1
MERANT PLC
DIRECTORS' REMUNERATION REPORT
UK FORMAT
YEAR ENDED APRIL 30 2000
The MERANT remuneration committee consists of three non-executive
directors, Mr. Burns (Chairman), Mr. Berty and Mr. Hughes. None of the committee
members has any personal financial interests (other than as shareholders and/or
optionholders), conflicts of interests arising from cross-directorships or
day-to-day involvement in running the business.
The committee ensures that remuneration is appropriate to each executive
director's responsibilities, taking into consideration the overall financial and
business position of the Company, the highly competitive industry of which
MERANT is part, salary scales within the Company, and the importance of
recruiting and retaining management of the appropriate calibre.
EXECUTIVE DIRECTORS' REMUNERATION POLICY
Mr. Greenfield is the only executive director.
The chief components of the executive director's remuneration are as
follows:
Basic salary: The salary rate for the executive director is
determined by reference to relevant market data for the countries in which
the director performs his duties, and is normally reviewed on an annual
basis. In general, the committee's philosophy is to have base salary rates
lower than those of others in the market, with higher rates of pay for
performance. In addition, the rate for the executive director takes into
account the salary levels of staff as a whole in each country.
Performance-related pay: The executive director is eligible for
annual performance-related bonuses, which are calculated based on fixed
formulae measuring MERANT's performance against targets set at the
beginning of each year. Such bonuses are earned on a pro-rata basis in
proportion to the level of achievement relative to the performance targets
set, subject to certain minimum thresholds. The philosophy is to offer
greater than market opportunities in terms of bonus compensation, scaling
upwards if the performance of MERANT exceeds the targets set out at the
beginning of the period. In the year ended April 30 2000 such bonuses were
based on audited revenues and earnings per share results compared to
pre-determined targets.
Pension contributions: MERANT does not operate a pension scheme for
its directors. The executive director participates in MERANT's deferred
compensation plan for U.S.-based employees (401k plan), whereby MERANT will
partially match employee contributions to the plan, up to a maximum
contribution of 3% of the employee's compensation, subject to IRS
limitations.
Compensation for loss of office: The level of compensation offered by
the Company is determined by the need to provide the executive director
with a competitive package in accordance with the criteria described
elsewhere in this "Executive Directors' Remuneration Policy" section, but
would not exceed the equivalent of two years' pay (salary plus calculated
portion of bonus, or performance-related pay).
Share options: The executive director is eligible to participate in
the MERANT share option plans, details of which are set out in note 24 to
the financial statements on page 104. The grant of share options to the
executive director is designed to ensure that an element of his
remuneration is directly related to long-term growth in shareholder value.
Long term incentives: The executive director is not eligible for any
other long-term incentive payments.
Service agreements: Upon his appointment the Chief Executive Officer
entered into a three-year service agreement with the Company, expiring on
December 1 2001. On early termination by the Company, he is entitled to one
year's salary and bonus and a further one year salary and bonus for
services to be rendered to the Company over 18 months and for a
non-competition covenant. The
15
2
agreement stipulates that in the event of a change in control, the
agreement is automatically extended for a three-year term commencing on the
date of change in control.
REMUNERATION FOR NON-EXECUTIVE DIRECTORS
Remuneration for non-executive directors is determined by the Board as a
whole based upon the advice of an independent advisor who has provided details
of comparables. Directors are not involved in any discussions or decisions about
their own remuneration.
Non-executive directors receive an annual retainer and earn additional fees
for attendance at Board meetings and for time spent on other Company-related
business. Fees are set within the limits stipulated in the Company's Articles of
Association.
Non-executive directors are eligible to participate in the MERANT share
option plans, details of which are set out in note 24 to the financial
statements on page 104.
None of the non-executive 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.
DIRECTORS' REMUNERATION
The following table analyses the remuneration earned by each director in
the year ended April 30 2000 and discloses summary information for the
fifteen-month period ended April 30 1999:
PERFORMANCE- TOTAL TOTAL
SALARY RELATED PAY FEES 2000 1999
L'000 L'000 L'000 L'000 L'000
------ ------------ ----- ----- -----
J Michael Gullard..................................... -- -- 84 84 118
Harold Hughes......................................... -- -- 21 21 39
Michel Berty (appointed September 24 1998)............ -- -- 18 18 22
Kevin Burns (appointed September 24 1998)............. -- -- 21 21 144
Gary Greenfield (appointed September 24 1998)......... 248 103 -- 351 1,627
Barry X Lynn (appointed September 16 1999)............ -- -- 11 11 --
Don C Watters (appointed December 8 1999)............. -- -- 6 6 --
Martin Waters (resigned September 16 1999)............ -- -- 6 6 1,465
Paul Adams (resigned September 24 1998)............... -- -- -- -- 248
Ron Forbes (resigned May 14 1998)..................... -- -- -- -- 93
J Sidney Webb (died March 24 1999).................... -- -- -- -- 23
---- ---- ---- ---- -----
248 103 167 518 3,779
---- ---- ---- ---- -----
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3
The following table summarises directors' remuneration, including gains
realised on exercise of share options.
YEAR ENDED FIFTEEN MONTHS
APRIL 30 ENDED APRIL 30
2000 1999
L'000 L'000
---------- ---------------
All directors:
Aggregate emoluments................................ 518 3,779
Sums paid to third parties for directors'
services.......................................... 6 6
Gain on exercise of share options................... 2,484 28
----- -----
3,008 3,813
----- -----
Highest paid director:
Aggregate emoluments................................ 21 1,627
Gain on exercise of share options................... 1,151 --
----- -----
1,172 1,627
----- -----
Gains on exercise of share options are calculated based on the market price
as at the date of exercise even though the shares may have been sold at a
different price or retained.
DIRECTORS' SHAREHOLDINGS
The beneficial interests of the current directors in the share capital of
MERANT are as follows:
APRIL 30 APRIL 30
2000 1999
--------- ---------
2p SHARES 2p SHARES
J Michael Gullard, Chairman.............................. 77,500 77,500
Harold Hughes............................................ 110,000 110,000
Michel Berty............................................. -- 10,000
Kevin Burns.............................................. 500 60,000
Barry X Lynn............................................. -- --(*)
Don C Watters............................................ -- --(*)
Gary Greenfield, Chief Executive Officer................. 25,155 25,155
- ---------------
* At date of appointment in the cases of Mr. Lynn and Mr. Watters
Certain of these holdings are held in the form of ADSs. There have been no
changes in these holdings since the year end.
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4
DIRECTORS' SHARE OPTIONS
The following table sets out the numbers of options to acquire ordinary
shares or ADSs held by each director, and the changes in holdings during the
year.
NUMBER OF OPTIONS
OPTION -------------------------------------------------------
DATE OF PRICE APRIL 30 APRIL 30 LATEST
DIRECTOR OPTION GRANT (IN GBP) 1999 GRANTED EXERCISED(2) LAPSED 2000 EXERCISE DATE
- -------- ----------------- -------- --------- ------- ------------ ------ --------- -----------------
J Michael Gullard.... June 2 1994 2.13 50,000 -- (50,000) -- -- --
June 21 1996 1.67 250,000 -- (150,000) -- 100,000 June 21 2006
September 16 1999 2.87 -- 20,000 -- -- 20,000 September 16 2009
Harold Hughes........ August 19 1992 3.00 50,000 -- -- -- 50,000 August 19 2002
June 16 1994 2.40 10,000 -- -- -- 10,000 June 16 2004
September 16 1999 2.87 -- 10,000 -- -- 10,000 September 16 2009
Michel Berty......... November 21 1996 1.98 9,165 (1) (9,165) -- -- --
September 24 1997 3.61 41,250 (1) (41,250) -- -- --
September 16 1999 2.87 -- 10,000 (10,000) -- -- --
Kevin Burns.......... September 21 1994 2.48 72,185 (1) (72,185) -- -- --
February 15 1996 2.68 268,120 (1) (268,120) -- -- --
September 25 1996 1.75 206,250 (1) (206,250) -- -- --
September 16 1999 2.87 -- 10,000 -- -- 10,000 September 16 2009
Barry X Lynn......... September 16 1999 2.87 -- 10,000 -- -- 10,000 September 16 2009
Don C Watters........ December 8 1999 4.54 -- 10,000 -- -- 10,000 December 8 2009
Gary Greenfield...... (1) (1) 2,819,550 (1) (250,000) -- 2,569,550 (1)
January 4 1999 1.05 3,250,000 -- -- -- 3,250,000 January 4 2009
- ---------------
(1) Options granted to Mr. Berty, Mr. Burns and Mr. Greenfield by INTERSOLV, Inc
which were converted into options to acquire ADSs in the Company. Conversion
terms are set out in note 2 to the U.S. format financial statements on page
46 and in note 3 to the U.K. format financial statements on page 90. In the
case of Mr. Greenfield, the options outstanding at April 30 2000 were
granted between August 20 1990 and May 1 1998 at prices between L1.47 and
L3.42, and expire between August 20 2000 and May 1 2008.
(2) Gains on exercise of share options are calculated based on the market price
as at the date of exercise even though the shares may have been sold at a
different price or retained. The options shown in the table as "Exercised"
were all exercised on December 16 1999, on which date the closing mid-market
price of the ordinary shares was L4.41. On this basis, gains totalling
L2,483,723 were made as follows: Mr. Gullard L524,800; Mr. Berty L70,553;
Mr. Burns L1,150,870; and Mr. Greenfield L737,500.
(3) The market price of the shares at April 30 2000 was L1.56 and the range
during the year was L1.47 to L4.87.
On behalf of the board
/s/ J. Michael Gullard
J Michael Gullard, chairman
September 12 2000
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5
MERANT PLC
FINANCIAL STATEMENTS 2000
SELECTED CONSOLIDATED FINANCIAL DATA
US FORMAT
The following selected financial data should be read in conjunction with,
and is qualified in its entirety by reference to, the financial statements of
MERANT, expressed in U.S. dollars, set forth on pages 36 to 60 of this report.
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEARS ENDED JANUARY 31,
(IN THOUSANDS OF U.S. DOLLARS -- EXCEPT PER SHARE AND APRIL 30, APRIL 30, APRIL 30, ------------------------------
ADS DATA AND PERCENTAGES) 2000 1999 1998 1998 1997 1996
- ----------------------------------------------------- ---------- ---------- ------------ -------- -------- --------
RESULTS OF OPERATIONS:
Net revenue.................................. $365,444 $374,202 $106,987 $362,919 $283,640 $280,097
Operating income before goodwill amortization and
non-recurring charges...................... 15,141 20,189 18,959 44,997 2,280 6,734
Pre-tax income before goodwill amortization and
non-recurring charges...................... 19,928 26,523 20,100 48,932 5,226 11,441
Goodwill amortization........................ (8,316) (3,585) (464) (1,391) -- --
Non-recurring charges (see note 2, below).... (13,500) (49,662) (17,292) (17,468) (37,603) (23,069)
(Loss) income before income taxes............ (1,888) (26,724) 2,344 30,073 (32,377) (11,628)
Net (loss) income............................ (2,408) (28,532) 1,489 20,148 (35,856) (14,867)
Net (loss) income per share (note 4, below):
Basic...................................... (0.02) (0.20) 0.01 0.15 (0.27) (0.11)
Diluted.................................... (0.02) (0.20) 0.01 0.14 (0.27) (0.11)
Basic -- per ADS........................... (0.08) (1.00) 0.05 0.73 (1.35) (0.57)
Diluted -- per ADS......................... (0.08) (1.00) 0.05 0.70 (1.35) (0.57)
Weighted average number of shares outstanding, in
thousands:
Basic...................................... 145,897 143,130 137,823 137,351 133,002 130,602
Diluted.................................... 145,897 143,130 145,618 144,326 133,002 130,602
Basic -- ADS equivalent.................... 29,179 28,626 27,565 27,470 26,600 26,120
Diluted -- ADS equivalent.................. 29,179 28,626 29,124 28,865 26,600 26,120
FINANCIAL POSITION AT END OF PERIOD:
Cash and short-term investments.............. 125,678 121,384 126,907 118,572 95,876 92,077
Total assets................................. 329,016 323,082 333,715 333,074 257,887 272,523
Long term obligations........................ -- -- 648 612 1,314 3,018
Shareholders' equity......................... 161,402 152,211 179,442 172,073 123,493 157,109
FINANCIAL CONDITION:
Working capital.............................. 74,188 89,619 101,727 94,230 62,421 69,005
Current ratio................................ 1.48 1.57 1.64 1.64 1.52 1.71
NOTES:
(1) Data for prior periods has been restated to include business combinations
that have been accounted for using the pooling-of-interests method (see note
2 to the consolidated financial statements on page 45).
(2) Details of the non-recurring charges are set out in note 5 to the
consolidated financial statements on page 48.
(3) For years through January 31, 1998, annual amounts reflect the financial
data of INTERSOLV, Inc on an April 30 year end. Financial data for the three
months ended April 30, 1998 are included in both the three months ended
April 30, 1998 and the year ended January 31, 1998.
(4) Shares and per-share data for all periods presented have been restated to
reflect the 5-for-1 stock split of MERANT's ordinary shares, which was
effective as of the close of business on March 13, 1998. Each American
depositary share, or ADS, represents five ordinary shares.
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MERANT PLC
FINANCIAL STATEMENTS 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
US FORMAT
The following discussion should be read in conjunction with the financial
statements of MERANT plc and its subsidiaries in U.S. dollars, on pages 36 to 60
of this report.
In addition to historical information, this discussion contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those indicated by the forward-looking
statements. Factors that might cause or contribute to such differences include,
but are not limited to, those discussed below under the section "Risk factors
that may influence future operating results."
MERANT designs, develops and markets software products and services for
enterprise application development. Enterprise application development is where
businesses accelerate the application of innovative information technology to
create a competitive advantage. Our solution offerings empower organizations to
transform their enterprise applications for the changing technology and business
requirements of the e-business environment, manage the application development
process, and provide integrated data connectivity across the enterprise, from
the mainframe to the Internet.
Last year we reported that we had changed our fiscal year end and
accounting reference date to April 30 from January 31. References to fiscal 2000
and fiscal 1999 are to the years ended April 30, 2000 and April 30, 1999,
respectively. References to fiscal 1998 are to the year ended January 31, 1998.
This report also discloses results for the three-month fiscal period ended April
30, 1998 (referred to as "the 1998 transition period"), which were the basis of
a Transition Report filed with the SEC on Form 20-F.
RESULTS OF OPERATIONS
MERANT reported a net loss for fiscal 2000 of $2.4 million or $0.08 per
American depositary share ("ADS"). This compares to a net loss of $28.5 million
or $1.00 per ADS in fiscal 1999, net income of $1.5 million or $0.05 per ADS
diluted in the 1998 transition period, and net income of $20.1 million or $0.70
per ADS diluted in fiscal 1998. These results include non-recurring charges of
$13.5 million in fiscal 2000, $49.7 million in fiscal 1999, $17.3 million in the
1998 transition period and $17.5 million in fiscal 1998.
The table below discloses results of operations as a percentage of net
revenue for fiscal 2000, 1999, the 1998 transition period and fiscal 1998 and
also shows the percentage change between the three fiscal years.
PERCENTAGE OF NET REVENUE YEAR TO YEAR
---------------------------------------------------- PERCENTAGE CHANGE
THREE MONTHS -------------------------
YEAR ENDED YEAR ENDED ENDED YEAR ENDED FISCAL 1999 FISCAL 1998
APRIL 30, APRIL 30, APRIL 30, JANUARY 31, TO TO
2000 1999 1998 1998 FISCAL 2000 FISCAL 1999
---------- ---------- ------------ ----------- ----------- -----------
NET REVENUE
License fees.............. 51% 52% 57% 55% (3)% (3)%
Maintenance
subscriptions.......... 30% 26% 23% 24% 11% 12%
Training and consulting... 19% 22% 20% 21% (15)% 8%
--- --- --- --- --- --
TOTAL NET REVENUE...... 100% 100% 100% 100% (2)% 3%
--- --- --- --- --- --
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PERCENTAGE OF NET REVENUE YEAR TO YEAR
---------------------------------------------------- PERCENTAGE CHANGE
THREE MONTHS -------------------------
YEAR ENDED YEAR ENDED ENDED YEAR ENDED FISCAL 1999 FISCAL 1998
APRIL 30, APRIL 30, APRIL 30, JANUARY 31, TO TO
2000 1999 1998 1998 FISCAL 2000 FISCAL 1999
---------- ---------- ------------ ----------- ----------- -----------
COST OF REVENUE
Cost of license fees...... 3% 4% 3% 4% (35)% 9%
Cost of maintenance
subscriptions.......... 6% 7% 5% 6% (4)% 20%
Cost of training and
consulting............. 16% 18% 17% 17% (13)% 9%
--- --- --- --- --- --
TOTAL COST OF
REVENUE.............. 25% 29% 25% 27% (14)% 11%
--- --- --- --- --- --
Gross profit................ 75% 71% 75% 73% 2% 0%
--- --- --- --- --- --
OPERATING EXPENSES
Research and
development............ 16% 16% 14% 17% (1)% (2)%
Sales and marketing....... 47% 42% 37% 37% 9% 16%
General and
administrative......... 8% 8% 7% 7% (6)% 20%
Goodwill amortization..... 2% 1% 0% 0% 132% 158%
Non-recurring charges..... 4% 13% 16% 5% n/m n/m
--- --- --- --- --- --
TOTAL OPERATING
EXPENSES............. 77% 80% 74% 66% (7)% 25%
--- --- --- --- --- --
(LOSS) INCOME FROM
OPERATIONS................ (2)% (9)% 1% 7% n/m n/m
--- --- --- --- --- --
Interest income, net........ 1% 2% 1% 1% (24)% 61%
--- --- --- --- --- --
(LOSS) INCOME BEFORE INCOME
TAXES..................... (1)% (7)% 2% 8% n/m n/m
--- --- --- --- --- --
Income taxes................ 0% (1)% (1)% (3)% (71)% (82)%
--- --- --- --- --- --
NET (LOSS) INCOME........... (1)% (8)% 1% 6% n/m n/m
--- --- --- --- --- --
- ---------------
n/m not a meaningful number.
Net revenue
The Company generally license its products to end-users under license
agreements. The Company also offer its customers a broad range of services,
including maintenance, support, training and consulting. Maintenance services
consist primarily of enhancements and upgrades to products as well as telephone
support concerning the use of our products. Training and consulting services
provides a range of support services and are focused on helping customers in
using our products.
In October of 1999 we introduced the MERANT Egility Framework, a series of
solutions to create e-business application infrastructures for customers. These
solutions combine MERANT technology and support services to provide customers
with rapid development, integration and delivery of information systems. MERANT
also continues to support customer demand for traditional development tools,
primarily for the COBOL market.
Total net revenue for fiscal 2000 was $365.4 million, a 2% decrease
relative to fiscal 1999. During fiscal 2000, our Egility e-business revenue
increased 16% and accounted for 51% of total revenue. Increased revenue
generated from our Egility solutions was offset by a 16% decrease in revenue
from our traditional COBOL products and services, which includes our Year 2000
solutions. Revenue from Year 2000 products and services represented 6% of total
revenue, down from 15% in the year ended April 30, 1999. Total revenue,
excluding revenue from Year 2000 products and services, increased 8% in fiscal
2000 relative to fiscal 1999.
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Net revenue for fiscal 1999 was $374.2 million, or 3% more than fiscal
1998. Revenues excluding Year 2000 products and services grew 6% in fiscal 1999.
Revenues related to Year 2000 products and services represented 15% of total
revenues in fiscal 1999 and 20% of total revenues in fiscal 1998.
Revenue by business segment
For most of fiscal 2000, the basis of MERANT's internal reporting continued
to be the four business segments established in 1998. In accordance with
Financial Accounting Standard 131 "Disclosures about Segments of an Enterprise
and Related Information" we are reporting segmental data in our financial
statements on the basis of our internal reporting segments in fiscal 2000, and
the following comments reflect that analysis.
Our product and service offerings were organized in these four primary
solution areas:
- Application Development Management (ADM or MERANT PVCS series). MERANT
PVCS, an industry leader in Software Configuration Management, is a
comprehensive suite of configuration and change management products
providing a reusable team development infrastructure that can be
configured for application development projects, enabling customers to
reduce risk within the development lifecycle and accelerate development
of quality software.
- Enterprise Data Connectivity (EDC or MERANT DataDirect series). MERANT
DataDirect is an industry standard for data connectivity, helping speed
delivery of critical business information through flexible and reliable
data access middleware.
- Application Creation and Transformation (ACT or MERANT Micro Focus
series). MERANT Micro Focus is a leading brand for developing and
transforming applications primarily based on COBOL. MERANT Micro Focus
solutions help customers extend their existing code and skills assets in
three key areas: distributed computing, application transformation and
mainframe development.
- Enterprise Consulting Solutions (ECS or MERANT Consulting). MERANT
Consulting provides a broad spectrum of enterprise application
development services. The Company's expertise is distinguished by its
focus on infrastructure modernization, application transformation
(including Year 2000 transformation), enterprise application integration
and e-business development
Increased revenue for ADM and EDC products and non-Y2K ECS Services was
offset by a decline in revenue for ACT products and Year 2000 services. The
decrease in ACT products was primarily related to the decline in demand for Year
2000 products, compared to fiscal 1999.
ACT and ADM revenues grew due to increased license and service fee
revenues, reflecting continuing increased demand for these products. ECS revenue
growth was constant reflecting increased competition for products and services
to support Year 2000 renewal projects. Increases recorded by these solution
areas were partially offset by a 5% decrease in revenues for EDC, where a
decline in the Asia-Pacific area caused by a downturn in the general business
climate was only partially offset by revenue increases in other geographic
areas.
Revenue by product/service type
License fee revenue decreased by $6.7 million or 3% to $186.4 million in
fiscal 2000 relative to fiscal 1999, and by $5.6 million or 3% to $193.1 million
in fiscal 1999 relative to fiscal 1998. In fiscal 2000, increases in license fee
revenue from our Egility business was more than offset by decreases in our COBOL
license fee revenue, including license fees for Year 2000 products. The decrease
in license fees in 1999 was primarily due to a decrease in the demand for
MERANT's Year 2000 products in North America, along with integration issues
related to the INTERSOLV acquisition.
Maintenance subscriptions increased by $10.4 million or 11% to $109.3
million in fiscal 2000 relative to fiscal 1999, and by $10.8 million or 12% to
$98.9 million in fiscal 1999 relative to fiscal 1998. The increases in
maintenance subscriptions in fiscal 2000 and 1999 resulted from a combination of
growth in the installed customer base and renewal of existing maintenance
contracts for ADM and EDC products.
22
9
Training and consulting revenue decreased by $12.5 million or 15% to $69.7
million in fiscal 2000 relative to fiscal 1999, having previously increased by
$6.1 million or 8% to $82.2 million in fiscal 1999 relative to fiscal 1998. The
decrease in training and consulting revenue in fiscal 2000 reflected the rapid
downturn in Year 2000 transformation business. In 1999 higher demand for
training and consulting services in all solution areas more than offset the
slight decrease experienced in Year 2000 transformation projects.
Revenue by geography
We divide our operations between North America, which includes U.S.A. and
Canada, and International, which encompasses the rest of our worldwide
operations.
North America revenue decreased by $11.1 million or 5% to $216.1 million in
fiscal 2000 relative to fiscal 1999, and represented 59% of our total revenue,
compared to 61% in 1999. In fiscal 2000 increases in North American revenue from
our ADM and EDC solution areas were offset by the adverse effect of declines in
revenue generated by Year 2000 and COBOL-based products and services.
International revenue increased by $2.3 million or 2% to $149.4 million in
fiscal 2000 relative to fiscal 1999, and represented 41% of our total revenue,
compared to 39% in 1999. International revenue has been less dependent on Year
2000 and COBOL-based products and services, and declines in those areas were
offset by increases in other areas of our business.
Cost of revenue
Cost of license fees is comprised principally of the cost of product
materials (including the purchase of disks and CDs, the transfer of data to
electronic media, and the printing of manuals), packaging and distribution
costs, and royalties to third party software developers for the licensing of
certain add-on software products. These costs decreased by $5.0 million or 35%
to $9.4 million in fiscal 2000 relative to fiscal 1999, having increased by $1.1
million or 9% to $14.4 million in 1999 relative to 1998, and represented 5% of
license fees in fiscal 2000, compared to 7% in 1999 and 7% in 1998. Reductions
in fiscal 2000 principally reflect savings in product materials arising from the
documentation being supplied on CD-ROM.
Cost of maintenance subscriptions is comprised principally of compensation
for technical support personnel. These costs decreased by 4% to $23.4 million in
fiscal 2000 relative to fiscal 1999, having previously increased by 20% to $24.4
million in fiscal 1999 relative to fiscal 1998. Cost of maintenance
subscriptions represented 21% of maintenance subscriptions in fiscal 2000,
compared to 25% in 1999 and 23% in 1998. The improved margin and reduced cost
recorded in 2000 reflected the benefits of the investments made in 1999 to
improve the effectiveness of our telephone and on-line Internet support. The
cost increases in 1999 reflected those investments, notably the addition of
personnel to the telephone support functions to support the growing customer
base.
Cost of training and consulting is comprised principally of compensation
and expenses of training and consulting personnel. Such costs decreased by $9.0
million or 13% to $59.1 million in fiscal 2000 relative to 1999, having
increased by $5.7 million or 9% to $68.1 million in fiscal 1999 relative to
1998, and represented 85% of training and consulting revenue in fiscal 2000,
compared to 83% in 1999 and 82% in 1998. In 2000 training and consulting costs
were reduced in response to reduced demand for our consulting services,
especially in Year 2000-related projects. The increases recorded in 1999 in
amount and as a percentage of revenue were primarily the result of increased
investment in personnel needed to support the growing demand for consulting and
training services in all solution areas.
Gross profit
Gross profit represented 75% of total net revenue in 2000, compared to 71%
in 1999 and 73% in 1998. The improved margin in 2000 reflects direct cost
savings on our license fee and maintenance subscription revenue as well as
changes in the mix of revenue, principally the reduction in training and
consulting revenues. In 1999 the lower margin reflected proportionately higher
maintenance subscriptions and training and consulting revenues, when compared to
1998.
23
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MERANT's gross margin can be affected by a number of factors, including
changes in product or distribution channel mix, the mix of product, maintenance
and service revenue, and competitive pressures on pricing. Gross margin is also
dependent on discounts selectively provided to customers in competitive sales
situations. In addition, the expansion of our consulting organization and our
ability to deploy its capacity to revenue generating projects may adversely
affect gross margin. As a result of the above factors, gross margin fluctuations
are difficult to predict, and gross margins may decline from current levels in
future periods.
Research and development
Research and development costs consist principally of compensation and
travel expenses for software developers and related facility costs. Research and
development spending supports the development and enhancement of new and
existing products and is consistent with our strategy of investing heavily to
improve and expand our product lines. We capitalize some of this expenditure as
software product assets, in accordance with Statement of Financial Accounting
Standard No. 86, and provide for amortization of each asset over its estimated
life. Research and development costs include the amortization of previously
capitalized software costs. The following table discloses the components of
research and development costs:
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
IN THOUSANDS OF U.S. DOLLARS 2000 1999 1998 1998
- ---------------------------- ---------- ---------- ------------ -----------
Current expenditure on research and development,
before capitalization............................ $55,309 $53,624 $13,699 $ 56,197
Deduct: amounts capitalized........................ (3,770) (8,524) (2,480) (10,285)
------- ------- ------- --------
Current expenditure charged to income.............. 51,539 45,100 11,219 45,912
Amortization of previously capitalized costs....... 7,627 14,751 3,332 14,916
------- ------- ------- --------
Research and development costs, income statement... $59,166 $59,851 $14,551 $ 60,828
------- ------- ------- --------
Research and development costs decreased by $0.7 million or 1% in fiscal
2000 relative to fiscal 1999, and by $1.0 million or 2% in fiscal 1999 relative
to 1998, and represented 16% of net revenue in 2000, compared to 16% in 1999 and
17% in 1998.
Current expenditure on internal software research and development increased
by $1.7 million or 3% in fiscal 2000 relative to fiscal 1999, having decreased
by $2.6 million or 5% to $53.6 million in fiscal 1999 relative to fiscal 1998,
and represented 15% of net revenue in fiscal 2000, compared to 14% in 1999 and
15% in 1998. During fiscal 2000, MERANT's development efforts were redirected
towards the areas with the greatest growth opportunity. Additional investments
in technologies to support the MERANT Egility framework, were offset somewhat by
reductions in our efforts supporting traditional development tools.
