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MICRO FOCUS
1996 Annual Report
[In the middle of the front cover page, a large number "96" and a hazy shadow
thereof appear with the phrases "distributed computing", "Year 2000" and
"Legacy" placed over the large number "96".]
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CONTENTS
LETTER TO SHAREHOLDERS 2
FURTHER INFORMATION FOR SHAREHOLDERS 6
FINANCIAL STATEMENTS US FORMAT 7 US
FINANCIAL STATEMENTS UK FORMAT 27 UK
Micro Focus is an international business strongly influenced by its
relationships with US customers and whose sales are mostly denominated in US
dollars.
For the benefit of UK and US based shareholders and customers, the financial
statements are presented in both UK and US formats in separate sections of the
report. The other sections are common to both sets of financial statements.
The accounting policies adopted by Micro Focus are within the framework of UK
accounting standards and are also in line with US generally accepted accounting
principles ("US GAAP") as they apply to US software companies.
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Company registration number 1709998
Part Number: POOO482
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LETTER TO SHAREHOLDERS
I am very pleased to be writing to you, the shareholders of Micro Focus, for the
first time. I took on the role of Chief Executive Officer in April of last year
and, since then, it has been an exciting year of learning and change both for
myself and Micro Focus. In 1996, Micro Focus made significant changes in the way
it defines and pursues market opportunities. We believe we have defined large,
dynamic markets as well as strategies for meeting customer requirements in those
markets and we are confident in our ability to deliver the products Information
Technology organizations throughout the world need to develop, maintain and
manage their enterprise computing assets. We look to 1997 with a great deal of
confidence.
FINANCIAL RESULTS
For the fiscal year ended January 31, 1997, the Company reported revenue of
$115,409,000 (GBP 73,089,000) and a net loss of $10,508,000 or $0.69 per share
(GBP 7,281,000 or 48.0 pence per share). The fiscal 1996 results include a
restructuring charge of $8,000,000 (GBP 5,195,000). In the comparable period of
1995, the Company reported net revenue of $121,956,000 (GBP 77,258,000) and a
net loss of $10,436,000 or $0.69 per share (GBP 6,470,000 or 43.6 pence per
share). The prior year's results included restructuring charges of $10,502,000
(GBP 6,667,000). Micro Focus ended the year with cash and short term investment
balances of $71,560,000 (GBP 44,725,000), an increase of $12,712,000 (GBP
5,753,000) from a year ago.
While the full year results show a Company in transition, I am pleased to report
that we did return to profitability in the third and fourth quarters of 1996.
Shortly after I joined the Company, Micro Focus undertook a significant
restructuring to reduce costs, reorganize operations and rationalize product
lines. The Company reduced operating expenses by discontinuing unprofitable
products and divisions. Redundant marketing groups and functions were
consolidated. As a Company, we instituted new cost-control measures, deployed a
new, more effective financial model, and put "best of class" goals in place. But
most importantly, Micro Focus concentrated its efforts on serving the most
dynamic segments of its markets.
Our restructuring efforts began to show results in the second half. The third
and fourth quarters of 1996 saw increased sales of Micro Focus development
tools. Organizations that are beginning to address the century date change, or
so-called "Year 2000" conversions accounted for a significant increase in sales
of Revolve/2000 (TM) - an analysis and assessment tool that helps companies make
large software systems Year 2000 compliant. The Company expects sales
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of Revolve/2000 and the other Micro Focus tools and services associated with
solving Year 2000 date conversion problems to increase as the Year 2000 draws
near.
MANAGEMENT
At the same time that I joined Micro Focus, Brian Reynolds, then the Company's
Chairman and Paul O'Grady, then the Company's Chief Executive Officer resigned
from the Company which they founded in 1976. The Company wishes to recognize
these two individuals for their outstanding contributions to Micro Focus over
the years. Micro Focus began with their vision and grew with their guidance to
become a market leader. We owe them much and wish them well.
During 1996, the Company was fortunate to be able to add new talent to its
senior management team: Anthony R. Muller, Senior Vice President and Chief
Financial Officer; Chris Christides, Vice President of North American Sales; and
Stanley J. Blaustein, Vice President and Chief Information Officer. Each of
these executives brings leadership and strong management skills to Micro Focus.
OUR MARKETS
One of the most important objectives during the year was to focus the Company on
key market opportunities where Micro Focus could truly satisfy customer needs.
In May 1996, the Micro Focus Management Team reorganized the Company along
product lines by establishing meaningful business units focusing on three key
customer opportunities:
YEAR 2000 SOLUTIONS
Many enterprise information systems are unable to process year dates later than
1999 and, as a result, may face system failures in the Year 2000. Our solution
is to supply products and services that help organizations convert applications
and ensure mission-critical systems will not fail in the Year 2000 and beyond.
Customers are expressing a strong requirement for effective tools and services
to help them resolve this problem.
The Year 2000 transition represents a large market opportunity for Micro Focus.
We believe our market position as a leading supplier of COBOL-based development
and maintenance tools gives us unique capabilities. The millennium date problem
faced by customers is too large to be addressed on an ad-hoc basis - it requires
professional project management, a clear methodology, effective tools, tight
schedules and clear lines of accountability. Micro Focus provides key software
and services to help customers manage these aspects of Year 2000
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conversions.
Since, as a Company, we believe that many requirements of a successful Year 2000
conversion effort also apply to organizations maintaining Legacy systems or
making transitions to Distributed Computing, we expect to apply a similar
solution strategy to our other markets. Customers who work with Micro Focus to
successfully solve Year 2000 problems will have many of the tools and processes
in place that will help them succeed in providing other Information Technology
solutions.
DISTRIBUTED COMPUTING SOLUTIONS
A second market the Company pursues is networked computing and especially the
Internet. This sector represents significant opportunities for Information
Technology organizations to deliver applications which provide a business
advantage and new levels of information to expanding audiences. Businesses faced
with this challenge typically have significant investments in COBOL applications
and COBOL programming expertise. We believe that our COBOL customers will
embrace the opportunity to leverage their skills and investments with our
products in this area. During 1997, Micro Focus plans to release NetExpress
(TM), an integrated set of tools for developing business applications targeted
at graphical PC workstations, distributed computing environments and the
Internet. NetExpress combines Micro Focus' traditional strength in the COBOL
language with new rapid application development and deployment technology that
can allow our customers to bring the power of the Internet and networked
computing to their COBOL applications.
LEGACY SOLUTIONS
The Company's Legacy business continues to be a key asset. Micro Focus has many
customers who have adopted our cost-effective application development and
maintenance tools through the COBOL Workbench product line. These large-scale
Information Technology organizations are able to productively develop and
maintain applications targeted to run on mainframes using PC and
client/server-based tools.
We plan to enhance these tools in 1997 by adding functionality specifically
designed to better meet the needs of developers creating applications targeted
at mainframes. Our goal with this technology is to make workstation-based
development and maintenance of mainframe production applications a simpler and
more efficient process and, as a result, we would expect our Legacy Solution
tools and services to be adopted by an even larger group of customers.
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SALES CHANNELS
Not only are we making changes to better serve our customers with products, the
Company also intends to reach those markets more effectively. Micro Focus will
concentrate on expanding direct sales channels and developing new ones;
strengthening partnerships with key Original Equipment Manufacturers and
enhancing relationships with key consulting organizations - especially those
organizations specializing in providing Year 2000 solutions. Micro Focus will
continue its efforts to partner successfully with our distributors throughout
the world.
LOOKING FORWARD
In most of 1996, the Micro Focus Management Team focused on putting in place the
organization, processes and people that will better meet the needs of customers,
work more effectively with partners and provide value for shareholders. In 1997,
we will focus our attention on delivering the innovative technology our
customers need to make their businesses more efficient and productive. Micro
Focus will work closely with its partners to provide complete solutions to the
complex challenges Information Technology organizations are facing.
We began preparing to meet the challenges of the coming year by introducing a
revised cost structure and re-focused research and development efforts in 1996.
Ultimately, our success will depend on our most important asset - the employees
of Micro Focus. We will continue to recruit and attract new talent as well as
train new leaders from our current employees. We will encourage people to
achieve extraordinary results. I commit that our management will use informed
judgment and experience to strive to provide our shareholders with the rewards
they deserve for placing their trust in us.
Sincerely,
/s/ M.A Gumucio
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Marcelo A. Gumucio
Chief Executive Officer
March 4 1997
This Letter to Shareholders contains 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 fiscal 1997 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 below in
Management Discussion and Analysis under the heading "Factors that may influence
future operating results" as well as those discussed elsewhere in this Annual
Report. 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 this Annual Report. For more
information regarding "forward-looking statements," see "Further Information for
Shareholders-Special Note on Forward-Looking Statements."
Copyright 1997 Micro Focus Ltd. Micro Focus, Visual and COBOL Workbench are
registered trademarks of Micro Focus Ltd. NetExpress, Visual Object COBOL and
Revolve/2000 are trademarks of Micro Focus. Other trademarks are property of
their respective companies.
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FURTHER INFORMATION FOR SHAREHOLDERS
U.S. SECURITIES LAW MATTERS
Micro Focus is required to comply with various U.S. securities laws and
regulations because it has American Depository Shares registered with the U.S.
Securities and Exchange Commission ("SEC") which are traded in the U.S. on The
Nasdaq Stock Market.
SEC FILINGS. As a foreign private issuer in the U.S., the Company is required to
make certain filings with the SEC, including periodic filings on Form 6-K and an
annual report on Form 20-F.
Micro Focus is required to file with the SEC by means of Form 6-K any
information that Micro Focus makes or is required to make public pursuant to the
laws of the U.K., files or is required to file with the London Stock Exchange,
or distributes or is required to distribute to its shareholders.
Form 20-F is similar to the annual Form 10-K filing required of U.S. public
companies, except that Form 20-F makes allowances for the differences in legal
and regulatory obligations applicable to non-U.S. companies. Portions of this
Annual Report will be incorporated by reference into the Micro Focus' next Form
20-F. Unless a portion of this Annual Report is specifically incorporated by
reference into the Form 20-F, this Annual Report is not considered to be a part
of the Company's Form 20-F filing. The filing includes a general introduction to
Micro Focus, and sections discussing, among other items, a description of its
business, its property, its principal shareholders, the nature of the trading
markets, taxation issues, information regarding its directors and officers, as
well as risk factors regarding the Company.
The Company currently plans to file its next Form 20-F with the SEC in March
1997. A copy of such Form 20-F may be obtained without charge by contacting
"Investor Relations" at Micro' Focus offices in either Newbury or Palo Alto
listed at the back of this Annual Report.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS. Micro Focus is also subject to
various U.S. securities laws and regulations relating to the disclosure of
information. In particular, the Private Securities Litigation Reform Act of
1995, which became effective in the United States as of January 1, 1996 (the
"Securities Litigation Reform Act"), applies to the Company and its disclosure
of information and provides that the Company can be exempt from liability for
making forward-looking statements if certain cautionary language is included
along with such statements. This Annual Report contains certain "forward-looking
statements" (as such term is defined in the rules promulgated pursuant to the
U.S. Securities Act of 1933, as amended) 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. Such forward-looking statements are
subject to the safe harbor created by the Securities Litigation Reform Act. When
used in this document, the words "anticipate," "believe," "estimate," "expect"
and similar expressions, as they relate to the Company or its management, are
intended to identify such forward-looking statements. Such statements reflect
the current views of the Company or its management with respect to future events
and are subject to certain risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialise, or should underlying
assumptions prove incorrect, the Company's actual results, performance or
achievements in fiscal 1997 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 below in Management Discussion and Analysis under
the heading 'Factors that may influence future operating results', as well as
those discussed elsewhere in this Annual Report. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. 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 this Annual Report.
ELECTRONIC FILINGS. The SEC maintains a World Wide Web site located at
http://www.sec.gov. that contains a searchable database of filings, reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. Foreign private issuers, such as Micro Focus
are not currently required to file electronically with the SEC, but may choose
to do so. As of March 1997, Micro Focus began voluntarily submitting its filings
electronically to the SEC.
ANNUAL GENERAL MEETING OF SHAREHOLDERS
The 1997 annual general meeting of Micro Focus Group Plc will be held at its
registered office, The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, UK. The
full notice of this meeting will be sent to shareholders in due course.
ORDINARY SHARES
Micro Focus Group Plc's ordinary shares have been listed on the London Stock
Exchange since 1983 under the symbol MICF.
Since 1992 Micro Focus Group Plc's ordinary shares have also been traded on The
Nasdaq Stock Market in the United States in the form of American Depositary
Shares, evidenced by American Depositary Receipts, under the symbol MIFGY.
The table below shows, in respect of each of Micro Focus' last eight fiscal
quarters, the highest and lowest middle market quotation as reported in the
Daily Official List of the London Stock Exchange (in respect of ordinary shares)
and the highest and lowest closing sales prices as reported by the Nasdaq
National Market System (in respect of American Depositary Shares).
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Micro Focus London Stock Exchange Nasdaq
quarters (in G.B. pounds) (in US dollars)
High Low High Low
1995
First quarter 8.23 7.58 13.88 11.00
Second quarter 7.83 7.00 12.75 10.88
Third quarter 7.90 5.73 12.75 9.25
Fourth quarter 6.78 5.60 10.50 8.25
1996
First quarter 13.35 5.58 19.50 8.38
Second quarter 10.10 6.43 15.75 9.75
Third quarter 10.40 7.00 16.13 10.50
Fourth quarter 11.40 7.92 19.13 13.00
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[At the top of the left portion of the page, the capital letters "US" appear in
over-sized print.]
FINANCIAL STATEMENTS US FORMAT
FINANCIAL STATEMENTS PREPARED IN ACCORDANCE
WITH U.S. GAAP (IN U.S. DOLLARS)
SELECTED CONSOLIDATED FINANCIAL DATA 8
MANAGEMENT'S DISCUSSION AND ANALYSIS 9
CONSOLIDATED STATEMENTS OF INCOME 15
CONSOLIDATED BALANCE SHEETS 16
CONSOLIDATED STATEMENTS OF CASH FLOW 17
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY 18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1 Significant accounting policies 19
2 Acquisitions 21
3 Research and development costs 22
4 Non-recurring items 22
5 Property, plant and equipment 22
6 Lines of credit 22
7 Commitments 23
8 Income taxes 23
9 Business segment information 24
10 Employee share and retirement plans 24
11 Quarterly financial information (unaudited) 26
REPORT OF THE INDEPENDENT AUDITORS 26
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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 Micro
Focus, expressed in U.S. dollars, set forth on pages 15 to 26 of this report.
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In thousands of U.S. dollars Years ended January 31: 1997 1996 1995 1994 1993
(except per share data, percentages Annual Report: 1996 1995 1994 1993 1992
and employees)
OPERATING RESULTS FOR THE YEAR:
Net revenue 115,409 121,956 138,459 125,468 118,629
Non-recurring items * (8,000) (9,469) (18,265) - -
(Loss) income before income taxes (8,383) (10,536) 1,550 32,528 38,532
Net (loss) income (10,508) (10,436) (4,860) 22,044 26,160
Net (loss) income per share ($0.69) ($0.69) ($0.33) $1.52 $1.80
Weighted average number of shares outstanding (thousands) 15,234 15,101 14,706 14,535 14,512
FINANCIAL POSITION AT END OF YEAR:
Cash and short-term investments 71,560 58,848 88,758 86,316 79,777
Total assets 151,311 160,354 197,640 164,873 144,368
Long-term obligations 24 100 307 605 4,041
Shareholders' equity 88,783 97,474 115,842 112,650 90,218
FINANCIAL CONDITION:
Working capital 42,578 41,231 58,122 73,027 62,688
Current ratio 1.81 1.76 1.80 2.68 2.43
Return on net revenue: excluding non-recurring items * n/a n/a 10.0% 17.6% 22.1%
Return on average equity: excluding non-recurring items * n/a n/a 12.0% 28.4% 39.4%
EMPLOYEE INFORMATION:
Average number of employees 646 735 751 667 599
Number of employees at year-end 626 708 788 698 636
Net revenue per employee 179 166 184 188 198
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* Details of the non-recurring items are set out in note 4 to the consolidated
financial statements on page 22.
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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 Micro Focus Group Plc and its subsidiaries ("Micro Focus") in U.S.
dollars, on pages 15 to 26. In this discussion, references to fiscal years 1996,
1995 and 1994 are to the years ended January 31 1997, 1996 and 1995
respectively.
RESULTS OF OPERATIONS
Micro Focus reported a net loss for fiscal 1996 of $10.5m and a net loss for
fiscal 1995 of $10.4m. These results include non-recurring charges of $8.0m in
1996 and $9.5m in 1995.
The table below sets forth operating results as a percentage of net revenue for
the three fiscal years ended January 31 1997. To further aid comparison,
non-recurring items are identified separately in the table, and percentages
shown against other cost categories are exclusive of non-recurring items.
