[MERANT LOGO]
2001 ANNUAL REPORT
WWW.MERANT.COM
MERANT PLC
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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Letter to Shareholders...................................... 3
Directors' Report........................................... 6
Corporate Governance Report................................. 12
Directors' Remuneration Report.............................. 16
U.S. Financial Statements:
Selected Financial Data................................... 20
Management's Discussion and Analysis...................... 21
Consolidated Financial Statements and Notes............... 39
Report of Independent Auditors............................ 65
U.K. Financial Statements:
Selected Financial Data................................... 66
Management's Discussion and Analysis...................... 67
Consolidated Financial Statements and Notes............... 78
Statement of Directors' Responsibilities.................. 109
Report of the Auditors.................................... 110
Further Information for Shareholders........................ 111
</Table>
For the benefit of our shareholders and customers, we publish financial
statements in both U.S. and U.K. formats in separate sections of this report. In
preparing these financial statements, we have adopted accounting policies which
are within the framework of U.K. accounting standards and are also in compliance
with U.S. generally accepted accounting principles as they apply to U.S.
software companies.
MERANT plc, Registered office: The Lawn, 22-30 Old Bath Road, Newbury, Berkshire
RG14 1QN, U.K. Registered in England No. 1709998.
2
MERANT PLC
TO OUR SHAREHOLDERS
Our purpose in creating MERANT from the combination of Micro Focus and
INTERSOLV three years ago was to leverage the strengths of two unquestioned
leaders in the software development tools market. The formation of MERANT
brought together three distinct core competencies (COBOL development,
client/server application development management and data access middleware).
Our intention was to provide customers with one source for e-business solutions
in application development, management and integration across all platforms.
We were not able to produce the synergies we expected. Despite the customer
desire at the CIO level to consolidate vendors and integrate software assets and
processes, each of our product groups serves distinct customer sets within the
corporate IT organization. Different buying influences with different needs and
issues drive the purchase of the different MERANT product families.
We have expended significant effort since the formation of MERANT to bring
our three core offerings together to create and position solutions to address
customer requirements in the Internet environment. We concluded at mid-year that
we were not succeeding, and that the best value opportunity for shareholders
would be to focus on our distinct markets, customers and competencies.
With that conclusion, we readdressed our strategy and business plan and
reorganized MERANT into three independent business units. All product
management, development, marketing, sales, services and support were dedicated
to and focused on meeting the needs of customers and prospects in those distinct
market segments.
This strategy provided four benefits: 1) reassurance to our customers and
prospects of our commitment to them through the product brand names they know
and trust; 2) articulation of a crisp, clear and compelling value proposition to
each of our distinct audiences; 3) focus of resources where we see the greatest
growth potential and disposal of businesses in which we see less opportunity for
return; and 4) greater visibility of the shareholder value of each of our
businesses. With this strategy in place we have taken specific steps in an
effort to realize and return that value to our shareholders.
Reassure customers. We began to execute on the product brand focus near
the end of the third quarter. Customers are pleased to see that the product
brand in which they invested is receiving renewed focus and attention, and that
they and their needs are the central focus of our business once again.
Clarify value proposition. We have returned to basics and drawn a direct
line between customer needs, our products and our story. There is no longer any
need for salespeople to articulate an umbrella strategy and to "interpret" how
our messaging applies to customer needs. The new messaging directly addresses
the customer's needs and is tightly linked to the MERANT products.
Invest in growth potential. We believe the strongest growth potential for
MERANT is with its PVCS brand, in the market for enterprise change management.
PVCS has long been a leader in the software configuration management (SCM)
market, and is one of the most recognized brands in its segment among IT
developers and managers. But we have lost market share in recent years. We must
focus on the enterprise change management business to ensure that we reverse
this market share erosion.
The impact of Internet technology and the emerging importance of enterprise
content management are changing the scope of the IT organization's
responsibility. IT must now manage all the digital assets of the organization,
not just software and application code. MERANT is intent on establishing a
leadership position in this expanding market with PVCS as the core offering.
Web content management is a major requirement in this expanded IT
environment. Web content management is currently estimated by Ovum to be a $1.1
billion market, growing to over $3.1 billion by 2006.
We entered the rapidly growing content management market in February 2001
with the acquisition of the Enterprise Division of NetObjects. PVCS Content
Manager (previously called NetObjects Collage) is a
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premier 100% browser-based, out-of-box, scalable enterprise content management
platform. It covers and manages the entire web content lifecycle and allows
joint deployment of content and code through tight integration with PVCS
Dimensions -- one of MERANT's leading Software Change Management solutions.
Expose and return value to shareholders. The new business unit
organization more clearly creates visibility for the underlying value of each
unit. As a result, in August we closed on the sale of the Micro Focus business
and received an initial payment of $54.5 million in cash from the buyers, based
on an estimated tangible net asset value of $2.0 million. The final net asset
value and purchase price will be determined as provided for by the sale
agreement in the latter half of this fiscal year.
On September 11, we announced an agreement to sell the DataDirect business
for $29.3 million. At that time, we also announced that we propose to return
excess capital of at least L56 million (approximately $80 million) to
shareholders following completion of the DataDirect business sale.
A brief review. Financial results were uneven throughout the year. The
Company was unable to consistently meet revenue projections. Amid all of the
internal changes during the year and the external tumult in the technology
markets, we were able to grow our PVCS business by 8% (though we lost market
share), maintain our DataDirect revenues while increasing penetration of the
vital OEM market for data connectivity products, and stabilize the Micro Focus
business to facilitate its sale.
We were aggressive in cost containment and reduced headcount by over 30%
during the course of the year, from over 2,000 to 1,450 at year-end. With a
focus on cost management we were also able to end the year with cash balances of
L61.2 million ($88.1 million), even after re-purchasing 10% of our own shares
and making an $18 million investment in web content management:
We refocused our service offerings during the year as well. This included
shutting down our E-Solutions business during the third quarter, thus moving
away from the flagging Internet Professional Services market. In keeping with
our new strategy, we aligned our consulting resources on the core business
units. In the process we enhanced our consulting skill sets with the specialized
expertise required to deliver success and maximum ROI to our customers.
We continued to focus on increasing customer loyalty throughout the year.
Through customer-specific communications from management about our dedication
and commitment, and an aggressively accelerated regional user group program,
customers were delivered clear messages that we value their business and are
committed to their success.
In our last Annual Report, we identified three strategic objectives: Reach
out to customers with a common face, enhance and expand Egility, and e-enable
MERANT.
Common face. While we were successful in increasing awareness of the
MERANT name, we were far less successful in generating increased revenue through
our consolidated sales model. Customers at senior levels like to see one face
from the company, but at the purchasing level they buy from the many faces best
able to address their specific pains and needs.
Expand Egility. Egility was the consolidated story for MERANT, offering
customers an application infrastructure for combining applications, content, and
data. Our intent was to expand the breadth and depth of the solutions, combining
advanced technology, expertise and practices. With our mid-year conclusion to
focus on our three distinct markets, we abandoned our consolidated marketing
strategy.
E-enable MERANT. While helping our customers change their business model
to take advantage of advances in technology, we also recognized the need to
e-enable our own company. During the second quarter, we launched MERANT ASaP,
our hosted development service that enables customers to provide software
configuration management and testing capability to teams via the web. ASaP
exceeded its target for new customers and continues to generate excitement in
the press and analyst communities.
Additionally, we significantly upgraded our Internet presence with a
completely new web site. We increased participation in the MERANT.com community
with increased site visits, increased business leader visits to our community
site, increased e-commerce transactions and increased customer usage of MERANT
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SupportNet Online, our web-based customer support services. We also implemented
an internal knowledge management system, which is now used extensively
throughout the company to store, share and disseminate information and
intellectual property.
In June, the Company announced that Gary Greenfield would step down when a
new CEO had been identified and that the search for a new CEO had begun. On
September 20, MERANT announced that Gerald (Gerry) Perkel had been named
President and CEO. Mr. Perkel joins MERANT from Xerox where as president of the
Office Printing Business he has been responsible for approximately $3.5 billion
of Xerox's business and been one of the key senior executives leading Xerox's
turnaround. Prior to Xerox, Mr. Perkel was president of the Color Printing and
Imaging Business of Tektronix, growing annual revenue in that business
profitably from $400 million to $800 million in four years.
At that time we also announced that MERANT would move its operational
headquarters to Hillsboro, Oregon, which is the primary development, sales and
support location for MERANT PVCS. The move is intended to geographically
concentrate the Company following the sale of the Micro Focus and DataDirect
businesses and will be carried out over a period of several months. MERANT's
registered and head office will remain in Newbury, UK.
We are going to be a smaller, more focused company. It is our intent to
recapture the leading position in the enterprise change management market. We
are attempting to return excess capital to the shareholders and increase the
value of our core business. We appreciate your patience during this transition
and promise that we will work hard to reward your patience.
/s/ J. MICHAEL GULLARD
J. Michael Gullard, Chairman of the Board
October 22, 2001
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MERANT PLC
DIRECTORS' REPORT
YEAR ENDED APRIL 30 2001
The directors of MERANT plc ("the Company") present their Report together
with the audited financial statements of the Company and its subsidiary
undertakings (collectively "MERANT") for the year ended April 30 2001.
PRINCIPAL ACTIVITIES
MERANT plc is the parent company of a group of companies whose principal
activities are the design, development and marketing of software products and
services. MERANT's solution offerings for fiscal 2001 were as follows:
- Enterprise Change Management ("ECM" or "PVCS") -- Helping companies
improve their ability to manage change to enterprise digital
assets -- software applications, code and web content.
- Enterprise Data Connectivity ("EDC" or DataDirect") -- Provides
standards-based data connectivity technology to integrate varied systems,
applications and data across their enterprise.
- Application Creation & Transformation ("ACT" or Micro Focus") -- Enables
companies to leverage existing investments in IT systems and extend these
assets into new business applications.
- Internet Professional Services ("IPS" or E-Solutions") -- Services used
to deliver complete applications to accelerate customers' e-business
solution initiatives.
As described below and in the Letter to Shareholders, the company has been
restructuring it's operations to focus the business on ECM.
OPERATING RESULTS
As outlined in the Letter to Shareholders on pages 3 to 5, the Company is
engaged in a process of restructuring its operations to focus on profitable
growth, concentrate resources on markets with the greatest growth opportunities
and attempt to maximize value for shareholders. In support of this strategy, the
Company withdrew from its IPS business in February 2001. After the end of the
Company's 2001 financial year, in August 2001, the Company sold its ACT
Division. In addition, in September 2001, the Company agreed to sell its EDC
business, subject to shareholder approval.
In accordance with U.K. generally accepted accounting principles ("GAAP"),
the operating results of the E-Solutions Division have been classified as
discontinued operations in the financial statements for the current year and
results for prior years have been adjusted accordingly. Operating results of the
ACT Division are included in continuing operations, but a summary of the results
of the ACT Division is disclosed in note 26 to the financial statements on page
107.
In accordance with U.S. GAAP, the operating results of the E-Solutions and
ACT Divisions have been classified as discontinued operations in the financial
statements for the current year and results for prior years have been adjusted
accordingly.
The following table summarises the Company's operating results under U.K.
GAAP for the year ended April 30 2001 and for the two preceding financial
periods. In 1999 the Company changed its financial year-end
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from January 31 to April 30, and consequently the results for that financial
year, as presented below and in the financial statements, are for the
fifteen-month period ended April 30 1999.
<Table>
<Caption>
FIFTEEN
YEAR ENDED YEAR ENDED MONTHS ENDED
APRIL 30 APRIL 30 APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- ------------
Revenue.................................. 215,433 227,283 215,473
Operating profit, excluding amortisation
of goodwill and non-recurring
charges................................ 2,720 9,509 17,886
Amortisation of goodwill................. (42,482) (39,150) (21,915)
Non-recurring charges.................... (14,571) (8,491) (11,831)
Loss on ordinary activities, after
amortisation of goodwill and
non-recurring charges.................. (54,333) (38,132) (15,860)
Interest, net............................ 4,287 2,763 4,288
(Loss) before taxation................... (50,046) (35,369) (11,572)
(Loss) after taxation.................... (50,914) (35,461) (15,279)
(Loss) per share: basic.................. (37.9p) (24.9p) (14.3p)
(Loss) per share: diluted................ (37.9p) (24.9p) (14.3p)
</Table>
Amortisation of goodwill represents provisions against the goodwill which
has been recorded on corporate acquisitions. It includes a charge of L35.0
million (2000: L35.0 million; 1999: L21.2 million) for amortisation of the
goodwill which arose on the acquisition of INTERSOLV, Inc. in 1998. Further
details of corporate acquisitions and the related goodwill are set out in note 3
to the financial statements on page 90.
DIVIDEND
The directors will not be recommending payment of a dividend in respect of
the year ended April 30 2001. As stated in the Letter to Shareholders, in fiscal
2002 we propose to return excess capital to shareholders following completion of
the DataDirect business sale. We are currently evaluating the alternatives
available to return excess capital.
FUTURE PROSPECTS
A review of the business and an indication of future prospects is provided
in the Letter to Shareholders on pages 3 to 5.
DIRECTORS
The following directors served during the year:
Non-executive directors:
J Michael Gullard, Chairman(a)(c)
Harold Hughes(a)(b)
Michel Berty(b)(c)
Kevin J Burns (resigned November 30 2000)
Barry X Lynn(a)
Don C Watters(a)(b)
Chief Executive Officer: (Executive officer)
Gary Greenfield(c)
---------------
NOTES:
(a) Member of audit committee
(b) Member of remuneration committee
(c) Member of nomination committee
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After the year-end, on September 20 2001, Gerald Perkel was appointed to
the Board as President and Chief Executive Officer in succession to Mr.
Greenfield. Mr. Greenfield will remain as an executive director of the Company
until October 31 2001.
The Company's chairman, Mr. Gullard, is 56. He was appointed a
non-executive director in May 1995 and was elected Chairman in March 1996. He is
general partner of Cornerstone Management, a California, U.S.A.-based venture
capital firm that provides strategic focus and direction for technology
companies primarily in the software and data communications industries. He is
also a director of JDA Software Group, Inc., and is Chairman of Netsolve, Inc.,
both publicly quoted U.S. companies. Mr. Gullard's 27 years in the technology
industry included a number of executive and management posts at
Telecommunications Technology Inc. and the Intel Corporation. He holds a
master's of business administration and a bachelor's of arts degree from
Stanford University in California.
Mr. Perkel, who is 46, joined MERANT on September 20, 2001 as the Company's
President and Chief Executive Officer, and was appointed an executive director
on the same date. He joined MERANT from Xerox where he served as senior vice
president and president of the Office Printing Business for Xerox Corporation.
He joined Xerox in January 2000 when Xerox acquired the Color Printing and
Imaging Division (CPID) of Tektronix, Inc., where he served as president. Mr.
Perkel serves on the board of Upright Systems, an Internet start-up, and as a
board member for the Juvenile Diabetes Foundation. He holds a bachelor of
science degree in system science engineering from the University of California
at Los Angeles. (UCLA).
Mr. Hughes, who is 55, was appointed a non-executive director in December
1993. Mr. Hughes worked for 26 years with Intel, where he held senior positions
in financial and operational management. He is currently a director of the
London Pacific Group Ltd., a financial services company, Lumic, a semiconductor
company, and eVineyard, an e-commerce company.
Mr. Berty, who is 62, was appointed as a non-executive director of the
Company following the acquisition of INTERSOLV in September 1998. He had been a
non-executive director of INTERSOLV since 1997. He is also on the boards of
directors of Buysmart, e-vantage, iGate Cap., Level 8, Netgain and Sapiens
International, all of which are U.S.-based corporations, and a Paris-based
French company, Asterop, S.A. From 1972 until 1997 he was an executive of the
Cap Gemini Group and served as Chief Executive Officer of Cap Gemini America
from 1993 to 1997.
Mr. Greenfield, who is 46, was appointed a non-executive director in
September 1998 following the acquisition of INTERSOLV, Inc. He was appointed
Chief Executive Officer on December 1 1998 and held that post until September 20
2001. At INTERSOLV, Mr. Greenfield had held senior management positions since
1987, including the role of Chief Executive Officer from 1996 to 1998. Mr.
Greenfield also serves on the board of directors for Hyperion Solutions, Mobius
Management Systems, Inc., and Managed Object Solutions, Inc. He is chairman of
the Information Technology Association of America, a trade association
representing the U.S. information technology industry.
Mr. Lynn, 51 years old, is the President and CEO of Be eXceL management,
inc. and Director/General Partner of Shoreline Venture Management. Prior to
founding Be eXceL, Mr. Lynn was with Wells Fargo for 16 years, his last position
being the President of Wells Fargo Technology Services. Previously, he served as
the company's Chief Information Officer. Before that, he ran Wells Fargo's
Private Banking Operations and their Investment Operations. Mr. Lynn founded and
became the first President of Wells Fargo Securities.
Mr. Watters, who is 58, retired from McKinsey & Co in 1997 after 28 years
service, most recently as a director, and continues to act as a consultant and
as a member of the McKinsey Advisory Board.
All of the board members are U.S. citizens.
The Company's Articles of Association require that one third of the
directors should retire by rotation each year and submit for re-election. Mr.
Gullard and Mr. Lynn will therefore retire at the 2001 annual general meeting
and, being eligible, will offer themselves for re-election. Neither Mr. Gullard
nor Mr. Lynn has a service contract with the Company. In addition, Mr. Perkel,
who has been appointed to the Board since the last annual general meeting, also
retires and will offer himself for re-appointment. His appointment as the
8
Company's President and Chief Executive Officer is at will, and may be
terminated by Mr. Perkel or by the Company at any time for any reason.
The directors' remuneration report on page 16 to 19 sets out details of
remuneration earned by the directors, their interests in the share capital of
the Company, and options they have been granted to acquire ordinary shares in
the Company under the MERANT share option plans.
DIRECTORS' RESPONSIBILITIES
A statement of the directors' responsibilities in respect of the financial
statements is set out on page 109.
SUB-COMMITTEES OF THE BOARD
The audit, remuneration and nomination committees are formally constituted
sub-committees of the Board. Details of the membership of these committees and
their roles are set out in the report on corporate governance on pages 12 to 15.
SUBSTANTIAL SHAREHOLDERS
At October 18, 2001 the following interests of 3% or more in the share
capital of the Company have been reported:
<Table>
<Caption>
ORDINARY PERCENTAGE
SHARES HELD HOLDING
----------- ----------
Schroder Investment Management Ltd................... 19,805,121 14.7%
MERANT Trustees Limited.............................. 6,105,293 4.5%
</Table>
At April 30 2001 The Bank of New York, acting as Depositary Bank, held
approximately 12% of the Company's ordinary shares in respect of which American
depositary shares ("ADSs") have been issued, evidenced by American depositary
receipts ("ADRs"). The ADRs are traded in the United States on the Nasdaq
National Market. On March 13 1998 the Company split its ordinary shares on a
5-for-1 basis, but the Company's ADSs did not split and, consequently, each ADS
now represents five ordinary shares. Some of the holdings reported above may be
held in the form of ADSs, but for the purposes of the table, numbers of ADSs
have been converted to numbers of ordinary shares.
RESEARCH AND DEVELOPMENT
MERANT has a continuing commitment to a high level of investment in
research and development, and continues to develop new products whilst updating
and improving its existing products. An indication of product development
activity is provided in the Management's Discussion and Analysis on page 70 of
this annual report. Research and development costs are summarised in note 5 to
the financial statements on page 93.
CORPORATE GOVERNANCE
The directors' report on corporate governance is set out on pages 12 to 15.
EVENTS SINCE THE BALANCE SHEET DATE
In August 2001 MERANT completed the sale of its ACT Division to Golden Gate
Capital and Parallax Partners for $62.5 million (approximately L43.4 million)
payable in cash, subject to adjustments based on the value of assets
transferred. As the transaction was conditional upon shareholder approval and
other regulatory approvals, MERANT held an extraordinary general meeting of
shareholders on July 23 2001, at which our shareholders approved the
transaction. An initial cash payment of $54.5 million was received from the
purchasers. Under the terms of the agreement, final settlement of the sale price
is due during the second half of the year ended April 30 2002. The net gain
arising from the sale of the business will be recognised in fiscal 2002.
9
On September 11 2001 the Company announced that it had agreed to sell its
EDC Division to Golden Gate Capital for $29.3 million (approximately L20.6
million), payable in cash, subject to adjustments based on the value of assets
transferred. Completion of the transaction is subject to certain conditions,
including approval by MERANT shareholders and other regulatory approvals. The
Company will seek shareholder approval at an extraordinary general meeting, to
be held on October 30 2001. Subject to approval, completion of the transaction
is expected shortly afterwards. The Company expects to record a small gain on
the disposal of the EDC Division. At the same time as the sale announcement, the
Company announced that it proposes to return excess capital to shareholders
following completion of the sale of the EDC Division.
On September 14 2001 the Company signed an agreement to sell its freehold
premises in Newbury, Berkshire. As a result of the disposal of the ACT Division,
the Company decided it was no longer appropriate to retain the freehold of its
Newbury premises. However, the Company will continue to occupy a suite of
offices within the property, which will remain its head and registered office.
The sale was completed on October 12 2001 and the Company expects to incur a
pre-tax loss of approximately L1.7 million ($2.5 million) on the transaction.
On September 20 2001 the Company announced the appointment of Gerald Perkel
as President and Chief Executive Officer. Mr. Perkel succeeds Gary Greenfield,
who announced in June that he proposed to step down once a new CEO had been
identified. At the same time, the Company also announced that its operational
headquarters would move from Rockville, Maryland, U.S.A. to Hillsboro, Oregon,
U.S.A., which is the primary development, sales and support location for the
Company's ECM Division. The cost of the relocation is expected to be between
L10.5 million ($15 million) and L14 million ($20 million).
EURO CONSIDERATIONS
The euro trades on currency exchanges of the twelve participating countries
and is available for non-cash transactions. MERANT's internal systems have the
ability to price and invoice customers 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. 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. However, the Company has not
incurred, and does not expect to incur, material operating expenses other than
personnel costs of existing staff or be required to invest heavily in internal
systems improvements with regard to the introduction and use of the euro. The
Company does not expect total expenditures related to the euro, other than
personnel costs of existing staff, to be material.
BRANCHES
During the current year MERANT established a branch operation in Korea.
EMPLOYEE INVOLVEMENT
MERANT places considerable value on involving, preserving good relations
with, and communicating with, its employees. Dialogue with employees is
encouraged through the use of the Company's intranet, employee surveys, and the
holding of regular site meetings.
Every employee is eligible to become a MERANT shareholder through the
ownership of options to acquire ordinary shares in the Company under the MERANT
share option plans, and employees are also encouraged to invest in the Company
through the Employee Share Purchase Plan. Details of these employee benefit
plans are set out in note 24 to the financial statements on pages 105 to 107.
DISABLED EMPLOYEES
MERANT gives full and fair consideration to applications for employment
from disabled persons where a handicapped or disabled person may adequately
cover the requirements of the job with reasonable accommodation. If necessary
MERANT reasonably accommodates and endeavours to retrain any member of staff who
develops disability during employment with MERANT and to provide career
development and promotion opportunities wherever appropriate.
10
ENVIRONMENT
MERANT recognises its responsibilities for the environment, and the
possible effects of its activities on the environment are given due
consideration. As a software company, MERANT's activities should have a minor
effect on the environment. MERANT has taken steps to reduce environmental
impacts in such areas as minimisation of waste and energy conservation.
SUPPLIER PAYMENT POLICY AND PRACTICE
It is Company policy to settle payment terms with suppliers when agreeing
the terms of transactions, to ensure that suppliers are made aware of the terms
of payment, and to comply with those contractual arrangements. On April 30 2001
the average length of time MERANT was taking to settle its trade creditors was
30 days.
PURCHASE OF OWN SHARES
On August 24 2000 the Company purchased for cancellation 14,408,798
ordinary shares at L0.95 per share for an aggregate consideration of
L13,688,000. Authority to make this purchase was granted by shareholders at the
annual general meeting which was held on September 16 1999. The authority was
renewed by shareholders at the annual general meeting held on November 29 2000
and remains in force until the next annual general meeting. 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.
The Company provides loans to MERANT Trustees Limited to enable it to
purchase ordinary shares in the Company. These investments are made primarily to
ensure that the Company can fulfil its potential current obligations under the
MERANT 1999 Employee Share Purchase Plan (ESPP). During the year ended April 30
2001, MERANT Trustees Limited acquired 5,375,000 ordinary shares at an average
price of L0.97 per share, for a total of L5,212,000. This represented 4.0% of
the Company's issued share capital at April 30 2001. For more information on the
ESPP, see note 24 to the financial statements on page 106.
SPECIAL BUSINESS AT THE ANNUAL GENERAL MEETING
The annual general meeting will be held on November 28 2001. The full text
of all resolutions to be proposed at the meeting, together with an explanatory
letter, is set out in the Notice of Meeting which is being distributed to
shareholders with this Annual Report.
AUDITORS
On June 28 2001 Ernst & Young, the Company's auditor, transferred its
business to Ernst & Young LLP, a limited liability partnership incorporated
under the Limited Liability Partnerships Act 2000. The directors consented to
treating the appointment of Ernst & Young as extending to Ernst & Young LLP with
effect from June 28 2001. A resolution to reappoint Ernst & Young LLP as the
Company's auditor will be proposed at the forthcoming annual general meeting.
By Order of the Board
/S/ LEO MILLSTEIN
Leo Millstein
Company Secretary
October 22, 2001
11
MERANT PLC
REPORT ON CORPORATE GOVERNANCE
YEAR ENDED APRIL 30 2001
BACKGROUND
The London Stock Exchange published its Principles of Good Governance and
Code of Best Practice ("the Combined Code") in June 1998. The Combined Code is
based on the recommendations of the Hampel Committee on Corporate Governance,
and of the earlier reports of the Cadbury and Greenbury Committees. It consists
of a set of basic principles, each of which contains several detailed
provisions. The U.K. Listing Rules require the directors to report on how they
are applying the principles, and the extent to which they have complied with the
detailed provisions. The following review sets out how MERANT applies the
principles of the Code and explains any non-compliance with Code provisions.