In fiscal 2000, we capitalized 7% of these costs, or $3.8 million, as
software product assets, compared to 16% in 1999 and 18% in 1998. These
capitalized costs will be amortized over the respective products' estimated
economic lives of three or four years. After providing for amortisation of
previously capitalized costs, the net charge to income, representing the excess
of amortization over capitalization, amounted to $3.9 million in fiscal 2000,
compared to $6.2 million in 1999 and $4.6 million in 1998.
MERANT believes that ongoing development of new products and features is
required to maintain and enhance its competitive position. Accordingly, while we
will continue to control expenses where possible, we anticipate that aggregate
research and development expenses will increase over time, and may not be
directly related to the level of revenue realized in future periods.
Sales and marketing
Sales and marketing costs include compensation, travel and related facility
costs for sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows. These costs increased by $13.9 million or 9% to
$169.6 million in fiscal 2000 relative to fiscal 1999, and by $21.0 million or
16% to $155.7 million in fiscal 1999 relative to 1998, and represented 46% of
net revenue in fiscal year 2000, compared to
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42% in 1999 and 37% in 1998. The increase in sales and marketing costs in fiscal
2000 and 1999 reflected sales force expansion, higher commissions and higher
advertising and marketing costs, including those associated with the new
corporate name and product launches. The increase in costs as percentage of
revenue in fiscal 1999 was the result of lower than expected revenue in the
North American market relative to our investment in the sales and marketing
organizations.
MERANT believes that continued investment in sales, marketing, customer
support and promotional activities is essential to maintaining its competitive
position. We are expanding our sales and support staffs and, accordingly, we
anticipate that sales and marketing expenses will be higher in future periods.
General and administrative
General and administrative costs include compensation, travel and related
facility costs for MERANT's group management, finance, legal and human resources
operations. These costs decreased by $1.9 million or 6% to $29.7 million in 2000
relative to 1999, having increased by $5.2 million or 20% to $31.6 million in
fiscal 1999 relative to fiscal 1998, and represented 8% of net revenue in fiscal
2000, compared to 8% in 1999 and 7% in 1998. The decrease in general and
administrative costs in 2000 reflected savings from the elimination of duplicate
administrative functions following the merger with INTERSOLV. The increase in
1999 was due to higher costs resulting from the merger of INTERSOLV along with
continued investment in infrastructure.
We anticipate that general and administrative expenses will increase in
future periods, but decrease as a percentage of net revenue.
Goodwill amortization
Goodwill amortization charges arise as a result of business combinations
accounted for as purchases, where the excess of the purchase price over the
respective estimated fair value of the net tangible assets of each company is
attributed to goodwill and amortized over its economic life. These costs
increased by $4.7 million or 132% to $8.3 million in 2000 relative to 1999, and
by $2.2 million or 158% to $3.6 million in fiscal 1999 relative to fiscal 1998,
and represented 2% of net revenue in fiscal year 2000, compared to 1% in 1999
and less than 1% in 1998. MERANT has recorded additions to goodwill of $46.1
million as a result of acquisitions in fiscal 2000 and $7.3 million as a result
of acquisitions in fiscal 1999. The significant increases in goodwill
amortization in 2000 and 1999 are the result of these increases in the value of
goodwill.
We anticipate that goodwill amortization charges will remain at least at
current levels through fiscal 2002, and may increase, depending on any future
corporate acquisitions.
Non-recurring charges
In the fourth quarter of fiscal 2000, we recorded a non-recurring charge of
$13.5 million. This charge resulted from management actions to accelerate our
transition to e-business solutions and to reduce expenses relative to the
decline in demand for our Year 2000 (Y2K) and traditional COBOL-based products
and services. The charge was made up of a $7.4 million non-cash write-off of
previously capitalized software product assets, and a $6.1 million provision for
future cash expenditures for severance costs for approximately 50 employees in
our Y2K and COBOL related businesses ($3.3 million) and for the costs associated
with closing of excess facilities ($2.8 million). These actions are expected to
be completed in the next fiscal year and will reduce future expenses.
In fiscal 1999, we recorded a charge of $49.7 million in respect of the
merger with INTERSOLV, and the subsequent restructuring of the combined
businesses. Aggregate direct transaction costs of $24.5 million represented
charges for investment bankers, employee contractual obligations, stamp duties
and listing fees associated with the issuance and listing of new shares on the
London Stock Exchange and other professional fees. In addition, we recorded a
charge of $25.2 million to reflect costs associated with integration efforts.
This charge was primarily comprised of the write-off of redundant or impaired
assets and severance costs. The actions were substantially completed by April
30, 2000 resulting in no material change to the amounts accrued at April 30,
1999.
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In fiscal 1998, we recognized non-recurring costs of $17.5 million, net.
This charge included a $15.7 million write off of purchased research and
development costs arising from the SQL acquisition, with the balance principally
related to costs of $2.0 million which arose when INTERSOLV exited selected non-
strategic product areas.
Interest income, net
Interest earned on cash and short-term investments, net of interest
expense, decreased by $1.5 million or 24% to $4.8 million in fiscal 2000
relative to fiscal 1999, having increased by $2.4 million or 61% to $6.3 million
in fiscal 1999 relative to 1998. The decrease in fiscal 2000 reflected lower
average cash balances during the year, as well as lower interest rates. The
increase in fiscal 1999 principally represented the impact of higher cash
balances.
MERANT has a hedging program whose aim is, where possible, to minimize
foreign exchange gains or losses from recorded foreign-currency denominated
assets and liabilities. This program involves the use of borrowings and forward
foreign exchange contracts in certain European currencies, including the euro.
We do not hedge anticipated foreign currency revenues and expenses not yet
incurred. No hedging contracts were outstanding at the year-end.
Income taxes
MERANT has reported negative tax rates of 28% in fiscal 2000 and 7% in
fiscal 1999. The tax rate in 1998 was 33%. The applicable U.K. statutory rate
was 30% in 2000 and 31% in 1999 and 1998.
Our tax rate in each of the past two years has been distorted by the
non-recurring costs charged against income, a proportion of which were not
deductible for tax purposes. The differences between the reported tax rates and
the U.K. statutory rates reflect the impact of these non-deductible costs, as
well as permanent differences between accounting profits and taxable profits,
primarily the difference in the treatment of amortisation of goodwill. Our tax
rate can also be adversely affected by the distribution of taxable profits and
losses among the tax jurisdictions in which we operate. An analysis of the
charge for income taxes, including an analysis of differences between the
effective rate and the U.K. statutory rates, is given in note 11 to the
consolidated financial statements on page 51.
The income tax returns of some of our U.S. subsidiaries for fiscal years
ended January 31, 1993 through 1997 have been examined by the Internal Revenue
Service, which has proposed increases to the amount of U.S. income taxes due in
respect of those fiscal years. Any adjustments that may result from this
examination are not expected to have a material adverse impact on our
consolidated operating results or our financial position.
Business combinations
During fiscal 2000, MERANT completed four acquisitions.
On August 3, 1999, we acquired all of the outstanding stock of Essential
Software, Inc (trading as The Marathon Group), a privately-held Internet
professional services firm based in Raleigh, North Carolina. The total
consideration for the transaction was approximately $15.8 million, the whole of
which was paid in cash.
On November 23, 1999, we acquired all of the outstanding stock of
EnterpriseLink Technology Corporation, a privately held supplier of enterprise
extension software based in Campbell, California. The total consideration for
the transaction is up to approximately $22 million, payable as a combination of
cash and assumption of debt, of which approximately $14.1 million was paid prior
to April 30, 2000. We also assumed EnterpriseLink stock options outstanding as
of the closing which converted into options to acquire up to 511,904 MERANT
ordinary shares.
On December 6, 1999, we acquired all of the outstanding stock of Trillium
Software Corporation, a privately held supplier of change management software
based in Eden Prairie, Minnesota. The total
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consideration for the transaction is up to approximately $7 million, payable in
cash, of which approximately $4.1 million was paid prior to April 30, 2000.
On January 8, 2000, we acquired the remaining 79.9% of the outstanding
stock of Northern Software Partners AS, our distributor for the Nordic region,
based in Oslo, Norway. The total consideration for the transaction is up to
approximately $4 million, payable in cash, of which approximately $3.2 million
was paid prior to April 30, 2000. Northern Software Partners AS changed its name
to MERANT Nordic AS on January 21, 2000.
These transactions have been accounted for using the purchase accounting
method. Accordingly, we have allocated to goodwill the excess of the estimated
purchase price over the respective estimated fair value of each company's net
tangible assets. We will amortize this amount, which totalled $46.1 million in
the aggregate, over its estimated economic life of five years.
During fiscal 1999, MERANT completed three acquisitions.
On May 15, 1998, we acquired all of the outstanding stock of our Italian
distributor, Micro Focus Italia, s.r.l., for total consideration of
approximately $4.6 million. On August 13, 1998, we acquired all of the
outstanding stock of our Australian distributor, Advanced Software Engineering
Pty Ltd., for total consideration of approximately $2.5 million. These
transactions were accounted for using the purchase method. Accordingly, the
excess of the purchase price over the respective estimated fair value of the net
tangible assets of each company, which amounted to $7.3 million in the
aggregate, was allocated to goodwill, and is being amortized over its estimated
economic life of four years.
On September 24, 1998, MERANT completed the merger with INTERSOLV in a
transaction accounted for using the pooling-of-interests method. Accordingly our
financial statements for all periods prior to the merger have been restated to
reflect the merger. The merger was structured as a tax-free reorganization under
U.S. tax law. We issued approximately 12.6 million new MERANT ADSs (representing
approximately 63.1 million new MERANT ordinary shares) in exchange for
INTERSOLV's common stock and share equivalents outstanding, which at the time of
the completion of the transaction represented approximately 46% of our share
capital on a fully-diluted basis. Prior to the merger, INTERSOLV was a
Rockville, Maryland-based public corporation listed on the Nasdaq National
Market, which provided software solutions that facilitate the development,
delivery and deployment of business information systems. INTERSOLV's products
and services were focused primarily in the areas of application development
management, enterprise data connectivity and enterprise application renewal.
During the three-month fiscal period ended April 30, 1998, INTERSOLV
acquired all of the outstanding stock of SQL Software Limited in exchange for
1,251,450 common shares in INTERSOLV (equivalent to 3,441,488 MERANT ordinary
shares). The transaction was accounted for using the purchase method. The cost
of the acquisition was $19.2 million, of which $15.7 million was allocated to
purchased research and development and written off on completion of the
acquisition since no technological feasibility or alternative future use could
be demonstrated. Additionally, $2.4 million was allocated to goodwill and other
intangibles, and is being amortized over its economic life, which is estimated
to be five years.
In fiscal 1998, MERANT made two acquisitions.
On January 20, 1998, we acquired all of the outstanding stock of XDB
Systems, Inc. in exchange for 1,891,975 ordinary shares in MERANT. XDB Systems,
Inc. was a privately-held corporation based in Columbia, Maryland, providing DB2
database development, maintenance and connectivity solutions. The combination
was accounted for using the pooling-of-interests method.
On April 30, 1998, we acquired all of the outstanding stock of Millennium
UK Limited, a privately-held consulting firm, in exchange for 745,710 ordinary
shares in MERANT and a cash payment of $3.2 million. Millennium UK Limited
provided consulting and project management services and had specialized
expertise in the estimating, planning and management of Year 2000 compliance
projects. The transaction was accounted for using the purchase method.
Accordingly, the excess of the purchase price over the estimated
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fair value of the net tangible assets, which amounted to $6.7 million, was
allocated to goodwill, and is being amortised over its economic life, which is
primarily estimated to be three years.
Additional information on these transactions is given in note 2 to the
consolidated financial statements on page 45.
FORWARD-LOOKING STATEMENTS
The following statement is made in accordance with the U.S. Private
Securities Litigation Reform Act of 1995: This Annual Report contains
forward-looking statements that include statements regarding expectations for
our business strategy, prospects and growth, including the growth of our
e-business solutions business and related revenues, and the one-time nature of
certain charges. Forward-looking statements are subject to the safe harbor
created by the Private Securities Litigation Reform Act, which provides that
MERANT can be exempt from liability for making forward-looking statements if
cautionary language is included with the statements. When used in this document,
the words "anticipate," "believe," "estimate," "expect" and similar expressions,
as they relate to MERANT or its management, are intended to identify these
forward-looking statements.
These forward-looking statements involve a number of risks and
uncertainties. Actual results could differ materially from those anticipated by
these forward-looking statements. Future results will be difficult to predict as
MERANT transforms its business strategy to provide e-business solutions and away
from certain of its past primary markets, including the market for Year 2000
products and services. Factors that could cause actual results to differ
materially include, among others, our ability to effectively manage our costs
against uncertain revenue expectations, the potential for a decrease in revenue
or a slowdown in revenue growth which may be caused by delays in the timing of
sales and the delivery of products or services, our ability to develop, release,
market and sell products and services to customers in the highly dynamic market
for enterprise application development and e-business solutions, the potential
for a shift in demand for enterprise application development solutions and
e-business solutions based on changes in technology and customer needs, the
market acceptance of our e-business solutions and e-business solutions
generally, the effect of competitors' efforts to enter our markets and the
possible success of existing competitors in those markets, and our ability to
manage and integrate recently acquired businesses or other businesses that we
may acquire in the future.
Further information on potential factors which could affect our financial
results is included in MERANT's financial statements for fiscal 2000 under the
heading "Factors That May Influence Future Operating Results," and elsewhere in
this Annual Report, and in Quarterly Reports on Form 6-K for the quarters ended
July 31, 1999, October 31, 1999, and January 31, 2000, each as submitted to the
SEC and as may be updated and amended with future filings or submissions,
including MERANT's Form 20-F for the year ended April 30, 2000. MERANT
undertakes no obligation to release publicly any updates or revisions to any
forward-looking statements contained in this announcement that may reflect
events or circumstances occurring after the date of this announcement.
RISK FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS
MERANT operates in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. This section of the discussion
highlights some of these risks and their possible impact on our future results
of operations and financial condition.
Our operating results may fluctuate, and any fluctuations could adversely
affect the price of our securities
Our future operating results are subject to quarterly and annual
fluctuations. If we fail to meet the expectations of securities analysts and
investors as a result of any future fluctuations in our quarterly operating
results, the market price of our securities would likely decrease. We expect
that our results may fluctuate in the future due to a variety of factors,
including:
- demand for our products,
- the size and timing of customer orders and the lengthy sales cycle,
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- product life cycles,
- our ability to introduce and market new and enhanced versions of our
products on a timely basis,
- the introduction and acceptance of new products and product enhancements
by us or by our competitors,
- customer order deferrals in anticipation of new or enhanced products or
technologies,
- the timing of product introductions or enhancements by us or by our
competitors,
- technological changes in the software industry,
- changes in the mix of distribution channels through which our products
are offered,
- purchasing patterns of distributors and retailers, including customer
budgeting cycles,
- the quality of products sold,
- changes to our product and service offerings as a result of acquisitions
of companies or technologies
- price and other competitive conditions in the industry,
- changes in our level of operating expenses,
- changes in our sales incentive plans,
- the cancellation of licenses during the warranty period,
- non-renewal of maintenance agreements,
- the effects of extended payment terms (particularly for international
customers),
- economic conditions generally or in various geographic areas, and
- other factors discussed in this section.
MERANT's insignificant backlog and long sales cycle combined with costs that
are fixed, make it difficult to predict future revenue and to compensate for a
revenue shortfall
Historically, we have operated with little product backlog, because we
generally ship our products when we receive an order. As a result, our license
fee revenue in any quarter will depend on the volume and timing of orders
received in that quarter, and our ability to fill those orders. In addition, the
purchase process of our customers typically ranges from a few weeks to a few
months or longer from initial inquiry to order, which makes it difficult to
predict the timing of sales and license fees. Our staffing and operating
expenses are based on anticipated revenue levels, and a high percentage of our
costs is fixed over the short term and does not vary with revenue. Because of
these factors, small variations between anticipated orders and actual orders, as
well as non-recurring or large orders, have caused disproportionate variations
in our operating results from quarter to quarter, and may do so in the future.
As a result, and due to the typical size of customers' orders, our quarterly
operating results and cash flows would suffer from a lost or delayed sale.
Moreover, if significant sales occur earlier than expected, operating results
for later quarters may suffer.
Seasonality can cause our operating results to fluctuate
Our revenue also is affected by seasonal fluctuations resulting from lower
sales that typically occur during the summer months in Europe and other parts of
the world. In addition, we have historically experienced lower revenue for the
first quarter of a fiscal year than in the fourth quarter of the prior fiscal
year. We typically recognize a high proportion of quarterly revenue during the
last month of a fiscal quarter and significant fluctuations in new order revenue
can occur due to the timing of customer orders. Quarterly results therefore can
vary to the extent that sales for a quarter are delayed, particularly since a
relatively high proportion of our expenses do not vary with revenue.
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Our revenue could decline if there is a decline in the demand for or use of
the COBOL language or mainframe computers
A substantial portion of our revenue is derived from products and related
services for mainframe application development in the COBOL language and for
COBOL compilers running on workstations and personal computers. We expect that a
substantial portion of our revenue will continue to be derived from these
products and services in the future. As a result, our future operating results
depend upon continued demand for, and market acceptance and use of, the COBOL
language. Any decline in that market as a result of competition, technological
change or other factors could cause our revenue to decline.
If our new products and services fail to achieve customer acceptance, or if we
fail to manage product transitions, our business reputation and financial
performance would suffer
We are in a market that is subject to rapid technological change. We must
continually adapt to that change by improving our products and introducing new
products, technologies and services. Our growth and financial performance will
depend in part on our ability to develop and introduce enhancements of existing
products and new products that accommodate the latest technological advances and
standards, customer requirements and market conditions on a timely and
cost-effective basis. This depends in part on our ability to attract and retain
qualified employees. In the past, we have experienced delays and increased
expenses in developing new products. We may not be successful in marketing, on a
timely basis or at all, competitive products, product enhancements and new
products that respond to technological change, changes in customer requirements
and emerging industry standards.
Product defects can be expensive to fix and can cause us to lose customers
Software products as complex as those we offer may contain undetected
errors or failures when first introduced or as new versions are released.
Despite our testing, as well as testing and use by current and potential
customers, errors might be found in new products after commencement of
commercial shipments. The occurrence of errors could result in loss of or delay
in market acceptance of our products.
Protection of our intellectual property is limited, which may affect our
competitive position
Our success depends upon our proprietary software technology. Despite the
precautions we take to protect our proprietary rights, it may be possible for a
third party to copy or otherwise obtain and use our products or technology
without authorization, or to develop similar technology independently. Policing
unauthorized use of our products is difficult, and while we are unable to
determine the extent to which software piracy of our products exists, software
piracy can be expected to be a persistent problem. In addition, effective
protection of intellectual property rights may be unavailable or limited in some
countries. Patents have been granted on fundamental technologies in software,
and patents may be issued that relate to fundamental technologies incorporated
into our products.
Our products may infringe the intellectual property rights of third parties,
which may result in lawsuits and prevent us from selling our products
Except for a trademark infringement claim against our distributor in
Brazil, which local counsel advises is unlikely to succeed, there are currently
no material notices or material pending claims that our products, trademarks or
other proprietary rights infringe the proprietary rights of third parties.
However, third parties have and may continue to assert infringement claims
against us. If it is necessary or desirable, we may seek licenses under disputed
third party intellectual property rights. However, these licenses may not be
available on reasonable commercial terms, if at all. Failure to obtain a license
from a third party for technology that we use could cause us to incur
substantial liabilities and to suspend the production and sale of products. With
regard to those technologies that we license from third parties, we must rely
upon those third parties for information on the ownership of the licensed
technologies. As a result, our exposure to infringement claims may increase. We
generally obtain representations as to the ownership of licensed technology and
indemnifica-
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tion to cover any breach of these representations. However, representations may
not be accurate and indemnification may not provide adequate compensation or
protection for breach of the representations.
In addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish their validity.
Litigation to determine the validity of any claims (including infringement
claims against us and claims initiated by us against third parties) could result
in significant expense and divert the efforts of our technical and management
personnel from operating activities, whether or not the litigation is determined
in our favor. In the event of an adverse ruling in any litigation, we may be
required to pay substantial damages, to discontinue the use and sale of
infringing products, to expend significant resources to develop non-infringing
technology or to obtain licenses to the infringed technology. Our failure to
develop or license a substitute technology could prevent us from selling our
products. As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers may become
increasingly subject to infringement claims. Any claims against us, with or
without merit, as well as claims we initiate against third parties, can be time
consuming and expensive to defend or prosecute and to resolve.
Competition can lead to pricing pressures and loss of market share
Rapid technological change and aggressive competition characterize the
markets in which we compete. We expect competition to increase in the future
from existing competitors and from other companies that may enter our existing
or future markets with similar or substitute solutions that may be less costly
or provide better performance or functionality than our products. Some of our
current and prospective competitors have greater financial, marketing or
technical resources and may be able to adapt more quickly to new or emerging
technologies, or devote greater resources to the promotion and sale of their
products than we can. Other companies may develop competitive products in the
future. In addition, the software industry is characterized generally by low
barriers to entry, as a result of which new competitors with technological,
marketing or other competitive advantages may emerge and rapidly acquire market
share. Furthermore, we may not be able to compete effectively in the future in
the professional services market. If price competition increases significantly,
competitive pressures could cause us to reduce the prices of our products and
services, which would result in reduced profit margins and could harm our
ability to provide adequate service to our customers.
International sales account for a significant portion of our revenue, which
exposes us to the business and economic risks of global operations
In fiscal 2000, sales to customers outside of the United States represented
approximately 42% of our revenue, compared to 40% in 1999 and 35% in 1998. We
intend to continue to expand our operations outside of the United States and
enter additional international markets, and commit significant time and
resources to developing international sales and support channels. Risks inherent
in conducting international business generally include:
- exposure to exchange rate fluctuations,
- longer payment cycles,
- greater difficulties in accounts receivable collection and enforcing
agreements,
- tariffs and other restrictions on foreign trade,
- U.S. export requirements,
- economic and political instability,
- withholding and other tax consequences,
- restrictions on repatriation of earnings, and
- the burdens of complying with a wide variety of foreign laws.
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If we lose key personnel or are unable to hire additional qualified personnel
as necessary, we may not be able to manage our business successfully or sell
our products
Several of our senior management personnel are relatively new to MERANT,
and our success will depend in part on the successful assimilation and
performance of these individuals. Competition for qualified personnel in the
software industry is intense, and we may not be able to attract and retain a
sufficient number of qualified personnel to conduct our business in the future.
Our success depends to a significant degree upon the continued contributions of
our key management, marketing, product development, professional services and
operational personnel, including key personnel of acquired companies. We do not
have employment agreements with most of our key personnel, nor do we maintain
key person life insurance on any of these persons.
If we were unable to manage growth effectively, our operations would be
disrupted
We have recently experienced a period of rapid growth, which has placed a
significant strain on our financial, management, operational and other
resources. If this rapid growth is maintained, these strains will continue. Our
management, personnel, systems, procedures and controls may not be adequate to
support existing and future operations.
Market volatility may cause the price of our securities to decline
The market price of our securities has experienced significant price
volatility, and volatility may occur in the future. Factors that may have a
significant impact on the market price of our securities include:
- actual or anticipated fluctuations in our operating results,
- changes in financial estimates by securities analysts,
- announcements of technological innovations,
- new products or new contracts announced by us or by our competitors,
- developments with respect to patents, copyrights or proprietary rights,
- conditions and trends in the software and other technology industries,
- adoption of new accounting standards affecting the software industry, and
- general market conditions.
Furthermore, the stock market has experienced extreme volatility that has
particularly affected the market prices of equity securities of many high
technology companies. These market fluctuations, as well as general economic,
political and market conditions, may cause the market price of our securities to
be volatile.
If we engage in future business combinations, we may fail to integrate
acquired businesses effectively, which could disrupt our ongoing business and
generate negative publicity
We have completed a number of business combinations in recent years, most
recently the merger with INTERSOLV in September 1998, and the acquisitions of
Essential Software, Inc. in August 1999, EnterpriseLink Technology Corporation
in November 1999, Trillium Software Corporation in December 1999 and Northern
Software Partners AS in January 2000. We may complete additional acquisitions in
the future. The process of integrating an acquired company's business into our
operations may result in unforeseen operating difficulties and expenditures. It
may also absorb significant management attention that would otherwise be
available for the ongoing development and operation of our business. Moreover,
the anticipated benefits of an acquisition might not be realized. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurring of debt and contingent liabilities, and amortization
provisions related to goodwill and other intangible assets. In addition,
acquisitions involve numerous risks, including:
- difficulties in the assimilation of the operations, personnel,
technologies and products of the acquired companies,
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- difficulties in managing diverse geographic sales and research and
development operations,
- the diversion of management attention from other business concerns,
- risks of entering markets in which we have no or limited direct prior
experience,
- the potential loss of key employees of MERANT or of the acquired company,
and
- potential disputes with respect to the provisions of the acquisition
agreements.
Year 2000 and euro issues could still negatively affect our business
We developed and implemented an enterprise-wide plan to analyze and address
potential Year 2000 issues affecting our internal systems, our interaction with
third party vendors and suppliers, and our products and services. As of
September 30, 1999, we completed the plan in all material respects, although we
have continued to address internal Year 2000 readiness issues on an ongoing
basis with respect to newly-acquired systems and suppliers, regularly-scheduled
system updates and upgrades, and internal operations. To date we have
experienced no significant impact from the Year 2000 problem on our ability to
carry on normal business operations. However, there can be no assurance that we
will not experience significant unanticipated negative consequences caused by
undiscovered Year 2000 problems with our internal systems, our third party
vendors and suppliers, or our products and services.
While we have not been subject to any claims or lawsuits to date relating
to any Year 2000-related failures of our products or services, there can be no
assurance that customers or former customers will not bring claims or lawsuits
against us seeking compensation for losses associated with any such failures. A
material adverse outcome in a Year 2000 claim or lawsuit could have a material
adverse effect on our business, financial condition and results of operations.
The euro now trades on currency exchanges and is available for non-cash
transactions. As of May 1, 1999, MERANT's internal systems have the ability to
price and invoice customers in the euro. We are also engaging in foreign
exchange and hedging activities in the euro. We will continue to modify the
internal systems that will be affected by this conversion, but do not expect the
costs of further system modifications to be material. There can be no assurance,
however, that we will be able to complete such modifications to comply with euro
requirements, which could have a material adverse effect on our business,
financial condition and results of operations. We will continue to evaluate the
impact of the euro's introduction on our foreign exchange and hedging
activities, functional currency designations and pricing strategies in the new
economic environment. In addition, we face risks to the extent that banks and
vendors upon whom we rely are unable to make appropriate modifications to
support our operations with respect to euro transactions. While we will continue
to evaluate the impact of the euro, management does not believe its introduction
will have a material adverse effect upon our business, financial condition or
results of operations.
The rights of our shareholders may differ from the shareholder rights of a
U.S. corporation
The right of shareholders and, therefore, certain of the rights of holders
of ADRs, are governed by English law, including the Companies Act 1985, and by
MERANT's Memorandum and Articles of Association. These rights differ in many
respects from the rights of shareholders in typical U.S. corporations.
U.S. judgments may not be enforceable against us
MERANT plc is a public limited company organized under the laws of England
and Wales. Judgments of U.S. courts, including judgments against MERANT plc,
predicated on the civil liability provisions of the federal securities laws of
the United States, may not be enforceable in English courts.
Exchange rate fluctuations can cause operating results to fluctuate
The majority of our revenue arises in U.S. dollars, whereas our costs are
incurred approximately equally in U.S. dollars and other currencies,
predominately G.B. pounds. Consequently, fluctuations in exchange rates,
particularly between the U.S. dollar and the G.B. pound, may have a significant
impact on our operating
33
20
results, notably when expressed in G.B. pounds. In fiscal years 2000, 1999 and
1998, fluctuations between the U.S. dollar and the G.B. pound were not
significant, and net exchange rate gains or losses on operational transactions
were not material.
We prepare separate consolidated financial statements expressed in U.S.
dollars and G.B. pounds. We translate revenue, costs and expenses arising in
currencies other than the reporting currency using average exchange rates. We
translate assets and liabilities denominated in currencies other than the
reporting currency at exchange rates in effect at the balance sheet date.
LIQUIDITY AND CAPITAL RESOURCES
MERANT continues to fund its activities through cash from operating
activities. Our cash, cash equivalents and liquid short-term investments
increased during the year from $121.4 million to $125.7 million.