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PERCENTAGE OF NET REVENUE PERCENTAGE CHANGE
1995 1994
1996 1995 1994 TO 1996 TO 1995
NET REVENUE
Product revenue 58 57 70 (4) (28)
Service revenue 42 43 30 (7) 26
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TOTAL NET REVENUE 100 100 100 (5) (12)
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COSTS AND EXPENSES
Cost of product revenue 9 11 12 (27) (16)
Cost of service revenue 16 16 12 (5) 15
Research and development 30 29 23 (2) 9
Sales and marketing 40 41 35 (7) 2
General and administrative 8 7 6 13 6
Non-recurring charges 7 8 12 n/a n/a
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TOTAL COSTS AND EXPENSES 110 112 100 (7) (2)
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(LOSS) FROM OPERATIONS (10) (12) - n/a n/a
Interest income (net) 3 3 2 (21) 1
Acquisition charges - - (1) n/a n/a
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(LOSS) INCOME BEFORE INCOME TAXES (7) (9) 1 (20) n/a
Income taxes (2) - (5) n/a n/a
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NET (LOSS) (9) (9) (4) 1 115
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NET REVENUE
Micro Focus derives its net revenue from the license of software products and
related support and maintenance ("direct revenue") and from the licensing of
distribution rights to software products to original equipment manufacturers
("OEM revenue"). Direct revenue represented 90%, 89% and 86% of total net
revenue in fiscal 1996, 1995 and 1994 respectively.
Net revenue is analyzed between product revenue, which consists of licensing of
software products to end-users and OEMs, and service revenue, consisting of
maintenance and other support services, including training and consulting.
Total net revenue decreased by $6.6m or 5% to $115.4m in fiscal 1996, and by
$16.5m or 12% to $122.0m in fiscal 1995.
Product revenue decreased by $2.9m or 4% to $66.5m in fiscal 1996, and by $27.4m
or 28% to $69.4m in fiscal 1995.
Service revenue decreased by $3.6m or 7% to $48.9m in fiscal 1996, having
increased by $10.9m or 26% to $52.6m in 1995.
Net revenue by customer location was contributed as follows:
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FISCAL YEARS: 1996 1995 1994
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United Kingdom 9% 9% 9%
United States 53% 55% 59%
Other 38% 36% 32%
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100% 100% 100%
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The decrease in net revenue in fiscal 1996 arose during the first two quarters
with flat sales comparisons in the second half of the year. Net revenue
decreased by 10% in the United States. Non-U.S. territories showed no overall
sales increase, with growth in the United Kingdom, France and Japan being offset
by decreased sales to certain distributors, notably those in Italy and Brazil.
Factors contributing to the decline in net revenue in the first half of 1996
included slow conversion to 32-bit products and continuing uncertainties arising
from the fundamental changes caused by the Internet. The improved performance in
the second half of the year reflected increased sales of products to address the
century date change or "Year 2000" problem.
In 1995 net revenue decreases were reported in the United States, and in other
territories. Factors contributing to the fall in net revenue included postponed
investment decisions caused by uncertainties arising from the impact of the
Internet and the launch of Windows 95, and from delayed delivery of 32-bit
products.
COST OF PRODUCT 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.
Excluding non-recurring items, such costs decreased by $3.7m or 27% to $10.0m in
fiscal 1996 and by $2.6m or 16% to $13.7m in fiscal 1995 and represented 15%,
20% and 17% of product revenue in 1996, 1995 and 1994 respectively.
The decrease in product costs during 1996 reflected savings in product materials
arising from the documentation being supplied on CD-ROM.
The decrease in 1995 reflected the decline in revenue.
COST OF SERVICE REVENUE
Cost of service revenue is comprised principally of compensation for technical
support personnel, plus the costs associated with training and consulting.
Excluding non-recurring items, such costs decreased by $0.9m or 5% to $18.6m in
fiscal 1996, having increased by $2.5m or 15% to $19.5m in fiscal 1995, and
represented 38%, 37% and 41% of service revenue in 1996, 1995 and 1994
respectively. The decrease in 1996 reflected reductions taken to better align
expenses with revenue. The increase in 1995 resulted from increases in product
support for client/server and rehosting programs.
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.
Micro Focus' 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.
Research and development spending in 1996 was directed principally towards
further development of Revolve/2000 (TM) products which address the Year 2000
problem; NetExpress (TM), a complete set of tools for developing business
applications targeted at graphical PC workstations, distributed computer
environments and the Internet; and tools to enhance the functionality and
capability of the core legacy COBOL Workbench product line for workstation
development of IBM mainframe applications.
Research and development spending in 1995 and 1994 was directed principally
towards enabling Micro Focus products to operate across multiple operating
systems and graphical user interfaces; development of new 32-bit products;
further development of client/server solutions; object oriented programming in
COBOL; and tools for downsizing from IBM mainframes.
Expenditure on internal software research and development, before
capitalization, decreased by $6.9m or 19% to $30.1m in fiscal 1996, having
increased by $0.8m or 2% to $37.1m in fiscal 1995 and represented 26%, 30% and
26% of net revenue in fiscal 1996, 1995 and 1994 resectively. The decrease in
1996 reflected the impact of the restructuring announced in the first quarter of
1996 (see "Non-recurring items" below).
In fiscal 1996, 1995 and 1994, $8.3m, $15.6m and $15.0m, representing 27%, 42%
and 41% of such costs, respectively, were capitalized as software product
assets. Provisions for amortization in those years, excluding non-recurring
items, amounted to $12.7m, $13.9m and $10.9m, resulting in a net charge to
income in 1996 of $4.4m, compared to net credits of $1.7m and $4.0m in 1995 and
1994 respectively.
Total research and development costs also include restructuring costs of $3.5m
and $7.0m in 1996 and
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1995 (see "non-recurring items", below, and notes 3 and 4 to the consolidated
financial statements on page 22).
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.
Excluding non-recurring items, such costs decreased by $3.5m or 7% to $45.9m in
fiscal 1996, having increased by $1.0m or 2% to $49.4m in fiscal 1995 and
represented 40%, 41% and 35% of net revenue in fiscal 1996, 1995 and 1994. The
decrease in 1996 reflects the impact of the worldwide cost reductions
implemented in the first quarter. The increase in 1995 was mainly in respect of
increased marketing activity including advertising, seminars and user
conferences.
GENERAL AND ADMINISTRATIVE
General and administrative costs include the group management, finance, legal
and human resources operations of Micro Focus.
Excluding non-recurring items, such costs increased by $1.1m or 13% to $9.4m in
fiscal 1996, having increased by $0.5m or 6% to $8.3m in fiscal 1995 and
represented 8%, 7% and 6% of net revenue in fiscal 1996, 1995 and 1994. In 1996
general and administrative costs have increased following the strengthening of
the Micro Focus management team.
NON-RECURRING ITEMS
In the first quarter of 1996 Micro Focus incurred a restructuring charge of
$8.0m. The charge consisted of costs associated with a reduction in the
Company's workforce of approximately 65 people, with facility closures and
consolidations, and with asset write-downs. The restructuring was essentially
completed during the year, but payments estimated at $2.3m remain to be paid in
1997.
Non-recurring items recorded in 1995 consisted of a charge of $10.5m for
restructuring costs and a credit of $1.0m in respect of an employer loan to the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust").
Restructuring costs of $5.0m incurred in the first quarter of 1995, principally
reflected employee terminations (including salary, benefit continuation and
outplacement costs for approximately 75 employees), closure of surplus office
facilities, and write-downs of related fixed assets. An additional charge of
$5.5m, booked in the fourth quarter of 1995, reflected a reduction in the
carrying values of software product assets in line with future revenue
expectations from certain products.
In 1994 Micro Focus recorded charges of $18.3m, of which $12.8m represented the
write-off of purchased research and development costs, goodwill and other
charges incurred in connection with the purchase of Burl Software Laboratories,
Inc. ("Burl"); and $5.5m related to other acquisitions made during that year
(see Acquisitions, below).
INTEREST INCOME
Interest income represents interest earned on cash and short-term investments.
Interest income decreased by $0.7m or 21% to $2.7m in fiscal 1996, having
remained constant at $3.4m in 1995 and 1994. The current decrease principally
reflects lower average cash balances, and to a lesser degree, lower interest
rates.
INCOME TAXES
A tax provision of $2.1m was recorded for 1996. The effective tax rate in both
1996 and 1995 was affected by the distribution of taxable profits and losses
among the tax jurisdictions in which Micro Focus operates. The Company has not
recognised the tax effects of operating losses in U.S. subsidiaries. In 1994 the
Company expensed a non-recurring charge of $11,765,000 representing purchased
research and development costs. These costs were non-deductible for tax purposes
and resulted in a significant distortion of the effective tax rate in that year.
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 8 to
the consolidated financial statements on page 23.
ACQUISITIONS
In 1995 Micro Focus completed the agreed acquisition of Burl (see note 2 to the
consolidated financial statements on page 21). The transaction had been
accounted for as a purchase in 1994.
In 1994 Micro Focus acquired the intellectual property rights to certain
development tools from mbp, a German subsidiary of EDS, for $5.0m and the Expert
Consulting Division of The Systems Group for $1.0m.
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FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS
Micro Focus operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. This section highlights
some of these factors and the possible impact of these factors on future results
from operations.
The factors set forth below 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 fiscal 1997 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 in the Letter to Shareholders above and those
discussed elsewhere in this Annual Report. 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
this Annual Report. For more information regarding forward-looking statements,
see Further Information for Shareholders- Special Note on Forward-Looking
Statements.
Micro Focus' 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, product life cycles, the
ability of the Company to develop, 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 enhancements or new
products, changes in the mix of distribution channels through which the
Company's products are offered, purchasing patterns of distributors and
retailers, quality control 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, budgeting cycles of
its customers, the cancellation of licenses during the warranty period,
nonrenewal of maintenance agreements, economic conditions generally or in
various geographic areas, and other factors discussed in this section.
A high percentage of Micro Focus' operating expenses are fixed over the short
term and if anticipated revenue does not occur or is delayed, the operating
results for that quarter will be immediately and adversely affected. In
addition, a substantial portion of Micro Focus' 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. Furthermore, while the Company's business has not
been subject to seasonal variations, the Company's customers tend to make
product purchase decisions in the fourth quarter of a fiscal year as a result of
purchase cycles related to expiration of budgetary authorizations. As a result,
the Company experiences lower revenue for the first quarter of a fiscal year
than in the fourth quarter of the prior fiscal year. The Company's revenue is
also affected by seasonal fluctuations resulting from lower sales that typically
occur during the summer months in Europe and other parts of the world. Due to
all of the foregoing factors, it is possible that in some future quarters Micro
Focus' operating results will be below the expectations of stock market analysis
and investors and that the share price would likely be materially adversely
affected.
Micro Focus is in a market that is subject to rapid technological change. Micro
Focus must continually adapt to that change by improving its products and
introducing new products and technologies. The growth and financial performance
of Micro Focus will depend upon 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 upon its
ability to attract and retain qualified employees. In the past, Micro Focus has
experienced delays and increased expenses in developing 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 or to attract and retain qualified employees,
could materially adversely affect the Company's business, results of operations
and financial condition.
Substantially all of Micro Focus' revenue is currently, and is expected to
continue to be derived from products and services related to applications
development in the COBOL language. As a result, Micro Focus' future operating
results depend upon market acceptance of the COBOL language. Any decline in the
demand for or market acceptance of the COBOL language or mainframe computers
where COBOL is a as
12
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a result of competition, technological change or other factors would have a
material adverse effect on Micro Focus' business, financial condition and
results of operations.
The markets in which the Company competes are characterized by rapid
technological change and aggressive competition. The Company believes that the
principal competitive factors in the Company's markets are product performance
and reliability, functionality, product quality, application portability,
product enhancement, price, training, support and the quality of service
offerings. 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 including
database vendors of tools and other programming languages that may be less
costly or provide better performance or functionality. Some of the Company's
current and prospective competitors in the products and services markets have
greater financial, marketing or technical resources than Micro Focus 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 Micro Focus.
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. Further more, there can be no assurance that
the Company will be able to compete effectively in the future in the
professional services market and, particularly, the Year 2000 professional
services market.
The market price of the Company's securities has experienced significant price
volatility and such volatility may occur in the future. Factors such as actual
or anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors 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. Further, 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.
Micro Focus is subject to the general economic climate 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 "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. There can be no assurance that the factors described above will
not have an adverse effect on the Company's future international revenues.
The Company markets certain of its products and services to customers for
managing development and maintenance of mission-critical computer software
systems. In addition, an increasing portion of the Company's business is devoted
to addressing the Year 2000 problem, which affects the performance and
reliability of many mission-critical systems. The Company's agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product and service liability claims. It is possible, however, that
the limitation of liability provisions contained in the Company's customer
agreements may not be effective as a result of existing or future federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions.
Although the Company has not experienced any product or service liability claims
to date, the sale and support of its products and services may entail the risk
of such claims, particularly in the Year 2000 market. A successful product or
service liability claim brought against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition. Furthermore, the Company anticipates that demand in the Year 2000
market will decline, perhaps rapidly, following the year 2000 and the demand for
the Company's Year 2000 solutions, products and services may also as a result of
new technologies, competition or other factors. If this decline in demand were
to occur, the Company's license revenues and professional services fees could be
materially and adversely affected.
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EXCHANGE RATE FLUCTUATIONS
Micro Focus 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 Micro Focus' net revenue arises in U.S. dollars (approximately
two-thirds in 1996) whereas its costs and expenses 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 Micro Focus'
operating results, notably when expressed in G.B. pounds.
In 1996 and 1995 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
Micro Focus continues to fund its activities through cash from operations. In
1996 cash provided by operating activities was $24.4m (1995: $13.7m).
In 1996 Micro Focus invested $3.9m (1995: $13.7m) in property, plant and
equipment and $8.3m (1995: $16.0m) in software product assets. Investment in
1995 included $7.0m in the redevelopment of the Company's U.K. headquarters
office in Newbury, England. In 1995 the Company also paid $6.3m in connection
with the acquisition of Burl and spent $8.0m on the purchase of shares in the
Company for the benefit of the Micro Focus Group Employee Benefit Trust 1994.
Net of these expenditures, cash and short-term investments increased by $12.7m
to $71.6m (1995: decreased by $29.9m to $58.8m).
Micro Focus may invest a further $10.0m on capital during 1997 in connection
with occupying a new U.S. facility, and on communications software and other
information systems improvements.
The Company has in place a line of credit under the terms of which unsecured
financing of up to $8.0m is available until December 1997. There have been no
borrowings under this line of credit to date.
Micro Focus 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. All cash is freely remittable.
Micro Focus believes that existing cash balances in combination with internally
generated funds and its available bank lines of credit will be sufficient to
meet cash requirements in 1997.
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CONSOLIDATED STATEMENTS OF INCOME (US FORMAT)
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31 JANUARY 31 JANUARY 31
In thousands of U.S. dollars (except share and per share data) 1997 1996 1995
NET REVENUE
Product revenue $66,466 $69,399 $96,807
Service revenue 48,943 52,557 41,652
- ---------------------------------------------------------------------------------------------------------------
TOTAL NET REVENUE 115,409 121,956 138,459
===============================================================================================================
COSTS AND EXPENSES
Cost of product revenue 10,016 13,709 16,311
Cost of service revenue 18,580 19,520 17,034
Research and development (note 3) 34,544 35,337 32,299
Sales and marketing 45,884 49,429 48,456
General and administrative 9,442 8,343 7,835
Non recurring charges (note 4) 8,000 9,469 16,765
- ---------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 126,466 135,807 138,700
===============================================================================================================
(LOSS) FROM OPERATIONS (11,057) (13,851) (241)
Interest income 2,706 3,432 3,408
Interest expense (32) (117) (117)
Acquisition costs - - (1,500)
- ---------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (8,383) (10,536) 1,550
Income taxes (note 8) (2,125) 100 (6,410)
- ---------------------------------------------------------------------------------------------------------------
NET (LOSS) ($10,508) ($10,436) ($4,860)
===============================================================================================================
NET (LOSS) PER SHARE (NOTE 1) ($0.69) ($0.69) ($0.33)
===============================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (THOUSANDS) 15,234 15,101 14,706
===============================================================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.
15
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CONSOLIDATED BALANCE SHEETS (US FORMAT)
In thousands of U.S. dollars (except share and per share data) JANUARY 31 JANUARY 31
1997 1996
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 71,560 $ 58,848
Accounts receivable, net of allowance for doubtful accounts of $1,066 ($645 in 1995) 20,275 30,975
Inventories 774 2,573
Prepaid expenses and other assets 2,490 3,379
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 95,099 95,775
======================================================================================================================
Property, plant and equipment, net (note 5) 32,868 37,615
Software product assets, net of accumulated amortization of $95,402 ($79,968 in 1995) 23,344 26,964
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $151,311 $160,354
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,886 $ 8,038
Product and royalties payable 963 977
Accrued employee compensation and commissions 5,811 6,733
Accrued payroll taxes 838 676
Capital leases (note 7) 109 224
Income taxes payable 4,142 3,022
Deferred revenue 26,635 29,686
Other current liabilities 9,137 5,188
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 52,521 54,544
======================================================================================================================
Capital leases (note 7) 24 100
Deferred income taxes (note 8) 9,983 8,236
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 62,528 62,880
======================================================================================================================
Commitments (note 7)
Shareholders' equity:
Ordinary shares: 10 pence (G.B.) par value, 22,500,000 shares authorized,
15,168,000 shares issued and outstanding (15,144,000 in 1995) 2,389 2,386
Additional paid-in capital 27,468 27,257
Treasury stock (8,959) (8,959)
Retained earnings 70,276 80,784
Currency translation adjustment (2,391) (3,994)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 88,783 97,474
======================================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $151,311 $160,354
======================================================================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.