APPLYING THE PRINCIPLES OF GOOD GOVERNANCE
The Board:
The Company is managed by a Board of directors which meets at least once a
quarter to review trading results and discuss operational and business issues.
In particular it deals with those matters reserved to it for decision, according
to the schedule of responsibilities and authorities, which stipulates clear
requirements for matters which exceed delegated authorities to be dealt with by
the Board. These include:
- business strategy, including operating, financing, dividend and risk
management policies;
- annual operating budgets
- business acquisitions and disposals
- authority levels
- approval of financial statements
The Board deals with other strategic matters as appropriate, and regularly
receives presentations from senior management. During the past year, these
included issues such as marketing initiatives, technological developments and
investor relations. During the year ended April 30 2001, the Board was also
responsible for the discussions regarding control of the Company, and for
publication of the appropriate announcement regarding those discussions.
The Board is based in the U.S.A., and is constituted in line with U.S.
practice. It consists of a non-executive Chairman, four other non-executive
directors and one executive director, the Chief Executive Officer. Biographies
of the directors are set out in the Directors' Report on page 8. Senior
management is represented on the Board by the Chief Executive Officer, whose
role is therefore separate and distinct from that of the Chairman. Each of the
non-executive directors has had senior executive experience in other companies
and offers independent judgment on Board matters. None has previously served in
an executive capacity with MERANT. The senior non-executive director is Harold
Hughes.
The proportion of non-executive directors complies with the Code, and the
Board considers that the balance achieved between executive and non-executive
directors is appropriate and effective for the control and direction of the
business.
There are procedures for Board members to receive appropriate induction and
training and to solicit independent professional advice where specific expertise
is required in the course of exercising their duties. All directors have access
to the Company Secretary, who is responsible for ensuring compliance with
appropriate statutes and regulations.
Directors are subject to re-election by shareholders at the first
opportunity after their appointment and thereafter at intervals of no more than
three years, with one third of directors being required to submit for re-
election by rotation each year.
12
Sub-committees of the Board:
The Board is assisted by committees which have been established with
written terms of reference. Their roles and composition are set out below.
The audit committee consists of Mr. Hughes (chairman), Mr. Gullard, Mr.
Lynn and Mr. Watters, all of whom are non-executive directors. The role of the
audit committee is explained under "Accountability and audit", below.
The remuneration committee consists of three non-executive directors, Mr.
Berty (Chairman), Mr. Hughes and Mr. Watters. Mr. Berty, who has been a member
of the committee since 1999, was appointed committee chairman in December 2000
when the committee's former chairman, Mr. Burns, resigned as a director of the
Company. Mr. Hughes has been a member of the committee since 1993. Mr. Watters
was appointed a member of the committee in December 2000. 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 meets at least quarterly and is responsible for recommending
to the Board the framework of executive remuneration and then determining
individual terms of employment. These responsibilities cover salary and bonus
arrangements, benefits, contracts of employment and share option grants. The
committee operates in accordance with written terms of reference and is
authorised to seek appropriate professional advice if it considers this
necessary. It 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.
The directors' remuneration report on pages 16 to 19 provides full
disclosure of the remuneration policy and the amounts of remuneration and
benefits earned by the directors.
The nomination committee consists of Mr. Gullard (chairman), Mr. Greenfield
and Mr. Berty. The committee meets from time to time when required to do so, and
makes recommendations to the Board on all proposed new appointments of
directors. Such appointments are subject to subsequent confirmation by the
shareholders.
Relations with shareholders
MERANT conducts regular dialogue with institutional shareholders to ensure
mutual understanding of objectives and divulges such information as is permitted
within the guidelines of the Listing Rules of the Financial Services Authority.
The Company's website includes an Investor Relations area, which includes a
calendar of events, current market price of the Company's shares and other
information of interest to corporate and individual shareholders.
All shareholders are invited to participate in the annual general meeting,
where both the Chairman and the Chief Executive Officer are available to answer
questions. Each matter to be dealt with at the annual general meeting is
addressed by a separate resolution. Proxy votes received are disclosed to the
meeting after each resolution has been dealt with on a show of hands.
Accountability and audit
The audit committee meets at least quarterly to consider the adequacy of
the group's system of internal controls, policies and procedures and the outcome
of the external audit, and to review the group's annual and quarterly reports
and accounts. It also involves the group's auditors in that process, focusing
particularly on compliance with legal requirements, accounting standards and the
requirements of the UK Financial Services Authority and Nasdaq, and on an
ongoing basis reviews the effectiveness of our systems of internal financial
controls. It also advises the board on the appointment of the group's auditors
together with their remuneration for both audit and non-audit work. The
committee is authorised to investigate any activity within its terms of
13
reference, to seek any information it requires from any employee and to obtain
independent professional advice if it considers this necessary. The Chief
Financial Officer and the external auditor normally attend its meetings. There
is provision for the committee to confer with the auditors without the
attendance of executive officers and other members of the Company's management.
The ultimate responsibility for reviewing and approving our annual and quarterly
reports and accounts remains with the board of directors.
Management prepares a comprehensive system of budgets and forecasts with
monthly reporting of actual results against targets, and provides the directors
with regular updates on the financial performance of the Company. At the
quarterly board meetings, the Chief Financial Officer provides an analysis of
financial information which includes key performance and risk indicators. The
group's auditors are engaged to review the group's reported results and balance
sheet at each quarter end, and to audit the annual results and balance sheet
which are included in this report. The board is responsible for reviewing and
approving for publication the financial results for the previous quarter. In
addition, the Audit Committee meets with the group's auditors to discuss the
results of their audit work.
The Company does not currently have an internal audit function. The Board
has reviewed the need for an internal audit function but has decided that the
current control mechanisms are sufficient for the size of the Company. The Board
has agreed to review the situation on an annual basis.
A statement on the responsibilities of the directors in relation to the
financial statements is set out on page 109.
Risk management
The Combined Code requires Boards of listed companies to maintain a sound
system of internal control, to review those controls at least annually, and to
report to shareholders that they have done so. The Turnbull Report "Internal
Control: Guidance for Directors on the Combined Code" was published in September
1999 to provide guidance to directors in respect of this requirement.
The Board recognises that it is ultimately responsible for the group's
system of internal control and for reviewing its effectiveness. However, the
risk management process and systems of internal control are designed to manage
rather than eliminate the risk of failure to achieve business objectives, and
can provide only reasonable and not absolute assurance against material
misstatement or loss. The Board takes direct responsibility for these processes
on a quarterly basis and considers:
- the authority, resources and co-ordination of those involved in the
identification, assessment and management of significant risks faced by
the group;
- the response to the significant risks which have been identified by
management and others;
- the monitoring of the reports from group management;
- the maintenance of a control environment directed towards the proper
management of risk; and
- the annual reporting procedures.
During the financial year ended April 30 2001 the Board enhanced and
formalised its risk management initiatives. In April 2000 it commissioned an
initial risk assessment review by external consultants. The Company appointed a
Director of Network Security and Business Continuity, whose role is to
co-ordinate all risk assessment initiatives and to establish an on-going process
in accordance with the Turnbull guidance, for identifying, evaluating and
managing significant risks faced by the group. The Director of Network Security
and Business Continuity presents his findings to the Board on a quarterly basis.
The process involves an annual assessment of the effectiveness of internal
control covering financial, operational, compliance and other controls and risk
management. A formal review of the strategic business risks is carried out on
each core business unit and support function and the management actions in place
for monitoring and minimising these risks. Each assessment consists of a review
of programs, processes and practices to identify, evaluate and prioritise risk
and determine ownership and responsibility, corrective actions implemented and
ongoing monitoring and reporting.
14
This process was put in place with effect from the beginning of May 2001,
and remained in place up to the date of approval of this Annual Report. It is
the board's intention that control processes will be fully embedded in all areas
of the group's operations during the year ended April 30 2002 and will be
reviewed by the board on a quarterly basis. The board is confident that this
approach will enable the group to comply fully with the Turnbull guidance in
respect of the year ended April 30 2002.
The Chief Executive Officer also reports to the Board on behalf of the
Executive Committee on significant changes in the business and the external
environment which affect significant risks. Where areas for improvement in the
system are identified, the Board considers the recommendations made by the
Director of Network Security and Business Continuity and by the Executive
Committee.
GOING CONCERN
After making enquiries, the directors have a reasonable expectation, at the
time of approval of these financial statements, that MERANT has adequate
resources to continue as a going concern for the foreseeable future, and the
financial statements have been prepared on this basis.
COMPLIANCE WITH THE CODE OF BEST PRACTICE
The Company is required to report on its compliance with the provisions of
Section 1 of the Combined Code throughout the year ended April 30 2001. Except
as detailed below, the directors consider that the Company has complied
throughout the period under review with the provisions of Section 1 of the
Combined Code.
MERANT's non-executive directors have been granted share options in
accordance with a resolution passed by shareholders at the 1999 annual general
meeting. Provision A.3.2 of the Combined Code requires that non-executive
directors should be independent of management and free from any business or
other relationship which could materially interfere with the exercise of their
independent judgment. The Company considers that the numbers of options granted
to the non-executive directors is de minimus in terms of their own personal
wealth and therefore does not compromise their independence; however, as a
result of the option grants, the Company does not comply with provision A.3.2 of
the Combined Code.
In response to the Turnbull guidance, the Board has established procedures
for the systematic review of the Company's risk management processes, in
compliance with principal D.2.1 of the Combined Code. However, during the year
the Board's primary focus was the reorganisation of the Company into three
segments, the development of plans to maximise the return of value to
shareholders, and in pursuit of that aim, management of the closure of its
E-Solutions business and of the proposals for the sale of the ACT Division. As a
result, the formalised process of risk management which the Company developed
during the year was not fully operational until the end of the year.
Consequently the Company did not comply for the whole of the year under review.
The Company anticipates that it will be able to report full compliance in this
respect for the year ended April 30 2002.
/s/ Leo Millstein
Leo Millstein
Company Secretary
October 22, 2001
15
MERANT PLC
DIRECTORS' REMUNERATION REPORT
UK FORMAT
YEAR ENDED APRIL 30 2001
Directors' remuneration is determined by recommendations from the
remuneration committee, whose composition and terms of reference are set out in
the Report on Corporate Governance on pages 12 to 15.
EXECUTIVE DIRECTOR'S REMUNERATION POLICY
The remuneration package for MERANT's executive director is designed to
attract, motivate, and retain individuals of the necessary calibre. It is
determined by reference to relevant market data for the countries in which the
director performs his duties, and recognises the continuing competitive market
in the sectors in which MERANT operates. The chief components of the
remuneration for Mr. Greenfield, the executive officer during the year ended
April 30 2001 are as follows:
Basic salary: the salary rate for the executive director is reviewed
at the end of each financial year. 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 an
annual performance-related bonus. The bonus is calculated based on fixed
formulae measuring MERANT's performance against targets set at the
beginning of each year, and is 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 2001 the bonus was based on audited
revenues and earnings per share results compared to pre-determined targets;
the executive director did not earn a bonus under this scheme.
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 certain U.S.
IRS limitations.
Other benefits: the executive director is entitled to participate in
all welfare plans and policies provided to other senior executives,
including medical, life, accidental death and travel insurance. In
addition, MERANT Inc. has advanced a loan to Mr. Greenfield, as set out in
note 25 to the financial statements on page 107.
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 Director's Remuneration Policy" section, but
would not exceed the equivalent of two years' pay (salary plus calculated
portion of bonus, or performance-related pay). This entitlement consists of
a maximum of one year's salary and bonus as severance and an additional one
year's salary and bonus for services rendered to the Company for twelve
months following termination and as consideration for certain non-compete
covenants. In addition, the executive director's welfare benefits would
continue for eighteen months.
Share options: the executive director is eligible to participate in
the MERANT share option plans, on the same terms as all employees of the
Company. Option prices are set at the market price at date of grant, and
are never offered at a discount. Details of the share option plans are set
out in note 24 to the financial statements on pages 105 to 107. 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.
16
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 professional 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 pages 105 to 107.
SERVICE AGREEMENTS
Mr. Greenfield, the Chief Executive Officer during the year ended April 30
2001, entered into a three-year service agreement with the Company, expiring on
December 1 2001. Upon termination for other than death, disability, or cause, or
if he resigns for good reason, he is entitled to compensation as set out above.
None of the non-executive directors has a letter of appointment 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 2001 and discloses summary information for the year
ended April 30 2000:
<Table>
<Caption>
PERFORMANCE BENEFITS-IN-
SALARY RELATED PAY FEES KIND 2001 2000
L'000 L'000 L'000 L'000 L'000 L'000
------ ----------- ----- ------------ ----- -----
J Michael Gullard............................. -- -- 63 -- 63 84
Michel Berty.................................. -- -- 15 -- 15 18
Gary Greenfield............................... 321 -- -- 6 327 351
Harold Hughes................................. -- -- 16 -- 16 21
Barry X Lynn (appointed September 16 1999).... -- -- 15 -- 15 11
Don C Watters (appointed December 8 1999)..... -- -- 13 -- 13 6
Kevin Burns (resigned November 30 2000)....... -- -- 12 -- 12 21
Martin Waters (resigned September 16 1999).... -- -- -- -- -- 6
---- -- ---- -- ---- ----
321 -- 134 6 461 518
---- -- ---- -- ---- ----
</Table>
17
The following table summarises directors' remuneration, including gains on
exercise of share options.
<Table>
<Caption>
YEARS ENDED
APRIL 30
--------------
2001 2000
L'000 L'000
----- -----
All directors:
Aggregate emoluments........................................ 455 518
Sums paid to third parties for directors' services.......... 6 6
Gain on exercise of share options........................... -- 2,484
--- -----
461 3,008
--- -----
Highest paid director:
Aggregate emoluments........................................ 327 21
Gain on exercise of share options........................... -- 1,151
--- -----
327 1,172
--- -----
</Table>
Gains on exercise of share options are calculated based on the market price
as at the date of exercise although the shares may have been sold at a different
price or retained.
DIRECTORS' SHAREHOLDINGS
The beneficial interests of the directors holding office at April 30 2001
in the share capital of MERANT are as follows:
<Table>
<Caption>
APRIL 30 APRIL 30
2001 2000
2P SHARES 2P SHARES
J Michael Gullard, Chairman.............................. 77,500 77,500
Harold Hughes............................................ 110,000 110,000
Michel Berty............................................. -- --
Barry X Lynn............................................. -- --
Don C Watters............................................ -- --
Gary Greenfield.......................................... 38,595 25,155
</Table>
Certain of these holdings are held in the form of American depositary
shares ("ADSs"). In June 2001 Gary Greenfield acquired 19,469 shares from his
participation in the Employee Share Purchase Plan. There have been no other
changes in these holdings since the year-end.
18
DIRECTORS' SHARE OPTIONS
The following table sets out the numbers of options to acquire ordinary
shares or ADSs held during the year by each director in office at April 30 2001
and the changes in their holdings during the year.
<Table>
<Caption>
NUMBER OF OPTIONS
OPTION ------------------------------------------
DATE OF PRICE APRIL 30 APRIL 30 EARLIEST LATEST
OPTION GRANT (IN GBP) 2000 GRANTED LAPSED 2001 EXERCISE DATE EXERCISE DATE
------------ --------- --------- ------- ------- --------- ------------- -------------
J Michael Gullard.... June 21 1996 1.67 100,000 -- -- 100,000 June 21 1997 June 21 2006
Sept 16 1999 2.87 20,000 -- -- 20,000 Sept 16 1999 Sept 16 2009
Nov 30 2000 0.78 -- 20,000 -- 20,000 Nov 30 2000 Nov 30 2010
Harold Hughes........ Aug 19 1992 3.00 50,000 -- -- 50,000 Aug 19 1993 Aug 19 2002
June 16 1994 2.40 10,000 -- -- 10,000 June 16 1995 June 16 2004
Sept 16 1999 2.87 10,000 -- -- 10,000 Sept 16 1999 Sept 16 2009
Nov 30 2000 0.78 -- 10,000 -- 10,000 Nov 30 2000 Nov 30 2010
Michel Berty......... Nov 30 2000 0.78 -- 10,000 -- 10,000 Nov 30 2000 Nov 30 2010
Barry X Lynn......... Sept 16 1999 2.87 10,000 -- -- 10,000 Sept 16 1999 Sept 16 2009
Nov 30 2000 0.78 -- 10,000 -- 10,000 Nov 30 2000 Nov 30 2010
Don C Watters........ Dec 8 1999 4.59 10,000 -- -- 10,000 Dec 8 1999 Dec 8 2009
Nov 30 2000 0.78 -- 10,000 -- 10,000 Nov 30 2000 Nov 30 2010
Gary Greenfield...... (1) 1.71-3.99 2,569,550 -- (76,535) 2,493,015 (1)
Jan 4 1999 1.05 3,250,000 -- -- 3,250,000 Jan 4 2000 Jan 4 2009
</Table>
---------------
(1) Options granted to Mr. Greenfield by INTERSOLV, Inc. which were converted
into options to acquire ADSs in the Company. The options outstanding at
April 30 2001 were granted between July 7 1992 and May 1 1998, vest between
July 7 1993 and September 24 1998, and expire between July 7 2002 and May 1
2008.
(2) The directors did not exercise any options during the year.
(3) The market price of the shares at April 30 2001 was L0.71 and the range
during the year was L0.62 to L1.65.
On behalf of the board
/s/ J. Michael Gullard
J Michael Gullard, chairman
October 22, 2001
19
MERANT PLC
FINANCIAL STATEMENTS 2001
SELECTED CONSOLIDATED FINANCIAL DATA
US FORMAT
This 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 39 to 64 of this report.
<Table>
<Caption>
THREE MONTHS YEARS ENDED
YEARS ENDED APRIL 30, ENDED JANUARY 31,
(IN THOUSANDS OF U.S. DOLLARS -- EXCEPT PER ------------------------------ APRIL 30, ------------------
SHARE AND ADS DATA, PERCENTAGES AND EMPLOYEES) 2001 2000 1999 1998 1998 1997
---------------------------------------------- -------- -------- -------- ------------ -------- --------
RESULTS OF OPERATIONS:
Net revenue............................................... $185,555 $174,769 $156,992 $ 50,425 $149,596 $127,978
Operating income (loss) before goodwill amortization and non-
recurring items......................................... 1,061 (6,143) (17,862) 18,959 44,997 2,280
Interest income, net...................................... 6,154 4,787 6,334 1,151 3,935 2,946
Pre-tax income (loss) before goodwill amortization and non-
recurring items......................................... 7,215 (1,356) (11,528) 12,573 23,136 (21,713)
Goodwill amortization..................................... (1,900) (1,008) (474) -- -- --
Non-recurring and other items (note 2, below)............. (7,250) -- (49,662) (17,292) (17,468) (28,933)
(Loss) income before income taxes......................... (1,935) (2,364) (61,664) (4,719) 5,668 (50,646)
(Loss) income after income taxes.......................... (3,185) (2,884) (63,472) (3,420) 1,549 (53,407)
(Loss) income from discontinued operations................ (10,023) 476 34,940 4,909 18,599 17,551
(Loss) on disposal of discontinued operations............. (16,320) -- -- -- -- --
Net (loss) income......................................... (29,528) (2,408) (28,532) 1,489 20,148 (35,856)
Basic (loss) income per ADS (note 4, below):
-- continuing operations................................ (0.12) (0.10) (2.22) 0.05 0.73 (1.35)
-- discontinued operations.............................. (0.98) 0.02 1.22 0.00 0.00 0.00
-- net (loss) income.................................... (1.10) (0.08) (1.00) 0.05 0.73 (1.35)
Diluted (loss) income per ADS (note 4, below):
-- continuing operations................................ (0.12) (0.10) (2.22) 0.05 0.70 (1.35)
-- discontinued operations.............................. (0.98) 0.02 1.22 0.00 0.00 0.00
-- net (loss) income.................................... (1.10) (0.08) (1.00) 0.05 0.70 (1.35)
FINANCIAL POSITION AT END OF PERIOD:
Cash and short-term investments........................... 84,828 117,701 121,384 126,907 118,572 95,876
Total assets of continuing business....................... 154,962 201,640 233,780 266,406 265,765 189,304
Total net assets of discontinued business................. 46,738 75,214 80,305 67,752 67,752 68,583
Long term obligations..................................... -- -- -- 648 612 1,314
Shareholders' equity...................................... 103,747 161,402 152,211 179,443 172,073 123,493
FINANCIAL CONDITION:
Working capital of continuing business.................... 44,232 74,719 89,619 101,728 94,230 62,421
Current ratio............................................. 1.52 1.72 1.57 1.73 1.64 1.52
</Table>
NOTES:
(1) Data for all periods have been restated to reclassify the operations of the
E-Solutions and ACT Divisions as discontinued operations.
(2) Details of the non-recurring and other items are set out in note 6 to the
consolidated financial statements on page 53.
(3) Data for periods prior to April 30, 1999 have been restated to include the
acquisition of INTERSOLV, Inc., which was accounted for using the
pooling-of-interests method (see note 2 to the consolidated financial
statements on pages 48 to 49). For years through January 31, 1998, annual
amounts reflect the financial data of INTERSOLV on an April 30 year-end
basis. Financial data for INTERSOLV 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 (ADS) represents five ordinary shares.
20
MERANT PLC
FINANCIAL STATEMENTS 2001
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 39 to 64
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."
Founded in 1976, MERANT designs, develops and markets software products and
services for enterprise application development. Our solution offerings permit
organizations to manage the application development process, and provide
integrated data connectivity across the enterprise. We license our products to
other independent software vendors, software developers and service providers,
and offer integrated software solutions to businesses of all sizes. We
distribute our products through our offices in North America, Europe, and Asia,
and through a network of distributors and value-added resellers, and directly
through our website.
RESULTS OF OPERATIONS
As described in the Letter to Shareholders on pages 3 to 5, MERANT began a
process of restructuring its operations during fiscal 2001, to focus on
profitable growth, concentrate resources on markets with the greatest growth
opportunities and attempt to maximize value for shareholders. In support of this
strategy, in February 2001, MERANT discontinued the operations and business of
its E-Solutions Division which had been generating operating losses. In
addition, after the end of the fiscal year, in August 2001, MERANT sold its ACT
Division due to low growth prospects. The operating results of these businesses
have been classified as discontinued operations in the financial statements for
the current year and results for prior years have been restated accordingly.
More detail of these discontinued businesses and the disposal process is set out
under "Discontinued operations", below.
In September 2001, MERANT announced that it had agreed to sell its EDC
Division. That sale is still subject to shareholder and other regulatory
approvals and consequently the results of that business are included in
continuing operations. In this discussion on MERANT's results of operations,
references to operating revenues, costs and income are to MERANT's continuing
operations, as disclosed in the financial statements, unless otherwise
indicated.
In fiscal 2001, MERANT reported operating income before non-recurring
charges and amortization of goodwill, of $1.1 million, compared to a loss of
$6.1 million in fiscal 2000 and $17.9 million in fiscal 1999. After
non-recurring charges and amortization of goodwill, net loss for fiscal 2001 was
$3.2 million or $0.12 per American depositary share (ADS). This compares to a
net loss of $2.9 million or $0.10 per ADS in 2000 and a net loss of $63.5
million or $2.22 per ADS in 1999.
Net revenue
MERANT generally licenses its products to end-users under license
agreements. MERANT also offers 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 provide a range of
support services and are focused on helping customers use our products.
Total net revenue for fiscal 2001 was $185.6 million, a 6% increase
relative to 2000. Total net revenue for fiscal 2000 was $174.8 million, or 11%
greater than the previous fiscal year.
21
Revenue by product/service type
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ -------- ------ -------- ------ --------
License fees..................... $ 95,630 -1% $ 96,633 14% $ 85,100
Maintenance subscriptions........ 62,786 19% 52,789 26% 41,996
Training and consulting.......... 27,139 7% 25,347 -15% 29,896
-------- ------ -------- ------ --------
Total net revenue................ $185,555 6% $174,769 11% $156,992
======== ====== ======== ====== ========
</Table>
License fee revenue decreased by $1.0 million in 2001 relative to 2000, as
modest growth experienced in the ECM and EDC businesses was offset by the
negative impact of the strengthening U.S. dollar during the year. In 2000,
license fee revenue increased $11.5 million, due to increased demand for these
products.
Maintenance subscriptions increased by $10.0 million in 2001 relative to
2000, and by $10.8 million in 2000 relative to 1999, as a result of a
combination of growth in the installed customer base and renewal of existing
maintenance contracts for ECM and EDC products in both periods.
Training and consulting revenue increased by $1.8 million in 2001 relative
to 2000, with especially strong demand for ECM services in Europe. Training and
consulting revenue decreased in fiscal 2000 compared to prior year, as demand
for ECM focused on the Year 2000 change problem decreased.
Revenue by business segment
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ -------- ------ -------- ------ --------
Enterprise Change Management..... $139,525 8% $129,027 12% $115,382
Enterprise Data Connectivity..... 46,030 1% 45,742 10% 41,610
-------- ------ -------- ------ --------
Total net revenue................ $185,555 6% $174,769 11% $156,992
======== ====== ======== ====== ========
</Table>
ECM revenue was $139.5 million in fiscal 2001, or up 8% from the previous
year. Growth at constant currency exchange rates was 12%, with growth driven by
growth in maintenance and service revenues for this area. ECM had modest overall
growth in license fees as strong growth in Europe and Asia was partially offset
by weakness in North America. For fiscal 2000, ECM revenue was $129.0 million,
or up 12% from prior year. Growth for this fiscal year was the result of growth
in new ECM licenses along with expansion of the maintenance base.
EDC revenue for fiscal 2001 was $46.0 million, up 1%. For fiscal 2000, EDC
overall revenue grew 10% to $45.7 million. For this two-year period, double
digit growth to other independent software vendors embedding this technology was
offset by lower direct sales to end-user businesses.
Revenue by geography
We analyse our revenue between Americas (North and South America), EMEA
(Europe, Middle East and Africa) and Asia-Pacific (Asia and the countries of the
Pacific Rim, including Australia).
Americas revenue in fiscal 2001 was $128.9 million, an increase of 8% or
$9.8 million relative to fiscal 2000, and represented 69% of our total revenue,
compared to 68% in 2000. This overall revenue increase arose as a result of
increasing demand mostly within the North America market, but offset somewhat by
lower demand for new licenses.