In fiscal 2000, operating activities generated $48.9 million in cash. We
invested $56.0 million to grow our business: $41.8 million on the acquisition of
the businesses referred to above under the section "Business combinations", and
$14.8 million, net, was spent on property, plant and equipment and capitalized
software. $18.2 million was generated from the sale of shares to option-holders
on the exercise of their options and $4.2 million was used to repurchase shares
for the employee share purchase plan. Overall cash, cash equivalents and liquid
short-term investments increased by $4.3 million to $125.7 million.
In fiscal 1999, operating activities generated $18.3 million in cash. We
invested $7.3 million on the purchase of two of our international distributors
and $15.0 million in property, plant and equipment and capitalized software.
Financing activities in the form of share option exercises and purchases under
the employee share purchase plan generated $1.9 million that offset the $3.1
million net repayment of various debt obligations. Overall cash, cash
equivalents and liquid short-term investments decreased by $5.5 million to
$121.4 million.
In December 1999 the Board of directors authorized a loan to MERANT
Trustees Limited to enable it to purchase, subject to certain market and
business conditions, up to 1,000,000 MERANT ordinary shares. In accordance with
this authority, MERANT Trustees Limited acquired 800,000 ordinary shares prior
to April 30, 2000.
We invest our surplus cash in liquid money market investments in the United
States, primarily mutual funds, municipal bonds and government agency
securities. These cash equivalents and short-term investments are classified as
available-for-sale under the provisions of SFAS 115 "Accounting for Certain
Investments in Debt and Equity Securities". They are carried at fair value. The
unrealized gains and losses, net of tax, are included in accumulated other
comprehensive income, which is disclosed as a separate component of
shareholders' equity.
MERANT has in place a line of credit under the terms of which unsecured
financing of up to L5.0 million ($7.9 million at April 30, 2000) is available
until January 2001. At April 30, 2000, borrowings equivalent to $2.8 million had
been made against this line of credit compared to $2.7 million at April 30,
1999.
We believe it is important to maintain a conservative capital structure and
a strong cash position. Our 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.
We believe that existing cash balances in combination with internally
generated funds and our available bank line of credit will be more than
sufficient to meet cash requirements in fiscal 2001.
MARKET RISK
MERANT operates internationally and we are therefore exposed to market risk
from changes in interest rates and foreign currency exchange rates. In order to
reduce exposures to these risks, we use derivative financial instruments. We
view these instruments as risk management tools that are entered into for
hedging purposes only. We do not use derivative financial instruments for
speculative or trading purposes.
34
21
The primary objective of our investment policy is to preserve principal
while maximising yield without significantly increasing risk. We invest surplus
cash in short-term fixed-income marketable securities and consequently we are
exposed to fluctuations in interest rates on these marketable securities. At
April 30, 2000, the fair value of our financial instruments with exposure to
interest rate risk was $22.7 million. A hypothetical 50 basis point increase in
interest rates would result in an approximate $113,000 decrease in the fair
value of our securities. This sensitivity analysis is performed on our financial
positions at April 30, 2000. Actual results may differ materially from this
analysis.
Our operations are based principally in the U.S.A. and the U.K. and we also
operate in fifteen other countries around the world. Consequently we are exposed
to the effects of foreign currency exchange rate fluctuations, particularly, but
not exclusively, between the U.S. dollar and G.B. pounds sterling. We use
derivative financial instruments to reduce our exposure to market risks from
changes in foreign currency exchange rates. The derivative instruments used,
which are foreign exchange forward contracts, are non-leveraged, over the
counter instruments that involve little complexity and, typically, have
maturities of 60 days or less. Gains and losses on forward foreign currency
contracts are recognized in the same period as losses or gains on the underlying
transactions and therefore offset. No foreign currency exchange contracts were
outstanding at April 30, 2000. We prepared a sensitivity analysis for exposure
for foreign net assets as of April 30, 2000 to assess the impact of hypothetical
changes in foreign currency rates. Based upon the results of this analysis, a
10% adverse change in foreign currency rates from the April 30, 2000 rates would
result in a currency translation loss of approximately $464,000 before taxes.
35
22
MERANT PLC
FINANCIAL STATEMENTS 2000
CONSOLIDATED STATEMENTS OF OPERATIONS
US FORMAT
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND ADS DATA 2000 1999 1998 1998
- --------------------------------------------------- ---------- ---------- ------------ -----------
NET REVENUE
License fees.................................... $186,444 $193,144 $ 61,384 $198,793
Maintenance subscriptions....................... 109,260 98,858 24,533 88,015
Training and consulting......................... 69,740 82,200 21,070 76,111
-------- -------- -------- --------
TOTAL NET REVENUE............................ 365,444 374,202 106,987 362,919
-------- -------- -------- --------
COST OF REVENUE
Cost of license fees............................ 9,418 14,390 3,392 13,255
Cost of maintenance subscriptions............... 23,403 24,445 5,599 20,446
Cost of training and consulting................. 59,087 68,074 17,409 62,376
-------- -------- -------- --------
TOTAL COST OF REVENUE........................ 91,908 106,909 26,400 96,077
-------- -------- -------- --------
GROSS PROFIT...................................... 273,536 267,293 80,587 266,842
-------- -------- -------- --------
OPERATING EXPENSES
Research and development (note 4)............... 59,166 59,851 14,551 60,828
Sales and marketing............................. 169,575 155,680 40,137 134,671
General and administrative...................... 29,654 31,573 6,950 26,346
Goodwill amortization........................... 8,316 3,585 464 1,391
Non-recurring charges (note 5).................. 13,500 49,662 17,292 17,468
-------- -------- -------- --------
TOTAL OPERATING EXPENSES..................... 280,211 300,351 79,394 240,704
-------- -------- -------- --------
(LOSS) INCOME FROM OPERATIONS..................... (6,675) (33,058) 1,193 26,138
Interest income, net.............................. 4,787 6,334 1,151 3,935
-------- -------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES................. (1,888) (26,724) 2,344 30,073
Income taxes (note 11)............................ (520) (1,808) (855) (9,925)
-------- -------- -------- --------
NET (LOSS) INCOME................................. $ (2,408) $(28,532) $ 1,489 $ 20,148
======== ======== ======== ========
Net (loss) income per share: basic (note 6)....... $ (0.02) $ (0.20) $ 0.01 $ 0.15
======== ======== ======== ========
Net (loss) income per ADS: basic (note 6)......... $ (0.08) $ (1.00) $ 0.05 $ 0.73
======== ======== ======== ========
Shares used in computing net (loss) income per
share: basic (note 6)........................... 145,897 143,130 137,823 137,351
ADSs used in computing net (loss) income per ADS:
basic (note 6).................................. 29,179 28,626 27,565 27,470
Net (loss) income per share: diluted (note 6)..... $ (0.02) $ (0.20) $ 0.01 $ 0.14
======== ======== ======== ========
Net (loss) income per ADS: diluted (note 6)....... $ (0.08) $ (1.00) $ 0.05 $ 0.70
======== ======== ======== ========
Shares used in computing net (loss) income per
share: diluted (note 6)......................... 145,897 143,130 145,618 144,326
ADSs used in computing net (loss) income per ADS:
diluted (note 6)................................ 29,179 28,626 29,124 28,865
NOTE: Share and per share data for all periods presented has been restated to
reflect the 5-for-1 stock split of MERANT's ordinary shares, which was
effective as of the close of business on March 13, 1998. Each American
depositary share (ADS) represents five ordinary shares.
See accompanying notes to consolidated financial statements on pages 40 to 60.
36
23
MERANT PLC
FINANCIAL STATEMENTS 2000
CONSOLIDATED BALANCE SHEETS
US FORMAT
APRIL 30, APRIL 30,
AMOUNTS IN THOUSANDS 2000 1999
- -------------------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $106,140 $ 86,580
Short-term investments.................................... 19,538 34,804
Accounts receivable, net of allowances for doubtful
accounts of $4,255 ($4,785 in 1999).................... 92,840 111,317
Prepaid expenses and other assets......................... 10,127 13,485
-------- --------
TOTAL CURRENT ASSETS................................... 228,645 246,186
-------- --------
NON-CURRENT ASSETS:
Property, plant and equipment, net (note 7)............... 47,518 46,090
Goodwill, net of amortization of $13,717 ($7,271 in
1999).................................................. 44,297 10,239
Software product assets, net of amortization of $56,654
($129,060 in 1999)..................................... 5,569 17,007
Other assets.............................................. 2,987 3,560
-------- --------
TOTAL ASSETS........................................... $329,016 $323,082
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings (note 8)....................................... $ 2,785 $ 2,716
Accounts payable.......................................... 12,208 12,150
Accrued employee compensation and commissions............. 20,088 24,352
Income taxes payable...................................... 7,601 18,325
Deferred revenue.......................................... 69,830 69,155
Other current liabilities................................. 41,945 29,869
-------- --------
TOTAL CURRENT LIABILITIES.............................. 154,457 156,567
-------- --------
Deferred income taxes (note 11)........................... 13,157 14,304
-------- --------
TOTAL LIABILITIES...................................... 167,614 170,871
-------- --------
COMMITMENTS AND CONTINGENCIES (notes 9 and 10)
SHAREHOLDERS' EQUITY:
Ordinary shares: 2 pence (G.B.) par value 212,000 shares
authorized; 149,389 shares issued and outstanding
(143,673 in 1999)...................................... 4,876 4,691
Additional paid-in capital................................ 172,892 154,868
Treasury shares: 4,371 shares (3,810 shares).............. (11,742) (7,552)
Retained earnings......................................... 6,442 8,850
Accumulated other comprehensive loss...................... (11,066) (8,646)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................. 161,402 152,211
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $329,016 $323,082
======== ========
See accompanying notes to consolidated financial statements on pages 40 to 60.
37
24
MERANT PLC
FINANCIAL STATEMENTS 2000
CONSOLIDATED STATEMENTS OF CASH FLOW
US FORMAT
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
IN THOUSANDS 2000 1999 1998 1998
- ------------ ---------- ---------- ------------ -----------
OPERATING ACTIVITIES
NET (LOSS) INCOME.................................... $ (2,408) $ (28,532) $ 1,489 $ 20,148
Adjustments to reconcile net (loss) income to cash
provided by operations
Depreciation of fixed assets....................... 9,549 12,571 4,166 12,276
Amortization of software product assets............ 7,627 14,751 3,332 14,916
Amortization of goodwill........................... 8,316 3,585 464 1,391
Write-off of software and intangible assets........ 7,404 2,000 -- --
Write-down of purchased research and development... -- -- 15,739 15,739
Gain on sale of discontinued product lines......... -- -- 423 423
Restructuring/acquisition charges.................. -- 4,774 (496) (496)
Loss on sale of fixed assets....................... 230 -- 1,780 207
Deferred income taxes.............................. (1,020) (423) (4,426) --
Other.............................................. 349 -- -- --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable................................ 15,366 (4,134) 2,840 (42,287)
Prepaid expenses and other assets.................. 2,609 (1,614) (1,500) (942)
Accounts payable................................... 427 (3,020) 5,162 2,992
Accrued employee compensation...................... (3,647) (1,508) (3,403) 6,581
Income taxes payable............................... (10,224) 2,742 3,059 6,219
Deferred revenue................................... 1,690 13,678 (349) 5,524
Other current liabilities.......................... 12,676 3,445 2,814 1,366
-------- --------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 48,944 18,315 31,094 44,057
-------- --------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net of
capital lease obligations incurred................. (13,664) (6,449) (4,815) (18,269)
Software product assets.............................. (3,593) (8,524) (2,480) (10,285)
Proceeds from sale of discontinued product lines..... -- -- 1,200 1,200
Acquisition of subsidiaries, net of cash balances
acquired........................................... (41,835) (7,076) 1,589 (1,848)
Available-for-sale securities net.................... 15,266 5,649 (4,132) (33,639)
Disposals of property, plant and equipment........... 2,456 -- 13 570
Other................................................ 601 -- -- --
-------- --------- -------- --------
NET CASH (USED) BY INVESTING ACTIVITIES................ (40,769) (16,400) (8,625) (62,271)
-------- --------- -------- --------
FINANCING ACTIVITIES
Issuance of ordinary shares, net of expenses......... 18,208 1,709 2,613 9,879
Treasury shares...................................... (4,190) 217 -- 1,190
Borrowings net....................................... 177 (3,051) (7,705) (3,509)
Repayment of capital leases.......................... -- (18) (1) (73)
-------- --------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES....... 14,195 (1,143) (5,093) 7,487
-------- --------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents.......................................... (2,810) (651) 247 (316)
-------- --------- -------- --------
Increase (decrease) in cash and cash equivalents....... 19,560 121 17,623 (11,043)
Adjusted for INTERSOLV cash flow previously reported... -- -- (13,420) --
Cash and cash equivalents at beginning of period....... 86,580 86,459 82,256 93,299
-------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $106,140 $ 86,580 $ 86,459 $ 82,256
======== ========= ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid during the period.................. $ 10,297 $ 4,317 $ 207 $ 1,464
======== ========= ======== ========
Interest paid during the period...................... $ 306 $ 239 $ 116 $ 976
======== ========= ======== ========
See accompanying notes to consolidated financial statements on pages 40 to 60.
38
25
MERANT PLC
FINANCIAL STATEMENTS 2000
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
US FORMAT
ACCUMULATED
ORDINARY ADDITIONAL COMPREHENSIVE OTHER
NUMBER SHARES PAID-IN TREASURY RETAINED INCOME COMPREHENSIVE
IN THOUSANDS OF SHARES AMOUNT CAPITAL STOCK EARNINGS (LOSS) INCOME (LOSS) TOTAL
- ------------ --------- -------- ---------- -------- -------- ------------- ------------- --------
BALANCE, JANUARY 31, 1997.... 134,320 $4,566 $124,741 $(10,482) $ 11,902 $ (7,234) $123,493
Share options exercised...... 3,204 37 8,272 2,713 -- -- 11,022
Issued for acquisitions...... 4,186 37 18,741 -- -- -- 18,778
Conversion of loan notes..... 36 -- 48 -- -- -- 48
Comprehensive income:
Net income................. -- -- -- -- $ 20,148 20,148 -- 20,148
Unrealised gain on
marketable securities,
net of taxes............. -- -- -- -- -- 134 134 134
Currency translation
adjustment............... -- -- -- -- -- (1,550) (1,550) (1,550)
-------
Comprehensive income....... 18,732
------- ------ -------- -------- -------- ------- -------- --------
BALANCE, JANUARY 31, 1998.... 141,746 4,640 151,802 (7,769) 32,050 (8,650) 172,073
Share options exercised...... 266 39 1,369 -- -- -- 1,408
Comprehensive income:
Net income................. -- -- -- -- 1,489 1,489 -- 1,489
Unrealised (loss) on
marketable securities,
net of taxes............. -- -- -- -- -- (72) (72) (72)
Currency translation
adjustment............... -- -- -- -- -- 696 696 696
-------
Comprehensive income....... 2,113
Adjustments re transition
period................... 3,843 6 3,849
------- ------ -------- -------- -------- ------- -------- --------
BALANCE, APRIL 30, 1998...... 142,012 4,679 153,171 (7,769) 37,382 (8,020) 179,443
Share options exercised...... 1,661 12 1,697 217 1,926
Comprehensive (loss):
Net (loss)................. -- -- -- -- (28,532) (28,532) (28,532)
Unrealised gain on
marketable securities,
net of taxes............. -- -- -- -- -- 5 5 5
Currency translation
adjustment............... -- -- -- -- -- (631) (631) (631)
-------
Comprehensive (loss)....... (29,158)
------- ------ -------- -------- -------- ------- -------- --------
BALANCE, APRIL 30, 1999...... 143,673 4,691 154,868 (7,552) 8,850 (8,646) 152,211
Share options exercised...... 5,716 185 18,024 390 -- -- -- 18,599
Shares acquired.............. (4,741) -- -- -- (4,741)
Comprehensive (loss):
Net (loss)................. -- -- -- -- (2,408) (2,408) -- (2,408)
Unrealised (loss) on
marketable securities,
net of taxes............. -- -- -- -- -- (203) (203) (203)
Currency translation
adjustment............... -- -- -- 161 -- (2,217) (2,217) (2,056)
-------
Comprehensive (loss)....... (4,828)
------- ------ -------- -------- -------- ------- -------- --------
BALANCE, APRIL 30, 2000...... 149,389 $4,876 $172,892 $(11,742) $ 6,442 $(11,066) $161,402
======= ====== ======== ======== ======== ======= ======== ========
See accompanying notes to consolidated financial statements on pages 40 to 60.
39
26
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT
The statutory accounts of MERANT plc for the year ended April 30, 2000,
within the meaning of section 240 of the Companies Act 1985 of Great Britain,
are set out on pages 74 to 106 of this Annual Report.
Effective November 30, 1998, the Company elected to change its fiscal year
end and accounting reference date to April 30 from January 31. Consequently, the
prior period results shown in this report are for the fiscal year ended April
30, 1999 (fiscal 1999), the three-month fiscal period ended April 30, 1998, and
the fiscal year ended January 31, 1998 (fiscal 1998).
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Founded in 1976, MERANT designs, develops and markets computer software
products and provides related support services. The Company derives
approximately 50% of its revenue from the license of software products, either
directly to end-users or in the form of distribution rights to original
equipment manufacturers. Product licenses are sold and supported in more than 60
countries, either through its direct sales force or through a network of
indirect channels including resellers and distributors. Approximately 30% of our
revenue is derived from the provision of product support and maintenance
subscriptions, and the remaining 20% from the provision of training and
consulting services. Our principal market is the United States, which accounts
for approximately 60% of revenue; 35% of revenue is derived from customers in
Europe, and the remaining 5% from customers located in the rest of the world.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
MERANT and its wholly owned subsidiaries. They have been prepared in accordance
with U.S. GAAP, which differs from U.K. GAAP, particularly as to the treatment
of business combinations and goodwill and the presentation of certain items in
the financial statements. All significant inter-company balances and
transactions have been eliminated on consolidation.
The Company has concluded several business combinations in the past three
fiscal years. As more fully described in note 2 on page 46, these transactions
have been accounted for either under the pooling-of-interests method or the
purchase method, as appropriate. With respect to the merger with INTERSOLV, Inc,
which was accounted for using the pooling-of-interests method, the Company
restated its fiscal 1998 consolidated financial statements to include the
financial results of INTERSOLV at April 30, 1998 and for the year ended April
30, 1998. Consequently, financial data for the three months ended April 30, 1998
are included in both the three months ended April 30, 1998 and in fiscal 1998.
The Company has made certain presentational changes to the income statement
in 2000, and data presented in the 1999 and 1998 financial statements have been
changed to conform to the 2000 presentation. Specifically, the descriptions used
to analyze revenue have been changed to license fees (previously described as
product revenue), maintenance subscriptions (previously maintenance revenue),
and training and consulting (previously service revenue). These new descriptions
do not represent any changes to the actual numbers presented. Also, the
presentation of operating costs is amended to separately identify amortization
of goodwill, which previously had been included in general and administrative
costs. The results of operations are not affected by these changes in
presentation.
40
27
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of estimates
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue recognition
License fees: MERANT's standard end user license agreement provides for an
initial fee to use our products in perpetuity up to a maximum number of users.
The Company also enters into other types of license agreements, typically with
major end user customers, which allow for the use of our products, usually
restricted by the number of employees, the number of users, or the license term.
The Company recognizes fees as revenue upon product shipment, provided a signed
agreement is in place, fees are fixed or determinable, and collection of the
resulting receivable is deemed probable. Fees from licenses sold together with
consulting services are generally recognized upon shipment provided that the
above criteria have been met and payment of the license fees is not dependent
upon the performance of the consulting services. Where these criteria have not
been met, the Company recognizes both the license and consulting fees under the
percentage of completion method of contract accounting. The Company provides for
sales returns based on historical rates of return.
Maintenance subscriptions: Maintenance agreements generally call for
MERANT to provide technical support and software updates to customers. Revenue
is recognized on technical support and software update rights ratably over the
term of the support agreement. Payments for maintenance fees are generally made
in advance and are nonrefundable.
Training and consulting: The Company recognizes revenue from consulting
and education as the services are performed.
Advertising costs
Advertising costs are charged to operations when incurred. Advertising
expense, which includes media, agency and promotional expenses, amounted to
$11,496,000 in fiscal 2000, compared to $12,984,000 in 1999, $2,704,000 in the
three-month fiscal period ended April 30, 1998 and $8,791,000 in fiscal 1998.
Net income per share
Basic net income per share is calculated as net income divided by the
weighted average number of ordinary shares outstanding during the period.
Diluted net income per share is calculated as net income divided by the
weighted average number of ordinary shares outstanding during the period,
including dilutive ordinary share equivalents, represented by shares issuable
upon exercise of share options. The computation assumes the proceeds from the
exercise of share options are used to repurchase our ordinary shares at their
average market price during each period.
Earnings per share data are set out in note 6 to the consolidated financial
statements on page 49. The Company also reports net earnings per American
depositary share (ADS) equivalent; each ADS represents five ordinary shares.
41
28
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income taxes
The provisions for income taxes include U.K., U.S. and other income taxes
currently payable and those deferred because of temporary differences between
financial and tax reporting.
Cash, cash equivalents and short-term investments
The Company's investment policy authorizes investment in U.S. government
securities, municipal bonds, certificates of deposit with highly-rated financial
institutions and other specified money market instruments of similar liquidity
and credit quality. In accordance with SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company determines the
appropriate classification of debt securities at the time of purchase and
reviews that decision at each balance sheet date. Securities that the Company
has the intent and the ability to hold until maturity are classified as
held-to-maturity. The Company classifies all other debt securities as
available-for-sale and carries them at fair value, based on quoted market
prices. Unrealized gains and losses are reported as a separate component of
shareholders' equity. Available-for-sale securities that have original
maturities of less than three months at the date of acquisition are disclosed on
the balance sheet as cash equivalents. The cost of securities sold is based on
the specific identification method.
Derivative financial instruments
MERANT's operations are based principally in the United States and the
United Kingdom but the Company also operates in fifteen other countries around
the world. Consequently, the Company is exposed to the effects of foreign
currency exchange rate fluctuations, particularly, but not exclusively, between
the U.S. dollar and G.B. pounds sterling. The Company uses derivative financial
instruments to reduce its exposure to market risks from changes in foreign
currency exchange rates. The derivative instruments used, which are foreign
exchange forward contracts, are non-leveraged, over-the-counter instruments that
involve little complexity and, typically, have maturities of 60 days or less.
The Company does not hold or issue derivatives for speculative trading purposes.
Gains and losses on forward foreign currency contracts are recognized in the
same period as losses or gains on the underlying transactions and therefore
offset.
Concentration of credit risk
Financial instruments which potentially subject MERANT to concentrations of
credit risk, as defined by SFAS 105 "Disclosure of Information about Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk", consist principally of cash and cash equivalents,
short-term investments, foreign exchange contracts and trade receivables.
MERANT places its short-term investments only in high quality financial
instruments and limits the amounts invested with any one issuer. The Company is
exposed to credit risk in the event of default by these institutions to the
extent of the amount recorded on the balance sheet. The counterparties to the
agreements relating to our foreign exchange contracts are financial institutions
of high credit standing. Concentrations of credit risk with respect to trade
receivables are limited due to our large, widespread customer base that
encompasses many different industries and countries. The Company performs
ongoing credit evaluations of our customers and generally does not require
collateral. The Company maintains reserves for potential losses, and such losses
have been within management's expectations. No single customer represented more
than 5% of our revenue in 2000, 1999 or 1998.
42
29
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Translation of foreign currencies
The Company translates assets and liabilities denominated in currencies
other than U.S. dollars at exchange rates in effect at the end of the period.
Revenue, costs and expenses are translated using average monthly rates in effect
during the period. Gains and losses resulting from the process of translating
financial statements denominated in currencies other than U.S. dollars are
included in shareholders' equity.
Intercompany accounts are primarily denominated in U.S. dollars or U.K.
sterling. Transaction gains or (losses) included in operations amounted to
$524,000 in 2000 and $(557,000) in 1999.
Inventories
Inventories, consisting principally of diskettes and technical manuals, are
stated at the lower of cost and market, using the first-in, first-out method.
Contracts in progress, representing engineering costs associated with
non-cancelable license agreements prior to delivery, are included in inventories
and expensed when the related revenue is recognized. Inventories are included in
the balance sheet under Prepaid Expenses and Other Assets.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated provisions
for depreciation and amortization. Depreciation and amortization are 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......................................... 5-11 years
Transportation equipment................................. 3-4 years
Leasing
Assets held under leases that transfer substantially all the benefits and
risks of ownership of an asset to the Company are capitalized as fixed assets.
The amount capitalized is the net present value of future lease payments, this
sum also being treated as a liability. Depreciation on such leased assets is
provided at rates calculated to write off the capitalized cost over the shorter
of the lease term and the asset's economic life. Lease payments are apportioned
between finance charges (computed on the basis of implicit interest rates) and a
reduction in the original liability.
Rentals paid under operating leases are expensed on a straight-line basis
over the term of the lease.
Goodwill
Goodwill represents the excess of the cost of acquiring a business over the
aggregate fair value of the net assets acquired. Goodwill arising on a purchase
is capitalized as an intangible asset and amortized over its estimated economic
life. The estimated life ranges from 4 to 5 years and depends on the length of
the future period expected to benefit from the purchase. Where there is a
potential impairment of goodwill, based on discounted cash flow projections of
the businesses acquired, goodwill will be written-down to its estimated value.
43
30
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Software product assets (capitalized software development costs)
Costs related to the initial development and design of new software
products prior to the establishment of technological feasibility are written off
as research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, subsequent development costs incurred are capitalized software product
assets, in compliance with SFAS 86 "Accounting for the Cost of Computer Software
to be Sold, Leased or Otherwise Marketed".
Software licensed for inclusion in the MERANT product set, including
software acquired through acquisitions which meets the provisions for
capitalization under SFAS 86 is also included in software product assets. In
fiscal 1998, purchased software totaling $1.1 million was capitalized.
Software product assets are amortized using the straight-line method over
the economic life of the products, which in most cases is estimated to be three
years. Where a shortfall in future revenue from a product is anticipated, the
Company accelerates amortization. If the remaining estimated economic life of a
product is judged to be reduced significantly, we may reduce the carrying amount
of the capitalized software costs. Amortization of software product assets is
included in research and development costs.
Stock based compensation
MERANT accounts for its stock-based employee compensation plans using the
intrinsic value method prescribed by APB Opinion No. 25 "Accounting for Stock
Options Issued to Employees". Accordingly, since all options are granted with an
exercise price equal to the fair value of the shares at the date of grant, the
Company recognizes no compensation expense for share option grants.
Pro-forma disclosures of net income (loss) and net income (loss) per share
computed as if the fair-value-based method had been applied are made in
accordance with SFAS 123 "Accounting for Stock Based Compensation" and disclosed
in note 13 to the consolidated financial statements on page 57.
Other recent pronouncements
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. (SOP 98-9). SOP 98-9 amends
SOP 97-2 and requires recognition of revenue using the residual method, where
the total fair value of any undelivered elements is deferred and recognised in
accordance with SOP 97-2. The Company will adopt SOP 98-9 in fiscal 2001, but
does not expect adoption to have a material effect on results from operations or
financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative financial
instruments and hedging activities and requires us to recognize all derivatives
as either assets or liabilities on the balance sheet and measure them at fair
value. In June 1999 SFAS 137 was issued, delaying the effective implementation
of SFAS 133. The company will be required to implement SFAS 133 in fiscal 2002.
Compliance is not expected to have a material effect on results from operations
or financial position.
44
31
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 2 BUSINESS COMBINATIONS
During fiscal 2000, MERANT completed four acquisitions.
On August 3, 1999, the Company acquired all of the outstanding stock of
Essential Software, Inc (trading as The Marathon Group), a privately-held
Internet professional services firm based in Raleigh, North Carolina. The total
consideration for the transaction was approximately $15.8 million, the whole of
which was paid in cash.
On November 23, 1999, the Company acquired all of the outstanding stock of
EnterpriseLink Technology Corporation, a privately-held supplier of enterprise
extension software based in Campbell, California. The total consideration for
the transaction is up to approximately $22 million, payable as a combination of
cash and assumption of debt, of which approximately $14.1 million was paid prior
to April 30, 2000. MERANT also assumed EnterpriseLink stock options outstanding
as of the closing which converted into options to acquire up to 511,904 MERANT
ordinary shares.