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CONSOLIDATED STATEMENTS OF CASH FLOW (US FORMAT)
In thousands of U.S. dollars
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31 JANUARY 31 JANUARY 31
1997 1996 1995
OPERATING ACTIVITIES
Net (loss) ($10,508) ($10,436) ($4,860)
Adjustments to reconcile net (loss) to cash provided by operations
Depreciation of fixed assets 8,931 9,759 6,654
Amortization of software product assets 12,690 19,862 10,929
Loss on sale of fixed assets 528 107 16
Amortization of goodwill - - 500
Purchased in-process technology - - 11,265
Other acquisition costs - - 1,500
Deferred income taxes 1,374 (374) 589
Changes in operating assets and liabilities:
Decrease in accounts receivable 10,663 3,952 2,803
Decrease (increase) in inventories 1,895 185 (520)
Decrease in prepaid expenses and other assets 1,041 202 2,007
(Decrease) increase in accounts payable (3,130) 1,005 379
(Decrease) increase in product royalties payable (18) 312 (274)
(Decrease) increase in accrued employee
compensation and commissions payable (890) (908) 1,664
Increase (decrease) in accrued payroll taxes 158 (105) (838)
Increase (decrease) in income taxes payable 690 (4,266) (5,104)
(Decrease) increase in deferred revenue (2,958) (4,141) 5,303
Increase (decrease) in other current liabilities 3,890 (1,477) 3,037
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,356 13,677 35,050
=================================================================================================================
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
net of capital lease obligations incurred (3,887) (13,726) (18,660)
Software product assets (8,261) (15,989) (15,477)
Own shares - (7,954) -
Settlement of deferred purchase consideration - (6,252) -
Disposals of property, plant and equipment 899 472 232
Short-term investments - - 51,227
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (11,249) (43,449) 17,322
=================================================================================================================
FINANCING ACTIVITIES
Issuance of ordinary shares, net of expenses 215 446 336
Repayment of capital leases (233) (467) (481)
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY FINANCING ACTIVITIES (18) (21) (145)
=================================================================================================================
EFFECT OF EXCHANGE RATE CHANGES ON CASH (377) (117) 1,382
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 12,712 (29,910) 53,609
Cash at beginning of year 58,848 88,758 35,149
- -----------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $71,560 $58,848 $88,758
=================================================================================================================
Supplemental disclosure of cash flow information:
Income taxes paid during the year 61 4,569 10,925
Interest paid during the year 32 117 117
=================================================================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (US FORMAT)
In thousands of U.S. dollars
- ------------------------------------------------------------------------------------------------------------------------------------
ORDINARY ADDITIONAL DEFERRED CURRENCY
NUMBER SHARES PAID-IN TREASURY PURCHASE OTHER RETAINED TRANSLATION
OF SHARES AMOUNT CAPITAL STOCK CONSIDERATION RESERVES EARNINGS ADJUSTMENT TOTAL
BALANCE, JANUARY 31 1994 14,217 $2,238 $19,235 - - ($29) $96,109 ($4,903) $112,650
Share options exercised 147 22 314 - - - - - 336
Transfer between reserves - - - - - 29 (29) - -
Agreed acquisition of Burl - - - - 5,311 - - - 5,311
Net loss - - - - - - (4,860) - (4,860)
Currency translation adjustment - - - - - - - 2,405 2,405
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31 1995 14,364 2,260 19,549 - 5,311 - 91,220 (2,498) 115,842
Share options exercised 115 19 474 - - - - - 493
Agreed acquisition of Burl 665 107 7,234 - (5,311) - - - 2,030
Treasury stock - - - (8,959) - - - - (8,959)
Net loss - - - - - - (10,436) - (10,436)
Currency translation adjustment - - - - - - - (1,496) (1,496)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31 1996 15,144 2,386 27,257 (8,959) - - 80,784 (3,994) 97,474
Share options exercised 24 3 211 - - - - - 214
Net loss - - - - - - (10,508) - (10,508)
Currency translation adjustment - - - - - - - 1,603 1,603
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31 1997 15,168 $2,389 $27,468 ($8,959) - - $70,276 ($2,391) $88,783
====================================================================================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US FORMAT)
The statutory financial statements of Micro Focus, within the meaning of section
240 of the Companies Act 1985 of Great Britain, for the year ended January 31
1997 are contained on pages 40 to 55.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
To enable the reader to see immediately any information provided in addition to
the common policy statements, the text of this note and the corresponding note 1
to the U.K. format financial statements on page 46 is italicized where the
text is identical.
NATURE OF OPERATIONS
Micro Focus designs and develops computer software products. Approximately 90%
of its revenue is derived from the sale of software product licenses and related
support and maintenance to end users. The remaining 10% is derived from the
licensing of distribution rights to software products to original equipment
manufacturers.
Product licenses are sold and supported in more than 60 countries. The principal
market is the United States, which accounts for approximately 55% of revenue.
Approximately 30% of revenue is derived from customers in Europe and
approximately 10% is earned in the Pacific Rim.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are those of Micro Focus Group Plc and all
of its subsidiaries ("Micro Focus"). They have been prepared under the
historical cost convention and in accordance with U.S. generally accepted
accounting principles ("GAAP"), which, as applied by Micro Focus, do not differ
in any significant respect from U.K. GAAP, except with regard to the treatment
of acquisitions and goodwill and the presentation of certain items in the
financial statements. All significant inter-company balances and transactions
have been eliminated on consolidation.
In accordance with industry trends, the Company has revised the presentation of
accounts receivable and deferred income for all years presented. This revision,
in essence a reclassification, has not affected the results of operations or
financial position of the Company.
REVENUE RECOGNITION
Net revenue represents the amounts derived from the provision of goods and
services which fall within Micro Focus' ordinary activities, stated net of
applicable taxes.
Revenue from sales of software packaged products to end users and resellers is
recognized when the product is delivered.
Revenue from sales to original equipment manufacturers ("OEMs") under
non-cancelable license agreements generally provide for development fees and
initial license fees, which are recognized at the later of (a) the date product
is delivered to the OEM and (b) the date payment becomes due within twelve
months and (c) the date of receipt of monies if collection cannot be assessed
with reasonable assurance. When sales by the OEM exceed the initial license fee
commitment, revenue is recognized as unit shipments are reported by the OEM.
Revenue from maintenance agreements is recognized pro-rata over the life of the
agreement corresponding to notional delivery of the service.
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 No. 86
("SFAS 86") "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed".
Software purchased for inclusion in the Micro Focus product set, including
software acquired on acquisitions, which meets the provisions for
capitalizations under SFAS 86, is also included in software product assets.
During the years ended January 31 1997, 1996 and 1995 purchased software,
totaling $nil, $350,000 and $843,000 respectively, was added to software product
assets.
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21
Software product assets are amortized using the straight line method over the
estimated economic life of the products, which in most cases is assumed to be
four years. Where market expectations dictate, amortization is accelerated.
Amortization of software product assets is included in research and development
costs.
GOODWILL
Goodwill represents the excess of the amount paid on the acquisition of a
business 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 lives will depend on the length of the future period expected to
benefit from the purchase. Where there is doubt over expected future benefits,
amortization is accelerated.
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 years
Transportation equipment 3 - 4 years
LEASING
Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are capitalized as fixed assets. The amount capitalized
is that sum for which the leased asset could be purchased at the start of the
lease, 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.
INCOME TAXES
The provision for income taxes includes U.S., U.K. and other income taxes
currently payable and those deferred because of timing differences between
financial and tax reporting.
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.
CASH AND SHORT-TERM INVESTMENTS
Cash includes cash equivalents which represent cash placed on short-term deposit
where the maturity date is less than three months from the initial date of
deposit.
Short-term investments represents cash placed on deposit where the maturity
date is between three and twelve months from the initial date of deposit.
TRANSLATION OF FOREIGN CURRENCIES
Micro Focus' policy on foreign currency translation complies with SFAS 52
"Foreign Currency Translation".
Assets and liabilities denominated in currencies other than U.S. dollars are
translated at exchange rates in effect at the balance sheet date. Closing U.S.
dollar to G.B. pound rates at January 31 1997, 1996 and 1995 were $1 = GBP
0.625, $1 = GBP 0.662 and $1 = GBP 0.629 respectively. Revenue, costs and
expenses are translated using average rates. Monthly average U.S. dollar to G.B.
pound rates used during 1996 range between $1 = GBP 0.585 and $1 = GBP 0.667,
and average $1 = GBP 0.633 (1995: $1 = GBP 0.634; 1994: $1 = GBP 0.648).
Translation adjustments resulting from the process of translating financial
statements denominated in currencies other than U.S. dollars are dealt with
separately in stockholders' equity.
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22
NET (LOSS) PER SHARE
Net (loss) per share is based on net (loss) and on the weighted average
number of ordinary shares outstanding during the period, including common share
equivalents, represented by shares issuable upon exercise of share options. The
computation assumes the proceeds from the exercise of share options are used to
repurchase the Company's ordinary shares at their average market price during
each period. In 1994 and 1995 common stock equivalents were antidilutive and
therefore excluded from the computation.
Pro-forma net (loss) per share calculated on the fair-value-based method is
disclosed in accordance with SFAS 123 (see "Stock based compensation", below).
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.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Micro Focus to concentrations of
credit risk consist principally of short-term investments and trade receivables.
Micro Focus places its short-term investments only in financial high quality
instruments and, by policy, limits the amounts invested with any one issuer.
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. No single customer represented more than 10% of Micro
Focus' revenue in 1996, 1995 and 1994.
OTHER RISKS AND UNCERTAINTIES
Micro Focus' policy is to amortize capitalized software using the straight-line
method over the remaining estimated economic life of the product. In the event
that the remaining estimated economic life of a product is judged to be reduced
significantly, the carrying amount of such capitalized software costs would be
reduced.
STOCK BASED COMPENSATION
The Company grants share options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for share option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no
compensation expense for the share option grants.
Financial Accounting Board Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued in October 1995 and is effective for
fiscal 1996. As set out in note 10 the Company has elected to apply the
disclosure provisions of the standard and has therefore added pro forma
disclosures of net income and earnings per share as if the fair-value-based
method had been applied.
NOTE 2 ACQUISITIONS
There were no acquisitions in 1996.
In May 1995 Micro Focus completed the agreed acquisition of Burl Software
Laboratories, Inc. for a total of $13,500,000, which was satisfied by the issue
of 664,979 ordinary shares and the payment of $6,251,000 in cash. The
acquisition was accounted for as a purchase.
In 1994 Micro Focus acquired the Expert Consulting Division of The Systems
Group, a consultancy business based in Massachusetts. In addition, the
intellectual property rights to certain development tools were purchased from
mbp Softwareentwickslungs GmbH, a German subsidiary of EDS, a U.S. corporation,
at a cost of $5,000,000.
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23
NOTE 3 RESEARCH AND DEVELOPMENT COSTS
- ----------------------------------------------------------------------
(in thousands) 1996 1995 1994
Research and development costs,
before capitalization $30,126 $37,059 $36,243
Costs capitalized as software
product assets (8,272) (15,639) (14,977)
Amortization of capitalized costs 12,690 13,917 10,929
Previously deferred costs expensed
on contract completion 104
- ----------------------------------------------------------------------
$34,544 $35,337 $32,299
======================================================================
NOTE 4 NON-RECURRING ITEMS
Non-recurring items recorded in 1996 represent a charge of $8,000,000 for
restructuring costs. The charge consists of the costs associated with a
reduction in the Company's workforce of approximately 65 people, with facility
closures and consolidations, and with asset write-downs. The restructuring was
essentially completed during the year, but payments estimated at $2,300,000
remain to be paid in 1997.
Non-recurring items recorded in 1995 consist of a charge of $10,502,000 for
restructuring costs and a credit of $1,033,000 in respect of an employer loan to
the Micro Focus Group Employee Benefit Trust 1994.
Restructuring costs of $5,031,000 incurred in the first quarter of 1995 related
to employee terminations, closure of surplus office facilities, and fixed asset
write-downs. Additional asset write-downs of $5,471,000 booked in the fourth
quarter of 1995 were primarily the result of a review into the carrying value of
software product assets.
In 1994 Micro Focus recorded a charge of $18,265,000 related to acquisitions
made during that year. This charge included $12,765,000 representing the
write-off of purchased research and development costs, goodwill and other
charges incurred in connection with the purchase of Burl Software Laboratories,
Inc.; and $5,000,000 of intellectual property rights acquired
from mbp.
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------
(in thousands) 1996 1995
Land and buildings $ 21,690 $ 19,845
Leasehold improvements 1,343 2,994
Computer and communications
equipment & software 38,328 37,772
Office equipment 7,503 7,326
Transportation equipment 467 897
- --------------------------------------------------------------------
Property, plant and equipment - at cost 69,331 68,834
Less: accumulated depreciation
and amortization (36,463) (31,219)
- --------------------------------------------------------------------
Property, plant and equipment - net $ 32,868 $ 37,615
====================================================================
The above figures include assets under capital leases as follows:
- -------------------------------------------------------
Cost $200 $564
Less: accumulated depreciation
and amortization (105) (249)
- -------------------------------------------------------
$95 $315
=======================================================
During the years ended January 31 1997, 1996 and 1995 depreciation expense,
including depreciation on leased assets, totalled $8,931,000, $9,759,000 and
$6,654,000 respectively.
NOTE 6 LINES OF CREDIT
Micro Focus has in place a line of credit under the terms of which financing is
available until December 1997, either in G.B. pounds or such other currency as
Micro Focus may determine, of up to the equivalent of GBP 5,000,000 ($8,000,000
at January 31 1997). Any borrowings under this line of credit will bear interest
at 1% above the London Interbank Offered Rate (LIBOR) and would be unsecured.
There have been no borrowings under this line of credit to date.
22
24
NOTE 7 COMMITMENTS
Micro Focus has entered into both capital and operating leases. The capital
leases are principally for transportation equipment. The operating leases are
for buildings, furniture and equipment and generally contain renewal options at
rates which approximate the anticipated market rate at expiration. In most
cases, it is expected that the operating leases will be renewed or replaced by
other leases in the normal course of business.
Minimum rental payments due under the leases described above are as follows:
- ----------------------------------------------------------
(in thousands) Capital Operating
Years ended January 31 Leases Leases
1998 $113 $2,741
1999 24 1,983
2000 - 1,663
2001 - 1,483
2002 - 1,447
Thereafter - 7,509
- ----------------------------------------------------------
Total minimum lease payments 137 16,826
Less: amount representing interest (4)
- ----------------------------------------------------------
Present value of net minimum
lease payments $133
- ----------------------------------------------------------
During the years ended January 31 1997, 1996 and 1995 rent expense totalled
$4,006,000, $4,809,000 and $4,726,000 respectively.
NOTE 8 INCOME TAXES
Income taxes consist of:
- ----------------------------------------------------------
(in thousands) 1996 1995 1994
Current: U.K $ 375 $ 210 $3,045
U.S. federal 6 297 181
U.S. state 1 (3) 116
Other 369 (230) 2,402
- ----------------------------------------------------------
751 274 5,744
==========================================================
Deferred: U.K 1,489 (235) 1,617
U.S. federal (115) (113) (956)
U.S. state -- (26) 5
- ----------------------------------------------------------
1,374 (374) 666
==========================================================
Total: $2,125 $(100) $6,410
==========================================================
Deferred taxes result from timing differences in the recognition of revenues
and expenses for tax and financial statement purposes. The sources of these
differences and the tax effect of each were as follows:
- ------------------------------------------------------------------
in thousands 1996 1995 1994
Software development costs and other $1,571 ($620) $907
Depreciation and amortization (197) 246 (241)
- ------------------------------------------------------------------
$1,374 ($374) $666
==================================================================
Micro Focus has not recognized the tax effects of operating losses in U.S.
subsidiaries. The following table analyses the differences between the U.K. tax
rate and the effective tax rate:
- -------------------------------------------------------------------------
1996 1995 1994
U.K. statutory tax rate 33.0% 33.0% 33.0%
Tax effect of earnings of foreign subsidiaries (37.3) 7.2 2.8
Permanent differences and other items (21.0) (39.2) (3.5)
Non-recurring charges - - 381.2
- -------------------------------------------------------------------------
Effective tax rate (25.3%) 1.0% 413.5%
=========================================================================
In 1994 the Company expensed non-recurring charges of $16,765,000. These charges
reduced income before income taxes by 92% from $18,315,000 to GBP 1,550,000 and,
since a significant proportion of these charges were non deductable for tax
purposes, increased the effective tax rate from 32.3% to 413.5%
Deferred income taxes, all of which are non-current, are as follows:
- -----------------------------------------------------------
(in thousands) 1996 1995
Software development costs and other $9,712 $7,768
Depreciation and amortization 271 468
- -----------------------------------------------------------
$9,983 $8,236
===========================================================
Deferred tax relative to the different tax jurisdictions is as follows:
- ---------------------------------------------------------
(in thousands) 1996 1995
U.K. $9,983 $8,121
U.S. - 115
- ---------------------------------------------------------
$9,983 $8,236
=========================================================
23
25
NOTE 9 BUSINESS SEGMENT INFORMATION
Micro Focus operates in one business segment - the development and marketing of
computer software products. The following table analyzes worldwide operations by
geographical segment, based on the location of Micro Focus facilities.