EMEA revenue in fiscal 2001 was $47.6 million, an increase of $1.2 million
or 3% relative to 2000, and represented 26% of our total revenue, compared to
27% in 2000. At constant currency exchange rates, EMEA revenue increased 13%.
The strengthening of the U.S. dollar against the U.K. pound and the euro
negatively impacted our U.S. dollar-reported results.
Asia Pacific revenue in fiscal 2001 was $9.0 million, a decrease of $0.2
million or 2% relative to 2000, and represented 5% of our total revenue in 2001
and 2000. This decrease arose in the ECM Division.
22
Cost of revenue
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ------- ------ ------- ------ -------
Cost of license fees.................... $ 3,197 -35% $ 4,927 -45% $ 8,988
Cost of maintenance subscriptions....... 11,832 17% 10,102 -8% 10,938
Cost of training and consulting......... 27,204 31% 20,834 -21% 26,369
------- --- ------- --- -------
Total cost of revenue................... $42,233 18% $35,863 -23% $46,295
======= === ======= === =======
</Table>
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 represented 3% of license fee
revenues in 2001, compared to 5% in 2000 and 11% in 1999. The significant
decrease in 2001 relative to 2000 was due to continued cost savings achieved on
delivery of product materials. The significant decrease in 2000 relative to 1999
principally reflected savings in product materials arising from the
documentation being supplied on CD-ROM.
Cost of maintenance subscriptions is comprised principally of salaries and
benefits for technical support personnel. These costs represented 19% of
maintenance subscription revenues in 2001 and 2000, compared to 26% in 1999.
Cost of maintenance subscriptions increased in 2001 relative to 2000, in line
with the increase in revenue from maintenance subscriptions. The decrease in
2000 relative to 1999 reflected the benefits of the investments made in 1999 to
improve the effectiveness of our telephone and web support function.
Cost of training and consulting is comprised principally of salaries,
benefits and expenses of training and consulting personnel. These costs
represented 100% of training and consulting revenue in 2001, compared to 82% in
2000 and 88% in 1999. The increase in 2001 relative to 2000 was due to the
transfer of personnel from discontinued services offerings to the ECM business
faster than the growth in revenue. Actions were taken during the later part of
fiscal 2001 to reduce costs in this area. Training and consulting costs were
reduced in 2000 relative to 1999 in response to reduced demand for our
consulting services, especially in Year 2000-related ECM projects.
Gross profit
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ -------- ------ -------- ------ --------
Gross profit......................... $143,322 3% $138,906 25% $110,697
Percentage of total revenue
(margin)........................... 77% 79% 71%
</Table>
The reduced gross profit margin in 2001 reflects improved margins for
product licenses and maintenance subscriptions being offset by declining margins
generated within the consulting services after absorbing downsizing costs. The
improved margin in 2000 relative to 1999 reflected 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.
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. Because of the above factors, gross margin fluctuations are
difficult to predict, and gross margins may decline from current levels in
future periods.
23
Research and development
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ------- ------ ------- ------ -------
Research and development expenditure....... $33,999 28% $26,505 -3% $27,192
Deduct: amounts capitalized................ -- -100% (1,095) 28% (858)
------- ---- ------- --- -------
Current expenditure charged to income...... 33,999 34% 25,410 -4% 26,334
Add: amortization of previously capitalized
costs.................................... 1,544 -11% 1,743 73% 1,007
------- ---- ------- --- -------
Research and development costs............. $35,543 31% $27,153 -1% $27,341
------- ---- ------- --- -------
Percentage of total revenue................ 19% 16% 17%
</Table>
Research and development costs consist principally of salaries, benefits
and travel expenses for software developers, related facility costs and expenses
associated with computer equipment used in software development. 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
economic life. Research and development costs include the amortization of
previously capitalized software costs.
Current expenditure on software research and development increased by $7.5
million in 2001 relative to 2000. This increase reflects MERANT's increased
investment on development projects focused on ECM, including the web content
portion of this segment.
In 2001, none of this expenditure was capitalized as software product
assets, compared to $1.1 million in 2000. Capitalized costs are amortized over
the respective products' estimated economic lives of up to three years. After
providing for amortisation of previously capitalized costs, the net charge to
income, representing the excess of amortization over capitalization, amounted to
$1.5 million in 2001, compared to $0.6 million in 2000 and $0.1 million in 1999.
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
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ------- ------ ------- ------ -------
Sales and marketing................. $90,630 -8% $98,182 18% $83,188
Percentage of total revenue......... 49% 56% 53%
</Table>
Sales and marketing costs include salaries and benefits, sales commissions,
travel and related facility costs for sales, pre-sales and marketing personnel,
and publicity costs such as advertising, trade shows and other market
development programs. In 2001 these costs decreased by $7.6 million relative to
2000 as a result of cost reduction programs implemented at the beginning of the
fiscal year. In fiscal 2000, sales and marketing costs increased by $15.0
million, reflecting sales force expansion, higher commissions and higher
advertising and marketing costs, including those associated with the corporate
name-change and product launches.
MERANT believes that continued investment in sales, marketing, customer
support and promotional activities is essential to maintaining its competitive
position. However, we have brought additional focus to this effort in late
fiscal 2001, attempting to reduce these costs as a percentage of revenue.
24
General and administrative
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ------- ------ ------- ------ -------
General and administrative.......... $16,088 -18% $19,714 9% $18,030
Percentage of total revenue......... 9% 11% 11%
</Table>
General and administrative costs consist principally of salaries and
benefits, travel and related facility costs for MERANT's group management,
finance, legal and human resources operations, and include such costs as outside
legal and accounting fees. These costs decreased by $3.6 million in 2001
relative to 2000 as a result of cost reductions implemented throughout this past
year and increased by $1.7 million in 2000 relative to 1999 reflecting the
changes made to support a growing business. We anticipate that general and
administrative expenses will decrease in future periods.
Goodwill amortization
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ------- ------ ------- ------ -------
Goodwill amortization............... $ 1,900 89% $ 1,008 113% $ 474
Percentage of total revenue......... 1% 1% 0%
</Table>
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. During fiscal 2001
and 2000, we completed two corporate acquisitions on which the total amount of
capitalized goodwill amounted to $16.0 million. Consequently, amortization
charges increased significantly in 2001 relative to 2000, and in 2000 relative
to 1999.
We anticipate that goodwill amortization charges will increase in fiscal
2002 to reflect full-year amortisation charges arising on businesses acquired in
fiscal 2001.
Non-recurring charges
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ---- ------ ---- ------ -------
Non-recurring charges.......................... -- 0% -- 0% $49,662
Percentage of total revenue.................... 0% 0% 32%
</Table>
No non-recurring charges against continuing operations were recorded in
fiscal 2001 or 2000. One-time charges in connection with the discontinuance of
our E-Solutions consulting business have been separately identified on the
income statement (see "Discontinued operations", on page 27).
In 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.
Acquired in-process research and development
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ------ ------ ---- ------ ----
Acquired in-process research and development.... $7,250 n/a -- 0% --
Percentage of total revenue..................... 4% 0% 0%
</Table>
In the fourth quarter of fiscal 2001, we recorded a charge of $7.3 million
for acquired in-process research and development related to our acquisition of
the Enterprise Division of NetObjects, Inc. This charge was expensed at the time
of acquisition. The principal ongoing project of the Enterprise Division at the
time of
25
purchase was the development of the NetObjects Collage V2.0 web content
management software. We purchased this technology to incorporate it into future
versions of our existing enterprise change management products to further
enhance those products. At the date we acquired the Enterprise Division, it was
estimated that 60% of the development effort had been completed and that the
remaining 40% of the development effort would take approximately six months to
complete and would cost $2.0 million. The value of the in-process technology was
determined by estimating the projected net cash flows related to existing
products into which the technology would be integrated. The computation includes
costs to complete the development of the technology, and the future net revenues
that may be earned from the products, but excludes the value attributed to the
existing technology with the products prior to the integration of the purchased
technology. These cash flows were discounted back to their net present value
using a discount rate of 20%, exclusive of the value attributable to the use of
in-process technologies in future products.
The fair values of the existing products and patents, as well as the
technology currently under development, were determined using the income
approach, which discounts expected future cash flows to present value. The
discount rates of 20% used in the present value calculations were derived from a
weighted-average cost of capital analysis and venture capital surveys, adjusted
upward to reflect additional risks inherent in the development life cycle. We
consider the pricing model for products related to these acquisitions to be
standard within the software industry. However, we do not expect to achieve a
material amount of expense reductions or synergies as a result of integrating
the acquired in-process technology. Therefore, the valuation assumptions do not
include significant anticipated cost savings.
The development of these technologies remains a significant risk due to the
remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products, and significant competitive
threats from numerous companies. The nature of the efforts to develop the
acquired technologies into commercially viable products consists principally of
planning, designing, and testing activities necessary to determine that the
products can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner would
result in a loss of market share or a lost opportunity to capitalize on emerging
markets and could have a material adverse impact on our business and operating
results.
The assumptions primarily consist of an expected completion date for the
in-process projects, estimated costs to complete the projects, and revenue and
expense projections once the products have entered the market. Shipment volumes
of products from the above-acquired technologies are not material to our overall
financial results at the present time. Therefore, it is difficult to determine
the accuracy of overall revenue projections early in the technology or product
life cycle. Failure to achieve the expected levels of revenue and net income
from these products will negatively impact the return on investment expected at
the time that the acquisitions were completed and potentially result in
impairment of any other assets related to the development activities.
Interest income, net
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ------ ------ ------ ------ ------
Interest income, net....................... $6,154 29% $4,787 -24% $6,334
Percentage of total revenue................ 3% 3% 4%
</Table>
Interest earned on cash and short-term investments, net of interest
expense, increased by $1.4 million in 2001 relative to 2000. The increase
recorded in 2001 relative to 2000 reflects interest earned on refunded corporate
taxes. The decrease of $1.5 million in 2000 relative to 1999 reflected lower
average cash balances during the year, as well as lower interest rates.
26
Income taxes
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ ------- ------ ----- ------ -------
Income taxes............................. $(1,250) 140% $(520) -71% $(1,808)
Percentage of total revenue.............. -1% 0% -1%
Effective tax rate....................... -65% -22% -3%
U.K. statutory rate...................... 30% 30% 31%
</Table>
MERANT's tax rate in each of the last three years has been distorted by the
permanent differences between accounting profits and taxable profits, primarily
the difference in the treatment of amortisation of goodwill. The tax rate is
also impacted by reserves being established for tax benefits of net operating
losses for which realization is not assured. In 1999, the tax rate was impacted
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.
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 12 to the
consolidated financial statements on pages 55 to 57.
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.
Discontinued operations
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ -------- ------ ---- ------ -------
(Loss) income from discontinued
operations, net of income taxes........ $(10,023) n/m $476 -99% $34,940
(Loss) on disposal of discontinued
operations, net of income taxes........ $(16,320) n/m -- n/m --
</Table>
As disclosed above, MERANT is reporting the operating results from both its
E-Solutions Division, which was discontinued during the year, and those of its
ACT Division, which was sold in August 2001, as discontinued operations.
In February 2001, MERANT's Board of Directors approved management's plan to
discontinue the operations and business of the Company's E-Solutions Division.
The plan was announced by MERANT on February 21, 2001, and was completed by the
beginning of May, 2001. Accordingly, MERANT reported the results of operations
of the business, which amounted to a net loss of $13.8 million in fiscal 2001
and net income of $0.4 million in 2000, as discontinued operations. In fiscal
2001, MERANT also recorded the loss arising on the discontinuance of the
business, which amounted to $16.3 million. The loss includes the write-off of
unamortised goodwill, which totaled $11.6 million.
After the fiscal year end, in August 2001, MERANT completed the sale of its
ACT Division to Golden Gate Capital and Parallax Partners for $62.5 million in
cash, subject to potential post-closing adjustments based on the value of assets
transferred. As the transaction was conditional upon shareholder approval and
other customary conditions of closing, MERANT held an extraordinary general
meeting of shareholders on July 23, 2001, at which our shareholders approved the
transaction. The transaction was closed on August 10, 2001, and an initial cash
payment of $54.5 million was received from the buyers. Under the terms of the
agreement, final settlement of the sale price is due in the second half of
fiscal 2002. The operating results of the ACT Division were included in
continuing operations in our financial statements until we received shareholder
approval, at which time we reported them as discontinued operations. The net
gain arising from the sale of the business will be recognised in fiscal 2002
(see note 3 to the consolidated financial statements on pages 50 to 52).
27
Accordingly, the ACT Division's net income of $3.8 million in fiscal 2001
and $0.1 million in 2000 is included in discontinued operations. Net income for
fiscal 2000 included a non-recurring charge of $13.5 million related to
management actions to reduce expenses relative to the decline in demand for Year
2000 and COBOL-based products and services. The charge was made up of a $7.3
million non-cash write-off of previously capitalized software product assets, a
provision of $3.3 million for severance costs for approximately 50 employees in
our Year 2000 and COBOL-related businesses and $2.8 million for other costs
primarily associated with the closure of excess facilities. These actions were
completed prior to April 30, 2001.
Additional information on these disposals is given in note 3 to the
consolidated financial statements on pages 50 to 52.
Business combinations
In the fourth quarter of fiscal 2001, MERANT completed the acquisition of
the Enterprise Division of NetObjects, Inc. The total consideration for the
transaction was $18.1 million, the whole of which was payable in cash. This
transaction has been accounted for using the purchase accounting method. As
described above, under "Acquired in-process research and development" $7.3
million of the acquisition cost was allocated to in-process research and
development and expensed at the time of acquisition. The remaining excess of the
purchase price over the estimated fair value of the net tangible assets acquired
has been capitalized as goodwill. We are amortizing this amount, which totalled
$11.6 million, over its estimated economic life of five years.
In the third quarter of fiscal 2000, on December 6, 1999, MERANT 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 was estimated at the time of closing to
be approximately $7 million, payable in cash, of which $4.2 million was paid
before April 30, 2000. The total cost of the acquisition included contingency
payments of up to $2.0 million, which are based on meeting financial performance
targets covering the period ended October 31, 2001. It is unlikely that these
targets will be met. After valuation adjustments to the acquired assets, and on
the assumption that no contingency payments will be due, the cost of the
acquisition has been revised to $4.3 million. The excess of the purchase price
over the estimated fair value of the net tangible assets acquired has been
capitalized as goodwill. We are amortizing this amount, which totalled $4.4
million, over its estimated economic life of five years.
In the second quarter of fiscal 1999, MERANT completed the merger with
INTERSOLV, Inc. 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.
Additional information on these transactions is given in note 2 to the
consolidated financial statements on pages 48 to 49.
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 enterprise change management business and
related revenues, the return of excess capital to shareholders, and the one-time
nature of certain
28
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", "realize", "likely", "unlikely"
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 focus on its enterprise change
management products and services and away from certain of its past primary
markets, including the market for Year 2000 products and services, the market
for application, creation and transformation, or COBOL, mainframe software
products and services, and the market for enterprise data connectivity, or
middleware, software products and services. MERANT's ability to recruit and
retain key personnel, especially in the sales and business units and at the
senior management level, could materially alter financial results and plans for
the sales and business units. Other factors that could cause actual results to
differ materially include, among others, the ability of MERANT to effectively
manage its 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, the
ability of MERANT to develop, release, market and sell products and services to
customers in the highly dynamic market for enterprise change management
products, the potential need for enterprise change management products to shift
based on changes in technology and customer needs, the effect of competitors'
efforts to enter MERANT's markets and the possible success of existing
competitors in those markets, the possibility that the sale of the DataDirect
enterprise data connectivity business will not proceed as planned or may not be
completed at all, and MERANT's ability to manage and integrate recently acquired
businesses or other businesses that it may acquire in the future as well as
efficiently dispose of, and manage the provision or receipt, as the case may be,
of certain services related to, businesses or products which are not a part of
MERANT's business strategy, including MERANT's ability to complete and manage
obligations related to, the sale of the DataDirect enterprise data connectivity
business and the earlier disposal of the Micro Focus application, creation and
transformation division.
Further information on potential factors which could affect our financial
results is included below under the heading "Risk factors that may influence
future operating results," and elsewhere in this Annual Report, and in reports
on Form 6-K 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, 2001. MERANT undertakes no obligation to release publicly any updates
or revisions to any forward-looking statements contained in this Annual Report
that may reflect events or circumstances occurring after the date of this Annual
Report.
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.
MERANT undertakes no obligation to release publicly any updates or
revisions to any forward-looking statements contained in this Annual Report that
may reflect events or circumstances occurring after the date of this Annual
Report. For more information on forward-looking statements, see "Forward-looking
statements" above.
Our operating results may fluctuate, and any fluctuations could adversely
affect the price of MERANT 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 MERANT securities would likely decrease. The market
price of MERANT's
29
securities has experienced significant price volatility. We expect that our
operating results may fluctuate in the future due to a variety of factors,
including:
- demand for, and acceptance of, our products,
- the size and timing of customer orders and the lengthy sales cycle,
- product life cycles,
- our ability, and that of our competitors, to introduce and market new and
enhanced product versions on a timely basis,
- 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 or hardware industries,
- changes in the mix of distribution channels through which our products
are offered,
- purchasing patterns of distributors and retailers, including those based
on customer budgeting cycles,
- the quality of our products,
- price and other competitive conditions in the industry,
- changes in our level of operating expenses,
- changes in our sales incentive plans,
- changes in our executive or sales management,
- our ability to acquire and effectively integrate, or divest, as the case
may be, companies and products,
- the cancellation of licenses during the warranty period,
- non-renewal of maintenance agreements,
- the effects of extended payment terms (particularly for international
customers),
- economic and/or political 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 compensate for a
revenue shortfall
Historically, we have operated with little product backlog, because we
generally ship our products when we receive an order. As a result, our product
revenue in any quarter will depend on the volume and timing of 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 several 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 in
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, can cause disproportionate variations in our
operating results from quarter to quarter. As a result, and due to the typical
size of customers' orders, our quarterly operating results and cash flow would
suffer from a lost or delayed sale. The company has historically been dependent
upon large enterprise transactions with individual customers. Moreover, if
significant sales occur earlier in a given period 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
30
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.
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
MERANT is in a market that is subject to rapid technological change. We
must continually adapt to that change by improving our products and introducing
new products, technologies and services. Our growth and financial performance
will depend in part on our ability to develop and introduce enhancements of
existing products and new products that accommodate the latest technological
advances and standards, customer requirements and market conditions on a timely
and cost-effective basis. This depends in part on our ability to attract and
retain qualified employees. In the past, we have experienced delays and
increased expenses in developing new products. We may not be successful in
marketing, on a timely basis or at all, competitive products, product
enhancements and new products that respond to technological change, changes in
customer requirements and emerging industry standards.
Product defects can be expensive to fix and can cause 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 cost of correcting such errors could be substantial
and there could be associated adverse publicity. For these reasons, 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 although we are unable to
determine the extent to which software piracy of our products exists, software
piracy can be expected to be a persistent problem. In addition, effective
protection of intellectual property rights may be unavailable or limited in some
foreign countries. Patents have been granted on fundamental technologies in
software, and third party patents may issue 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
Third parties may assert intellectual property infringement claims against
us in the future concerning our products, trademarks or other proprietary
rights. We became aware in the period August through October 2001 of several
possible patent infringement claims against us, and are in the process of
confirming our belief that our technology is not the subject of these claims. If
it is necessary or desirable, we may seek licenses under disputed third party
intellectual property rights. However, these licenses may not be available on
reasonable commercial terms, if at all. The failure to obtain a license from a
third party for technology that we use could cause us to incur substantial
liabilities and to suspend the production and sale of certain 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
indemnification 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.
31
In addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish their validity.
Litigation to determine the validity of any claims could result in significant
expense and divert the efforts of our technical and management personnel from
operating activities, whether or not the litigation is determined in our favor.
In the event of an adverse ruling in any litigation, we may be required to pay
substantial damages, 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, it is possible that 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
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, including customers, 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 years 2001, 2000 and 1999, sales to customers outside of the
United States represented approximately 31%, 32%, and 31% respectively, of our
revenue. 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. The risks
inherent in conducting international business generally include:
- exposure to exchange rate fluctuations
- longer payment cycles
- greater difficulties in accounts receivable collection and enforcing
agreements
- tariffs and other restrictions on foreign trade
- U.S., European Union and other countries' export requirements
- economic and political instability
- withholding and other tax consequences
- restrictions on repatriation of earnings
32
- the burdens of complying with a wide variety of foreign laws
- general economic and political conditions.
If we lose key personnel or are unable to hire additional qualified personnel
as necessary, we may not be able to manage our business successfully or sell
our products
Several of our senior management personnel are relatively new to MERANT,
including but not limited to our President and CEO, Gerald Perkel, who joined
the company in September 2001, 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 successfully
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, as the
case may be, key personnel of acquired companies. We do not have employment
agreements with most of our key personnel to ensure their continued employment,
and we do not maintain key person life insurance on any of these persons.
If we were unable to manage growth effectively, our operations would be
disrupted
MERANT has recently experienced tremendous organizational and personnel
changes, including the sale of the Company's Application, Creation and
Transformation ("ACT") Division, and the pending sale of the Enterprise Data
Connectivity ("EDC") Division. These changes have placed a significant strain on
our financial, management, operational and other resources. These strains will
continue as we transition to a company focused on the enterprise change
management ("ECM") market for our PVCS products. Additionally, in the case of
the ACT sale, and assuming the EDC sale closes as planned, we will provide
certain transition services to the new entities, and certain services will be
provided to us by the new entities, in all cases for certain specified periods.
The process of divesting a significant division of a company's business may also
result in unforeseen operating difficulties and expenditures. Our management,
personnel, systems, procedures and controls may not be adequate to support both
the new entities' operations, and our own existing and future operations.
Moreover, the anticipated financial, strategic and other benefits of the
divestiture(s) might not be realized.
Market volatility may cause the price of our securities to decline
The market price of MERANT's securities has experienced significant price
volatility, particularly since the announcement in June 1998 of the merger with
INTERSOLV, and volatility may occur in the future. Factors that may have a
significant impact on the market price of our securities include:
- actual or anticipated fluctuations in our operating results,
- changes in financial estimates by securities analysts,
- announcements of technological innovations,
- new products or new contracts achieved 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, or new interpretations of existing
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. The Company and certain of its present and former officers and/or
directors are presently defendants in a class action lawsuit alleging, among
other things, violations of the US securities laws. There can be no assurance
that the Company and/or its officers and directors may not be the subject of
additional lawsuits in the future in connection with, among other things, the
possible market price volatility of MERANT's securities.
33
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, Northern
Software Partners AS in January 2000, and the Enterprise Division of NetObjects,
Inc. in February, 2001. 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
financial, strategic and other 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, practices,
technologies and products of the acquired companies,
- difficulties in managing diverse geographic sales and research and
development operations,
- the diversion of management attention from other business priorities or
issues,
- risks of entering markets in which we have no or limited direct prior
experience, and the potential loss of key employees of MERANT or the
acquired company.
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. We experienced
no significant impact from the Year 2000 problem on our ability to carry on
normal business operations. We have not been subject to any claims or lawsuits
to date relating to any Year 2000-related failures of our products or services,
but 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.
Twelve member countries of the European Union have adopted the euro as
their legal currency. The participating countries established fixed euro
conversion rates between their existing national currencies and the euro. The
euro now trades on currency exchanges and is available for non-cash
transactions. MERANT's internal systems have the ability to price and invoice
customers 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 rights 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.
34
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 results, notably when expressed in G.B. pounds. In
fiscal years 2001, 2000 and 1999, 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.
If accounting interpretations or new pronouncements relating to revenue
recognition change are introduced, our reported revenues could decline or we
could be forced to make changes in our business practices
Over the past few years, the American Institute of Certified Public
Accountants issued Statement of Position, or SOP 97-2, "Software Revenue
Recognition," and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." These standards address
software revenue recognition matters primarily from a conceptual level and do
not include specific guidance in many areas. We believe that we are currently in
compliance with SOPs 97-2 and SOP 98-9. In addition, in December 1999, the SEC
staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements", or SAB 101, which explains how the SEC staff believes
existing revenue recognition rules should be applied or referenced for
transactions not addressed by existing rules.
The accounting profession continues to discuss certain provisions of SOP
97-2 and SAB 101 with the objective of providing additional guidance on
potential interpretations. These discussions and the issuance of
interpretations, once finalized, could lead to unanticipated changes in the
Company's current revenue accounting practices, with possible resulting
recognition of lower revenues. Accordingly, we may need to change our business
practices in order to continue to recognize a substantial portion of our license
revenues. These changes, and possible additional new accounting pronouncements
in the future, may extend sales cycles, increase administrative costs and
otherwise adversely affect our business.
The current depressed general economic and market conditions could cause
decreases in demand for our software and related services, which could
negatively affect our revenue and operating results and the market price of our
securities
Downturns in general economic and market conditions such as those being
experienced at present may result in customers postponing or canceling software
purchasing decisions. If demand for our software and related services decreases,
our revenues may decrease and our operating results would be negatively
impacted. The market price of the Company's securities could similarly be
negatively impacted as the result of this decreased demand and resulting effect
on operating results.
Risks related to doing business with the Federal government
We sell our products, maintenance, training, and services, directly and
indirectly, from time to time, to agencies of the Federal government. Companies
selling to the government may be subject to a variety of specialized regulations
governing such areas as employment practices, product pricing and discount
practices, and contract management. Our compliance with the terms and conditions
of individual government contracts, including, but not limited to contractual
disclosures, and sales activity reporting systems, have been audited in the
past, are currently being audited, and may be audited in the future. There can
be no assurance that any
35
such audit may not result in a cost adjustment, refund, penalty and/or further
investigation. Any of these possible scenarios could be expensive and
distracting to us, in terms of the time and management of personnel and outside
professional resources needed to respond to the government's audit or
investigation demands, and the associated costs.