On December 6, 1999, the Company acquired all of the outstanding stock of
Trillium Software Corporation, a privately-held supplier of change management
software based in Eden Prairie, Minnesota. The total consideration for the
transaction is up to approximately $7 million, payable in cash, of which
approximately $4.1 million was paid prior to April 30, 2000.
On January 8, 2000, the Company acquired the remaining 79.9% of the
outstanding stock of Northern Software Partners AS, the Company's distributor
for the Nordic region, based in Oslo, Norway. The total consideration for the
transaction is up to approximately $4 million, payable in cash, of which $3.2
million was paid prior to April 30, 2000. Northern Software Partners AS changed
its name to MERANT Nordic on January 21, 2000.
The terms of acquisition of Essential Software, EnterpriseLink and Trillium
Software include earn-out provisions that may result in additional payments of
$8.6 million. These amounts will be recorded as additional purchase price in the
event that they become payable.
Other current liabilities includes $6.0 million in deferred purchase price
payments.
These transactions have been accounted for using the purchase method.
Accordingly, the excess of the purchase price over the respective estimated fair
value of the net tangible assets of each of the acquired companies, which
amounted to $46.1 million in the aggregate, has been allocated to goodwill and
is being amortized over its estimated economic life of five years. The net
assets of the acquired companies have been combined with those of MERANT as of
the respective dates of acquisition, and their results of operations have been
combined with those of MERANT for the periods subsequent to acquisition. The
results of operations of the acquired companies prior to the acquisitions were
not material, and thus pro forma information has not been provided.
During fiscal 1999, MERANT completed three acquisitions.
On May 15, 1998, the Company acquired all of the outstanding stock of its
Italian distributor, Micro Focus Italia, s.r.l. for total consideration of
$4,600,000. Micro Focus Italia, s.r.l. changed its name to MERANT s.r.l. on
March 1, 1999.
On August 13, 1998 the Company acquired all of the outstanding stock of our
Australian distributor, Advanced Software Engineering Pty., Limited for total
consideration of $2,480,000. Advanced Software Engineering Pty., Limited changed
its name to MERANT Pty., Limited on February 16, 1999.
45
32
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 2 BUSINESS COMBINATIONS -- (CONTINUED)
Both transactions were accounted for using the purchase method.
Accordingly, the excess of the purchase price over the respective estimated fair
value of the net tangible assets of each of the acquired companies, which
amounted to $7,304,000 in the aggregate, was allocated to goodwill and is being
amortised over its estimated economic life of five years. The net assets of both
companies were combined with those of MERANT as of the respective dates of
acquisition, and their results were combined with MERANT's results for the
periods subsequent to acquisition.
On September 24, 1998, the Company acquired all of the outstanding stock of
INTERSOLV, Inc ("INTERSOLV") in exchange for 63,084,000 ordinary shares in
MERANT which represented a value of $272,000,000 on the date the merger was
completed. INTERSOLV, a publicly-held corporation based in Maryland, U.S.A., and
listed on the Nasdaq National Market, was a provider of software solutions that
facilitate the development, delivery and deployment of business information
systems. INTERSOLV's products and services were focused primarily in the areas
of application development management, enterprise data connectivity and
enterprise application renewal. Immediately prior to the transaction, INTERSOLV
had a total of 22,940,000 outstanding shares. Under the terms of the agreement,
each share of INTERSOLV common stock was exchanged for 0.55 MERANT American
depositary shares (or ADSs). In addition, each outstanding option or right to
purchase or acquire shares of INTERSOLV stock was assumed by MERANT and became
an option or right to purchase or acquire MERANT ADSs, with appropriate
adjustments to the price and number of shares based on the exchange ratio of
0.55 ADSs per INTERSOLV share. The merger was structured as a tax-free
reorganization under U.S. tax law. The Company issued 12,617,000 new MERANT ADSs
(representing 63,084,000 new MERANT ordinary shares) in exchange for INTERSOLV's
common stock and share equivalents outstanding, which at the time of the
completion of the transaction represented approximately 46% of MERANT's share
capital on a fully-diluted basis.
The combination was accounted for using the pooling-of-interests method,
and previously reported consolidated financial statements have been restated to
include the financial position and results of operations of INTERSOLV.
The Company recorded a charge of $49,662,000 in the second quarter of 1999
in connection with the INTERSOLV merger (see note 5 to the consolidated
financial statements on page 48).
During the three-month fiscal period ended April 30, 1998, the Company's
subsidiary, INTERSOLV, Inc. acquired all of the outstanding stock of SQL
Software Limited ("SQL") in exchange for the equivalent of 3,441,488 ordinary
shares in MERANT. SQL was a privately-held UK-based provider of process
automation tools. The transaction was accounted for using the purchase method.
The cost of the transaction was $19,200,000, of which $15,739,000 was allocated
to purchased research and development and was written off at the time of
acquisition since no technological feasibility or alternative future use could
be demonstrated. Additionally, $2,400,000 was allocated to goodwill and other
intangibles, and is being amortized over its estimated economic life of five
years.
In fiscal 1998 MERANT completed two acquisitions.
On January 20, 1998, the Company acquired all of the outstanding stock of
XDB Systems, Inc ("XDB") in exchange for 1,891,975 ordinary shares in MERANT
which represented a value of $14,243,000 on the date the merger was completed.
The combination was accounted for using the pooling-of-interests method. XDB, a
privately-held corporation based in Columbia, Maryland, was a provider of DB2
database development, maintenance and connectivity solutions. The Company
incurred charges in the third quarter of 1998 of approximately $1.6 million in
connection with activities to complete this acquisition.
46
33
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 2 BUSINESS COMBINATIONS -- (CONTINUED)
On April 30, 1997, the Company acquired all of the outstanding stock of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, for a
total consideration of $6,400,000, satisfied by a cash payment of $3,200,000 and
the issue of 745,710 ordinary shares in MERANT. Millennium provided specialized
consulting and project management services. The transaction was accounted for
using the purchase method. Accordingly, the excess of the purchase price over
the estimated fair value of the net tangible assets, which amounted to
$6,737,000, was allocated to goodwill and is being amortised over its estimated
economic life of four years.
NOTE 3 FINANCIAL INSTRUMENTS
Cash equivalents and short term investments
The following table summarises, by major security type, the fair value of
our cash equivalents and short-term investments. Our short term investments
generally have maturity dates less than one year.
GROSS
UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS (LOSSES) FAIR VALUE
- -------------- ------- -------------- ----------
AT APRIL 30, 2000:
Money market funds................................. $ 2,210 -- $ 2,210
Commercial paper................................... 2,099 $ 3 2,102
Variable rate notes................................ 1,001 1,001
Federal agency issues.............................. 7,780 (168) 7,612
Corporate bonds and notes.......................... 10,011 (188) 9,823
------- ----- -------
$23,101 $(353) $22,748
------- ----- -------
Classified as:
Cash equivalents................................... $ 3,210
Short term investments............................. 19,538
-------
$22,748
-------
AT APRIL 30, 1999:
Money market funds................................. $ 173 -- $ 173
Commercial paper................................... 9,062 $ 1 9,063
Variable rate notes................................ 4,409 -- 4,409
Federal agency issues.............................. 8,306 (21) 8,285
Corporate bonds and notes.......................... 22,595 (3) 22,592
------- ----- -------
$44,545 $ (23) $44,522
------- ----- -------
Classified as:
Cash equivalents................................... $ 9,718
Short term investments............................. 34,804
-------
$44,522
-------
47
34
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 3 FINANCIAL INSTRUMENTS -- (CONTINUED)
Financial instruments with derivative risk
No foreign currency contracts were outstanding at April 30, 2000 or at
April 30, 1999.
Sale of receivables
In fiscal 1998 the Company entered into agreements to sell $2,536,000 in
accounts receivable at a net discount of approximately 7.25%, which was charged
to operations as incurred. $2,161,000 of these accounts receivable were sold on
a recourse basis, of which $200,000 remains outstanding at April 30, 2000 for
which the Company remains liable in the event of default.
NOTE 4 RESEARCH AND DEVELOPMENT COSTS
THREE MONTHS YEAR ENDED
YEAR ENDED YEAR ENDED ENDED JANUARY
APRIL 30, APRIL 30, APRIL 30, 31,
(IN THOUSANDS) 2000 1999 1998 1998
- -------------- ---------- ---------- ------------ ----------
Research and development costs, before
capitalization............................. $55,309 $53,624 $13,699 $ 56,197
Costs capitalized as software product
assets..................................... (3,770) (8,524) (2,480) (10,285)
Amortization of capitalized costs............ 7,627 14,751 3,332 14,916
------- ------- ------- --------
$59,166 $59,851 $14,551 $ 60,828
------- ------- ------- --------
NOTE 5 NON-RECURRING ITEMS
In the fourth quarter of fiscal 2000, the Company recorded a non-recurring
charge of $13,500,000. This charge resulted from actions that recognize an
accelerated transition to e-business solutions and the relative decline in
demand for Year 2000 and traditional COBOL-based products and services. The
charge included a $7,404,000 non-cash write-off of previously capitalized
software product assets related primarily to COBOL, a $3,218,000 provision for
severance costs for approximately 50 employees in COBOL related business and
$2,878,000 of other costs primarily associated with closure of excess
facilities. These actions are expected to be completed in the next fiscal year
and to reduce future expenses. The employee severance program was completed in
the first fiscal quarter of the year ended April 30, 2001.
During the second quarter of fiscal 1999, the Company incurred charges
amounting to $49,662,000 in respect of the acquisition of INTERSOLV and the
subsequent restructuring of the combined businesses. The Company incurred direct
transaction costs totaling $24,549,000 for investment banker fees, employee
contractual obligations, the cost of listing new shares on the London Stock
Exchange and other professional fees. The Company incurred costs associated with
subsequent integration efforts totaling $25,113,000, which were primarily
comprised of severance costs, distributor agreement buyouts, and the write-off
of duplicative facilities and other redundant assets. The severance costs
totaled $982,000 and related to approximately 75 employees in the administrative
functions. Amounts paid in fiscal 2000 related to severance and distributor
buyouts totaled $1,380,000 and $ nil, respectively. All employees were
terminated and there was no material adjustment to the accrued expenses.
Unpaid amounts relating to these non-recurring charges, which totaled
$6,913,000 at April 30, 2000 and $5,910,000 at April 30, 1999, are included in
other current liabilities.
48
35
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 5 NON-RECURRING ITEMS -- (CONTINUED)
In the three-month transition period to April 30, 1998, the Company
recorded non-recurring costs of $17,468,000, net, in the subsidiary company,
INTERSOLV. This charge included a $15,739,000 write-off of purchased research
and development costs arising from the acquisition of SQL Software Limited, and
costs of $1,800,000 upon exit of non-strategic product lines.
NOTE 6 EARNINGS PER SHARE
The following table discloses the net (loss) income per share and net
(loss) income per ADS equivalent; each ADS represents five ordinary shares. In
2000 and 1999, ordinary share equivalents of approximately 18,625,000 and
1,597,000, respectively, were antidilutive and therefore excluded from the
computation.
THREE MONTHS YEAR ENDED
YEAR ENDED YEAR ENDED ENDED JANUARY
APRIL 30, APRIL 30, APRIL 30, 31,
IN THOUSANDS 2000 1999 1998 1998
- ------------ ---------- ---------- ------------ ----------
Net (loss) income per share:
Numerator for basic and diluted net
(loss) income per share:
-- net (loss) income............. $ (2,408) $(28,532) $ 1,489 $ 20,148
-------- -------- -------- --------
Denominator for basic net (loss)
income per share -- weighted
average shares outstanding....... 145,897 143,130 137,823 137,351
Dilutive share options............. -- -- 7,795 6,975
-------- -------- -------- --------
Denominator for diluted net (loss)
income per share................. 145,897 143,130 145,618 144,326
-------- -------- -------- --------
Net (loss) income per ADS:
Numerator for basic and diluted net
(loss) income per ADS:
-- net (loss) income............. $ (2,408) $(28,532) $ 1,489 $ 20,148
-------- -------- -------- --------
Denominator for basic net (loss)
income per ADS -- weighted
average ADSs outstanding......... 29,179 28,626 27,565 27,470
Dilutive share options............. -- -- 1,559 1,395
-------- -------- -------- --------
Denominator for diluted net (loss)
income per ADS................... 29,179 28,626 29,124 28,865
-------- -------- -------- --------
49
36
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 7 PROPERTY, PLANT AND EQUIPMENT
APRIL 30, APRIL 30,
(IN THOUSANDS) 2000 1999
- -------------- --------- ---------
Land and buildings....................................... $ 21,856 $ 22,263
Leasehold improvements................................... 10,633 9,964
Computer and communications equipment & software......... 78,371 70,845
Office equipment......................................... 13,879 13,387
Transportation equipment................................. 340 383
-------- --------
Property, plant and equipment -- at cost................. 125,079 116,842
Less: accumulated depreciation and amortization.......... (77,561) (70,752)
-------- --------
Property, plant and equipment -- net..................... $ 47,518 $ 46,090
-------- --------
Depreciation expense totaled $9,549,000 in fiscal 2000, compared to
$12,571,000 in 1999, $4,166,000 in the three-month fiscal period ended April 30,
1998 and $12,276,000 in fiscal 1998.
NOTE 8 BORROWINGS
MERANT has an unsecured revolving multi-currency facility, under the terms
of which financing of up to L5,000,000 ($7,900,000 at April 30, 2000) or its
equivalent in such other currency as MERANT may determine, is available. This
facility expires in January 2001. Borrowings under this facility bear interest
at 0.75% above the London Interbank Offered Rate ("LIBOR"). At April 30, 2000
and April 30, 1999, the amounts outstanding against this credit line represented
loans totaling 2.6 million euros, which were incurring interest at rates of 4.5%
and 3.5%, respectively.
NOTE 9 COMMITMENTS
The Company leases office space and equipment under operating leases
expiring at various dates through 2013. In most cases, it is anticipated that
these leases will be renewed or replaced by other leases in the normal course of
business. Future minimum lease commitments as at April 30, 2000 are as follows:
(IN THOUSANDS)
YEARS ENDED APRIL 30
- --------------------
2001........................................................ $12,505
2002........................................................ 9,815
2003........................................................ 8,491
2004........................................................ 6,601
2005 and thereafter......................................... 16,898
-------
Total minimum lease payments................................ $54,310
-------
Rent expense totaled $14,346,000 in fiscal 2000, $12,086,000 in 1999,
$2,592,000 in the three-month fiscal period ended April 30, 1998 and $10,206,000
in fiscal 1998.
NOTE 10 CONTINGENCIES
In December 1998 and January 1999, seven class action securities complaints
were filed in the U.S. District Court for the Southern District of New York
against MERANT plc ("MERANT") and certain of its officers and directors. The
Court ordered the seven cases consolidated, appointed lead plaintiffs and lead
50
37
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 10 CONTINGENCIES -- (CONTINUED)
counsel, and ordered the filing of a consolidated amended complaint, which was
filed on June 9, 1999. The lead plaintiffs sought to have the matter certified
as a class action of purchasers of the American depositary shares of MERANT
during the period from June 17, 1998 to November 12, 1998, including the former
shareholders of INTERSOLV, Inc. who acquired American depositary shares of
MERANT in connection with the merger involving the two companies. The
consolidated complaint alleges various violations of the Securities Act of 1933
and the Securities Exchange Act of 1934 and sought unspecified compensatory
damages for alleged failure to disclose material nonpublic information
concerning MERANT's business condition and prospects. In May 1999, MERANT filed
a motion to transfer the matter to the Northern District of California, and the
Court granted MERANT's motion in November 1999. The action was transferred in
December 1999 to the Northern District of California. After the action was
transferred to California, plaintiffs again amended their complaint alleging the
same claims as described in the prior amended complaint but without the 1934 Act
claims or the class period. MERANT filed a motion to dismiss the newly-amended
complaint in June 2000.
MERANT intends to defend this litigation vigorously. However, due to the
inherent uncertainties of litigation, MERANT cannot accurately predict the
ultimate outcome of the litigation. Any unfavorable outcome of the litigation
could have an adverse impact on MERANT's business, financial condition and
results of operations.
MERANT and its subsidiaries are also involved in legal proceedings, claims
and litigation arising in the ordinary course of business. Although the ultimate
results of these legal proceedings, claims and litigation are not currently
determinable, in the opinion of management these matters will not materially
affect MERANT's financial position, results of operations, or liquidity.
NOTE 11 INCOME TAXES
(Loss) income before income taxes consisted of the following:
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
(IN THOUSANDS) 2000 1999 1998 1998
-------------- ---------- ---------- ------------ -----------
U.K. ........................ $(3,754) $(30,738) $1,604 $ 1,744
U.S. ........................ (2,878) (13,087) (4,142) 12,304
Other........................ 4,744 17,101 4,882 16,025
------- -------- ------ -------
$(1,888) $(26,724) $2,344 $30,073
------- -------- ------ -------
51
38
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 11 INCOME TAXES -- (CONTINUED)
Income taxes consist of:
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
(IN THOUSANDS) 2000 1999 1998 1998
- -------------- ---------- ---------- ------------ -----------
Current:
U.K. ...................... $ 695 $(1,535) $(726) $5,319
U.S. federal............... -- -- -- 1,910
U.S. state................. 131 250 118 669
Other...................... 840 3,711 1,755 1,917
------- ------- ----- ------
1,666 2,426 1,147 9,815
------- ------- ----- ------
Deferred:
U.K. ...................... (2,982) (618) (292) 110
U.S. federal............... 1,836 -- -- --
------- ------- ----- ------
(1,146) (618) (292) 110
------- ------- ----- ------
Total:....................... $ 520 $ 1,808 $ 855 $9,925
------- ------- ----- ------
The following table analyzes the differences between taxes at the U.K.
statutory tax rate and taxes at the effective tax rate for the periods shown:
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
(IN THOUSANDS) 2000 1999 1998 1998
-------------- ---------- ---------- ------------ -----------
Expected taxes............... $ (566) $(8,107) $703 $9,022
Changes in valuation
allowance.................. 1,536 5,149 -- --
Permanent differences and
other items................ 3,093 4,766 152 903
Benefit of net operating loss
carry forwards............. (3,543) -- -- --
------- ------- ---- ------
Effective tax rate........... $ 520 $ 1,808 $855 $9,925
------- ------- ---- ------
52
39
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 11 INCOME TAXES -- (CONTINUED)
Deferred income taxes, all of which are non-current, and the tax
jurisdictions to which they relate, are as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 2000 1999
- -------------- --------- ---------
Assets:
Property............................................. $ (3,215) $ (4,329)
Tax losses........................................... (9,123) (9,123)
Research and development credits..................... (2,554) (2,554)
Restructuring provision.............................. (4,657) (1,856)
Bad debts............................................ (136) (287)
-------- --------
Total assets........................................... (19,685) (18,149)
-------- --------
Liabilities:
Capitalized software................................. 4,007 4,813
Mark-to-market, deferred compensation and other...... 22,150 22,491
-------- --------
Total liabilities...................................... $ 26,157 $ 27,304
-------- --------
Valuation allowance.................................... 6,685 5,149
-------- --------
Net deferred income taxes.............................. $ 13,157 $ 14,304
-------- --------
U.K. .................................................. $ 7,280 $ 8,323
U.S.A. ................................................ 5,877 5,981
-------- --------
$ 13,157 $ 14,304
-------- --------
At April 30, 2000, the Company had foreign net operating loss carry
forwards of approximately $23 million which expire, if unused, in various years
through 2014.
The corporate income tax returns of certain U.S. subsidiaries have been
under examination by the Internal Revenue Service, which has proposed certain
adjustments. The Company believes that the outcome of the examination will not
give rise to any material adjustment to the financial statements.
NOTE 12 BUSINESS SEGMENT INFORMATION
For fiscal 2000, MERANT operated in four business segments. The products
and services of each segment are marketed throughout the world. The major
product and service lines by segment are as follows:
Application Creation and Transformation (ACT)
Application Development Management (ADM)
Enterprise Data Connectivity (EDC)
Enterprise Consulting Solutions (ECS)
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies. Intersegment sales
and transfers are priced as if the sales or transfers were to third parties. The
Company evaluates business segment performance on operating income before income
taxes and exclusive of non-recurring items. Currently, the Company does not
separately accumulate and report asset information by market segment.
No single customer accounts for more than 5% of revenue.
53
40
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 12 BUSINESS SEGMENT INFORMATION -- (CONTINUED)
The following table summarises operations by business segment, net of
inter-segment trading, and reconciles segmental operating income before
non-recurring charges, to (loss) income before income taxes:
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
(IN THOUSANDS) 2000 1999 1998 1998
- -------------- ---------- ---------- ------------ -----------
Net revenues
ACT.......................... $159,459 $179,423 $ 49,640 $173,293
ADM.......................... 129,026 115,382 34,425 107,463
EDC.......................... 45,742 41,610 12,850 43,878
ECS.......................... 31,217 35,975 9,525 35,845
Discontinued products........ -- 1,812 547 2,440
-------- -------- -------- --------
$365,444 $374,202 $106,987 $362,919
-------- -------- -------- --------
Operating income, before non-
recurring charges:
ACT.......................... 31,032 53,923 18,342 63,581
ADM.......................... 29,043 25,882 11,766 31,038
EDC.......................... 7,150 7,810 3,248 5,760
ECS.......................... (4,114) 875 452 4,935
Discontinued products........ -- (802) (652) (1,974)
-------- -------- -------- --------
Segment operating income..... $ 63,111 $ 87,688 $ 33,156 $103,340
-------- -------- -------- --------
Corporate non-allocated
costs...................... (47,970) (67,499) (14,207) (58,343)
Goodwill..................... (8,316) (3,585) (464) (1,391)
Non-recurring charges........ (13,500) (49,662) (17,292) (17,468)
Interest income, net......... 4,787 6,334 1,151 3,935
-------- -------- -------- --------
(Loss) income before income
taxes...................... $ (1,888) $(26,724) $ 2,344 $ 30,073
-------- -------- -------- --------
54
41
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 12 BUSINESS SEGMENT INFORMATION -- (CONTINUED)
The following table analyzes revenue and long-lived assets, based on the
location of the selling organization:
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
(IN THOUSANDS) 2000 1999 1998 1998
- -------------- ---------- ---------- ------------ -----------
Revenue:
United States.............. $213,036 $222,967 $ 66,818 $235,549
United Kingdom............. 67,438 72,090 24,189 57,627
Europe (excluding U.K.).... 65,433 61,986 10,387 46,306
Other...................... 19,537 17,159 5,593 23,437
-------- -------- -------- --------
$365,444 $374,202 $106,987 $362,919
-------- -------- -------- --------
Long-lived assets:
United States.............. $ 20,875 $ 20,760 $ 28,692 $ 28,341
United Kingdom............. 74,939 53,341 61,232 55,511
Europe (excluding U.K.).... 2,844 2,183 2,473 2,419
Other...................... 2,367 612 693 5,678
-------- -------- -------- --------
$101,025 $ 76,896 $ 93,090 $ 91,949
-------- -------- -------- --------
NOTE 13 EMPLOYEE BENEFIT PLANS
Share option plans
MERANT's share option plans provide for the grant of options to acquire
shares to persons who devote substantially all their working time to MERANT and
other eligible persons as determined by the Board. The exercise price of options
issued under these plans is 100% of the fair market value at the time the
options are granted. Options are generally exercisable in monthly or annual
installments commencing one year after the date of grant. Unexercised options
lapse as a consequence of the termination of the optionholder's employment by
MERANT, for whatever reason, or at a predetermined expiry date (of up to ten
years from the date of grant), whichever occurs first.
In September 1998, shareholders approved the 1998 Share Option Plan, which
authorized MERANT to grant options over a maximum of 21,352,000 shares under the
1998, 1996 and 1991 Share Option Plans. This authority will expire on September
24, 2008. Under this plan, 25% of each grant generally becomes exercisable one
year from the date of grant and the remaining 75% become exercisable in equal
monthly installments over the following three years. As of April 30, 2000,
options outstanding under this plan were 15,261,640.
Options are also outstanding as a result of grants made under MERANT's
previous share option plans and under share option plans adopted by MERANT as a
result of recent corporate acquisitions. Authority to grant new options under
these plans has expired, but options granted under those plans continue to be
exercisable in accordance with the original grant rules, or the acquisition
agreements.
When the Company acquired EnterpriseLink in November 1999, it assumed
obligations under EnterpriseLink's share option plans that entitled
EnterpriseLink's former option-holders to exercise their options in return for
MERANT shares. When the Company merged with INTERSOLV in September 1998, it
adopted INTERSOLV's stock option plans, including the option plans previously
assumed by INTERSOLV from
55
42
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
companies that it had acquired. When the Company acquired XDB in January 1998,
it assumed obligations under XDB's share option plans that entitled XDB's former
option-holders to exercise their options in return for MERANT shares. These
agreements generally entitle option-holders to acquire MERANT ADSs or shares at
U.S. dollar-denominated amounts. For the purposes of the disclosures set out in
the tables below, the Company has converted option prices from U.S. dollars to
pounds sterling using the exchange rate at April 30, 2000, which was L1.00 =
$1.58; and where appropriate the Company converted numbers of options and prices
to share-equivalents.
In addition to options which the Company grants, MERANT Trustees Limited
("MTL") is permitted to acquire MERANT ordinary shares and to grant options over
them, under the terms of the MERANT Employee Benefit Trust 1994 ("the Trust").
The Trust was established to further the policy of encouraging employee share
ownership. At April 30, 2000, MTL owned 4,371,269 shares. Options granted by MTL
and outstanding at April 30, 2000 totaled 2,660,055, and a further 110,000
shares were reserved for options granted before MTL purchased the shares. The
remaining 1,601,214 shares were available for the grant of further options and
for the MERANT 1999 Employee Share Purchase Plan. The shares held by the Trust
are shown in the balance sheet as treasury stock within shareholders' equity.
The following table summarizes share option activity under all of MERANT's
share option plans:
OPTION PRICE
NUMBER PER SHARE
OF SHARES IN G.B. POUNDS
---------- --------------
Outstanding, January 31, 1997..................... 20,478,062 L0.11-L4.32
Options granted................................... 10,738,678 L0.97-L7.41
Options exercised................................. (2,597,688) L0.11-L3.70
Options cancelled................................. (6,639,266) L0.11-L4.52
---------- -----------
Outstanding, January 31, 1998..................... 21,979,786 L0.11-L7.41
Options granted................................... 947,870 L6.25-L7.15
Options exercised................................. (398,843) L0.11-L3.49
Options cancelled................................. (625,429) L0.11-L4.20
---------- -----------
Outstanding, April 30, 1998....................... 21,903,384 L0.11-L7.41
Options granted................................... 10,648,660 L1.05-L6.28
Options exercised................................. (807,512) L0.11-L3.70
Options cancelled................................. (6,066,428) L0.11-L4.52
---------- -----------
Outstanding, April 30, 1999....................... 25,678,104 L0.11-L7.41
Options granted................................... 11,628,119 L2.46-L4.54
Options assumed................................... 481,731 L0.34-L1.02
Options exercised................................. (5,954,997) L0.11-L7.41
Options cancelled................................. (3,544,707) L1.06-L6.28
---------- -----------
Outstanding, April 30, 2000....................... 28,288,250 L0.34-L7.15
---------- -----------
56
43
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The following tables summarize information about share options outstanding
at April 30, 2000:
OPTION PRICE WEIGHTED AVERAGE
AUTHORITY FOR NUMBER PER SHARE EXERCISE PRICE
ISSUANCE OF OPTIONS OF SHARES IN G.B. POUNDS (IN G.B. POUNDS)
- ------------------- ---------- -------------- ----------------
1991 Share Option Plan................ 1,111,322 L1.13-L3.49 L1.40
1996 Share Option Plan................ 1,609,341 L1.47-L7.15 L3.63
1998 Share Option Plan................ 15,261,640 L1.05-L4.54 L2.01
XDB plans............................. 42,750 L3.41-L4.69 L4.55
INTERSOLV plans....................... 7,058,105 L1.50-L3.68 L2.70
EnterpriseLink plans.................. 435,037 L0.34-L1.02 L0.71
----------
Options over unissued shares.......... 25,518,195 L0.34-L7.15 L2.26
The Trust............................. 2,770,055 L1.05-L4.85 L1.41
---------- ----------- -----
28,288,250 L0.34-L7.15 L2.18
---------- ----------- -----
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGES OF NUMBER OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISABLE EXERCISE PRICE
EXERCISE PRICES AT APRIL 30, 2000 (MONTHS) (IN G.B. POUNDS) AT APRIL 30, 2000 (IN G.B. POUNDS)
- --------------- ------------------ ---------------- ---------------- ------------------ ----------------
L0.10-L2.00.......... 14,425,209 99 1.17 6,198,755 1.22
L2.01-L3.00.......... 6,512,236 86 2.57 3,718,641 2.48
L3.01-L7.41.......... 7,350,805 107 3.80 1,547,018 3.94
---------- --- ---- ---------- ----
28,288,250 98 2.18 11,464,414 1.99
---------- --- ---- ---------- ----
The weighted average exercise price of options exercisable at April 30,
2000 is $3.14.
