145,618 144,326 132,327
ADSs used in computing net (loss) income per ADS:
diluted (note 6)................................ 28,626 29,124 28,865 26,465
- - - ---------------
NOTE: Share and per share data for all periods presented has been restated to
comply with SFAS 128 -- Earnings Per Share (see note 1 to the consolidated
financial statements on page 36) and to reflect the 5-for-1 stock split of
the Company's Ordinary Shares, which was effective as of the close of
business on March 13, 1998 (see note 14 to the consolidated financial
statements on page 54.) Each American Depositary Share ("ADS") represents
five Ordinary Shares.
See accompanying notes to consolidated financial statements on pages 35 to 55.
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MERANT PLC
FINANCIAL STATEMENTS 1999
CONSOLIDATED BALANCE SHEETS
US FORMAT
APRIL 30, APRIL 30,
AMOUNTS IN THOUSANDS 1999 1998
-------------------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 86,580 $ 86,459
Short-term investments.................................... 34,804 40,448
Accounts receivable, net of allowances for doubtful
accounts of $4,785 ($5,133 in 1998).................... 111,317 101,847
Prepaid expenses and other assets......................... 13,485 11,871
-------- --------
TOTAL CURRENT ASSETS................................... 246,186 240,625
-------- --------
FIXED ASSETS:
Property, plant and equipment, net (note 7)............... 46,090 52,212
Goodwill, net of amortization of $7,271 ($3,686 in
1998).................................................. 10,239 6,520
Software product assets, net of amortization of $129,060
($113,027 in 1998)..................................... 17,007 25,234
Other assets.............................................. 3,560 9,124
-------- --------
TOTAL ASSETS........................................... $323,082 $333,715
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings (note 8)....................................... $ 2,716 $ 5,137
Accounts payable.......................................... 12,150 15,170
Accrued employee compensation and commissions............. 24,352 25,860
Income taxes payable...................................... 18,325 15,583
Deferred revenue.......................................... 69,155 55,477
Other current liabilities................................. 29,869 21,670
-------- --------
TOTAL CURRENT LIABILITIES.............................. 156,567 138,897
-------- --------
Long term debt and other liabilities........................ -- 648
Deferred income taxes (note 11)............................. 14,304 14,727
-------- --------
TOTAL LIABILITIES...................................... $170,871 $154,272
-------- --------
COMMITMENTS AND CONTINGENCIES (notes 9 and 10)
SHAREHOLDERS' EQUITY:
Ordinary shares: 2 pence (G.B.) par value 212,000 shares
authorized 143,673 shares issued and outstanding
(142,012 in 1998)...................................... $ 4,691 $ 4,679
Additional paid-in capital................................ 154,868 153,171
Treasury stock (3,810 shares; 1998: 3,926 shares)......... (7,552) (7,769)
Retained earnings......................................... 8,850 37,382
Accumulated other comprehensive loss...................... (8,646) (8,020)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................. 152,211 179,443
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $323,082 $333,715
-------- --------
- - - ---------------
NOTE: Share data for all periods presented has been restated to reflect the
5-for-1 stock split of the Company's Ordinary Shares, which was effective
as of the close of business on March 13, 1998 (see note 14 to the
consolidated financial statements on page 54.) Each American Depositary
Share ("ADS") represents five Ordinary Shares.
See accompanying notes to consolidated financial statements on pages 35 to 55.
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MERANT PLC
FINANCIAL STATEMENTS 1999
CONSOLIDATED STATEMENTS OF CASH FLOW
US FORMAT
THREE MONTHS YEAR YEAR
YEAR ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
IN THOUSANDS 1999 1998 1998 1997
- - - ------------ ---------- ------------ ----------- -----------
OPERATING ACTIVITIES
NET (LOSS) INCOME........................................ $(28,532) $ 1,489 $ 20,148 $(35,856)
Adjustments to reconcile net (loss) income to cash
provided by operations
Depreciation of fixed assets........................... 12,571 4,166 12,276 14,156
Amortization of software product assets................ 14,751 3,332 14,916 21,390
Amortization of goodwill............................... 3,585 464 1,391 --
Write-down of software and intangible assets........... 2,000 -- -- 22,535
Write-down of purchased research and development....... -- 15,739 15,739 --
Gain on sale of discontinued product lines............. -- 423 423 --
Restructuring/acquisition charges...................... 4,774 (496) (496) (3,247)
Loss on sale of fixed assets........................... -- 1,780 207 504
Deferred income taxes.................................. (423) (4,426) -- 2,004
Changes in operating assets and liabilities:
Accounts receivable.................................... (4,134) 2,840 (42,287) 878
Prepaid expenses and other assets...................... (1,614) (1,500) (942) 3,987
Accounts payable....................................... (3,020) 5,162 2,992 (457)
Accrued employee compensation.......................... (1,508) (3,403) 6,581 (890)
Income taxes payable................................... 2,742 3,059 6,219 (2,204)
Deferred revenue....................................... 13,678 (349) 5,524 191
Other current liabilities.............................. 3,445 2,814 1,366 3,553
-------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 18,315 31,094 44,057 26,544
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net of
capital lease obligations incurred..................... (6,449) (4,815) (18,269) (11,932)
Software product assets.................................. (8,524) (2,480) (10,285) (17,739)
Proceeds from sale of discontinued product lines......... -- 1,200 1,200 --
Acquisition of subsidiaries, net of cash balances
acquired............................................... (7,304) 1,589 (1,848) --
Available-for-sale securities............................ 5,649 (4,132) (33,639) 1,654
Disposals of property, plant and equipment............... -- 13 570 916
Other.................................................... -- -- -- (209)
-------- -------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES...................... (16,628) (8,625) (62,271) (27,310)
-------- -------- -------- --------
FINANCING ACTIVITIES
Issuance of ordinary shares, net of expenses............. 1,709 2,613 9,879 4,770
Own shares............................................... 217 -- 1,190 (3,445)
Borrowings............................................... -- -- -- 6,422
Repayment of borrowings.................................. (3,051) (7,705) (3,509) --
Repayment of capital leases.............................. (18) (1) (73) (233)
-------- -------- -------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES........... (1,143) (5,093) 7,487 7,514
-------- -------- -------- --------
Effect of exchange rate changes on cash.................... (651) 247 (316) (1,139)
-------- -------- -------- --------
Increase (decrease) in cash................................ 121 17,623 (11,043) 5,609
Adjusted for INTERSOLV cash flow previously reported....... -- (13,420) -- --
Cash at beginning of period................................ 86,459 82,256 93,299 87,690
-------- -------- -------- --------
CASH AT END OF PERIOD...................................... $ 86,580 $ 86,459 $ 82,256 $ 93,299
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid during the period...................... $ 4,317 $ 207 $ 1,464 $ 1,291
======== ======== ======== ========
Interest paid during the period.......................... $ 239 $ 116 $ 976 $ 789
======== ======== ======== ========
See accompanying notes to consolidated financial statements on pages 35 to 55.
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MERANT PLC
FINANCIAL STATEMENTS 1999
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
US FORMAT
ACCUMULATED
ORDINARY ADDITIONAL COMPREHENSIVE OTHER
NUMBER SHARES PAID-IN TREASURY RETAINED INCOME COMPREHENSIVE
IN THOUSANDS OF SHARES AMOUNT CAPITAL STOCK EARNINGS (LOSS) INCOME (LOSS) TOTAL
- - - ------------ --------- -------- ---------- -------- -------- ------------- ------------- --------
BALANCE, JANUARY 31,
1996................... 131,876 $4,553 $118,318 $ (8,959) $ 47,758 $(5,793) $155,877
Share options
exercised.............. 885 4 2,843 1,922 -- -- 4,769
Repurchase of ordinary
shares................. (1,048) -- -- (3,445) -- -- (3,445)
Conversion of loan
notes.................. 2,607 9 3,580 3,589
Comprehensive (loss):
Net (loss)............. -- -- -- -- (35,856) $(35,856) -- (35,856)
Unrealised (loss) on
marketable
securities, net of
taxes................ -- -- -- -- -- (92) (92) (92)
Currency translation
adjustment........... -- -- -- -- -- (1,349) (1,349) (1,349)
--------
Comprehensive (loss)... (37,297)
------- ------ -------- -------- -------- -------- ------- --------
BALANCE, JANUARY 31,
1997................... 134,320 4,566 124,741 (10,482) 11,902 (7,234) 123,493
Share options
exercised.............. 3,204 37 8,272 2,713 -- -- 11,022
Issued for
acquisitions........... 4,186 37 18,741 -- -- -- 18,778
Conversion of loan
notes.................. 36 -- 48 -- -- -- 48
Comprehensive income:
Net income............. -- -- -- -- 20,148 20,148 -- 20,148
Unrealised gain on
marketable
securities, net of
taxes................ -- -- -- -- -- 134 134 134
Currency translation
adjustment........... -- -- -- -- -- (1,550) (1,550) (1,550)
--------
Comprehensive income... 18,732
------- ------ -------- -------- -------- -------- ------- --------
BALANCE, JANUARY 31,
1998................... 141,746 4,640 151,802 (7,769) 32,050 (8,650) 172,073
Share options
exercised.............. 266 39 1,369 -- -- -- 1,408
Comprehensive income:
Net income............. -- -- -- -- 1,489 1,489 -- 1,489
Unrealised gain on
marketable
securities, net of
taxes................ -- -- -- -- -- (72) (72) (72)
Currency translation
adjustment........... -- -- -- -- -- 696 696 696
--------
Comprehensive income... 2,113
Adjustments re transition
period................. 3,843 6 3,849
------- ------ -------- -------- -------- -------- ------- --------
BALANCE, APRIL 30,
1998................... 142,012 4,679 153,171 (7,769) 37,382 (8,020) 179,443
Share options
exercised.............. 1,661 12 1,697 217 1,926
Comprehensive (loss):
Net (loss)............. -- -- -- -- (28,532) (28,532) (28,532)
Unrealised (loss) on
marketable
securities, net of
taxes................ -- -- -- -- -- 5 5 5
Currency translation
adjustment........... -- -- -- -- -- (631) (631) (631)
--------
Comprehensive (loss)... (29,158)
------- ------ -------- -------- -------- -------- ------- --------
BALANCE, APRIL 30 1999... 143,673 $4,691 $154,868 $ (7,552) $ 8,850 $(8,646) $152,211
======= ====== ======== ======== ======== ======== ======= ========
See accompanying notes to consolidated financial statements on pages 35 to 55.
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MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT
Effective November 30, 1998, MERANT plc ("the Company") elected to change
its fiscal year end and accounting reference date to April 30 from January 31.
The Company is therefore reporting results for the fiscal year ended April 30,
1999 ("fiscal 1999"). References to fiscal 1998 and fiscal 1997 are to the years
ended January 31, 1998 and January 31, 1997, respectively. This report also
discloses results for the three-month fiscal period ended April 30, 1998, which
were the basis of a Transition Report filed with the SEC on Form 20-F.
The Company statutory accounts, within the meaning of section 240 of the
Companies Act 1985 of Great Britain, are drafted in accordance with accounting
principles generally accepted in the U.K. ("U.K. GAAP"). Copies of those
financial statements, for the fifteen-month period ended April 30, 1999, are
available from the Company's offices in Newbury and Rockville.
Effective February 16, 1999, the Company changed its corporate name from
Micro Focus Group Plc to MERANT plc.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
MERANT designs, develops and markets computer software products and
provides related support services. Approximately 55% of its revenue is derived
from the license of software products, either directly to end-users or in the
form of distribution rights to original equipment manufacturers. Approximately
25% is derived from the provision of product support and maintenance services,
and the balance from the provision of professional services, principally
training and consulting. Product licenses are sold and supported in more than 60
countries. The principal market is the United States, which accounts for
approximately 60% of revenue; a further 20% of revenue is derived from customers
in Europe and approximately 10% is earned in the Pacific Rim, and the remaining
10% from customers located in the rest of the world.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, including INTERSOLV, Inc, which
merged with the Company effective September 24, 1998. They have been prepared in
accordance with U.S. GAAP, which differs from U.K. GAAP, particularly as to the
treatment of acquisitions and goodwill and the presentation of certain items in
the financial statements.
As more fully described in Note 2, the Company has concluded several
business combinations in the past three fiscal years. These transactions have
been accounted for either under the pooling-of-interests method or the purchase
method, as appropriate. With respect to the merger with INTERSOLV, Inc, which
was accounted for using the pooling-of-interests method, the consolidated
financial statements at January 31, 1998, and for the years ended January 31,
1998 and 1997, have been restated to include the financial results of INTERSOLV,
Inc at April 30, 1998, and for the years ended April 30, 1998 and 1997,
respectively. Consequently, financial data for the three months ended April 30,
1998 are included in both the three months ended April 30, 1998 and the year
ended January 31, 1998. All significant inter-company balances and transactions
have been eliminated on consolidation.
Certain reclassifications of data presented in the 1998 and 1997 financial
statements and related notes have been made to conform with the 1999
presentation. Specifically, the presentation of net revenue and cost of revenue
in the statements of income has been revised in order to analyse service revenue
and related direct costs between maintenance and other services. The results of
operations of the Company are not affected by this changed presentation.
35
161
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of estimates
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue recognition
The Company has adopted Statement of Position ("SOP") 97-2 "Software
Revenue Recognition with Respect to Certain Transactions". Adoption of SOP 97-2
did not have a material effect on the Company's results of operations or
financial condition.
Product revenue: the Company's standard end user license agreement for the
Company's products provides for an initial fee to use the product in perpetuity
up to a maximum number of users. The Company also enters into other types of
license agreements, typically with major end user customers, which allow for the
use of the Company's products, usually restricted by the number of employees,
the number of users, or the license term. Fees from licenses are recognized as
revenue upon product shipment, provided a signed agreement is in place, fees are
fixed or determinable, and collection of the resulting receivable is deemed
probable. Fees from licenses sold together with consulting services are
generally recognized upon shipment provided that the above criteria have been
met and payment of the license fees is not dependent upon the performance of the
consulting services. In instances where the aforementioned criteria have not
been met, both the license and consulting fees are recognized under the
percentage of completion method of contract accounting. The Company provides for
sales returns based on historical rates of return.
Maintenance revenue: maintenance agreements generally call for the Company
to provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognized ratably over the term
of the support agreement. Payments for maintenance fees are generally made in
advance and are nonrefundable.
Service revenue: the Company provides consulting and education services to
its customers. Revenue from such services is generally recognized as the
services are performed.
Advertising costs
Advertising costs are charged to operations when incurred. Advertising
expense, which includes media, agency and promotional expenses, amounted to
$12,984,000, $2,704,000 $8,791,000 and $14,388,000 in fiscal 1999, the three
month fiscal period to April 30, 1998 and in fiscal 1998 and 1997, respectively.
Net income per share
The Company adopted SFAS 128 "Earnings per Share" in the third quarter of
fiscal 1998. All prior year net income per share data reported herein has been
restated accordingly.
Basic net income per share is calculated as net income divided by the
weighted average number of ordinary shares outstanding during the period.
Diluted net income per share is calculated as net income divided by the
weighted average number of ordinary shares outstanding during the period,
including dilutive ordinary share equivalents, represented by shares issuable
upon exercise of share options. The computation assumes the proceeds from the
exercise of
36
162
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
share options are used to repurchase the Company's ordinary shares at their
average market price during each period.
Earnings per share data is set out in note 6 to the consolidated financial
statements on page 45. The Company also reports net earnings per American
Depositary Share ("ADS") equivalent; each ADS represents five ordinary shares.
Income taxes
The provision for income taxes includes U.K., U.S. and other income taxes
currently payable and those deferred because of temporary differences between
financial and tax reporting.
Cash, cash equivalents and short-term investments
Cash and cash equivalents include cash placed on short-term deposit and
short-term money market instruments where the maturity date is less than three
months from the initial date of deposit.
In accordance with SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities," the appropriate classification of debt securities is
determined at the time of purchase and re-evaluated at each balance sheet date.
Debt securities that the Company has the intent and the ability to hold until
maturity are classified as held-to-maturity, and all other debt securities are
classified as available-for-sale.
Short-term investments represents available-for-sale securities with
original maturities in excess of three months from the initial date of
investment. The cost of securities sold is based on the specific identification
method.
Derivative financial instruments
The Company enters into forward foreign currency contracts to hedge the
value of assets and liabilities recorded in foreign currencies against
fluctuations in exchange rates.
For these financial instruments, no impact on financial position or results
of operations would result from a change in the underlying exchange rate, as a
change in the derivatives value would be offset by an opposite change in the
hedged exposure. The Company does not hold or issue derivatives for speculative
trading purposes.
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk, as defined by SFAS 105 "Disclosure of Information
about Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentration of Credit Risk", consist principally of
short-term investments, foreign exchange contracts and trade receivables.
MERANT places its short-term investments only in high quality financial
instruments and limits the amounts invested with any one issuer. The Company is
exposed to credit risk in the event of default by these institutions to the
extent of the amount recorded on the balance sheet. The counterparties to the
agreements relating to the Company's foreign exchange contracts are financial
institutions of high credit standing. Concentrations of credit risk with respect
to trade receivables are limited due to the large, widespread customer base
which encompasses many different industries and countries. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves
37
163
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
for potential losses, and such losses have been within management's
expectations. No single customer represented more than 5% of MERANT's revenue in
1999, 1998 or 1997.
Translation of foreign currencies
Assets and liabilities denominated in currencies other than US dollars are
translated at exchange rates in effect at the balance sheet date. Revenue, costs
and expenses are translated using average rates. Translation adjustments
resulting from the process of translating financial statements denominated in
currencies other than U.S. dollars are dealt with separately in shareholders'
equity.
Inventories
Inventories, consisting principally of diskettes and technical manuals, are
stated at the lower of cost or market, using the first-in, first-out method.
Contracts in progress, representing engineering costs associated with
non-cancelable license agreements prior to delivery, are included in inventories
and expensed when the related revenue is recognized. Inventories are included in
the balance sheet under Prepaid Expenses and Other Assets.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is computed using
the straight-line method over estimated economic lives from the time the asset
is put into use. Present estimated economic lives are as follows:
Office buildings......................................... 40 years
Leasehold improvements................................... over the lease term
Computer equipment....................................... 3-5 years
Office equipment......................................... 7-11 years
Transportation equipment................................. 3-4 years
Leasing
Leases which transfer substantially all the benefits and risks of ownership
of an asset to the Company are capitalized as fixed assets. The amount
capitalized is the net present value of future lease payments, this sum also
being treated as a liability.
Depreciation on such leased assets is provided at rates calculated to write
off the capitalized cost over the shorter of the lease term and the asset's
economic life. Lease payments are apportioned between finance charges (computed
on the basis of implicit interest rates) and a reduction in the original
liability.
Rentals paid under operating leases are expensed on a straight line basis
over the term of the lease.
Goodwill
Goodwill represents the excess of amounts paid on business acquisitions
over the aggregate fair value of the net assets acquired. Goodwill arising on a
purchase is capitalized as an intangible fixed asset and amortized over its
estimated useful life. The estimated life will depend on the length of the
future period expected to benefit from the purchase. Where there is a potential
impairment of goodwill, based on cash flow projections of the businesses
acquired, amortization is accelerated.
38
164
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Software product assets (capitalized software development costs)
Costs related to the initial development and design of new software
products prior to the establishment of technological feasibility are written off
as research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalized as software product
assets, in compliance with Statement of Financial Accounting Standards ("SFAS")
No. 86 "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed".
Software licensed for inclusion in the MERANT product set, including
software acquired through acquisitions which meets the provisions for
capitalization under SFAS 86, is also included in software product assets.
During fiscal 1999, the three-month fiscal period ended April 30, 1998, and
fiscal 1998 and 1997, purchased software totaling $--, $--, $1.1 million and
$--, respectively was added to software product assets.
Software product assets are amortized using the straight line method over
the economic life of the products, which in most cases is estimated to be three
to four years. Where a shortfall in future revenue from a product is
anticipated, amortization is accelerated. In the event that the remaining
estimated economic life of a product is judged to be reduced significantly, the
carrying amount of the capitalized software costs may be reduced.
Amortization of software product assets is included in research and
development costs.
Stock based compensation
The Company accounts for its stock-based employee compensation plans using
the intrinsic value method prescribed by APB Opinion No. 25 "Accounting for
Stock Options Issued to Employees", and accordingly, since all options are
granted with an exercise price equal to the fair value of the shares at the date
of grant, recognizes no compensation expense for share option grants.
Pro-forma disclosures of net income (loss) and net income (loss) per share
computed as if the fair-value-based method had been applied are made in
accordance with SFAS 123 "Accounting for Stock Based Compensation".