- ----------------------------------------------------------------
1996 1995 1994
Revenue:
United States $ 67,388 $ 78,118 $ 90,065
United Kingdom 53,859 53,578 55,310
Europe (excluding U.K. 32,866 32,125 38,856
Other 3,048 2,051 2,119
- ----------------------------------------------------------------
157,161 165,872 186,350
Inter-segment revenue:
United States (5,470) (7,498) (4,261)
United Kingdom (25,217) (26,369) (23,993)
Europe (excluding U.K.) (10,331) (8,708) (18,154)
Other (734) (1,341) (1,483)
- ----------------------------------------------------------------
Total net revenue 115,409 121,956 138,459
================================================================
Income from operations:
United States (7,522) (7,278) (14,431)
United Kingdom (3,789) 1,913 8,980
Europe (excluding U.K.) (441) (7,760) 6,523
Other 695 (726) (1,313)
- ----------------------------------------------------------------
(11,057) (13,851) (241)
================================================================
Total assets:
United States 18,246 36,041 47,289
United Kingdom 70,11 59,506 64,622
Europe (excluding U.K.) 62,305 64,120 84,680
Other 646 687 1,049
- ----------------------------------------------------------------
$ 151,311 $160,35 $ 197,640
================================================================
Inter-segment revenue principally represents license fees and sub-contracted
development charges between locations.
NOTE 10 EMPLOYEE STOCK AND RETIREMENT PLANS
SHARE OPTION PLANS
Micro Focus operates two plans both of which provide for the grant of share
options to acquire shares to all persons who devote substantially all their
working time to Micro Focus and such other eligible persons as the Board may
determine. The terms and exercise prices of options issued under these plans are
determined at the time the options are granted. Unexercised options lapse when
the optionholder ceases to be employed by Micro Focus or at a predetermined
expiry date (of up to ten years from the date of grant), whichever occurs first.
The Micro Focus Share Option Plan ("the Plan") was established in 1984. It meets
the terms and conditions required by the U.S. Internal Revenue Code in order
that the options will qualify as Incentive Stock Options, and as required by the
U.K. Inland Revenue in order to qualify as an approved Company Share Option
Plan. Options issued under the Plan are generally exercisable in five equal
cumulative annual instalments commencing one year after the date of grant.
At January 31 1997 1,769,342 options were issued and outstanding under the Plan,
and a further 427,911 had been approved for grant by shareholders of the Company
but were currently unissued.
In 1994 Micro Focus established a discretionary employee benefit trust, the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust"), the purpose of
which is to further Micro Focus' policy of encouraging share ownership by its
employees. Under the terms of the Trust, Micro Focus Trustees Limited ("MFTL")
is permitted to acquire ordinary shares of Micro Focus Group Plc and to issue
options over those shares to directors and employees.
In 1995 MFTL purchased 915,216 shares in the Company and granted options on
530,700 of these shares at a price of GBP 6.97 (G.B. pounds) per share. Under
the terms of the grant these options vest, and therefore become exercisable, in
five equal annual instalments only on the achievement by Micro Focus of certain
predetermined annual earnings per share targets in respect of each of the
financial years ended January 31 1996 to January 31 2000. In March 1996
one-fifth of the options lapsed when the announcement of financial results for
the year ended January 31 1996 indicated that the target in respect of that year
had not been achieved. In April 1996 376,840 of the remaining options were
exchanged for 282,630 new options, issued at a price of GBP 6.85 (G.B. pounds)
per share. These new options are exercisable in five equal cumulative annual
instalments commencing one year after the date of grant.
At January 31 1997 693,690 of the options issued by MFTL in 1995 and 1996 were
outstanding. A further 32,000 shares over which options had been granted prior
to their acquisition by MFTL remained outstanding at January 31 1997 at prices
between GBP 6.05 and GBP 14.98 (G.B. pounds). The remaining 189,526 shares were
available for the grant of further options. Options issued by the Trust do not
qualify as Incentive Stock Options (for U.S. taxation purposes), nor does the
plan qualify as an approved Company Share Option Plan (for U.K. taxation
purposes).
The shares held by the Trust are shown in the Balance Sheet as Treasury Stock
within Shareholders' Equity.
24
26
Share option activity under the plans was as follows:
- -------------------------------------------------------------
Option price
Number per share
of shares (in G.B. pounds)
Outstanding, January 31 1994 1,310,176 0.92-28.83
Options granted 608,416 8.16-16.38
Options exercised (148,206) 0.92-7.63
Options cancelled (41,512) 2.20-28.83
- -------------------------------------------------------------
Outstanding, January 31 1995 1,728,874 0.92-28.83
Options granted 603,795 5.65-8.20
Options exercised (114,865) 2.20-5.42
Options cancelled (159,035) 2.20-28.83
- -------------------------------------------------------------
Outstanding, January 31 1996 2,058,769 5.42-28.83
Options granted 2,300,830 5.83-9.60
Options exercised (24,156) 5.42-9.66
Options cancelled (1,840,411) 5.42-28.83
- -------------------------------------------------------------
Outstanding, January 31 1997 2,495,032 5.42-21.61
- -------------------------------------------------------------
The following tables summarize information about share options outstanding at
January 31 1997:
Options outstanding:
- ------------------------------------------------------------------
Ranges of Number Weighted Weighted
exercise prices outstanding average average
(in G.B. pounds) at January contractual life exercise price
31 1997 (months) (in G.B. pounds)
5.42-7.50 1,748,302 110 6.83
7.51-10.00 525,340 113 8.45
10.01-21.61 221,390 101 15.36
- --------------------------------------------------------------------
2,495,032 110 7.93
- --------------------------------------------------------------------
Options exercisable:
- ----------------------------------------------------------
Ranges of Number Weighted
exercise prices exercisable average
(in G.B. pounds) at January exercise price
31 1997 (in G.B. pounds)
5.42-7.50 45,502 5.58
7.51-10.00 7,644 8.18
10.01-21.61 114,916 15.48
- ----------------------------------------------------------
168,062 12.47
- ----------------------------------------------------------
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 use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee share options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995: 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 0.378
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 transferable.
In addition, the option valuation models require the input of highly subjective
assumptions including the expected share price volatility. Because the Company's
employee share options have characteristics significantly different from those
of traded options and 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 its
employee share 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 loss was $11,779,000 and $10,639,000 and pro forma loss per share was
$0.77 and $0.70 in fiscal 1996 and 1995 respectively.
The effects on net loss and loss per share are not likely to be representative
of the effects on reported net income for future years since 1995 reflects
expense for only one year's vesting.
RETIREMENT PLANS
Micro Focus 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, Micro Focus' plan qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, Micro Focus 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 the years ended January 31 1997, 1996 and 1995 contributions totalling
$690,000, $949,000 and $1,086,000 respectively have been expensed.
25
27
NOTE 11 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the two years ended January 31 1997 is as
follows:
In thousands (except per share data)
- -------------------------------------------------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter Year
- -------------------------------------------------------------------------------------------------
Year ended January 31 1997:
Net revenue 24,169 28,088 28,285 34,867 115,409
Restructuring charges (8,000) -- -- -- (8,000)
Operating (loss) income (13,747) (1,963) 1,101 3,552 (11,057)
Net (loss) income (13,096) (1,207) 1,080 2,715 (10,508)
Net (loss) income per share ($0.86) ($0.08) $0.07 $0.18 ($0.69)
- -------------------------------------------------------------------------------------------------
Year ended January 31 1996:
Net revenue 28,683 30,147 27,841 35,285 121,956
Restructuring charges (5,031) -- -- (5,471) (10,502)
Operating (loss) income (9,883) 776 (1,200) (3,544) (13,851)
Net (loss) income (8,279) 984) (516) (2,625) (10,436)
Net (loss) income per share ($0.55) $0.07 ($0.03) ($0.17) ($0.69)
- -------------------------------------------------------------------------------------------------
REPORT OF THE INDEPENDENT AUDITORS (US FORMAT)
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MICRO FOCUS GROUP Plc
We have audited the consolidated balance sheets of Micro Focus Group Plc and
subsidiaries as of January 31 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended January 31 1997 on pages 15 to 25. 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 and
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Micro Focus Group
Plc and subsidiaries at January 31 1997 and 1996 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended January 31 1997 in conformity with United States generally accepted
accounting principles.
Ernst & Young
Chartered Accountants
Registered Auditor
Reading, England
March 6 1997
26
28
[At the top of the left portion of the page, the capital letters "UK" appear in
over-sized print.]
FINANCIAL STATEMENTS UK FORMAT
FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH U.K.
ACCOUNTING PRINCIPLES (IN GB POUNDS)
DIRECTORS' REPORT 28
- ------------------------------------------------------------------------
EXECUTIVE REMUNERATION COMMITTEE'S REPORT 31
- -------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA 34
- -------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS 35
- -------------------------------------------------------------------------
CONSOLIDATED PROFIT AND LOSS ACCOUNT 40
- -------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET 41
- -------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENT 42
- -------------------------------------------------------------------------
NOTES TO CONSOLIDATED CASH FLOW STATEMENT 43
- -------------------------------------------------------------------------
COMPANY BALANCE SHEET 44
- -------------------------------------------------------------------------
STATEMENT OF TOTAL RECOGNISED GAINS
AND LOSSES 45
- -------------------------------------------------------------------------
MOVEMENT IN SHAREHOLDERS' FUNDS 45
- -------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
1 Significant accounting policies 46
2 Revenue (turnover) 48
3 Research and development costs 48
4 Operating (loss)/profit 48
5 Directors and employees 49
6 Interest expense 49
7 Exceptional items 49
8 Taxation 50
9 (Loss)/earnings per share 50
10 Intangible fixed assets 50
11 Tangible fixed assets 51
12 Investments 51
13 Stocks 52
14 Debtors 52
15 Creditors: amounts falling due within one year 52
16 Creditors: amounts falling due after more than one year 53
17 Lease commitments 53
18 Deferred taxation 53
19 Capital commitments 53
20 Segmental information 54
21 Share option plans 54
- -------------------------------------------------------------------------
STATEMENT OF DIRECTORS' RESPONSIBILITIES 56
- -------------------------------------------------------------------------
REPORT OF THE AUDITORS 56
- -------------------------------------------------------------------------
27
29
DIRECTORS' REPORT (UK FORMAT)
The directors of Micro Focus Group Plc ("the Company") present their Report
together with the audited financial statements of the Company and its subsidiary
undertakings ("Micro Focus") for the year ended January 31 1997.
PRINCIPAL ACTIVITIES
The principal activities of Micro Focus are the design, development and
marketing of compilers and programmer productivity tools for the development and
deployment of business applications across a wide range of computer equipment
from personal computer workstations to mainframe computers.
TRADING RESULTS
The table below summarises the trading results as disclosed in the consolidated
profit and loss account.
- ------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
- ------------------------------------------------------------------------
Revenue 73,089 77,258 89,885
(Loss)/profit before taxation (5,809) (6,542) 8,723
(Loss)/profit after taxation (7,281) (6,470) 4,590
- ------------------------------------------------------------------------
(Loss)/profit before taxation is after charging exceptional items amounting to
GBP 5,195,000 (1995: GBP 6,001,000) details of which are set out in note 7
to the financial statements on page 49.
DIVIDEND
Following customary practice the directors will not be recommending payment of a
dividend.
DIRECTORS' RESPONSIBILITIES
A statement of the directors' responsibilities in respect of the financial
statements is set out on page 56.
FUTURE PROSPECTS
A review of the business and an indication of future prospects is given in the
Letter to Shareholders on pages 2 to 5.
RESEARCH AND DEVELOPMENT
Micro Focus has a continuing commitment to a high level of investment in
research and development. An indication of product development activity is given
in the Letter to Shareholders. Research and development costs are summarised in
note 3 to the financial statements on page 48.
DIRECTORS
The directors who served throughout the year are as follows:
Non-executive directors:
J. Michael Gullard, Chairman
Harold Hughes, Deputy Chairman
Executive directors:
Marcelo Gumucio, Chief Executive Officer
Paul Adams
Ron Forbes
In addition, Brian Reynolds and Paul O'Grady served as directors until their
resignations on March 24 1996 and April 1 1996 respectively.
J. Michael Gullard was appointed a non-executive director in May 1995 and was
elected Chairman in March 1996. He is General Partner of Cornerstone Management,
a California, USA-based venture capital organisation. He is a U.S. resident.
Harold Hughes, who was appointed a non-executive director in December 1993, is
also a U.S. resident. He is currently Vice-President of Planning and Logistics
at Intel Corporation.
Marcelo Gumucio, who became a non-executive director in January 1996, was
appointed Chief Executive Officer on April 1 1996.
J. Michael Gullard and Paul Adams will retire by rotation at the 1997 annual
general meeting and, being eligible, will offer themselves for re-election.
Neither Mr. Gullard nor Mr. Adams has a service contract with the Company.
The directors' interests in the share capital of the Company are set out in the
Executive Remuneration Committee's Report on page 33. The directors also hold
options to acquire ordinary shares in the Company under the Micro Focus share
option plans. A table showing the options held by each director, together with
those granted and those which have lapsed during the year, is also set out in
the Executive Remuneration Committee's Report.
28
30
SUBSTANTIAL SHAREHOLDERS
The following interests of 3% or more in the issued share capital of the Company
have been reported as at February 14 1997:
- ----------------------------------------------------------------------------
Ordinary Percentage
shares held holding
Fidelity Corporation 1,583,875 10.4%
The Prudential Corporation Group 1,493,099 9.8%
Pioneering Management 1,471,000 9.7%
Micro Focus Trustees Limited 915,216 6.0%
Paul O'Grady 824,588 5.4%
Brian Reynolds 775,000 5.1%
- ----------------------------------------------------------------------------
At February 14 1997 the Bank of New York acting as Depositary Bank held
approximately 18.8% of the Company's shares in respect of which American
Depositary Receipts ("ADRs") have been issued. The ADRs are traded in the United
States on the Nasdaq Stock Market. Certain of the holdings reported above are
held in the form of ADRs.
FINANCIAL ASPECTS OF CORPORATE GOVERNANCE
The Board reviewed the Company's compliance with the Cadbury Committee's Code of
Best Practice ("The Code") at the time of its issue in 1992 and continues to
monitor its compliance in the light of subsequent guidance issued by the Cadbury
Committee and current best practice. The Board considers that it complied with
the Code in 1996 except as noted below.
Since April 1 1996 the Company has had only two non-executive directors, both of
whom have been appointed for unspecified terms.
The constitution of the Board is kept under review and changes are made when
appropriate and in the best interests of Micro Focus.
The Company's Audit Committee was established on March 8 1996. It currently
comprises the two non-executive directors, J. Michael Gullard and Harold Hughes.
The Company's Executive Remuneration Committee, which was formed in December
1993, also currently comprises the two non-executive directors, J. Michael
Gullard and Harold Hughes.
With respect to the existence and operation of its Executive Remuneration
Committee, the Company has complied throughout 1996 with Section A of the Best
Practice Provisions annexed to the listing rules of the London Stock Exchange.
The Executive Remuneration Committee's Report to shareholders is set out on page
31.
The directors acknowledge their responsibility for ensuring that the Company has
in place a system of internal financial controls that is appropriate to the
various business environments in which it operates. Such a system can provide
only reasonable and not absolute assurance against material misstatement or
loss.
Control is exercised through an organisational structure with clearly defined
levels of responsibility, authorisation and approval and appropriate segregation
of duties and reporting procedures to ensure that assets are safeguarded against
material loss and that transactions are properly authorised, processed and
reported. Financial performance data is regularly prepared, reviewed and
compared with budgeted targets. The Board has reviewed the effectiveness of the
system of internal financial control as it operated during the year.
After making enquiries, the directors have a reasonable expectation that Micro
Focus has adequate resources to continue in operational existence for the
foreseeable future. For this reason they continue to adopt the going concern
basis in preparing the financial statements.
Ernst & Young, the Company's auditors, have confirmed that, in their opinion:
with respect to the directors' statements on internal financial control and
going concern in the preceding paragraphs, the directors have provided the
disclosures required by the Listing Rules of the London Stock Exchange and such
statements are consistent with the information of which they are aware from
their audit work on the financial statements; and the directors' other
statements in the preceding paragraphs appropriately reflect the Company's
compliance with the other aspects of the Code specified for their review by
Listing Rule 12.43(j). Ernst & Young were not required to perform the additional
work necessary to, and did not, express any opinion on the effectiveness of
either the Company's system of internal financial control or its corporate
governance procedures nor the ability of Micro Focus to continue in operational
existence.
29
31
EMPLOYEE INVOLVEMENT
Micro Focus places considerable value on the involvement of its employees and on
good relations and communication with them.
Wide employee consultation takes place on matters affecting their interests.
Employee involvement in the business is encouraged in many ways, including the
holding of regular company-wide meetings and, specifically, awareness of Micro
Focus' financial performance is maintained through the participation of
employees in the Micro Focus bonus scheme.
At Micro Focus, every employee is eligible to become a shareholder through the
ownership of options to acquire ordinary shares in the Company under the Micro
Focus share option plans (see note 21 to the financial statements on page 54).