Pro-forma data
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee share options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
share options. Under APB 25, no compensation expense is recognized because the
exercise price of the options equals the market price of the underlying shares
on the date of grant.
SFAS 123 requires disclosure of pro forma information regarding net income
(loss) and net income (loss) per share. This has been determined as if we had
accounted for employee share options granted since January 31, 1995 under the
fair value method of SFAS 123. The Company estimated the fair value for these
options at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions: 5.5% in 2000 and 5.5% in 1999 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 0.638 in 2000, 0.647 in 1999
and 0.378 in 1998; and an average expected life of the option of six years. The
estimated fair market value of share options granted in 2000 and 1999 amounted
to $33,250,000 and $26,845,000, respectively.
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, it requires the input of highly subjective
assumptions including the expected share price volatility. Because the Company's
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions
57
44
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
can materially affect the fair value estimate, in management's opinion, the
existing model does not necessarily provide a reliable single measure of the
fair value of MERANT's options.
The following table sets out our pro forma net income (loss) and diluted
net income (loss) per share data:
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
2000 1999 1998 1998
---------- ---------- ------------ -----------
Net loss (income) (in thousands)... $(12,479) $(37,646) $ (380) $14,012
Net loss (income) per share........ $ (0.09) $ (0.26) $(0.00) $ 0.10
For purposes of these disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The effects on pro
forma disclosures of applying SFAS 123 are not representative of the effects in
future years since SFAS 123 applies only to options granted since January 31,
1995. The effect will not be fully reflected in the pro forma disclosures until
2001.
Employee stock purchase plans
At our annual general meeting of shareholders held on September 16, 1999,
shareholders approved adoption of the MERANT 1999 Employee Share Purchase Plan
(ESPP). All full-time employees are eligible to participate in the ESPP, and up
to 1,000,000 ordinary shares will initially be made available from Treasury
stock to participating employees. Under the terms of the ESPP, payroll
deductions are made during six-month offering periods for the purpose of
purchasing ordinary shares at the end of an offering period. Participants may
purchase shares at a price equivalent to 85% of the market value at either the
beginning or the end of the offering period, whichever is the lower. The initial
offering period runs from December 1999 to June 2000. At April 30, 2000, amounts
totaling $1,777,000 had been collected under the plan. At the end of the first
offering period, on June 19, 2000, participating employees acquired
approximately 850,000 ordinary shares from Treasury stock.
Most INTERSOLV employees were eligible to participate in the INTERSOLV
employee stock purchase plan, which was constituted under similar rules. The
INTERSOLV plan was terminated effective September 24, 1998. During fiscal 1999,
employees purchased units of INTERSOLV common stock equivalent to 465,515 MERANT
ordinary shares, compared to none in the three-month fiscal period ended April
30, 1998 and 787,480 in fiscal 1998.
Warrants
In fiscal 1997, INTERSOLV issued warrants to purchase 140,000 INTERSOLV
shares at an exercise price of $10.375. These warrants were assumed by MERANT
and became warrants to acquire 77,000 MERANT ADSs at $18.864 per ADS. At April
30, 2000, the warrants had been fully exercised.
Post-retirement benefits
MERANT has entered into arrangements to provide retirement benefits for its
employees on a defined contribution basis. Contributions are independently
administered by insurance companies and other financial institutions, and are
expensed in the year in which they become payable.
58
45
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
In the United States, MERANT's plan qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, MERANT contributes to employee plans on a
percentage-of-salary basis. Arrangements for employees in other countries have
been established on similar bases, subject to local conditions and practices in
the countries concerned.
Contributions which total $4,642,000 in fiscal 2000, $1,934,000 in fiscal
1999, $483,000 in the three-month fiscal period ended April 30, 1998 and
$1,202,000 in fiscal 1998, have been expensed.
NOTE 14 COMPREHENSIVE INCOME (LOSS)
Cumulative components of other comprehensive income (loss) consists of the
following:
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, JANUARY 31,
(IN THOUSANDS) 2000 1999 1998 1998
-------------- ---------- ---------- ------------ -----------
Foreign currency translation
adjustments...................... $(10,846) $(8,629) $(7,998) $(8,694)
Unrealized gain (loss) on
marketable securities, net of
tax.............................. (226) (23) (28) 44
Other.............................. 6 6 6 --
-------- ------- ------- -------
$(11,066) $(8,646) $(8,020) $(8,650)
-------- ------- ------- -------
The benefit related to annualized loss in marketable securities are not
material. As net earnings from foreign affiliates are considered primarily
reinvested, no deferred taxes are provided in foreign currency translation
adjustment.
NOTE 15 RELATED PARTY TRANSACTION
Included in Prepaid expenses and other debtors is a loan to the executive
director amounting to $1,219,600 (1999: $nil).
In August of 1999, one of the Company's subsidiaries, MERANT Inc., a
California corporation, entered into a loan agreement with Mr. Greenfield. The
loan was made in conjunction with a home purchase by Mr. Greenfield and is
secured by that property. The loan accrues interest at a rate of 7.5% per annum,
which is comparable to mortgage interest rates in the United States and higher
than the rate that the Company generally earned on invested cash. At the
beginning of fiscal year 2000 no amount was outstanding, and the maximum
principal outstanding during the fiscal year was $1,247,000. The outstanding
balance as of April 30 2000 was $1,219,587, including $29,587 of accrued
interest. The maturity date is August 30 2001. The Company has made no provision
(within the meaning of Schedule 4 to the U.K. Companies Act) in respect of
delinquency in repayment of the loan, as the Company has every expectation that
the loan will be repaid in accordance with its terms. As of the date of this
filing, Mr. Greenfield is current on all interest payments. The directors
believe the loan is appropriate for a company whose business is primarily in the
United States and whose executive director is living in the United States, where
loans of this type are not uncommon.
NOTE 16 SUBSEQUENT EVENT
In June 2000, our Indian subsidiary, MERANT Solutions, Pvt., Ltd.,
terminated its business as a distributor of our products in India. MERANT has
entered into an agreement with a third party to distribute
59
46
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 16 SUBSEQUENT EVENT -- (CONTINUED)
its products in India and does not expect these events to have any material
adverse impact on its operating results or financial condition.
On August 24, 2000, MERANT purchased for cancellation 14,408,798 ordinary
shares at 95 pence (sterling) per share for an aggregate consideration of
L13,688,000 (equivalent to $20,258,000 at the exchange rate ruling on the date
of the transaction). Authority to make this purchase was granted by shareholders
at the annual general meeting held on September 16, 1999. The purchase
represented 9.7% of the issued share capital as of the date of the transaction.
The shares were purchased on the London Stock Exchange and were cancelled
effective September 1, 2000.
NOTE 17 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 2000 and 1999 is as follows:
FIRST SECOND THIRD FOURTH
IN THOUSANDS (EXCEPT PER ADS DATA) QUARTER QUARTER QUARTER QUARTER TOTAL
- ---------------------------------- ------- -------- ------- -------- --------
YEAR ENDED APRIL 30, 2000:
Net revenue..................... $87,595 $ 92,167 $88,590 $ 97,092 $365,444
Gross profit.................... 64,430 69,153 66,842 73,111 273,536
Non-recurring charges........... -- -- -- (13,500) (13,500)
Operating income (loss)......... 318 5,915 1,090 (13,998) (6,675)
Net income (loss)............... 852 4,283 1,572 (9,115) (2,408)
Net income (loss) per ADS: basic.. 0.03 0.15 0.05 (0.31) (0.08)
Net income (loss) per ADS:
diluted....................... 0.03 0.14 0.05 (0.31) (0.08)
------- -------- ------- -------- --------
YEAR ENDED APRIL 30, 1999:
Net revenue..................... $95,275 $ 87,159 $95,717 $ 96,051 $374,202
Gross profit.................... 68,994 61,273 67,819 69,207 267,293
Non-recurring charges........... -- (49,662) -- -- (49,662)
Operating income (loss)......... 9,591 (49,497) 6,104 744 (33,058)
Net income (loss)............... 7,229 (42,304) 5,212 1,331 (28,532)
Net income (loss) per ADS: basic.. 0.25 (1.47) 0.18 0.05 (1.00)
Net income (loss) per ADS:
diluted....................... 0.24 (1.47) 0.18 0.05 (1.00)
------- -------- ------- -------- --------
Data for all periods presented has been restated to reflect the
pooling-of-interest accounting for the merger with INTERSOLV, Inc. which was
completed in the second quarter of fiscal 1999 (see note 2 to the consolidated
financial statements on page 46). Net income (loss) per ADS is calculated on the
basis of discrete periods; the sum of the four quarters may not equal the
calculated full year amount.
60
47
MERANT PLC
FINANCIAL STATEMENTS 2000
REPORT OF INDEPENDENT AUDITORS
US FORMAT
To the Board of Directors and Shareholders
of MERANT plc
We have audited the accompanying consolidated balance sheets of MERANT plc
as of April 30, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended April 30,
2000 and 1999, the three-month period ended April 30, 1998 and for the year
ended January 31, 1998 on pages 36 to 60. 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 did not audit the financial statements of INTERSOLV, Inc., a
wholly-owned subsidiary, which statements reflect total assets constituting 39%
of the related consolidated financial statement total at April 30, 1998, and
total revenue of approximately 55% and 54% of the related consolidated financial
statement totals for the three month period ended April 30, 1998 and for the
year ended January 31, 1998, respectively. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for INTERSOLV, Inc., is based solely on the
report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MERANT plc at April
30, 2000 and 1999, and the consolidated results of its operations and its cash
flows for the years ended April 30, 2000 and 1999, the three-month period ended
April 30, 1998 and for the year ended January 31, 1998, in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
McLean, Virginia, U.S.A.
June 26, 2000, except paragraph 2 of Note 16,
as to which the date is September 1, 2000
61
48
MERANT PLC
FINANCIAL STATEMENTS 2000
SELECTED CONSOLIDATED FINANCIAL DATA
UK FORMAT
The following selected financial data should be read in conjunction with,
and is qualified in its entirety by reference to, the financial statements of
MERANT, expressed in G.B. pounds, set out on pages 74 to 106 of this report.
FIFTEEN MONTHS YEAR ENDED
YEAR ENDED ENDED ------------------------------------
IN THOUSANDS OF G.B. POUNDS APRIL 30 APRIL 30 JANUARY 31 JANUARY 31 JANUARY 31
(EXCEPT PER SHARE DATA AND PERCENTAGES) 2000 1999 1998 1997 1996
- --------------------------------------- ---------- -------------- ---------- ---------- ----------
OPERATING RESULTS FOR THE PERIOD:
Revenue............................... 227,283 215,473 97,015 73,089 77,258
Operating profit/(loss) excluding
amortisation of goodwill and non-
recurring charges................... 9,509 17,886 12,736 (2,313) (2,633)
Amortisation of goodwill (39,150) (21,915) -- -- --
Non-recurring charges................. (8,491) (11,831) -- (5,195) (6,001)
(Loss)/profit before taxation......... (35,369) (11,572) 15,217 (5,809) (6,542)
Retained (loss)/profit for the
period.............................. (35,461) (15,279) 10,426 (7,281) (6,470)
(Loss)/earnings per share: basic...... (24.9P) (14.3p) 14.0p (10.2p) (8.7p)
(Loss)/earnings per share: diluted.... (24.9P) (14.3p) 13.3p (10.2p) (8.7p)
Average number of shares in issue
(thousands)......................... 145,958 110,714 78,735 75,780 74,215
FINANCIAL POSITION AT END OF PERIOD:
Cash and bank deposits................ 79,543 75,394 51,518 44,725 38,972
Total assets.......................... 304,559 322,361 123,824 100,204 111,828
Creditors: amounts falling due after
more than one year.................. -- 6 12 15 66
Total shareholders funds.............. 198,484 217,109 70,892 61,124 70,187
FINANCIAL CONDITION:
Working capital....................... 60,219 62,370 36,195 26,611 27,306
Current ratio......................... 1.58 1.67 1.78 1.81 1.76
- ---------------
NOTES:
(1) Details of the non-recurring charges are set out in note 8 to the
consolidated financial statements on page 92.
(2) Shares and per-share data for prior periods has been restated to reflect the
5-for-1 sub-division of the Company's ordinary shares, which took effect
from the close of business on March 13 1998.
62
49
MERANT PLC
FINANCIAL STATEMENTS 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
UK FORMAT
This discussion has been prepared in accordance with U.S. reporting
practice and is presented here so that readers of the U.K. format financial
statements have the same information as readers of the U.S. format financial
statements. It should be read in conjunction with the financial statements of
MERANT plc and its subsidiary undertakings (collectively "MERANT") in G.B.
pounds, on pages 74 to 106.
In addition to historical information, this discussion contains
forward-looking statements which involve risks and uncertainties that could
cause actual results to differ materially from those indicated by the forward-
looking statements. (See below under the section "Risk factors that may
influence future operating results.")
MERANT designs, develops and markets software products and services for
enterprise application development. Enterprise application development is where
businesses accelerate the application of innovative information technology to
create a competitive advantage. MERANT's solution offerings empower
organisations to transform their enterprise applications for the changing
technology and business requirements of the e-business environment, manage the
application development process, and provide integrated data connectivity across
the enterprise, from the mainframe to the Internet.
Last year the Company reported that it had elected to change its financial
year-end and accounting reference date to April 30 from January 31. Comparative
figures are therefore reported for the fifteen-month period ended April 30 1999.
Throughout this discussion, references to financial year 2000 are to the year
ended April 30 2000, references to 1999 are to the fifteen-month period ended
April 30 1999, and references to 1998 are to the year ended January 31 1998.
RESULTS OF OPERATIONS
For the year ended April 30 2000 the Company has reported a loss after
taxation of L35.5 million or 24.9 pence per share as compared to a loss after
taxation of L15.3 million or 14.3 pence per share for the fifteen-month period
ended April 30 1999. The loss for the current year includes a pre-tax
non-recurring charge of L8.5 million which has arisen as a result of a planned
realignment of the Company's business.
Last year the Company reported its acquisition of INTERSOLV, Inc.
("INTERSOLV"), a transaction that approximately doubled the size of the Company
in terms of revenue, costs and employees. The current year is the first in which
the revenue and costs of INTERSOLV are included for the full year. The Company
is providing for amortisation of the goodwill which arose on the acquisition
over four years, resulting in an annual charge against income of approximately
L35 million, subject to any future reviews for impairment.
The profit before taxation for the year ended April 30 2000, excluding
non-recurring charges and the amortisation of goodwill, was L12.3 million,
compared to L17.1 million for the fifteen-month period ended April 30 1999.
The following table analyses the Company's profit and loss account for each
of last three financial periods on a percentage-of-revenue basis and shows the
annualised percentage changes over the past three financial periods.
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PERCENTAGE OF REVENUE
---------------------------------------- YEAR TO YEAR
FIFTEEN MONTHS YEAR PERCENTAGE CHANGE
YEAR ENDED ENDED ENDED ---------------------------
APRIL 30 APRIL 30 JANUARY 31 1999 TO 1998 TO
2000 1999 1998 2000 1999
---------- -------------- ---------- ------------ ------------
(ANNUALISED) (ANNUALISED)
REVENUE
Licence fees.................... 51% 55% 62% 23% 56%
Maintenance subscriptions....... 30% 26% 29% 50% 60%
Training and consulting......... 19% 19% 9% 32% 293%
--- --- --- ----- ----
TOTAL REVENUE................ 100% 100% 100% 32% 78%
--- --- --- ----- ----
COST OF REVENUE
Cost of licence fees............ 3% 4% 8% (22)% 7%
Cost of maintenance
subscriptions................ 6% 8% 7% 7% 95%
Cost of training and
consulting................... 16% 14% 9% 57% 164%
--- --- --- ----- ----
TOTAL COST OF REVENUE........ 25% 26% 24% 28% 95%
--- --- --- ----- ----
GROSS PROFIT...................... 75% 74% 76% 33% 72%
--- --- --- ----- ----
OPERATING EXPENSES
Research and development........ 18% 16% 20% 51% 40%
Sales and marketing............. 48% 41% 37% 53% 101%
General and administrative...... 8% 9% 6% 26% 66%
Amortisation of goodwill........ 18% 10% -- 123% --
--- --- --- ----- ----
TOTAL OPERATING EXPENSES..... 92% 76% 63% 59% 113%
--- --- --- ----- ----
OPERATING (LOSS)/PROFIT........... (17)% (2)% 13% 1,083% (125)%
Exceptional item -- fundamental
restructuring................... -- (5)% -- -- --
--- --- --- ----- ----
(LOSS)/PROFIT AFTER EXCEPTIONAL
ITEM............................ (17)% (7)% 13% 201% (200)%
Interest income................... 1% 2% 3% (17)% 39%
Interest expense.................. -- -- -- 64% 66%
--- --- --- ----- ----
(LOSS)/PROFIT BEFORE TAXATION..... (16)% (5)% 16% 282% (161)%
Taxation.......................... -- (2)% (5)% (97)% (38)%
--- --- --- ----- ----
RETAINED (LOSS)/PROFIT FOR THE
PERIOD.......................... (16)% (7)% 11% 190% (217)%
--- --- --- ----- ----
Revenue
The Company generally licenses its products to end-users under licence
agreements. The Company also offers its customers a broad range of services,
including maintenance, support, training and consulting. Maintenance services
consist primarily of enhancements and upgrades to products as well as telephone
support concerning the use of the Company's products. Training and consulting
services provides a range of support services and are focused on helping
customers in using the Company's products.
In October 1999, the Company announced the MERANT Egility Framework, a
series of solutions to create e-business application infrastructures for
customers. These solutions combine MERANT technology and support services to
provide customers with rapid development, integration and delivery of
information systems.
Total revenue for 2000 was L227.3 million, which represents a 5% increase
relative to the fifteen-month period ended April 30 1999, or 23% on an
annualised basis. The increase results from the partial inclusion of revenue
from the INTERSOLV business in the prior period. During the current year,
Egility e-business revenue accounted for 51% of total revenue. Increased revenue
generated from Egility solutions was offset by a
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14% decrease in revenue from traditional COBOL products and services, which
includes Year 2000 solutions. Revenue from Year 2000 products and services
represented 6% of total revenue, down from 15% relative to the previous twelve
months. Total revenue, excluding revenue from Year 2000 products and services,
increased 8% on an annualised basis.
Total revenue for the fifteen-month period ended April 30 1999 was L215.5
million, an increase of L118.5 million or 122% relative to the year ended
January 31 1998. Most of the 1999 increase was the result of the INTERSOLV
acquisition combined with the additional three months in 1999. Revenue from the
existing business increased by 9% in 1999 on an annualised basis.
Revenue by solution area
In the year ended April 30 2000 the basis of MERANT's internal reporting
continued to be the four business units established in 1998. The Company's
Egility solutions span all of these business units, as do its traditional COBOL
products and services, and in future the Company will focus on analysing
products and services between Egility and COBOL solutions. Segmental data is
reported in the financial statements on the basis of our historical reporting
segments, and the following comments reflect that analysis.
The four primary solution areas into which our product and service
offerings are organised are as follows:
- Application Development Management (ADM or MERANT PVCS series). MERANT
PVCS, the industry leader in Software Configuration Management, is a
complete suite of configuration and change management products providing
a reusable team development infrastructure that can be configured for any
project, enabling customers to reduce risk within the development
lifecycle and accelerate development of quality software.
- Enterprise Data Connectivity (EDC or MERANT DataDirect series). MERANT
DataDirect is an industry standard for data connectivity, helping speed
delivery of critical business information through flexible and reliable
data access middleware.
- Application Creation and Transformation (ACT or MERANT Micro Focus
series). MERANT Micro Focus is a leading brand for developing and
transforming applications. MERANT Micro Focus solutions help customers
extend their existing code and skills assets in three key areas:
distributed computing, application transformation and mainframe
development.
- Enterprise Consulting Solutions (ECS or MERANT Consulting). MERANT
Consulting provides a broad spectrum of enterprise application
development services. The Company's expertise is distinguished by its
focus on infrastructure modernization, application transformation,
enterprise application integration and e-business development.
In the year ended April 30 2000 the respective contributions to revenue
from these solution areas was as follows: ADM 35%, ACT 44%; EDC 13%; and ECS 8%.
Revenue by product type
Licence fee revenue totalled L116.2 million, a decrease of L2.0 million or
2% relative to 1999. On an annualised basis, licence fee revenue in 2000
increased by 23% relative to 1999. The increase in 2000 reflected full inclusion
of revenue from the former INTERSOLV business. Increases in licence fee revenue
from the Egility business was more than offset by decreases in revenues derived
from COBOL business. In 1999 licence fee revenue increased by L57.8 million or
96% to L118.2 million, principally as a result of the INTERSOLV acquisition
combined with the additional three months in 1999. Growth in European markets in
1999 more than offset weakness in North American revenue caused by a decrease in
the Company's Year 2000 business, the effects of the Company's sales force
reorganization and integration issues related to the INTERSOLV acquisition.
Maintenance subscriptions increased L11.4 million or 20% to L67.9 million
in 2000 relative to 1999 and by L28.2 million or 100% to L56.5 million in 1999
relative to 1998. On an annualised basis, maintenance subscriptions in 2000
increased by 50% relative to 1999. These year-on-year increases resulted from a
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combination of growth in the installed customer base and renewal of existing
maintenance contracts for all key products, as well as the acquisition of
INTERSOLV, Inc.
Training and consulting revenue totalled L43.2 million, an increase of L2.4
million or 6% relative to 1999. On an annualised basis, training and consulting
in 2000 increased by 32% relative to 1999. In 1999 training and consulting
revenue increased by 293% on an annualised basis. This significant growth in
training and consulting revenue is largely attributable to the INTERSOLV
acquisition, which traditionally earned a higher proportion of its revenue from
service business.
Revenue by geography
In 2000, U.S. revenue decreased by 1% or L0.8 million to L132.5 million
relative to the fifteen-month period ended April 30 1999 and represented 58% of
total revenue, compared to 62% in 1999 and 51% in 1998. On an annualised basis,
U.S. revenue increased by 24%, which reflects the full inclusion of revenue from
the former INTERSOLV business. U.K. revenue decreased by 5% or L1.4 million to
L28.7 million relative to the fifteen-month period ended April 30 1999, but
increased by 19% on an annualised basis, and represented 13% of total revenue,
compared to 14% in 1999 and 12% in 1998. European revenue (excluding U.K.)
increased by 33% or L11.8 million to L47.9 million relative to the fifteen-month
period ended April 30 1999, and represented 21% of total revenue, compared to
17% in 1999 and 19% in 1998. Revenue from other territories increased by 14% or
L2.2 million to L18.2 million relative to the fifteen-month period ended April
30 1999 and represented 8% of total revenue, compared to 7% in 1999 and 18% in
1998.
Cost of revenue
Cost of license fees is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media, and printing of manuals), packaging and distribution costs,
and royalties to third party software developers for the licencing of certain
add-on software products. These costs decreased by L3.5 million or 37% to L5.8
million in 2000 relative to 1999, having increased by L2.4 million or 34% to
L9.4 million in 1999 relative to 1998 and represented 5% of licence fee revenue
in 2000 (1999: 8%; 1998: 12%). These percentage reductions principally reflect
savings in product materials arising from the documentation being supplied on
CD-ROM. On an annualised basis cost of licence fees were reduced by 22% in 2000
relative to 1999, and increased by 7% in 1999 relative to 1998.
Cost of maintenance subscriptions is comprised principally of remuneration
for technical support personnel. These costs decreased by L2.4 million or 14% to
L14.6 million in 2000 relative to 1999, having increased by L10.0m or 143% to
L17.0m in 1999 relative to 1998 and represented 21% of maintenance subscriptions
in 2000 (1999: 30%; 1998: 25%). On an annualised basis such costs increased by
7% in 2000 relative to 1999, and by 95% in 1999 relative to 1998. The cost
decreases in 2000 principally reflect savings in product materials arising from
documentation being supplied on CD-ROM. The cost increases in 1999 reflected the
growth in maintenance subscriptions as well as the addition of personnel to the
telephone support functions to support the growing customer base.
Cost of training and consulting is comprised principally of remuneration
and expenses of training and consulting personnel. These costs increased by L7.5
million or 26% to L36.7 million in 2000 relative to 1999, and by L20.4 million
or 230% to L29.2 million in 1999 relative to 1998 and represented 85% of
training and consulting revenue in 2000 (1999: 72%; 1998: 107%). On an
annualised basis these costs increased by 57% in 2000 relative to 1999, and by
164% in 1999 relative to 1998. The increases in amount and as a percentage of
revenue reflect the inclusion of INTERSOLV, but also reflect increased
investment in personnel needed to support the growing demand for consulting and
training services in all solution areas.
Gross profit
The Company's gross profit represented 75% of revenue in 2000, which is
consistent with the gross profit achieved in the previous two reporting periods
(1999: 74%, 1998: 76%).
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The Company's gross margin can be affected by a number of factors,
including changes in product or distribution channel mix, the mix of product and
service revenue, and competitive pressures on pricing. Gross margin is also
dependent on discounts selectively provided to customers in competitive sales
situations. In addition, gross margin may be adversely affected by expansion of
the Company's consulting organisation and the ability to deploy its capacity to
revenue generating projects. As a result of the above factors, gross margin
fluctuations are difficult to predict, and gross margins may decline from
current levels in future periods.
Research and development
Research and development costs consist principally of remuneration and
travel expenses for software developers and related costs less the proportion of
those costs which are capitalised, plus the charge for amortisation of
previously capitalised costs. Research and development spending supports the
development and enhancement of new and existing products and is consistent with
the Company's strategy of investing heavily to improve and expand its product
lines. Certain project costs are capitalised as software product assets and
amortised over the estimated life of the resulting product. Research and
development costs include the amortisation of previously capitalised software
costs. The following table discloses the components of research and development
costs:
FIFTEEN MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31,
2000 1999 1998
L'000 L'000 L'000
---------- -------------- -----------
Current expenditure on research and
development, before capitalisation.... 34,485 30,455 17,602
Deduct: amounts capitalised............. (2,356) (5,853) (5,688)
------ ------ ------
Current expenditure charged to income... 32,129 24,602 11,914
Amortisation of previously capitalised
costs................................. 4,740 9,717 7,765
Non-recurring charges................... 4,657 -- --
------ ------ ------
Research and development costs, profit
and loss account...................... 41,526 34,319 19,679
------ ------ ------
In 2000 and 1999 research and development has been principally directed
towards improvement and enhancements to Egility solution technology. Efforts are
generally focused in areas of most potential.
Expenditure on internal software research and development increased by L4.0
million or 13% to L34.5 million in 2000 relative to 1999, having increased by
L12.9 million or 73% to L30.5 million in 1999 relative to 1998 and represented
15% of revenue in 2000 (1999: 16%; 1998: 20%). On an annualised basis such costs
increased by 34% in 2000 relative to 1999, and by 40% in 1999 relative to 1998.
The increases in 2000 and 1999 were primarily the result of the INTERSOLV
acquisition.
In 2000 L2.4 million, representing 7% of these costs, were capitalised as
software product assets (1999: 19%, 1998: 32%) and will be amortized over their
estimated economic lives of three or four years. After providing for
amortisation of previously capitalised costs, the net charge to profit and loss
in respect of capitalisation and amortisation of software in 2000 is L2.4
million (1999: L3.8 million, 1998: L2.1 million).
The Company reported non-recurring charges in the year ended April 30 2000
in connection with a realignment of its business, as described below under
"Non-recurring charges". An impairment charge totalling L4.7 million, which
represent provisions against the carrying value of previously capitalised
software product assets, has been included in research and development costs.
The Company believes that ongoing development of new products and features
is required to maintain and enhance its competitive position. Accordingly, while
the Company will continue to control expenses where possible, the Company
anticipates that aggregate research and development expenses will increase over
time, and may not be directly related to the level of revenue realised in future
periods.