Other recent pronouncements
In fiscal 1999, the Company adopted SFAS 130 "Reporting Comprehensive
Income", SFAS 131 "Disclosures About Segments of an Enterprise and Related
Information", and SFAS 132 "Disclosures About Pension and Other Post-Retirement
Benefits". SFAS 130 requires disclosure of comprehensive income, represented by
net income plus other changes in non-owner shareholders' equity, including
unrealised gains and losses on SFAS 115 securities and foreign currency
translation adjustments. The Company discloses this data in its Consolidated
Statements of Shareholders' Equity.
SFAS 131 changes the way in which corporations identify and report
operating segments in annual and interim financial statements. The statement
requires selected information and related disclosure about products and
services, geographic areas and major customers. Such information is reported in
note 12 to the
39
165
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
consolidated financial statements. Compliance with the requirements of these
statements did not affect the Company's results from operations or financial
position.
SFAS 132 standardises disclosure requirements for pensions and other
post-retirement benefits.
In December 1998 the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-9 "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions". SOP 98-9 rescinds
certain provisions of 97-2 and permits the residual method for the calculation
of residual amounts for delivered elements. Adoption of this standard is not
expected to have a material effect on the Company's results from operations or
financial position.
In June, 1998 the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition and measurement of all derivatives as assets or
liabilities. The Company will be required to adopt SFAS 133 in fiscal 2002.
Compliance is not expected to have a material effect on the Company's results
from operations or financial position.
NOTE 2 BUSINESS COMBINATIONS
During fiscal 1999 MERANT completed three acquisitions.
On May 15, 1998 the Company acquired all of the outstanding stock of its
Italian distributor, Micro Focus Italia, s.r.l. for total consideration of
$4,600,000. MF Italia changed its name to MERANT s.r.l. on March 1, 1999.
On August 13, 1998 the Company acquired all of the outstanding stock of its
Australian distributor, Advanced Software Engineering Pty, Ltd for total
consideration of $2,480,000. ASE changed its name to MERANT Pty Limited on
February 16, 1999.
Both transactions have been accounted for using the purchase method.
Accordingly, the excess of the estimated purchase price over the estimated fair
value of the net tangible assets of each of the acquired companies has been
allocated to goodwill, and the net assets and results of operations of both
companies have been combined with those of MERANT as of the respective dates of
acquisition and for the periods subsequent to acquisition, respectively.
Goodwill arising on the acquisitions, which amounted to $7,304,000, is being
amortised over its estimated economic life of four years.
The results of operations of both these acquired companies prior to the
acquisitions were not material, and thus pro forma information has not been
provided.
On September 24, 1998 the Company acquired all of the outstanding stock of
INTERSOLV, Inc ("INTERSOLV") in exchange for 63,084,000 ordinary shares in the
Company which represented a value of $272,000,000 on the date the merger was
completed. INTERSOLV, a public corporation based in Maryland, U.S.A., and listed
on the Nasdaq National Market, was a provider of software solutions that
facilitate the development, delivery and deployment of business information
systems. INTERSOLV's products and services were focused primarily in the areas
of application development management, enterprise data connectivity and
enterprise application renewal.
Immediately prior to the transaction, INTERSOLV had a total of 22,940,000
outstanding shares. Under the terms of the agreement, each common share of
INTERSOLV was exchanged for 0.55 MERANT American Depositary Shares ("ADSs"). In
addition, each outstanding option or right to purchase or acquire shares of
INTERSOLV stock was assumed by the Company and became an option or right to
purchase or
40
166
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 2 BUSINESS COMBINATIONS -- (CONTINUED)
acquire MERANT ADSs, with appropriate adjustments to the price and number of
shares based on the exchange ratio of 0.55 ADSs per INTERSOLV share. The merger
was structured as a tax-free reorganization under U.S. tax law. The Company
issued 12,617,000 new MERANT ADSs (representing 63,084,000 new MERANT ordinary
shares) in exchange for INTERSOLV's common stock and share equivalents
outstanding, which at the time of the completion of the transaction represented
approximately 46% of MERANT's share capital on a fully-diluted basis.
The combination has been accounted for using the pooling-of-interests
method, and previously reported consolidated financial statements have been
restated to include the financial position and results of operations of
INTERSOLV. The following table reconciles the operating results for prior
periods to the amounts reflecting restatement of prior years to include
INTERSOLV operations.
FROM MAY 1, THREE MONTHS
1998 TO ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 24, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1998 1998 1998 1997
- - - -------------- ------------- ------------ ----------- -----------
Net revenue:
MERANT......................... $ 68,256 $ 48,650 $167,309 $123,227
INTERSOLV...................... 67,033 58,369 196,480 160,413
Eliminations................... -- (32) (870)
-------- -------- -------- --------
As restated.................... $135,289 $106,987 $362,919 $283,640
-------- -------- -------- --------
Net income (loss):
MERANT......................... $ 1,099 $ 5,337 $ 14,633 $(14,690)
INTERSOLV...................... (2,138) (3,848) 5,515 (21,166)
-------- -------- -------- --------
As restated.................... $ (1,039) $ 1,489 $ 20,148 $(35,856)
-------- -------- -------- --------
The Company recorded a charge of $49,662,000 in the second quarter of 1999
in connection with the INTERSOLV merger (see note 5 to the consolidated
financial statements on page 44).
During the three-month fiscal period ended April 30, 1998, the Company
acquired, through its subsidiary, INTERSOLV, Inc, all of the outstanding stock
of SQL Software Ltd ("SQL") in exchange for the equivalent of 3,441,488 ordinary
shares in the Company. SQL was a privately-held UK-based provider of process
automation tools.
The transaction was accounted for using the purchase method. The cost of
the transaction, including acquisition costs, was $19,200,000, of which
$15,739,000 was allocated to purchased research and development and was written
off at the time of acquisition since no technological feasibility or alternative
future use could be demonstrated. Additionally, $2,400,000 allocated to goodwill
and other intangibles, and is being amortized over its estimated economic life
which is estimated to be five years.
In fiscal 1998 the Company completed two acquisitions.
On January 20, 1998, the Company acquired all of the outstanding stock of
XDB Systems, Inc ("XDB") in exchange for 1,891,975 ordinary shares in the
Company which represented a value of $14,243,000 on the date the merger was
completed. The combination was accounted for using the pooling-of-interests
method. XDB, a privately-held corporation based in Columbia, Maryland, was a
provider of DB2 database development, maintenance and connectivity solutions.
The Company incurred charges in the third quarter of 1998 of approximately $1.6
million in connection with activities to complete this acquisition.
41
167
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 2 BUSINESS COMBINATIONS -- (CONTINUED)
On April 30, 1997, the Company acquired all of the outstanding stock of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, for a
total consideration of $6,400,000, satisfied by a cash payment of $3,200,000 and
the issue of 745,710 ordinary shares in the Company. Millennium provided
specialized consulting and project management services. The transaction was
accounted for using the purchase method. Accordingly, the excess of the purchase
price over the estimated fair value of the net tangible assets, which amounted
to $6,737,000, was allocated to goodwill and is being amortised over its
estimated economic life, which is estimated to be three years.
NOTE 3 FINANCIAL INSTRUMENTS
The Company invests its excess cash in accordance with an investment policy
approved by the Board of Directors. This policy authorizes investment in U.S.
government securities, municipal bonds, certificates of deposit with
highly-rated financial institutions and other specified money market instruments
of similar liquidity and credit quality.
The Company has classified all of its investment securities as
available-for-sale and carries such securities at fair value, based on quoted
market prices. Unrealized gains and losses are reported as a separate component
of shareholders' equity. Available-for-sale securities with original maturities
of less than three months are classified as cash equivalents.
Estimated fair values of financial instruments are based on quoted market
prices. The carrying amounts and fair value of the Company's financial
instruments are as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- - - -------------- --------- ---------
Cash and cash equivalents................................. $86,580 $86,459
Short term investments.................................... 34,804 40,448
------- -------
Cash, cash equivalents and short term investments include the following
available-for-sale securities as defined in note 1:
GROSS UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS (LOSSES) FAIR VALUE
- - - -------------- ------- ---------------- ----------
At April 30, 1999:
Money market funds.......................... $ 173 -- $ 173
Commercial paper............................ 9,062 $ 1 9,063
Variable rate notes......................... 4,409 -- 4,409
Federal agency issues....................... 8,306 (21) 8,285
Corporate bonds and notes................... 22,595 (3) 22,592
------- ---- -------
$44,545 $(23) $44,522
------- ---- -------
At April 30, 1998:
Money market funds.......................... $ 815 -- $ 815
Commercial paper............................ 20,721 $ 10 20,731
Certificates of deposit..................... 7,971 10 7,981
Federal agency issues....................... 3,870 5 3,875
Auction rate securities..................... 3,319 -- 3,319
Corporate bonds and notes................... 22,954 42 22,996
------- ---- -------
$59,650 $ 67 $59,717
------- ---- -------
42
168
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 3 FINANCIAL INSTRUMENTS -- (CONTINUED)
The cost and estimated fair values of available-for-sale securities at
April 30, 1999 are set forth below:
ESTIMATED
GROSS UNREALIZED FAIR
(IN THOUSANDS) COST GAINS (LOSSES) VALUE
- - - -------------- ------- ---------------- ---------
Less than three months...................... $ 9,717 $ 1 $ 9,718
Between 3-12 months......................... 14,749 7 14,756
Over 12 months.............................. 20,079 (31) 20,048
------- ---- -------
$44,545 $(23) $44,522
------- ---- -------
For balance sheet presentation, available-for-sale securities are
classified as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- - - -------------- --------- ---------
Cash and cash equivalents................................. $ 9,718 $19,269
Short term investments.................................... 34,804 40,448
------- -------
$44,522 $59,717
------- -------
Due to its worldwide operations, the Company 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. The Company uses derivative
financial instruments to reduce its exposure to market risks from changes in
foreign currency exchange rates. The derivative instruments used, which are
foreign exchange forward contracts, are non-leveraged, over-the-counter
instruments which involve little complexity.
The notional amounts of foreign currency contracts were $-- and $4,800,000
at April 30, 1999 and April 30, 1998, respectively, and were predominantly to
exchange U.S. dollars for G.B. pounds sterling. Substantially all forward
foreign currency contracts entered into by the Company have maturities of 60
days or less.
Sale of receivables
In fiscal 1998 the Company entered into agreements to sell $2,536,000 in
accounts receivable at a net discount of approximately 7.25%, which was charged
to operations as incurred. $2,161,000 of these accounts receivable were sold on
a recourse basis, of which $520,000 remains outstanding at April 30, 1999 for
which the Company remains liable in the event of default.
NOTE 4 RESEARCH AND DEVELOPMENT COSTS
THREE MONTHS YEAR YEAR
YEAR ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- - - -------------- ---------- ------------- ----------- -----------
Research and development
costs, before
capitalization............. $53,624 $13,699 $ 56,197 $ 60,660
Costs capitalized as software
product assets............. (8,524) (2,480) (10,285) (17,739)
Amortisation of capitalized
costs...................... 14,751 3,332 14,916 21,390
------- ------- ---------- -----------
$59,851 $14,551 $ 60,828 $ 64,311
------- ------- ---------- -----------
43
169
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 5 NON-RECURRING ITEMS
During the second quarter of fiscal 1999, the Company incurred charges
amounting to $49,662,000 in respect of the acquisition of INTERSOLV, Inc and the
subsequent restructuring of the combined businesses. Aggregate direct
transaction costs totaling $24,549,000 were incurred for investment banker fees,
employee contractural obligations, the cost of listing new shares on the London
Stock Exchange and other professional fees. Costs associated with subsequent
integration efforts totaled $25,113,000 and were primarily comprised of the
write-off of redundant assets, distributor agreement buyouts and severance
costs. The write-off of redundant assets results primarily from duplicative
facilities and assets. Severance costs of $982,000 related to approximately 75
employees in the Company's administrative functions.
Provisions for restructuring charges, included in other current liabilities
amounted to $5,910,000 and $--at April 30, 1999 and April 30, 1998 respectively.
In the transition period to April 30, 1998, the Company recognized
non-recurring costs of $17,468,000, net, in its subsidiary company, INTERSOLV,
Inc. This charge included a $15,739,000 write off of purchased research and
development costs arising from the SQL acquisition, and costs of $1,800,000 on
exiting non-strategic product lines.
As explained in note 1, the Company's results for fiscal 1998 include the
results of INTERSOLV, Inc for the year ended April 30, 1998 and consequently
also include the above non-recurring charge of $17,468,000.
In fiscal 1997, the Company recorded non-recurring charges of $37,603,000.
INTERSOLV, Inc completed a comprehensive business strategy review of its primary
market opportunities, which led the company to record a charge of $28,933,000 to
write down capitalized and purchased software and certain related intangible
assets to their net realizable values. In addition, the Company incurred costs
totalling $8,670,000 in connection with a workforce reduction, facility closures
and consolidations, and asset write-downs.
44
170
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 6 EARNINGS PER SHARE
The following table discloses the net (loss) income per share and net
(loss) income per ADS equivalent; each ADS represents five ordinary shares. In
1999 3,435,000 ordinary share equivalents were antidilutive and therefore
excluded from the computation.
THREE MONTHS YEAR YEAR
YEAR ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
IN THOUSANDS 1999 1998 1998 1997
------------ ---------- ------------ ----------- -----------
Net (loss) income per share:
Numerator for basic and diluted
net (loss) income per share:
net (loss) income.............. $(28,532) $ 1,489 $ 20,148 $(35,856)
-------- -------- -------- --------
Denominator for basic net (loss)
income per share -- weighted
average shares outstanding..... 143,130 137,823 137,351 132,327
Dilutive share options........... -- 7,795 6,975 --
-------- -------- -------- --------
Denominator for diluted net
(loss) income per share........ 143,130 145,618 144,326 132,327
-------- -------- -------- --------
Net (loss) income per ADS:
Numerator for basic and diluted
net (loss) income per ADS: net
(loss) income.................. $(28,532) $ 1,489 $ 20,148 $(35,856)
-------- -------- -------- --------
Denominator for basic net (loss)
income per ADS -- weighted
average ADSs outstanding....... 28,626 27,565 27,470 26,465
Dilutive share options........... -- 1,559 1,395 --
-------- -------- -------- --------
Denominator for diluted net
(loss) income per ADS.......... 28,626 29,124 28,865 26,465
-------- -------- -------- --------
NOTE 7 PROPERTY, PLANT AND EQUIPMENT
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- - - -------------- --------- ---------
Land and buildings...................................... $ 22,263 $ 22,679
Leasehold improvements.................................. 9,964 9,595
Computer and communications equipment & software........ 70,845 73,413
Office equipment........................................ 13,387 8,881
Transportation equipment................................ 383 268
-------- --------
Property, plant and equipment -- at cost................ 116,842 114,836
Less: accumulated depreciation and amortization......... (70,752) (62,624)
-------- --------
Property, plant and equipment -- net.................... $ 46,090 $ 52,212
-------- --------
45
171
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 7 PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)
During fiscal 1999, the three-month fiscal period ended April 30, 1998 and
fiscal 1998 and 1997 depreciation expense, including depreciation on leased
assets, totalled $12,571,000, $4,166,000, $12,276,000 and $14,156,000
respectively.
NOTE 8 BORROWINGS
Short term borrowings consist of:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- - - -------------- --------- ---------
Bank loan.................................................. $2,716 $1,652
Notes payable.............................................. -- 3,485
------ ------
$2,716 $5,137
------ ------
The bank loan represents borrowings against an unsecured revolving
multi-currency facility, under the terms of which financing of up to
GBP 5,000,000 ($8,050,000 at April 30, 1999) or its equivalent in such other
currency as the Company may determine, is available until January 2001.
Borrowings under this facility bear interest at 0.75% above the London Interbank
Offered Rate ("LIBOR"). The amount outstanding against this credit line at April
30, 1999 represented loans totaling 2.6 million euros which were incurring
interest at a composite rate of 3.5%. The amount outstanding at April 30, 1998
represented a loan of 10 million French francs, which was incurring interest at
3.6%.
The notes payable represented an unsecured credit arrangement with two
banks which expired in September, 1998. The weighted average interest rate
during fiscal 1998 was 8.5%.
NOTE 9 COMMITMENTS
The Company leases office space and equipment under operating leases
expiring at various dates through 2017. In most cases, it is anticipated that
these leases will be renewed or replaced by other leases in the normal course of
business.
The Company also leases transportation equipment under capital leases.
Minimum lease commitments as at April 30, 1999 are as follows:
(IN THOUSANDS)
YEARS ENDED APRIL 30 OPERATING LEASES
- - - -------------------- ----------------
2000........................................................ $12,509
2001........................................................ 9,402
2002........................................................ 7,472
2003........................................................ 6,205
2004 and thereafter......................................... 8,443
-------
Total minimum lease payments................................ $44,031
-------
Less: amount representing interest..........................
Present value of net minimum lease payments.................
During fiscal 1999, the three-month fiscal period ended April 30, 1998 and
fiscal 1998 and 1997, rent expense totalled $12,086,000 $2,592,000, $10,206,000
and $9,793,000 respectively.
46
172
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 10 CONTINGENCIES
In December 1998 and January 1999, seven class action securities complaints
were filed in the United States District Court for the Southern District of New
York against the Company 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 American Depository Shares of the Company during the
period from June 17, 1998 to November 12, 1998, including the former
shareholders of INTERSOLV, Inc who acquired American Depositary Shares 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 the Company's business condition and prospects.
The Company has filed a motion to transfer the matter to the Northern
District of California. The Company intends to defend all of this litigation
vigorously. However, due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of the litigation. Any
unfavorable outcome of litigation could have an adverse impact on the Company's
business, financial condition and results of operations.
The Company 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 the Company's financial position, results of operations, or
liquidity.
NOTE 11 INCOME TAXES
Income taxes consist of:
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- - - -------------- ---------- ------------- ----------- -----------
Current:
U.K. .......................... $(1,535) $(726) $5,319 $ 760
U.S. federal................... -- -- 1,910 (88)
U.S. state..................... 250 118 669 (91)
Other.......................... 3,711 1,755 1,917 893
------- ----- ------ ------
2,426 1,147 9,815 1,474
------- ----- ------ ------
Deferred:
U.K. .......................... (618) (292) 110 1,489
U.S. federal................... -- -- -- 439
U.S. state..................... -- -- -- 77
------- ----- ------ ------
(618) (292) 110 2,005
------- ----- ------ ------
Total:........................... $ 1,808 $ 855 $9,925 $3,479
------- ----- ------ ------
47
173
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 11 INCOME TAXES -- (CONTINUED)
The following table analyzes the differences between the U.K. statutory tax
rate and the effective tax rate for fiscal 1999.
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
1999 1998 1998 1997
---------- ------------ ----------- -----------
U.K. statutory tax rate...... 30.9% 31.0% 31.3% 33.0%
Goodwill..................... -2.5% -- -- --
Permanent differences and
other items................ 6.6% 5.5% 1.7% -5.8%
Non-recurring charges........ -41.8% -- -- -37.9%
------ ----- ----- ------
Effective tax rate........... -6.8% 36.5% 33.0% -10.7%
------ ----- ----- ------
Deferred income taxes, all of which are non-current, are as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- - - -------------- --------- ---------
Capitalized software...................................... $ 9,651 $10,648
Valuation allowances...................................... 5,502 6,774
Property.................................................. (1,287) (811)
Bad debts................................................. -- (984)
Tax losses................................................ (2,950) (2,786)
Mark to market............................................ 773 --
Research and development credits.......................... (2,368) (800)
Other..................................................... 4,983 2,686
------- -------
$14,304 $14,727
------- -------
Deferred tax relative to the different tax jurisdictions is as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- - - -------------- --------- ---------
U.K. ..................................................... $ 8,323 $10,111
U.S.A. ................................................... 5,981 4,616
------- -------
$14,304 $14,727
------- -------
The corporate income tax returns of certain U.S. subsidiaries are under
examination by the Internal Revenue Service, which has proposed certain
adjustments. The Company believes that the outcome of the examination will not
give rise to any material adjustment to the financial statements.
NOTE 12 BUSINESS SEGMENT INFORMATION
As explained in note 1 to the consolidated financial statements on page 39,
the Company has adopted SFAS 131 "Disclosures About Segments of an Enterprise
and Related Information", which establishes new standards for the way in which
corporations identify and report operating segments in annual and interim
financial statements. The statement requires selected information and related
disclosure about products and
48
174
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 12 BUSINESS SEGMENT INFORMATION -- (CONTINUED)
services, geographic areas and major customers. Adoption of SFAS 131 does not
effect the Company's consolidated financial position, results of operations, or
liquidity.
The Company operates in four business segments, as indicated below. The
products and services of each segment are marketed throughout the world. The
major product and service lines by segment are as follows:
Application Creation and Transformation ("ACT")
Application Development Management ("ADM")
Enterprise Data Connectivity ("EDC")
Enterprise Consulting Solutions ("ECS")
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies. Intersegment sales
and transfers are priced as if the sales or transfers were to third parties. The
Company evaluates business segment performance on operating income before income
taxes and exclusive of restructuring charges and other non-recurring items. The
Company currently does not separately accumulate and report asset information by
market segment.