DISABLED EMPLOYEES
Micro Focus gives consideration to applications for employment from disabled
persons where the requirement of the job may be adequately covered by a
handicapped or disabled person. If necessary Micro Focus endeavours to retrain
any member of staff who develops a disability during employment with Micro Focus
and to provide career development and promotion opportunities wherever
appropriate.
SUPPLIER PAYMENT POLICY
It is the policy of the Company to settle the terms of payment with suppliers
when agreeing the terms of transactions, to ensure that suppliers are made aware
of the terms of payment, and to comply with those contractual arrangements.
SPECIAL BUSINESS AT THE ANNUAL GENERAL MEETING
In accordance with normal practice, special resolutions will be proposed at the
1997 annual general meeting renewing the Board's authority to disapply
pre-emptive rights and authorising the Company to purchase certain of its own
shares. Equivalent resolutions were passed at last year's annual general
meeting. In 1996 the Board had no occasion to use the power to purchase the
Company's own shares, but believes it should have this facility, in line with
current standard practice.
The full text of all resolutions will be set out in the notice of annual general
meeting which will be distributed to shareholders in due course.
AUDITORS
Ernst & Young have expressed their willingness to continue in office as auditors
and a resolution proposing their re-appointment will be submitted at the annual
general meeting.
By Order of the Board
/s/ Loren E. Hillberg
Loren E. Hillberg
Secretary
March 4 1997
30
32
EXECUTIVE REMUNERATION COMMITTEE'S REPORT (UK FORMAT)
The Micro Focus Executive Remuneration Committee was established in December
1993. At present the Committee comprises the two non-executive directors, J.
Michael Gullard and Harold Hughes.
The remuneration of the executive directors is determined by the Committee. The
Commitee 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 Micro Focus is
part, and the importance of recruiting and retaining management of the
appropriate calibre. The Company has complied with Section A of the Best
Practice Provisions annexed to the Listing Rules of the London Stock Exchange.
The Report of the Auditors on page 56 confirms that the scope of that report
covers the disclosures contained in this report that are specified for review by
the London Stock Exchange.
DIRECTORS' REMUNERATION POLICY
In framing its remuneration policy, the Committee has given full consideration
to Section B of the Best Practice Provisions annexed to the listing rules of the
London Stock Exchange. The chief components of remuneration are as follows:
BASIC SALARY: Salary rates for the 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.
FEES: 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. Such fees are determined in advance by the Executive
Directors and not by the Committee.
PERFORMANCE-RELATED PAY: Executive directors are eligible for annual
performance-related bonuses, which are calculated based on fixed formulae
measuring Micro Focus' 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 Micro Focus
exceeds the targets set out at the beginning of the year.
In 1996 such bonuses were based on achievement against targets measuring
performance (measured in terms of earnings per share, excluding exceptional
items) for the ten month period ended January 31 1997. On the basis of that
achievement, executive directors would earn bonuses equivalent to between 33%
and 133% of their basic salary entitlements.
PENSION CONTRIBUTIONS: The Company does not operate a pension scheme for its
directors, but does make contributions to a director's own personal pension in
lieu of salary entitlement.
OTHER BENEFITS: Other benefits principally relate to the use of corporate
communications facilities by, and personal travel provided for, a former
director.
LONG-TERM INCENTIVES/SHARE OPTIONS: All of the directors are eligible to
participate in the Micro Focus share option plans, details of which are set out
in note 21 to the financial statements on page 54. 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.
None of the directors is eligible for any other long-term incentive payments.
SERVICE AGREEMENTS: None of the directors has a service contract 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.
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DIRECTORS' REMUNERATION
The following table analyses the remuneration earned by each director in 1996
and 1995.
- --------------------------------------------------------------------------------------------------------------------
(In thousands of G.B. pounds) Performance- Compensation
related Other for loss Pension
Salary Fees pay benefits of office contributions TOTAL
1996: J Michael Gullard -- 63 -- -- -- -- 63
Harold Hughes -- 20 -- -- -- -- 20
Marcelo Gumucio 101 1 129 -- -- -- 231
Paul Adams 79 -- 50 -- -- -- 129
Ron Forbes 79 -- 16 -- -- 6 101
Brian Reynolds -- -- -- 29 -- -- 29
(resigned March 24 1996)
Paul O'Grady 24 -- -- -- 30 -- 54
(resigned April 1 1996)
- --------------------------------------------------------------------------------------------------------------------
283 84 195 29 30 6 627
- --------------------------------------------------------------------------------------------------------------------
1995: J Michael Gullard -- 62 -- -- -- -- 62
(appointed May 2 1995)
Harold Hughes -- 34 -- -- -- -- 34
Marcelo Gumucio -- 1 -- -- -- -- 1
(appointed January 27 1996)
Paul Adams 143 -- -- -- -- -- 143
Ron Forbes 76 -- 3 -- -- 6 85
Brian Reynolds -- -- -- 117 -- -- 117
Paul O'Grady 120 -- 11 -- -- -- 131
- --------------------------------------------------------------------------------------------------------------------
339 97 14 117 -- 6 573
- --------------------------------------------------------------------------------------------------------------------
Upon the resignation of Paul O'Grady, the Company entered into a consultancy
agreement with an entity with which Mr. O'Grady is affiliated to provide
management consulting services to the Company in exchange for a payment of
$750,000 (GBP 490,000), plus reimbursement of expenses. As expected, the bulk of
the services that were anticipated to be performed under the agreement were
performed during 1996.
In the case of Brian Reynolds, the Company entered into an agreement with an
entity with which Mr. Reynolds is affiliated that provides for the Company to
receive management and technology consulting services in exchange for a payment
of $800,000 (GBP 500,000) and the transfer to the entity of certain computer and
telecommunications equipment which the Company has valued at $249,000 (GBP
155,000). As expected, the bulk of the services that were anticipated to be
performed under the agreement were performed during 1996.
The following additional information is provided in accordance with the
requirements of the Companies Act 1985.
In 1996 Ron Forbes was the highest-paid U.K. director. In 1995 Paul O'Grady was
the highest-paid U.K. director. The remuneration of the chairmen was as follows:
(In thousands of G.B. pounds) 1996 1995
Paul O'Grady (February 1 1995 - May 2 1995) - 42
Brian Reynolds (May 2 1995 - March 24 1996) 29 89
J. Michael Gullard (since March 24 1996) 53 -
- -----------------------------------------------------------------
The emoluments, excluding pension contributions, of the individual directors
fell within the following ranges:
(In G.B. pounds) 1996 1995
No. No.
20,001 - 25,000 1 -
75,001 - 80,000 - 1
90,001 - 95,000 1 -
130,001 - 135,000 - 1
Directors working mainly outside
the United Kingdom 5 5
- ---------------------------------------------------
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DIRECTORS' SHAREHOLDINGS
The interests of the directors (all of which are beneficial) in the share
capital of Micro Focus Group Plc are as follows:
- -----------------------------------------------------------------------------------------
January 31 January 31
1997 1996
J Michael Gullard, Chairman 1,000 -
Harold Hughes, Deputy Chairman 20,000 -
Marcelo Gumucio, Chief Executive Officer - -
Paul Adams 106,600 106,300
Ron Forbes 23,676 23,676
- -----------------------------------------------------------------------------------------
There have been no changes in these holdings since the year end.
DIRECTORS' SHARE OPTIONS
The following table sets out the number of options held by each director in
1996, including the changes in holdings during the year. No options were
exercised by any of the directors during the year.
Number of options
-------------------------------------
January January Date Option Latest
31 1996 Granted Lapsed 31 1997 of grant price (in G.B. pounds) exercise
date
J. Michael Gullard 10,000 10,000 June 2 1994 10.67 June 2 2004
50,000 50,000 June 21 1996 8.35 June 21 2006
Harold Hughes 10,000 10,000 August 19 1992 14.98 August 19 2002
2,000 2,000 June 16 1994 11.98 June 16 2004
Marcelo Gumucio 10,000 10,000 January 30 1996 6.05 January 30 2006
362,500 362,500 April 1 1996 6.53 April 1 2006
362,500 362,500 June 21 1996 8.35 June 21 2006
Paul Adams 1,600 1,600 May 8 1990 5.42 August 8 1998
18,400 (18,400) - July 11 1991 16.72 July 11 2001
16,000 (16,000) - August 19 1992 14.98 August 19 2002
6,000 (6,000) - September 21 1993 17.45 September 21 2003
6,000 (6,000) - June 2 1994 10.67 June 2 2004
6,000 (6,000) - June 16 1994 11.98 June 16 2004
30,000 (30,000) - August 8 1995 6.97 August 8 2005
57,300 57,300 April 10 1996 6.85 April 10 2006
Ron Forbes 18,400 (18,400) - July 11 1991 16.72 July 11 2001
16,000 (16,000) - August 19 1992 14.98 August 19 2002
6,000 (6,000) - September 21 1993 17.45 September 21 2003
6,000 (6,000) - June 2 1994 10.67 June 2 2004
6,000 (6,000) - June 16 1994 11.98 June 16 2004
20,000 (20,000) - August 8 1995 6.97 August 8 2005
51,300 51,300 April 10 1996 6.85 April 10 2006
- -----------------------------------------------------------------------------------------------------------------------
Notes: 1) In April 1996 the Company offered all employees the opportunity to
cancel all outstanding options above the then fair market value and
receive instead a new option, with a new vesting schedule, for three
new shares for each four shares then under option. Mr. Adams and Mr.
Forbes accepted these offers.
2) The market price of the shares at January 31 1997 was GBP 10.55 and
the range during the year was GBP 5.58 to GBP 13.35.
On behalf of the Committee
/s/ Harold Hughes
Harold Hughes
Chairman of the Executive
Remuneration Committee
March 4 1997
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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 Micro
Focus, expressed in G.B. pounds, set out on pages 40 to 55 of this report.
- ---------------------------------------------------------------------------------------------------------------------------------
In thousands of G.B. pounds (except per Years ended January 31: 1997 1996 1995 1994 1993
share data, percentages and employees) Annual Report: 1996 1995 1994 1993 1992
OPERATING RESULTS FOR THE YEAR:
Revenue 73,089 77,258 89,885 83,842 68,882
Exceptional items * (5,195) (6,001) (4,148) - -
(Loss)/profit before taxation (5,809) (6,542) 8,723 21,761 22,777
Retained (loss)/profit for the year (7,281) (6,470) 4,590 14,747 15,444
(Loss)/earnings per share (48.0p) (43.6p) 32.0p 104.3p 110.3p
(Loss)/earnings per share: excluding exceptional items * (13.8p) (11.7p) 61.0p 104.3p 110.3p
Average number of shares in issue (thousands) 15,156 14,843 14,336 14,138 13,998
FINANCIAL POSITION AT END OF YEAR:
Cash and bank deposits 44,725 38,972 55,823 57,544 53,541
Total assets 100,204 111,828 124,302 109,915 96,892
Creditors: amounts falling due after more than one year 15 66 193 404 2,712
Total shareholders funds 61,124 70,187 72,856 75,100 60,549
FINANCIAL CONDITION:
Working capital 26,611 27,306 36,554 48,686 42,073
Current ratio 1.81 1.76 1.80 2.38 2.16
Return on revenue: excluding exceptional items * n/a n/a 10% 18% 22%
Return on average equity: excluding exceptional items * n/a n/a 12% 28% 35%
EMPLOYEE INFORMATION:
Average number of employees 646 735 751 667 599
Number of employees at year end 626 708 788 698 636
Revenue per employee 113 105 120 126 115
- ---------------------------------------------------------------------------------------------------------------------------------
* Details of the exceptional items are set out in note 7 to the financial
statements on page 49.
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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 added to the U.K. format section of this Annual Report 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 Micro Focus Group Plc and its subsidiary undertakings
("Micro Focus") in G.B. pounds, on pages 40 to 55.
RESULTS OF OPERATIONS
Micro Focus reported a loss for the year after taxation of GBP 7.3m (1995: GBP
6.5m.) These results include exceptional charges of GBP 5.2m in 1996 and GBP
6.7m in 1995 and an exceptional credit of GBP 0.7m in 1995.
The table below sets out operating results as a percentage of revenue for the
three years ended January 31 1997. To further aid comparison, exceptional items
are identified separately in the table, and percentages shown against other cost
categories are exclusive of exceptional items.
- ---------------------------------------------------------------------------------------------------------------
Percentage of revenue Percentage change
1995 1994
1996 1995 1994 to 1996 to 1995
REVENUE
PRODUCT REVENUE 57 57 70 (4) (30)
Service revenue 43 43 30 (7) 23
- ---------------------------------------------------------------------------------------------------------------
Total revenue 100 100 100 (5) (12)
- ---------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of product revenue 9 11 12 (27) (18)
Cost of service revenue 16 16 12 (4) 12
Research and development 30 29 23 (1) 7
Sales and marketing 40 40 35 (7) (1)
General and administrative 8 7 6 14 3
Exceptional items 7 8 - (13) -
Purchased research and development costs - - 5 - -
- ---------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 110 111 93 (6) 3
- ---------------------------------------------------------------------------------------------------------------
OPERATING (LOSS)/PROFIT (10) (11) 7 (13) n/a
Interest income 2 3 2 (21) (2)
Interest expense - - - (72) (3)
- ---------------------------------------------------------------------------------------------------------------
(LOSS)/PROFIT BEFORE TAXATION (8) (8) 9 (11) n/a
Taxation (2) - (4) n/a n/a
- ---------------------------------------------------------------------------------------------------------------
(LOSS) FOR THE YEAR (10) (8) (5) 1 115
- ---------------------------------------------------------------------------------------------------------------
REVENUE
Micro Focus derives its revenue from the license of software products and
related support and maintenance ("direct revenue") and from the licensing of
distribution rights to software products to original equipment manufacturers
("OEM revenue"). Direct revenue represented 90% of total revenue in 1996 (1995:
89%; 1994: 86%).
Revenue is analysed between product revenue, which consists of licensing of
software product to end-users and OEMs, and service revenue, consisting of
maintenance and other support services, including training and consulting.
Total revenue decreased by GBP 4.2m or 5% to GBP 73.1m in 1996, and by GBP 12.6m
or 12% to GBP 77.3m in 1995.
Product revenue decreased by GBP 2.0m or 4% to GBP 42.0m in 1996, and by GBP
18.9m or 30% to GBP 44.0m in 1995.
Service revenue decreased by GBP 2.2m or 7% to GBP 31.1m in 1996, having
increased by GBP 6.3m or 23% to GBP 33.3m in 1995.
Revenue by customer location is analysed in note 2 to the financial statements
on page 48.
Revenue decreased by 10% in the United States. Other territories showed no
overall sales increase, with growth in the United Kingdom, France and Japan
being offset by decreased sales to certain distributors, notably those in Italy
and Brazil.
Factors contributing to the decline in revenue in the first half of 1996
included slow conversion to 32-bit products and continuing uncertainties arising
from the
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fundamental changes caused by the Internet. The improved performance in
the second half of the year was reflected by increased sales of products to
address the century date change or "Year 2000" problem.
In 1995 revenue decreases were reported in the United States, and in other
territories. Factors contributing to the fall in revenue included postponed
investment decisions caused by uncertainties arising from the impact of the
Internet and the launch of Windows 95, and from delayed delivery of 32-bit
products.
COST OF PRODUCT 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.
Excluding exceptional items, such costs decreased by GBP 2.3m or 27% to GBP 6.3m
in 1996 and by GBP 1.9m or 18% to GBP 8.7m in 1995 and represented 15% of
product revenue in 1996 (1995: 20%; 1994: 17%).
The decrease in product costs during 1996 reflected savings in product materials
arising from the intro-duction of documentation being supplied on CD-ROM.
The decrease in 1995 reflected the fall in revenue.
COST OF SERVICE REVENUE
Cost of service revenue is comprised principally of compensation for technical
support personnel, plus the costs associated with training and consulting.
Excluding exceptional items, such costs decreased by GBP 0.5m or 4% to GBP 11.8m
in 1996, having increased by GBP 1.3m or 12% to GBP 12.3m in 1995, and
represented 38%, of service revenue in 1996 (1995: 37%; 1994: 41%). The decrease
in 1996 reflected reductions taken to better align expenses with revenue. The
increase in 1995 resulted from increases in product support for client/server
and rehosting programs.
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 capitalised and the amortisation of previously capitalised software
costs. Micro Focus' 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 product lines.
Research and development spending in 1996 has been directed principally towards
further development of Revolve/2000(TM) products which address the Year 2000
problem; NetExpress(TM), a complete set of tools for developing business
applications targeted at graphical PC workstations, distributed computer
environments and the Internet; and tools to enhance the functionality and
capability of core legacy COBOL Workbench products for workstation development
of IBM mainframe applications.
Research and development spending in 1995 and 1994 was directed principally
towards enabling Micro Focus products to operate across multiple operating
systems and graphical user interfaces; development of new 32-bit products;
further development of client/server solutions; object oriented programming in
COBOL; Expenditure on internal software research and development, before
capitalisation, decreased by GBP 4.2m or 18% to GBP 19.2m in 1996, and by GBP
0.1m to GBP 23.4m in 1995. The decrease in 1996 reflected the impact of the
restructuring announced in the first quarter (see "Exceptional items" below).