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Sales and marketing
Sales and marketing costs include remuneration, travel and related facility
costs for sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows. In the year ended April 30 2000, sales and
marketing costs also includes non-recurring charges totalling L3.5 million, as
described below under "Non-recurring charges". These costs represent provisions
for excess sales facility costs and severance costs. Including those
non-recurring charges, sales and marketing costs increased by L19.8 million or
22% to L109.0 million in 2000 relative to 1999, having increased by L53.7m or
151% to L89.2m in 1999 relative to 1998 and represented 48% of revenue in 2000
(1999: 41%; 1998: 37%). On an annualised basis sales and marketing costs
increased by 53% in 2000 relative to 1999, and by 101% in 1999 relative to 1998.
Most of the increase in 2000 was the result of including a full year's sales and
marketing costs of the former INTERSOLV business, following the acquisition of
INTERSOLV during the previous year. Higher costs were also attributable to the
non-recurring charges, as well as higher commissions and increased advertising
and marketing costs, including those associated with the new corporate name and
product launches.
The Company believes that continued investment in sales, marketing,
customer support and promotional activities is essential to maintaining its
competitive position. The Company is expanding its sales and support staffs and,
accordingly, anticipates that sales and marketing expenses will be higher in
future periods.
General and administrative
General and administrative costs include remuneration, travel and related
costs for the Company's group management, finance, legal and human resources
operations. In the year ended April 30 2000, general and administrative costs
also includes severance costs totalling L0.3 million, as described below under
"Non-recurring charges". As presented in the profit and loss account on page 74,
general and administrative costs also include current provisions for
amortisation of goodwill which has arisen on acquisitions made since January 31
1998. However, to provide a better understanding of the underlying levels of
general and administrative costs, amortisation of goodwill is identified
separately in the table on page 57 and in this discussion. Excluding goodwill
amortisation charges, general and administrative costs increased by L0.1 million
or 1% to L18.6 million in 2000 relative to 1999, having increased by L12.2
million or 192% to L18.5 million in 1999 relative to 1998 and represented 8% of
revenue in 2000 (1999: 9%; 1998: 6%). On an annualised basis these costs
increased by 26% in 2000 relative to 1999, and by 135% in 1999 relative to 1998.
The underlying increase in general and administrative costs in 2000 reflected
the full inclusion of the INTERSOLV business. The increase in 1999 was due to
higher costs resulting from the merger of INTERSOLV along with continued
investment in infrastructure.
The Company anticipates that general and administrative expenses will
increase in future periods, but, excluding provisions for amortisation of
goodwill, will decrease as a percentage of revenue.
Amortisation of goodwill
Goodwill amortisation charges arise as a result of corporate acquisitions,
where the excess of the purchase price over the respective estimated fair value
of the net tangible assets of each company is attributed to goodwill and
amortised over its estimated economic life. Amortisation of goodwill represents
current provisions for amortisation of goodwill which has been capitalised since
January 31 1998 in accordance with FRS 10 "Goodwill and Intangible Assets". In
2000 the Company has capitalised goodwill totalling L31.4 million (1999: L144.4
million, 1998: Lnil). Provisions for amortisation of goodwill increased by L17.3
million or 79% to L39.2 million in 2000 relative to 1999, which was the first
year in which amortisation was recorded under the rules of FRS 10, and
represented 18% of net revenue, compared to 10% in 1999.
The Company anticipates that amortisation of goodwill will remain at least
at current levels until September 2002, and may increase, depending on any
future corporate acquisitions.
In the profit and loss account on page 74, amortisation of goodwill is
included in general and administrative costs.
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Non-recurring charges
In April 2000 the Company announced a realignment of its business and
recorded one-time charges totalling L8.5 million against current income. The
charges resulted from management actions to accelerate the Company's transition
to e-business solutions and to reduce expenses relative to the decline in demand
for its Year 2000 (Y2K) and traditional COBOL-based products and services. Of
this total, L4.7 million represents provisions for impairment of previously
capitalised software product assets, where the book values attributed to certain
products could not be justified by the future revenue streams projected for
those products. The balance of L3.8 million relates to provision for severance
costs for approximately 50 employees in the Company's Y2K and COBOL related
business and for costs associated with closing of excess facilities. These
actions are expected to reduce future expenses and will significantly reduce the
carrying value of the Company's software product assets. These non-recurring
charges have been charged to the profit and loss account as follows:
L'000
-----
Research and development.................................... 4,657
Sales and marketing......................................... 3,502
General and administrative.................................. 332
-----
8,491
=====
Exceptional items
In 1999 the Company provided for costs of L11.8 million in connection with
a fundamental restructuring of its operations. Following the acquisition of
INTERSOLV in September 1998, senior management realigned the Company to complete
the integration of the combined operations. As part of this realignment, the
Company incurred charges consisting principally of the write-off of redundant or
impaired assets and severance costs. Because of the fundamental nature of this
reorganisation, the related costs are disclosed as an exceptional item on the
face of the profit and loss account.
Interest income
Interest earned on cash and short-term investments decreased by L1.5
million or 33% to L3.0 million in 2000 relative to 1999, having increased by
L1.9 million or 74% to L4.4 million in 1999 relative to 1998 and represented 1%
of revenue in 2000 (1999: 2%; 1998: 3%). On an annualised basis interest income
decreased by 17% in 2000 relative to 1999, having increased by 39% in 1999
relative to 1998. The decrease in 2000 reflected lower average cash balances
during the year, as well as lower interest rates. The increase in 1999 primarily
represented the impact of higher cash balances.
Taxation
The Company has recorded tax charges in 2000 and 1999 on pre-tax losses.
The tax charge in 2000 was L0.1 million which represents less than 1% of the
pre-tax loss for the year. In 1999 the tax charge of L3.7 million represented
32% of the pre-tax loss. In both years the effective tax rate is significantly
distorted by the impact of provisions for amortisation of goodwill, which is
generally not an allowable expense for tax purposes. The rates in 2000 and 1999
are also impacted by the distribution of corporate profits and losses among the
tax jurisdictions in which the Company operates. The Company anticipates that
its effective tax rate will be significantly impacted by provisions for
amortisation of goodwill for the next three years.
In 1998 the effective tax rate was distorted by the impact of disallowable
exceptional items, and losses incurred in the United States which can only be
offset against profits arising in the United States in future periods.
The income tax returns of certain of the Company's U.S. subsidiary
undertakings for the years ended January 31 1993 to 1997 have been under
examination by the U.S. Internal Revenue Service, which has proposed increases
to the amount of U.S. income taxes due in respect of those years. Any
adjustments that
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may result from this examination are not expected to have a material adverse
impact on the Company's consolidated operating results or its financial
position.
An analysis of the charge for income taxes is given in note 10 to the
financial statements on page 94.
Acquisitions
In the year ended April 30 2000 MERANT completed four acquisitions at a
total cost of L30.1 million.
On August 3 1999 the Company acquired all of the share capital of Essential
Software, Inc (trading as The Marathon Group), a privately-owned Internet
professional services firm based in Raleigh, North Carolina, U.S.A. The total
consideration for the transaction was approximately $15.8 million (L9.8
million), payable in cash.
On November 23 1999 the Company acquired all of the share capital of
EnterpriseLink Technology Corporation, a privately-owned supplier of enterprise
extension software based in Campbell, California, U.S.A. The total consideration
for the transaction is up to approximately $22.0 million (L14.0 million),
depending on certain earnings targets being met, payable in cash. The Company
also assumed EnterpriseLink stock options which converted into options to
acquire up to 511,904 MERANT ordinary shares.
On December 6 1999 the Company acquired all of the share capital of
Trillium Software Corporation, a privately-owned supplier of change management
software based in Eden Prairie, Minnesota, U.S.A. The total consideration for
the transaction is up to approximately $6.5 million (L4.0 million), depending on
certain earnings targets being met, payable in cash.
On January 8 2000 the Company acquired the remaining 79.9% of the share
capital of Northern Software Partners AS, MERANT's distributor for the Nordic
region, based in Oslo, Norway. The total consideration for the transaction is up
to approximately $4.0 million (L2.3 million), depending on certain earnings
targets being met, payable in cash.
These transactions have been accounted for using the acquisition method.
Accordingly, the excess of the estimated purchase price over the respective
estimated fair value of the net tangible assets of each company, which amounted
to L31.4 million in total, was allocated to goodwill, and is being amortised
over its estimated economic life of five years.
In 1999 MERANT completed three acquisitions at a total cost of L165.0
million.
On May 15 1998 the Company acquired all of the share capital of its Italian
distributor, Micro Focus Italia, s.r.l. ("MF Italia"), for total consideration
of approximately L2.6 million. The Company made an initial cash payment of L2.4
million, with the balance payable in cash, dependent on future results of MF
Italia. In the year ended April 30 2000 L0.3 million was paid under the terms of
the acquisition agreement, and no additional payments are anticipated. MF Italia
changed its name to MERANT s.r.l. on March 1, 1999.
On August 13 1998 the Company acquired all of the share capital of its
Australian distributor, Advanced Software Engineering Pty., Ltd. ("ASE"), for
total consideration of approximately L1.5 million. The Company made an initial
cash payment of L1.0 million, with the balance payable in cash, dependent on
future results of ASE. In the year ended April 30 2000 L0.1 million was paid
under the terms of the acquisition agreement, and no additional payments are
anticipated. ASE changed its name to MERANT Pty., Ltd. on February 16 1999.
On September 24 1998 the Company completed the acquisition of INTERSOLV, a
U.S. public corporation based in Maryland, and listed on the Nasdaq National
Market. The merger was structured as a tax-free reorganization under U.S. tax
law. The Company issued approximately 12.6 million new MERANT ADSs (representing
approximately 63.1 million new MERANT ordinary shares) in exchange for
INTERSOLV's common stock and share equivalents outstanding, which at the time of
the completion of the transaction represented approximately 46% of MERANT's
share capital on a fully-diluted basis. INTERSOLV was a provider of software
solutions that facilitate the development, delivery and deployment of business
information systems.
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Goodwill which arose on the acquisition, representing the excess of the
consideration over the net value of the assets acquired, totalled L140.1
million. This amount has been capitalised as an intangible asset, and
amortisation is being provided through the profit and loss account over a
four-year period. Amortisation of this goodwill is expected to result in an
annual charge of approximately L35 million, subject to any future reviews for
impairment. The Company's results include the results of INTERSOLV from the date
of acquisition.
In the year ended January 31 1998 the Company completed two acquisitions.
On April 30 1997 the Company acquired all of the share capital of
Millennium UK Limited, a privately-owned consulting firm, for a consideration of
L4.0m paid in a combination of L2.0m in cash and the issue of 747,060 ordinary
shares in the Company. Millennium UK Limited was a consulting and project
management services company which brought to MERANT specialised expertise in the
estimating, planning and management of Year 2000 compliance projects.
On January 20 1998 the Company acquired all of the share capital of XDB
Systems, Inc., in exchange for 1,891,975 ordinary shares in the Company, which
represented a value of L8.7m on the date of the acquisition. XDB Systems Inc., a
privately-owned corporation based in Maryland, U.S.A., was a provider of DB2
database development, maintenance and connectivity solutions.
Further information on these transactions is given in note 3 to the
financial statements on page 86.
Year 2000 considerations
The Company developed and implemented an enterprise-wide plan to analyze
and address potential Year 2000 issues affecting its internal systems, its
interaction with third party vendors and suppliers, and its products and
services. By September 30 1999 the plan was completed in all material respects,
although the Company has continued to address internal Year 2000 readiness
issues on an ongoing basis with respect to newly-acquired systems and suppliers,
regularly-scheduled system updates and upgrades, and internal operations. To
date the Company has experienced no significant impact from the Year 2000
problem on its ability to carry on normal business operations. However, there
can be no assurance that the Company will not experience significant
unanticipated negative consequences caused by undiscovered Year 2000 problems
with its internal systems, its third party vendors and suppliers, or its
products and services.
While MERANT has not been subject to any claims or lawsuits to date
relating to Year 2000-related failures of its products or services, there can be
no assurance that customers or former customers will not bring claims or
lawsuits against the Company seeking compensation for losses associated with
those failures. A material adverse outcome in a Year 2000 claim or lawsuit could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Euro considerations
The euro now trades on currency exchanges and is available for non-cash
transactions. As at May 1 1999 the Company's internal systems have the ability
to price and invoice customers in the euro. The Company is also engaging in
foreign exchange and hedging activities in the euro. The Company will continue
to modify the internal systems that will be affected by this conversion, but
does not expect the costs of further system modifications to be material. There
can be no assurance, however, that the Company will be able to complete such
modifications to comply with euro requirements, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company will continue to evaluate the impact of the euro's
introduction on its foreign exchange and hedging activities, functional currency
designations and pricing strategies in the new economic environment. In
addition, the Company faces risks to the extent that banks and vendors upon whom
the Company relies and their suppliers are unable to make appropriate
modifications to support the Company's operations with respect to euro
transactions. While the Company will continue to evaluate the impact of the
euro, management does not believe its introduction will have a material adverse
effect upon the Company's business, financial condition or results of
operations.
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Risk factors that may influence future operating results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. In accordance
with U.S. practice, the Company highlights some of these risks, and their
possible impact on its future results of operations and financial condition, in
the U.S. format financial statements on page 28 of this report. Interested
readers are encouraged to study these comments.
Derivatives and other financial instruments
MERANT's principal financial instruments, other than derivatives, comprise
bank loans, cash and short-term deposits. The main purpose of these financial
instruments is to fund the operations of the business. The Company has various
other financial instruments, such as trade debtors and trade creditors, that
arise directly from its operations.
MERANT also enters into derivative transactions (principally forward
currency contracts). The purpose is to manage the currency risks arising from
the group's operations and its sources of finance.
It is, and has been throughout the period under review, the group's policy
that no trading in financial instruments shall be undertaken.
The main risks arising from the group's operations are liquidity risk and
foreign currency risk. The Board reviews and agrees policies for managing each
of these risks and they are summarised below. These policies have remained
unchanged during the period under review.
Liquidity risk
The group's objective is to maintain a balance between maximisation of
investment returns and liquidity by restriction of the permitted investments and
the duration to maturity of those investments.
Foreign currency risk
As a result of the significant investment in overseas operations, movements
in foreign currency exchange rates can significantly affect the group's balance
sheet. The group seeks to mitigate the effect of this structural currency
exposure by entering into foreign exchange hedges and by using its borrowing
facilities. In managing its structural currency exposures, the group's
objectives are to maintain a low cost of borrowings and to retain some potential
for currency-related appreciation while partially hedging against currency
depreciation. At April 30 2000 no hedging contracts were outstanding;
borrowings, denominated in euros, totalled L1.6 million.
The group also has transactional currency exposures. Such exposures arise
from sales or purchases by an operating unit in currencies other than that
unit's functional currency. The group uses its multi-currency bank facility to
minimise such currency exposures.
Exchange rate fluctuations
MERANT prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average monthly exchange
rates. Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of the Company's revenue arises in U.S. dollars (approximately
two-thirds in 1999), whereas its costs are incurred approximately equally in
U.S. dollars and other currencies, predominately G.B. pounds. Consequently
fluctuations in exchange rates, particularly between the U.S. dollar and the
G.B. pound, may have a significant impact on the Company's operating results,
notably when expressed in G.B. pounds. In 2000, 1999 and 1998, 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.
The Company has a hedging programme that aims, where possible, to minimise
foreign exchange gains or losses from recorded foreign-currency denominated
assets and liabilities. This programme involves the use of borrowings and
forward foreign exchange contracts in certain European currencies, including the
euro. The
72
59
Company does not hedge anticipated foreign currency revenues and expenses not
yet incurred. No hedging contracts were outstanding at April 30 2000.
Liquidity and capital resources
MERANT continues to fund its activities through cash from operating
activities. During the year, cash balances increased from L75.4 million to L79.5
million.
In the year ended April 30 2000 operating activities generated L36.8
million in cash. In addition, L8.5 million, net, was generated by corporate
share plans, representing the excess of proceeds from the sale of shares to
option-holders on the exercise of their options over the cost of shares acquired
by the Company. L37.7 million was invested in the business during the year:
L27.8 million was spent on the acquisition of the businesses referred to above
under the section "Business combinations", and L9.9 million, net, was invested
in computer and telecommunications equipment and other fixed assets, and in
developing new software. After payment of corporate taxes of L6.4 million, and
other cash inflows totalling L1.4 million, net, cash balances increased during
the year by L4.1 million.
In 1999 cash provided by operating activities was L33.9 million. During the
year MERANT invested L8.9 million in computer equipment and other tangible fixed
assets and L5.9 million in software product assets. Net of these expenditures,
cash and short-term investments increased by L23.9 million to L75.4 million.
Cash in excess of operating requirements is invested in liquid money market
investments in the United States, primarily mutual funds, municipal bonds and
government agency securities.
In December 1999 the Board of directors authorised a loan of L2.5 million
to MERANT Trustees Limited, to enable it to purchase, subject to certain market
and business conditions, up to 1,000,000 MERANT ordinary shares. Following
receipt of this loan, MERANT Trustees Limited acquired 800,000 ordinary shares
prior to April 30 2000.
The Company has in place a line of credit under the terms of which
unsecured financing of up to L5.0 million is available until January 2001. At
April 30 2000 borrowings equivalent to L1.8 million had been made against this
line of credit compared to L1.7 million at April 30 1999.
MERANT believes it is important to maintain a conservative capital
structure and a strong cash position. The Company's investment policy is
designed to minimise risk while maximizing return on cash given such levels of
risk, and to keep uninvested cash at a minimum. Cash management is centralised,
although some cash is held at various subsidiaries around the world to meet
local operating requirements. All cash is freely remittable.
The Company believes that existing cash balances in combination with
internally generated funds and its available bank lines of credit will be more
than sufficient to meet cash requirements in 2001.
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60
MERANT PLC
FINANCIAL STATEMENTS 2000
CONSOLIDATED PROFIT AND LOSS ACCOUNT
UK FORMAT
YEAR ENDED APRIL 30 2000
----------------------------------- FIFTEEN MONTHS YEAR ENDED
CONTINUING ACQUISITIONS ENDED JANUARY 31
OPERATIONS (NOTE 3) TOTAL APRIL 30 1999 1998
NOTES L'000 L'000 L'000 L'000 L'000
----- ---------- ------------ ------- -------------- ----------
REVENUE
Licence fees...................... 114,140 2,088 116,228 118,245 60,480
Maintenance subscriptions......... 67,492 368 67,860 56,454 28,233
Training and consulting........... 39,740 3,455 43,195 40,774 8,302
------- ----- ------- ------- ------
TOTAL REVENUE.................. 2 221,372 5,911 227,283 215,473 97,015
------- ----- ------- ------- ------
COSTS OF REVENUE
Cost of licence fees.............. 5,756 112 5,868 9,365 6,990
Cost of maintenance
subscriptions.................. 14,449 103 14,552 16,998 6,984
Cost of training and consulting... 32,702 4,016 36,718 29,247 8,861
------- ----- ------- ------- ------
TOTAL COST OF REVENUE.......... 52,907 4,231 57,138 55,610 22,835
------- ----- ------- ------- ------
GROSS PROFIT........................ 168,465 1,680 170,145 159,863 74,180
------- ----- ------- ------- ------
OPERATING EXPENSES
Research and development.......... 4 41,040 486 41,526 34,319 19,679
Sales and marketing............... 107,592 1,367 108,959 89,161 35,477
General and administrative........ 5 57,736 56 57,792 40,412 6,288
------- ----- ------- ------- ------
TOTAL OPERATING EXPENSES....... 206,368 1,909 208,277 163,892 61,444
------- ----- ------- ------- ------
OPERATING (LOSS)/PROFIT............. 6 (37,903) (229) (38,132) (4,029) 12,736
------- -----
Exceptional item -- fundamental
restructuring..................... 8 -- (11,831) --
------- ------- ------
(LOSS)/PROFIT AFTER EXCEPTIONAL
ITEM.............................. (38,132) (15,860) 12,736
Interest income..................... 2,953 4,433 2,551
Interest expense.................... 9 (190) (145) (70)
------- ------- ------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION................... (35,369) (11,572) 15,217
Taxation............................ 10 (92) (3,707) (4,791)
------- ------- ------
RETAINED (LOSS)/PROFIT FOR THE
PERIOD............................ (35,461) (15,279) 10,426
======= ======= ======
(LOSS)/EARNINGS PER SHARE: BASIC.... 11 (24.9p) (14.3p) 14.0p
(LOSS)/EARNINGS PER SHARE:
DILUTED........................... 11 (24.9p) (14.3p) 13.3p
------- ------- ------
NOTE: (Loss)/earnings per share data for prior periods have been restated to
reflect the 5-for-1 sub-division of the Company's ordinary shares, which
took effect on March 13, 1998.
The notes on pages 81 to 106 form part of these financial statements.
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61
MERANT PLC
FINANCIAL STATEMENTS 2000
CONSOLIDATED BALANCE SHEET
UK FORMAT
APRIL 30 APRIL 30
2000 1999
NOTES L'000 L'000
----- -------- --------
FIXED ASSETS
Intangible fixed assets................................... 12 120,205 133,976
Tangible fixed assets..................................... 13 30,075 28,633
Investments............................................... 14 7,431 4,691
------- -------
TOTAL FIXED ASSETS..................................... 157,711 167,300
------- -------
CURRENT ASSETS
Stocks.................................................... 15 1,444 1,780
Debtors................................................... 16 65,861 77,887
Cash and bank deposits.................................... 79,543 75,394
------- -------
TOTAL CURRENT ASSETS................................... 146,848 155,061
------- -------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 17 86,629 92,691
------- -------
NET CURRENT ASSETS.......................................... 60,219 62,370
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES.................. 217,930 229,670
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR..... 18 -- 6
PROVISIONS FOR LIABILITIES AND CHARGES...................... 21 19,446 12,555
------- -------
NET ASSETS.................................................. 198,484 217,109
======= =======
CAPITAL AND RESERVES
Called up share capital................................... 2,988 2,873
Share premium account..................................... 200,421 189,261
Profit and loss account................................... (4,925) 24,975
------- -------
TOTAL SHAREHOLDERS' FUNDS.............................. 198,484 217,109
======= =======
The financial statements on pages 74 to 106 were approved by the Board of
directors on September 12 2000
/s/ GARY GREENFIELD /s/ J. MICHAEL GULLARD
Gary Greenfield J. Michael Gullard
Director Director
The notes on pages 81 to 106 form part of these financial statements.
75
62
MERANT PLC
FINANCIAL STATEMENTS 2000
CONSOLIDATED CASH FLOW STATEMENT
UK FORMAT
FIFTEEN MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30 APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- -----------
NET CASH INFLOW FROM OPERATING ACTIVITIES (NOTE i)...... 36,756 33,864 17,767
------- ------- -------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received..................................... 2,936 4,433 2,519
Interest paid......................................... (190) (145) (70)
------- ------- -------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE.................................. 2,746 4,288 2,449
------- ------- -------
TAXATION
U.K. corporation tax/(paid) refunded.................. (5,542) 1,297 (599)
Overseas tax (paid)................................... (854) (582) (262)
------- ------- -------
TAX PAID................................................ (6,396) 715 (861)
------- ------- -------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets..................... (9,041) (8,906) (8,263)
Capitalised software product assets................... (2,361) (5,853) (5,688)
Investment in own shares, net......................... (2,741) 195 748
Disposal of tangible fixed assets..................... 1,523 -- 447
------- ------- -------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT............................................ (12,620) (14,564) (12,756)
------- ------- -------
ACQUISITIONS AND DISPOSALS
Investment in subsidiary undertakings................. (28,276) 16,048 (2,000)
Net cash acquired with subsidiaries................... 518 (17,928) 961
------- ------- -------
NET CASH OUTFLOW FROM ACQUISITIONS AND DISPOSALS........ (27,758) (1,880) (1,039)
------- ------- -------
CASH (OUTFLOW)/INFLOW BEFORE FINANCING.................. (7,272) 22,423 5,560
------- ------- -------
FINANCING
Issue of ordinary shares.............................. 11,285 2,139 1,517
Expenses attributable to issue of ordinary shares..... -- (2,654) --
Capital element of finance lease obligations.......... -- (9) (65)
Bank loan............................................. 72 689 1,007
------- ------- -------
NET CASH INFLOW FROM FINANCING.......................... 11,357 165 2,459
------- ------- -------
INCREASE IN CASH........................................ 4,085 22,588 8,019
======= ======= =======
The notes on pages 81 to 106 form part of these financial statements.
76
63
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO CONSOLIDATED CASH FLOW STATEMENT
UK FORMAT
FIFTEEN MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30 APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- -----------
(i) RECONCILIATION OF OPERATING (LOSS)/PROFIT TO "NET
CASH INFLOW FROM OPERATING ACTIVITIES"
Operating (loss)/profit................................. (38,132) (4,029) 12,736
Depreciation charges.................................... 5,931 8,512 4,534
Amortisation charges.................................... 43,890 30,390 7,765
Loss on sale of tangible fixed assets................... 146 3,032 72
Exceptional item........................................ (2,737) (6,918) --
Decrease/(increase) in stocks........................... 379 (1,419) 154
Decrease/(increase) in debtors.......................... 12,148 (7,229) (14,460)
Increase in creditors................................... 15,131 11,525 6,966
------- ------ -------
NET CASH INFLOW FROM OPERATING ACTIVITIES............... 36,756 33,864 17,767
------- ------ -------
(ii) RECONCILIATION TO NET FUNDS
Increase in cash in the period.......................... 4,085 22,588 8,019
Cash (outflow) from (decrease) in debt and lease
financing............................................. (84) (680) (942)
------- ------ -------
4,001 21,908 7,077
Translation difference.................................. 90 1,288 (1,226)
------- ------ -------
4,091 23,196 5,851
Net funds, beginning of period.......................... 73,689 50,493 44,642
------- ------ -------
NET FUNDS, END OF PERIOD................................ 77,780 73,689 50,493
======= ====== =======
BALANCES AT BALANCES AT
APRIL 30 CASH EXCHANGE APRIL 30
1999 FLOW DIFFERENCES 2000
----------- ----- ----------- -----------
(iii) ANALYSIS OF NET FUNDS:
Cash............................................... 75,394 4,085 64 79,543
Short term loans................................... (1,696) (93) 26 (1,763)
Finance lease obligations.......................... (9) 9 -- --
------ ----- -- ------
73,689 4,001 90 77,780
------ ----- -- ------
The notes on pages 81 to 106 form part of these financial statements.
77
64
MERANT PLC
FINANCIAL STATEMENTS 2000
COMPANY BALANCE SHEET
UK FORMAT
APRIL 30 APRIL 30
2000 1999
NOTES L'000 L'000
----- --------- ---------
FIXED ASSETS
Tangible fixed assets..................................... 13 2,924 2,945
Investments............................................... 14 222,070 206,479
------- -------
TOTAL FIXED ASSETS..................................... 224,994 209,424
------- -------
CURRENT ASSETS
Amounts owed by subsidiary undertakings................... 24,264 9,353
Other debtors............................................. 352 --
Cash and bank deposits.................................... 8,184 68
------- -------
TOTAL CURRENT ASSETS................................... 32,800 9,421
------- -------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Amounts owed to subsidiary undertakings................... 27,110 7,548
Trade creditors........................................... -- 3
Accrued expenses.......................................... 278 580
------- -------
27,388 8,131
------- -------
NET CURRENT ASSETS.......................................... 5,412 1,290
------- -------
NET ASSETS.................................................. 230,406 210,714
======= =======
CAPITAL AND RESERVES
Called up share capital................................... 2,988 2,873
Share premium account..................................... 200,420 189,261
Profit and loss account................................... 26,998 18,580
------- -------
TOTAL SHAREHOLDERS' FUNDS.............................. 230,406 210,714
======= =======
The financial statements on pages 74 to 106 were approved by the Board of
directors on September 12 2000.
/s/ GARY GREENFIELD /s/ J. MICHAEL GULLARD
Gary Greenfield J. Michael Gullard
Director Director
This is the balance sheet of MERANT plc, the holding company of the MERANT group
of companies, which is presented in accordance with section 226 of the Companies
Act 1985 of Great Britain. No profit or loss account is presented for MERANT plc
as provided by section 230 of the same Act.
The notes on pages 81 to 106 form part of these financial statements.