No single customer accounts for more than 5% of revenue.
A summary of the Company's operations by business segment, net of
inter-segment trading, is shown below:
THREE MONTHS YEAR
YEAR ENDED ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- - - -------------- ---------- ------------ ----------- -----------
Net revenues
ACT.............................. $178,033 $ 49,640 $174,983 $138,343
ADM.............................. 116,772 34,425 107,463 81,155
EDC.............................. 41,610 12,850 43,878 48,501
ECS.............................. 35,975 9,525 35,845 12,399
Discontinued products............ 1,812 547 1,750 3,242
-------- -------- -------- --------
$374,202 $106,987 $362,919 $283,640
-------- -------- -------- --------
Operating income, before non-
recurring charges
ACT.............................. 12,680 12,834 38,941 11,122
ADM.............................. 29,624 11,744 31,149 15,648
EDC.............................. 6,748 3,164 6,042 5,091
ECS.............................. 4,263 152 6,323 (249)
Discontinued products............ -- 307 (3,242) --
-------- -------- -------- --------
$ 53,315 $ 28,201 $ 79,213 $ 31,612
-------- -------- -------- --------
49
175
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 12 BUSINESS SEGMENT INFORMATION -- (CONTINUED)
Presented below is a reconciliation of segmental operating income, before
non-recurring charges, to consolidated income before income taxes:
THREE MONTHS YEAR
YEAR ENDED ENDED ENDED YEAR ENDED
JANUARY 31, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- - - -------------- ----------- ------------ ----------- -----------
Segment operating income......... $ 53,315 $ 28,201 $ 79,213 $ 31,612
Corporate non-allocated costs.... (24,043) (7,414) (27,737) (23,440)
Non-recurring charges............ (49,662) (17,292) (17,468) (37,603)
Interest income, net............. (6,334) (1,151) (3,935) (2,946)
-------- -------- -------- --------
$(26,724) $ 2,344 $ 30,073 $(32,377)
-------- -------- -------- --------
Presented below is an analysis of the Company's revenue, based on the
location of the selling organization, and long-lived assets:
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- - - -------------- ---------- ------------ ----------- -----------
Revenue:
United States.................. $222,967 $ 66,818 $235,549 $178,456
United Kingdom................. 72,090 24,189 57,627 40,562
Europe (excluding U.K.)........ 61,986 10,387 46,306 44,901
Other.......................... 17,159 5,593 23,437 19,721
-------- -------- -------- --------
$374,202 $106,987 $362,919 $283,640
-------- -------- -------- --------
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- - - -------------- -------- -------- -------- --------
Long-lived assets:
United States.................. $ 20,760 $ 28,692 $ 28,341 $ 21,014
United Kingdom................. 53,341 61,232 55,511 47,338
Europe (excluding U.K.)........ 2,183 2,473 2,419 2,157
Other.......................... 612 693 5,678 6,154
-------- -------- -------- --------
$ 76,896 $ 93,090 $ 91,949 $ 76,663
======== ======== ======== ========
NOTE 13 EMPLOYEE BENEFIT PLANS
Share option plans
The Company's share option plans provide for the grant of options to
acquire shares to persons who devote substantially all their working time to
MERANT and such other eligible persons as the Board may determine. The exercise
price of options issued under these plans is 100% of the fair market value at
the time such options are granted. Options are generally exercisable in monthly
or annual installments commencing one year after the date of grant. Unexercized
options lapse when the optionholder ceases to be employed by MERANT or at a
predetermined expiry date (of up to ten years from the date of grant), whichever
occurs first.
50
176
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
In September 1998 shareholders approved the 1998 Share Option Plan, which
authorized the Company to grant options over a maximum of 15,079,000 shares.
Such authority will expire on September 24, 2008. During the year 6,453,000
options were granted under this plan, of which 25% become exercisable one year
from the date of grant and the remaining 75% in equal monthly installments over
the following three years.
Options are no longer issuable under any of the Company's previous share
option plans, but options granted under those plans continue to be exercisable
in accordance with the original grant rules.
The 1996 Share Option Plan was approved by shareholders in June 1996 and
authorised the Company to grant options over a maximum of 3,786,845 shares
(representing 5% of the issued share capital of the Company at that time); such
authority expired on June 18, 1999. During the year, 938,705 options were
granted under this plan, exercisable in annual installments over a five-year
period commencing one year from the date of grant. No further options will be
granted under this plan.
Options are also outstanding under share option plans adopted by MERANT as
a result of recent corporate acquisitions, as set forth below. No further
options will be granted under these plans.
Pursuant to the combination with INTERSOLV, Inc, ("INTERSOLV"), the Company
adopted INTERSOLV's 1997 Employee Stock Option Plan, 1992 Stock Option Plan,
1982 Stock Option Plan, and the option plans previously assumed by INTERSOLV
from companies which it had acquired. Under the agreement, each outstanding
option or right to purchase or acquire shares of INTERSOLV stock was assumed by
the Company and became an option or right to purchase or acquire American
Depositary Shares ("ADSs") in the Company, with appropriate adjustments to the
price and number of shares based on the exchange ratio of 0.55 ADSs per
INTERSOLV share. During fiscal 1999, but prior to its acquisition by the
Company, INTERSOLV granted 528,711 options to acquire shares of its common stock
(equivalent to 1,453,955 options to acquire shares in the Company) under its
1997 Employee Stock Option Plan, exercisable in annual installments over a
four-year period commencing one year from the date of grant. The agreement
entitles option-holders to acquire ADSs at U.S. dollar-denominated amounts; for
the purposes of the following disclosures, option prices have been converted
from U.S. dollars to pounds sterling using the exchange rate at April 30, 1999,
which was GBP 1.00=$1.61; and options and prices are converted to
share-equivalents.
Pursuant to the agreement to acquire XDB Systems, Inc, ("XDB") in fiscal
1998, the Company adopted XDB's 1992 Share Option Plan and 1996 Share Option
Plan. Under the agreement, XDB's former option-holders are entitled to exercise
their options in return for shares in the Company. At April 30, 1999, 124,548 of
these options remained outstanding.
In addition to options granted by the Company, MERANT Trustees Limited
("MTL") is permitted to acquire ordinary shares in the Company and to grant
options over them, under the terms of the Micro Focus Group Employee Benefit
Trust 1994 ("the Trust"). The Trust was established to further the Company's
policy of encouraging share ownership by its employees. At April 30 1999, MTL
owned 3,810,075 shares. Options granted by MTL and outstanding at April 30 1999
totaled 2,938,800, and a further 110,000 shares were reserved for options
granted before MTL purchased the shares. The remaining 761,275 shares were
available for the grant of further options. The shares held by the Trust are
shown in the balance sheet as treasury stock within shareholder's equity.
51
177
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Share option activity under all of the Company's share option plans is
summarized below:
NUMBER OPTION PRICE PER
OF SHARES SHARE IN G.B. POUNDS
----------- --------------------
Outstanding, January 31, 1996................. 16,853,835 GBP0.11-GBP5.77
Options granted............................... 13,933,979 GBP1.17-GBP1.94
Options exercised............................. (127,655) GBP0.11-GBP1.93
Options cancelled............................. (10,182,097) GBP0.11-GBP5.77
----------- ---------------
Outstanding, January 31, 1997................. 20,478,062 GBP0.11-GBP4.32
Options granted............................... 10,738,678 GBP0.97-GBP7.41
Options exercised............................. (2,597,688) GBP0.11-GBP3.70
Options cancelled............................. (6,639,266) GBP0.11-GBP4.52
----------- ---------------
Outstanding, January 31, 1998................. 21,979,786 GBP0.11-GBP7.41
Options granted............................... 947,870 GBP6.25-GBP7.15
Options exercised............................. (398,843) GBP0.11-GBP3.49
Options cancelled............................. (625,429) GBP0.11-GBP4.20
----------- ---------------
Outstanding, April 30, 1998................... 21,903,384 GBP0.11-GBP7.41
Options granted............................... 10,648,660 GBP1.06-GBP6.28
Options exercised............................. (807,512) GBP0.11-GBP3.70
Options cancelled............................. (6,066,428) GBP0.11-GBP4.52
----------- ---------------
Outstanding, April 30, 1999................... 25,678,104 GBP0.11-GBP7.15
----------- ---------------
The following tables summarize information about share options outstanding
at April 30, 1999:
AUTHORITY FOR NUMBER OPTION PRICE PER
ISSUANCE OF OPTIONS OF SHARES SHARE IN G.B. POUNDS
------------------- ---------- --------------------
1991 Share Option Plan......................... 2,215,429 GBP1.13-GBP3.49
1996 Share Option Plan......................... 2,978,640 GBP1.47-GBP7.15
1998 Share Option Plan......................... 6,453,000 GBP1.06-GBP1.49
XDB plans...................................... 44,530 GBP5.39-GBP7.41
INTERSOLV plans................................ 10,937,930 GBP0.11-GBP3.61
---------- ---------------
Options over unissued shares................... 22,629,304 GBP0.11-GBP7.41
The Trust...................................... 3,048,800 GBP1.37-GBP4.85
---------- ---------------
25,678,104 GBP0.11-GBP7.41
NUMBER OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGES OF AT APRIL 30, CONTRACTUAL LIFE EXERCISE PRICE
EXERCISE PRICES 1999 (MONTHS) (IN G.B. POUNDS)
- - - --------------- ------------------ ---------------- ----------------
GBP0.10-GBP2.00................... 13,262,144 102 1.26
GBP2.01-GBP3.00................... 7,570,625 87 2.44
GBP3.01-GBP7.41................... 4,845,335 100 4.09
---------- --- ----
25,678,104 97 2.14
---------- --- ----
52
178
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
An analysis of those options currently exercisable as of April 30, 1999 is
set forth below:
NUMBER EXERCISABLE WEIGHTED AVERAGE
RANGES OF AT APRIL 30, EXERCISE PRICE
EXERCISE PRICES 1999 (IN G.B. POUNDS)
- - - --------------- ------------------ ----------------
GBP0.10-GBP2.00.................................. 3,671,859 1.56
GBP2.01-GBP3.00.................................. 5,442,154 2.44
GBP3.01-GBP7.41.................................. 2,557,508 4.09
---------- ----
11,671,521 2.43
---------- ----
Pro-forma data
As stated in note 1, the Company has elected to follow APB 25 and related
Interpretations in accounting for its employee share options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires the use of option valuation models that were not developed for use
in valuing employee share options. Under APB 25, because the exercise price of
the Company's options equals the market price of the underlying shares on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123, and has been determined as if the Company had
accounted for employee share options granted since January 31, 1995 under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1999, 1998 and 1997: risk-free
interest rate based on Treasury Strip, No Principal from the Wall Street Journal
for maturity of six years, based on the date of grant; dividend yields of 0%;
volatility factors of the expected market price of 0.647 in 1999 and 0.378 in
1998 and 1997; and an average expected life of the option of six years.
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the option valuation models require the input of
highly subjective assumptions including the expected share price volatility.
Because the Company's options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the Company's options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income (loss) and diluted net income (loss) per share data is set
forth below:
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
JANUARY 31, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- - - -------------- ----------- ------------ ----------- -----------
Net loss (income) (in
thousands)..................... ($37,646) ($ 380) $14,012 ($40,026)
Net loss (income) per share...... ($ 0.26) ($0.00) $ 0.10 ($ 0.30)
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of such effects in future years since SFAS 123 is applicable
only to options granted since January 31, 1995. The effect will not be fully
reflected in the pro forma disclosures until 2001.
53
179
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Employee stock purchase plan
Most INTERSOLV employees were eligible to participate in the INTERSOLV
employee stock purchase plan, which was authorized to grant rights to purchase
INTERSOLV's common stock. Eligible employees could purchase shares of
INTERSOLV's common stock at a purchase price equivalent to 85% of market value.
The plan was terminated effective September 24, 1998. During fiscal 1999,
the three-month fiscal period ended April 30, 1998 and fiscal 1998 and 1997,
respectively, are equivalent to 465,515, --, 787,480 and 558,460 shares in the
Company were purchased under this plan.
Warrants
In fiscal 1997, INTERSOLV issued warrants to purchase 140,000 INTERSOLV
shares at an exercise price of $10.375. These warrants were assumed by the
Company and became warrants to acquire ADSs in the Company at $5.70625 per ADS.
At April 30, 1999, the warrants were fully exercisable; they expire in 2006.
Retirement plans
MERANT has entered into arrangements to provide pensions for its employees
on a defined contribution basis. Contributions, which are independently
administered by insurance companies and other financial institutions, are
expensed in the year in which they become payable.
In the United States, MERANT's plan qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, MERANT matches contributions made by
participating employees up to certain predetermined thresholds. Arrangements for
employees in other countries have been established on similar bases, subject to
local conditions and practices in the countries concerned.
In fiscal 1999, the three-month fiscal period ended April 30, 1998 and
fiscal 1998 and 1997, contributions totalling $1,934,000, $483,000, $1,202,000
and $1,125,000 respectively, have been expensed.
NOTE 14 SHARE SPLIT
The Company's ordinary shares were split on a 5-for-1 basis with effect
from close of business on March 13, 1998. The Company's American Depositary
Shares ("ADSs") did not split, although the conversion rights of such ADSs were
adjusted such that each ADS represents five ordinary shares.
NOTE 15 COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consists of the following:
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
1999 1998 1998 1997
---------- ------------ ----------- -----------
Foreign currency translation
adjustments............................ $(8,629) $(7,998) $(8,694) $(7,144)
Unrealized gain (loss) on marketable
securities, net of tax................. (23) (28) 44 (90)
Other.................................... 6 6 -- --
------- ------- ------- -------
$(8,646) $(8,020) $(8,650) $(7,234)
======= ======= ======= =======
54
180
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 16 SUBSEQUENT EVENT
On August 3, 1999, the Company completed the acquisition of Essential
Software, Inc. (d/b/a The Marathon Group), a privately-held Internet
professional services firm based in Raleigh, North Carolina for a total
consideration of $15 million payable in cash.
NOTE 17 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 1999 and 1998, and for the
fiscal quarter ended April 30, 1998 is as follows:
FIRST SECOND THIRD FOURTH
IN THOUSANDS (EXCEPT PER ADS DATA) QUARTER QUARTER QUARTER QUARTER TOTAL
- - - ---------------------------------- ------- ------- ------- -------- --------
Year ended April 30, 1999:
Net revenue.................................. $95,275 $87,159 $95,717 $ 96,051 $374,202
Non-recurring items.......................... -- (49,662) -- -- (49,662)
Operating income (loss)...................... 9,591 (49,497) 6,104 744 (33,058)
Net income (loss)............................ 7,229 (42,304) 5,212 1,331 (28,532)
Net income (loss) per ADS: basic............. 0.25 (1.47) 0.18 0.05 (1.00)
Net income (loss) per ADS: diluted........... 0.24 (1.47) 0.18 0.05 (1.00)
------- ------- ------- -------- --------
Fiscal quarter ended April 30, 1998:
Net revenue.................................. $106,987 $106,987
Non-recurring items.......................... (17,292) (17,292)
Operating income............................. 1,193 1,193
Net income................................... 1,489 1,489
Net income per ADS: basic.................... 0.05 0.05
Net income per ADS: diluted.................. 0.05 0.05
------- ------- ------- -------- --------
Year ended January 31, 1998:
Net revenue.................................. $73,175 $86,895 $92,494 $110,355 $362,919
Non-recurring items.......................... (176) -- -- (17,292) (17,468)
Operating income............................. 3,566 8,108 13,271 1,193 26,138
Net income................................... 2,980 5,886 9,793 1,489 20,148
Net income per ADS: basic.................... 0.11 0.21 0.36 0.05 0.73
Net income per ADS: diluted.................. 0.11 0.20 0.34 0.05 0.70
------- ------- ------- -------- --------
- - - ---------------
NOTES: Data for all periods presented has been restated to reflect the
pooling-of-interest accounting in connection with the acquisitions made
during 1999 and 1998 (see note 2 to the consolidated financial statements
on page 40).
Share and per share data has been restated to reflect the 5-for-1 stock
split of the Company's ordinary shares (see note 14 to the consolidated
financial statements on page 54).
55
181
MERANT PLC
FINANCIAL STATEMENTS 1999
REPORT OF INDEPENDENT AUDITORS
US FORMAT
To the Board of Directors and Shareholders
of MERANT plc
We have audited the accompanying consolidated balance sheets of MERANT plc
and subsidiaries as of April 30, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for the year ended
April 30, 1999, the three-month period ended April 30, 1998 and for each of the
two years in the period ended January 31, 1998 on pages 31 to 55. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
The consolidated financial statements give retroactive effect to the
combination of the Company and INTERSOLV, Inc. which has been accounted for
using the pooling-of-interests method as described in note 2 to the financial
statements on page 40.
We did not audit the financial statements of INTERSOLV, Inc, which
statements reflect total assets constituting 39% of the related consolidated
financial statement total at April 30, 1998, and net revenue constituting
approximately 55%, 54% and 57% of the related consolidated financial statement
totals for the three month period ended April 30, 1998 and for the years ended
January 31, 1998 and January 31, 1997, respectively. Those statements, which
were prepared in accordance with accounting principles generally accepted in the
United States, were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to amounts included for INTERSOLV,
Inc for 1998 and 1997, is based solely on the report of the other auditors.
We conducted our audits in accordance with United Kingdom auditing
standards which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MERANT plc at April
30, 1999 and 1998, and the consolidated results of its operations and its
consolidated cash flows for the year ended April 30, 1999, the three-month
period ended April 30, 1998 and for each of the two years in the period ended
January 31, 1998, in conformity with accounting principles generally accepted in
the United States.
Ernst & Young
Reading, England
August 4 1999
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
SELECTED CONSOLIDATED FINANCIAL DATA
UK FORMAT
The following selected financial data should be read in conjunction with,
and is qualified in its entirety by reference to, the financial statements of
MERANT, expressed in G.B. pounds, set out on pages 72 to 103 of this report.
PERIODS ENDED:
------------------------------------------------------------
IN THOUSANDS OF G.B. POUNDS APRIL 30 JANUARY 31 JANUARY 31 JANUARY 31 JANUARY 31
(EXCEPT PER SHARE DATA, PERCENTAGES AND EMPLOYEES) 1999 1998 1997 1996 1995
- - - -------------------------------------------------- -------- ---------- ---------- ---------- ----------
OPERATING RESULTS FOR THE PERIOD:
Revenue....................................... 215,473 97,015 73,089 77,258 89,885
Profit/(loss) before taxation and exceptional
items....................................... 259 15,217 (614) (541) 12,871
Exceptional items............................. (11,831) -- (5,195) (6,001) (4,148)
(Loss)/profit before taxation................. (11,572) 15,217 (5,809) (6,542) 8,723
Retained (loss)/profit for the period......... (15,279) 10,426 (7,281) (6,470) 4,590
(Loss)/Earnings per share: basic.............. (14.3P) 14.0p (10.2p) (8.7p) 6.4p
(Loss)/Earnings per share: diluted............ (14.3P) 13.3p (10.2p) (8.7p) 6.4p
Average number of shares in issue (thousands)... 110,714 78,735 75,780 74,215 71,680
FINANCIAL POSITION AT END OF PERIOD:
Cash and bank deposits........................ 75,394 51,518 44,725 38,972 55,823
Total assets.................................. 322,361 123,824 100,204 111,828 124,302
Creditors: amounts falling due after more than one
year........................................ -- 12 15 66 193
Total shareholders funds...................... 217,109 70,892 61,124 70,187 72,856
FINANCIAL CONDITION:
Working capital............................... 62,370 36,195 26,611 27,306 36,554
Current ratio................................. 1.67 1.78 1.81 1.76 1.80
Return on revenue: excluding exceptional items... N/A 11% n/a n/a 10%
Return on average equity: excluding exceptional
items....................................... N/A 16% n/a n/a 12%
EMPLOYEE INFORMATION
Average number of employees................... 1,461 768 646 735 751
Period end number of employees................ 2,018 827 626 708 788
Revenue per employee (annualised)............. 147 126 113 105 120
(Loss) profit after taxation per employee:
excluding exceptional items (annualised).... (5) 14 (3) (2) 12
- - - ---------------
NOTES: Details of the exceptional items are set out in note 8 to the
consolidated financial statements on page 89.
Shares and per-share data for prior periods has been restated to comply
with FRS 14 -- Earnings per Share and to reflect the 5-for-1 sub-division
of the Company's ordinary shares, which took effect from the close of
business on March 13, 1998 (see note 25 to the consolidated financial
statements on page 102).
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
UK FORMAT
This discussion has been prepared in accordance with U.S. reporting
practice and is presented here so that readers of the U.K. format financial
statements have the same information as readers of the U.S. format financial
statements. It should be read in conjunction with the financial statements of
MERANT plc and its subsidiary undertakings ("MERANT") in G.B. pounds, on pages
72 to 103.