LIQUIDITY AND CAPITAL RESOURCES
<Table>
<Caption>
(IN THOUSANDS OF U.S. DOLLARS) 2001 CHANGE 2000 CHANGE 1999
------------------------------ -------- ------ -------- ------ --------
Cash, cash equivalents and short-term
investments........................ $ 84,828 -28% $117,701 -3% $121,384
Working capital...................... 44,232 -41% 74,719 -17% 89,619
Shareholders' equity................. 103,747 -35% 161,402 6% 152,211
</Table>
Our cash equivalents and short-term investments consist of liquid money
market investments in the United States, primarily mutual funds, municipal bonds
and government agency securities. All of our 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 with the unrealized gains and losses, net of tax, included
in accumulated other comprehensive income, which is disclosed as a separate
component of shareholders' equity.
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.
MERANT continues to fund its activities through cash from operating
activities.
In fiscal 2001, our cash, cash equivalents and short term investments
decreased by $32.9 million. Cash generated from continuing operations totalled
$18.1 million. During the year $7.9 million, net was invested in property, plant
and equipment and $18.1 million was used to acquire the Enterprise Division of
NetObjects, Inc. In addition, MERANT also spent $21.1 million on the purchase of
its own shares for cancellation.
In 2000, our cash, cash equivalents and liquid short-term investments
decreased by $3.7 million. Operating activities generated $17.3 million in cash.
We invested $14.3 million, net, on property, plant and equipment and capitalized
software. $18.6 million was generated from the sale of shares to option-holders
on the exercise of their options and $4.6 million was used to repurchase shares
for the employee share purchase plan.
We expect to continue our investing activities, including expenditures for
computer systems for research and development, sales and marketing and
administrative staff. Furthermore, cash reserves may be used to purchase MERANT
shares and to acquire software companies, products or technologies that are
complementary to our business.
MERANT is authorized to acquire its own shares, subject to certain market
and business conditions, for the benefit of its employee share plans. In
accordance with this authority, MERANT Trustees Limited acquired 5.4 million
ordinary shares (equivalent to 1.1 million ADRs) during fiscal 2001 at a cost of
approximately $7.7 million.
MERANT has in place a line of credit under the terms of which unsecured
financing of up to L5.0 million ($7.2 million at April 30, 2001) is available
until January 2002. At April 30, 2001, borrowings equivalent to $2.0 million had
been made against this line of credit compared to $2.8 million at April 30,
2000.
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.
36
We believe that our existing cash, cash equivalents and short-term
investments, in combination with internally generated funds and our available
bank line of credit, will be more than sufficient to meet cash requirements in
fiscal 2002.
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.
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, 2001, the fair value of our financial instruments with exposure to
interest rate risk was $18.1 million. A hypothetical 50 basis point increase in
interest rates would result in an approximate $91,000 decrease in the fair value
of our securities. This sensitivity analysis is performed on our financial
positions at April 30, 2001. Actual results may differ materially from this
analysis.
Our operations are based principally in the U.S.A. and the U.K. but 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, 2001. We prepared a sensitivity analysis for exposure
for foreign net assets as of April 30, 2001 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, 2001 rates would
result in a currency translation loss of approximately $3.8 million before
taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board finalized SFAS 133
"Accounting for Derivative Instruments and Hedging Activities" (as amended by
SFAS 137 and SFAS 138). 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. We will be required to adopt SFAS 133 in fiscal
2002. The adoption of SFAS 133 is not expected to have a material effect on
results from operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements". This bulletin establishes guidelines for
revenue recognition in the financial statements. We will be required to adopt
SAB 101 in fiscal 2002. The adoption of SAB 101 is not expected to have a
material effect on results from operations or financial position.
In March 2000, the FASB issued Financial Interpretation No. 44 "Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB No. 25". The Company has elected to follow APB 25 and related
Interpretations in accounting for its employee share options, and FIN 44
clarifies the application of APB 25 for certain issues. The adoption of FIN 44
did not have a material effect on results from operations or financial position.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001 and for acquisitions occurring after July 1, 2001. Under
the new rules, goodwill and identifiable intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of
37
fiscal 2003. During fiscal 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets and
has not yet determined what the effect of these tests will be on the earnings
and financial position of the Company.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." The new standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002. The Company will adopt
FASB No. 143 beginning May 1, 2002 and does not believe the statement will have
a material effect on its financial position.
In October 2001, the FASB issued SFAS 144, "Accounting for the Disposal or
Impairment of Long Lived Assets." The FASB's new rules on asset impairment
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and provides a single
accounting model for long-lived assets to be disposed of. The new rules also
will supersede the provisions of APB Opinion 30 with regard to reporting the
effects of a disposal of a segment of a business and will require expected
future operating losses from discontinued operations to be displayed in
discontinued operations in the period(s) in which the losses are incurred
(rather than as of the measurement date as presently required by APB 30). In
addition, more dispositions will qualify for discontinued operations treatment
in the income statement. The standard is applicable for fiscal years beginning
after December 15, 2001, and will be adopted by the Company beginning May 1,
2002.
38
MERANT PLC
FINANCIAL STATEMENTS 2001
CONSOLIDATED STATEMENTS OF OPERATIONS
US FORMAT
<Table>
<Caption>
YEAR ENDED APRIL 30,
------------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND ADS DATA 2001 2000 1999
--------------------------------------------------- -------- -------- --------
NET REVENUE
License fees.............................................. $ 95,630 $ 96,633 $ 85,100
Maintenance subscriptions................................. 62,786 52,789 41,996
Training and consulting................................... 27,139 25,347 29,896
-------- -------- --------
TOTAL NET REVENUE....................................... 185,555 174,769 156,992
-------- -------- --------
COST OF REVENUE
Cost of license fees...................................... 3,197 4,927 8,988
Cost of maintenance subscriptions......................... 11,832 10,102 10,938
Cost of training and consulting........................... 27,204 20,834 26,369
-------- -------- --------
TOTAL COST OF REVENUE................................... 42,233 35,863 46,295
-------- -------- --------
GROSS PROFIT................................................ 143,322 138,906 110,697
-------- -------- --------
OPERATING EXPENSES
Research and development (note 5)......................... 35,543 27,153 27,341
Sales and marketing....................................... 90,630 98,182 83,188
General and administrative................................ 16,088 19,714 18,030
Goodwill amortisation..................................... 1,900 1,008 474
Non-recurring charges (note 6)............................ -- -- 49,662
Acquired in-process research and development (note 6)..... 7,250 -- --
-------- -------- --------
TOTAL OPERATING EXPENSES................................ 151,411 146,057 178,695
-------- -------- --------
(LOSS) INCOME FROM OPERATIONS............................... (8,089) (7,151) (67,998)
Interest income, net........................................ 6,154 4,787 6,334
-------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES..................................................... (1,935) (2,364) (61,664)
Income taxes on continuing operations....................... (1,250) (520) (1,808)
-------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS.................... (3,185) (2,884) (63,472)
(Loss) income from discontinued operations, net of income
taxes..................................................... (10,023) 476 34,940
(Loss) on disposal of discontinued operations, net of income
taxes..................................................... (16,320) -- -
-------- -------- --------
NET (LOSS).................................................. $(29,528) $ (2,408) $(28,532)
======== ======== ========
Basic net (loss) income per share from continuing
operations................................................ $ (0.02) $ (0.02) $ (0.44)
Basic net (loss) income per share from discontinued
operations................................................ $ (0.20) $ 0.00 $ 0.24
Basic net (loss) per share.................................. $ (0.22) $ (0.02) $ (0.20)
Shares used in computing basic net (loss) per share......... 134,305 145,897 143,130
-------- -------- --------
Diluted net (loss) income per share from continuing
operations................................................ $ (0.02) $ (0.02) $ (0.44)
Diluted net (loss) income per share from discontinued
operations................................................ $ (0.20) $ 0.00 $ 0.24
Diluted net (loss) per share................................ $ (0.22) $ (0.02) $ (0.20)
Shares used in computing diluted net (loss) per share....... 134,305 145,897 143,130
-------- -------- --------
Basic net (loss) income per ADS from continuing
operations................................................ $ (0.12) $ (0.10) $ (2.22)
Basic net (loss) income per ADS from discontinued
operations................................................ $ (0.98) $ 0.02 $ 1.22
Basic net (loss) per ADS.................................... $ (1.10) $ (0.08) $ (1.00)
ADSs used in computing basic net (loss) per ADS............. 26,861 29,179 28,626
-------- -------- --------
Diluted net (loss) income per ADS from continuing
operations................................................ $ (0.12) $ (0.10) $ (2.22)
Diluted net (loss) income per ADS from discontinued
operations................................................ $ (0.98) $ 0.02 $ 1.22
Diluted net (loss) per ADS.................................. $ (1.10) $ (0.08) $ (1.00)
ADSs used in computing diluted net (loss) per ADS........... 26,861 29,179 28,626
-------- -------- --------
</Table>
See accompanying notes to consolidated financial statements on pages 43 to 64.
39
MERANT PLC
FINANCIAL STATEMENTS 2001
CONSOLIDATED BALANCE SHEETS
US FORMAT
<Table>
<Caption>
APRIL 30, APRIL 30,
(AMOUNTS IN THOUSANDS) 2001 2000
---------------------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 81,973 $ 98,163
Short-term investments.................................... 2,855 19,538
Accounts receivable, net of allowances for doubtful
accounts of $4,104 ($3,882 in 2000).................... 37,416 52,471
Prepaid expenses and other assets......................... 6,282 7,842
-------- --------
TOTAL CURRENT ASSETS................................... 128,526 178,014
-------- --------
FIXED ASSETS:
Property, plant and equipment, net (note 8)............... 10,470 15,618
Goodwill, net of amortization of $3,220 ($1,320 in
2000).................................................. 14,597 4,875
Software product assets, net of amortization of $7,356
($6,705 in 2000)....................................... 832 1,483
Net assets of discontinued operations..................... 46,738 75,214
Other assets.............................................. 537 1,650
-------- --------
TOTAL ASSETS........................................... $201,700 $276,854
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings (note 9)....................................... $ 2,017 $ 2,785
Accounts payable.......................................... 6,634 6,950
Accrued employee compensation and commissions............. 13,496 13,970
Income taxes payable...................................... 3,618 7,601
Deferred revenue.......................................... 39,877 41,423
Other current liabilities................................. 18,652 30,566
-------- --------
TOTAL CURRENT LIABILITIES.............................. 84,294 103,295
-------- --------
Deferred income taxes (note 12)........................... 13,659 12,157
-------- --------
TOTAL LIABILITIES...................................... 97,953 115,452
-------- --------
COMMITMENTS AND CONTINGENCIES (notes 10 and 11)
SHAREHOLDERS' EQUITY:
Ordinary shares: 2 pence (G.B.) par value 212,000 shares
authorized, 134,963 shares issued and outstanding
(149,389 in 2000)...................................... 4,448 4,876
Additional paid-in capital................................ 152,844 172,892
Treasury stock: 7,260 shares (4,371 in 2000).............. (13,872) (11,742)
Retained (deficit) earnings............................... (23,086) 6,442
Accumulated other comprehensive loss...................... (16,587) (11,066)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................. 103,747 161,402
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $201,700 $276,854
======== ========
</Table>
See accompanying notes to consolidated financial statements on pages 43 to 64.
40
MERANT PLC
FINANCIAL STATEMENTS 2001
CONSOLIDATED STATEMENTS OF CASH FLOW
US FORMAT
<Table>
<Caption>
YEARS ENDED APRIL 30,
-----------------------------------
(AMOUNTS IN THOUSANDS) 2001 2000 1999
---------------------- --------- --------- ---------
OPERATING ACTIVITIES
NET (LOSS) FROM CONTINUING OPERATIONS..................... $ (3,185) $ (2,884) $(63,472)
Adjustments to reconcile net (loss) to cash provided by
operations
Depreciation of fixed assets............................ 11,854 7,507 10,865
Amortization of software product assets................. 651 1,743 1,007
Amortization of goodwill................................ 1,900 1,008 474
Write-down of software and intangible assets............ -- 885 161
Loss on disposal of fixed assets........................ 1,205 -- --
Deferred income taxes................................... 1,502 (2,147) 9,040
In-process R&D.......................................... 7,250 -- --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable..................................... 13,428 14,477 (20,393)
Prepaid expenses and other assets....................... 1,316 (4,123) 3,062
Accounts payable........................................ (316) (4,542) 2,668
Accrued employee compensation........................... (474) (1,470) 1,386
Income taxes payable.................................... (3,983) (10,724) 15,668
Deferred revenue........................................ (2,257) 5,644 15,562
Other current liabilities............................... (10,792) 11,958 18,857
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF
CONTINUING OPERATIONS..................................... 18,099 17,332 (5,115)
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment................ (7,911) (13,177) (4,134)
Software product assets................................... -- (1,095) (7,423)
Acquisition of subsidiaries, net of cash balances
acquired................................................ (18,108) (4,100) (1,974)
Net change in available-for-sale securities............... 16,077 14,825 5,505
-------- -------- --------
NET CASH (USED IN) INVESTING ACTIVITIES OF CONTINUING
OPERATIONS................................................ (9,942) (3,547) (8,026)
-------- -------- --------
FINANCING ACTIVITIES
Issuance of ordinary shares, net of expenses.............. 1,451 18,599 1,926
Purchases of Treasury stock, net.......................... (2,996) (4,580) --
Shares acquired for cancellation.......................... (21,061) -- --
Borrowings................................................ -- 49 --
Repayment of capital leases............................... (9) -- (9)
Repayment of borrowings................................... (768) -- (2,634)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS..................................... (23,383) 14,068 (717)
-------- -------- --------
Effect of exchange rate changes on cash..................... (3,097) (1,354) (298)
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS...... 2,133 (12,821) 12,182
Increase (decrease) in cash................................. (16,190) 13,678 (1,974)
Cash at beginning of period................................. 98,163 84,485 86,459
-------- -------- --------
CASH AT END OF PERIOD....................................... $ 81,973 $ 98,163 $ 84,485
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid during the period....................... $ 3,171 $ 10,297 $ 4,317
======== ======== ========
Interest paid during the period........................... $ 265 $ 306 $ 239
======== ======== ========
</Table>
See accompanying notes to consolidated financial statements on pages 43 to 64.
41
MERANT PLC
FINANCIAL STATEMENTS 2001
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
US FORMAT
<Table>
<Caption>
ACCUMULATED
ORDINARY ADDITIONAL RETAINED OTHER
NUMBER SHARES PAID-IN TREASURY EARNINGS COMPREHENSIVE COMPREHENSIVE
IN THOUSANDS OF SHARES AMOUNT CAPITAL STOCK (DEFICIT) (LOSS) (LOSS) TOTAL
------------ --------- -------- ---------- -------- --------- ------------- ------------- --------
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 tax.............. -- -- -- -- -- 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 for
Treasury.................. -- -- -- (4,741) -- -- -- (4,741)
Comprehensive (loss):
Net (loss)................ -- -- -- -- (2,408) $ (2,408) -- (2,408)
Unrealised (loss) on
marketable securities,
net of tax.............. -- -- -- -- -- (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
Share options exercised..... 165 10 575 866 -- -- -- 1,451
Shares acquired for
cancellation.............. (14,609) (438) (20,623) -- -- -- -- (21,061)
Shares acquired for
Treasury.................. -- -- -- (7,744) -- -- -- (7,744)
Shares sold through ESPP
program................... -- -- -- 4,748 -- -- -- 4,748
Comprehensive (loss):
Net (loss)................ -- -- -- -- (29,528) $(29,528) -- (29,528)
Unrealised gain on
marketable securities,
net of tax.............. -- -- -- -- -- 127 127 127
Currency translation
adjustment.............. -- -- -- -- -- (5,648) (5,648) (5,648)
--------
Comprehensive (loss) $(35,049)
------- ------ -------- -------- -------- ======== -------- --------
BALANCE, APRIL 30, 2001..... 134,945 $4,448 $152,844 $(13,872) $(23,086) $(16,587) $103,747
======= ====== ======== ======== ======== ======== ========
</Table>
See accompanying notes to consolidated financial statements on pages 43 to 64.
42
MERANT PLC
FINANCIAL STATEMENTS 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT
The statutory accounts of MERANT plc for the year ended April 30, 2001,
within the meaning of section 240 of the Companies Act 1985 of Great Britain,
are set out on pages 78 to 108 of this Annual Report.
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 35% of our
revenue is derived from the provision of product support and maintenance
subscriptions, and the remaining 15% from the provision of training and
consulting services. Our principal market is the United States, which accounts
for approximately 70% of revenue; 25% 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 inter-company accounts and transactions have been
eliminated on consolidation.
As more fully disclosed in note 3 on pages 50 to 52, the Company has
restated the 2000 and 1999 financial statements to reflect business disposals in
2001 accounted for as discontinued operations. The detailed results of
operations and cash flows reflect only the results of continuing operations.
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.
We also enter 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 if 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
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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
We expense all advertising costs when incurred, and classify these costs
under sales and marketing expense. Advertising costs, which includes media,
agency and promotional expenses, amounted to $7,673,000 in fiscal 2001, compared
to $8,817,000 in fiscal 2000 and $9,241,000 in fiscal 1999.
Net income (loss) per share
Basic net income (loss) per share is calculated as net income (loss)
divided by the weighted average number of ordinary shares outstanding during the
period.
Diluted net income (loss) per share is calculated as net income (loss)
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 (loss) per share data are set out in note 7 on page 53. The
Company also reports net earnings (loss) per American depositary share (ADS)
equivalent; each ADS represents five ordinary shares.
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
Cash equivalents are instruments with maturities of less than three months
at the time of purchase.
MERANT'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, net of taxes, are included in accumulated
other comprehensive income, which is reported as a separate component of
shareholders' equity. 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 ten 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. MERANT 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
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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. MERANT 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 2001, 2000 or 1999.
Translation of foreign currencies
The Company translates assets and liabilities denominated in currencies
other than U.S. dollars at year-end exchange rates. Revenues and expenses are
translated using average rates in effect during the year. Gains and losses
resulting from the process of translating financial statements denominated in
currencies other than U.S. dollars are included in accumulated other
comprehensive income, which is reported as a separate component of shareholders'
equity.
Intercompany accounts are primarily denominated in U.S. dollars or U.K.
pounds sterling. Transaction gains (losses) included in continuing operations
amounted to $(718,000) in 2001, $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 or market, using the first-in, first-out method.
Contracts in progress, representing engineering costs associated with
non-cancelable license agreements prior to delivery, are included in inventories
and expensed when the related revenue is recognized. Inventories are included in
the balance sheet under Prepaid Expenses and Other Assets.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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:
<Table>
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
</Table>
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 fixed asset and amortized over its estimated
economic life. The estimated life will depend on the length of the future period
expected to benefit from the purchase. Where there is a potential impairment of
goodwill, based on cash flow projections of the businesses acquired, goodwill
will be written down to its estimated value.
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, any subsequent development costs incurred prior to general release are
capitalized as 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.
Software product assets are amortized using the straight-line method over
the economic life of the products, which in most cases is estimated to be three
to four years. Where a shortfall in future revenue from a product is
anticipated, we accelerate amortization. If we judge that the remaining
estimated economic life of a product has been reduced significantly, we may
reduce the carrying amount of the capitalized software 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" and related Interpretations. Accordingly, since all
options are granted with an exercise price equal to the fair value of the
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 14 on pages 58 to 61.
Other recent pronouncements
In June 1999, the Financial Accounting Standards Board finalized SFAS 133
"Accounting for Derivative Instruments and Hedging Activities" (as amended by
SFAS 137 and SFAS 138). 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. We will be required to adopt SFAS 133 in fiscal
2002, but we do not expect adoption to have a material effect on results from
operations or financial position.
In March 2000, the FASB issued Financial Interpretation No. 44 "Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB No. 25". The Company has elected to follow APB 25 and related
Interpretations in accounting for its employee share options, and FIN 44
clarifies the application of APB 25 for certain issues. The adoption of FIN 44
did not have a material effect on results from operations or financial position.
In June 2001, the FASB issued SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001 and for acquisitions occurring after July 1, 2001. Under
the new rules, goodwill and identifiable intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of fiscal 2003. During fiscal 2002, the Company will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets and has not yet determined what the effect of these tests will
be on the earnings and financial position of the Company.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." The new standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002. The Company will adopt
SFAS 143 beginning May 1, 2002 and does not believe the statement will have a
material effect on its financial position.
In October 2001, the FASB issued SFAS 144, "Accounting for the Disposal or
Impairment of Long Lived Assets." The FASB's new rules on asset impairment
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and provides a single
accounting model for long-lived assets to be disposed of. The new rules also
will supersede the provisions of APB Opinion 30 with regard to reporting the
effects of a disposal of a segment of a business and will require expected
future operating losses from discontinued operations to be displayed in
discontinued operations in the period(s) in which the losses are incurred
(rather than as of the measurement date as presently required by APB 30). In
addition, more dispositions will qualify for discontinued operations treatment
in the income statement. The standard is applicable for fiscal years beginning
after December 15, 2001, and will be adopted by the Company beginning May 1,
2002.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 2 BUSINESS COMBINATIONS
On February 20, 2001, MERANT completed the acquisition of the Enterprise
Division of NetObjects, Inc. The acquired business, which was based in Redwood
City, California, is a provider of Web Content Management software. The total
consideration for the transaction was $18,108,000, the whole of which was
payable in cash. The transaction has been accounted for using the purchase
accounting method.
The Company allocated $7,250,000 to in-process research and development and
expensed this against income at the time of acquisition because technological
feasibility had not been established and no future alternative uses existed. The
value of the in-process technology was determined by estimating the projected
net cash flows related to products in development. The computation included
costs to complete the development of the technology and the future net revenues
that may be earned from the products. The estimated net present value of cash
flows took into account the characteristics and applications of the
technologies, the size and growth rate of existing and future markets and
product life cycles. The rates utilized to discount the cash flows to their
present value were based on an estimated cost of capital calculation.
The remaining excess of the purchase price over the estimated fair value of
the net tangible assets acquired, which amounted to $11,569,000, has been
allocated to goodwill and is being amortized over its estimated economic life of
five years. The net assets of the Enterprise Division have been combined with
those of MERANT as of the date of acquisition, and its results of operations
have been combined with those of MERANT for the period since acquisition. The
results of operations before the acquisition were not material, and thus pro
forma information has not been provided.
In the third quarter of fiscal 2000, on December 6, 1999, MERANT 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 was estimated at the time of closing to
be approximately $7,000,000, payable in cash, of which $4,150,000 was paid
before April 30, 2000. The total cost of the acquisition included contingency
payments of up to $2,000,000, which are based on meeting financial performance
targets covering the period ended October 31, 2001. It is unlikely that these
targets will be met. After valuation adjustments to the acquired assets, and on
the assumption that no contingency payments will be due, the cost of the
acquisition has been revised to $4,250,000. The transaction was accounted for
using the purchase accounting method. The excess of the purchase price over the
estimated fair value of the net tangible assets acquired has been capitalized as
goodwill. We are amortizing this amount, which totalled $4,383,000, over its
estimated economic life of five years.
On September 24, 1998, the Company acquired all of the outstanding stock of
INTERSOLV, Inc. ("INTERSOLV"), a publicly held corporation based in Rockville,
Maryland, and listed on the Nasdaq National Market, for $272,000,000. INTERSOLV
was a provider of software solutions, focused primarily in the areas of
application development management, enterprise data connectivity and enterprise
application renewal. 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 the merger was completed
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 data were 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
transaction (see note 6 on page 53).
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 2 BUSINESS COMBINATIONS -- (CONTINUED)
BUSINESS COMBINATIONS SUBSEQUENTLY DISCONTINUED
During fiscal 2000 and 1999, MERANT also acquired several businesses which
were incorporated into the E-Solutions Division or the ACT Division, both of
which are now disclosed as Discontinued Operations (see note 3 on page 50).
In the second quarter of fiscal 2000, 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
$16,242,000, the whole of which was paid in cash. The unamortised portion of the
goodwill arising on this transaction, which amounted to $11,551,000, was written
off in fiscal 2001 as part of the closure of the E-Solutions Division and is
included in loss on discontinued operations.
In the third quarter of fiscal 2000, 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 was $14,682,000, payable
as a combination of cash and assumption of debt, of which $14,100,000 was paid
before April 30, 2000. The EnterpriseLink technology was incorporated into the
ACT Division, and the unamortised portion of the goodwill which arose on this
transaction will be set against the net gain on the disposal of the ACT Division
in fiscal 2002.
Also in the third quarter of fiscal 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 was estimated at the time of
closing to be approximately $4,000,000, payable in cash, of which $3,631,000 was
paid before April 30, 2000. The total cost included contingency payments of up
to $494,000, which were based on meeting financial performance targets covering
the period ended December 31, 2000. These payments became due and were paid
during 2001 in accordance with the terms of the agreement. Northern Software
Partners AS was incorporated into the ACT Division, and the unamortised portion
of the goodwill which arose on this transaction will be set against the net gain
on the disposal of the ACT Division in fiscal 2002.
In the first quarter of fiscal 1999, 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. MERANT s.r.l. was incorporated into
the ACT Division, and the unamortised portion of the goodwill which arose on
this transaction will be set against the net gain on the disposal of the ACT
Division in fiscal 2002.
In the second quarter of fiscal 1999, on August 13, 1998, the Company
acquired all of the outstanding stock of its 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. MERANT Pty., Limited was incorporated into the ACT
Division, and the unamortised portion of the goodwill which arose on this
transaction will be set against the net gain on the disposal of the ACT Division
which will be recorded in fiscal 2002.
Each of the above transactions was accounted for using the purchase
accounting method. Accordingly, the net assets of the acquired companies were
combined with those of MERANT as of the respective dates of acquisition, and
their results of operations were combined with those of MERANT for the periods
since acquisition. The excess of the estimated purchase price over the
respective estimated fair value of the net tangible assets of each of the
acquired companies was allocated to goodwill and amortization was provided based
on an estimated economic life of five years. Where the acquired business has
been subsequently closed or sold, the unamortized portion of the goodwill is
written off at the time of sale or disposal.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 3 DISCONTINUED BUSINESS
In February 2001, MERANT's Board of Directors approved management's plan to
discontinue the operations and business of the Company's Enterprise Consulting
Services Division. The plan to discontinue was announced on February 21, 2001,
and was completed at the beginning of May, 2001. Accordingly, MERANT reported
the results of operations of the E-Solutions Division as discontinued
operations. In fiscal 2001, MERANT also recorded the loss arising on the
termination of the business, which amounted to $16,320,000. The loss includes
$11,551,000 for the write-off of unamortised goodwill, severance costs of
$832,000 and other closure costs of $3,937,000.