In 1996 27% of these costs were capitalised as software product assets (1995:
42%; 1994: 41%). Provisions for amortisation excluding exceptional items,
amounted to GBP 8.1m (1995: GBP 8.8m; 1994: GBP 7.1m), resulting in a net charge
to income in 1996 of GBP 2.8m, compared to net credits of GBP 1.1m and GBP 2.6m
in 1995 and 1994 respectively.
Total research and development costs also include restructuring costs of GBP
2.3m and GBP 4.5m in 1996 and 1995 (see "Exceptional items", below, and note 7
to the financial statements on page 49).
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.
Excluding exceptional items, such costs decreased by GBP 2.1m or 7% to GBP 29.2m
in 1996, and by GBP 0.2m or 1% to GBP 31.3m in 1995. The decrease in 1996
reflects the impact of the worldwide cost reductions implemented in the first
quarter.
GENERAL AND ADMINISTRATIVE
General and administrative costs include the group management, finance, legal
and human resources operations of Micro Focus.
Excluding exceptional items, such costs increased by GBP 0.8m or 14% to GBP 6.0m
in 1996, having increased by GBP 0.1m to GBP 5.2m in 1995. In 1996 general and
administrative costs have increased following the strengthening of the Micro
Focus management team.
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EXCEPTIONAL ITEMS
In the first quarter of 1996 Micro Focus incurred a restructuring charge of GBP
5.2m. The charge consisted of costs associated with a reduction in the Company's
workforce of approximately 65 people, facility closures and consolidations, and
asset write-downs. The restructuring was essentially completed during the year,
but payments estimated at GBP 1.5m remain to be paid in 1997.
Exceptional items recorded in 1995 consisted of a charge of GBP 6.7m for
restructuring costs and a credit of GBP 0.7m in respect of an employer loan to
the Micro Focus Group Employee Benefit Trust 1994.
Restructuring costs of GBP 3.1m incurred in the first quarter of 1995
principally reflected employee terminations (including salary, benefit
continuation and outplacement costs for approximately 75 employees), closure of
surplus office facilities, and write-downs of related fixed assets. An
additional charge of GBP 3.6m, booked in the fourth quarter of 1995, was
primarily the result of a review into the carrying values of software product
assets.
In 1994 Micro Focus recorded exceptional charges of GBP 3.2m, representing the
write-off of intellectual property rights acquired from mbp and GBP 0.9m in
connection with the purchase of Burl Software Laboratories, Inc.("Burl").
INTEREST INCOME
Interest income represents interest earned on cash and short-term investments.
Interest income decreased by GBP 0.5m or 21% to GBP 1.7m in 1996, having
remained constant at GBP 2.2m in 1995 and 1994. The current decrease principally
reflects lower average cash balances, and, to a lesser degree, lower interest
rates.
INCOME TAXES
A tax provision of GBP 1.5m was recorded for 1996. The effective tax rate in
both 1996 and 1995 was affected by the distribution of taxable profits and
losses among the tax jurisdictions in which Micro Focus operates. The Company
has not recognised the tax effects of operating losses in U.S. subsidiaries.
An analysis of the charge for taxation, including an analysis of differences
between the effective rate and the U.K. statutory rate, is given in note 8 to
the financial statements on page 50.
ACQUISITIONS
In 1995 Micro Focus completed the agreed acquisition of Burl (see note 12 to the
financial statements on page 52). The transaction had been accounted for as a
purchase in 1994.
In 1994 Micro Focus acquired the intellectual property rights to certain
development tools from mbp, a German subsidiary of EDS, for U.S. $5.0m (GBP
3.2m) and the Expert Consulting Division of The Systems Group for U.S. $0.5m
(GBP 0.3m).
FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS
Micro Focus operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. This section highlights
some of these factors and the possible impact of these factors on future results
from operations.
This section has been 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 Private Securities Litigation Reform Act of 1995, which became effective in
the United States as of January 1 1996. For more information regarding such law
and forward-looking statements, see Further Information for Shareholders-Special
Note on Forward-Looking Statements above.
The factors set forth below 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 1997 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 in the Letter to Shareholders above and those
discussed elsewhere in this Annual Report. 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
this Annual Report. For more information regarding forward-looking statements,
see Further Information for Shareholders - Special Note on Forward-Looking
Statements on page 6.
Micro Focus' 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, product life cycles, the
ability of the Company to develop, 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 enhancements or new
products, changes in the mix of
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distribution channels through which the Company's products are offered,
purchasing patterns of distributors and retailers, quality control 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, budgeting cycles of its customers, the cancellation of licenses during
the warranty period, nonrenewal of maintenance agreements, economic conditions
generally or in various geographic areas, and other factors discussed in this
section.
A high percentage of Micro Focus' operating expenses is fixed over the short
term and if anticipated revenue does not occur or is delayed, the operating
results for that quarter will be immediately and adversely affected. In
addition, a substantial portion of Micro Focus' 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. Furthermore, while the Company's business has not
been subject to seasonal variations, the Company's customers tend to make
product purchase decisions in the fourth quarter of the Company's financial year
as a result of purchase cycles related to expiration of budgetary
authorizations. As a result, the Company experiences lower revenue for the first
quarter of its financial year than in the fourth quarter of the prior year. The
Company's revenue is also affected by seasonal fluctuations resulting from lower
sales that typically occur during the summer months in Europe and other parts of
the world. Due to all of the foregoing factors, it is possible that in some
future quarters Micro Focus' operating results will be below the expectations of
stock market analysts and investors and that the share price would be materially
adversely affected.
Micro Focus is in a market that is subject to rapid technological change. Micro
Focus must continually adapt to that change by improving its products and
introducing new products and technologies. The growth and financial performance
of Micro Focus will depend upon 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 new products depends upon its ability to attract and retain qualified
employees. In the past, Micro Focus has experienced delays and increased
expenses in developing 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 or to attract
and retain qualified employees, could materially adversely affect the Company's
business, results of operations and financial condition.
Substantially all of Micro Focus' revenue is currently, and is expected to
continue to be, derived from products and services related to applications
development in the COBOL language. As a result, Micro Focus' future operating
results depend upon continued market acceptance of the COBOL language. Any
decline in the demand for of the COBOL language or mainframe computers where
COBOL is a dominant language as a result of competition, technological change or
other factors would have a material adverse effect on Micro Focus' business,
financial condition and results of operations.
The markets in which the Company competes are characterized by rapid
technological change and aggressive competition and the quality of service
offerings. The Company believes that the principal competitive factors in the
Company's markets are product performance and reliability, functionality,
product quality, application portability, product enhancement, price, training,
support and services. 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 including
vendors of other programming languages and database vendors with tools that may
be less costly or provide better performance or functionality. Some of the
Company's current and prospective competitors in the products and service
markets have greater financial, marketing or technical resources than Micro
Focus 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
Micro Focus. 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 and particularly the Year 2000 professional
services market.
The market price of the Company's securities has experienced significant price
volatility and such volatility may occur in the future. Factors such as actual
or anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software industry
and
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40
other factors may have a significant impact on the market price of the Company's
securities. Further, the stockmarket 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.
Micro Focus is subject to the general economic climate 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 "Exchange rate fluctuations" directly below), longer payment cycles,
greater difficulties in debtor collection and enforcing agreements, tariffs and
other restrictions on foreign trade, 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. There can be no assurance that the factors described above will
not have an adverse effect on the Company's future international revenues.
The Company markets certain of its products and services to customers for
managing the development and maintenance of mission-critical computer software
systems. In addition, an increasing portion of the Company's business is devoted
to addressing the Year 2000 problem, which affects the performance and
reliability of many mission-critical systems. The Company's agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product and service liability claims. It is possible, however, that
the limitation of liability provisions contained in the Company's customer
agreements may not be effective as a result of existing or future domestic or
foreign laws or ordinances or unfavorable judicial decisions. Although the
Company has not experienced any product or service liability claims to date, the
sale and support of its products and services may entail the risk of such
claims, particularly in the Year 2000 market. A successful product or service
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition.
Furthermore, the Company anticipates that demand in the Year 2000 market will
decline, perhaps rapidly, following the year 2000 and the demand for the
Company's Year 2000 solutions, products and services may also decline as a
result of new technologies, competition or other factors. If this decline in
demand were to occur, the Company's license revenues and professional services
fees could be materially and adversely affected.
EXCHANGE RATE FLUCTUATIONS
Micro Focus 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 Micro Focus' revenue arises in U.S. dollars (approximately
two-thirds in 1996) whereas its costs and expenses 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 Micro Focus'
operating results, notably when expressed in G.B. pounds. In 1996 and 1995
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
Micro Focus continues to fund its activities through cash from operations. In
1996 cash provided by operating activities was GBP 12.1m (1995: GBP 9.7m). In
1996 Micro Focus invested GBP 2.4m (1995: GBP 8.6m) in property, plant and
equipment and GBP 5.3m (1995: GBP 9.9m) in software product assets. Investment
in 1995 included GBP 4.4m in the redevelopment of the Company's U.K.
headquarters office in Newbury, England. In 1995 the Company also paid GBP 3.9m
in connection with the acquisition of Burl and spent GBP 5.0m on the purchase of
shares in the Company for the benefit of the Micro Focus Group Employee Benefit
Trust 1994.
Net of these expenditures, cash and bank increased by GBP 5.7m to GBP 44.7m
(1995: decreased by GBP 16.9m to GBP 39.0m). Micro Focus may invest a further
GBP 5.8m on capital during 1997 in connection with occupying a new U.S.
facility, and on communications software and other information systems
improvements. 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 December 1997. There
have been no borrowings under this line of credit to date.
Micro Focus 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. All cash is freely remittable. Micro Focus believes that existing
39
41
CONSOLIDATED PROFIT AND LOSS ACCOUNT (UK FORMAT)
Year ended January 31
Continuing operations
In thousands of G.B.pounds Before exceptional Exceptional Year ended Year ended
(except per share data) items items (note 7) 1997 January 31 January 31
Notes 1996 1995
Revenue
Product revenue 42,020 -- 42,020 43,991 62,878
Service revenue 31,069 -- 31,069 33,267 27,007
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 2 73,089 -- 73,089 77,258 89,885
==============================================================================================================================
Costs and expenses
Cost of product revenue 6,352 54 6,406 8,855 10,586
Cost of service revenue 11,848 44 11,892 12,343 11,055
Research and development 3 22,044 2,255 24,299 26,851 24,149
Sales and marketing 29,158 988 30,146 32,857 31,464
General and administrative 6,000 1,854 7,854 4,986 5,099
- ------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 75,402 5,195 80,597 85,892 82,353
==============================================================================================================================
Operating (loss)/profit 4 (2,313) (5,195) (7,508) (8,634) 7,532
Interest income 1,720 2,166 2,210
Interest expense 6 (21) (74) (76)
Other acquisition charges -- -- (943)
- ------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit before taxation (5,809) (6,542) 8,723
Taxation 8 (1,472) 72 (4,133)
- ------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit for the year (7,281) (6,470) 4,590
==============================================================================================================================
(Loss)/earnings per share 9 (48.0p) (43.6p) 32.0p
==============================================================================================================================
(Loss)/earnings per share: 9 (13.8p) (11.7p) 61.0p
before exceptional items
==============================================================================================================================
The notes on pages 46 to 55 form part of these financial statements.
40
42
CONSOLIDATED BALANCE SHEET (UK FORMAT)
In thousands of G.B. pounds January 31 January 31
Notes 1997 1996
Fixed assets
Intangible fixed assets 10 14,590 17,857
Tangible fixed assets 11 20,543 24,910
Investments 12 5,634 5,634
- -------------------------------------------------------------------------------------
Total fixed assets 40,767 48,401
=====================================================================================
Current assets
Stocks 13 484 1,704
Debtors 14 14,228 22,751
Cash and bank deposits 44,725 38,972
- -------------------------------------------------------------------------------------
Total current assets 59,437 63,427
=====================================================================================
Creditors: amounts falling due within one year 15 16,180 16,461
Deferred revenue 16,646 19,660
- -------------------------------------------------------------------------------------
Net current assets 26,611 27,306
=====================================================================================
Total assets less current liabilities 67,378 75,707
Creditors: amounts falling due after more than one year 16 15 66
Provisions for liabilities and charges:
Deferred taxation 18 6,239 5,454
- -------------------------------------------------------------------------------------
Net assets 61,124 70,187
=====================================================================================
Capital and reserves
Called up share capital 1,517 1,514
Share premium account 18,071 17,936
Profit and loss account 41,536 50,737
- -------------------------------------------------------------------------------------
Total shareholders' funds 61,124 70,187
=====================================================================================
The financial statements on pages 40 to 55 were approved by the Board of
directors on March 4 1997.
/s/ M.A. Gumucio /s/ Ron Forbes
- --------------------- ---------------------
Marcelo Gumucio Ron Forbes
Director Director
The notes on pages 46 to 55 form part of these financial statements.
41
43
CONSOLIDATED BALANCE SHEET (UK FORMAT)
In thousands of G.B. pounds Year ended Year ended Year ended
January 31 January 31 January 31
1997 1996 1995
Net cash inflow from operating activities (note i) 12,135 9,725 26,436
Returns on investments and servicing of finance
Interest received 1,803 2,082 3,505
Interest paid (21) (74) (76)
- -----------------------------------------------------------------------------------------------
Net cash inflow from returns on investments and
servicing of finance 1,782 2,008 3,429
===============================================================================================
Taxation
U.K. corporation tax (paid) (88) (1,562) (4,721)
Overseas tax refunded (paid) 70 (1,362) (2,207)
- -----------------------------------------------------------------------------------------------
Tax paid (18) (2,924) (6,928)
===============================================================================================
Investing activities
Purchase of tangible fixed assets (2,500) (8,643) (12,208)
Purchase of software product assets -- (226) (333)
Capitalised software product assets (5,258) (9,882) (9,719)
Investment in own shares -- (5,002) --
Investment in subsidiary undertakings -- (3,892) --
Investment in bank deposits -- -- 33,187
Disposal of tangible fixed assets 546 298 149
- -----------------------------------------------------------------------------------------------
Net cash (outflow)/inflow from investing activities (7,212) (27,347) 11,076
===============================================================================================
Net cash (outflow)/inflow before financing 6,687 (18,538) 34,013
===============================================================================================
Financing (note ii)
Issue of ordinary shares, net of expenses 138 278 224
Capital element of finance lease obligations (131) (295) (315)
- -----------------------------------------------------------------------------------------------
Net cash inflow/(outflow) from financing 7 (17) (91)
===============================================================================================
Increase/(decrease) in cash 6,694 (18,555) 33,922
===============================================================================================
Increase/(decrease) in cash, as above (note iii) 6,694 (18,555) 33,922
(Repayment of) bank deposits (note iv) -- -- (33,187)
Effect of foreign exchange translation differences (941) 1,704 (2,456)
- -----------------------------------------------------------------------------------------------
Increase/(decrease) in cash and bank deposits 5,753 (16,851) (1,721)
===============================================================================================
The notes on pages 46 to 55 form part of these financial statements.
42
44
NOTES TO CONSOLIDATED CASH FLOW STATEMENT (UK FORMAT)
In thousands of G.B. pounds Year ended Year ended Year ended
January 31 January 31 January 31
1997 1996 1995
(i) Reconciliation of operating (loss)/profit to "Net cash inflow from operating
activities"
Operating (loss)/profit (7,508) (8,634) 7,532
Depreciation charges 5,655 6,186 4,351
Amortisation charges 8,012 12,639 7,093
Loss on sale of tangible fixed assets 221 70 11
Decrease/(increase) in stocks 1,171 117 (325)
Decrease in debtors 8,012 2,174 2,213
(Decrease)/increase in creditors (790) (690) 2,475
(Decrease)/increase in deferred revenue (2,693) (2,137) 3,086
- -----------------------------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities 12,135 9,725 26,436
=============================================================================================================================
(ii) Analysis of changes in financing:
- -----------------------------------------------------------------------------------------------------------------------------
Share capital (including premium):
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year 19,450 14,584 14,360
Shares issued to complete acquisition of Burl -- 4,558 --
Share options exercised 138 308 224
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year 19,588 19,450 14,584
- -----------------------------------------------------------------------------------------------------------------------------
Loans and finance lease obligations:
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year 214 509 700
Finance lease obligations (131) (295) (191)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year 83 214 509
=============================================================================================================================
(iii) Analysis of changes in cash during the year
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year 38,972 55,823 23,433
Increase/(decrease) in cash 7,526 (18,555) 33,922
Effect of foreign exchange rate changes on cash (1,773) 1,704 (1,532)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year 44,725 38,972 55,823
=============================================================================================================================
(iv) Analysis of changes in bank deposits during the year
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year -- -- 34,111
(Decrease) in bank deposits -- -- (33,187)
Effect of foreign exchange rate changes on bank deposits -- -- (924)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year -- -- --
=============================================================================================================================
The notes on pages 46 to 55 form part of these financial statements.