On February 16 1999, the Company changed its corporate name from "Micro
Focus Group Plc" to "MERANT plc".
On September 24, 1998, the Company acquired INTERSOLV, Inc. ("INTERSOLV")
in a transaction which approximately doubled the size of the Company in terms of
revenue, costs and employees, and resulted in the Company incurring significant
charges against current operations. Also, the Company elected to change its
financial year end and accounting reference date to April 30 from January 31 and
is therefore reporting results for the fifteen-month period ended April 30,
1999.
For these two reasons, the reported results for 1999 are difficult to
compare with the results for 1998, and consideration of these factors should be
made in any review of variances in revenue and costs.
RESULTS OF OPERATIONS
The Company has reported a loss for the period, after taxation, of
GBP 15.3m or 14.3 pence per share as compared to a profit after taxation in
1998 of GBP 10.4m or 13.3 pence per share diluted. The loss for the current
period is after providing for certain charges resulting from the acquisition of
INTERSOLV.
The Company's results include the results of INTERSOLV from September 24,
1998, the date of its acquisition (or the "INTERSOLV Acquisition"). Goodwill
arising on the acquisition--representing the excess of the consideration over
the net value of the assets acquired--totalled GBP 140.1m. This amount has been
capitalised as an intangible asset, which will be amortised through the profit
and loss account over a four year period. Amortisation of this goodwill is
therefore expected to result in an annual charge of approximately GBP 35m,
subject to any future reviews an of impairment. In the period up to April 30
1999, the Company recorded a charge of GBP 21.2m, which is included in the
profit and loss account under general and administrative costs. In addition,
the Company recorded a one-time exceptional charge of GBP 11.8m in connection
with the costs incurred to restructure the combined business following the
merger of the two companies. Because of the fundamental nature of this
restructuring, this charge is disclosed separately in the profit and loss
account, below. The Company does not expect to incur any additional costs in
connection with the merger
During 1999 the Company also acquired two of its foreign distributors.
Details of the acquisitions are set out below under the section "Acquisitions"
on page 63.
The following table discloses operating results as a percentage of revenue
for each of last three financial years and the percentage changes relative to
the previous year for each of the last two years. Throughout this
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discussion, references to 1999 are to the fifteen-month period ended April 30,
1999, and references to 1998 and 1997 are to the years ended January 31, 1998
and January 31, 1997 respectively.
PERCENTAGE OF NET REVENUE
------------------------------------------ YEAR TO YEAR
FIFTEEN MONTHS PERCENTAGE CHANGE
ENDED YEAR ENDED YEAR ENDED --------------------------------
APRIL 30, JANUARY 31, JANUARY 31, 1998 TO 1997 TO
1999 1998 1997 1999 1998
-------------- ----------- ----------- ------------ -----------------
(ANNUALISED)
REVENUE
Product revenue............... 55% 62% 58% 56% 44%
Maintenance revenue........... 26% 29% 40% 60% -4%
Service revenue............... 19% 9% 2% 293% 434%
---- ---- ---- ----- -----
TOTAL REVENUE.............. 100% 100% 100% 78% 33%
---- ---- ---- ----- -----
COST OF REVENUE
Cost of product revenue....... 4% 8% 9% 7% 9%
Cost of maintenance revenue... 8% 7% 14% 95% -35%
Cost of service revenue....... 14% 9% 2% 164% 645%
---- ---- ---- ----- -----
TOTAL COST OF REVENUE...... 26% 24% 25% 95% 25%
---- ---- ---- ----- -----
GROSS PROFIT.................... 74% 76% 75% 72% 35%
---- ---- ---- ----- -----
OPERATING EXPENSES
Research and development...... 16% 20% 33% 40% -19%
Sales and marketing........... 41% 37% 41% 101% 18%
General and administrative.... 19% 6% 11% 414% -20%
---- ---- ---- ----- -----
TOTAL OPERATING EXPENSES... 76% 63% 85% 113% -1%
---- ---- ---- ----- -----
OPERATING (LOSS)/PROFIT......... -2% 13% -10% -125% -270%
Exceptional item -- fundamental
restructuring................. -5% -- -- -- --
---- ---- ---- ----- -----
(LOSS)/PROFIT AFTER EXCEPTIONAL
ITEM.......................... -7% 13% -10% -200% -270%
Interest income................. 2% 3% 2% 39% 48%
Interest expense................ -- -- -- 66% 233%
---- ---- ---- ----- -----
(LOSS)/PROFIT BEFORE TAXATION... -5% 16% -8% -161% -362%
Taxation........................ -2% -5% -2% -38% 225%
---- ---- ---- ----- -----
RETAINED (LOSS)/PROFIT
FOR THE PERIOD................ -7% 11% -10% -217% -243%
Revenue
The Company's products are generally licenced to end users pursuant to a
licence agreement that restricts the use of the product to a designated number
of developers. The Company also offers its customers a broad range of services,
including maintenance, support, training and consulting. Maintenance services
consist primarily of enhancements and upgrades to products as well as telephone
support concerning the use of the Company's products. Training and consulting
services are focused on assisting customers in using the Company's products.
The Company's product and service offerings are focused in four primary
solution areas: Application Development Management (or "ADM", which includes
MERANT PVCS series), Enterprise Data Connectivity (or "EDC", which includes
MERANT DataDirect series), Application Creation and Transformation (or "ACT",
which includes MERANT Micro Focus series) and Enterprise Consulting Solutions
(or "ECS", which includes MERANT Consulting). These four solution areas are
collectively referred to as the Company's key products or solution areas.
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Total revenue for the fifteen-month period ended April 30 1999 increased by
GBP 118.5m or 122% to GBP 215.5m relative to the twelve month period ended
January 31 1998 and by GBP 23.9m or 33% to GBP 97.0m in 1998. Most of the
1999 increase was the result of the INTERSOLV Acquisition combined with the
additional three months in 1999. Revenue from the business prior to the
INTERSOLV Acquisition ("Existing Business") increased by 9% in 1999 on an
annualised basis. The increase in 1998 reflected initial worldwide sales of the
Company's SoftFactory 2000 and NetExpress products, increased UNIX product
sales and revenue from consulting services.
Revenue by Solution Area
Total revenue for the fifteen-month period ended April 30 1999 increased
by GBP 118.5m or 122% to GBP 215.5m relative to the twelve month period ended
January 31 1998 and by GBP 23.9m or 33% to GBP 97.0m in 1998. Most of the
1999 increase was the result of the INTERSOLV Acquisition combined with the
additional three months in 1999. Revenue from Existing Business increased by 9%
in 1999 on an annualised basis. The Existing Business increase in fiscal 1998
reflected initial worldwide sales of the Company's SoftFactory 2000 and
NetExpress products, increased UNIX product sales and revenue from consulting.
Product revenue
Product revenue increased by GBP 57.8m or 96% to GBP 118.2 million
relative to 1998, having previously increased by GBP 18.5m or 44% to GBP
60.5m in 1998 relative to 1997. Most of the 1999 increase was the result of the
INTERSOLV Acquisition combined with the additional three months in 1999.
Revenue from Existing Business increased by 4% on an annualised basis. Growth
in European markets in 1999, more than offset weakness in North American
revenue caused by a decrease in the Company's Year 2000 business, the effects
of the Company's sales force reorganization and integration issues related to
the INTERSOLV acquisition. The increase in revenue in 1998 reflected higher
sales of ACT product revenue in all geographies.
Maintenance revenue
Maintenance revenue increased by GBP 28.2m or 100% to GBP 56.5m relative
to 1998, having previously decreased by GBP 1.3m or 4% to GBP 28.2m in 1998
relative to 1997. Most of the 1999 increase was the result of the INTERSOLV
Acquisition combined with the additional three months in 1999. Revenue from
Existing Business increased by 3% in 1999 on an annualised basis. The decrease
in 1998 was the result of lower than expected maintenance contract renewals.
Service revenue
Service revenue increased by GBP 32.5m or 391% to GBP 40.8m relative to
1998, having previously increased by GBP 6.7m or 434% to GBP 8.3m in 1998
relative to 1997, and represented 19% of total revenue in 1999 (1998: 9%; 1997:
2%). The significant growth in service revenue is attributable to the INTERSOLV
Acquisition in 1999 and of Millennium UK Ltd in 1998.
Geographic revenue
In 1999, 62% of revenue arose in the U.S.A., compared to 51% in 1998. U.K.
revenue increased to 14% of total revenue (1998: 12%). In the fifteen-month
period ended April 30, 1999, U.S. revenue increased by 171%, U.K. revenue by
154% and revenue from the rest of the world by 42%. Most of the 1999 increase
was the result of the INTERSOLV Acquisition combined with the additional three
months in 1999. The INTERSOLV Acquisition also changed the geographic mix of
the Company somewhat.
There can be no assurance that the market for the Company's products will
grow in future periods at its historical rate of growth, that certain segments
will not decline, or that the Company will be able to increase or maintain its
market share in the future or achieve its historical revenue growth rates.
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Cost of revenue
Cost of product revenue is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media, and printing of manuals), packaging and distribution costs,
and royalties to third party software developers for the licencing of certain
add-on software products. Such costs increased by GBP 2.4m or 34% to GBP 9.4m
for the fifteen-month period ended April 30 1999, having previously increased
by GBP 0.6m or 9% to $7.0m in 1998 relative to 1997 and represented 8%, 12% and
15% of product revenue in 1999, 1998 and 1997 respectively. These percentage
reductions principally reflect savings in product materials arising from the
documentation being supplied on CD-ROM.
Cost of maintenance revenue is comprised principally of remuneration for
technical support personnel. Such costs increased by GBP 10.0m or 143% to
GBP 17.0m for the fifteen-month period ended April 30 1999, having previously
decreased by GBP 3.7m or 35% to $7.0m in 1998 relative to 1997 and represented
30%, 25% and 36% of maintenance revenue in 1999, 1998 and 1997 respectively.
Cost of service revenue is comprised principally of remuneration and
expenses of training and consulting personnel. Such costs increased by GBP
20.4m or 230% to GBP 29.2m for the fifteen-month period ended April 30 1999,
having previously increased by GBP 7.7m or 645% to $8.9m in 1998 relative to
1997 and represented 72%, 107% and 77% of service revenue in 1999, 1998 and
1997 respectively.
Gross profit
Gross profit represented 74%, 76% and 75% of revenue in 1999, 1998 and
1997 respectively. The decrease in 1999 primarily reflects proportionately
higher maintenance and service revenues.
The Company's gross 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 is also
dependent on discounts selectively provided to customers in competitive sales
situations. In addition, gross margin may be adversely affected by expansion of
the Company's consulting organisation and the ability to deploy its capacity to
revenue generating projects. As a result of the above factors, gross margin
fluctuations are difficult to predict, and gross margins may decline from
current levels in future periods.
Research and development
Research and development costs consist principally of remuneration for
software developers and related costs, less the proportion of those costs
capitalised, plus the charge for amortisation of previously capitalised costs.
The Company's high level of research and development spending supports the
development and enhancement of new and existing products and is consistent with
the Company's strategy of investing heavily to improve and expand its product
lines.
In fiscal 1999 and 1998, research and development has been principally
directed towards improvement and enhancements to existing solution areas.
Efforts are generally focused in areas of most promise.
Expenditure on internal software research and development increased by
GBP 14.6m or 74% to GBP 34.3m for the fifteen-month period to April 30 1999,
having decreased by GBP 4.6m or 19% to GBP 19.7m in 1998 relative to 1997 and
represented 16%, 20% and 33% of revenue in 1999, 1998 and 1997 respectively.
Most of the 1999 increase was the result of the INTERSOLV acquisition combined
with the additional three months in 1999. The decrease in 1998 development
expenditure reflect a lower relative cost structure following the restructuring
of operations in fiscal 1997.
In 1999 GBP 5.9m, representing 19% of these costs, were capitalised as
software product assets (1998: 32%, 1997: 27%). Provisions for amortisation
amounted to GBP 9.7m (1998: GBP 7.8m; 1997: GBP 8.1m) resulting in a net
charge to profit and loss in 1999 of GBP 3.8m (1998: GBP 2.1m; 1997: GBP
2.8m).
The Company believes that ongoing development of new products and features
is required to maintain and enhance its competitive position. Accordingly,
while the Company will continue to control expenses where possible, the Company
anticipates that aggregate research and development expenses will increase over
time, and may not be directly related to the level of revenue realised in
future quarters.
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Sales and marketing
Sales and marketing costs include remuneration, travel and facility costs
for sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows. Such costs increased by GBP 53.7m or 151% to
GBP 89.2m for the fifteen-month period ended April 30 1999 relative to the year
ended January 31 1998, and by GBP 5.3m or 18% to GBP 35.5m in 1998 relative
to 1997 and represented 41% of revenue in 1999 (1998: 37%, 1997: 41%). Most of
the 1999 increase was the result of the INTERSOLV Acquisition combined with the
additional three months in 1999. In addition, fiscal 1999 includes costs
associated with the new corporate name.
The Company believes that continued investments in sales, marketing,
customer support and promotional activities are essential to maintaining its
competitive position. The Company is expanding its sales and support staffs
and, accordingly, anticipates that sales and marketing expenses will be higher
in future periods, but as a function of revenue will decrease.
General and administrative
General and administrative costs include the Company's group management,
finance, legal and human resources operations. Such costs increased by GBP
34.1m or 543% to GBP 40.4m for the fifteen-month period ended April 30 1999
relative to the year ended January 31 1998, having decreased by GBP 1.6m or
20% to GBP 6.3m in 1998 relative to 1997 and represented 19% of revenue in
1999 (1998: 6%, 1997: 11%.)
In the current period, the Company adopted Financial Reporting Standard 10
"Goodwill and Intangible Assets" (see under "New accounting standards" in note
1 to the financial statements on page 83). Accordingly, the Company has
capitalised goodwill totaling GBP 144.4m in the current period, and
amortisation of this balance will be charged to general and administrative
costs over the estimated economic life of the goodwill acquired. Amortisation
charged in the current period amounted to GBP 21.9m. Exclusive of that charge,
general and administrative costs increased by 194% and represent 9% of revenue.
Most of the 1999 increase was the result of the INTERSOLV Acquisition combined
with the additional three months in 1999.
The total for 1997 included GBP 1.9m of restructuring costs (see
Exceptional items, below). The underlying increase in 1998 reflected higher
bonus accruals and staff additions.
The Company is investing to strengthen its infrastructure and anticipates
that general and administrative expenses will increase in future quarters, but
decrease as a percentage of revenue.
Exceptional items
During the current period the Company provided for costs of GBP 11.9m in
connection with a fundamental restructuring of its operations. Following the
acquisition of INTERSOLV in September 1998, the senior management of the
Company realigned the Company to complete the integration of the combined
operations. As part of this realignment, the Company has incurred charges
consisting principally of the write-off of redundant or impaired assets and
severance costs. Because of the fundamental nature of this reorganisation, the
related costs have been disclosed as an exceptional item on the face of the
profit and loss account.
In the year ended January 31 1997 the Company recorded a restructuring
charge of GBP 5.2m, representing the costs associated with a workforce
reduction of approximately 65 people, facility closures and consolidations, and
asset write-downs. Due to the nature of the restructuring, the amounts booked
were charged against operating profit.
Interest income
Interest earned on cash and short-term investments increased by GBP 1.9m
or 74% to GBP 4.4m for the fifteen-month period ended April 30 1999 relative
to the year ended January 31 1998 and by GBP 0.8m or 48% to GBP 2.6m in 1998
relative to 1997 and represented 2% of revenue in 1999 (1998: 3%, 1997: 2%.)
The increase in 1999 represented the impact of higher cash balances. The
increase in 1998 reflected higher average cash balances
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and also higher investment yields resulting from the investment of funds in
money market instruments instead of bank certificates of deposit.
The Company has a hedging programme to minimise foreign exchange gains or
losses, where possible, from recorded foreign-currency denominated assets and
liabilities. This programme involves the use of borrowings and forward foreign
exchange contracts in certain European currencies, including the euro. No
hedging contracts were outstanding at the year end.
Taxation
The Company's effective tax rate in the current period is significantly
distorted by the impact of provisions for amortisation of goodwill, which is not
an allowable expense. (See "General and administrative costs", above) The
current period rate is also impacted by corporate profits and losses arising in
different tax jurisdictions. The Company's effective tax rate is expected to be
significantly impacted by provisions for amortisation of goodwill for the next
four years.
In prior years the effective tax rate was distorted by the impact of
disallowable exceptional items, and losses incurred in the United States which
can only be offset against profits arising in the U.S. in future periods.
The income tax returns of certain of the Company's U.S. subsidiary
undertakings for the years ended January 31, 1993 to 1997 are under examination
by the U.S. Internal Revenue Service, which has proposed increases to the amount
of U.S. income taxes due in respect of those years. Any adjustments that may
result from this examination are not expected to have a material adverse impact
on the Company's consolidated operating results or its financial position.
An analysis of the charge for income taxes is given in note 10 to the
financial statements on page 90.
Acquisitions
In the current financial year MERANT completed three acquisitions at a
total cost of GBP 165,012,000.
On May 15, 1998, the Company acquired all of the share capital of its
Italian distributor, Micro Focus Italia, s.r.l. ("MF Italia"), for total
consideration of approximately GBP 2.6m. The Company made an initial cash
payment of GBP 2.4m, with the balance payable in cash, dependent on future
results of MF Italia. MF Italia changed its name to MERANT s.r.l. on March 1,
1999.
On August 13, 1998, the Company acquired all of the share capital of its
Australian distributor, Advanced Software Engineering Pty Ltd. ("ASE"), for
total consideration of approximately GBP 1.5m. The Company made an initial cash
payment of GBP 1.0m, with the balance payable in cash, dependent on future
results of ASE. ASE changed its name to MERANT Pty Ltd on February 16, 1999.
On September 24, 1998, the Company completed the acquisition of INTERSOLV,
a U.S. public corporation based in Maryland, and listed on the Nasdaq National
Market. INTERSOLV was a provider of software solutions that facilitate the
development, delivery and deployment of business information systems.
INTERSOLV's products and services are focused primarily in the areas of
application development management, enterprise data connectivity and enterprise
application renewal.
Under the terms of the agreement, each common share of INTERSOLV was
exchanged for 0.55 MERANT American Depositary Shares ("ADSs"). In addition, each
outstanding option or right to purchase or acquire shares of INTERSOLV common
stock was assumed by the Company and became an option or right to purchase or
acquire MERANT ADSs, with appropriate adjustments to the price and number of
shares based on the exchange ratio of 0.55 ADSs per INTERSOLV share. The merger
was structured as a tax-free reorganization under U.S. tax law. The Company
issued approximately 12.6 million new MERANT ADSs (representing approximately
63.1 million new MERANT ordinary shares) in exchange for INTERSOLV's common
stock and share equivalents outstanding, which at the time of the completion of
the transaction represented approximately 46% of MERANT's share capital on a
fully-diluted basis.
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Further information on these transactions is given in note 3 to the
financial statements on page 86.
In the year ended January 31 1998 the Company completed two acquisitions.
On April 30 1997 the Company acquired all of the share capital of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, for a
consideration of GBP 4.0m paid in a combination of GBP 2.0m in cash and the
issue of 747,060 ordinary shares in the Company. Millennium was a consulting
and project management services company which brought to MERANT specialised
expertise in the estimating, planning and management of Year 2000 compliance
projects.
On January 20 1998 the Company acquired all of the share capital of XDB
Systems, Inc ("XDB") in exchange for 1,891,975 ordinary shares in the Company,
which represented a value of GBP 8.7m on the date of the acquisition. XDB, a
privately-held corporation based in Maryland, USA, was a provider of DB2
database development, maintenance and connectivity solutions.
Year 2000 considerations
The Year 2000 problem is the result of the widespread practice since the
early days of computing of using only two digits to refer to a year (such as
"98" for "1998") instead of four digits in computer systems. When the Year 2000
arrives or the computer system refers to dates after December 31, 1999, such
systems will interpret the two digits "00" as "1900" as opposed to "2000".
Failure to address this problem could cause results ranging from system failures
to erroneous calculations in date-dependent operations for dates falling after
December 31, 1999. The Company has instituted various projects to become Year
2000 ready. "Year 2000 ready" as used herein means that the performance or
functionality of the Company's internal systems will not be significantly
affected by the dates prior to, during and after the Year 2000.
State of Readiness
The Company has developed and implemented an enterprise-wide plan to
analyse and address potential Year 2000 issues affecting its internal systems,
its interaction with third party vendors and suppliers, and its products and
services.