After the fiscal year-end, in August 2001, MERANT completed the sale of its
Application Creation and Transformation Division to Golden Gate Capital and
Parallax Partners for $62,500,000 in cash, subject to potential post-closing
adjustments based on the value of assets transferred. As the transaction was
conditional upon shareholder approval and other customary conditions of closing,
MERANT held an extraordinary general meeting of shareholders on July 23, 2001,
at which our shareholders approved the transaction. The transaction was closed
on August 10, 2001, and an initial cash payment of $54,500,000 was received from
the buyers. Under the terms of the agreement, final settlement of the sale price
is due in the second half of fiscal 2002. The operating results of the ACT
Division were included in continuing operations in our financial statements
until we received shareholder approval, at which time we reported them as
discontinued operations. Accordingly, the ACT Division's results of operations
are now included in discontinued operations. Net income for 2000 included a
non-recurring charge of $13,500,000 resulting from management actions to reduce
expenses relative to the decline in demand for Year 2000 and COBOL-based
products and services. The charge was made up of a $7,404,000 non-cash write-off
of previously capitalized software product assets, a provision of $3,218,000 for
severance costs for approximately 50 employees in our Year 2000 and COBOL-
related businesses and $2,878,000 for other costs primarily associated with the
closure of excess facilities. The net gain arising from the sale of the business
will be recognised in fiscal 2002.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 3 DISCONTINUED BUSINESS -- (CONTINUED)
As a result of the completion of the transactions described above, the
operating results of the E-Solutions Division and the ACT Division have been
disclosed as discontinued operations in these financial statements. Operating
results of discontinued operations are analyzed below.
<Table>
<Caption>
YEARS ENDED APRIL 30,
-----------------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- --------- --------- ---------
E-SOLUTIONS DIVISION
Net revenue............................. $ 8,493 $ 31,216 $ 37,787
Operating costs before goodwill......... (20,022) (28,591) (37,569)
--------- --------- ---------
(11,529) 2,625 218
Goodwill amortization................... (2,248) (2,248) --
--------- --------- ---------
(Loss) income before income taxes....... (13,777) 377 218
Income taxes............................ -- -- --
--------- --------- ---------
Net (loss) income from E-Solutions
Division.............................. (13,777) 377 218
--------- --------- ---------
ACT DIVISION
Net revenue............................. 123,596 159,461 179,423
Operating costs before allocated
corporate charges, goodwill and
non-recurring charges................. (103,928) (128,429) (125,500)
--------- --------- ---------
19,668 31,032 53,923
Allocated corporate charges............. (8,745) (12,373) (16,090)
Goodwill amortization................... (7,169) (5,060) (3,111)
Non-recurring charges................... -- (13,500) --
--------- --------- ---------
Income before income taxes.............. 3,754 99 34,722
Income taxes............................ -- -- --
--------- --------- ---------
Net income from ACT Division............ 3,754 99 34,722
--------- --------- ---------
Net (loss) income from discontinued
operations............................ $ (10,023) $ 476 $ 34,940
--------- --------- ---------
</Table>
Allocated corporate charges represent corporate overhead costs that are
directly attributable to the discontinued operations. The current tax provision
related to (loss) income from discontinued operations is offset by utilization
of net operating losses for tax purposes.
Net assets excluding the potential tax impact of discontinued operations
are analyzed below:
<Table>
<Caption>
APRIL 30
-------------------
(IN THOUSANDS) 2001 2000
-------------- -------- --------
Current assets........................................... $ 43,525 $ 50,631
Fixed and intangible assets.............................. 53,152 76,745
Current liabilities...................................... (49,189) (51,162)
Long term liabilities.................................... (750) (1,000)
-------- --------
Net assets of discontinued operations.................... $ 46,738 $ 75,214
-------- --------
</Table>
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 3 DISCONTINUED BUSINESS -- (CONTINUED)
The net cash provided by (used in) operating activities of discontinued
operations is analyzed below:
<Table>
<Caption>
YEAR ENDED APRIL 30,
--------------------------------
2001 2000 1999
-------- -------- --------
NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (INCLUDING LOSS ON
DISPOSAL)................................ $(26,343) $ 476 $ 34,940
Depreciation of fixed assets............. 974 2,042 1,706
Goodwill amortization.................... 9,423 7,308 3,111
Loss on disposal of discontinued
operations............................ 16,320 -- --
Changes in operating assets and
liabilities of discontinued
operations............................ 1,759 15,276 (19,201)
Cash used in investing activities
(primarily acquisitions of
businesses)........................... -- (37,923) (8,374)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) DISCONTINUED
OPERATIONS............................... $ 2,133 $(12,821) $ 12,182
======== ======== ========
</Table>
NOTE 4 FINANCIAL INSTRUMENTS
Cash equivalents and short term investments
The following table summarizes, by major security type, the fair value of
our cash equivalents and short-term investments. Our short-term investments
generally have maturity dates of less than one year.
<Table>
<Caption>
GROSS
UNREALISED ESTIMATED
(IN THOUSANDS) COST GAINS (LOSSES) FAIR VALUE
-------------- ------- -------------- ----------
AT APRIL 30, 2001:
Money market funds......................... $15,264 $ -- $15,264
Corporate bonds and notes.................. 2,975 (120) 2,855
------- ----- -------
$18,239 $(120) $18,119
------- ----- -------
Classified as:
Cash equivalents........................... $15,264
Short term investments..................... 2,855
-------
$18,119
-------
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
-------
</Table>
Financial instruments with derivative risk
No foreign currency contracts were outstanding at April 30, 2001 or at
April 30, 2000.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 5 RESEARCH AND DEVELOPMENT COSTS
<Table>
<Caption>
YEARS ENDED APRIL 30,
-----------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- ------- ------- -------
Research and development costs, before capitalization....... $33,999 $26,505 $27,192
Costs capitalized as software product assets................ -- (1,095) (858)
Amortization of capitalized costs........................... 1,544 1,743 1,007
------- ------- -------
$35,543 $27,153 $27,341
------- ------- -------
</Table>
NOTE 6 NON-RECURRING ITEMS
In the fourth quarter of fiscal 2001, the Company recorded a charge of
$7,250,000 representing in-process research and development arising on the
acquisition of the Enterprise Division of NetObjects, Inc. This charge is
described in note 2 on page 48.
During the second quarter of fiscal 1999, the Company recognized
non-recurring charges against continuing operations amounting to $49,662,000.
These charges arose 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 also incurred costs totaling
$25,113,000 in connection with subsequent integration efforts, primarily
severance costs, distributor agreement buyouts, and the write-off of duplicative
facilities and other redundant assets.
Unpaid amounts relating to non-recurring charges, which totaled $680,000 at
April 30, 2001 and $2,686,000 at April 30, 2000, are included in other current
liabilities.
NOTE 7 EARNINGS (LOSS) PER SHARE
The following table discloses the components of net (loss) income per share
from continuing operations and net (loss) income per ADS equivalent from
continuing operations; each ADS represents five ordinary shares. Ordinary share
equivalents were anti-dilutive and therefore excluded from the computation.
<Table>
<Caption>
YEARS ENDED APRIL 30,
---------------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- -------- --------- --------
Net (loss) income per share from
continuing operations:
Net (loss) income......................... $ (3,185) $ (2,884) $(63,472)
-------- --------- --------
Weighted average shares outstanding....... 134,305 145,897 143,130
Dilutive effect of ordinary share
equivalents (share options)............. -- -- --
-------- --------- --------
Weighted average shares outstanding,
assuming dilutive effect of share
options................................. 134,305 145,897 143,130
-------- --------- --------
Net (loss) income per ADS from continuing
operations:
Net (loss) income......................... $ (3,185) $ (2,884) $(63,472)
-------- --------- --------
Weighted average ADSs outstanding......... 26,861 29,179 28,626
Dilutive effect of ordinary share
equivalents (share options)............. -- -- --
-------- --------- --------
Weighted average ADSs outstanding,
assuming dilutive effect of share
options................................. 26,861 29,179 28,626
-------- --------- --------
</Table>
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 8 PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
APRIL 30, APRIL 30,
(IN THOUSANDS) 2001 2000
-------------- --------- ---------
Leasehold improvements................................... $ 11,333 $ 10,633
Computer and communications equipment & software......... 20,380 30,948
Office equipment......................................... 4,111 5,480
Transportation equipment................................. 128 340
-------- --------
Property, plant and equipment -- at cost................. 35,952 47,401
Less: accumulated depreciation and amortization.......... (25,482) (31,783)
-------- --------
Property, plant and equipment -- net..................... $ 10,470 $ 15,618
-------- --------
</Table>
Depreciation expense totaled $11,854,000 in fiscal 2001, compared to
$7,507,000 in 2000 and $10,865,000 in 1999.
NOTE 9 BORROWINGS
MERANT has an unsecured revolving multi-currency facility, under the terms
of which financing of up to L5,000,000 ($7,200,000 at April 30, 2001) or its
equivalent in any other currency that MERANT may determine, is available. This
facility expires in January 2002. Borrowings under this facility bear interest
at 0.75% above LIBOR (the London Interbank Offered Rate). At April 30, 2001 and
April 30, 2000, the amounts outstanding against this credit line represented
loans totaling 2.0 million euros ($2,017,000) and 2.6 million euros
($2,785,000), which were incurring interest at rates of 4.8% and 4.5%,
respectively.
NOTE 10 COMMITMENTS
The Company leases office space and equipment under operating leases
expiring at various dates through 2016. 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, 2001 are as follows:
<Table>
<Caption>
(IN THOUSANDS)
YEARS ENDED APRIL 30
--------------------
2002..................................................... $13,369
2003..................................................... 12,073
2004..................................................... 9,338
2005..................................................... 4,748
2006 and thereafter...................................... 14,375
-------
Total minimum lease payments............................. $53,903
-------
</Table>
Rent expense totaled $13,591,000 in fiscal 2001, $13,403,000 in 2000 and
$11,499,000 in 1999.
NOTE 11 CONTINGENCIES
In December 1998 and January 1999, seven class action securities complaints
were filed in the United States District Court for the Southern District of New
York against the Company and certain of its officers and directors. The Court
ordered the seven cases consolidated, appointed lead plaintiffs and lead
counsel, and ordered the filing of a consolidated 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 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 alleged various violations of the U.S. Securities Act
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 11 CONTINGENCIES -- (CONTINUED)
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. The defendants filed a
motion to dismiss the newly-amended complaint in June 2000 and plaintiffs
opposed this motion. A hearing on the motion took place in September 2000. On
December 20, 2000, the Court issued a ruling granting in part and denying in
part the defendant's motion to dismiss. The Court dismissed all of plaintiffs'
allegations, with the exception of certain allegations that defendants misled
the market regarding the Company's plans for its Y2K business. On February 16,
2001, the defendants answered the second consolidated amended complaint, denying
the remaining allegations and asserting affirmative defenses against the claim.
Because of the Court's ruling, the mandatory discovery stay of the Reform Act is
no longer in effect. The plaintiffs have served document requests on the Company
and document production has begun on a rolling schedule. The plaintiffs filed
their motion for class certification and supporting materials on April 20, 2001.
On June 19, 2001, the Court entered a Stipulation and Order Regarding Class
Certification ("Class Certification Order"). The Class Certification Order
certified this action to proceed as a class action while preserving the
defendants' rights to challenge, at a later date, the propriety of this action
proceeding as a class action, the definition of the class, and the class
representatives. On October 25, 2001, at a Joint Case Management Conference, the
Court established a pre-trial schedule and set a trial date of April 7, 2003.
The Company 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 12 INCOME TAXES
(Loss) income before income taxes consisted of the following:
<Table>
<Caption>
YEARS ENDED APRIL 30
------------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- ------- ------- --------
U.K. ........................................ $ 981 $(3,907) $(47,868)
U.S.A. ...................................... (1,485) (719) (20,932)
Other........................................ (1,431) 2,262 7,136
------- ------- --------
$(1,935) $(2,364) $(61,664)
------- ------- --------
</Table>
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 12 INCOME TAXES -- (CONTINUED)
Income taxes consist of:
<Table>
<Caption>
YEARS ENDED APRIL 30
-----------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- ------- ------- -------
Current:
U.K. ....................................... $ (303) $ 695 $(1,535)
U.S. federal................................ -- -- --
U.S. state.................................. -- 131 250
Other....................................... 301 840 3,711
------- ------- -------
(2) 1,666 2,426
------- ------- -------
Deferred:
U.K. ....................................... 1,252 (2,982) (618)
U.S. federal................................ -- 1,836 --
------- ------- -------
1,252 (1,146) (618)
------- ------- -------
Total:........................................ $ 1,250 $ 520 $ 1,808
------- ------- -------
</Table>
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:
<Table>
<Caption>
YEARS ENDED APRIL 30
-------------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- ------- -------- --------
Expected taxes.............................. $ (581) $ (709) $(19,116)
Changes in valuation allowance.............. (225) 1,436 5,149
Permanent differences and other items....... 4,705 (102) 15,775
Benefit of net operating loss carry
forwards.................................. (2,649) (105) --
------- -------- --------
Total tax charge............................ $ 1,250 $ 520 $ 1,808
------- -------- --------
</Table>
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 12 INCOME TAXES -- (CONTINUED)
Deferred income taxes, all of which are non-current, and the tax
jurisdictions to which they relate, are as follows:
<Table>
<Caption>
APRIL 30, APRIL 30,
(IN THOUSANDS) 2001 2000
-------------- --------- ---------
Assets:
Property............................................. $ (2,680) $ (3,215)
Tax losses........................................... (5,958) (9,123)
Research and development costs....................... -- (2,554)
Restructuring provision.............................. (1,552) (4,657)
Bad debts............................................ (872) (136)
-------- --------
Total assets........................................... (11,062) (19,685)
-------- --------
Liabilities:
Capitalized software................................. 1,011 4,007
Mark-to-market, deferred compensation and other...... 17,752 21,150
-------- --------
Total liabilities...................................... 18,763 25,157
-------- --------
Valuation allowance.................................... 5,958 6,685
-------- --------
Net deferred income taxes.............................. 13,659 12,157
-------- --------
U.K. .................................................. 8,024 6,280
U.S.A. ................................................ 5,635 5,877
-------- --------
$ 13,659 $ 12,157
======== ========
</Table>
At April 30, 2001 MERANT had net operating loss carry forwards of
approximately $9,500,000, which expire, if unused, in various years through
2020.
The corporate income tax returns of certain U.S. subsidiaries have been
under examination by the Internal Revenue Service. The Company believes that the
outcome of the examination will not have a material effect on its operating
results.
NOTE 13 BUSINESS SEGMENT INFORMATION
Through fiscal 2001, 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)
Enterprise Change Management (ECM)
Enterprise Data Connectivity (EDC)
Internet Professional Services (IPS or E-Solutions)
As a consequence of the Company's decision in February 2001 to discontinue
the operations and business of its E-Solutions Division, and the sale of its ACT
Division in August 2001, both of these segments have been disclosed as
discontinued operations.
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.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 13 BUSINESS SEGMENT INFORMATION -- (CONTINUED)
No single customer accounts for more than 5% of revenue.
The following table summarizes operations by business segment, net of
inter-segment trading, and reconciles segmental operating income before
non-recurring charges, to (loss) income before income taxes:
<Table>
<Caption>
YEAR ENDED APRIL 30,
--------------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- -------- -------- --------
Net revenue:
ECM...................................... $139,525 $129,027 $115,382
EDC...................................... 46,030 45,742 41,610
-------- -------- --------
185,555 174,769 156,992
-------- -------- --------
Operating income (loss), before
non-recurring charges:
ECM...................................... 27,808 29,043 25,882
EDC...................................... 14,100 7,150 7,810
-------- -------- --------
41,908 36,193 33,692
-------- -------- --------
Corporate non-allocated costs.............. (40,847) (42,336) (51,554)
Amortization of goodwill................... (1,900) (1,008) (474)
Non-recurring and other charges............ (7,250) -- (49,662)
Interest income, net....................... 6,154 4,787 6,334
-------- -------- --------
(Loss) before income taxes................. $ (1,935) $ (2,364) $(61,664)
-------- -------- --------
</Table>
The following table analyzes revenue and long-lived assets, based on the
location of the selling organization:
<Table>
<Caption>
YEAR ENDED APRIL 30,
------------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- -------- -------- --------
Net revenue:
United States.............................. $128,928 $119,155 $107,037
United Kingdom............................. 26,266 23,538 26,814
Europe (excluding U.K.).................... 21,333 22,838 18,056
Other...................................... 9,028 9,238 5,085
-------- -------- --------
$185,555 $174,769 $156,992
-------- -------- --------
Long-lived assets:
United States.............................. $ 7,165 $ 10,331 $ 14,191
United Kingdom............................. 17,116 10,370 618
Europe (excluding U.K.).................... 1,646 2,227 1,987
Other...................................... 509 698 816
-------- -------- --------
$ 26,436 $ 23,626 $ 17,612
-------- -------- --------
</Table>
NOTE 14 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
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 14 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
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 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
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.
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 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.
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").
At April 30, 2001, MTL owned 7,260,448 shares. Options granted by MTL and
outstanding at April 30, 2001 totaled 2,240,035, and a further 60,000 shares
were reserved for options attached to shares which MTL had purchased. The
remaining 4,960,413 shares were available for the grant of new options and for
the MERANT 1999 Employee Share Purchase Plan (see "Employee share purchase
plans", below). 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:
<Table>
<Caption>
OPTION PRICE
NUMBER PER SHARE
OF SHARES IN G.B. POUNDS
---------- --------------------
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 L0.34--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
Options granted............................... 3,685,500 L0.68--L1.37
Options exercised............................. (287,841) L1.06--L1.37
Options cancelled............................. (9,137,686) L1.06--L6.28
---------- -----------
Outstanding, April 30, 2001................... 22,548,223 L0.34--L7.15
---------- -----------
</Table>
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 14 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The following tables summarize information about share options outstanding
at April 30, 2001:
<Table>
<Caption>
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............................ 772,583 L1.13-L3.49 L1.40
1996 Share Option Plan............................ 681,036 L1.47-L7.15 L2.69
1998 Share Option Plan............................ 13,146,624 L0.68-L4.54 L1.59
XDB plans......................................... 13,575 L3.74-L5.15 L4.66
INTERSOLV plans................................... 5,353,815 L1.64-L4.04 L2.84
EnterpriseLink plans.............................. 280,555 L0.34-L3.49 L2.87
----------
Options over unissued shares...................... 20,248,188 L0.34-L7.15 L1.97
The Trust......................................... 2,300,035 L1.05-L3.00 L1.30
---------- ----------- --------
22,548,223 L0.34-L7.15 L1.90
---------- ----------- --------
</Table>
<Table>
<Caption>
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGES OF NUMBER OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISABLE EXERCISE PRICE
EXERCISE PRICES AT APRIL 30, 2001 (MONTHS) (IN G.B. POUNDS) AT APRIL 30, 2001 (IN G.B. POUNDS)
--------------- ------------------ ---------------- ---------------- ------------------ ----------------
L0.34-L1.50.......... 12,711,516 96 1.04 5,759,665 1.12
L1.51-L3.00.......... 5,654,666 68 2.51 4,868,460 2.51
L3.01-L7.15.......... 4,182,041 96 3.70 2,081,400 3.73
---------- ---- ---- ---------- ----
22,548,223 89 1.90 12,709,525 2.08
---------- ---- ---- ---------- ----
</Table>
The weighted average exercise price of options exercisable at April 30,
2001 is $3.00.
As permitted by SFAS 123, the Company follows APB 25 and related
Interpretations in accounting for its 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:
<Table>
<Caption>
YEARS ENDED APRIL 30 2001 2000 1999
-------------------- ------- ------- -------
Weighted average risk-free interest rate................ 6.0% 5.5% 5.5%
Dividend yield.......................................... 0% 0% 0%
Weighted average expected life.......................... 6 years 6 years 6 years
Expected volatility..................................... 74.2% 63.8% 64.7%
</Table>
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 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 estimated fair market value of share options granted in 2001 and 2000
amounted to $3,315,000 and $33,250,000, respectively. The following table
discloses net (loss) and net (loss) per share on the basis that
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 14 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
compensation expense had been determined consistent with SFAS 123 using the
assumptions above and the straight-line amortisation method for continuing and
discontinued operations.
<Table>
<Caption>
YEARS ENDED APRIL 30 2001 2000 1999
-------------------- -------- -------- --------
Net (loss), in thousands........................... $(39,967) $(12,479) $(37,646)
Net (loss) per share............................... $ (0.30) $ (0.09) $ (0.26)
</Table>
Employee share purchase plans
All full-time employees are eligible to participate in the MERANT 1999
Employee Share Purchase Plan (ESPP), which was approved at the 1999 annual
general meeting of shareholders. 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 the 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. During fiscal 2001,
employees participating in the first two offering periods acquired approximately
2,163,000 ordinary shares from Treasury stock. At April 30, 2001, amounts
totaling $1,121,000 had been collected under the plan's third offering period,
which expired in June, 2001.
Post-retirement benefits
MERANT has entered into agreements 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.
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 $3,117,000 in fiscal 2001, $3,464,000 in 2000 and
$1,329,000 in 1999, have been expensed.
NOTE 15 ACCUMULATED COMPREHENSIVE (LOSS)
Components of other accumulated comprehensive (loss) consists of the
following:
<Table>
<Caption>
YEARS ENDED APRIL 30,
-------------------------------
(IN THOUSANDS) 2001 2000 1999
-------------- -------- -------- -------
Foreign currency translation adjustments.... $(16,494) $(10,846) $(8,629)
Unrealized gain (loss) on marketable
securities, net of tax.................... (99) (226) (23)
Other....................................... 6 6 6
-------- -------- -------
$(16,587) $(11,066) $(8,646)
-------- -------- -------
</Table>
The tax benefit related to unrealized loss in marketable securities is not
material. As net earnings from foreign affiliates are considered primarily
reinvested, no deferred taxes are provided in foreign currency translation
adjustment. Upon disposal of ACT Division, $5,054,000 of foreign currency
translation losses will be realized and included in gain on disposal of ACT
Division. Realized gains (losses) on marketable securities are not material and
are included in interest income.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 16 RELATED PARTY TRANSACTION
Included in Prepaid expenses and other assets is a loan to Mr. Greenfield,
a director of the Company, amounting to $1,257,000 in 2001 and $1,220,000 in
2000.
In fiscal 2000, one of the Company's subsidiaries, MERANT Inc., a
California corporation, entered into a loan agreement with Mr. Greenfield, who
was Chief Executive Officer at the time. The loan was made in conjunction with a
home purchase by Mr. Greenfield and is secured by that property. The following
table shows the movements on the loan account:
<Table>
<Caption>
YEARS ENDED APRIL 30,
----------------------
(IN THOUSANDS) 2001 2000
-------------- --------- ---------
Loan outstanding, beginning of year........................ $1,220 --
Advanced during the year................................... -- $1,247
Repaid during the year..................................... (52) (57)
Interest charged during the year........................... 89 30
------ ------
Loan outstanding, end of year.............................. $1,257 $1,220
------ ------
Of which:
Principal.................................................. 1,190 1,190
Interest................................................... 67 30
</Table>
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
MERANT generally earned on invested cash. The maximum principal outstanding
during 2001 was $1,257,000. The loan matures on or before August 30, 2003.
MERANT has made no provision in respect of delinquency in repayment of the loan,
as it has every expectation that the loan will be repaid in accordance with the
terms. As at the date of this report, Mr. Greenfield is current on all interest
payments.
NOTE 17 SUBSEQUENT EVENTS
The Company has been engaged in a process of restructuring during the
current calendar year. As part of this process, several significant events have
been announced since April 30, 2001.
As disclosed in note 3, on page 50, the Company completed the sale of its
ACT Division on August 10, 2001. An initial cash payment of $54,500,000 was
received from the buyers. Final settlement of the sale price, which is subject
to adjustment based on the value of the assets transferred, is during the second
half of fiscal 2002.
On September 14, 2001, the Company signed an agreement to sell its freehold
premises in Newbury, Berkshire, U.K. MERANT will rent a suite of offices at the
Newbury site, which will remain its head and registered office. The sale was
completed on October 12, 2001, and will be included as a component of the gain
on disposal of the ACT Division to be recognized in fiscal 2002.
On September 11, 2001, the Company announced that it had agreed to sell its
Enterprise Data Connectivity Division to Golden Gate Capital for $29,250,000,
subject to adjustment for changes in book value of the business prior to
closing. Completion of the transaction is dependent on certain conditions,
including approval by MERANT shareholders and customary regulatory approvals.
The Company will seek shareholder approval at an extraordinary general meeting,
to be held on October 30, 2001. Subject to approval, completion of the
transaction is expected shortly afterwards. The Company expects to record a
small gain on the disposal of the EDC Division. At the same time, the Company
announced that it proposes to return excess capital of at least L56,000,000
(approximately $80,000,000) to shareholders following completion of the sale
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 17 SUBSEQUENT EVENTS -- (CONTINUED)
of the EDC Division. The Company has not determined the impact on continuing
operations related to this disposition.
On September 20, 2001, the Company announced the appointment of Gerald
Perkel as President and Chief Executive Officer. Mr. Perkel succeeds Gary
Greenfield, who announced in June that he proposed to step down once a new CEO
had been identified. At the same time, the Company also announced that its
operational headquarters would relocate from Rockville, Maryland to Hillsboro,
Oregon, which is the primary development, sales and support location for the
Company's ECM Division. The cost of the relocation is expected to be between
$15,000,000 and $20,000,000.