43
45
COMPANY BALANCE SHEET (UK FORMAT)
January 31 January 31
In thousands of G.B. pounds Notes 1997 1996
Fixed assets
Tangible fixed assets 11 2,992 3,077
Investments 12 32,809 33,319
- ------------------------------------------------------------------------------------------
Total fixed assets 35,801 36,396
==========================================================================================
Current assets
Amounts owed by subsidiary undertakings 11,214 8,436
Other debtors 2 --
Cash and bank deposits 18 76
- ------------------------------------------------------------------------------------------
Total current assets 11,234 8,512
==========================================================================================
Creditors: amounts falling due within one year: -- --
Amounts owed to subsidiary undertakings 11,469 10,145
Trade creditors 9 2
Corporation tax 178 174
Accrued expenses 47 109
- ------------------------------------------------------------------------------------------
Net current (liabilities) (469) (1,918)
==========================================================================================
Total assets less current liabilities 35,332 34,478
Provisions for liabilities and charges:
Deferred taxation 18 19 19
- ------------------------------------------------------------------------------------------
Net assets 35,313 34,459
==========================================================================================
Capital and reserves
Called up share capital 1,517 1,514
Share premium account 18,071 17,936
Profit and loss account 15,725 15,009
- ------------------------------------------------------------------------------------------
Total shareholders' funds 35,313 34,459
==========================================================================================
The financial statements on pages 40 to 55 were approved by the Board of
directors on March 4 1997.
/s/ M.A. Gumucio /s/ Ron Forbes
- ------------------------------ ----------------------------
Marcelo Gumucio Ron Forbes
Director Director
This is the balance sheet of Micro Focus Group Plc, the holding company of the
Micro Focus 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 Micro Focus Group Plc as provided by section 230 of the same Act.
The notes on pages 46 to 55 form part of these financial statements.
44
46
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (UK FORMAT)
Year ended Year ended Year ended
In thousands of G.B. pounds January 31 January 31 January 31
1997 1996 1995
- -----------------------------------------------------------------------------------------
(Loss)/profit for the year (7,281) (6,470) 4,590
Currency translation adjustment (1,920) 2,275 (2,978)
- -----------------------------------------------------------------------------------------
Total recognised gains and losses for the year (9,201) (4,195) 1,612
=========================================================================================
MOVEMENT IN SHAREHOLDERS' FUNDS (UK FORMAT)
- --------------------------------------------------------------------------------
In thousands of G.B. pounds
(except per share data) Ordinary shares of 10p each : Share Deferred Other Retained
Authorised Issued Amount premium purchase reserves earnings Total
consideration
'000 '000
Balance, January 31 1994 16,500 14,217 1,422 12,938 -- 1 60,739 75,100
Share options exercised -- 147 15 209 -- -- -- 224
Transfer between reserves -- -- -- -- -- (1) 1 --
Agreed acquisition of Burl -- -- -- -- 3,340 -- -- 3,340
Goodwill arising on acquisitions -- -- -- -- -- -- (7,420) (7,420)
Profit for the year -- -- -- -- -- -- 4,590 4,590
Currency translation adjustment -- -- -- -- -- -- (2,978) (2,978)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 31 1995 16,500 14,364 1,437 13,147 3,340 -- 54,932 72,856
Share options exercised -- 115 11 297 -- -- -- 308
Shares issued to complete Burl
acquisition -- 665 66 4,492 (3,340) -- -- 1,218
(Loss) for the year -- -- -- -- -- -- (6,470) (6,470)
Currency translation adjustment -- -- -- -- -- -- 2,275 2,275
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 31 1996 16,500 15,144 1,514 17,936 -- -- 50,737 70,187
Increase in authorised share capital 6,000 -- -- -- -- -- -- --
Share options exercised -- 24 3 135 -- -- -- 138
(Loss) for the year -- -- -- -- -- -- (7,281) (7,281)
Currency translation adjustment -- -- -- -- -- -- (1,920) (1,920)
- ------------------------------------------------------------------------------------------------------------------------------------
The issued ordinary shares are allotted, called up and fully paid.
Micro Focus Group 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).
The notes on pages 46 to 55 form part of these financial statements.
45
47
NOTES TO THE FINANCIAL STATEMENTS (UK FORMAT)
The statutory financial statements of Micro Focus, within the meaning of section
240 of the Companies Act 1985 of Great Britain, for the year ended January 31
1997 are contained on pages 40 to 55.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
To enable the reader to see immediately any information provided in addition to
the common policy statements, the text of this note and the corresponding note 1
to the financial statements in U.S. format on page 19 is italicised where the
text is identical.
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 Micro Focus, do not differ in any significant respect from U.S. generally
accepted accounting principles ("GAAP") except with regard to the treatment of
acquisitions and goodwill and the presentation of certain items in the financial
statements.
BASIS OF CONSOLIDATION
The consolidated financial statements are those of Micro Focus Group Plc ("the
Company") and all of its subsidiary undertakings ("Micro Focus"). All
significant inter-company balances and transactions have been eliminated on
consolidation.
Certain changes have been made to the presentation of data in the financial
statements this year in line with current best practice. The profit and loss
account has been amended to disclose an analysis of revenue between that derived
from products and that derived from services. Cost of revenue has been similarly
analysed. Also, the Company has revised the presentation of debtors and deferred
revenue in the balance sheet. These reclassifications have not impacted the
results of operations or financial position of the Company. Certain amounts
previously reported in 1995 and 1994 have been reclassified to conform with the
1996 presentation.
REVENUE RECOGNITION
Revenue represents the amounts derived from the provision of goods and services
which fall within Micro Focus' ordinary activities, stated net of applicable
sales taxes.
Revenue from licensing software packaged products to end users and resellers is
recognised on delivery.
Revenue from sales to original equipment manufacturers ("OEMs") under
non-cancellable licence agreements generally provide for development fees and
initial licence fees, which are recognised at the later of (a) the date product
is delivered to the OEM and (b) the date payment becomes due within twelve
months and (c) the date of receipt of monies if collection cannot be assessed
with reasonable assurance. When sales by the OEM exceed the initial licence fee
commitment, revenue is recognised as unit shipments are reported by the OEM.
Revenue from maintenance agreements is recognised pro-rata over the life of the
agreement corresponding to notional delivery of the service.
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 Micro Focus 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
four years. Where market expectations dictate, amortisation is accelerated.
Amortisation of software product assets is included in research and development
costs.
GOODWILL
Goodwill represents the excess of the amount paid on the acquisition of a
business over the aggregate fair value of the net assets acquired. Such amounts
are set off against reserves as incurred.
46
48
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 years
Transportation equipment 3 - 4 years
LEASING
Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are capitalised as fixed assets. The amount capitalised
is that sum for which the leased asset could be purchased at the start of the
lease, 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.
INVESTMENTS
Investments are recorded at cost less any provision for permanent diminution in
value.
TRANSLATION OF FOREIGN CURRENCIES
Micro Focus' policy on foreign currency translation complies with U.K. 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 the balance sheet date. Closing G.B.
pound to U.S. dollar rates at January 31 1997, 1996 and 1995 were GBP 1 =
$1.60, GBP 1 = $1.51 and GBP 1 = $1.59 respectively. Revenues, costs and
expenses are translated using average rates. Monthly average G.B. pound to U.S.
dollar rates used during 1996 range between GBP 1 = $1.50 and GBP 1 = $1.71,
and average GBP 1 = $1.58 (1995: GBP 1 = $1.58; 1994: GBP 1 = $1.54.)
Translation adjustments resulting from the process of translating financial
statements denominated in currencies other than G.B. pounds are dealt with
through reserves.
(LOSS)/EARNINGS PER SHARE
(Loss)/earnings per share is based on the (loss)/profit for the year after
taxation, and on the weighted average number of ordinary shares outstanding
during the year.
Fully diluted earnings per share is based on the profit for the year after
taxation, and on the weighted average number of ordinary shares outstanding
during the period as adjusted for shares issuable upon exercise of share
options. The computation assumes the proceeds from the exercise of share options
are invested in 2.5% Consolidated Stock. Fully diluted earnings per share is
disclosed where dilution from earnings per share is greater than 3%.
47
49
PENSIONS
Micro Focus 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
Compliance with Financial Reporting Standard 8 - Related Party Disclosures ("FRS
8"), which was issued by the Accounting Standards Board in 1995, became
mandatory in 1996. The financial statements of Micro Focus have not been
affected by the increased disclosures required by FRS 8.
NOTE 2 REVENUE (TURNOVER)
The following table analyses revenue by customer location:
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
Revenue:
United States 38,640 42,824 53,215
Japan 3,519 2,720 4,185
United Kingdom 6,811 7,178 8,136
Europe (excluding U.K.) 19,297 19,400 19,269
Other 4,822 5,136 5,080
- --------------------------------------------------------------------------------
73,089 77,258 89,885
================================================================================
An analysis of revenue based on the location of Micro Focus facilities is
included in note 20 on page 54.
NOTE 3 RESEARCH AND DEVELOPMENT COSTS
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
Research and development costs,
before capitalisation 19,235 23,423 23,505
Costs capitalised as software
product assets (5,258) (9,882) (9,719)
Amortisation of capitalised costs 8,067 8,805 7,093
Previously deferred costs expensed
on contract completion -- -- 65
- --------------------------------------------------------------------------------
22,044 22,346 20,944
Exceptional items (note 7):
Restructuring costs:
- accelerated amortisation -- 3,834 --
- other costs 2,255 671 --
Purchased research and development
costs written off -- -- 3,205
- --------------------------------------------------------------------------------
24,299 26,851 24,149
================================================================================
NOTE 4 OPERATING (LOSS)/PROFIT
Operating (loss)/profit is stated after charging:
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
Auditors' remuneration:
audit services: U.K 105 96 130
audit services: overseas 93 100 104
non-audit services: U.K 181 141 125
non-audit services: overseas 218 179 156
Operating lease rentals:
equipment 743 903 883
land and buildings 1,811 2,137 2,187
Depreciation on leased assets 39 118 190
Other depreciation and
amortisation 5,616 6,068 4,161
The profit attributable to the ordinary shareholders of Micro Focus Group Plc,
dealt with in the financial statements of Micro Focus, is GBP 716,000 (1995:
profit GBP 1,449,000; 1994: loss GBP 7,790,000).
48
50
NOTE 5 DIRECTORS AND EMPLOYEES
An analysis of the directors' remuneration, including details of the
remuneration of the chairmen and highest-paid U.K. director, is set out in the
Executive Remuneration Committee's Report on page 31.
The average monthly number of staff employed by Micro Focus during the year was:
- --------------------------------------------------------------------
1996 1995 1994
No. No. No.
U.S. and Japan 316 362 378
Europe 330 373 373
- --------------------------------------------------------------------
646 735 751
====================================================================
Staff costs, which include salaries, bonus and commissions, amounted to:
- ----------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
U.S. and Japan 17,270 18,272 20,333
Europe 12,215 13,552 13,450
- ----------------------------------------------------------------------
29,485 31,824 33,783
Social security costs 2,797 2,884 2,808
Other pension costs 437 596 710
- ----------------------------------------------------------------------
32,719 35,304 37,301
======================================================================
Other pension costs principally represent amounts paid by Micro Focus to
personal pension schemes operated by its employees. In the United Kingdom, Micro
Focus 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 6 INTEREST EXPENSE
Interest expense principally represents finance charges payable in respect of
finance leases.
NOTE 7 EXCEPTIONAL ITEMS
Exceptional items recorded in 1996 represent a charge of GBP 5,195,000 for
restructuring costs. The charge consists of the costs associated with a
reduction in the Company's workforce of approximately 65 people, with facility
closures and consolidations, and with asset write-downs. The restructuring was
essentially completed during the year, but payments estimated at GBP 1,500,000
remain to be paid in 1997.
Exceptional items recorded in 1995 consist of a charge of GBP 6,667,000 for
restructuring costs and a credit of GBP 666,000 resulting from the adoption of
Abstract 13 "Accounting for ESOP Trusts" which was issued by the Urgent Issues
Task Force of the Accounting Standards Board in June 1995.
Restructuring costs of GBP 3,125,000 announced in May 1995 principally related
to employee terminations, closure of surplus office facilities, and fixed asset
write-downs. Additional asset write-downs of GBP 3,542,000 booked in the fourth
quarter of 1995 were primarily the result of a review into the carrying value of
software product assets.
In 1994 non-recurring exceptional items charged against income consisted of GBP
3,205,000 of intellectual property rights acquired from mbp and GBP 943,000 of
costs related to the acquisition of Burl Software Laboratories, Inc.
49
51
In 1996 and 1995 the effective tax rate was distorted principally as a result of
losses incurred in the United States which can only be offset against profits
arising in future periods. The effective tax rate for 1994 was distorted by the
impact of exceptional items.
The corporation tax returns of a U.S. subsidiary undertaking for the years ended
January 31 1991 and 1992 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.
52
NOTE 8 TAXATION
The taxation charge for the year consists of the following:
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
U.K. corporation tax at 33% 237 133 2,383
Deferred taxation 870 (458) 760
Double taxation relief (174) (105) (356)
Overseas taxation:
U.S. federal 4 5 (163)
U.S. state 1 -- 3
Other 276 (118) 1,966
- --------------------------------------------------------------------------------
1,214 (543) 4,593
Taxation underprovided/(over-
provided) in previous years:
Corporation tax 258 -- (403)
Deferred taxation -- 202 (361)
Overseas taxation:
U.S. federal -- 193 281
U.S. state -- (2) 73
Other -- 78 (50)
- --------------------------------------------------------------------------------
1,472 (72) 4,133
===============================================================================
In 1996 and 1995 the effective tax rate was distorted principally as a result
of losses incurred in the United States which can only be offset against
profits arising in future periods. The effective tax rate for 1994 was
distorted by the impact of exceptional items.
The corporation tax returns of a U.S. subsidiary undertaking for the years
ended January 31 1991 and 1992 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.
NOTE 9 (LOSS)/EARNINGS PER SHARE
The calculation of (loss)/earnings per share is based on the loss after taxation
of GBP 7,281,000 (1995: loss GBP 6,470,000; 1994: profit GBP 4,590,000) and on
15,156,000 ordinary shares (1995: 14,843,000; 1994: 14,336,000), being the
weighted average number of shares in issue.
Adjusted (loss)/earnings per share, excluding exceptional items, has been
calculated in addition to the (loss)/earnings per share required by FRS 3 since
in the opinion of the directors this will provide shareholders with a better
indication of the underlying (loss)/earnings per share.
NOTE 10 INTANGIBLE FIXED ASSETS
Intangible fixed assets consist of software product assets, as follows:
- --------------------------------------------------------------------------------
Amort- Net book
(In thousands of G.B. pounds) Cost isation value
At January 31 1996 70,816 52,959 17,857
Currency fluctuations (1,858) (1,400) (458)
Additions 5,258 -- 5,258
Amortisation for the year -- 8,067 (8,067)
- -------------------------------------------------------------------------------
At January 31 1997 74,216 59,626 14,590
===============================================================================
50
53
NOTE 11 TANGIBLE FIXED ASSETS
(a) Micro Focus:
- --------------------------------------------------------------------------------
Computer &
(In thousands of Freehold Leasehold communications Trans-
G.B. pounds) land and improve- Office equipment portation
buildings ments equipment & software equipment Total
Cost:
At January 31 1996 13,142 1,983 4,852 25,014 594 45,585
Currency fluctuations -- (75) (211) (1,076) (3) (1,365)
Additions 414 101 77 1,891 17 2,500
Disposals -- (1,169) (28) (1,875) (316) (3,388)
- --------------------------------------------------------------------------------------------------------
At January 31 1997 13,556 840 4,690 23,954 292 43,332
========================================================================================================
Depreciation:
At January 31 1996 205 1,847 2,779 15,581 263 20,675
Currency fluctuations -- (55) (125) (737) (3) (920)
Provision for the year 231 135 678 4,531 80 5,655
Disposals -- (1,167) (20) (1,257) (177) (2,621)
- --------------------------------------------------------------------------------------------------------
At January 31 1997 436 760 3,312 18,118 163 22,789
========================================================================================================
Net book values:
At January 31 1996 12,937 136 2,073 9,433 331 24,910
At January 31 1997 13,120 80 1,378 5,836 129 20,543
========================================================================================================
The above figures include transportation equipment held under finance leases as
follows:
- ----------------------------------------------------------
Amort- Net book
(In thousands of G.B. pounds) Cost isation value
At January 31 1996 374 165 209
Provision for the year - 39 (39)
Disposals (249) (138) (111)
- ----------------------------------------------------------
At January 31 1997 125 66 59
==========================================================
(b) Company:
The Company's tangible fixed assets consist of freehold land and buildings,
valued at cost which includes capitalized interest amounting to GBP 385,000.
- ----------------------------------------------------------
Net book
(In thousands of G.B. pounds) Cost Depreciation value
At January 31 1996 3,088 11 3,077
Provision for the year -- 85 (85)
- --------------------------------------------------------
At January 31 1997 3,088 96 2,992
========================================================
NOTE 12 INVESTMENTS
(a) Micro Focus:
Investments represents an investment in the Company's own shares.
In 1995 the Company funded the acquisition of 915,216 shares by Micro Focus
Trustees Limited on behalf of the Micro Focus Group Employee Benefit Trust 1994
("the Trust"). The cost to Micro Focus amounted to GBP 5,634,000. Options have
been granted to employees over 693,690 of these shares (see note 21 to the
financial statements on page 54). As at January 31 1997 the market value of the
shares was GBP 9,656,000 (January 31 1996: GBP 5,674,000); if they had been sold
at this value a liability to corporation tax of approximately GBP 1,100,000
(January 31 1996: GBP nil) would have arisen. The Trust has not waived its right
to dividends in respect of this shareholding.