The Company has established a Year 2000 Project Team to implement a
comprehensive four-phase Year 2000 readiness plan addressing the Year 2000
readiness of the Company's internal systems. The Year 2000 readiness plan is
comprised of four phases (inventory, analysis, remediation and validation
phases). The inventory, analysis and remediation stages of the Year 2000
readiness plan have been substantially completed in all material respects with
respect to the Company's material internal systems, and the Company expects to
substantially complete the validation phase of the plan in all material respects
by August 31 1999. The Year 2000 readiness plan covers IT systems (desktop,
laptop, servers, routers, hubs, switches, and remote access systems, operating
systems, software and critical business systems), non-IT embedded systems
(telephone, voice messaging, teleconferencing, data services and equipment, fax,
copiers and similar equipment.), facilities (elevators, security systems, card
access systems and similar systems), and the Company's vendors and suppliers. As
part of the inventory phase, the Company sought confirmation from its material
suppliers on the current Year 2000 readiness of their systems and/or their
intended time schedule for achieving Year 2000 readiness. During the remainder
of calendar 1999, the Company will also be completing, reviewing and updating
its contingency and disaster recovery plans and preparing a detailed action plan
for the crossover of the Company into the next millennium.
With respect to its software products, each of the Company's product
business units has completed a Year 2000 assessment of its currently offered
products. In preparing for the Year 2000 date change, the Company has adopted
the Year 2000 compliance standard published by the British Standards Institute
(BSI)--BSI DISC PD2000-1 "A Definition of Year 2000 Conformity Requirements." As
a result of this assessment, the Company believes that the vast majority of its
currently offered products are Year 2000 compliant, and expects virtually all of
its remaining currently offered products to become compliant during calendar
1999 through new releases. In any event, the Company expects that all the then
current versions of its offered products will be Year 2000 compliant before the
end of calendar 1999. Because Year 2000 compliance
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is generally integrated into its normal product development activities, the
Company has not incurred and does not expect to incur any significant
incremental expenses in addressing this issue in its product lines. The Company
believes that a small number of customers who receive product support from the
Company are operating product versions that may not be Year 2000 compliant or
products that the Company has replaced or intends to replace with comparable
Year 2000 compliant products. The Company believes that the vast majority of
such customers are migrating and will continue to migrate to compliant versions
and products through new releases, which the Company is strongly encouraging. In
addition, certain former customers may be operating non-compliant versions of
products in respect of which the Company's agreed-upon product support and
warranty periods have expired. The Company has not undertaken, and does not plan
to undertake in the future, an assessment of whether these former customers are
taking appropriate steps to address any related Year 2000 issues.
The Company does not expect customers who licence or migrate to Year 2000
compliant versions of its products to experience any material Year 2000 failures
caused by such products. In addition, the Company believes that its licences and
other agreements contain customary and appropriate limitations on the Company's
obligations with respect to any Year 2000 failures that may be caused by its
current or former products. However, there can be no assurance that the
Company's expectations and beliefs as to these matters will prove to be
accurate. Moreover, the Company's products are used in IT systems containing
third-party hardware and software, some of which may not be Year 2000 compliant.
Many of the Company's customers use legacy computer systems that are expected to
be particularly susceptible to Year 2000 compliance issues. Various commentators
have predicted that a significant amount of litigation may arise out of Year
2000 compliance issues. While the Company has not been subject to any Year 2000
product claims or lawsuits to date, there can be no assurance that customers or
former customers will not bring claims or lawsuits against the Company seeking
compensation for losses associated with Year 2000-related failures. A material
adverse outcome in a Year 2000 claim or lawsuit could have a material adverse
effect on the Company's business, financial condition and results of operations.
A small number of the products the Company sells are licenced from third
parties. Although the current versions of these products have generally been
warranted to the Company as being Year 2000 compliant, these products have
generally not been subjected to the same extensive Company testing as those
products developed or acquired by the Company. The Company is therefore working
with these third party suppliers to obtain assurance of Year 2000 compliance.
The Company has designated its website as the Company's "Year 2000 Internet
Website" under the terms of the Year 2000 Information and Readiness Disclosure
Act (the "Act") (S.2392). The information provided on past and present pages on
this website regarding the Year 2000 compliance of Company products has been
designated as "Year 2000 Readiness Disclosures." The pages on this website have
been and will continue to be the Company's primary means for communicating to
customers regarding the Year 2000 compliance of its products.
Demand for Year 2000 Remediation Products and Services
The Company anticipates that demand in the Year 2000 product and service
market will decline, perhaps rapidly, in anticipation of or following the Year
2000, and the demand for the Company's Year 2000 compliance products and
services may also decline significantly as a result of new technologies,
competition or other factors. In the quarter ended October 31, 1998, the
Company's Year 2000 business was affected by customers moving to the later
stages of their remediation processes, for which the Company did not have the
appropriate products generally available until November, 1998. If these factors
were to continue, the Company's licence revenue and professional service fees
could be materially and adversely affected.
Costs and Risks Associated with Year 2000 Issues; Contingency Plans
The Company currently does not anticipate that it will incur material
operating expenses or be required to invest heavily in internal systems
improvements as a result of Year 2000 readiness issues. In addition, the Company
has not incurred and does not currently expect to incur any significant
incremental expenses in addressing this issue in its product and services. Total
expenditures, excluding personnel costs of existing staff, related to the Year
2000 readiness of the Company's internal systems is not expected to be material.
However,
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there can be no assurance that the Company will not experience significant
additional expenses for unforeseen Year 2000 issues, including those out of the
reasonable control of the Company. Although the Company believes that its Year
2000 readiness efforts are designed to appropriately identify and address those
Year 2000 issues that are within the Company's control, there can be no
assurance that the Company's efforts will be fully effective or that Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition or results of operations. The novelty and complexity of the
issues presented and the Company's dependence on the preparedness of third
parties are among the factors that could cause the Company's efforts to be less
than fully effective. Moreover, Year 2000 issues present many risks that are
simply beyond the Company's control, such as the potential effects of Year 2000
issues on the economy in general and on the Company's business partners and
customers in particular. The Company intends to continue to evaluate both
existing and newly identified Year 2000 risks and to develop and implement such
further responsive measures as it deems appropriate.
The Company is developing a contingency plan and a disaster recovery plan,
as well as an action plan for the crossover of the Company into the next
millenium. Such plans seek to minimise the impact of the Year 2000 problem on
the Company's business, financial condition and results of operations. During
the remainder of calendar 1999, the Company will be reviewing and updating such
plans.
Euro considerations
With effect from January 1 1999 eleven of the fifteen member countries of
the European Union adopted the euro as their legal currency. From 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. With effect from May 1
1999 the Company's internal systems have the ability to price and invoice
customers in the euro. The Company is also engaging in foreign exchange and
hedging activities in the euro. The Company will continue to modify the internal
systems that will be affected by this conversion during fiscal 2000, and does
not expect the costs of further system modifications to be material. There can
be no assurance, however, that the Company will be able to complete such
modifications to comply with euro requirements, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company will continue to evaluate the impact of the introduction
of the euro on its foreign exchange and hedging activities, functional currency
designations, and pricing strategies in the new economic environment. In
addition, the Company faces risks to the extent that banks and vendors upon whom
the Company relies and their suppliers are unable to make appropriate
modifications to support the Company's operations with respect to euro
transactions. While the Company will continue to evaluate the impact of the
euro, management does not believe its introduction will have a material adverse
effect upon the Company's business, financial condition or results of
operations.
Factors that may influence future operating results
The following comments are included in both the U.S. and U.K. format of the
Management's Discussion and Analysis in this Annual Report in accordance with
the U.S. Private Securities Litigation Reform Act 1995. For more information on
U.S. Securities Law Matters see page 106.
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. This section of
the discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
The factors set forth below as well as statements made elsewhere in the
Company's Annual Report and these financial statements contain certain
forward-looking statements that are based on the beliefs of the Company's
management, as well as assumptions made by, and information currently available
to, the Company's management. The Company's actual results, performance or
achievements in the remainder of fiscal 2000 and beyond could differ materially
from those expressed in, or implied by, any such forward-looking statements.
Factors that could cause or contribute to such material differences include, but
are not limited to, those discussed in this section below, as well as those
discussed elsewhere in the Company's Annual Report and these financial
statements. The Company undertakes no obligation to release publicly any updates
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or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of the Company's Annual Report. For more
information regarding forward-looking statements, see Further Information for
Shareholders--Special Note on Forward-Looking Statements on page 106 of this
Report.
Year 2000 Spending Policies. Many of our customers and potential customers
could potentially implement policies that prohibit or strongly discourage making
changes or additions to their internal computer systems until after January 1,
2000. If companies implement such a policy, we could experience lower revenues
if potential customers who might otherwise purchase our products or services
delay purchases until after January 1, 2000 in an effort to stabilize their
internal computer systems in order to cope with the Year 2000 problem or because
their information technology budgets have been diverted to address Year 2000
issues. If our potential customers delay purchasing our products and services in
preparation for Year 2000 problem, our business could be seriously harmed.
Integration of INTERSOLV; Synergies. In September 1998, the Company
acquired all the share capital of INTERSOLV. The Company acquired INTERSOLV with
the expectation that the acquisition will result in long-term strategic
benefits. Realization of these anticipated benefits depends in part on whether
the operations and administration of the companies are fully integrated in an
efficient and effective manner. There can be no assurance that this will occur.
The combined company's integration efforts have yet to be fully completed and
are still ongoing. The successful integration of MERANT and INTERSOLV will
require, among other things, integration of the product offerings of the
companies, sales and marketing and research and development efforts, the
cooperation and coordination of the business managers of the two companies, and
the integration of globally dispersed operations. It is possible that this
integration will not be accomplished smoothly or successfully, and that efforts
to achieve integration may require more time, expense and management attention
than anticipated. The diversion of management's attention from day-to-day
operations and any difficulties encountered in the integration process could
have a material adverse effect on the Company's business, financial condition
and results of operations. If the integration of the Company's and INTERSOLV's
operations is not successful, if the combined companies do not achieve the
operational efficiencies and other business synergies that are anticipated or if
those synergies are not achieved as quickly as may be expected by financial
analysts or at the level expected by financial analysts, or if the effect of the
merger on earnings per share is not in line with the expectation of financial
analysts, the market price of the MERANT ordinary shares or the MERANT ADSs
could be significantly and adversely affected.
Fluctuations in Operating Results; Absence of Significant Backlog. The
Company's future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders and the lengthy sales cycle,
product life cycles, the ability of the Company to introduce and market new and
enhanced versions of the Company's products on a timely basis, the introduction
and acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of new or enhanced
products or technologies, the timing of product introductions or enhancements by
the Company or its competitors, technological changes in the software industry,
changes in the mix of distribution channels through which the Company's 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 the Company's level of
operating expenses, changes in the Company's sales incentive plans, the
cancellation of licences 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.
A relatively high percentage of the Company's operating expenses is fixed
over the short term and if anticipated revenue for a fiscal quarter does not
occur or is delayed, the operating results for that quarter will be immediately
and adversely affected. The Company historically has operated with little
product backlog, because its products are generally shipped as orders are
received. As a result, revenue of the Company in any quarter will depend on the
volume and timing of, and the ability to fill, orders received in that quarter.
In addition, a substantial portion of the Company's revenue for most quarters is
booked and shipped in the last
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month of the quarter such that the magnitude of the quarterly fluctuations may
not become evident until late in or even at the end of the particular quarter.
Seasonality of Operating Results. The Company's 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, the
Company has historically experienced lower revenue for the first quarter of a
fiscal year than in the fourth quarter of the prior fiscal year. The Company
typically has recognised a high proportion of its 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 the Company's expenses do not vary with revenue.
Due to all of the foregoing factors, it is possible that in some future quarters
the Company's operating results will be below the expectations of stock market
analysts and investors and that the Company's share price would be materially
adversely affected.
Product Concentration. A large portion of the Company's revenue is derived
from products and related services for mainframe application development in the
COBOL language and COBOL compilers running on workstations and personal
computers. The Company expects that a substantial portion of its revenue will be
derived from such products and services in the future. As a result, the
Company's future operating results depend upon continued market acceptance and
use of the COBOL language. Any decline in the demand for or market acceptance or
use of the COBOL language or mainframes as a result of competition,
technological change or other factors could have a material adverse effect on
the Company's business, financial condition and results of operations.
Year 2000 Business and Compliance Issues. Information concerning the
Company's state of Year 2000 readiness, the demand for its Year 2000 remediation
products and services, the costs associated with its Year 2000 issues and its
contingency plans, and the Company's state of euro readiness are incorporated
herein by reference to the information included above in these financial
statements under the captions entitled "Year 2000 considerations" and "Euro
considerations" in the "Management's Discussion and Analysis of Results of
Operations and Financial Condition" section.
Rapid Technological Change; Dependence on New Products. The Company is in
a market that is subject to rapid technological change. The Company must
continually adapt to that change by improving its products and introducing new
products, technologies and services. The growth and financial performance of the
Company will depend in part on its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market enhancements of existing products and new products depends in part on
its ability to attract and retain qualified employees. In the past, the Company
has experienced delays and increased expenses in developing certain new
products. Any failure by the Company to anticipate or respond adequately to
changes in technology and market conditions, to complete product development and
introduce new products on a timely basis and with an adequate level of
performance and functionality, or to attract and retain qualified employees,
could materially adversely affect the Company's business, financial condition
and results of operations. to new or emerging technologies, or devote greater
resources to the promotion and sale of their products than can the Company.
There can be no assurance that other companies will not develop competitive
products in the future. In addition, the software industry is characterised
generally by low barriers to entry, as a result of which new competitors
possessing technological, marketing or other competitive advantages may emerge
and rapidly acquire market share. Furthermore, there can be no assurance that
the Company will be able to compete effectively in the future in the
professional services market.
Susceptibility to General Economic Conditions. The Company's revenue and
results of operations are subject to fluctuations in the general economic
conditions in the various areas of the world in which it does business. The
risks inherent in conducting international business generally include exposure
to exchange rate fluctuations (see the section entitled "Exchange rate
fluctuations" below), longer payment cycles, greater difficulties in debt
collection and enforcing agreements, tariffs and other restrictions on foreign
trade, export requirements, economic and political instability, withholding and
other tax consequences, restrictions on
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repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. In addition, the laws of certain countries in which the Company's
products may be marketed may not protect the Company's intellectual property
rights to the same extent, as do the laws of the United States and Europe. There
can be no assurance that the factors described above will not have an adverse
effect on the Company's future international revenue.
Dependence on Key Personnel. Several of the senior management personnel of
the Company are relatively new to the Company, including the Company's Chief
Executive Officer and Chief Financial Officer, and the Company's 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 there can be no assurance that the Company will be able to attract
and retain a sufficient number of qualified personnel to conduct its business in
the future. The Company's success depends to a significant degree upon the
continued contributions of its key management, marketing, product development,
professional services and operational personnel, including key personnel of
acquired companies. The Company will not have employment agreements with most of
its key personnel, nor does it maintain key person life insurance on any of
these persons.
Management of Growth. Both the Company and INTERSOLV have recently
experienced a period of rapid growth in revenue. This growth has placed a
significant strain on the financial, management, operational and other resources
of the combined companies, and if it continues is expected to continue to place
a significant strain on the Company's financial, management, operational and
other resources. There can be no assurance that the Company's management
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations.
Volatility of Stock Price. The market price of the Company's securities
has experienced significant price volatility, particularly since the
announcement of the Company's proposed acquisition of INTERSOLV in June 1998,
and such volatility may occur in the future. Factors such as actual or
anticipated fluctuations in the Company's operating results, changes in
financial estimates by securities analysts, announcements of technological
innovations, new products or new contracts by the Company or its 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, general market
conditions and other factors may have a significant impact on the market price
of the Company's securities. 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 adversely affect the
market price of the Company's securities.
Recent and Future Acquisitions. The challenges of integrating the
organizations and operations of the Company and INTERSOLV have been compounded
by ongoing efforts associated with the integration of recent acquisitions by
both companies, including the acquisitions by the Company of Millennium UK
Limited in April 1997, XDB Systems, Inc. in January 1998, Micro Focus Italia
S.r.L. in May 1998 and Advanced Software Engineering Pty. Ltd. in August 1998
and the acquisition by INTERSOLV of SQL Software, Ltd. in March 1998. The
Company also acquired Essential Software, Inc. (trading as The Marathon Group)
in August 1999. The Company is still in the process of integrating the
operations acquired in these transactions with its own. There can be no
assurance that the anticipated benefits of recently concluded business
combinations will be realised. In addition, these acquisitions have required
significant additional management resources and attention. The Company expects
to continue growing its business through acquisitions. If the Company is
unsuccessful in integrating and managing the recently acquired businesses or
other businesses it may acquire in the future, the Company's business, financial
condition and results of operations could be adversely affected in future
periods.
Enforceability of U.S. Judgments. The Company is a public limited company
organised under the laws of England and Wales. Judgments of U.S. courts,
including judgments against the Company, predicated on the civil liability
provisions of the federal securities laws of the United States, may not be
enforceable in English courts.
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Derivatives and other financial instruments
MERANT's principal financial instruments, other than derivatives, comprise
bank loans, cash and short-term deposits. The main purpose of these financial
instruments is to fund the operations of the business. The Company has various
other financial instruments, such as trade debtors and trade creditors, that
arise directly from its operations.
MERANT also enters into derivative transactions (principally forward
currency contracts). The purpose is to manage the currency risks arising from
the group's operations and its sources of finance.
It is, and has been throughout the period under review, the group's policy
that no trading in financial instruments shall be undertaken.
The main risks arising from the group's operations are liquidity risk and
foreign currency risk. The board reviews and agrees policies for managing each
of these risks and they are summarised below. These policies have remained
unchanged during the period under review.
Liquidity risk
The group's objective is to maintain a balance between maximisation of
investment returns and liquidity by restriction of the permitted investments and
the duration to maturity of those investments.
Foreign currency risk
As a result of the significant investment in overseas operations, the
group's balance sheet can be significantly affected by movements in foreign
currency exchange rates. The group seeks to mitigate the effect of this
structural currency exposure by entering into foreign exchange hedges. In
managing its structural currency exposures, the group's objectives are to
maintain a low cost of borrowings and to retain some potential for
currency-related appreciation while partially hedging against currency
depreciation. No hedging contracts were outstanding at April 30, 1999.
The group also has transactional currency exposures. Such exposures arise
from sales or purchases by an operating unit in currencies other than that
unit's functional currency. The group uses its multi-currency bank facility to
minimise such currency exposures.
Exchange rate fluctuations
MERANT prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates.
Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of the Company's revenue arises in U.S. dollars (approximately
two-thirds in 1999), whereas its costs are incurred approximately equally in
U.S. dollars and other currencies, predominately 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 the Company's operating results,
notably when expressed in G.B. pounds.
In 1999, 1998 and 1997, fluctuations between the U.S. dollar and the G.B.
pound have not been significant, and net exchange rate gains or losses on
operational transactions have been immaterial.
Liquidity and capital resources
MERANT continues to fund its activities through cash from operating
activities. In 1999 cash provided by operating activities was GBP 33.9m (1998:
GBP 17.8m).
In 1999 MERANT invested GBP 8.9m (1998: GBP 8.3m) in computer equipment
and other tangible fixed assets and GBP 5.9m (1998: GBP 5.7m) in software
product assets.
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Investment in 1998 included GBP 2.7m in connection with the relocation of
the Company to new U.S. facilities in Mountain View, California and Wayne,
Pennsylvania, and GBP 3.2m for the installation and implementation of new
internal recording and reporting systems.
Net of these expenditures, cash and short-term investments increased by
GBP 23.9m to GBP 75.4m (1998: increased by GBP 6.8m to GBP 51.5m).
The Company has in place a line of credit under the terms of which
unsecured financing of up to GBP 5.0m is available until January 2001.
At April 30 1999 borrowings totalling GBP 1.7m had been made against this
line of credit (January 31 1998: GBP 1.0m).
MERANT believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid money
market investments. The Company's investment policy is designed to minimise risk
while maximizing return on cash given such levels of risk, and to keep
uninvested cash at a minimum. Cash management is centralised, although some cash
is held at various subsidiaries around the world to meet local operating
requirements. All cash is freely remittable.
The Company believes that existing cash balances in combination with
internally generated funds and its available bank lines of credit will be more
than sufficient to meet cash requirements in 2000.