NOTE 18 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 2001 and 2000 is as follows:
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
IN THOUSANDS (EXCEPT PER ADS DATA) QUARTER QUARTER QUARTER QUARTER(A) TOTAL
---------------------------------- ------- ------- ------- ---------- --------
YEAR ENDED APRIL 30, 2001:
Net revenue..................... $41,016 $48,975 $46,284 $49,280 $185,555
Gross profit.................... 31,098 37,933 35,395 38,896 143,322
(Loss) income from continuing
operations.................... (3,534) 3,282 3,058 (5,991) (3,185)
(Loss) income from discontinued
operations.................... (7,179) (4,265) (4,140) 5,561 (10,023)
(Loss) on disposal of discontinued
operations.................... (16,320) (16,320)
Net (loss) income............... (10,713) (983) (1,082) (16,750) (29,528)
Net (loss) income from continuing
operations per ADS: basic..... $ (0.12) $ 0.12 $ 0.12 $ (0.23) $ (0.12)
Net (loss) income from continuing
operations per ADS: diluted... $ (0.12) $ 0.12 $ 0.12 $ (0.23) $ (0.12)
Net (loss) income per ADS: basic.. $ (0.37) $ (0.04) $ (0.04) $ (0.65) $ (1.10)
Net (loss) income per ADS:
diluted....................... $ (0.37) $ (0.04) $ (0.04) $ (0.65) $ (1.10)
------- ------- ------- ------- --------
YEAR ENDED APRIL 30, 2000:
Net revenue..................... $40,137 $41,020 $40,980 $52,632 $174,769
Gross profit.................... 31,048 32,423 32,835 42,600 138,906
(Loss) income from continuing
operations.................... (2,785) 2,552 (1,647) (1,004) (2,884)
(Loss) income from discontinued
operations.................... 4,595 6,552 4,985 (15,656) 476
Net income (loss)............... 1,810 9,104 3,338 (16,660) (2,408)
Net (loss) income from continuing
operations per ADS: basic..... $ (0.09) $ 0.09 $ (0.05) $ (0.03) $ (0.10)
</Table>
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT -- (CONTINUED)
NOTE 18 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
IN THOUSANDS (EXCEPT PER ADS DATA) QUARTER QUARTER QUARTER QUARTER(a) TOTAL
---------------------------------- ------- ------- ------- ---------- --------
Net (loss) income from continuing
operations per ADS: diluted..... $ (0.09) $ 0.08 $ (0.05) $ (0.03) $ (0.10)
------- ------- ------- ------- --------
Net income (loss) per ADS: basic.. $ 0.06 $ 0.31 $ 0.10 $ (0.57) $ (0.08)
Net income (loss) per ADS:
diluted......................... $ 0.06 $ 0.30 $ 0.10 $ (0.57) $ (0.08)
------- ------- ------- ------- --------
</Table>
---------------
(a) Includes the $7,250,000 in-process research and development expensed in
connection with the acquisition of The Enterprise Division of NetObjects
(see note 2 on page 48).
64
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
and subsidiaries as of April 30, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended April 30, 2001, 2000 and 1999 on pages 39 to 42. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with 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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MERANT plc at April 30, 2001 and 2000, and the consolidated results of its
operations and its cash flows for the years ended April 30, 2001, 2000 and 1999,
in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
McLean, Virginia, U.S.A.
July 23, 2001, except for note 17, as to
which the date is September 20, 2001
65
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 pounds sterling, set out on pages 78 to 108 of this report.
<Table>
<Caption>
FIFTEEN MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
IN THOUSANDS OF G.B. POUNDS APRIL 30 APRIL 30 APRIL 30 JANUARY 31 JANUARY 31
(EXCEPT PER SHARE DATA AND PERCENTAGES) 2001 2000 1999 1998 1997
--------------------------------------- ---------- ---------- -------------- ---------- ----------
OPERATING RESULTS FOR THE PERIOD:
Revenue............................... 215,433 227,283 215,473 97,015 73,089
Operating profit(loss) excluding
amortisation of goodwill and non-
recurring charges................... 2,720 9,509 17,886 12,736 (614)
Amortisation of goodwill.............. (42,482) (39,150) (21,915) -- --
Non-recurring charges................. (14,571) (8,491) (11,831) -- (5,195)
Interest income, net.................. 4,287 2,763 4,288 2,481 1,699
(Loss)/profit before taxation......... (50,046) (35,369) (11,572) 15,217 (5,809)
Retained (loss)/profit for the
period.............................. (50,914) (35,461) (15,279) 10,426 (7,281)
(Loss)/earnings per share: basic...... (37.9P) (24.9p) (14.3p) 14.0p (10.2p)
(Loss)/earnings per share: diluted.... (37.9P) (24.9p) (14.3p) 13.3p (10.2p)
Average number of shares in issue
(thousands)......................... 139,952 145,958 110,714 78,735 75,780
FINANCIAL POSITION AT END OF PERIOD:
Cash and bank deposits................ 61,200 79,543 75,394 51,518 44,725
Total assets.......................... 230,775 304,559 322,361 123,824 100,204
Creditors: amounts falling due after
more than one year.................. - - 6 12 15
Total shareholders funds.............. 128,466 198,484 217,109 70,892 61,124
FINANCIAL CONDITION:
Working capital....................... 29,461 60,219 62,370 36,195 26,611
Current ratio......................... 1.32 1.70 1.67 1.78 1.81
</Table>
---------------
NOTES:
(1) Details of the non-recurring charges are set out in note 9 to the financial
statements on page 95.
(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.
66
MERANT PLC
FINANCIAL STATEMENTS 2001
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 pounds
sterling, on pages 78 to 108.
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.")
Founded in 1976, MERANT designs, develops and markets software products and
services for enterprise application development. Our solution offerings for 2001
were as follows:
- Enterprise Change Management ("ECM" or "PVCS") -- Helping companies
improve their ability to manage change to enterprise digital assets, such
as software applications, code and web content.
- Enterprise Data Connectivity ("EDC" or "Data Direct") -- Provides
standards-based data connectivity technology to integrate varied systems,
applications and data across their enterprise.
- Application Creation & Transformation ("ACT" or "Micro Focus") -- Enables
companies to leverage existing investments in IT systems and extend these
assets into new business applications.
- Internet Professional Services ("IPS" or "E-Solutions") -- Services used
to deliver complete applications to accelerate customers' e-business
solution initiatives.
Two years ago 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 year ended April 30 2000 and
for the fifteen-month period ended April 30 1999. Throughout this discussion,
references to financial year 2001 are to the year ended April 30 2001,
references to 2000 are to the year ended April 30 2000 and references to 1999
are to the fifteen-month period ended April 30 1999.
RESULTS OF OPERATIONS
As described in the Letter to Shareholders on pages 3 to 5, the Company
began a process of restructuring its operations during 2001, with the objectives
of concentrating resources on growth opportunities and delivering increased
value to shareholders. In support of this strategy, in February 2001, the
Company withdrew from its E-Solutions Division. This business had contributed
approximately 3% of the Company's revenue in the current year, and 9% in the
previous year. The operating results of the E-Solutions Division have been
disclosed as discontinued operations in the financial statements. After the end
of the fiscal year, in August 2001, the Company sold its Application Creation
and Transformation Division, and in September 2001 the Company announced that it
had agreed to sell its Enterprise Data Connectivity Division. In accordance with
U.K. accounting standards, the operating results of those businesses are
included in continuing operations.
In 1999 the Company reported its acquisition of INTERSOLV, Inc.,
("INTERSOLV"), a transaction which approximately doubled the size of the Company
in terms of revenue, costs and employees. The transaction was accounted for as
an acquisition, and INTERSOLV's operating results have been included with those
of the Company for the period since September 24 1998, the date of the
acquisition.
In the year ended April 30 2001 MERANT reported an operating profit before
exceptional items and amortisation of goodwill, of L2.7 million, compared to
L9.5 million in 2000 and L17.9 million in 1999. After exceptional items and
amortisation of goodwill, net loss for 2001 was L50.9 million or 37.9p per
share. This compares to net losses of L35.5 million or 24.9p per share in 2000
and L15.3 million or 14.3p per share in 1999.
67
Net revenue
The Company generally licences its products to end-users under license
agreements. The Company also offers 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.
Total net revenue for 2001 was L215.4 million, a 5% decrease relative to
2000. Revenue from continuing operations increased by 1%. Revenue growth from
the ECM and EDC Divisions was offset by lower demand for COBOL products and
services.
Total net revenue for 2000 was L227.3 million, a 5% increase relative to
1999, and representing a 23% increase on an annualised basis. The increase
results from the partial inclusion of the acquired INTERSOLV business during
1999. Increased revenue from the Company's ECM and EDC Divisions was offset by a
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% in the previous twelve months.
Revenue by product/service type
<Table>
<Caption>
2001 CHANGE 2000 CHANGE 1999
------- ------ ------- ------ -------
L'000 L'000 L'000
Licence fees........................ 105,313 -9% 116,228 -2% 118,245
Maintenance subscriptions........... 76,852 13% 67,860 20% 56,454
Training and consulting............. 27,619 16% 23,806 25% 19,102
------- --- ------- --- -------
Total net revenue from continuing
operations........................ 209,784 1% 207,894 7% 193,801
Revenue from discontinued
operations........................ 5,649 -71% 19,389 -11% 21,672
------- --- ------- --- -------
TOTAL NET REVENUE................... 215,433 -5% 227,283 5% 215,473
------- --- ------- --- -------
</Table>
Licence fee revenue decreased by L10.9 million in 2001 relative to 2000,
mostly because of a 27% decline in revenue for the ACT Division's COBOL
products. In 2000, license fee revenue decreased L2.0 million. On an annualised
basis, licence fee revenue in 2000 increased by 23% relative to 1999. The
increase in 2000 reflected the full inclusion of revenue from the former
INTERSOLV business.
Maintenance subscriptions increased by L9.0 million in 2001 relative to
2000, due to increases related to the ECM and EDC product areas offsetting the
decline in ACT COBOL products and services. In 2000, maintenance subscriptions
increased by L11.4 million relative to 1999. On an annualised basis, maintenance
subscriptions in 2000 increased by 50% relative to 1999. These year-on-year
increases resulted from a 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.
Training and consulting revenue increased by L3.8 million in 2001 relative
to 2000, due to increased demand in all product areas. In 2000, training and
consulting revenue increased by L4.7 million relative to 1999, largely due to
the acquisition of INTERSOLV, which traditionally earned a higher proportion of
its revenue from service business.
Revenue from discontinued operations represents revenue generated by the
Company's E-Solutions Division, which was closed in February 2001, three months
before the year-end.
Revenue by business segment
ECM revenue was L95.0 million in 2001, up 18% from the previous year.
Currency translation benefited 2001 revenue compared with 2000, primarily
because of the dollar strengthening compared to most currencies. Growth at
constant currency exchange rates was 12%, driven by increased maintenance and
service revenues
68
for this area. ECM had modest overall growth in license fees as strong growth in
Europe and Asia was mostly offset by weakness in North America.
EDC revenue for 2001 was L31.3 million, up 29%. Double digit growth on
sales to other independent software vendors embedding this technology was offset
by lower direct sales to end-user businesses.
ACT revenue was L83.5 million in 2001, down 4% from the previous year. The
decrease is primarily the result of a decrease in new licenses for COBOL related
products.
E-Solutions revenue was L5.6 million in fiscal 2001 compared with L19.4
million during the previous year. Revenue growth in new service offerings
focused on IPS was not great enough to offset the decrease in demand for Year
2000 consulting solutions. In addition, the Company decided to exit this
business in February of 2001.
Revenue by geography
In 2001, American revenue was L132.4 million, effectively unchanged
relative to 2000, but represented 61% of total revenue, compared to 58% in 2000
and 62% in 1999. In 2000, American revenue was L132.5 million, which represented
an increase of 24% over 1999 on an annualised basis, reflecting the full
inclusion of INTERSOLV revenue.
In 2001, U.K. revenue was L31.6 million, an increase of 10% relative to
2000, and represented 15% of total revenue, compared to 13% in 2000 and 14% in
1999. In 2000, U.K. revenue was L28.7 million, which represented an increase of
19% over 1999 on an annualised basis, reflecting the full inclusion of INTERSOLV
revenue.
In 2001, European revenue (excluding the U.K.) was L37.2 million, a
decrease of 22% relative to 2000, and represented 17% of total revenue, compared
to 21% in 2000 and 17% in 1999. In 2000, European revenue was L47.9 million.
Revenue from other territories decreased to L14.2 million in 2001, compared
to L18.2 million in 2000, and represented 7% of total revenue, compared to 8% in
2000 and 7% in 1999.
Cost of revenue
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
------ ------ ------ ------ ------
Cost of licence fees................... 4,836 -18% 5,868 -37% 9,365
Cost of maintenance subscriptions...... 14,243 -2% 14,552 -14% 16,998
Cost of training and consulting........ 26,784 35% 19,904 57% 12,704
------ --- ------ --- ------
Total cost of revenue from continuing
operations........................... 45,863 14% 40,324 3% 39,067
Cost of revenue from discontinued
operations........................... 8,523 -49% 16,814 2% 16,543
------ --- ------ --- ------
Total cost of revenue.................. 54,386 -5% 57,138 3% 55,610
------ --- ------ --- ------
</Table>
Cost of licence 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 licencing of
certain add-on software products. These costs represented 5% of licence fee
revenue in 2001, compared to 5% in 2000 and 8% in 1999. The significant decrease
in 2000 relative to 1999 reflected savings in product materials arising from the
documentation being supplied on CD-ROM.
Cost of maintenance subscriptions is comprised principally of salaries and
benefits for technical support personnel. These costs represented 19% of
maintenance subscription revenue in 2001 and 2000, compared to 26% in 1999. The
decrease in 2000 relative to 1999 reflected the benefits of the investments made
in 1999 to improve the effectiveness of our telephone support function.
69
Cost of training and consulting is comprised principally of salaries,
benefits and expenses of training and consulting personnel. These costs
represented 97% of training and consulting revenue in 2001, compared to 84% in
2000 and 67% in 1999. The increase in 2001 relative to 2000 was due to personnel
additions in this area exceeding the growth in revenue. Actions were taken in
the later part of 2001 to reduce costs in this area.
Gross profit
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
------- ------ ------- ------ -------
Gross profit................ 161,047 -5% 170,145 6% 159,863
Percentage of total revenue
(margin).................. 75% 75% 74%
</Table>
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,
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. Because 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
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
------- ------ ------ ------ -------
Research and development
expenditure................ 38,351 11% 34,485 13% 30,455
Deduct: amounts
capitalized................ (62) -97% (2,356) -60% (5,853)
------- --- ------ --- -------
Current expenditure charged
to income.................. 38,289 19% 32,129 31% 24,602
Add: amortization of
previously capitalized
costs...................... 1,485 -69% 4,740 -51% 9,717
Non-recurring charge for
impairment (note 9)........ -- n/a 4,657 n/a --
------- --- ------ --- -------
Total research and
development costs.......... 39,774 -4% 41,526 21% 34,319
------- --- ------ --- -------
Percentage of total
revenue.................... 18% 18% 16%
</Table>
Research and development costs consist principally of salaries, benefits
and travel expenses for software developers, related facility costs and expenses
associated with computer equipment used in software development. 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 capitalise some of this expenditure as
software product assets and provide for amortisation of each asset over its
estimated life. Research and development costs include the amortisation of
previously capitalised software costs.
Current expenditure on software research and development increased by L3.9
million in 2001 relative to 2000. This increase reflects MERANT's increased
investment on development projects focused on ECM, including the web content
management portion of this segment. In 2000 research and development expenditure
increased by L4.0 million. During 2001, MERANT's development efforts were
redirected primarily towards the areas with the greatest growth opportunity.
In 2001, L0.1 million of this expenditure was capitalised as software
product assets, compared to L2.4 million in 2000. The reduction in the level of
capitalisation is the result of fewer projects reaching technological
feasibility during 2001. After providing for amortisation of previously
capitalised costs, the net charge, representing the excess of amortisation over
capitalisation, amounted to L1.4 million in 2001, compared to L7.0 million in
2000 and L3.8 million in 1999. The charge in 2000 included an impairment charge
70
of L4.7 million which represented provisions against the carrying value of
previously capitalised software product assets.
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 realised in future periods.
Sales and marketing
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
------- ------ ------- ------ ------
Sales and marketing.......... 103,667 -5% 108,959 22% 89,161
Percentage of total
revenue.................... 48% 48% 41%
</Table>
Sales and marketing costs include salaries and benefits, sales commissions,
travel and related facility costs for sales, pre-sales and marketing personnel,
and publicity costs such as advertising, trade shows and other market
development programmes. In 2001 these costs decreased by L5.3 million relative
to 2000, due to lower revenue. In 2000 sales and marketing costs included a
non-recurring charge of L3.5 million related to a realignment of the business
(see "Non-recurring charges", below). In 2000, sales and marketing costs
increased by L20.8 million, reflecting sales force expansion, higher commissions
and higher advertising and marketing costs, including those associated with the
corporate name-change and product launches, but also reflecting the full
inclusion of INTERSOLV's business.
MERANT 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
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
------ ------ ------ ------ ------
General and administrative..... 14,886 -20% 18,642 1% 18,497
Percentage of total revenue.... 7% 8% 9%
</Table>
General and administrative costs consist principally of salaries and
benefits, travel and related facility costs for MERANT's group management,
finance, legal and human resources operations, and include such costs as outside
legal and accounting fees. As presented in the profit and loss account on page
78, general and administrative costs also include 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 this
discussion.
Excluding goodwill amortisation charges, general and administrative costs
decreased by L3.8 million in 2001 relative to 2000 as a result of achieved
operational efficiencies.
The Company anticipates that general and administrative expenses will
decrease in future periods.
Goodwill amortisation
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
------ ------ ------ ------ ------
Goodwill amortisation.......... 42,482 9% 39,150 79% 21,915
Percentage of total revenue.... 20% 17% 10%
</Table>
Goodwill amortisation charges arise as a result of acquisitions made by the
Company, where the excess of the purchase price over the respective estimated
fair value of the net tangible assets acquired is attributed to goodwill and
amortised over its economic life. In 2001 the Company has capitalised goodwill
totalling L11.9
71
million (2000: L31.4 million; 1999: L144.4 million). Consequently, amortisation
charges increased significantly in 2001 relative to 2000, and in 2000 relative
to 1999.
Non-recurring charges
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
------- ------ ----- ------ -------
Fundamental restructuring...... -- n/a -- n/a (11,831)
Provision for loss on disposal
of fixed assets.............. (3,254) n/a -- n/a --
Loss on termination of business
operation.................... (11,317) n/a -- n/a --
Percentage of total revenue.... -7% 0% -5%
</Table>
In the year ended April 30 2001, the Company has reported two non-operating
exceptional items on the face of the profit and loss account.
The provision for loss on disposal of fixed assets represents actual and
anticipated losses incurred on the Company's investment in its own shares. The
Company has acquired its own shares in order to fulfil its obligations to the
1999 Employee Share Purchase Plan (ESPP). Under the terms of the ESPP, the
Company is committed to selling those shares to participants of the ESPP at
prices based on current market values. Because of the decline in the market
value of the Company's shares during the year, the Company has incurred actual
losses amounting to L1.3 million on sales of its own shares during the year, and
has provided for future losses of L2.0 million. The provision for future losses
is based on estimates of the numbers of shares which will be sold to ESPP
participants in the year ended April 30 2002.
The loss on termination of business operation represents the net cost of
the termination of the consulting business. It consists of the carrying value of
goodwill now written off (L6.5 million), severance payments to employees of the
consulting business (L0.6 million) and other closure costs related to excess
facilities (L4.2 million).
In the year ended April 30 2000, the Company reported one-time charges
totalling L8.5 million and included these charges in the appropriate cost
categories within operating expenses in the profit and loss account:
<Table>
<Caption>
L'000
-----
Research and development.................................... 4,657
Sales and marketing......................................... 3,502
General and administrative.................................. 332
-----
8,491
-----
</Table>
The charges resulted from management actions which recognised 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, L4.7 million represented 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 related to provisions for severance
costs for approximately 50 employees in our COBOL related business and for the
costs associated with closing of excess facilities.
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, 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.
72
Interest income, net
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
----- ------ ----- ------ -----
Interest income, net.............. 4,287 55% 2,763 -36% 4,288
Percentage of total revenue....... 2% 1% 2%
</Table>
In 2001 interest earned on cash and short-term investments, net of interest
expense, increased by L1.5 million relative to 2000. The increase reflects
interest earned on refunded corporate taxes. In 2000 interest income declined by
17% on an annualised basis, reflecting lower average cash balances during the
year, as well as lower interest rates.
Income taxes
<Table>
<Caption>
2001 2000 1999
L'000 CHANGE L'000 CHANGE L'000
----- ------ ----- ------ ------
Income taxes..................... (868) 843% (92) -98% (3,707)
Percentage of total revenue...... 0% 0% -2%
Effective tax rate............... -2% 0% -32%
U.K. statutory rate.............. 30% 30% 31%
</Table>
MERANT's tax rate in each of the last three years has been significantly
distorted by the permanent differences between accounting profits and taxable
profits, primarily the difference in the treatment of amortisation of goodwill,
which is generally not an allowable expense for tax purposes. The tax rate is
also impacted by reserves being established for tax benefits of net operating
losses for which realisation is not assured and by the distribution of taxable
profits and losses among the tax jurisdictions in which the Company operates. An
analysis of the charge for income taxes, including an analysis of differences
between the effective rate and the U.K. statutory rates, is given in note 11 to
the financial statements on page 96.
The income tax returns of some of the Company's U.S. subsidiary
undertakings for the years ended January 31 1993 to 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. Any adjustments that may result
from this examination are not expected to have a material adverse impact on the
Company's consolidated operating results or its financial position.
Discontinued operations
In February 2001, MERANT's Board of Directors approved management's plan to
terminate the Company's E-Solutions Division, which operated the consulting
business. The closure of the E-Solutions Division was announced by the Company
on February 21 2001, and was completed at the beginning of May. Accordingly, the
Company reported the results of operations of the E-Solutions Division, which
amounted to net losses of L9.3 million in 2001 and L3.3 million in 2000, as
discontinued operations.
In 2001 the Company also recorded the loss arising on the termination of
the business, which amounted to L11.3 million. The loss includes a L8.1 million
write-off of the unamortised portion of the goodwill which arose on the
acquisition of Essential Software, Inc in 1999. Additional information on the
closure of the E-Solutions Division is given in note 4 to the financial
statements on pages 92 and 93.
Business combinations
On February 20 2001 MERANT completed the acquisition of the Enterprise
Division of NetObjects, Inc., a developer of web content management software
based in Redwood City, California, U.S.A. The total consideration for the
transaction was approximately L12.6 million, the whole of which was payable in
cash. This transaction has been accounted for using the acquisition method, and
accordingly, the excess of the purchase price over the estimated fair value of
the net tangible assets acquired has been capitalised as
73
goodwill. This amount, which totalled L13.1 million, is being amortised over its
estimated economic life of five years.
In the year ended April 30 2000 the Company completed four acquisitions at
a total cost of L28.9 million.
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. The total consideration for the transaction,
which amounted to L10.1 million, was paid in cash. Goodwill arising on the
transaction was amortised based on an estimated economic life of five years.
Essential Software, Inc., formed part of the E-Solutions Division, and the
unamortised portion of the goodwill, which amounted to L8.0 million, has been
included in loss on discontinued operations (see note 4 to the financial
statements on pages 92 and 93).
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
was L8.7 million. The EnterpriseLink technology was incorporated into the ACT
Division, and the unamortised portion of the goodwill which arose on this
acquisition will be set against the net gain on the disposal of the ACT Division
in 2002.
On December 6 1999 the company acquired all of the outstanding stock of
Trillium Software Corporation, a privately-owned supplier of change management
software based in Eden Prairie, Minnesota, U.S.A. The total consideration, which
was subject to adjustment depending on future operating results of Trillium up
to October 31 2001, was estimated at L4.0 million, of which L2.3 million was
paid on acquisition. It is unlikely that the financial performance targets will
be met. Consequently, the cost of the acquisition has been revised to L3.9
million. Goodwill arising on this acquisition, which totalled $4.4 million, is
being amortised over its estimated economic life of five years.
On January 8, 2000, the Company acquired for the ACT Division the remaining
79.9% of the outstanding stock of Northern Software Partners AS, its distributor
for the Nordic region, based in Oslo, Norway. The total consideration for the
transaction was estimated at the time of closing to be approximately L2.3
million, payable in cash, of which L2.0 million was paid in cash before April 30
2000. An additional L0.4 million was paid in the current year in accordance with
the acquisition agreement. No further payments are due and after transaction
cost adjustments, the cost of the acquisition has been revised to L2.6 million.
The initial valuation of goodwill has been increased accordingly. Northern
Software Partners AS, which changed its name to MERANT Nordic AS on January 21,
2000, was incorporated into the ACT Division, and the unamortised portion of the
goodwill which arose on this acquisition will be set against the net gain on the
disposal of the ACT Division in 2002.
Each of these transactions was accounted for using the acquisition method.
Accordingly, the excess of the purchase price over the respective estimated fair
value of the net tangible assets of each company was allocated to goodwill.
Amortisation was provided based on an estimated economic life of five years.
In the fifteen-month period ended April 30 1999 the Company 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., for total consideration of L2.7
million. On August 13 1998 the company acquired all of the outstanding stock of
its Australian distributor, Advanced Software Engineering Pty Ltd., for total
consideration of approximately L1.5 million. Both companies were incorporated
into the ACT Division, and the unamortised portion of the goodwill which arose
on these acquisitions will be set against the net gain on the disposal of the
ACT Division in 2002.
On September 24 1998 the Company acquired all of the share capital of
INTERSOLV, Inc., a publicly-owned corporation based in Rockville, Maryland,
U.S.A. and listed on the Nasdaq National Market, for $272.0 million
(approximately L160.8 million). INTERSOLV was a provider of software solutions,
focused primarily in the areas of application development management, enterprise
data connectivity and enterprise application renewal. The Company issued 12.6
million new MERANT ADSs (representing 63.1 million new
74
MERANT ordinary shares) in exchange for INTERSOLV's common stock and share
equivalents outstanding, which at the time the merger was completed represented
approximately 46% of MERANT's share capital on a fully-diluted basis. At the
time of this acquisition, provision was made for costs amounting to L11.8
million 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 9 on page 95.
Additional information on these transactions is given in note 3 to the
consolidated financial statements on pages 90 to 92.