In accordance with FRS 5 "Reporting the Substance of Transactions" and as
recommended in UITF Abstract 13 "Accounting for ESOP Trusts", the assets and
liabilities of the Trust, as well as its operating costs, are included in Micro
Focus' consolidated financial statements.
51
54
(b) Company
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995
Investments in subsidiary undertakings
Beginning of year 27,685 27,289
Effect of exchange rate changes (510) 396
- --------------------------------------------------------------------
End of year 27,175 27,685
Investment in own shares (see (a) above)
Beginning and end of year 5,634 5,634
- --------------------------------------------------------------------
32,809 33,319
====================================================================
The principal subsidiary undertakings, all of which are wholly-owned, are:
Country of incorporation
and operation
Micro Focus Limited UK (1)
Micro Focus International Limited UK (2)
Micro Focus Holdings Limited UK (1)
Micro Focus Incorporated USA (2)
Stingray Software Company Incorporated USA (2)
Burl Software Laboratories, Inc USA (1)
Micro Focus Japan Japan (2)
Micro Focus Gmbh Germany (2)
Micro Focus SARL France (2)
Micro Focus SA Spain (2)
Micro Focus Investments Limited Jersey (3)
Micro Focus Securities Limited Jersey (3)
Micro Focus Finance Limited Jersey (3)
System Focus BV Netherlands (2)
Micro Focus Technology NV Netherlands Antilles (2)
(1) Held directly by the Company
(2) Held by a subsidiary undertaking
(3) Held directly by the Company, operating as financing companies. The
activities of the other subsidiary undertakings are described in the
Directors' Report.
In May 1995 Micro Focus completed the acquisition of Burl Software
Laboratories, Inc. for a total of US$13.5m (GBP 8.5m), which was satisfied by
the issue of 664,979 ordinary shares and the payment of US$6.3m (GBP 3.9m) in
cash. The transaction was accounted for as an acquisition.
NOTE 13 STOCKS
The replacement value of stocks is not considered to be materially different
from their balance sheet values.
NOTE 14 DEBTORS
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995
Trade debtors 12,672 20,513
Other debtors and prepaid expenses 1,556 2,238
- ------------------------------------------------------------
14,228 22,751
============================================================
Trade debtors includes GBP 1,693,000 (1995: GBP 1,825,000) which is due more
than twelve months from the balance sheet date.
Other debtors and prepaid expenses includes:
- loans to an officer of Micro Focus totalling GBP 57,000 (1995: two officers
- GBP 117,000).
- amounts due more than twelve months from the balance sheet date totalling
GBP 164,000 (1995: GBP 270,000).
NOTE 15 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995
Obligations under finance leases (note 17) 68 148
Trade creditors 3,054 5,323
Current corporation tax 2,590 2,001
Other taxes and social security costs 1,129 850
Product royalties and purchases 602 647
Accrued employee compensation and commissions 3,632 4,459
Accrued expenses 5,105 3,033
- -----------------------------------------------------------------------
16,180 16,461
=======================================================================
Accrued expenses includes GBP 123,000 (1995: GBP 147,000) in respect of an
unfunded defined benefit scheme operated by a foreign subsidiary undertaking,
and other outstanding contributions payable by Micro Focus in connection with
employees' pension arrangements.
52
55
NOTE 16 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Creditors due after more than one year represent obligations under lease
commitments (see note 17).
Micro Focus has in place a line of credit under the terms of which financing is
available until December 1997, either in G.B. pounds or such other currency as
Micro Focus may determine, of up to the equivalent of GBP 5.0m. Any borrowings
under this line of credit will bear interest at 1% above the London Interbank
Offered Rate (LIBOR) and would be unsecured. There have been no borrowings under
this line of credit to date.
NOTE 17 LEASE COMMITMENTS
Financial commitments for future periods under lease agreements existing at
January 31 1997 were as follows:
Finance leases:
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995
Amounts payable within one year 71 152
Amounts payable from one to two years 15 67
- -------------------------------------------------------------
86 219
Less financial charges allocated after
the balance sheet date (3) (5)
- -------------------------------------------------------------
83 214
=============================================================
Finance leases are shown as:
Amounts due within one year (note 15) 68 148
Amounts due after more than one year 15 66
- -------------------------------------------------------------
83 214
=============================================================
Operating leases:
- --------------------------------------------------------------------------------
Land and buildings Other
(In thousands of G.B. pounds) 1996 1995 1996 1995
Commitment for 1997 under leases which expire:
within one year 1,117 808 114 101
in the second to fifth
years inclusive 3,131 556 459 351
thereafter 4,302 138 -- --
- ------------------------------------------------------------------------------------------
8,550 1,502 573 452
==========================================================================================
NOTE 18 DEFERRED TAXATION
Deferred taxation has been fully provided as follows:
(a) Micro Focus:
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995
Capital allowances in advance of depreciation
and amortisation 169 309
Other timing differences in recognising revenue
and expense items in different periods
for taxation purposes 6,070 5,145
- -----------------------------------------------------------------------
6,239 5,454
=======================================================================
(b) Company:
(In thousands of G.B. pounds) 1996 1995
Capital allowances in advance of depreciation
and amortisation 19 18
Other timing differences in recognising revenue
and expense items in different periods
for taxation purposes -- 1
- -----------------------------------------------------------------------
19 19
=======================================================================
NOTE 19 CAPITAL COMMITMENTS
At January 31 1997 and January 31 1996 Micro Focus had no material capital
expenditure commitments.
53
56
NOTE 20 SEGMENTAL INFORMATION
Micro Focus operates in one business segment - the development and marketing of
computer software products. The following table analyses worldwide operations by
geographical area, based on the location of Micro Focus facilities.
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
Revenue:
United Kingdom 33,974 33,988 35,863
United States 42,856 49,503 58,544
Europe (excluding U.K.) 20,588 20,196 25,135
Other 1,910 1,300 1,369
- ----------------------------------------------------------------------------------
99,328 104,987 120,911
Inter-segment revenue:
United Kingdom (15,900) (16,728) (15,583)
United States (3,501) (4,790) (2,770)
Europe (excluding U.K.) (6,381) (5,362) (11,720)
Other (457) (849) (953)
- ----------------------------------------------------------------------------------
Total revenue: 73,089 77,258 89,885
==================================================================================
Operating (loss)/profit:
United Kingdom (2,384) 1,350 5,848
United States (4,699) (4,429) (1,671)
Europe (excluding U.K.) (796) (5,097) 4,222
Other 371 (458) (867)
- ----------------------------------------------------------------------------------
(7,508) (8,634) 7,532
==================================================================================
Net operating assets/(liabilities):
United Kingdom 16,075 20,264 9,209
United States (8,199) (3,087) (162)
Europe (excluding U.K.) 2,988 9,176 8,609
Other (16) (558) (113)
- ----------------------------------------------------------------------------------
10,848 25,795 17,543
==================================================================================
Inter-segment revenue principally represents licence fees and charges for
research and development between locations. Operating (loss)/profit excludes
interest income and expense and, correspondingly, net 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:
- --------------------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
Net operating assets 10,848 25,795 17,543
Cash and bank deposits 44,725 38,972 55,823
Investment in own shares 5,634 5,634 --
Finance lease obligations (83) (214) (510)
- --------------------------------------------------------------------------
Net assets 61,124 70,187 72,856
==========================================================================
An analysis of revenue by customer location is included in note 2 to the
financial statements on page 48.
NOTE 21 SHARE OPTION PLANS
Micro Focus operates two plans both of which provide for the grant of options to
acquire shares to all persons who devote substantially all their working time to
Micro Focus and such other eligible persons as the Board may determine. The
terms and exercise prices of options issued under these plans are determined at
the time the options are granted. Unexercised options lapse when the
optionholder ceases to be employed by Micro Focus or at a predetermined expiry
date (of up to ten years from the date of grant), whichever occurs first.
The Micro Focus Share Option Plan ("the Plan") was established in 1984. It meets
the terms and conditions required by the U.S. Internal Revenue Code in order
that the options will qualify as Incentive Stock Options, and as required by the
U.K. Inland Revenue in order to qualify as an approved Company Share Option
Plan. Options issued under the Plan are generally exercisable in five equal
cumulative annual instalments commencing one year after the date of grant.
At January 31 1997 1,769,342 options were issued and outstanding under the Plan
and a further 427,911 had been approved for grant by shareholders of the Company
but were currently unissued.
In 1994 Micro Focus established a discretionary employee benefit trust, the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust"), the purpose of
which is to further the Company's policy of encouraging share ownership by its
employees. Under the terms of the Trust, Micro Focus Trustees Limited ("MFTL")
is permitted to acquire ordinary shares in the Company and to issue options over
those shares to directors and employees.
In 1995 MFTL purchased 915,216 shares in the Company and granted options on
530,700 of these shares at a price of GBP 6.97 per share. Under the terms of the
grant, these options vest, and therefore become exercisable, in five equal
annual instalments only on the achievement by Micro Focus of certain
predetermined annual earnings per share targets in respect of each of the
financial years ended January 31 1996 to January 31 2000. In March 1996
one-fifth of the outstanding options lapsed when the announcement of financial
results for the year ended January 31 1996 indicated that the target in respect
of that year had not been achieved. In April 1996 the Company offered all
employees the opportunity to cancel all outstanding options above the then fair
market value and receive instead a new option, with a new vesting schedule, for
three new shares for each four shares then under option. As a result 376,840 of
the remaining options
54
57
were exchanged for 282,630 new options, issued at a price of GBP 6.85 per share.
These new options are exercisable in five equal cumulative annual instalments
commencing one year after the date of grant.
At January 31 1997 693,690 of the options issued by MFTL in 1995 and 1996 were
outstanding. A further 32,000 shares over which options had been granted prior
to their acquisition by MFTL remained outstanding at January 31 1997 at prices
between GBP 6.05 and GBP 14.98. The remaining 189,526 shares were available for
the grant of further options. Options issued by the Trust under this plan do not
qualify as Incentive Stock Options (for U.S. taxation purposes), nor does the
plan qualify as an approved Company Share Option Plan (for U.K. taxation
purposes).
The shares held by the Trust are included in Investments (see note 12 to the
financial statements on page 51).
Share option activity under the plans was as follows:
- --------------------------------------------------------------------------------
(In G.B. pounds, except share data) Number Option price
of shares per share
January 31 1994 1,310,176 0.92-28.83
Options granted 608,416 8.16-16.38
Options exercised (148,206) 0.92-7.63
Options cancelled (41,512) 2.20-28.83
- ---------------------------------------------------------------------
January 31 1995 1,728,874 2.20-28.83
Options granted 603,795 5.65-8.20
Options exercised (114,865) 2.20-5.42
Options cancelled (159,035) 2.20-28.83
- ---------------------------------------------------------------------
January 31 1996 2,058,769 2.20-28.83
Options granted 2,300,830 5.83-9.70
Options exercised (24,156) 5.42-9.66
Options cancelled (1,840,411) 5.42-28.83
- ---------------------------------------------------------------------
January 31 1997 2,495,032 5.42-21.61
=====================================================================
The total of 2,495,032 options outstanding at January 31 1997 is represented by
1,769,342 unissued shares and 725,690 shares held by MFTL.
The outstanding options are exercisable between 1997 and 2006; the proceeds on
exercise at January 31 1997 would be GBP 19,790,000 (January 31 1996: GBP
25,233,000).
At January 31 1997 options for 168,000 shares (January 31 1996: 728,000 shares)
were currently exercisable at prices per share of between GBP 5.42 and GBP
21.61; the proceeds on exercise of such options at January 31 1997 would be GBP
2,095,000 (January 31 1996: 10,729,000).
55
58
STATEMENT OF DIRECTOR'S
RESPONSIBILITIES IN RELATION TO
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 Micro Focus Group and of the profit or loss of the Micro
Focus Group for that year. 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 confirm that they have complied with the above requirements in
preparing 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
Micro Focus Group and to enable them to ensure that the financial statements
comply with the Companies Act 1985. They are also responsible for safeguarding
the assets of the Micro Focus Group and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
REPORT OF THE AUDITORS (UK FORMAT)
TO THE MEMBERS OF MICRO FOCUS GROUP PLC
We have audited the financial statements on pages 40 to 55, 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 46 to 48. We
have also examined the information specified for audit by the London Stock
Exchange which is set out on pages 31 to 33 in the Executive Remuneration
Committee's Report.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described above, the directors are responsible for the preparation of the
financial statements. It is our responsibility to form an independent opinion,
based on our audit, on those financial statements and to report our opinion to
you.
BASIS OF 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 Micro Focus 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.
OPINION
In our opinion the financial statements give a true and fair view of the state
of affairs of the Company and of the Micro Focus Group as at January 31 1997 and
of the loss of the Micro Focus Group for the year then ended and have been
properly prepared in accordance with the Companies Act 1985.
Ernst & Young
Chartered Accountants
Registered Auditor
Reading
March 6 1997
56
59
DIRECTORS, ADVISORS AND ADDRESSES
DIRECTORS
J. Michael Gullard, Chairman, General Partner, Cornerstone Management
Marcelo Gumucio, Chief Executive Officer
Paul Aldous Adams, Vice President, International Sales
Ronald Harold Forbes, Vice President, International Finance
Harold Hughes, Vice President, Planning and Logistics, Intel Corporation
COMPANY SECRETARY
Loren E. Hillberg
COMPANY OFFICERS
Marcelo Gumucio, Chief Executive Officer
Anthony R. Muller, Senior Vice President and Chief Financial Officer
Paul Aldous Adams, Vice President, International Sales
Clive Beavis, Vice President, Product Development
Richard C. Butts, Vice President, Human Resources
Chris Christides, Vice President, North American Sales
Robert A. Connors, Vice President,Corporate Development
Loren E. Hillberg, Vice President and General Counsel
Charly Anderson, Vice President, Development Product Manager
Stanley J. Blaustein, Vice President and Chief Information Officer
Ronald Harold Forbes, Vice President, International Finance
Peter Katz, General Manager, Legacy and Year 2000 Solutions
Marian B. Sichel, General Manager, Distributed Computing Solutions
Larry Simmons, Vice President, Middleware and Communications
Alan Weddell, Vice President, United Kingdom Sales
REGISTERED OFFICE
Micro Focus Group Plc
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN
UK
BANKERS
Midland Bank Plc
1 Mansion House Street
Newbury
Berkshire RG14 5ET, UK
STOCKBROKERS
SBC Warburg
1 Finsbury Avenue
London EC2M 2PA, UK
and
The Stock Exchange London
EC2N 1HP, UK
REGISTRARS AND TRANSFER OFFICE
Lloyds Bank Registrars
The Causeway, Worthing
West Sussex BN99 6DA, UK
ADR DEPOSITARY
Bank of New York
ADR Division
101 Barclay Street, 22nd Floor
New York, New York 10286, USA
Tel: (+1) (212) 815 2042
AUDITORS
Ernst & Young, Chartered Accountants
Apex Plaza
Reading,
Berkshire RG1 1YE, UK
SOLICITORS
Jonathan Philip Davies, Solicitor
Memery Crystal
31 Southampton Row
London WC1B 5HT, UK
REGIONAL SALES OFFICES
60
UK
Micro Focus Ltd
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN
Tel: (+44) 1635 32646
Fax: (+44) 1635 33966
USA
Micro Focus Inc.
2465 East Bayshore Road
Palo Alto
California 94303
Tel: (+1) (415) 856 4161
Fax: (+1) (415) 856 6134
Micro Focus Inc. (Philadelphia)
1000 First Avenue, 3rd Floor
King of Prussia
Pennsylvania 19406
Tel: (+1) (610) 992 3400
Fax: (+1) (610) 992 3700
Micro Focus Inc.
2 Wall Street
New York
New York 10005
Tel: (+1) (212) 312 2200
Fax: (+1) (212) 312 2222
CANADA
Micro Focus Canada
3 Robert Speck Parkway
Suite 900
Mississauga, Ontario L4Z 2G5
Tel: (+1) 905 306 7280
Fax: (+1) 905 306 7530
JAPAN
Micro Focus Japan Ltd
Nishiazabu Mitsui Building 4F
4-17-30, Nishiazabu
Minato-ku, Tokyo 106
Tel: (+81) 3 3486 7791
Fax: (+81) 3 3486 5055
GERMANY
Micro Focus GmbH
Am Moosfeld 11
81829 Munchen
Tel: (+49) 89 42094 - 0
Fax: (+49) 89 42094 - 211
FRANCE
Micro Focus SARL
Tour Franklin
Defense 8
92042 Paris - La Defense Cedex
Tel: (+33) 1 47 75 75 75
Fax: (+33) 1 47 75 75 80
SPAIN
Micro Focus S.A.
Corsega 541, 4a Planta
08025 Barcelona
Tel: (+34) 3 435 70 01
Fax: (+34) 3 435 67 33
INDIA
Micro Focus (I) Pvt. Ltd.
47/6, M.G. Road
Mittal Towers, B-1217-19
Bangalore 560 001, India
Tel: (+91) 80 559 2647
Fax: (+91) 80 551 1019
Micro Focus Worldwide Web Site - http://www.microfocus.com
61
[In the middle of the back cover page, a large, hazy shadow of the number "96"
appears.]