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
CONSOLIDATED PROFIT AND LOSS ACCOUNT
UK FORMAT
FIFTEEN MONTHS ENDED
APRIL 30 1999
----------------------------------- YEAR ENDED YEAR ENDED
CONTINUING ACQUISITIONS JANUARY 31 JANUARY 31
OPERATIONS (NOTE 3) TOTAL 1998 1997
NOTES GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----- ---------- ------------ ------- ---------- ----------
REVENUE
Product revenue.................. 78,446 39,799 118,245 60,480 42,020
Maintenance revenue.............. 36,452 20,002 56,454 28,233 29,516
Service revenue.................. 17,670 23,104 40,774 8,302 1,553
------- ------ ------- ------ ------
TOTAL REVENUE................. 2 132,568 82,905 215,473 97,015 73,089
------- ------ ------- ------ ------
COSTS OF REVENUE
Cost of product revenue.......... 6,302 3,063 9,365 6,990 6,406
Cost of maintenance revenue...... 10,940 6,058 16,998 6,984 10,703
Cost of service revenue.......... 12,353 16,894 29,247 8,861 1,189
------- ------ ------- ------ ------
TOTAL COST OF REVENUE......... 29,595 26,015 55,610 22,835 18,298
------- ------ ------- ------ ------
GROSS PROFIT....................... 102,973 56,890 159,863 74,180 54,791
------- ------ ------- ------ ------
OPERATING EXPENSES
Research and development......... 4 25,459 8,860 34,319 19,679 24,299
Sales and marketing.............. 55,735 33,426 89,161 35,477 30,146
General and administrative....... 5 25,980 14,432 40,412 6,288 7,854
------- ------ ------- ------ ------
TOTAL OPERATING EXPENSES...... 107,174 56,718 163,892 61,444 62,299
------- ------ ------- ------ ------
OPERATING (LOSS)/PROFIT............ 6 (4,201) 172 (4,029) 12,736 (7,508)
Exceptional item -- fundamental
restructuring.................... 8 (11,831) -- --
------- ------ ------
(LOSS)/PROFIT AFTER EXCEPTIONAL
ITEM............................. (15,860) 12,736 (7,508)
Interest income.................... 4,433 2,551 1,720
Interest expense................... 9 (145) (70) (21)
------- ------ ------
(LOSS)/PROFIT BEFORE TAXATION...... (11,572) 15,217 (5,809)
Taxation........................... 10 (3,707) (4,791) (1,472)
------- ------ ------
RETAINED (LOSS)/PROFIT FOR THE
PERIOD........................... (15,279) 10,426 (7,281)
======= ====== ======
(LOSS)/EARNINGS PER SHARE: BASIC... 11 (14.3p) 14.0p (10.2p)
(LOSS)/EARNINGS PER SHARE: DILUTED. 11 (14.3p) 13.3p (10.2p)
------- ------ ------
- - - ---------------
NOTE: Share and per share data for prior periods has been restated to comply
with FRS 14 -- Earnings Per Share (see note 1 on page 82) and to reflect
the 5-for-1 sub-division of the Company's ordinary shares, which took
effect on March 13, 1998 (see note 25 on page 102).
The notes on pages 79 to 102 form part of these financial statements.
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
CONSOLIDATED BALANCE SHEET
UK FORMAT
APRIL 30 JANUARY 31
1999 1998
NOTES GBP'000 GBP'000
----- -------- ----------
FIXED ASSETS
Intangible fixed assets................................... 12 133,976 12,394
Tangible fixed assets..................................... 13 28,633 23,836
Investments............................................... 14 4,691 4,886
------- ------
TOTAL FIXED ASSETS..................................... 167,300 41,116
------- ------
CURRENT ASSETS
Stocks.................................................... 15 1,780 317
Debtors................................................... 16 77,887 30,873
Cash and bank deposits.................................... 75,394 51,518
------- ------
TOTAL CURRENT ASSETS................................... 155,061 82,708
------- ------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 17 92,691 46,513
------- ------
NET CURRENT ASSETS.......................................... 62,370 36,195
------- ------
TOTAL ASSETS LESS CURRENT LIABILITIES.................. 229,670 77,311
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR..... 18 6 12
PROVISIONS FOR LIABILITIES AND CHARGES...................... 21 12,555 6,407
------- ------
NET ASSETS.................................................. 217,109 70,892
======= ======
CAPITAL AND RESERVES
Called up share capital................................... 2,873 1,588
Share premium account..................................... 189,261 30,196
Profit and loss account................................... 24,975 39,108
------- ------
TOTAL SHAREHOLDERS' FUNDS.............................. 217,109 70,892
======= ======
The financial statements on pages 72 to 102 were approved by the Board of
directors on August 4 1999
Gary Greenfield J. Michael Gullard
Director Director
The notes on pages 79 to 102 form part of these financial statements.
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
CONSOLIDATED CASH FLOW STATEMENT
UK FORMAT
YEAR ENDED YEAR ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
--------- ---------- ----------
NET CASH INFLOW FROM OPERATING ACTIVITIES (NOTE I).......... 33,864 17,767 12,135
------- ------- ------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received......................................... 4,433 2,519 1,803
Interest paid............................................. (145) (70) (21)
------- ------- ------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE................................................... 4,288 2,449 1,782
------- ------- ------
TAXATION
U.K. corporation tax refunded (paid)...................... 1,297 (599) (88)
Overseas tax refunded/(paid).............................. (582) (262) 70
------- ------- ------
TAX PAID.................................................... 715 (861) (18)
------- ------- ------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets......................... (8,906) (8,263) (2,500)
Capitalised software product assets....................... (5,853) (5,688) (5,258)
Investment in own shares.................................. 195 748 --
Disposal of tangible fixed assets......................... -- 447 546
------- ------- ------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT................................................ (14,564) (12,756) (7,212)
------- ------- ------
ACQUISITIONS AND DISPOSALS
Investment in subsidiary undertakings..................... 16,048 (2,000) --
Net cash acquired with subsidiaries....................... (17,928) 961 --
------- ------- ------
NET CASH OUTFLOW FROM ACQUISITIONS AND DISPOSALS............ (1,880) (1,039) --
------- ------- ------
CASH INFLOW BEFORE FINANCING................................ 22,423 5,560 6,687
------- ------- ------
FINANCING
Issue of ordinary shares.................................. 2,139 1,517 138
Expenses attributable to issue of ordinary shares......... (2,654) -- --
Capital element of finance lease obligations.............. (9) (65) (131)
Bank loan................................................. 689 1,007 --
------- ------- ------
NET CASH INFLOW FROM FINANCING.............................. 165 2,459 7
------- ------- ------
INCREASE IN CASH............................................ 22,588 8,019 6,694
======= ======= ======
The notes on pages 79 to 102 form part of these financial statements.
74
200
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO CONSOLIDATED CASH FLOW STATEMENT
UK FORMAT
FIFTEEN MONTHS
ENDED YEAR ENDED YEAR ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------------- ---------- ----------
(i) RECONCILIATION OF OPERATING PROFIT TO "NET CASH INFLOW
FROM OPERATING ACTIVITIES"
Operating (loss)/profit.................................... (4,029) 12,736 (7,508)
Depreciation charges....................................... 8,512 4,534 5,655
Amortisation charges....................................... 30,390 7,765 8,067
Loss on sale of tangible fixed assets...................... 3,032 72 221
Exceptional item........................................... (6,918) -- --
(Increase)/decrease in stocks.............................. (1,419) 154 1,171
(Increase)/decrease in debtors............................. (7,229) (14,460) 8,012
Increase/(decrease) in creditors........................... 11,525 6,966 (3,483)
------ ------- ------
NET CASH INFLOW FROM OPERATING ACTIVITIES.................. 33,864 17,767 12,135
------ ------- ------
(ii) RECONCILIATION TO NET FUNDS
Increase in cash in the period............................. 22,588 8,019 6,694
Cash inflow/(outflow) from increase/(decrease) in debt and
lease financing.......................................... (680) (942) 131
------ ------- ------
21,908 7,077 6,825
Translation difference..................................... 1,288 (1,226) (941)
------ ------- ------
23,196 5,851 5,884
------ ------- ------
Net funds, beginning of period............................. 50,493 44,642 38,758
------ ------- ------
NET FUNDS, END OF PERIOD................................... 73,689 50,493 44,642
====== ======= ======
BALANCES BALANCES
AT JANUARY CASH EXCHANGE AT APRIL 30,
31, 1998 FLOW DIFFERENCES 1999
---------- ------ ----------- ------------
(iii) ANALYSIS OF NET FUNDS:
Cash.................................................. 51,518 22,588 1,288 75,394
Short term loans...................................... (1,007) (689) -- (1,696)
Finance lease obligations............................. (18) 9 -- (9)
------ ------ ----- ------
50,493 21,908 1,288 73,689
------ ------ ----- ------
The notes on pages 79 to 102 form part of these financial statements.
75
201
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
COMPANY BALANCE SHEET
UK FORMAT
APRIL 30 JANUARY 31
1999 1998
NOTES GBP'000 GBP'000
----- -------- ----------
FIXED ASSETS
Tangible fixed assets..................................... 13 2,945 2,971
Investments............................................... 14 206,479 45,086
------- ------
TOTAL FIXED ASSETS..................................... 209,424 48,057
------- ------
CURRENT ASSETS
Amounts owed by subsidiary undertakings................... 9,353 8,989
Other debtors............................................. -- 40
Cash and bank deposits.................................... 68 738
------- ------
TOTAL CURRENT ASSETS................................... 9,421 9,767
------- ------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Amounts owed to subsidiary undertakings................... 7,548 9,153
Trade creditors........................................... 3 69
Corporation tax........................................... -- 63
Accrued expenses.......................................... 580 206
------- ------
NET CURRENT ASSETS.......................................... 1,290 276
------- ------
TOTAL ASSETS LESS CURRENT LIABILITIES.................. 210,714 48,333
PROVISIONS FOR LIABILITIES AND CHARGES...................... 21 -- 19
------- ------
NET ASSETS.................................................. 210,714 48,314
======= ======
CAPITAL AND RESERVES
Called up share capital................................... 2,873 1,588
Share premium account..................................... 189,261 30,196
Profit and loss account................................... 18,580 16,530
------- ------
TOTAL SHAREHOLDERS' FUNDS.............................. 210,714 48,314
======= ======
The financial statements on pages 72 to 102 were approved by the Board of
directors on August 4 1999
Gary Greenfield J. Michael Gullard
Director Director
This is the balance sheet of MERANT plc, the holding company of the MERANT group
of companies, which is presented in accordance with section 226 of the Companies
Act 1985 of Great Britain. No profit or loss account is presented for MERANT plc
as provided by section 230 of the same Act.
The notes on pages 79 to 102 form part of these financial statements.
76
202
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
UK FORMAT
FIFTEEN MONTHS ENDED YEAR ENDED YEAR ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------------------- ---------- ----------
(Loss)/profit for the period.......................... (15,279) 10,426 (7,281)
Currency translation adjustment....................... 1,146 (1,122) (1,920)
------- ------ ------
TOTAL RECOGNISED GAINS AND LOSSES FOR THE
PERIOD......................................... (14,133) 9,304 (9,201)
The notes on pages 79 to 102 form part of these financial statements.
77
203
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
MOVEMENT IN SHAREHOLDERS' FUNDS
UK FORMAT
ORDINARY SHARES OF 2P EACH:
----------------------------- SHARE RETAINED
AUTHORISED ISSUED AMOUNT PREMIUM EARNINGS TOTAL
'000 '000 GBP'000 GBP'000 GBP'000 GBP'000
---------- ------- ------ ------- -------- -------
BALANCE, JANUARY 31 1996.............. 82,500 75,720 1,514 17,936 50,737 70,187
Increase in authorised share
capital............................. 30,000 -- -- -- -- --
Share options exercised............... -- 120 3 135 -- 138
(Loss) for the year................... -- -- -- -- (7,281) (7,281)
Currency translation adjustment....... -- -- -- -- (1,920) (1,920)
------- ------- ----- ------- ------- -------
BALANCE, JANUARY 31 1997.............. 112,500 75,840 1,517 18,071 41,536 61,124
Issued on acquisitions................ -- 2,635 52 10,627 -- 10,679
Goodwill arising on acquisitions...... -- -- -- -- (11,732) (11,732)
Share options exercised............... -- 940 19 1,498 -- 1,517
Profit for the year................... -- -- -- -- 10,426 10,426
Currency translation adjustment....... -- -- -- -- (1,122) (1,122)
------- ------- ----- ------- ------- -------
BALANCE, JANUARY 31 1998.............. 112,500 79,415 1,588 30,196 39,108 70,892
Increase in authorised share capital.. 99,500 -- -- -- -- --
Issued on acquisitions................ -- 63,084 1,262 159,603 -- 160,865
Acquisition costs..................... -- -- -- (2,654) -- (2,654)
Share options exercised............... -- 1,174 23 2,116 -- 2,139
(Loss) for the period................. -- -- -- -- (15,279) (15,279)
Currency translation adjustment....... -- -- -- -- 1,146 1,146
------- ------- ----- ------- ------- -------
BALANCE, APRIL 30 1999................ 212,000 143,673 2,873 189,261 24,975 217,109
------- ------- ----- ------- ------- -------
- - - ---------------
NOTES: 1. The authorised share capital was increased by GBP 1,990,000 by the
creation of 99,500,000 ordinary shares of 2p each
2. The issued ordinary shares are allotted, called up and fully paid.
3. MERANT plc has been authorised by its members to make market
purchases of its own shares (within the meaning of section 163(3) of
the Companies Act 1985).
4. Share data for prior periods has been restated to reflect the 5-for-1
sub-division of The Company's ordinary shares, which took effect on
March 13, 1998 (see note 25 on page 102).
The cumulative value of goodwill written off on acquisitions between December 23
1989 and April 30 1999 was GBP 11,732,000 (January 31 1998: GBP 11,732,000).
The notes on pages 79 to 102 form part of these financial statements.
78
204
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT
The statutory financial statements of MERANT plc ("the Company"), within
the meaning of section 240 of the Companies Act 1985 of Great Britain, for the
accounting period ended April 30 1999, are contained on pages 72 to 102.
On November 30 1998, the Company announced a change of its financial year
end and accounting reference date to April 30 from January 31. Consequently, the
results shown in this report are for the fifteen-month period ended April 30
1999; comparative figures are for the twelve month periods ended January 31,
1998 and 1997.
On February 16, 1999, the Company changed its corporate name from Micro
Focus Group Plc to MERANT plc.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared under the historical cost
convention and in accordance with applicable U.K. Accounting Standards, which,
as applied by MERANT, differ in certain respects from U.K. GAAP, particularly as
to the treatment of acquisitions and goodwill and the presentation of certain
items in the financial statements.
Certain reclassifications of data presented in the 1998 and 1997 financial
statements and related notes amounts have been made to conform with the 1999
presentation. Specifically, the presentation of revenue and cost of revenue in
the profit and loss account has been expanded to analyse service revenue and
related direct costs between maintenance and other services. The results of
operations of the Company are not affected by this changed presentation.
Basis of consolidation
The consolidated financial statements are those of MERANT plc and all of
its subsidiary undertakings (collectively "MERANT") for the accounting period
ended April 30 1999. All significant inter-company balances and transactions
have been eliminated on consolidation.
Acquisitions are accounted for using the acquisition method of accounting.
Accordingly the profit and loss account and cash flow statement include the
results and cash flows for the period of ownership. The cost of acquisition
represents the cash value of the consideration and/or the market value of the
shares issued on the date the offer became unconditional, plus expenses. The
purchase consideration is allocated between the identifiable tangible assets and
liabilities on the basis of fair value at the date of acquisition. The excess is
attributed to goodwill and is amortised over its estimated economic life.
Revenue recognition
Product revenue: the Company's standard end user licence agreement for the
Company's products provides for an initial fee to use the product.
The Company also enters into other types of licence agreement, typically
with major end user customers, which allow for the use of the Company's
products, usually restricted by the number of employees, the number of users, or
the licence term. Fees from licences are recognised as revenue upon product
shipment, provided a signed agreement is in place, fees are fixed or
determinable, and collection of the resulting debt is deemed probable. Fees from
licences sold together with consulting services are generally recognised upon
shipment provided that the above criteria have been met and payment of the
licence fees is not dependent
79
205
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
upon the performance of the consulting services. In instances where the
aforementioned criteria have not been met, both the licence and consulting fees
are recognised under the percentage of completion method of contract accounting.
The Company provides for sales returns based on historical rates of return.
Maintenance revenue: maintenance agreements generally call for the Company
to provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognised over the term of the
support agreement on a pro-rata basis. Payment for maintenance fees are
generally made in advance and are nonrefundable.
Service revenue: The Company provides consulting and education services to
its customers. Revenue from such services is generally recognised as the
services are performed.
Software product assets -- development costs
Costs related to the initial development and design of new software
products prior to the establishment of technological feasibility are written off
as research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalised as software product
assets.
Software purchased for inclusion in the MERANT product set, including
software acquired on acquisitions, is also included in software product assets.
Software product assets are amortised using the straight line method over
the estimated economic life of the products, which in most cases is assumed to
be three or four years. Where a shortfall in future revenue from a product is
anticipated, amortisation is accelerated. Software product assets are reviewed
for impairment if events or circumstances indicate that the carrying value may
not be recoverable.
Amortisation of software product assets is included in research and
development costs.
Goodwill
Goodwill is stated at cost, less accumulated amortisation. Cost represents
the excess of amounts paid on the acquisition of businesses over the aggregate
fair value of the net assets acquired. Amortisation is computed using the
straight-line method over the estimated economic life of the asset. The
estimated life will depend on the length of the future period expected to
benefit from the purchase. Present estimated economic lives are between three
and five years. Goodwill is reviewed for impairment if events or circumstances
indicate that the carrying value may not be recoverable.
Prior to January 31 1998 goodwill was written off directly to reserves as
incurred.
If a subsidiary or business is subsequently sold or closed, any goodwill
arising on acquisition that was written off directly to reserves or has not been
fully amortised through the profit and loss account is taken into account in
determining the profit or loss on the sale or closure.
80
206
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Tangible fixed assets
Tangible fixed assets are stated at cost less accumulated depreciation and
amortisation. Depreciation and amortisation is computed using the straight-line
method over estimated economic lives from the time the asset is put into use.
Present estimated economic lives are as follows:
Freehold office buildings................................ 40 years
Leasehold improvements................................... over the lease term
Computer equipment....................................... 3-5 years
Office equipment......................................... 7-11 years
Transportation equipment................................. 3-4 years
Leasing
Leases which transfer substantially all the risks and rewards of ownership
of an asset to MERANT are capitalised as fixed assets. The amount capitalised is
the net present value of the future lease payments, this sum also being treated
as a liability. Depreciation on such leased assets is provided at rates
calculated to write off the capitalised cost over the shorter of the lease term
and the asset's economic life. Lease payments are apportioned between finance
charges (computed on the basis of implicit interest rates) and a reduction in
the original liability.
Rentals paid under operating leases are charged to income on a
straight-line basis over the lease term.
Deferred taxation
Deferred taxation is provided on the liability method on all timing
differences to the extent that they are expected to reverse in the future
without being replaced, calculated at the rate at which it is anticipated the
timing differences will reverse.
Stocks
Stocks, consisting principally of diskettes and technical manuals, are
stated at the lower of cost and net realisable value, using the first-in,
first-out method. Contracts in progress, representing engineering costs
associated with non-cancellable licence agreements prior to delivery, are
included in stocks and charged to income when the related revenue is recognised.
Cash and bank deposits
Cash and bank deposits includes cash placed on deposit where the maturity
date is between three and twelve months from the initial date of deposit. All
such cash balances are repayable on demand and can be withdrawn at any time
without notice or penalty.
Investments
Investments are recorded at cost less any provision for impairment.
81
207
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Derivative instruments
MERANT uses forward foreign currency contracts to reduce exposure to
changes in foreign exchange rates. The criteria for forward foreign currency
contracts are:
- the instrument must be related to a foreign currency asset or liability
that is probable and whose characteristics have been identified
- it must involve the same currency as the hedged item (except that euros
may be used to hedge the currencies directly linked to the euro by fixed
rates)
- it must reduce the risk of foreign currency exchange movements on the
group's operations.
The rates under such contracts are used to record the hedge item. As a
result, gains and losses are offset against the foreign exchange gains and
losses on the related financial assets and liabilities.
Translation of foreign currencies
MERANT's policy on foreign currency translation complies with Statement of
Standard Accounting Practice No. 20 "Foreign Currency Translation".
Assets and liabilities denominated in currencies other than G.B. pounds are
translated at exchange rates in effect at balance sheet date. Revenue, costs and
expenses are translated using average rates.
Translation adjustments resulting from the process of translating financial
statements denominated in currencies other than G.B. pounds are dealt with
through reserves.
Earnings/(loss) per share
Basic earnings/(loss) per share is computed in accordance with Financial
Reporting Standard ("FRS") 14, and is computed as the profit/(loss) for the
period after taxation, divided by the weighted average number of ordinary shares
outstanding during the period, excluding shares held by the employee share
ownership trust (see note 14, below).
Diluted earnings per share is computed based on basic earnings/(loss) per
share, as adjusted for shares issuable upon exercise of dilutive share options.
The computation assumes the proceeds from the exercise of dilutive share options
are used to repurchase the Company's ordinary shares at their average market
price during each period.
Pensions
MERANT has entered into arrangements under which it makes defined
contributions to personal pension schemes operated by its employees.
Contributions, which are independently administered by insurance companies and
other financial institutions, are charged to income in the year in which they
become payable.