Post balance sheet event
Since the year-end, in August 2001, MERANT completed the sale of its
Application Creation and Transformation Division to Golden Gate Capital and
Parallax Partners for $62.5 million (L45.3 million) in cash, subject to
potential post-closing adjustments based on the value of assets transferred. As
the transaction was conditional upon shareholder approval, the Company held an
extraordinary general meeting of shareholders on July 23 2001, at which
shareholders approved the transaction. The transaction was completed on August
10 2001, and an initial cash payment of $54.5 million was received from the
buyers. Under the terms of the agreement, final settlement of the sale price is
due in the second half of the year ended April 30 2002. In accordance with U.K.
accounting standards, the operating results of the ACT Division have been
included in continuing operations in these financial statements. A summary of
these results is included in note 26 to the financial statements on pages 107 to
108. The net gain arising from the sale of the business will be recognised in
2002.
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 pages 29 to 35. Interested readers are
encouraged to study these comments.
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The Company'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. The Company 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 is 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 risks
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.
75
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 borrowing and to retain some potential
for currency-related appreciation while partially hedging against currency
depreciation. At April 30 2001 no hedging contracts were outstanding;
borrowings, denominated in euros, totalled L1.4 million.
The group also has transactional 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 pounds sterling. Revenue, costs and expenses arising in
currencies other than the reporting currency are translated using average
exchange rates. Assets and liabilities denominated in currencies other than the
reporting currency are translated at exchange rates in effect at the balance
sheet date. The majority of the Company's revenue arises in U.S. dollars
(approximately two-thirds in 2001), whereas its costs are incurred approximately
equally in U.S. dollars and other currencies, predominately pounds sterling.
Consequently fluctuations in exchange rates, particularly between the U.S.
dollar and the pound sterling, may have a significant impact on the Company's
operating results, notably when expressed in pounds sterling. In 2001, 2000 and
1999, fluctuations between the U.S. dollar and the pound sterling 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 Company does not hedge anticipated foreign currency revenues and
expenses not yet incurred. No hedging contracts were outstanding at April 30
2001.
Liquidity and capital resources
MERANT continues to fund its activities through cash from operating
activities. As a result of non-operating activities, cash balances have declined
during the year from L79.5 million to L61.2 million.
In the year ended April 30 2001 operating activities generated L19.7
million in cash. During the year L12.6 million was spent on the acquisition of
the Enterprise Division of NetObjects, Inc., and L6.8 million was invested in
computer and telecommunications equipment and other fixed assets. In addition,
L1.4 million, net, was absorbed by corporate share plans, representing the
excess of the Company's investment in its own shares over the proceeds from the
sale of shares to option-holders on the exercise of their options and to
participants in the Employee Share Purchase Plan. The Company also spent L13.8
million on the shares which it purchased for cancellation in August 2000.
In the year ended April 30 2000 operating activities generated L36.8
million in cash. During the year L37.7 million was invested in the business:
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. 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. 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.
76
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 2002. At
April 30 2001 borrowings equivalent to L1.4 million had been made against this
line of credit compared to L1.8 million at April 30 2000.
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 2002.
77
MERANT PLC
FINANCIAL STATEMENTS 2001
CONSOLIDATED PROFIT AND LOSS ACCOUNT
UK FORMAT
<Table>
<Caption>
FIFTEEN
YEAR MONTHS
ENDED YEAR ENDED ENDED
APRIL 30 APRIL 30 APRIL 30
NOTES 2001 2000 1999
----- -------- ---------- --------
L'000 L'000 L'000
-------- ---------- --------
REVENUE: CONTINUING BUSINESS
Licence fees....................................... 105,313 116,228 118,245
Maintenance subscriptions.......................... 76,852 67,860 56,454
Training and consulting............................ 27,619 23,806 19,102
------- ------- -------
209,784 207,894 193,801
REVENUE: DISCONTINUED BUSINESS....................... 4 5,649 19,389 21,672
------- ------- -------
TOTAL REVENUE................................... 215,433 227,283 215,473
------- ------- -------
COST OF REVENUE: CONTINUING BUSINESS
Cost of licence fees............................... 4,836 5,868 9,365
Cost of maintenance revenue........................ 14,243 14,552 16,998
Cost of service revenue............................ 26,784 19,904 12,704
------- ------- -------
45,863 40,324 39,067
COST OF REVENUE: DISCONTINUED BUSINESS............... 4 8,523 16,814 16,543
------- ------- -------
TOTAL COST OF REVENUE........................... 54,386 57,138 55,610
------- ------- -------
GROSS PROFIT......................................... 161,047 170,145 159,863
------- ------- -------
OPERATING EXPENSES
Research and development........................... 5 39,774 41,526 34,319
Sales and marketing................................ 103,667 108,959 89,161
General and administrative......................... 6 57,368 57,792 40,412
------- ------- -------
TOTAL OPERATING EXPENSES........................ 200,809 208,277 163,892
------- ------- -------
OPERATING (LOSS)/PROFIT:
Continuing business................................ (30,485) (34,816) (3,620)
Discontinued business.............................. (9,277) (3,316) (409)
------- ------- -------
TOTAL OPERATING (LOSS).......................... 7 (39,762) (38,132) (4,029)
EXCEPTIONAL ITEMS:
Fundamental restructuring.......................... 9 -- -- (11,831)
Loss on disposal of fixed assets................... 9 (3,254) -- --
Loss on termination of business operation.......... 4/9 (11,317) -- --
------- ------- -------
(LOSS) ON ORDINARY ACTIVITIES, BEFORE INTEREST
INCOME............................................. (54,333) (38,132) (15,860)
Interest income.................................... 4,466 2,953 4,433
Interest expense................................... 10 (179) (190) (145)
------- ------- -------
(LOSS) BEFORE TAXATION............................... (50,046) (35,369) (11,572)
Taxation........................................... 11 (868) (92) (3,707)
------- ------- -------
(LOSS) FOR THE PERIOD................................ (50,914) (35,461) (15,279)
======= ======= =======
(LOSS)/EARNINGS PER SHARE: BASIC..................... 12 (37.9P) (24.9p) (14.3p)
(LOSS)/EARNINGS PER SHARE: DILUTED................... 12 (37.9P) (24.9p) (14.3p)
------- ------- -------
</Table>
The notes on pages 85 to 108 form part of these financial statements.
78
MERANT PLC
FINANCIAL STATEMENTS 2001
CONSOLIDATED BALANCE SHEET
UK FORMAT
<Table>
<Caption>
APRIL 30 APRIL 30
2001 2000
NOTES L'000 L'000
----- -------- --------
FIXED ASSETS
Intangible fixed assets................................... 13 75,383 120,205
Tangible fixed assets..................................... 14 28,313 30,075
Investments............................................... 15 6,860 7,431
------- -------
TOTAL FIXED ASSETS..................................... 110,556 157,711
------- -------
CURRENT ASSETS
Stocks.................................................... 16 610 1,444
Debtors................................................... 17 58,409 65,861
Cash...................................................... 61,200 79,543
------- -------
TOTAL CURRENT ASSETS................................... 120,219 146,848
------- -------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 18 90,758 86,629
------- -------
NET CURRENT ASSETS.......................................... 29,461 60,219
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES.................. 140,017 217,930
PROVISIONS FOR LIABILITIES AND CHARGES...................... 21 11,551 19,446
------- -------
NET ASSETS.................................................. 128,466 198,484
======= =======
CAPITAL AND RESERVES
Called up share capital................................... 2,699 2,988
Share premium account and other reserves.................. 200,625 200,421
Capital redemption reserve................................ 292 --
Profit and loss account................................... (75,150) (4,925)
------- -------
TOTAL SHAREHOLDERS' FUNDS.............................. 128,466 198,484
======= =======
</Table>
The financial statements on pages 78 to 108 were approved by the Board of
directors on October 22, 2001
<Table>
/s/ J. MICHAEL GULLARD
J. Michael Gullard
Director
</Table>
The notes on pages 85 to 108 form part of these financial statements.
79
MERANT PLC
FINANCIAL STATEMENTS 2001
CONSOLIDATED CASH FLOW STATEMENT
UK FORMAT
<Table>
<Caption>
FIFTEEN MONTHS
YEAR ENDED YEAR ENDED ENDED
APRIL 30 APRIL 30 APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------------
NET CASH INFLOW FROM OPERATING ACTIVITIES (NOTE i)...... 19,718 36,756 33,864
------- ------- -------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:
Interest received..................................... 4,466 2,936 4,433
Interest paid......................................... (179) (190) (145)
------- ------- -------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE.................................. 4,287 2,746 4,288
------- ------- -------
TAXATION:
U.K. corporation tax (paid)/refunded.................. 256 (5,542) 1,297
Overseas tax (paid)................................... (2,145) (854) (582)
------- ------- -------
TAX (PAID)/REFUND....................................... (1,889) (6,396) 715
------- ------- -------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT:
Purchases of tangible fixed assets.................... (6,785) (9,041) (8,906)
Capitalised software product assets and other
intangibles........................................ (62) (2,361) (5,853)
Investment in own shares.............................. (5,212) (2,982) --
Proceeds from sale of own shares...................... 3,836 241 95
Disposal of tangible fixed assets..................... -- 1,523 --
------- ------- -------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT:........................................... (8,223) (12,620) (14,564)
------- ------- -------
ACQUISITIONS AND DISPOSALS:
Investment in subsidiary undertakings................. (12,962) (28,276) 16,048
Net cash acquired with subsidiary undertakings........ 518 (17,928)
------- ------- -------
NET CASH OUTFLOW FROM ACQUISITIONS AND DISPOSALS........ (12,962) (27,758) (1,880)
------- ------- -------
CASH INFLOW/(OUTFLOW) BEFORE FINANCING.................. 931 (7,272) 22,423
------- ------- -------
Issue of ordinary shares.............................. 207 11,285 2,139
Cancellation of ordinary shares....................... (13,688) -- --
Expenses attributable to issue/cancellation of
ordinary shares.................................... (150) -- (2,654)
Capital element of finance lease obligations.......... -- -- (9)
Bank loan............................................. (362) 72 689
------- ------- -------
NET CASH (OUTFLOW)/INFLOW FROM FINANCING................ (13,993) 11,357 165
------- ------- -------
(DECREASE)/INCREASE IN CASH............................. (13,062) 4,085 22,588
======= ======= =======
</Table>
The notes on pages 85 to 108 form part of these financial statements.
80
MERANT PLC
FINANCIAL STATEMENTS 2001
NOTES TO CONSOLIDATED CASH FLOW STATEMENT
UK FORMAT
<Table>
<Caption>
FIFTEEN
MONTHS
YEAR ENDED YEAR ENDED ENDED
APRIL 30 APRIL 30 APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------
(i) RECONCILIATION OF OPERATING (LOSS) TO "NET CASH INFLOW
FROM OPERATING ACTIVITIES"
Operating (loss)............................................ (39,762) (38,132) (4,029)
Depreciation charges........................................ 8,789 5,931 8,512
Amortisation charges........................................ 43,967 43,890 30,390
Loss on sale of tangible fixed assets....................... 837 146 3,032
Exceptional items........................................... (9,901) (2,737) (6,918)
Decrease/(increase) in stocks............................... 834 379 (1,419)
Decrease/(increase) in debtors.............................. 7,452 12,148 (7,229)
Increase in creditors....................................... 7,502 15,131 11,525
------- ------- ------
19,718 36,756 33,864
======= ======= ======
(ii) RECONCILIATION TO NET FUNDS
(Decrease)/increase in cash during the period............... (13,062) 4,085 22,588
Cash inflow (outflow) from (decrease) in debt and lease
financing................................................. 362 (84) (680)
------- ------- ------
(12,700) 4,001 21,908
Translation difference...................................... (5,281) 90 1,288
------- ------- ------
(17,981) 4,091 23,196
Net funds, beginning of period.............................. 77,780 73,689 50,493
------- ------- ------
NET FUNDS, END OF PERIOD.................................... 59,799 77,780 73,689
======= ======= ======
</Table>
<Table>
<Caption>
BALANCES AT BALANCES
APRIL 30 EXCHANGE AT APRIL 30
2000 CASH FLOW DIFFERENCES 2001
L'000 L'000 L'000 L'000
----------- --------- ----------- -----------
(iii) ANALYSIS OF NET FUNDS
Cash............................................ 79,543 (13,062) (5,281) 61,200
Short term loans................................ (1,763) 362 (112) (1,401)
------ ------- ------ ------
77,780 (12,700) (5,393) 59,799
------ ------- ------ ------
</Table>
The notes on pages 85 to 108 form part of these financial statements.
81
MERANT PLC
FINANCIAL STATEMENTS 2001
COMPANY BALANCE SHEET
UK FORMAT
<Table>
<Caption>
APRIL 30 APRIL 30
2001 2000
NOTES L'000 L'000
----- --------- ---------
FIXED ASSETS
Tangible fixed assets..................................... 14 2,904 2,924
Investments............................................... 15 221,930 222,070
------- -------
TOTAL FIXED ASSETS..................................... 224,834 224,994
------- -------
CURRENT ASSETS
Amounts owed by subsidiary undertakings................... 1,780 24,264
Other debtors............................................. 189 352
Cash...................................................... 14 8,184
------- -------
TOTAL CURRENT ASSETS................................... 1,983 32,800
------- -------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Amounts owed to subsidiary undertakings................... 6,201 27,110
Accrued expenses.......................................... 370 278
------- -------
6,571 27,388
------- -------
NET CURRENT (LIABILITIES)/ASSETS............................ (4,588) 5,412
------- -------
NET ASSETS.................................................. 220,246 230,406
======= =======
CAPITAL AND RESERVES
Called up share capital................................... 2,699 2,988
Share premium account and other reserves.................. 200,625 200,421
Capital redemption reserve................................ 292 --
Profit and loss account................................... 16,630 26,997
------- -------
TOTAL SHAREHOLDERS' FUNDS.............................. 220,246 230,406
======= =======
</Table>
The financial statements on pages 78 to 108 were approved by the Board of
directors on October 22 2001.
<Table>
/s/ J. MICHAEL GULLARD
J. Michael Gullard
Director
</Table>
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. No profit or loss account is presented for MERANT plc as provided by
section 230 of the same Act.
The notes on pages 85 to 108 form part of these financial statements.
82
MERANT PLC
FINANCIAL STATEMENTS 2001
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
UK FORMAT
<Table>
<Caption>
FIFTEEN MONTHS
YEAR ENDED YEAR ENDED ENDED
APRIL 30 APRIL 30 APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------------
(Loss) for the period....................................... (50,914) (35,461) (15,279)
Currency translation adjustment............................. (5,116) 5,561 1,146
------- ------- -------
TOTAL RECOGNISED GAINS AND LOSSES FOR THE PERIOD....... (56,030) (29,900) (14,133)
------- ------- -------
</Table>
The notes on pages 85 to 108 form part of these financial statements.
83
MERANT PLC
FINANCIAL STATEMENTS 2001
MOVEMENT IN SHAREHOLDERS' FUNDS
UK FORMAT
<Table>
<Caption>
ORDINARY SHARES OF 2p EACH: CAPITAL
----------------------------- SHARE REDEMPTION RETAINED
AUTHORISED ISSUED AMOUNT PREMIUM RESERVE EARNINGS TOTAL
'000 '000 L'000 L'000 L'000 L'000 L'000
---------- ------- ------ ------- ---------- -------- -------
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
Share buy-back................. -- (14,409) (288) -- 288 (13,838) (13,838)
Share options exercised........ -- 182 3 204 -- -- 207
Shares cancelled............... -- (200) (4) -- 4 (357) (357)
(Loss) for the period.......... -- -- -- -- -- (50,914) (50,914)
Currency translation
adjustment................... -- -- -- -- -- (5,116) (5,116)
------- ------- ----- ------- ----- ------- -------
BALANCE, APRIL 30 2001......... 212,000 134,963 2,699 200,625 292 75,150 128,466
======= ======= ===== ======= ===== ======= =======
</Table>
---------------
NOTES:
1. The issued ordinary shares are allotted, called up and fully paid.
2. 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).
On August 24 2000 the Company purchased for cancellation 14,408,798 ordinary
shares at L0.95 per share for an aggregate consideration of L13,688,000.
3. 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.
4. The cumulative value of goodwill written off on acquisitions, net of any
goodwill attributable to subsidiary undertakings or businesses disposed of
prior to the balance sheet date, was L11,732,000.
The notes on pages 85 to 108 form part of these financial statements.
84
MERANT PLC
FINANCIAL STATEMENTS 2001
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, for the year ended April
30 2001, are contained on pages 78 to 108.
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.
In 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 year ended April 30 2000
and the fifteen-month period ended April 30 1999.
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
2001. 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 MERANT's consolidated results 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 if 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 consulting fees are recognised under the percentage of
completion method of contract accounting.
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 recognised 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 recognises revenue from consulting and
education as the services are performed.
85
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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, any subsequent development costs incurred prior to general release 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.
Until January 31 1998 goodwill was written off directly to reserves as
incurred. When 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.
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:
<Table>
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
</Table>
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.
86
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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
All 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.
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.
Consequently, 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 pounds sterling
are translated at exchange rates in effect at balance sheet date. Revenues and
expenses are translated using average rates. Translation adjustments resulting
from the process of translating financial statements denominated in currencies
other than pounds sterling 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 12 on page 97).
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
87
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
share options are used to repurchase the Company's ordinary shares at their
average market price during each period.
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
In 2000 the Accounting Standards Board issued three new financial reporting
standards. The Company will be required to comply with these standards next
year.
FRS 17 "Retirement Benefits" deals with the treatment of pensions and other
retirement benefits in the employer's accounts. FRS 17 is principally concerned
with defined benefit pension schemes. Compliance with this standard is not
expected to have a significant impact on results of operations or financial
condition of the Company.
FRS 18 "Accounting Policies" deals primarily with the selection,
application and disclosure of accounting policies. Compliance with this standard
is not expected to have a significant impact on results of operations or
financial condition of the Company.
FRS 19 "Deferred Tax" will require companies to provide for deferred tax on
a "full" rather than "partial" provision basis. The Company has not yet
completed its evaluation of the impact of compliance with this standard, but
does not expect it to have a significant impact on results of operations or
financial condition of the Company.
NOTE 2 SEGMENTAL INFORMATION
Previously, MERANT has operated its business as one segment -- the
development and licencing of computer software products and related services.
During the second half of the current year, the Company was organised into four
business segments, each based around a group of products or services. The
following table analyses revenue, operating loss and net assets by segment for
the year ended April 30, 2001. It is not practicable to identify revenue,
operating loss and net assets by segment for prior years.
<Table>
<Caption>
YEAR ENDED
APRIL 30
2001
L'000
-----------
Revenue:
Enterprise Change Management.............................. 94,956
Enterprise Data Connectivity.............................. 31,315
Application Creation and Transformation................... 83,513
Internet Professional Services............................ 5,649
-------
215,433
=======
Operating profit/(loss):
Enterprise Change Management.............................. (29,186)
Enterprise Data Connectivity.............................. (4,880)
Application Creation and Transformation................... (3,176)
Internet Professional Services............................ (9,277)
-------
(39,762)
=======
</Table>
88
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 2 SEGMENTAL INFORMATION -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED
APRIL 30
2001
L'000
-----------
Net operating assets:
Enterprise Change Management.............................. 39,305
Enterprise Data Connectivity.............................. 5,725
Application Creation and Transformation................... 16,777
Internet Professional Services............................ --
-------
61,807
=======
</Table>
The following table analyses revenue by geographical area, based on
customer location:
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- ---------------
United Kingdom.......................... 31,594 28,735 30,123
United States........................... 132,438 132,458 133,269
Europe (excluding U.K.)................. 37,212 47,857 36,095
Japan................................... 6,345 7,556 6,371
Other................................... 7,844 10,677 9,615
------- ------- -------
215,433 227,283 215,473
------- ------- -------
</Table>
The following table analyses worldwide operations by geographical area,
based on the location of MERANT facilities.
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- ---------------
Total revenue:
United Kingdom........................ 36,561 54,289 59,512
United States......................... 132,316 132,407 141,734
Europe (excluding U.K.)............... 39,473 42,246 55,286
Other................................. 14,347 12,699 13,953
------- ------- -------
222,697 241,641 270,485
------- ------- -------
Inter-segment revenue:
United Kingdom........................ (5,290) (12,308) (14,613)
United States......................... (126) -- (20,402)
Europe (excluding U.K.)............... (1,848) (1,513) (17,062)
Other................................. -- (537) (2,935)
------- ------- -------
(7,264) (14,358) (55,012)
------- ------- -------
Third party revenue
United Kingdom........................ 31,271 41,981 44,899
United States......................... 132,190 132,407 121,332
Europe (excluding U.K.)............... 37,625 40,733 38,224
Other................................. 14,347 12,162 11,018
------- ------- -------
215,433 227,283 215,473
======= ======= =======
</Table>
89
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 2 SEGMENTAL INFORMATION -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- ---------------
Operating (loss):
United Kingdom........................ (39,944) (48,762) (24,308)
United States......................... 1,550 1,178 495
Europe (excluding U.K.)............... (2,205) 7,674 15,608
Other................................. 837 1,778 4,176
------- ------- -------
(39,762) (38,132) (4,029)
------- ------- -------
Net operating assets/(liabilities):
United Kingdom........................ 73,166 130,064 114,399
United States......................... (17,500) (19,087) 11,856
Europe (excluding U.K.)............... 4,253 1,555 5,489
Other................................. 1,888 741 6,985
------- ------- -------
61,807 113,273 138,729
------- ------- -------
</Table>
Inter-segment revenue principally represents charges for research &
development and for administrative costs between locations. Operating (loss)
excludes interest income and expense and, correspondingly, net operating
assets/(liabilities) exclude interest-bearing assets and liabilities. The
following table reconciles net operating assets as shown above to net assets as
shown in the balance sheet:
<Table>
<Caption>
APRIL 30 APRIL 30 APRIL 30
2001 2000 1999
L'000 L'000 L'000
(IN THOUSANDS) ---------- ---------- ---------------
Net operating assets.................... 61,807 113,273 138,729
Cash and bank deposits.................. 61,200 79,543 75,394
Bank loan............................... (1,401) (1,763) (1,696)
Investment in own shares................ 6,860 7,431 4,691
Finance lease obligations............... -- -- (9)
------- ------- -------
Net assets.............................. 128,466 198,484 217,109
------- ------- -------
</Table>
NOTE 3 ACQUISITIONS
During the three financial years ended April 30 2001 the Company made
several acquisitions. In accordance with the policy set out in note 1 on page
85, each transaction has been accounted for as an acquisition, and the goodwill
arising on each acquisition has been capitalised as an intangible asset (see
note 13 on page 97).
On February 20 2001 MERANT completed the acquisition of the Enterprise
Division of NetObjects, Inc., a developer of web content management software
based in Redwood City, California, U.S.A. The total consideration for the
transaction was $18,108,000 (L12,575,000), the whole of which was payable in
cash. The following table sets out the allocation of the cost of acquisition
between the tangible assets and liabilities of the
90
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 3 ACQUISITIONS -- (CONTINUED)
acquired business, and the resultant goodwill, which is being amortised over its
estimated economic life of five years.
<Table>
<Caption>
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
L'000 L'000 L'000
---------- ----------- --------------
Current liabilities...................... (493) -- (493)
Goodwill arising......................... 13,068
------
Cost of acquisition...................... 12,575
------
Purchase consideration payable to
vendors................................ 12,500
Transaction costs........................ 75
------
12,575
------
</Table>
The Enterprise Division of NetObjects, Inc. did not separately report its
results prior to its acquisition by the Company, and its contribution to the
profit or loss after taxation of NetObjects, Inc. cannot reasonably be
identified. However, the profit or loss after taxation attributable to the
Enterprise Division in the financial year of NetObjects, Inc. which ended
September 30 2000 and in the subsequent period to February 20 2001 are not
considered material to the Group as a whole.
For the period since acquisition, turnover of the Enterprise Division
business was approximately L279,000. At the date of the acquisition, personnel
of the acquired business relocated to the Company's office in Mountain View,
California, U.S.A., and became an integral part of the Company's Web Content
Management development initiative. The directors consider it is not possible to
allocate costs to the acquired business in any meaningful way, and are therefore
unable to provide any indication of the operating profit or loss of the acquired
business.
In the year ended April 30 2000 MERANT reported that it had completed the
acquisitions of the four companies listed below, at an estimated total cost of
L30,074,000. The estimated total cost included contingent amounts which were
dependent on future operating results of the acquired businesses. In the current
year, adjustments to acquisition costs, including revisions to those estimates,
have reduced the total cost to L28,923,000. The value attributed to goodwill was
initially computed by reference to the estimated cost of each acquisition, and
provisions for amortisation were based on an estimated economic life of five
years. The value of goodwill has been adjusted in the current year to reflect
changes in acquisition costs.
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, which amounted to L10,088,000, was paid in
cash. Goodwill arising on the transaction was amortised based on an estimated
economic life of five years. Essential Software, Inc., formed part of the
E-Solutions Division, and the unamortised portion of the goodwill, which
amounted to L6,520,000 was written off in the current year as part of the
closure of that business and is included in loss on discontinued operations.
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 was L8,713,000 a reduction of L5,298,000 from the
original estimated consideration. The EnterpriseLink technology was incorporated
into the ACT Division, and the unamortised portion of the goodwill which arose
on this acquisition will be set against the net gain on the disposal of the ACT
Division in 2002.
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, which was subject to adjustment depending on future operating
results of
91
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 3 ACQUISITIONS -- (CONTINUED)
Trillium up to October 31 2001, was estimated at L3,994,000, of which L2,306,000
was paid on acquisition. It is unlikely that the financial performance targets
will be met. Consequently, the cost of the acquisition has been revised to
L3,858,000. The initial valuation of goodwill has been reduced accordingly.
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, which was subject
to adjustment depending on future operating results of NSP covering the period
ended December 31 2000, was estimated at L2,280,000, of which L1,974,000 was
paid on acquisition. An additional L372,000 was paid in the current year in
accordance with the acquisition agreement. No further payments are due and after
transaction cost adjustments, the cost of the acquisition has been revised to
L2,616,000. The initial valuation of goodwill has been increased accordingly.
NSP, which changed its name to MERANT Nordic AS on January 21 2000, was
incorporated into the ACT Division, and the unamortised portion of the goodwill
which arose on this acquisition will be set against the net gain on the disposal
of the ACT Division in 2002.