78
65
MERANT PLC
FINANCIAL STATEMENTS 2000
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
UK FORMAT
FIFTEEN MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30 APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
(Loss)/profit for the period................................ (35,461) (15,279) 10,426
Currency translation adjustment............................. 5,561 1,146 (1,122)
------- ------- ------
TOTAL RECOGNISED GAINS AND LOSSES FOR THE PERIOD....... (29,900) (14,133) 9,304
------- ------- ------
The notes on pages 81 to 106 form part of these financial statements.
79
66
MERANT PLC
FINANCIAL STATEMENTS 2000
MOVEMENT IN SHAREHOLDERS' FUNDS
UK FORMAT
ORDINARY SHARES OF 2P EACH:
----------------------------- SHARE RETAINED
AUTHORISED ISSUED AMOUNT PREMIUM EARNINGS TOTAL
'000 '000 L'000 L'000 L'000 L'000
---------- ------- ------ ------- -------- -------
BALANCE, JANUARY 31 1997................. 112,500 75,840 1,517 18,071 41,536 61,124
Issued on acquisitions................... -- 2,635 52 10,627 -- 10,679
Goodwill arising on acquisitions......... -- -- -- -- (11,732) (11,732)
Share options exercised.................. -- 940 19 1,498 -- 1,517
Profit for the year...................... -- -- -- -- 10,426 10,426
Currency translation adjustment.......... -- -- -- -- (1,122) (1,122)
------- ------- ----- ------- ------- -------
BALANCE, JANUARY 31 1998................. 112,500 79,415 1,588 30,196 39,108 70,892
Increase in authorised share capital..... 99,500 -- -- -- -- --
Issued on acquisitions................... -- 63,084 1,262 159,603 -- 160,865
Acquisition costs........................ -- -- -- (2,654) -- (2,654)
Share options exercised.................. -- 1,174 23 2,116 -- 2,139
(Loss) for the period.................... -- -- -- -- (15,279) (15,279)
Currency translation adjustment.......... -- -- -- -- 1,146 1,146
------- ------- ----- ------- ------- -------
BALANCE, APRIL 30 1999................... 212,000 143,673 2,873 189,261 24,975 217,109
Share options exercised.................. -- 5,716 115 11,160 -- 11,275
(Loss) for the period.................... -- -- -- -- (35,461) (35,461)
Currency translation adjustment.......... -- -- -- -- 5,561 5,561
------- ------- ----- ------- ------- -------
BALANCE, APRIL 30 2000................... 212,000 149,389 2,988 200,421 (4,925) 198,484
------- ------- ----- ------- ------- -------
- ---------------
NOTES:
(1) The authorised share capital was increased in 1999 by L1,990,000 by the
creation of 99,500,000 ordinary shares of 2p each.
(2) The issued ordinary shares are allotted, called up and fully paid.
(3) MERANT plc has been authorised by its members to make market purchases of
its own shares (within the meaning of section 163(3) of the Companies Act
1985). The Company purchased shares after the year-end under the terms of
this authority -- see note 26 to the financial statements on page 106.
(4) Where appropriate, share data has been restated to reflect the 5-for-1
sub-division of the Company's ordinary shares which took effect on March 13,
1998.
(5) The cumulative value of goodwill written off on acquisitions between
December 23 1989 and April 30 2000 was L11,732,000. The amount of goodwill
written off prior to December 23 1989 is not readily ascertainable and has
been omitted on the grounds that it is not likely to be material.
The notes on pages 81 to 106 form part of these financial statements.
80
67
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT
The statutory financial statements of MERANT plc ("the Company"), within
the meaning of section 240 of the Companies Act 1985 of Great Britain, for the
year ended April 30 2000, are contained on pages 74 to 106.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared under the historical cost
convention and in accordance with applicable United Kingdom Accounting
Standards, which differ in certain respects from United States GAAP,
particularly as to the treatment of acquisitions and goodwill and the
presentation of certain items in the financial statements.
On November 30 1998, the Company announced a change of its financial
year-end and accounting reference date to April 30 from January 31.
Consequently, the comparative results shown in this report are for the
fifteen-month period ended April 30 1999 and for the twelve-month period ended
January 31 1998.
The Company has made some presentational changes in 2000 and, where
appropriate, reclassification of data presented in the 1999 and 1998 financial
statements and related notes has been made to conform with the 2000
presentation. Specifically, the descriptions used to analyse revenue have been
changed to licence fees (previously described as product revenue), maintenance
subscriptions (previously maintenance revenue), and training and consulting
(previously service revenue). These new descriptions do not represent any
changes to the actual numbers presented or to the results of operations of the
Company.
Basis of consolidation
The consolidated financial statements are those of MERANT plc and all of
its subsidiary undertakings (collectively "MERANT") for the year ended April 30
2000. All significant inter-company balances and transactions have been
eliminated on consolidation.
Acquisitions are accounted for using the acquisition method of accounting.
Accordingly the results of operations and cash flows of an acquired business are
included in the consolidated results of MERANT for the period since its
acquisition. The cost of acquisition represents the cash value of the
consideration and/or the market value of the shares issued on the date the offer
became unconditional and/or the discount on share options assumed, plus
expenses. The purchase consideration is allocated between the identifiable
tangible assets and liabilities on the basis of fair value at the date of
acquisition. The excess of the consideration over the fair value of the net
assets acquired is attributed to goodwill and is amortised over its estimated
economic life.
Revenue recognition
Licence fees: the Company's standard end user licence agreement for the
Company's products provides for an initial fee to use the product in perpetuity
up to a maximum number of users. The Company also enters into other types of
licence agreement, typically with major end user customers, which allow for the
use of the Company's products, usually restricted by the number of employees,
the number of users, or the licence term. Licence fees are recognised as revenue
upon product shipment, provided a signed agreement is in place, fees are fixed
or determinable, no significant vendor obligations remain and collection of the
resulting debt is deemed probable. Fees from licences sold together with
consulting services are generally recognised upon shipment provided that the
above criteria have been met and payment of the licence fees is not dependent
upon the performance of the consulting services. Where these criteria have not
been met, both the licence and
81
68
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
consulting fees are recognised under the percentage of completion method of
contract accounting. The Company provides for sales returns based on historical
rates of return.
Maintenance subscriptions: maintenance agreements generally call for the
Company to provide technical support and software updates to customers. Revenue
on technical support and software update rights is recognized over the term of
the support agreement on a pro-rata basis. Payments for maintenance fees are
generally made in advance and are nonrefundable.
Training and consulting: the Company provides consulting and education
services to its customers. Revenue from such services is generally recognised as
the services are performed.
Software product assets -- development costs
Costs related to the initial development and design of new software
products prior to the establishment of technological feasibility are written off
as research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalised as software product
assets.
Software purchased for inclusion in the MERANT product set, including
software acquired on acquisitions, is also included in software product assets.
Software product assets are amortised using the straight-line method over
the economic life of the products, which is generally three to four years. Where
a shortfall in future revenue from a product is anticipated, amortisation is
accelerated. Software product assets are reviewed for impairment if events or
circumstances indicate that the carrying value may not be recoverable.
Amortisation of software product assets is included in research and development
costs.
Goodwill
Goodwill is stated at cost, less accumulated amortisation. Cost represents
the excess of amounts paid on the acquisition of businesses over the aggregate
fair value of the net assets acquired. Amortisation is computed using the
straight-line method over the estimated economic life of the asset, which will
depend on the length of the future period expected to benefit from the purchase.
Present estimated economic lives are between three and five years. Goodwill is
reviewed for impairment if events or circumstances indicate that the carrying
value may not be recoverable.
Prior to January 31 1998 goodwill was written off directly to reserves as
incurred. If a subsidiary or business is subsequently sold or closed, any
goodwill arising on acquisition that was written off directly to reserves or has
not been fully amortised through the profit and loss account is taken into
account in determining the profit or loss on the sale or closure.
82
69
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Tangible fixed assets
Tangible fixed assets are stated at cost less accumulated depreciation.
Depreciation 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......................................... 5-11 years
Transportation equipment................................. 3-4 years
Leasing
Assets held under leases which transfer substantially all the risks and
rewards of ownership of an asset to MERANT are capitalised as fixed assets. The
amount capitalised is the net present value of the future lease payments, this
sum also being treated as a liability. Depreciation on such leased assets is
provided at rates calculated to write off the capitalised cost over the shorter
of the lease term and the asset's economic life. Lease payments are apportioned
between finance charges (computed on the basis of implicit interest rates) and a
reduction in the original liability.
Rentals paid under operating leases are charged to income on a
straight-line basis over the term of the lease.
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 include cash placed on deposit where the maturity
date is between three and twelve months from the initial date of deposit. All
such cash balances are repayable on demand and can be withdrawn at any time
without notice or penalty.
Investments
Investments are recorded at cost less any provision for impairment.
83
70
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Derivative instruments
MERANT uses forward foreign currency contracts to reduce exposure to
changes in foreign exchange rates. The criteria for forward foreign currency
contracts are that the instrument must:
- be related to a foreign currency asset or liability that is probable and
whose characteristics have been identified
- involve the same currency as the hedged item (except that euros may be
used to hedge the currencies directly linked to the euro by fixed rates)
- reduce the risk of foreign currency exchange movements on the group's
operations.
The rates under such contracts are used to record the hedge item. As a
result, gains and losses are offset against the foreign exchange gains and
losses on the related financial assets and liabilities.
Translation of foreign currencies
Assets and liabilities denominated in currencies other than G.B. pounds are
translated at exchange rates in effect at balance sheet date. Revenue, costs and
expenses are translated using average monthly rates. Translation adjustments
resulting from the process of translating financial statements denominated in
currencies other than G.B. pounds are dealt with through reserves.
Earnings/(loss) per share
Basic earnings/(loss) per share is computed as the profit/(loss) for the
period after taxation, divided by the weighted average number of ordinary shares
outstanding during the period, excluding shares held by the employee share
ownership trust (see note 14, below).
Diluted earnings per share is computed based on basic earnings per share,
as adjusted for shares issuable upon exercise of dilutive share options. The
computation assumes the proceeds from the exercise of dilutive share options are
used to repurchase the Company's ordinary shares at their average market price
during each period.
Pensions
MERANT has entered into arrangements under which it makes defined
contributions to personal pension schemes operated by its employees.
Contributions, which are independently administered by insurance companies and
other financial institutions, are charged to income in the year in which they
become payable.
New accounting standards
During 1999 the Accounting Standards Board issued two new financial
reporting standards. FRS 15 "Tangible Fixed Assets" deals with the cost,
depreciation and valuation of tangible fixed assets. FRS 16 "Current tax"
codifies tax disclosure requirements. Compliance with these standards, which the
Company has adopted in the current year, has not had a significant impact on
results of operations or financial condition of the Company.
84
71
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 2 SEGMENTAL INFORMATION
MERANT operates in one business segment -- the development and licencing of
computer software products and related services. The following table analyses
revenue by geographical area, based on customer location:
FIFTEEN MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30 APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
United Kingdom.......................... 28,735 30,123 11,864
United States........................... 132,458 133,269 49,037
Europe (excluding U.K.)................. 47,857 36,095 18,498
Japan................................... 7,556 6,371 3,964
Other................................... 10,677 9,615 13,652
------- ------- ------
227,283 215,473 97,015
------- ------- ------
The following table analyses worldwide operations by geographical area,
based on the location of MERANT facilities.
FIFTEEN MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30 APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
Total revenue:
United Kingdom........................ 54,289 59,512 43,249
United States......................... 132,407 141,734 56,846
Europe (excluding U.K.)............... 42,246 55,286 23,554
Other................................. 12,699 13,953 7,858
------- ------- -------
241,641 270,485 131,507
------- ------- -------
Inter-segment revenue:
United Kingdom........................ (12,308) (14,613) (21,003)
United States......................... -- (20,402) (4,199)
Europe (excluding U.K.)............... (1,513) (17,062) (9,077)
Other................................. (537) (2,935) (213)
------- ------- -------
(14,358) (55,012) (34,492)
------- ------- -------
Third party revenue:
United Kingdom........................ 41,981 44,899 22,246
United States......................... 132,407 121,332 52,647
Europe (excluding U.K.)............... 40,733 38,224 14,477
Other................................. 12,162 11,018 7,645
------- ------- -------
227,283 215,473 97,015
------- ------- -------
85
72
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 2 SEGMENTAL INFORMATION -- (CONTINUED)
FIFTEEN MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30 APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
Operating (loss)/profit:
United Kingdom........................ (48,762) (24,308) 5,498
United States......................... 1,178 495 1,041
Europe (excluding U.K.)............... 7,674 15,608 896
Other................................. 1,778 4,176 5,301
------- ------- -------
(38,132) (4,029) 12,736
------- ------- -------
Net operating assets/(liabilities):
United Kingdom........................ 130,064 114,399 14,174
United States......................... (19,087) 11,856 2,930
Europe (excluding U.K.)............... 1,555 5,489 (4,112)
Other................................. 741 6,985 2,521
------- ------- -------
113,273 138,729 15,513
------- ------- -------
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. The
following table reconciles net operating assets/(liabilities) as shown above to
net assets as shown in the balance sheet:
APRIL 30 APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
(IN THOUSANDS) ---------- -------------- ----------
Net operating assets.................... 113,273 138,729 15,513
Cash and bank deposits.................. 77,780 73,698 50,511
Investment in own shares................ 7,431 4,691 4,886
Finance lease obligations............... -- (9) (18)
------- ------- -------
Net assets.............................. 198,484 217,109 70,892
------- ------- -------
NOTE 3 ACQUISITIONS
During fiscal 2000 MERANT completed four acquisitions at an estimated total
cost of L30,074,000. Each transaction has been accounted for as an acquisition
in accordance with the policy set out in Note 1 to the financial statements on
page 73. Goodwill is being amortised over its estimated economic life of five
years.
On August 3 1999 the Company acquired all of the share capital of Essential
Software, Inc., a privately-owned Internet professional services firm based in
Raleigh, North Carolina, U.S.A., trading as The Marathon Group ("Marathon"). The
total consideration for the transaction was paid in cash. The following table
sets
86
73
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 3 ACQUISITIONS -- (CONTINUED)
out the allocation of the cost of acquisition between the tangible assets and
liabilities of Marathon, and the resultant goodwill.
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
L'000 L'000 L'000
---------- ----------- --------------
Tangible fixed assets.................... 406 406
Stock.................................... 49 49
Trade debtors............................ 760 (279) 481
Other debtors and prepaid expenses....... 38 38
Cash..................................... 28 28
Bank overdraft........................... (14) (14)
Current liabilities...................... (509) (509)
---- ---- -----
Total net assets......................... 758 (279) 479
---- ----
Goodwill arising......................... 9,310
-----
Cost of acquisition...................... 9,789
-----
Represented by:
Purchase consideration payable to
vendors................................ 8,385
Transaction costs........................ 1,404
-----
9,789
-----
Fair value adjustments related to an allowance against Marathon's trade
debtors. Marathon reported a loss after taxation of L132,000 in its financial
year ended December 31 1998. In the subsequent period to August 3 1999, the date
of its acquisition, Marathon recorded a loss after taxation of L712,000.
On November 23 1999 the Company acquired all of the share capital of
EnterpriseLink Technology Corporation ("EnterpriseLink"), a privately-owned
supplier of enterprise extension software based in Campbell, California, U.S.A.
The total consideration for the acquisition is estimated at L14,011,000, of
which L8,713,000 was paid in cash. The balance of the consideration is
contingent on the future operating results of EnterpriseLink. The maximum
consideration has been provided in these financial statements, this being the
current best estimate of the amount which will be payable. The Company also
assumed EnterpriseLink stock options which converted into options to acquire up
to 511,904 MERANT ordinary shares. The following table
87
74
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 3 ACQUISITIONS -- (CONTINUED)
sets out the allocation of the estimated cost of acquisition between the
tangible assets and liabilities of EnterpriseLink, and the resultant goodwill:
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
L'000 L'000 L'000
---------- ----------- --------------
Tangible fixed assets.................... 69 69
Trade debtors............................ 18 (12) 6
Other debtors and prepaid expenses....... 22 22
Cash..................................... 64 64
Bank overdraft........................... (195) (195)
Current liabilities...................... (1,223) (1,223)
Long-term liabilities.................... (1,069) -- (1,069)
------ --- ------
Total net liabilities.................... (2,314) (12) (2,326)
------ ---
Goodwill arising......................... 16,337
------
Cost of acquisition...................... 14,011
------
Represented by:
Purchase consideration payable to
vendors................................ 13,487
Transaction costs........................ 524
------
14,011
------
Fair value adjustments related to an allowance against EnterpriseLink's
trade debtors. EnterpriseLink reported a loss after taxation of L1,384,000 in
its financial year ended March 31 1999. In the subsequent period to November 23
1999, the date of its acquisition, EnterpriseLink recorded a loss after taxation
of L499,000.
On December 6 1999, the Company acquired all of the share capital of
Trillium Software Corporation ("Trillium"), a privately-owned supplier of change
management software based in Eden Prairie, Minnesota, U.S.A. The total
consideration for the acquisition is estimated at L3,994,000, of which
L2,306,000 was paid in cash. The balance of the consideration is contingent on
the future operating results of Trillium. The maximum consideration has been
provided in these financial statements, this being the current best estimate of
the
88
75
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 3 ACQUISITIONS -- (CONTINUED)
amount which will be payable. The following table sets out the allocation of the
estimated cost of acquisition between the tangible assets and liabilities of
Trillium, and the resultant goodwill:
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
L'000 L'000 L'000
---------- ----------- --------------
Fixed assets............................. 20 20
Trade debtors............................ 116 116
Prepaid expenses and other assets........ 1 1
Cash..................................... 39 39
Current liabilities...................... (122) (122)
---- ------- -----
Total net assets......................... 54 54
----
Goodwill arising......................... 3,940
-----
Cost of acquisition...................... 3,994
-----
Represented by:
Purchase consideration payable to
vendors................................ 3,796
Transaction costs........................ 198
-----
3,994
-----
No fair value adjustments were made to the assets and liabilities of
Trillium. Trillium recorded a profit after taxation of L128,000 in its ten-month
financial period ended October 31 1999. In the subsequent period to December 6
1999, the date of its acquisition, Trillium's profit after taxation was
immaterial.
On January 8 2000 the Company acquired the remaining 79.9% of the share
capital of Northern Software Partners AS ("NSP"), MERANT's distributor for the
Nordic region, based in Oslo, Norway. The total consideration for the
acquisition is estimated at L2,280,000, of which L1,974,000 was paid in cash.
The balance of the consideration is contingent on the future operating results
of NSP. The maximum consideration has been provided in these financial
statements, this being the current best estimate of the amount which will be
89
76
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 3 ACQUISITIONS -- (CONTINUED)
payable. The following table sets out the allocation of the estimated cost of
acquisition between the tangible assets and liabilities of NSP, and the
resultant goodwill:
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
L'000 L'000 L'000
---------- ----------- --------------
Fixed assets............................. 49 49
Trade debtors............................ 1,397 1,397
Prepaid expenses and other assets........ 90 90
Cash..................................... 387 387
Current liabilities...................... (1,456) (1,456)
------ ------- ------
Total net assets......................... 467 467
------ -------
Goodwill arising......................... 1,813
------
Cost of acquisition...................... 2,280
------
Represented by:
Purchase consideration payable to
vendors................................ 2,214
Transaction costs........................ 66
------
2,280
------
No fair value adjustments were made to the assets and liabilities of NSP.
NSP reported a profit after taxation of L267,000 in its financial year ended
December 31 1999. In the subsequent period to January 8 2000, the date of its
acquisition, NSP's profit after taxation was immaterial. NSP changed its name to
MERANT Nordic AS on January 21 2000.
The companies acquired during the year ended April 30 2000 have been
absorbed into the Company's operations, and it is not possible to separately
identify the cash flows from the acquired businesses.
In 1999 MERANT completed three acquisitions at a total estimated cost of
L165,012,000.
On May 15 1998 the Company acquired all of the share capital of its Italian
distributor, Micro Focus Italia, s.r.l., ("MF Italia"), for a total
consideration estimated at L2,644,000. The Company made an initial cash payment
of L2,470,000, with the balance payable in cash dependent on future results of
MF Italia. In the year ended April 30 2000 amounts totalling L252,000 were paid
under the terms of the acquisition agreement. No additional payments are
anticipated. MF Italia changed its name to MERANT s.r.l. on March 1 1999.
On August 13 1998 the Company acquired all of the share capital of its
Australian distributor, Advanced Software Engineering Pty., Ltd. ("ASE"), for a
total consideration estimated at L1,503,000. The Company made an initial cash
payment of L970,000, with the balance dependent on future results of ASE. In the
year ended April 30 2000 amounts totalling L142,000 were paid under the terms of
the acquisition agreement. No additional payments are anticipated. ASE changed
its name to MERANT Pty., Ltd. on February 16 1999.
On September 24 1998 the Company acquired all of the share capital of
INTERSOLV, Inc. in exchange for 63,084,000 ordinary shares in the Company, which
represented a value of L160,865,000 on the date the acquisition was completed.
INTERSOLV Inc., a provider of database development, maintenance and connectivity
solutions, was a publicly-owned corporation based in Maryland, U.S.A. Under the
terms of the agreement, each share of INTERSOLV common stock was exchanged for
0.55 MERANT American depositary shares (or ADSs). In addition, each outstanding
option or right to purchase or acquire shares of
90
77
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 3 ACQUISITIONS -- (CONTINUED)
INTERSOLV stock was assumed by MERANT and became an option or right to purchase
or acquire MERANT ADSs, with appropriate adjustments to the price and number of
shares based on the exchange ratio of 0.55 ADSs per INTERSOLV share. At the time
of this acquisition, provision was made for costs amounting to L11,831,000 in
connection with the fundamental reorganisation of the businesses of the combined
companies. These costs were disclosed as an exceptional item in 1999, as
described more fully in note 8 on page 92.
In accordance with the accounting policy described in note 1, goodwill
arising on these acquisitions has been capitalised as an intangible asset (see
note 1 on page 81).
NOTE 4 RESEARCH AND DEVELOPMENT COSTS
YEAR ENDED FIFTEEN MONTHS YEAR ENDED
APRIL 30 ENDED APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
Research and development costs, before
capitalisation........................ 34,485 30,455 17,602
Costs capitalised as software product
assets................................ (2,356) (5,853) (5,688)
Amortisation of capitalised costs....... 4,740 9,717 7,765
Non-recurring charge for impairment
(note 8).............................. 4,657 -- --
------ ------ ------
41,526 34,319 19,679
------ ------ ------
NOTE 5 GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs includes provisions for amortisation of
the goodwill arising on corporate acquisitions amounting to L39,150,000 (1999:
L21,915,000; 1998: Lnil).
NOTE 6 OPERATING (LOSS)/PROFIT
Operating (loss)/profit is stated after charging (or crediting):
YEAR ENDED FIFTEEN MONTHS YEAR ENDED
APRIL 30 ENDED APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
Auditors' remuneration:
audit services: U.K. ................. 133 204 117
audit services: overseas.............. 379 333 110
non-audit services: U.K. ............. 392 740 230
non-audit services: overseas.......... 292 531 289
Operating lease rentals: equipment...... 3,102 2,639 756
Operating lease rentals: land and
buildings............................. 5,808 3,799 1,780
Operating lease rental income:
buildings............................. (358) (461) (424)
Depreciation of tangible fixed assets:
owned................................. 5,932 8,512 4,495
leased................................ -- -- 39
Amortisation of intangible fixed
assets................................ 43,890 31,632 7,765
91
78
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 6 OPERATING (LOSS)/PROFIT -- (CONTINUED)
The profit attributable to the ordinary shareholders of MERANT plc, dealt
with in the financial statements of MERANT, is L8,418,000 (1999: L2,050,000,
1998: L805,000). There were no other movements on reserves other than the
movement on share premium shown in the Movement in Shareholders' Funds on page
80.
NOTE 7 DIRECTORS AND EMPLOYEES
An analysis of the directors' remuneration, pension entitlements and share
options and the relevant disclosures specified for audit by the Listing Rules of
the U.K. Financial Services Authority are set out under the headings "Directors'
remuneration" and "Directors share options" within the directors' remuneration
report on pages 15 to 18.
The average monthly numbers of staff employed by MERANT was as follows:
YEAR ENDED FIFTEEN MONTHS YEAR ENDED
APRIL 30 ENDED APRIL 30 JANUARY 31
2000 1999 1998
NO. NO. NO.
---------- -------------- ----------
U.K. ................................... 450 393 252
U.S. ................................... 1,111 785 355
Other................................... 420 283 112
----- ----- ---
1,981 1,461 719
----- ----- ---
Staff costs, which include salaries, bonus and commissions, amounted to:
YEAR ENDED FIFTEEN MONTHS YEAR ENDED
APRIL 30 ENDED APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
U.K. ................................... 22,082 21,707 10,324
U.S. ................................... 66,131 45,371 22,803
Other................................... 18,822 15,689 5,184
------- ------ ------
107,035 82,767 38,311
Social security costs................... 9,805 9,514 2,979
Other pension costs..................... 2,884 2,417 432
------- ------ ------
119,724 94,698 41,722
------- ------ ------
Other pension costs principally represent amounts paid by MERANT to
personal pension schemes operated by its employees. In the United Kingdom,
MERANT contributes to employee pensions on a percentage-of-salary basis, subject
to certain predetermined limits. Arrangements for employees in other countries
have been established on similar bases, subject to local regulations and
practices in the countries concerned.
NOTE 8 NON-RECURRING CHARGES
In April 2000 the Company recorded one-time charges totalling L8,491,000
against current income. The charges resulted from management actions which
recognise the Company's accelerated transition to e-business solutions and the
relative decline in demand for Year 2000 and traditional COBOL-based products
and services. Of this total, L4,657,000 represents provisions for impairment of
previously capitalised software
92
79
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 8 NON-RECURRING CHARGES -- (CONTINUED)
]product assets, where the book values attributed to certain products could not
be justified by the future revenue streams projected for those products. The
balance of L3,834,000 relates to provisions for severance costs for
approximately 50 employees in our COBOL related business and for the costs
associated with closing of excess facilities. These charges have been included
in the appropriate cost category within operating expenses in the profit and
loss account as follows:
L'000
Research and development.................................... 4,657
Sales and marketing......................................... 3,502
General and administrative.................................. 332
-----
8,491
-----
As at April 30 2000 L3,304,000 remained payable.
In 1999 the Company provided for costs of L11,831,000 in connection with a
fundamental restructuring of its operations. Following the acquisition of
INTERSOLV, Inc in September 1998, management realigned the Company's operations
into four business units, one of which closely aligned the pre-acquisition
operations of the Company. As part of this realignment, the Company incurred
charges consisting principally of the write-off of redundant or impaired assets
and severance costs. Because of the fundamental nature of this reorganisation,
the related costs have been disclosed as an exceptional item in the profit and
loss account. As at April 30 2000 outstanding amounts totalling L1,070,000
remained payable.
NOTE 9 INTEREST EXPENSE
YEAR ENDED FIFTEEN MONTHS YEAR ENDED
APRIL 30 ENDED APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
On bank loans and overdrafts............ 125 123 65
On late payment of taxes................ 63 21 --
Other................................... 2 -- --
Finance charges payable under finance
leases................................ -- 1 5
--- --- --
190 145 70
--- --- --
93
80
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 10 TAXATION
The taxation charge consists of the following:
YEAR ENDED FIFTEEN MONTHS YEAR ENDED
APRIL 30 ENDED APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- ----------
U.K. corporation tax.................... 612 2,645 3,244
Deferred taxation....................... (701) (1,198) (71)
Double taxation relief.................. -- -- (162)
Overseas taxation:
US federal............................ -- 1,079 542
US state.............................. 82 63 128
Other................................... 525 2,180 958
---- ------ -----
518 4,769 4,639
Taxation (overprovided)/under-provided
in previous years:
Corporation tax......................... (426) (1,062) --
Deferred taxation....................... -- -- 152
---- ------ -----
92 3,707 4,791
---- ------ -----
Effective tax rates..................... --% (32)% 31%
==== ====== =====
The Company's effective tax rate in 2000 and 1999 is significantly
distorted by the impact of provisions for amortisation of goodwill (see note 5)
which is not an allowable expense for tax purposes. The tax rate in 2000 and
1999 is also impacted by the distribution of corporate profits and losses among
the tax jurisdictions in which the Company operates. The Company's effective tax
rate is expected to be significantly impacted by provisions for amortisation of
goodwill for the next three years.
In 1998 the effective tax rate was distorted by the impact of losses
incurred in the United States which can only be offset against profits arising
in the United States in future periods.