New accounting standards
During 1997 and 1998 the Accounting Standards Board has issued five new
accounting standards with which the Company is required to comply with effect
from this financial year.
82
208
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
FRS 10 "Goodwill and Intangible Assets" requires, inter alia, that goodwill
arising as part of a business acquisition, which previously could be written off
directly to reserves, is instead capitalised as an intangible fixed asset, and
amortised over its estimated useful life, such amortisation being charged
through the profit and loss account. As set out in note 3, below, the Company
has recorded goodwill on acquisitions made during the current period. The
amounts of goodwill capitalised are shown in note 12, below. The Company has
charged amortisation on such goodwill to general and administrative costs, as
shown in note 5, below.
FRS 11 "Impairment of Fixed Assets and Goodwill" requires that where the
value of fixed assets or goodwill may have been impaired, such values should be
reviewed and any impairment losses written off in the profit and loss account.
The Company has not recorded any impairment losses in the current period.
FRS 12 "Provisions and Contingencies" sets out detailed rules on the
recognition, measurement and disclosure of provisions and contingencies. The
provision for restructuring has been reclassified in accordance with this
standard.
FRS 13 "Derivatives and Other Financial Instruments -- Disclosures"
requires narrative and numerical disclosures regarding a company's objectives,
policies and strategies in respect of financial instruments. The Company's
disclosures are set out in note 22, below.
FRS 14 "Earnings per Share" introduces new computation, presentation and
disclosure requirements for earnings per share data. The disclosures required by
FRS 14 are set out in note 11, below; prior year data has been restated in
accordance with FRS 14.
On February 18 1999 the Accounting Standards Board issued FRS 15 "Tangible
Fixed Assets", which deals with the cost, depreciation and valuation of tangible
fixed assets. Compliance with FRS 15, which the Company will adopt in 2000, is
not expected to have a significant impact on results of operations or financial
condition of the Company.
NOTE 2 SEGMENTAL INFORMATION
MERANT operates in one business segment -- the development and licencing of
computer software products and related services. The following table analyses
revenue by geographical area, based on customer location:
YEAR YEAR
FIFTEEN MONTHS ENDED ENDED ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------------------- ---------- ----------
United Kingdom......................... 30,123 11,864 6,811
United States.......................... 133,269 49,037 38,640
Europe (excluding U.K.)................ 36,095 18,498 19,297
Japan.................................. 6,371 3,964 3,519
Other.................................. 9,615 13,652 4,822
------- ------ ------
215,473 97,015 73,089
------- ------ ------
83
209
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 2 SEGMENTAL INFORMATION -- (CONTINUED)
The following table analyses worldwide operations by geographical area,
based on the location of MERANT facilities.
YEAR YEAR
FIFTEEN MONTHS ENDED ENDED ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------------------- ---------- ----------
Revenue:
United Kingdom....................... 59,512 43,249 33,974
United States........................ 141,734 56,846 42,856
Europe (excluding U.K.).............. 55,286 23,554 20,588
Other................................ 13,953 7,858 1,910
------- ------- -------
270,485 131,507 99,328
------- ------- -------
Inter-segment revenue:
United Kingdom....................... (14,613) (21,003) (15,900)
United States........................ (20,402) (4,199) (3,501)
Europe (excluding U.K.).............. (17,062) (9,077) (6,381)
Other................................ (2,935) (213) (457)
------- ------- -------
215,473 97,015 73,089
------- ------- -------
Operating profit/(loss):
United Kingdom....................... (24,308) 5,498 (2,960)
United States........................ 495 1,041 (4,699)
Europe (excluding U.K.).............. 15,608 896 (220)
Other................................ 4,176 5,301 371
------- ------- -------
(4,029) 12,736 (7,508)
------- ------- -------
Net operating assets/(liabilities):
United Kingdom....................... 114,399 14,174 16,075
United States........................ 11,856 2,930 (8,199)
Europe (excluding U.K.).............. 5,489 (4,112) 2,988
Other................................ 6,985 2,521 (16)
------- ------- -------
138,729 15,513 10,848
------- ------- -------
Inter-segment revenue principally represents licence fees and charges for
research and development between locations. Operating profit/(loss) excludes
interest income and expense and, correspondingly, net
84
210
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 2 SEGMENTAL INFORMATION -- (CONTINUED)
operating assets/(liabilities) exclude interest-bearing assets and liabilities.
A reconciliation of the net operating assets/(liabilities) as shown above to net
assets as shown in the balance sheet is as follows:
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------- ---------- ----------
Net operating assets........................... 138,729 15,513 10,848
Cash and bank deposits......................... 73,698 50,511 44,725
Investment in own shares....................... 4,691 4,886 5,634
Finance lease obligations...................... (9) (18) (83)
------- ------ ------
Net assets..................................... 217,109 70,892 61,124
------- ------ ------
NOTE 3 ACQUISITIONS
In the current financial year MERANT completed three acquisitions at a
total cost of GBP 165,012,000.
Each transaction has been accounted for as an acquisition, as set out in
note 1 on page 85. Accordingly, the results of operations and cash flows of the
acquired businesses have been combined with those of MERANT for the periods
subsequent to their acquisition, and the acquisition cost has been allocated
between the identifiable tangible assets and liabilities of the acquired
entities based on their respective fair values, with the difference allocated to
goodwill.
On May 15 1998 the Company acquired all of the share capital of its Italian
distributor, Micro Focus Italia, s.r.l., ("MF Italia"), for a total
consideration estimated at GBP 2,644,000. The Company made an initial cash
payment of GBP 2,470,000, with the balance payable in cash dependent on future
results of MF Italia.
The following table sets out the allocation of the estimated cost of
acquisition between the tangible assets and liabilities of MF Italia, and the
resultant goodwill.
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
GBP'000 GBP'000 GBP'000
---------- ----------- --------------
Cash........................................ 40 40
Accounts receivable......................... 1,735 (376) 1,359
Other current assets........................ 223 223
Tangible fixed assets....................... 147 147
Bank overdraft.............................. (172) (172)
Current liabilities......................... (1,785) (1,785)
------ ----- ------
Total net liabilities....................... 188 (376) (188)
------ -----
Goodwill arising............................ 2,832
------
2,644
------
Purchase consideration payable to vendors... 2,644
------
Fair value adjustments related to an increase in provisions for doubtful
accounts.
85
211
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 3 ACQUISITIONS -- (CONTINUED)
MF Italia reported a profit after taxation of GBP 482,000 in its financial
year ended December 31 1997. In the subsequent period to May 15 1998, the date
of its acquisition, MF Italia recorded a profit after taxation of GBP 106,000.
MF Italia changed its name to MERANT s.r.l. on March 1, 1999.
On August 13 1998 the Company acquired all of the share capital of its
Australian distributor, Advanced Software Engineering Pty, Ltd ("ASE"), for a
total consideration estimated at GBP 1,503,000. The Company made an initial
cash payment of GBP 970,000, with the balance dependent on future results of
ASE.
The following table sets out the allocation of the estimated cost of
acquisition between the tangible assets and liabilities of ASE, and the
resultant goodwill.
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
GBP'000 GBP'000 GBP'000
---------- ----------- --------------
Cash........................................ 270 270
Accounts receivable......................... 213 213
Other current assets........................ 107 107
Tangible fixed assets....................... 103 103
Current liabilities......................... (693) (693)
---- -------- -----
Total net assets............................ 0 0
---- -------- -----
Goodwill arising............................ 1,503
-----
Purchase consideration payable to vendors... 1,503
-----
The Company made no fair value adjustments to the assets and liabilities
reported by ASE.
ASE reported a profit after taxation of GBP 46,000 in its financial year
ended June 30 1998. In the subsequent period to August 13 1998, the date of its
acquisition, ASE recorded a profit after taxation of GBP 4,000.
ASE changed its name to MERANT Pty Ltd on February 16, 1999.
On September 24 1998 the Company acquired all of the share capital of
INTERSOLV, Inc ("INTERSOLV"), in exchange for 63,084,000 ordinary shares in the
Company, which represented a value of GBP 160,865,000 on the date the
acquisition was completed. INTERSOLV, a publicly-held corporation based in
Maryland, USA, is a provider of database development, maintenance and
connectivity solutions.
86
212
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 3 ACQUISITIONS -- (CONTINUED)
The following table sets out the allocation of the estimated cost of
acquisition between the tangible assets and liabilities of INTERSOLV, and the
resultant goodwill.
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
GBP'000 GBP'000 GBP'000
---------- ----------- --------------
Cash........................................ 17,567 17,567
Accounts receivable......................... 29,632 29,632
Other current assets........................ 3,521 3,521
Intangible fixed assets..................... 932 932
Tangible fixed assets....................... 6,971 6,971
Other assets................................ 5,496 5,496
Current liabilities......................... (27,712) (27,712)
Deferred taxation........................... (3,747) (3,747)
------- -- -------
Total net assets............................ 32,660 0 32,660
------- --
Goodwill arising............................ 140,061
-------
172,721
-------
Purchase consideration payable to vendors... 160,865
Costs of acquisition -- cash paid........... 11,856
-------
172,721
-------
The Company made no fair value adjustments to the assets and liabilities
reported by INTERSOLV.
INTERSOLV reported a profit after taxation of GBP 3,425,000 in its
financial year ended April 30 1998. For the subsequent period ended September
24 1998, the date of its acquisition, INTERSOLV's results are summarised as
follows:
GBP'000
-------
Summarised profit and loss account:
Revenue..................................................... 40,724
Operating profit............................................ (1,564)
Profit before taxation...................................... (1,356)
Taxation.................................................... 501
Retained profit for the period.............................. (854)
------
Statement of recognised gains and losses:
Retained profit for the period, as above.................... (854)
Foreign currency translation adjustment..................... (271)
------
Total recognised gains and losses................. (1,125)
------
The information shown in the above statement has been prepared on the basis
of INTERSOLV's accounting policies prior to its acquisition.
At the time of the acquisition, provision was made for costs amounting to
GBP 11,831,000 in connection with the fundamental reorganisation of the
businesses of the combined companies. These costs have been disclosed as an
exceptional item in the current period.
87
213
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 3 ACQUISITIONS -- (CONTINUED)
As explained in note 1, the Company has applied the provisions of FRS 10 to
these acquisitions. Accordingly, goodwill arising on these acquisitions has been
capitalised as an intangible asset (see note 12).
NOTE 4 RESEARCH AND DEVELOPMENT COSTS
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- ------- ---------- ----------
Research and development costs, before
capitalisation................................ 30,455 17,602 19,235
Costs capitalised as software product assets.... (5,853) (5,688) (5,258)
Amortisation of capitalised costs............... 9,717 7,765 8,067
Restructuring costs............................. -- -- 2,255
------ ------ ------
34,319 19,679 24,299
------ ------ ------
NOTE 5 GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs includes provisions for amortisation of
the goodwill arising on acquisitions amounting to GBP 21,915,000 (1998: GBPnil;
1997: GBPnil).
NOTE 6 OPERATING (LOSS)/PROFIT
Operating (loss)/profit is stated after charging:
APRIL 30 JANUARY JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- -------- ------- ---------
Auditors' remuneration: audit services: U.K....... 204 117 105
audit services: overseas........................ 333 110 93
non-audit services: U.K......................... 740 230 181
non-audit services: overseas.................... 531 289 218
Operating lease rentals:
equipment....................................... 2,639 756 743
land and buildings.............................. 3,799 1,780 1,811
Depreciation of tangible fixed assets:
owned........................................... 8,512 4,495 5,616
leased.......................................... -- 39 39
Amortisation of intangible fixed assets........... 31,632 7,765 8,067
------ ----- -----
The profit attributable to the ordinary shareholders of MERANT plc, dealt
with in the financial statements of MERANT, is GBP 2,050,000 (1998: GBP
805,000; 1997: GBP 716,000). There were no other movements on reserves other
than the movement on share premium shown in the Movement in Shareholders' Funds
on page 78.
88
214
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 7 DIRECTORS AND EMPLOYEES
An analysis of the directors' remuneration, pension entitlements and share
options and the relevant disclosures specified for audit by the London Stock
Exchange are set out under the headings "Directors' remuneration" and "Directors
share options" within the Remuneration Committee's Report on pages 12 to 15.
The average monthly numbers of staff employed by MERANT was as follows:
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED NO. NO. NO.
------------- -------- ---------- ----------
U.K. ........................................... 393 252 255
U.S. ........................................... 785 355 310
Other........................................... 283 112 81
----- --- ---
1,461 719 646
----- --- ---
Staff costs, which include salaries, bonus and commissions, amounted to:
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- ------- --------- ---------
U.K. ........................................... 21,707 10,324 9,173
U.S. ........................................... 45,371 22,803 16,758
Other........................................... 15,689 5,184 3,554
------ ------ ------
82,767 38,311 29,485
Social security costs........................... 9,514 2,979 2,797
Other pension costs............................. 2,417 432 437
------ ------ ------
94,698 41,722 32,719
------ ------ ------
Other pension costs principally represent amounts paid by MERANT to
personal pension schemes operated by its employees. In the United Kingdom,
MERANT matches contributions made by participating employees up to certain
predetermined thresholds. Arrangements for employees in other countries have
been established on similar bases, subject to local regulations and practices in
the countries concerned.
NOTE 8 EXCEPTIONAL ITEMS
During the current period the Company provided for costs of GBP 11,831,000
in connection with a fundamental restructuring of its operations. Following the
acquisition of INTERSOLV, Inc in September 1998, the senior management of the
Company was changed, and the new team proposed to realign the Company's
operations into four business units, one of which closely aligns the
pre-acquisition operations of the Company. As part of this realignment, the
Company has incurred charges consisting principally of the write-off of
redundant or impaired assets and severance costs. Because of the fundamental
nature of this reorganisation, the related costs have been disclosed as an
exceptional item on the face of the profit and loss account. As at April 30
1999, outstanding amounts totalling GBP 3,671,000 remained payable.
In the year ended January 31 1997 the Company booked a restructuring charge
of $5,195,000, representing the costs associated with a reduction in the
Company's workforce of approximately 65 people, facility closures and
consolidations, and asset write-downs. Due to the nature of the restructuring,
the amounts booked were charged against operating profit.
89
215
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 9 INTEREST EXPENSE
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- -------- ---------- ----------
On bank loans and overdrafts.................... 123 65 3
On other loans.................................. 21 -- --
Finance charges payable under finance leases.... 1 5 18
--- -- --
145 70 21
--- -- --
NOTE 10 TAXATION
The taxation charge consists of the following:
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- -------- ---------- ----------
U.K. corporation tax............................ 2,645 3,244 237
Deferred taxation............................... (1,198) (71) 870
Double taxation relief.......................... -- (162) (174)
Overseas taxation:
US federal.................................... 1,079 542 4
US state...................................... 63 128 1
Other........................................... 2,180 958 276
------ ----- -----
4,769 4,639 1,214
Taxation (overprovided)/under-provided in
previous years:
Corporation tax................................. (1,062) -- 258
Deferred taxation............................... -- 152 --
------ ----- -----
3,707 4,791 1,472
------ ----- -----
Effective tax rates............................. -32% 31% -25%
------ ----- -----
The Company's effective tax rate in the current period is significantly
distorted by the impact of provisions for amortisation of goodwill (see note 5)
for which there is no tax deduction. Excluding that charge, the tax rate in the
current period would be 36%. The current period rate is also impacted by
corporate profits and losses arising in different tax jurisdictions. The tax
effect of the exceptional items disclosed in the profit and loss account was not
significant.
In prior years the effective tax rate was distorted by the impact of
disallowable exceptional items, and losses incurred in the United States which
can only be offset against profits arising in future periods.
The Company's effective tax rate is expected to be significantly impacted
by provisions for amortisation of goodwill for the next four years.
The corporation tax returns of certain U.S. subsidiary undertakings are
under examination by the U.S. Internal Revenue Service, which has proposed
certain adjustments. The Company believes that the outcome of the examination
will not give rise to any material adjustment to the financial statements.
90
216
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 11 (LOSS)/EARNINGS PER SHARE
(Loss)/earnings per share is computed from the following data and in
accordance with the bases set out in note 1.
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- -------- ---------- ----------
(Loss)/profit after taxation................... (15,279) 10,426 (7,281)
------- ------ ------
Weighted average number of ordinary shares:
In issue..................................... 110,714 78,735 75,780
Owned by employee share ownership trust
(note 14)................................. (3,834) (4,109) (4,170)
------- ------ ------
Used in computing basic (loss)/earnings
per share.................................... 106,880 74,626 71,610
Dilutive options............................... -- 3,900 --
------- ------ ------
Used in computing diluted (loss)/earnings per
share........................................ 106,880 78,526 71,610
------- ------ ------
(Loss)/earnings per share: basic............... (14.3p) 14.0p (10.2p)
(Loss)/earnings per share: diluted............. (14.3p) 13.3p (10.2p)
In 1999 and 1997 share options were anti-dilutive and are therefore
excluded from the computations.
NOTE 12 INTANGIBLE FIXED ASSETS
SOFTWARE PRODUCT
ASSETS GOODWILL TOTAL
GBP'000 GBP'000 GBP'000
---------------- -------- -------
COST:
At January 31 1998.......................... 79,149 -- 79,149
Currency fluctuations....................... 91 -- 91
Arising on acquisitions..................... 4,935 1,125 6,060
Purchased goodwill and other additions...... 5,853 144,396 150,249
------ ------- -------
At April 30 1999............................ 90,028 145,521 235,549
------ ------- -------
DEPRECIATION:
At January 31 1998.......................... 66,755 -- 66,755
Currency fluctuations....................... 30 -- 30
Arising on acquisitions..................... 2,963 193 3,156
Provision for the period.................... 9,717 21,915 31,632
------ ------- -------
At April 30 1999............................ 79,465 22,108 101,573
------ ------- -------
NET BOOK VALUES:
At January 31 1998.......................... 12,394 -- 12,394
------ ------- -------
At April 30 1999............................ 10,563 123,413 133,976
------ ------- -------
91
217
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 13 TANGIBLE FIXED ASSETS
(a) MERANT:
COMPUTER &
COMMUNICATIONS
FREEHOLD LAND LEASEHOLD OFFICE EQUIPMENT & TRANSPORTATION
AND BUILDINGS IMPROVEMENTS EQUIPMENT SOFTWARE EQUIPMENT TOTAL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------- ------------ --------- -------------- -------------- ------
Cost:
At January 31 1998...... 13,828 2,575 4,651 27,822 126 49,002
Currency fluctuations... -- 107 120 532 3 762
Arising on
acquisitions.......... 150 3,214 2,946 11,401 28 17,739
Additions............... -- 294 859 7,641 112 8,906
Disposals............... (150) (1) (261) (3,393) (31) (3,836)
------ ----- ----- ------ --- ------
At April 30 1999........ 13,828 6,189 8,315 44,003 238 72,573
------ ----- ----- ------ --- ------
Depreciation:
At January 31 1998...... 659 817 2,698 20,922 70 25,166
Currency fluctuations... -- 43 72 432 1 548
Arising on
acquisitions.......... 7 1,354 1,752 7,394 11 10,518
Provision for the
period................ 27 744 914 6,802 25 8,512
Disposals............... (7) -- (98) (691) (8) (804)
------ ----- ----- ------ --- ------
At April 30 1999........ 686 2,958 5,338 34,859 99 43,940
------ ----- ----- ------ --- ------
Net book values:
At January 31 1998...... 13,169 1,758 1,953 6,900 56 23,836
------ ----- ----- ------ --- ------
At April 30 1999........ 13,142 3,231 2,977 9,144 139 28,633
------ ----- ----- ------ --- ------
The above figures include transportation equipment held under finance
leases as follows:
NET BOOK
COST DEPRECIATION VALUE
GBP'000 GBP'000 GBP'000
----- ------------ --------
At January 31 1998................. 125 66 59
Provision for the period
Disposals.......................... (125) (66) (59)
---- --- ---
At April 30 1999................... -- -- --
---- --- ---
92
218
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 13 TANGIBLE FIXED ASSETS -- (CONTINUED)
(b) COMPANY:
The Company's tangible fixed assets consist of freehold land and buildings,
valued at cost which includes capitalised interest amounting to GBP 385,000.
NET BOOK
COST DEPRECIATION VALUE
GBP'000 GBP'000 GBP'000
----- ------------ --------
At January 31 1998............................... 3,088 117 2,971
Provision for the period......................... -- 26 (26)
----- --- -----
At April 30 1999................................. 3,088 143 2,945
----- --- -----
NOTE 14 INVESTMENTS
(a) GROUP:
Investment in own shares represents the cost of shares acquired by MERANT
Trustees Limited on behalf of the Micro Focus Group Employee Benefit Trust 1994
("the Trust") (see note 24, below).
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Beginning of period....................................... 4,886 5,634
Sold on exercise of options............................... (195) (748)
----- -----
End of period............................................. 4,691 4,886
----- -----
As at April 30 1999 the Trust owned 3,810,075 shares. The market value of
these shares was GBP 5,620,000 (January 31 1998: GBP 20,729,000); if they had
been sold at this value a liability to corporation tax of approximately GBP
300,000 (January 31 1998: GBP 4,500,000) would have arisen. The Trust has not
waived its right to dividends in respect of this shareholding. The assets and
liabilities of the Trust, as well as its operating costs, are included in
MERANT's consolidated financial statements.
(b) COMPANY:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Investments in subsidiary undertakings:
Beginning of period..................................... 40,200 27,175
Acquisitions............................................ 170,573 12,679
Disposals............................................... (185,207) --
Additional investment................................... 176,222 309
Effect of exchange rate changes......................... -- 37
-------- ------
End of period........................................... 201,788 40,200
Investment in own shares (see (a) above)................ 4,691 4,886
-------- ------
206,479 45,086
-------- ------
93
219
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 14 INVESTMENTS -- (CONTINUED)
The principal subsidiary undertakings, all of which are wholly-owned, are:
COUNTRY OF INCORPORATION
NOTES AND OPERATION
----- ------------------------
MERANT Holdings Limited........................... 1 U.K.
MERANT International Limited...................... 1 U.K.
MERANT Asia Limited............................... 2 U.K.
MERANT Solutions, Inc............................. 2 U.S.A.
MERANT, Inc....................................... 2 U.S.A.
XDB Systems, Inc.................................. 2 U.S.A.
MERANT Pty Limited................................ 2 Australia
MERANT NV......................................... 2 Belgium
MERANT (Canada) Limited........................... 2 Canada
MERANT Solutions SARL............................. 2 France
MERANT SA......................................... 2 France
MERANT Gmbh....................................... 2 Germany
MERANT Solutions Gmbh............................. 2 Germany
MERANT Solutions Pvt Limited...................... 2,4 India
MERANT s.r.l...................................... 1 Italy
MERANT KK......................................... 2 Japan
MERANT Solutions KK............................... 2 Japan
MERANT Investments Limited........................ 1,3 Jersey
MERANT BV......................................... 2 Netherlands
System Focus BV................................... 2 Netherlands
MERANT Solutions SA............................... 2 Spain
- - - ---------------
(1) Held directly by the Company
(2) Held by a subsidiary undertaking
(3) Operating as a financing company. The activities of the other subsidiary
undertakings are described in the Directors' Report.
(4) MERANT Solutions Pvt. Limited has a financial year-end of March 31, which
corresponds with its permanent tax year-end.
NOTE 15 STOCKS
The replacement value of stocks is not considered to be materially
different from its balance sheet value.
NOTE 16 DEBTORS
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Trade debtors............................................. 70,682 29,145
Other debtors and prepaid expenses........................ 7,205 1,728
------ ------
77,887 30,873
------ ------
94
220
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 16 DEBTORS -- (CONTINUED)
Trade debtors includes GBP 1,784,000 (1998: GBP nil) which is due more
than twelve months from the balance sheet date. Other debtors and prepaid
expenses includes GBP nil (1998: GBP 74,000) which is due more than twelve
months from the balance sheet date.
NOTE 17 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Bank loan (note 22)....................................... 1,696 1,007
Obligations under finance leases (note 19)................ 3 6
Trade creditors........................................... 7,546 4,241
Current corporation tax................................... 11,534 6,428
Other taxes and social security costs..................... 1,345 1,725
Product royalties and purchases........................... 776 845
Accrued employee compensation and commissions............. 15,126 7,481
Deferred revenue.......................................... 42,954 20,030
Other accrued expenses.................................... 11,711 4,750
------ ------
92,691 46,513
------ ------
Accrued expenses includes GBP 161,000 (1998: GBP 116,000) in respect of
an unfunded defined benefit scheme operated by a foreign subsidiary
undertaking, and other outstanding contributions payable by MERANT in
connection with employees' pension arrangements.
NOTE 18 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Creditors due after more than one year represent obligations under lease
commitments (see note 19).
NOTE 19 LEASE COMMITMENTS
Financial commitments for future periods under lease agreements existing at
April 30 1999 are as follows:
FINANCE LEASES:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Amounts payable within one year........................... 3 6
Amounts payable from one to two years..................... 6 15
-- --
9 21
Less finance charges allocated to future periods.......... -- (3)
-- --
9 18
Finance leases are shown as:
Amounts due within one year (note 17)..................... 3 6
Amounts due after more than one year...................... 6 12
-- --
9 18
-- --
95
221
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 19 LEASE COMMITMENTS -- (CONTINUED)
OPERATING LEASES:
LAND AND BUILDINGS
------------------- OTHER
1999 1998 1999 1998
GBP'000 GBP'000 GBP'000 GBP'000
------ ------ ----- -----
Annual commitment under leases which
expire:
within one year...................... 990 263 1,249 4
in the second to fifth years
inclusive......................... 3,389 1,576 1,566 541
thereafter........................... 2,175 469 83 --
----- ----- ----- ---
6,554 2,308 2,898 545
----- ----- ----- ---
NOTE 20 CAPITAL COMMITMENTS
At April 30 1999 and January 31 1998 MERANT had no material capital
expenditure commitments.
NOTE 21 PROVISIONS FOR LIABILITIES AND CHARGES
RESTRUCTURING DEFERRED
PROVISION TAXATION TOTAL
GBP'000 GBP'000 GBP'000
------------- -------- ------
As at January 31, 1998.......................... -- 6,407 6,407
Arising during the period....................... 11,831 11,831
INTERSOLV balance............................... -- 3,675 3,675
Utilised........................................ (8,160) (1,198) (9,358)
------ ------ ------
As at April 30, 1999............................ 3,671 8,884 12,555
------ ------ ------
The restructuring provision arose in respect of a fundamental restructuring
of the Company's operations, as described in note 8, above. It is expected that
the outstanding amounts will be settled during the current financial year.
Deferred taxation has been fully provided as follows:
(a) MERANT:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Capital allowances in advance of depreciation and
amortisation............................................ (96) 89
Other timing differences.................................. 8,980 6,318
----- -----
8,884 6,407
----- -----
96
222
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 21 PROVISIONS FOR LIABILITIES AND CHARGES -- (CONTINUED)
The movement of deferred taxation during the period is as follows:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Balances, beginning of period............................. 6,407 6,239
Movement on capital allowances in advance of depreciation
and amortisation........................................ (185) (80)
Movement in other timing differences...................... 2,662 248
------ -----
Balances, end of period................................... 8,884 6,407
------ -----
(b) COMPANY:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Capital allowances in advance of depreciation and
amortisation............................................ -- 19
-- --
-- 19
-- --
NOTE 22 FINANCIAL INSTRUMENTS
An explanation of the group's objectives, policies and strategies for the
role of financial instruments in creating and changing the risks of the group in
its activities is included in the Management's Discussion and Analysis on page
58. The disclosures below exclude short term debtors and creditors.
INTEREST RATE EXPOSURES:
The interest rate risk profile of the Company's financial liabilities is as
follows:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Floating rate financial liabilities:
Euros..................................................... 1,696 --
French francs............................................. -- 1,007
Sterling.................................................. 9 18
----- -----
1,705 1,025
----- -----
Weighted average interest rate:
Euros..................................................... 3.5% --
French francs............................................. -- 3.6%
Sterling.................................................. N/A n/a
----- -----
3.5% 3.6%
----- -----
The liabilities denominated in euros and French francs represent borrowings
against an unsecured revolving multi-currency facility, under the terms of which
financing of up to GBP 5,000,000, or its equivalent in
97
223
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 22 FINANCIAL INSTRUMENTS -- (CONTINUED)
such other currency as the Company may determine, is available until January
2001. Borrowings under this facility bear interest at 0.75% above the London
Interbank Offered Rate ("LIBOR").
The sterling liability represents outstanding finance lease obligations.
The group's financial liabilities at April 30 1999 all mature within one
year, or on demand.
The interest rate risk profile of the Company's financial assets is as
follows:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Floating rate financial assets:
U.S. dollars.............................................. 44,890 42,297
Sterling.................................................. 20,045 5,794
Deutschemarks............................................. 4,193 464
French francs............................................. 1,389 245
Australian dollars........................................ 1,083 --
Indian rupees............................................. 839 1,102
Japanese yen.............................................. 751 141
Spanish pesetas........................................... 695 741
Dutch florins............................................. 605 10
Italian lire.............................................. 413 --
Canadian dollars.......................................... 320 724
Belgian francs............................................ 171 --
------ ------
75,394 51,518
------ ------
Floating rate financial assets comprise cash balances on current accounts
and money market deposits at call.
CURRENCY EXPOSURES:
The group's objectives in managing currency exposures arising from its net
investments overseas are explained on page 70.
98
224
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 22 FINANCIAL INSTRUMENTS -- (CONTINUED)
Net foreign currency monetary assets/liabilities held by the group's
sterling, U.S. dollar and other operations are as follows:
FUNCTIONAL CURRENCY OF STERLING U.S. DOLLAR OTHER TOTAL
OPERATIONS: GBP'000 GBP'000 GBP'000 GBP'000
---------------------- -------- ----------- ------ ------
At April 30, 1999:
Sterling.................................. 20,136 -- -- 20,136
U.S. dollar............................... 4,325 40,490 -- 44,815
Other..................................... 297 -- 10,146 10,443
------ ------ ------ ------
Total..................................... 24,758 40,490 10,146 75,394
------ ------ ------ ------
At January 31, 1998:
Sterling.................................. 6,612 -- -- 6,612
U.S. dollar............................... 2,256 39,228 -- 41,484
Other..................................... 342 -- 3,080 3,422
------ ------ ------ ------
Total..................................... 9,210 39,228 3,080 51,518
------ ------ ------ ------
The amounts shown above take into account the effect of forward foreign
currency contracts entered into to manage these currency exposures.
FAIR VALUES:
The fair values of all the group's financial assets and liabilities as set
out below equate to book value:
BOOK VALUE FAIR VALUE
GBP'000 GBP'000
---------- ----------
At April 30, 1999:
Primary financial instruments:
Short term borrowings................................. (1,705) (1,705)
Cash.................................................. 75,394 75,394
Derivative financial instruments:
Forward foreign exchange contracts.................... -- --
------ ------
At January 31, 1998:
Primary financial instruments:
Short term borrowings................................. (1,025) (1,025)
Cash.................................................. 51,518 51,518
Derivative financial instruments:
Forward foreign exchange contracts.................... (4,800) (4,800)
------ ------
Fair values have been determined on the basis of market value.
NOTE 23 CONTINGENT LIABILITY
In December 1998 and January 1999, seven class action securities complaints
were filed in the United States District Court for the Southern District of New
York against the Company and certain of its officers and directors. The Court
ordered the seven cases consolidated, appointed lead plaintiffs and lead
counsel, and
99
225
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 23 CONTINGENT LIABILITY -- (CONTINUED)
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 American Depository Shares of the Company during the period
from June 17, 1998 to November 12, 1998, including the former shareholders of
INTERSOLV, Inc who acquired American Depositary Shares 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 the Company's business condition and prospects.
The Company has filed a motion to transfer the matter to the Northern
District of California. The Company intends to defend all of its litigation
vigorously. However, due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of the litigation. Any
unfavourable outcome of litigation could have an adverse impact on the Company's
business, financial condition and results of operations.
NOTE 24 SHARE OPTION PLANS
The Company's share option plans provide for the grant of options to
acquire shares to all persons who devote substantially all their working time to
MERANT and such other eligible persons as the Board may determine. The exercise
price of options issued under these plans is 100% of the fair market value at
the time such options are granted. Options are generally exercisable in monthly
or annual installments commencing one year after the date of grant. Unexercised
options lapse as a consequence of an optionholder ceasing to be employed by
MERANT or at a predetermined expiry date (of up to ten years from the date of
grant), whichever occurs first.
In September 1998 shareholders approved the 1998 Share Option Plan, which
authorised the Company to grant options over a maximum of 15,879,000 shares.
Such authority will expire on September 24, 2008. During the year 6,453,000
options were granted under this plan, of which 25% become exercisable one year
from the date of grant and the remaining 75% in equal monthly installments over
the following three years.
Options are no longer issuable under any of the Company's previous share
option plans, but options granted under those plans continue to be exercisable
in accordance with the original grant rules.
The 1996 Share Option Plan was approved by shareholders in June 1996 and
authorised the Company to grant options over a maximum of 3,786,845 shares
(representing 5% of the issued share capital of the Company at that time); this
authority expired on June 18 1999. During the current period 1,886,075 options
were granted under this plan, exercisable in annual installments over a
five-year period commencing one year from the date of grant. Prior to 1996,
authority to issue options under similar terms had been granted pursuant to the
1991 Share Option Plan; such authority expired in 1996.
Options are also outstanding under share option plans adopted by MERANT as
a result of the acquisitions of INTERSOLV and XDB.
Pursuant to the agreement to acquire INTERSOLV, the Company adopted
INTERSOLV's 1997 Employee Stock Option Plan, 1992 Stock Option Plan, 1982 Stock
Option Plan, and the option plans previously assumed by INTERSOLV from companies
which it had acquired. Under the agreement, each outstanding option or right to
purchase or acquire shares of INTERSOLV stock was assumed by the Company and
became an option or right to purchase or acquire ADS in the Company, with
appropriate
100
226
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 24 SHARE OPTION PLANS -- (CONTINUED)
adjustments to the price and number of shares based on the exchange ratio of
0.55 ADSs per INTERSOLV share.
Pursuant to the agreement to acquire XDB in 1998, the Company adopted XDB's
1992 Share Option Plan and 1997 Share Option Plan. Under the agreement, XDB's
former option-holders are entitled to exercise their options in return for
shares in the Company.
In addition to options granted by the Company, MERANT Trustees Limited
("MTL") is permitted to acquire ordinary shares in the Company and to grant
options over them, under the terms of the Micro Focus Group Employee Benefit
Trust 1994 ("the Trust"). The Trust was established to further the Company's
policy of encouraging share ownership by its employees. At April 30 1999 MTL
owned 3,810,075 shares. Options granted by MTL and outstanding at April 30 1999
totalled 2,938,800, and a further 110,000 shares were reserved for options
granted before MTL purchased the shares. The remaining 761,275 shares were
available for the grant of further options. The shares held by the Trust are
included in Investments (see note 14, above).
Share option activity under all of the Company's share option plans is
summarised below:
NUMBER OPTION PRICE
OF SHARES PER SHARE IN GB POUNDS
---------- -----------------------
Outstanding, January 31 1996........................ 10,293,845 GBP1.08-GBP5.77
Options granted..................................... 11,504,150 GBP1.17-GBP1.94
Options exercised................................... (120,780) GBP1.08-GBP1.93
Options cancelled................................... (9,202,055) GBP1.08-GBP5.77
---------- ---------------
Outstanding, January 31 1997........................ 12,475,160 GBP1.08-GBP4.32
Options granted..................................... 6,622,725 GBP0.97-GBP7.41
Options exercised................................... (1,553,705) GBP1.08-GBP3.70
Options cancelled................................... (5,674,775) GBP0.97-GBP4.52
---------- ---------------
Outstanding, January 31 1998........................ 11,869,405 GBP0.97-GBP7.41
Options obligations assumed......................... 11,424,537 GBP0.11-GBP3.61
Options granted..................................... 10,142,575 GBP1.06-GBP7.15
Options exercised................................... (1,160,885) GBP0.11-GBP3.70
Options cancelled................................... (6,597,528) GBP0.11-GBP4.52
---------- ---------------
Outstanding, April 30 1999.......................... 25,678,104 GBP0.11-GBP7.41
---------- ---------------
101
227
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 24 SHARE OPTION PLANS -- (CONTINUED)
Options outstanding at April 30, 1999 were granted under the authorities
indicated below:
AUTHORITY FOR NUMBER OPTION PRICE PER
ISSUANCE OF OPTIONS OF SHARES SHARE IN G.B. POUNDS
------------------- ---------- --------------------
1991 Share Option Plan......................... 2,215,429 GBP1.13-GBP3.49
1996 Share Option Plan......................... 2,978,640 GBP1.47-GBP7.15
1998 Share Option Plan......................... 6,453,000 GBP1.06-GBP1.49
XDB plans...................................... 44,305 GBP5.39-GBP7.41
INTERSOLV plans................................ 10,937,930 GBP0.11-GBP3.61
---------- ---------------
22,629,304 GBP0.11-GBP7.41
The Trust...................................... 3,048,800 GBP1.37-GBP4.85
---------- ---------------
Outstanding, April 30 1999..................... 25,678,104 GBP0.11-GBP7.41
---------- ---------------
The outstanding options are exercisable between 1999 and 2009. The proceeds
on exercise at April 30, 1999 would be GBP 54,990,000 (January 31, 1998;
GBP 21,579,000).
At April 30, 1999 options for 11,671,000 shares (January 31, 1998 1,270,000
shares) were currently exercisable at prices per shares of between GBP 0.11 and
GBP 7.41; the proceeds of such options at April 30, 1999 would be GBP
28,391,000 (January 31, 1998, GBP 2,586,000).
NOTE 25 SUB-DIVISION OF ORDINARY SHARES
On March 12 1998 shareholders approved a 5-for-1 sub-division of the
Company's ordinary shares. The sub-division became effective as at the close of
business on Friday, March 13 1998. The Company's American Depositary Shares
("ADSs") which are traded on the Nasdaq Stock Market in the U.S.A., did not
split, although the conversion rights of such ADSs were adjusted such that each
ADS now represents five ordinary shares.
NOTE 26 SUBSEQUENT EVENT
On August 3 the Company completed the acquisition of Essential Software,
Inc. (trading as The Marathon Group), a privately-owned Internet professional
services firm based in Raleigh, North Carolina, U.S.A. for a total consideration
$15 million payable in cash.
102
228
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF
THE FINANCIAL STATEMENTS
UK FORMAT
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
Company and of the group and of the profit or loss of the group for that period.
In preparing those financial statements the directors are required to:
(a) select suitable accounting policies and then apply them
consistently;
(b) make judgments and estimates that are reasonable and prudent; and
(c) state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the financial
statements.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
group and to enable them to ensure that the financial statements comply with the
U.K. Companies Act 1985. They are also responsible for safeguarding the assets
of the group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
103
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
REPORT OF THE AUDITORS
UK FORMAT
To the members of MERANT plc
We have audited the financial statements on pages 72 to 102, which have
been prepared under the historical cost convention and on the basis of the
accounting policies set out in note 1 to the financial statements on pages 79 to
83.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors are responsible for preparing the Annual Report including, as
described above, the financial statements. Our responsibilities, as independent
auditors, are established by statute, the Auditing Practices Board, the Listing
Rules of the London Stock Exchange and by our profession's ethical guidance.
We report to you our opinion as to whether the financial statements give a
true and fair view and are properly prepared in accordance with the Companies
Act. We also report to you if, in our opinion, the directors' report is not
consistent with the financial statements, if the Company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if the information specified by law or the Listing
Rules regarding directors' remuneration and transactions with the Company is not
disclosed.
We read the other information contained in the Annual Report and consider
whether it is consistent with the audited financial statements. We consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements.
We review whether the statement on page 10 reflects the Company's
compliance with those provisions of the Combined Code specified for our review
by the Stock Exchange, and we report if it does not. We are not required to form
an opinion on the effectiveness of either the Company's corporate governance
procedures or its internal controls.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgments made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the group's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material mis-statement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
104
230
OPINION
In our opinion the financial statements give a true and fair view of the
state of affairs of the Company and of the group as at April 30 1999 and of the
loss of the group for the period then ended and have been properly prepared in
accordance with the U.K. Companies Act 1985.
Ernst & Young
Registered Auditor
Reading
August 4 1999
105
231
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Annual Report (Form
20-F) of MERANT plc of our report dated August 4, 1999 with respect to the
consolidated financial statements of MERANT plc for the year ended April 30,
1999 in respect of the U.S. format financial statements.
We also consent to the incorporation by reference in the registration
statements (Form S-8 Nos. 333-24867, 333-45701 and 333-65027) pertaining to the
employee share plans named on the facing sheets thereof of our report dated
August 4, 1999, with respect to the consolidated financial statements of MERANT
plc incorporated by reference in the Annual Report (Form 20-F) for the year
ended April 30, 1999 in respect of the U.S. format financial statements and of
our report dated August 4, 1999 with respect to the consolidated financial
statements of MERANT plc included herein for the fifteen months ended April 30,
1999 in respect of the U.K. format financial statements.
Our audits also included the financial statement schedules of MERANT plc
listed in Item 19(a). These schedules are the responsibility of MERANT's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, based on our audits, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ Ernst & Young
Ernst & Young
October 29, 1999
Reading, England
232
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-24867, 333-45701 and 333-65027) of MERANT plc
of our
report dated June 17, 1998 relating to the financial statements of Intersolv,
Inc., which appears in this Form 20-F.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
McLean, Virginia
October 29, 1999