The corporation tax returns of certain U.S. subsidiary undertakings for the
years ended January 31 1993 to January 31 1997 have been examined by the U.S.
Internal Revenue Service, which has proposed increases to the amount of U.S.
income taxes due in respect of those years. The Company believes that the
outcome of the examination will not give rise to any material adjustment to the
financial statements.
94
81
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 11 (LOSS)/EARNINGS PER SHARE
(Loss)/earnings per share is computed from the following data and in
accordance with the bases set out in note 1.
FIFTEEN MONTHS
YEAR ENDED ENDED YEAR ENDED
APRIL 30 APRIL 30 JANUARY 31
2000 1999 1998
L'000 L'000 L'000
---------- -------------- -----------
(Loss)/profit after taxation............ (35,461) (15,279) 10,426
------- ------- -------
Weighted average number of ordinary
shares:
In issue.............................. 145,958 110,714 78,735
Owned by employee share ownership
trust (note 14).................... (3,795) (3,834) (4,109)
------- ------- -------
Used in computing basic (loss)/earnings
per share............................. 142,163 106,880 74,626
Dilutive options........................ -- -- 3,900
------- ------- -------
Used in computing diluted
(loss)/earnings per share............. 142,163 106,880 78,526
------- ------- -------
(Loss)/earnings per share: basic........ (24.9P) (14.3p) 14.0p
(Loss)/earnings per share: diluted...... (24.9P) (14.3p) 13.3p
------- ------- -------
In 2000 and 1999 share options were anti-dilutive and therefore excluded
from the computations.
NOTE 12 INTANGIBLE FIXED ASSETS
SOFTWARE
PRODUCT
ASSETS GOODWILL TOTAL
L'000 L'000 L'000
---------- -------------- -----------
COST:
At April 30 1999........................ 90,028 145,521 235,549
Currency fluctuations................... 124 966 1,090
Arising on acquisitions................. -- 31,401 31,401
Impairment charge....................... (4,657) -- (4,657)
Additions............................... 2,356 142 2,498
Fully amortised items................... (52,535) -- (52,535)
------- ------- -------
AT APRIL 30 2000........................ 35,316 178,030 213,346
------- ------- -------
AMORTISATION:
At April 30 1999........................ 79,465 22,108 101,573
Currency fluctuations................... 96 117 213
Provision for the period................ 4,740 39,150 43,890
Fully amortised items................... (52,535) -- (52,535)
------- ------- -------
AT APRIL 30 2000........................ 31,766 61,375 93,141
------- ------- -------
95
82
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 12 INTANGIBLE FIXED ASSETS -- (CONTINUED)
SOFTWARE
PRODUCT
ASSETS GOODWILL TOTAL
L'000 L'000 L'000
---------- -------------- -----------
NET BOOK VALUES:
At April 30 1999........................ 10,563 123,413 133,976
------- ------- -------
AT APRIL 30 2000........................ 3,550 116,655 120,205
------- ------- -------
NOTE 13 TANGIBLE FIXED ASSETS
(a) MERANT:
COMPUTER &
COMMUNICATIONS
FREEHOLD LAND LEASEHOLD OFFICE EQUIPMENT & TRANSPORTATION
AND BUILDINGS IMPROVEMENTS EQUIPMENT SOFTWARE EQUIPMENT TOTAL
L'000 L'000 L'000 L'000 L'000 L'000
------------- ------------ --------- -------------- -------------- ------
COST:
At April 30 1999...... 13,828 6,189 8,315 44,003 238 72,573
Currency
fluctuations........ -- 41 (22) 196 (9) 206
Arising on
acquisitions........ -- -- 127 673 -- 800
Additions............. 5 771 1,158 6,424 37 8,395
Disposals............. -- (271) (794) (1,694) (51) (2,810)
------ ----- ----- ------ --- ------
AT APRIL 30 2000...... 13,833 6,730 8,784 49,602 215 79,164
------ ----- ----- ------ --- ------
DEPRECIATION:
At April 30 1999...... 686 2,958 5,338 34,859 99 43,940
Currency
fluctuations........ -- 32 (16) 103 (3) 116
Arising on
acquisitions........ -- -- 65 179 -- 244
Provision for the
period.............. 23 572 644 4,648 45 5,932
Disposals............. -- 111 (28) (1,197) (29) (1,143)
------ ----- ----- ------ --- ------
AT APRIL 30 2000...... 709 3,673 6,003 38,592 112 49,089
------ ----- ----- ------ --- ------
NET BOOK VALUES:
At April 30 1999...... 13,142 3,231 2,977 9,144 139 28,633
------ ----- ----- ------ --- ------
AT APRIL 30 2000...... 13,124 3,057 2,781 11,010 103 30,075
------ ----- ----- ------ --- ------
(b) COMPANY:
The Company's tangible fixed assets consist of freehold land and buildings,
valued at cost which includes capitalised interest amounting to L385,000.
NET BOOK
COST DEPRECIATION VALUE
L'000 L'000 L'000
----- ------------ --------
At April 30 1999.............................. 3,088 143 2,945
Provision for the period...................... -- 21 (21)
----- --- -----
At April 30 2000.............................. 3,088 164 2,924
----- --- -----
96
83
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 14 INVESTMENTS
(a) MERANT:
Investment in own shares represents the cost of ordinary shares in MERANT
plc acquired by MERANT Trustees Limited on behalf of the MERANT Employee Benefit
Trust 1994 ("the Trust") (see note 24, below).
APRIL 30 APRIL 30
2000 1999
L'000 L'000
-------- --------
Beginning of period....................................... 4,691 4,886
Sold on exercise of options............................... (242) (195)
Acquired.................................................. 2,982 --
----- -----
End of period............................................. 7,431 4,691
----- -----
As at April 30 2000 the Trust owned 4,371,269 shares. The market value of
these shares was L6,775,000 (1999: L5,620,000). The Trust has not waived its
right to dividends in respect of this shareholding. The assets and liabilities
of the Trust, as well as its operating costs, are included in MERANT's
consolidated financial statements.
(b) COMPANY:
APRIL 30 APRIL 30
2000 1999
L'000 L'000
-------- --------
Investments in subsidiary undertakings:
Beginning of period..................................... 201,788 40,200
Acquisitions............................................ 6,000 170,573
Disposals............................................... (24) (185,207)
Additional investment................................... 6,875 176,222
------- --------
End of period........................................... 214,639 201,788
Investment in own shares (see (a) above)................ 7,431 4,691
------- --------
222,070 206,479
------- --------
97
84
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 14 INVESTMENTS -- (CONTINUED)
The principal subsidiary undertakings, which are wholly-owned except where
noted below, are:
COUNTRY OF INCORPORATION
NOTES AND OPERATION
----- ------------------------
MERANT Holdings Limited.......................... 1 U.K.
MERANT International Limited..................... 1 U.K.
MERANT Asia Limited.............................. 2 U.K.
MERANT Solutions, Inc. .......................... 2 U.S.A.
MERANT, Inc. .................................... 2 U.S.A.
MERANT Pty Limited............................... 2 Australia
MERANT NV........................................ 2 Belgium
MERANT (Canada) Limited.......................... 2 Canada
MERANT SA........................................ 2 France
MERANT Gmbh...................................... 2 Germany
MERANT Solutions Pvt Limited..................... 2,4 India
MERANT s.r.l. ................................... 2 Italy
MERANT KK........................................ 2 Japan
MERANT Investments Limited....................... 1,3 Jersey
MERANT BV........................................ 2 Netherlands
System Focus BV.................................. 2 Netherlands
MERANT Nordic AS................................. 2 Norway
MERANT Ltda (80%)................................ 2 Portugal
MERANT Pte Ltd. ................................. 2 Singapore
MERANT Solutions SA.............................. 2 Spain
- ---------------
(1) Held directly by the Company
(2) Held by a subsidiary undertaking
(3) Operating as a financing company. The activities of the other subsidiary
undertakings are described in the Directors' Report.
(4) MERANT Solutions Pvt. Limited has a financial year-end of March 31, which
corresponds with its permanent tax year-end, and is required to prepare
audited financial statements made up to that date each year. The Company
does not consider that the benefits of preparing audited financial
statements to April 30 each year justify the additional costs which would be
incurred in producing them. See also note 26 on page 106.
NOTE 15 STOCKS
The replacement value of stocks is not considered to be materially
different from its balance sheet value.
98
85
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 16 DEBTORS
APRIL 30 APRIL 30
2000 1999
L'000 L'000
-------- --------
Trade debtors:
Due within one year..................................... 58,340 68,898
Due after more than one year............................ 420 1,784
------ ------
58,760 70,682
Other debtors and prepaid expenses (see note 25).......... 7,101 7,205
------ ------
65,861 77,887
------ ------
NOTE 17 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
APRIL 30 APRIL 30
2000 1999
L'000 L'000
-------- --------
Bank loan (note 22)....................................... 1,763 1,696
Obligations under finance leases.......................... -- 3
Trade creditors........................................... 7,726 7,546
Current corporation tax................................... 4,801 11,534
Other taxes and social security costs..................... 1,913 1,345
Product royalties and purchases........................... 1,565 776
Accrued employee compensation and commissions............. 12,714 15,126
Deferred revenue.......................................... 44,196 42,954
Other accrued expenses.................................... 11,951 11,711
------ ------
86,629 92,691
------ ------
Accrued expenses includes L256,000 (1999: L161,000) in respect of an
unfunded defined benefit scheme operated by a foreign subsidiary undertaking.
NOTE 18 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Creditors due after more than one year represent obligations under lease
commitments (see note 19).
99
86
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 19 LEASE COMMITMENTS
Financial commitments for future periods under lease agreements existing at
April 30 2000 are as follows:
Finance leases:
APRIL 30 APRIL 30
2000 1999
L'000 L'000
-------- --------
Amounts payable within one year........................... -- 3
-- --
Amounts payable from one to two years..................... -- 6
-- --
-- 9
-- --
Shown as:
Amounts due within one year (note 17)..................... -- 3
-- --
Amounts due beyond one year (note 18)..................... -- 6
-- --
-- 9
-- --
Operating leases:
LAND AND BUILDINGS OTHER
-------------------- --------------------
APRIL 30 APRIL 30 APRIL 30 APRIL 30
2000 1999 2000 1999
L'000 L'000 L'000 L'000
-------- -------- -------- --------
Annual commitment under leases which
expire:
within one year...................... 758 990 911 1,249
in the second to fifth years
inclusive......................... 3,476 3,389 1,473 1,566
thereafter........................... 2,275 2,175 20 83
----- ----- ----- -----
6,509 6,554 2,404 2,898
----- ----- ----- -----
NOTE 20 CAPITAL COMMITMENTS
At April 30 2000 and 1999 MERANT had no material capital expenditure
commitments.
NOTE 21 PROVISIONS FOR LIABILITIES AND CHARGES
RESTRUCTURING CONTINGENT DEFERRED
PROVISIONS LIABILITIES TAXATION TOTAL
L'000 L'000 L'000 L'000
------------- ----------- -------- ------
As at April 30 1999.............. 3,671 -- 8,884 12,555
Arising during the period........ 3,834 6,332 -- 10,166
Utilised......................... (2,601) (142) (701) (3,444)
Currency fluctuations............ -- -- 169 169
------ ----- ----- ------
As at April 30 2000.............. 4,904 6,190 8,352 19,446
------ ----- ----- ------
Restructuring provisions include amounts which arose in respect of the
fundamental restructuring of the Company's operations in 1999 and the additional
non-recurring charges arising in April 2000, as described in note 8, above. It
is expected that the majority of the outstanding amounts will be settled during
the current financial year.
100
87
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 21 PROVISIONS FOR LIABILITIES AND CHARGES -- (CONTINUED)
Contingent liabilities represents estimates of amounts payable to vendors
of companies acquired by MERANT. The amounts to be paid are dependent on meeting
performance targets (see also note 23).
Deferred taxation has been fully provided. The following table discloses
the major components of deferred taxation, and the movements during the year:
CAPITAL
ALLOWANCES IN
ADVANCE OF
DEPRECIATION AND OTHER TIMING
AMORTISATION DIFFERENCES TOTAL
L'000 L'000 L'000
---------------- ------------ -----
Balance, April 30 1999................... (96) 8,980 8,884
Movement during the year................. (238) (294) (532)
---- ----- -----
Balance, April 30 2000................... (334) 8,686 8,352
---- ----- -----
NOTE 22 FINANCIAL INSTRUMENTS
An explanation of the group's objectives, policies and strategies for the
role of financial instruments in creating and changing the risks of the group in
its activities is included in the Management's Discussion and Analysis on page
72.
INTEREST RATE EXPOSURES:
The interest rate risk profile of the Company's financial liabilities,
excluding short-term debtors and creditors, is as follows:
APRIL 30 APRIL 30
2000 1999
L'000 L'000
-------- --------
Floating rate financial liabilities:
Euros..................................................... 1,763 1,696
Sterling.................................................. -- 9
----- -----
1,763 1,705
----- -----
The euro liability represents borrowings against an unsecured revolving
multi-currency facility, under which financing of up to L5,000,000 (1999:
L5,000,000), or its equivalent in such other currency as the Company may
determine, is available until January 2001. Borrowings under this facility bear
interest at 0.75% above the London Interbank Offered Rate ("LIBOR").
The sterling liability represented outstanding finance lease obligations.
The group's financial liabilities at April 30 2000 and April 30 1999 all
mature within one year, or on demand.
101
88
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 22 FINANCIAL INSTRUMENTS -- (CONTINUED)
The interest rate risk profile of the Company's financial assets is as
follows:
APRIL 30 APRIL 30
2000 1999
L'000 L'000
-------- --------
Floating rate financial assets:
U.S. dollars.............................................. 42,024 44,890
Sterling.................................................. 23,439 20,045
Deutschemarks............................................. 3,261 4,193
Japanese yen.............................................. 2,274 751
French francs............................................. 1,294 1,389
Italian lire.............................................. 1,288 413
Norwegian kroner.......................................... 1,214 --
Indian rupees............................................. 1,069 839
Spanish pesetas........................................... 778 695
Australian dollars........................................ 698 1,083
Belgian francs............................................ 694 171
Dutch florins............................................. 687 605
Canadian dollars.......................................... 383 320
Portuguese escudos........................................ 271 --
Euros..................................................... 107 --
Other currencies.......................................... 62 --
------ ------
79,543 75,394
------ ------
Floating rate financial assets comprise cash balances on current accounts
and money market deposits at call. Where these assets are interest-bearing,
interest rates are set by the respective depositaries.
CURRENCY EXPOSURES:
The group's objectives in managing currency exposures arising from its net
investments overseas are explained on page 84.
Net foreign currency monetary assets/liabilities held by the group's
sterling, U.S. dollar and other operations are as follows:
STERLING U.S. DOLLAR OTHER TOTAL
FUNCTIONAL CURRENCY OF OPERATIONS: L'000 L'000 L'000 L'000
- ---------------------------------- -------- ----------- ------ ------
AT APRIL 30 2000:
U.S. dollar........................... 425 41,599 -- 42,024
Other................................. 2,042 -- 12,038 14,080
----- ------ ------ ------
Total................................. 2,467 41,599 12,038 56,104
----- ------ ------ ------
AT APRIL 30 1999:
U.S. dollar........................... 4,325 40,490 -- 44,815
Other................................. 297 -- 10,146 10,443
----- ------ ------ ------
Total................................. 4,622 40,490 10,146 55,258
----- ------ ------ ------
102
89
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 22 FINANCIAL INSTRUMENTS -- (CONTINUED)
FAIR VALUES:
The fair values of all the group's financial assets and liabilities
excluding short-term debtors and creditors, which have been determined on the
basis of market value, are not materially different from the book values shown
below:
APRIL 30 APRIL 30
2000 1999
L'000 L'000
-------- --------
Primary financial instruments:
Short term borrowings................................... (1,763) (1,705)
Cash.................................................... 79,543 75,394
------ ------
77,780 73,689
------ ------
Contingent liabilities (see note 21)...................... 6,190 --
====== ======
NOTE 23 CONTINGENT LIABILITY
In December 1998 and January 1999 seven class action securities complaints
were filed in the United States District Court for the Southern District of New
York against the Company and certain of its officers and directors. The Court
ordered the seven cases consolidated, appointed lead plaintiffs and lead
counsel, and ordered the filing of a consolidated amended complaint, which was
filed on June 9, 1999. The lead plaintiffs sought to have the matter certified
as a class action of purchasers of American Depositary Shares of the Company
during the period from June 17 1998 to November 12 1998, including the former
shareholders of INTERSOLV, Inc. who acquired American Depositary Shares of the
Company in connection with the merger involving the two companies. The
consolidated complaint alleges various violations of the U.S. Securities Act of
1933 and the U.S. Securities Exchange Act of 1934 and sought unspecified
compensatory damages for alleged failure to disclose material nonpublic
information concerning the Company's business condition and prospects. In May
1999, the Company filed a motion to transfer the matter to the Northern District
of California, and the Court granted the Company's motion in November 1999. The
action was transferred in December 1999 to the Northern District of California.
After the action was transferred to California, plaintiffs again amended their
complaint alleging the same claims as described in the prior amended complaint
but without the 1934 Act claims or the class period. MERANT filed a motion to
dismiss the newly-amended complaint in June 2000.
The Company intends to defend this litigation vigorously. However, due to
the inherent uncertainties of litigation, the Company cannot accurately predict
the ultimate outcome of the litigation. Any unfavourable outcome of the
litigation could have an adverse impact on the Company's business, financial
condition and results of operations.
The Company and its subsidiaries are also involved in legal proceedings,
claims and litigation arising in the ordinary course of business. Although the
ultimate results of these legal proceedings, claims and litigation are not
currently determinable, in the opinion of management these matters will not
materially affect the Company's financial position, results of operations, or
liquidity.
103
90
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 24 SHARE PLANS
EMPLOYEE SHARE OPTION PLANS
The Company's share option plans provide for the grant of options to
acquire shares to persons who devote substantially all their working time to
MERANT and such other eligible persons as the Board may determine. The exercise
price of options issued under these plans is 100% of the fair market value at
the time such options are granted. Options are generally exercisable in monthly
or annual instalments commencing one year after the date of grant. Unexercised
options lapse as a consequence of the optionholder ceasing to be employed by
MERANT or at a predetermined expiry date (of up to ten years from the date of
grant), whichever occurs first.
In September 1998 shareholders approved the 1998 Share Option Plan, which
authorised the Company to grant options over a maximum of 21,352,000 shares
under the 1998, 1996 and 1991 Share Option Plans. This authority will expire on
September 24 2008. Under this plan 25% of options granted become exercisable one
year from the date of grant and the remaining 75% in equal monthly instalments
over the following three years. As at April 30, 2000, 13,403,640 options were
outstanding under this plan.
Prior to 1998, authority to issue options under similar terms had been
granted pursuant to the 1991 Share Option Plan and the 1996 Share Option Plan;
these authorities have now expired. Options can no longer be granted under any
of the Company's previous share option plans, but options granted under those
plans continue to be exercisable in accordance with the original grant rules.
Options are also outstanding under share option plans adopted by MERANT as
a result of the recent acquisitions of EnterpriseLink, INTERSOLV and XDB. No
further options can be granted under these plans.
When the Company acquired EnterpriseLink in November 1999, it assumed
obligations under EnterpriseLink's share option plans that entitled
EnterpriseLink's former option-holders to exercise their options in return for
MERANT shares. Pursuant to the agreement to acquire INTERSOLV in 1998, the
Company adopted INTERSOLV's stock option plans, including the option plans
previously assumed by INTERSOLV from companies which it had acquired. Under the
agreement, each outstanding option or right to purchase or acquire shares of
INTERSOLV stock was assumed by the Company and became an option or right to
purchase or acquire ADSs in the Company, with appropriate adjustments to the
price and number of shares based on the exchange ratio of 0.55 ADSs per
INTERSOLV share. Pursuant to the agreement to acquire XDB in 1998, the Company
adopted XDB's share option plans. Under the agreement, XDB's former option-
holders are entitled to exercise their options in return for shares in the
Company.
In addition to options granted by the Company, MERANT Trustees Limited
("MTL") is permitted to acquire ordinary shares in the Company and to grant
options over them, under the terms of the MERANT Employee Benefit Trust 1994
("the Trust"). The Trust was established to further the Company's policy of
encouraging employee share ownership. At April 30 2000 MTL owned 4,371,269
shares. Options granted by MTL and outstanding at April 30 2000 totalled
2,660,055 and a further 110,000 shares were reserved for options granted before
MTL purchased the shares. The remaining 1,601,214 shares were available for the
grant of further options and for the MERANT 1999 Employee Share Purchase Plan.
The shares held by the Trust are included in Investments (see note 14, above).
104
91
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 24 SHARE PLANS -- (CONTINUED)
Share option activity under all of the Company's share option plans is
summarised below:
NUMBER OPTION PRICE
OF SHARES PER SHARE
---------- ------------
Outstanding, January 31 1997....................... 12,475,160 L1.08-L4.32
Options granted.................................... 6,622,725 L0.97-L7.41
Options exercised.................................. (1,553,705) L1.08-L3.70
Options cancelled.................................. (5,674,775) L0.97-L4.52
---------- -----------
Outstanding, January 31 1998....................... 11,869,405 L0.97-L7.41
Options obligations assumed........................ 11,424,537 L0.11-L3.61
Options granted.................................... 10,142,575 L1.05-L7.15
Options exercised.................................. (1,160,885) L0.11-L3.70
Options cancelled.................................. (6,597,528) L0.11-L4.52
---------- -----------
Outstanding, April 30 1999......................... 25,678,104 L0.11-L7.41
Options granted.................................... 11,628,119 L2.46-L4.54
Option obligations assumed......................... 481,731 L0.34-L1.02
Options exercised.................................. (5,954,997) L0.11-L7.41
Options cancelled.................................. (3,544,707) L1.06-L6.28
---------- -----------
Outstanding, April 30 2000......................... 28,288,250 L0.34-L7.15
---------- -----------
Options outstanding at April 30 2000 were granted under the authorities
indicated below:
AUTHORITY FOR NUMBER OPTION PRICE
GRANT OF OPTIONS OF SHARES PER SHARE
- ---------------- ---------- ------------
1991 Share Option Plan............................. 1,111,322 L1.13-L3.49
1996 Share Option Plan............................. 1,609,341 L1.47-L7.15
1998 Share Option Plan............................. 15,261,640 L1.05-L4.54
XDB plans.......................................... 42,750 L3.41-L4.69
INTERSOLV plans.................................... 7,058,105 L1.50-L3.68
EnterpriseLink plans............................... 435,037 L0.34-L1.02
----------
25,518,195 L0.34-L7.15
The Trust.......................................... 2,770,055 L1.05-L4.85
---------- -----------
Outstanding, April 30 2000......................... 28,288,250 L0.34-L7.15
---------- -----------
These options are exercisable between 2000 and 2010. The proceeds on
exercise of all outstanding options at April 30 2000 would be L61,578,000 (1999:
L54,990,000).
At April 30 2000 options for 11,464,000 shares (1999: 11,671,000 shares)
were currently exercisable at prices per share of between L0.34 and L7.15; the
proceeds from exercise of these options at April 30 2000 would be L22,847,000
(1999: L28,391,000).
EMPLOYEE SHARE PURCHASE PLANS
At the annual general meeting held on September 16 1999, shareholders
approved adoption of the MERANT 1999 Employee Share Purchase Plan (ESPP). All
full-time employees are eligible to participate
105
92
MERANT PLC
FINANCIAL STATEMENTS 2000
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 24 SHARE PLANS -- (CONTINUED)
in the ESPP, and up to 1,000,000 ordinary shares will initially be made
available to participating employees. Under the terms of the ESPP, payroll
deductions are made during six-month offering periods for the purpose of
purchasing ordinary shares at the end of an offering period. Participants may
purchase shares at a price equivalent to 85% of the market value at either the
beginning or the end of the offering period, whichever is the lower. The initial
offering period runs from December 1999 to June 2000. At April 30, 2000, amounts
totaling L1,125,000 had been collected under the plan. At the end of the first
offering period, on June 19 2000, participating employees acquired approximately
850,000 ordinary shares.
Most INTERSOLV employees were eligible to participate in the INTERSOLV
employee stock purchase plan, which was constituted under similar rules. The
INTERSOLV plan was terminated on September 24 1998. During the fifteen-month
period ended April 30 1999 employees purchased units of INTERSOLV common stock
equivalent to 465,515 MERANT ordinary shares.
NOTE 25 RELATED PARTY TRANSACTION
Included in Other debtors and prepaid expenses is a loan to the executive
director amounting to $1,219,600 (equivalent to L772,000 using year-end exchange
rates) (1999: Lnil).
In August of 1999, one of the Company's subsidiaries, MERANT Inc., a
California corporation, entered into a loan agreement with Mr. Greenfield. The
loan was made in conjunction with a home purchase by Mr. Greenfield and is
secured by that property. The loan is denominated in U.S. dollars and accrues
interest at a rate of 7.5% per annum, which is comparable to mortgage interest
rates in the United States and higher than the rate that the Company generally
earned on invested cash. At the beginning of fiscal year 2000 no amount was
outstanding, and the maximum principal outstanding during the fiscal year was
L789,000. The outstanding balance as of April 30 2000 was L772,000, including
L19,000 of accrued interest. The maturity date is August 30 2001. The Company
has made no provision (within the meaning of Schedule 4 to the Companies Act) in
respect of delinquency in repayment of the loan, as the Company has every
expectation that the loan will be repaid in accordance with its terms. As of the
date of this filing, Mr. Greenfield is current on all interest payments. The
directors believe the loan is appropriate for a company whose business is
primarily in the United States and whose executive director is living in the
United States, where loans of this type are not uncommon.
NOTE 26 SUBSEQUENT EVENT
In June 2000, the Company's Indian subsidiary undertaking, MERANT
Solutions, Pvt., Ltd., terminated its business as a distributor for the
Company's products in India. The Company has entered into an agreement with a
third party for the distribution of its products in India and does not expect
this event to have any material adverse impact on its operating results or
financial condition.
On August 24, 2000, MERANT purchased for cancellation 14,408,798 ordinary
shares at 95 pence per share for an aggregate consideration of L13,688,000.
Authority to make this purchase was granted by shareholders at the annual
general meeting held on September 16, 1999. The purchase represented 9.7% of the
issued share capital at the date of the transaction. The shares were purchased
on the London Stock Exchange and were cancelled on September 1 2000.
106
93
MERANT PLC
FINANCIAL STATEMENTS 2000
STATEMENT OF DIRECTORS' RESPONSIBILITIES
IN RESPECT OF THE FINANCIAL STATEMENTS
UK FORMAT
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
Company and of the group and of the profit or loss of the group for that period.
In preparing those financial statements the directors are required to:
(a) select suitable accounting policies and then apply them
consistently;
(b) make judgments and estimates that are reasonable and prudent; and
(c) state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the financial
statements.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
group and to enable them to ensure that the financial statements comply with the
U.K. Companies Act 1985. They are also responsible for safeguarding the assets
of the group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
107
94
MERANT PLC
FINANCIAL STATEMENTS 2000
REPORT OF THE AUDITORS
UK FORMAT
To the shareholders of MERANT plc
We have audited the financial statements on pages 74 to 106, 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 81 to
84.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors are responsible for preparing the Annual Report. As described
on page 107, this includes responsibility for preparing the financial statements
in accordance with United Kingdom law and accounting standards. Our
responsibilities, as independent auditors, are established in the United Kingdom
by statute, the Auditing Practices Board, the Listing Rules of the Financial
Services Authority and by our profession's ethical guidance.
We report to you our opinion as to whether the financial statements give a
true and fair view and are properly prepared in accordance with the Companies
Act. We also report to you if, in our opinion, the directors' report is not
consistent with the financial statements, if the Company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if the information specified by law or the Listing
Rules regarding directors' remuneration and transactions with the Company is not
disclosed.
We read the other information contained in the Annual Report and consider
whether it is consistent with the audited financial statements. We consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements.
We review whether the statement on pages 11 to 14 reflects the Company's
compliance with those provisions of the Combined Code specified for our review
by the Listing Rules, and we report if it does not. We are not required to form
an opinion on the effectiveness of either the Company's corporate governance
procedures or its internal controls.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgments made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the group's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material mis-statement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the
state of affairs of the Company and of the group as at April 30 2000 and of the
loss of the group for the year then ended and have been properly prepared in
accordance with the U.K. Companies Act 1985.
Ernst & Young
Registered Auditor
Reading
September 12 2000
108