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 of L2,722,000. MF Italia changed its name to MERANT s.r.l. on
March 1 1999. MERANT s.r.l. was incorporated into the ACT Division, and the
unamortised portion of the goodwill which arose on this acquisition will be set
against the net gain on the disposal of the ACT Division in 2002.
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 of L1,112,000. ASE changed its name to MERANT Pty., Ltd. on
February 16 1999. MERANT Pty., Ltd. was incorporated into the ACT Division, and
the unamortised portion of the goodwill which arose on this acquisition will be
set against the net gain on the disposal of the ACT Division in 2002.
On September 24 1998 the Company acquired all of the share capital of
INTERSOLV, Inc. ("INTERSOLV") a publicly-owned corporation based in Rockville,
Maryland, U.S.A. and listed on the Nasdaq National Market, for $272,000,000
(approximately L160,865,000). INTERSOLV was a provider of software solutions,
focused primarily in the areas of application development management, enterprise
data connectivity and enterprise application renewal. 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 the merger was completed represented approximately 46% of
MERANT's share capital on a fully-diluted basis. 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 9 on page 95.
During the year other adjustments totalling L1,186,000 were made to the
value of goodwill recorded on acquisitions.
NOTE 4 DISCONTINUED BUSINESS
In February 2001, MERANT's Board of Directors approved management's plan to
discontinue the Company's E-Solutions business. The closure was announced by the
Company on February 21 2001, and was completed at the beginning of May 2001. The
Company has reported the operating results of the E-Solutions
92
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 4 DISCONTINUED BUSINESS -- (CONTINUED)
business as discontinued operations. The following table discloses the operating
results of the E-Solutions business for each of the last three financial years:
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
(IN THOUSANDS) L'000 L'000 L'000
-------------- ---------- ---------- --------------
Revenue................................. 5,649 19,389 21,672
Cost of revenue......................... (8,523) (16,814) (16,543)
------ ------- -------
Gross (loss)/profit..................... (2,874) 2,575 5,129
Sales and marketing costs............... (4,893) (4,493) (4,421)
General and administrative costs........ (1,510) (1,398) (1,117)
------ ------- -------
Operating (loss) before taxation........ (9,277) (3,316) (409)
Taxation................................ -- -- --
------ ------- -------
(Loss) after taxation................... (9,277) (3,316) (409)
------ ------- -------
</Table>
The loss arising on the termination of the business consists of the
following:
<Table>
<Caption>
YEAR ENDED
APRIL 30
2001
(IN THOUSANDS) L'000
-------------- ----------
Carrying value of goodwill now written off.................. 6,520
Severance payments.......................................... 620
Other closure costs......................................... 4,177
------
Loss on business termination, before taxation............... 11,317
Taxation.................................................... --
------
Loss on business termination................................ 11,317
------
</Table>
NOTE 5 RESEARCH AND DEVELOPMENT COSTS
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------------
Research and development costs, before
capitalisation........................ 38,351 34,485 30,455
Costs capitalised as software product
assets................................ (62) (2,356) (5,853)
Amortisation of capitalised costs....... 1,485 4,740 9,717
Non-recurring charge for impairment
(note 9).............................. -- 4,657 --
------ ------ ------
39,774 41,526 34,319
------ ------ ------
</Table>
NOTE 6 GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs includes provisions for amortisation of
the goodwill arising on corporate acquisitions amounting to L42,482,000 (2000:
L39,150,000; 1999: L21,915,000).
93
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 7 OPERATING (LOSS)
Operating (loss) is stated after charging (or crediting):
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------------
Auditors' remuneration:
audit services: U.K................... 109 133 204
audit services: overseas.............. 583 379 333
non-audit services: U.K............... 168 392 740
non-audit services: overseas.......... 320 292 531
Operating lease rentals:
equipment............................. 3,455 3,102 2,639
land and buildings.................... 6,033 5,808 3,799
Rental income........................... (339) (358) (461)
Gain/(loss) on foreign exchange......... (443) (325) 338
Depreciation of tangible fixed assets... 8,789 5,931 8,512
Amortisation of intangible fixed
assets................................ 43,967 43,890 31,632
</Table>
The profit attributable to the ordinary shareholders of MERANT plc, dealt
with in the financial statements of MERANT, is L3,828,000 (2000: L8,418,000;
1999: L2,050,000). During the year reserves were reduced by L14,195,000 as a
result of the purchase by the Company of 14,608,798 of its own shares and their
subsequent cancellation. Other movements on reserves are shown in the Movement
in Shareholders' Funds on page 84.
NOTE 8 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 16 to 19.
The average monthly numbers of staff employed by MERANT was as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
NO. NO. NO.
---------- ---------- --------------
U.K..................................... 448 450 393
U.S..................................... 1,027 1,111 785
Other................................... 402 420 283
----- ----- -----
1,877 1,981 1,461
----- ----- -----
</Table>
94
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 8 DIRECTORS AND EMPLOYEES -- (CONTINUED)
Staff costs, which include salaries, bonus and commissions, amounted to:
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------------
U.K..................................... 21,225 22,082 21,707
U.S..................................... 70,962 66,131 45,371
Other................................... 18,569 18,822 15,689
------- ------- ------
110,756 107,035 82,767
Social security costs................... 9,773 9,805 9,514
Other pension costs..................... 2,699 2,884 2,417
------- ------- ------
123,228 119,724 94,698
------- ------- ------
</Table>
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 9 EXCEPTIONAL ITEMS
In the year ended April 30 2001, the Company has reported two non-operating
exceptional items on the face of the profit and loss account.
The loss on disposal of fixed assets of L3,254,000 represents actual and
anticipated losses incurred on the Company's investment in its own shares. The
Company has acquired its own shares in order to fulfil its obligations to the
1999 Employee Share Purchase Plan (ESPP). Under the terms of the ESPP, the
Company is committed to selling those shares to participants of the ESPP at
prices based on current market values. Because of the decline in the market
value of the Company's shares during the year, the Company has incurred actual
losses amounting to L1,306,000 on sales of its own shares during the year, and
has provided for future losses of L1,948,000. The provision for future losses is
based on estimates of the numbers of shares which will be sold to ESPP
participants in the year ended April 30 2002.
The loss on termination of business operation of L11,317,000 represents the
net cost of the termination of the E-Solutions business. An analysis of this
charge is shown in note 4 on pages 92 and 93.
In the year ended April 30 2000, the Company reported one-time charges
totalling L8,491,000 and included these charges in the appropriate cost
categories within operating expenses in the profit and loss account:
<Table>
<Caption>
L'000
-----
Research and development.................................... 4,657
Sales and marketing......................................... 3,502
General and administrative.................................. 332
-----
8,491
-----
</Table>
The charges resulted from management actions which recognised 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 represented provisions for impairment of previously
capitalised software product assets, where the book values attributed to certain
products could not be justified by the
95
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 9 EXCEPTIONAL ITEMS -- (CONTINUED)
future revenue streams projected for those products. The balance of L3,834,000
related to provisions for severance costs for approximately 50 employees in the
COBOL related business and for the costs associated with closing of excess
facilities. As at April 30 2001 L1,070,000 of these costs 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 2001 amounts totalling L472,000 remained payable.
NOTE 10 INTEREST EXPENSE
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------------
On bank loans and overdrafts............ 110 125 123
Finance charges payable under finance
leases................................ -- -- 1
Other................................... 69 65 21
--- --- ---
179 190 145
--- --- ---
</Table>
NOTE 11 TAXATION
The taxation charge consists of the following:
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------------
U.K. corporation tax.................... (211) 612 2,645
Deferred taxation....................... 870 (701) (1,198)
Overseas taxation:
U.S. federal.......................... -- -- 1,079
U.S. state............................ -- 82 63
Other................................. 209 525 2,180
----- ---- ------
868 518 4,769
Taxation (overprovided) in previous
years:
Corporation tax......................... -- (426) (1,062)
----- ---- ------
868 92 3,707
----- ---- ------
Effective tax rates..................... -2% --% -32%
===== ==== ======
</Table>
The Company's effective tax rate in each of the past three years has been
significantly distorted by the impact of permanent differences between
accounting profits and taxable profits, principally the provisions for
amortisation of goodwill (see note 6 on page 93) which are not an allowable
expense for tax purposes. The tax rate is also impacted by the distribution of
corporate profits and losses among the tax jurisdictions in which the Company
operates. The Company expects that its effective tax rate will continue to be
significantly impacted by provisions for amortisation of goodwill for at least
the next two years.
96
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 11 TAXATION -- (CONTINUED)
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.
NOTE 12 (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.
<Table>
<Caption>
YEAR ENDED YEAR ENDED FIFTEEN MONTHS
APRIL 30 APRIL 30 ENDED APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- ---------------
(Loss) after taxation................... (50,914) (35,461) (15,279)
------- ------- -------
Weighted average number of ordinary
shares:
In issue.............................. 139,952 145,958 110,714
Owned by employee share ownership
trust (note 15).................... (5,647) (3,795) (3,834)
------- ------- -------
Used in computing basic and diluted
(loss) per share...................... 134,305 142,163 106,880
------- ------- -------
(Loss) per share: basic................. (37.9P) (24.9p) (14.3p)
------- ------- -------
(Loss) per share: diluted............... (37.9P) (24.9p) (14.3p)
------- ------- -------
</Table>
Share options were anti-dilutive and therefore excluded from the
computations.
NOTE 13 INTANGIBLE FIXED ASSETS
<Table>
<Caption>
SOFTWARE
PRODUCT
ASSETS GOODWILL TOTAL
L'000 L'000 L'000
-------- -------- -------
COST:
At April 30 2000............................... 35,316 178,030 213,346
Currency fluctuations.......................... 504 (257) 247
ACQUISITIONS: current year..................... 62 13,068 13,130
adjustments to prior years........ -- (7,376) (7,376)
Amounts written off............................ -- (9,311) (9,311)
------ ------- -------
AT APRIL 30 2001............................... 35,882 174,154 210,036
------ ------- -------
AMORTISATION:
At April 30 2000............................... 31,766 61,375 93,141
Currency fluctuations.......................... 461 (125) 336
Amounts written off............................ -- (2,791) (2,791)
Provision for the period....................... 1,485 42,482 43,967
------ ------- -------
AT APRIL 30 2001............................... 33,712 100,941 134,653
------ ------- -------
NET BOOK VALUES:...............................
At April 30 2000............................... 3,550 116,655 120,205
------ ------- -------
AT APRIL 30 2001............................... 2,170 73,213 75,383
------ ------- -------
</Table>
97
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 14 TANGIBLE FIXED ASSETS
(a) MERANT:
<Table>
<Caption>
COMPUTER &
FREEHOLD COMMUNICATIONS
LAND AND LEASEHOLD OFFICE EQUIPMENT TRANSPORTATION
BUILDINGS IMPROVEMENTS EQUIPMENT & SOFTWARE EQUIPMENT TOTAL
L'000 L'000 L'000 L'000 L'000 L'000
--------- ------------ --------- -------------- -------------- -------
COST:
At April 30 2000..... 13,833 6,730 8,784 49,602 215 79,164
Currency
fluctuations....... -- 555 470 3,066 (18) 4,073
Additions............ -- 657 778 5,350 -- 6,785
Disposals............ -- (72) (514) (10,838) (108) (11,532)
------ ----- ----- ------- ---- -------
AT APRIL 30 2001..... 13,833 7,870 9,518 47,180 89 78,490
------ ----- ----- ------- ---- -------
DEPRECIATION:
At April 30 2000..... 709 3,673 6,003 38,592 112 49,089
Currency
fluctuations....... -- 293 332 2,377 (8) 2,994
Provision for the
period............. 20 925 947 6,897 -- 8,789
Disposals............ -- (36) (493) (10,106) (60) (10,695)
------ ----- ----- ------- ---- -------
AT APRIL 30 2001..... 729 4,855 6,789 37,760 44 50,177
------ ----- ----- ------- ---- -------
NET BOOK VALUES:
At April 30 2000..... 13,124 3,057 2,781 11,010 103 30,075
------ ----- ----- ------- ---- -------
AT APRIL 30 2001..... 13,104 3,015 2,729 9,420 45 28,313
------ ----- ----- ------- ---- -------
</Table>
(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.
<Table>
<Caption>
NET BOOK
COST DEPRECIATION VALUE
L'000 L'000 L'000
----- ------------ --------
At April 30 2000............................................ 3,088 164 2,924
Provision for the year...................................... -- 20 (20)
----- --- -----
AT APRIL 30 2001............................................ 3,088 184 2,904
----- --- -----
</Table>
Subsequent to the year-end, on October 12 2001, MERANT disposed of its
freehold land and buildings, as described in note 26 on pages 107 and 108.
98
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 15 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"). The shares have been acquired for the employee share
option plans and share purchase plan (see note 24 on pages 105 to 107).
<Table>
<Caption>
NET BOOK
COST PROVISIONS VALUE
L'000 L'000 L'000
------ ---------- --------
At April 30 2000............................................ 7,431 -- 7,431
Acquired.................................................... 5,212 -- 5,212
Sold on exercise of options................................. (572) -- (572)
Sold to participants of ESPP................................ (3,263) -- (3,263)
Provision for loss on disposal.............................. -- (1,948) (1,948)
------ ------ ------
At April 30 2001............................................ 8,808 (1,948) 6,860
------ ------ ------
</Table>
As at April 30 2001 the Trust owned 7,260,000 shares, with a market value
of L5,119,000 (April 30 2000: 4,371,000 shares; market value L6,775,000). The
Company has provided L1,948,000 to reflect anticipated losses on the future sale
of these shares to optionholders and participants in the employee share purchase
plan. 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:
<Table>
<Caption>
APRIL 30 APRIL 30
2001 2000
L'000 L'000
------------- -------------
Investments in subsidiary undertakings:
Beginning of year.................................. 214,639 201,788
Acquisitions....................................... -- 6,000
Disposals.......................................... (12) (24)
Additional investment.............................. 443 6,875
------- -------
End of year........................................ 215,070 214,639
Investment in own shares (see (a) above)........... 6,860 7,431
------- -------
221,930 222,070
------- -------
</Table>
99
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 15 INVESTMENTS -- (CONTINUED)
The principal subsidiary undertakings, which are wholly-owned except where
noted below, are:
<Table>
<Caption>
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, 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 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
</Table>
---------------
(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.
NOTE 16 STOCKS
The replacement value of stocks is not considered to be materially
different from its balance sheet value.
NOTE 17 DEBTORS
<Table>
<Caption>
APRIL 30 APRIL 30
2001 2000
L'000 L'000
-------- --------
Trade debtors:
Due within one year..................................... 52,789 58,340
Due after more than one year............................ -- 420
------ ------
52,789 58,760
Other debtors and prepaid expenses (see note 25).......... 5,620 7,101
------ ------
58,409 65,861
------ ------
</Table>
100
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 18 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<Table>
<Caption>
APRIL 30 APRIL 30
2001 2000
L'000 L'000
-------- --------
Bank loan (note 22)....................................... 1,401 1,763
Trade creditors........................................... 7,319 7,726
Current corporation tax................................... 2,606 4,801
Other taxes and social security costs..................... 1,808 1,913
Product royalties and purchases........................... 1,629 1,565
Accrued employee compensation and commissions............. 13,700 12,714
Deferred revenue.......................................... 51,498 44,196
Other accrued expenses.................................... 10,797 11,951
------ ------
90,758 86,629
------ ------
</Table>
NOTE 19 LEASE COMMITMENTS
Operating leases:
<Table>
<Caption>
LAND AND BUILDINGS OTHER
-------------------- --------------------
APRIL 30 APRIL 30 APRIL 30 APRIL 30
2001 2000 2001 2000
L'000 L'000 L'000 L'000
-------- -------- -------- --------
Annual commitment under leases which
expire:
within one year...................... 459 758 721 911
in the second to fifth years
inclusive......................... 4,065 3,476 1,082 1,473
thereafter........................... 1,613 2,275 45 20
----- ----- ----- -----
6,137 6,509 1,848 2,404
----- ----- ----- -----
</Table>
NOTE 20 CAPITAL COMMITMENTS
At April 30 2001 and 2000 MERANT had no material capital expenditure
commitments.
NOTE 21 PROVISIONS FOR LIABILITIES AND CHARGES
<Table>
<Caption>
RESTRUCTURING CONTINGENT DEFERRED
PROVISIONS LIABILITIES TAXATION TOTAL
L'000 L'000 L'000 L'000
------------- ----------- -------- ------
As at April 30 2000................ 4,904 6,190 8,352 19,446
Arising during the year............ -- -- 1,174 1,174
Utilised........................... (3,360) (6,190) -- (9,550)
Currency fluctuations.............. -- -- 481 481
------ ------ ------ ------
As at April 30 2001................ 1,544 -- 10,007 11,551
------ ------ ------ ------
</Table>
Restructuring provisions include amounts which arose in respect of the
Company's 1999 and 2000 restructuring programs, as described in note 9 on page
95. It is expected that the majority of the outstanding amounts will be settled
during the current financial year.
Contingent liabilities represented estimates of amounts payable to vendors
of companies acquired by MERANT. Amounts payable were dependent on meeting
performance targets.
101
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 21 PROVISIONS FOR LIABILITIES AND CHARGES -- (CONTINUED)
The following table discloses the major components of deferred taxation,
and the movements during the year.
<Table>
<Caption>
CAPITAL
ALLOWANCES IN
ADVANCE OF
DEPRECIATION AND OTHER TIMING
AMORTISATION DIFFERENCES TOTAL
L'000 L'000 L'000
------------------ ------------ ------
Balance, April 30 2000................ (334) 8,686 8,352
Movement during the year.............. 65 1,590 1,655
---- ------ ------
Balance, April 30, 2001............... (269) 10,276 10,007
---- ------ ------
</Table>
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
75.
INTEREST RATE EXPOSURES:
The interest rate risk profile of the Company's financial liabilities,
excluding short-term debtors and creditors, consists of a floating rate
liability denominated in euros. The euro liability represents borrowings against
an unsecured revolving multi-currency facility, under which financing of up to
L5,000,000 (2000: L5,000,000), or its equivalent in such other currency as the
Company may determine, is available until January 2002. Borrowings under this
facility bear interest at 0.75% above LIBOR (the London Interbank Offered Rate).
At April 30 2001 the balance outstanding was the equivalent of L1,401,000 (2000:
L1,763,000). The group's financial liabilities at April 30 2001 and April 30
2000 all mature within one year, or on demand.
102
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 22 FINANCIAL INSTRUMENTS -- (CONTINUED)
The interest rate risk profile of the Company's financial assets, excluding
short-term debtors and creditors, is as follows:
<Table>
<Caption>
APRIL 30 APRIL 30
2001 2000
L'000 L'000
-------- --------
Floating rate financial assets:
U.S. dollars.............................................. 42,653 42,024
Sterling.................................................. 6,637 23,439
Deutschemarks............................................. 2,161 3,261
Canadian dollars.......................................... 1,402 383
Euros..................................................... 1,376 107
Belgian francs............................................ 1,239 694
Norwegian kroner.......................................... 1,132 1,214
Spanish pesetas........................................... 1,069 778
Japanese yen.............................................. 1,027 2,274
Australian dollars........................................ 798 698
Dutch florins............................................. 604 687
French francs............................................. 438 1,294
Italian lire.............................................. 247 1,288
Indian rupees............................................. 214 1,069
Portuguese escudos........................................ 155 271
Other currencies.......................................... 48 62
------ ------
61,200 79,543
------ ------
</Table>
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 75.
Net foreign currency monetary assets/liabilities not held in functional
currencies are as follows:
<Table>
<Caption>
NET MONETARY ASSETS
-----------------------
US
DOLLARS OTHER TOTAL
FUNCTIONAL CURRENCY OF OPERATIONS: L'000 L'000 L'000
---------------------------------- ------- ----- -----
AT APRIL 30 2001 STERLING OPERATIONS................... 1,117 88 1,205
----- ----- -----
AT APRIL 30 2000 STERLING OPERATIONS................... 3,469 725 4,194
----- ----- -----
</Table>
103
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 or directors' valuation, are not materially different from
the book values shown below:
<Table>
<Caption>
APRIL 30 APRIL 30
2001 2000
L'000 L'000
-------- --------
Primary financial instruments:
Short term borrowings................................... (1,401) (1,763)
Cash.................................................... 61,200 79,543
------ ------
59,799 77,780
------ ------
</Table>
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 alleged 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. The defendants filed a
motion to dismiss the newly-amended complaint in June 2000 and plaintiffs
opposed this motion. A hearing on the motion took place in September 2000. On
December 20 2000 the Court issued a ruling granting in part and denying in part
the defendant's motion to dismiss. The court dismissed all of plaintiffs'
allegations, with the exception of certain allegations that defendants misled
the market regarding the Company's plans for its Y2K business. On February 16
2001, the defendants answered the second consolidated amended complaint, denying
the remaining allegations and asserting affirmative defences against the claim.
Because of the Court's ruling, the mandatory discovery stay of the Reform Act is
no longer in effect. The plaintiffs have served document requests on the Company
and document production has begun on a rolling schedule. The plaintiffs filed
their motion for class certification and supporting materials on April 20 2001.
On June 19 2001 the Court entered a Stipulation and Order Regarding Class
Certification ("Class Certification Order"). The Class Certification Order
certified this action to proceed as a class action while preserving the
defendants' rights to challenge, at a later date, the propriety of this action
proceeding as a class action, the definition of the class, and the class
representatives. On October 25, 2001, at a Joint Case Management Conference, the
Court established a pre-trial schedule and set a trial date of April 7, 2003.
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 MERANT's business, financial
condition and results of operations.
104
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 23 CONTINGENT LIABILITY -- (CONTINUED)
The Company and its subsidiaries are also involved in legal proceedings,
claims and litigation arising in the ordinary course of business. Although the
ultimate results of these legal proceedings, claims and litigation are not
currently determinable, in the opinion of management these matters will not
materially affect the Company's financial position, results of operations, or
liquidity.
NOTE 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 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
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.
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 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.
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 2001 MTL owned 7,260,448
shares. Options granted by MTL and outstanding at April 30 2001 totalled
2,240,035 and a further 60,000 shares were reserved for options granted before
MTL purchased the shares. The remaining 4,960,413 shares were available for the
grant of further options and for the MERANT 1999 Employee Share Purchase Plan
(see "Employee share purchase plans, below). The shares held by the Trust are
included in Investments. During the year the Company recorded an exceptional
charge of L3,254,000 for actual and estimated losses on its shareholding (see
note 9 on page 95).
105
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:
<Table>
<Caption>
NUMBER OPTION PRICE
OF SHARES PER SHARE
---------- ------------
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 granted.................................... 3,685,500 L0.68-L1.37
Options exercised.................................. (287,841) L1.06-L1.37
Options cancelled.................................. (9,137,686) L1.06-L6.28
---------- -----------
Outstanding, April 30 2001......................... 22,548,223 L0.34-L7.15
---------- -----------
</Table>
Options outstanding at April 30 2001 were granted under the authorities
indicated below:
<Table>
<Caption>
AUTHORITY FOR NUMBER OPTION PRICE
GRANT OF OPTIONS OF SHARES PER SHARE
---------------- ---------- ------------
1991 Share Option Plan............................. 772,583 L1.13-L3.49
1996 Share Option Plan............................. 681,036 L1.47-L7.15
1998 Share Option Plan............................. 13,146,624 L1.06-L4.54
XDB plans.......................................... 13,575 L3.74-L5.15
INTERSOLV plans.................................... 5,353,815 L1.64-L4.04
EnterpriseLink plans............................... 280,555 L0.34-L3.49
----------
20,248,188 L0.34-L7.15
The Trust.......................................... 2,300,035 L1.05-L3.00
---------- -----------
Outstanding, April 30 2001......................... 22,548,223 L0.34-L7.15
---------- -----------
</Table>
These options are exercisable between 2001 and 2011. The proceeds on
exercise of all outstanding options at April 30 2001 would be L42,922,000 (2000:
L61,578,000).
Not all of the outstanding options are currently exercisable. At April 30
2001 options for 12,710,000 shares (2000: 11,464,000 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 2001 would be L26,431,000 (2000:
L22,847,000).
EMPLOYEE SHARE PURCHASE PLANS
All full-time employees are eligible to participate in the MERANT 1999
Employee Share Purchase Plan (ESPP), which was approved at the 1999 annual
general meeting. 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. In the year ended April 30 2001,
106
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 24 SHARE PLANS -- (CONTINUED)
employees participating in the first two offering periods acquired approximately
L2,163,000 ordinary shares in the Company. At April 30 2001, amounts totaling
L1,121,000 had been collected under the plan's third offering period, which
expired in June 2001.
NOTE 25 RELATED PARTY TRANSACTION
Included in Other debtors and prepaid expenses is a loan to Mr. Greenfield,
a director of the Company, amounting to $1,257,000 (equivalent to L873,000 using
year-end exchange rates).
In August 1999, one of the Company's subsidiary undertakings, MERANT Inc.,
a California corporation, entered into a loan agreement with Mr. Greenfield, who
was Chief Executive Officer at the time. The loan was made in conjunction with a
home purchase by Mr. Greenfield and is secured by that property. The following
table shows the movements on the loan account:
<Table>
<Caption>
YEARS ENDED
APRIL 30,
----------------
2001 2000
(IN THOUSANDS) L'000 L'000
-------------- ----- -----
Loan outstanding, beginning of year......................... 772 --
Advanced during the year.................................... -- 775
Repaid during the year...................................... (35) (35)
Interest charged during the year............................ 60 19
Difference arising from currency fluctuations............... 76 13
--- ---
Loan outstanding, end of year............................... 873 772
--- ---
Of which:
Principal................................................... 826 753
Interest.................................................... 47 19
</Table>
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 MERANT generally earned on invested cash.
The maximum principal outstanding during 2001 was L873,000. The loan matures on
or before August 30, 2003. 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 it has every expectation that the loan will be repaid in accordance
with the terms. As at the date of this report, Mr. Greenfield is current on all
interest payments.
NOTE 26 SUBSEQUENT EVENTS
On August 10 2001, MERANT completed the sale of its Application Creation
and Transformation Division to Golden Gate Capital and Parallax Partners for
$62,500,000 (approximately L43,400,000) payable in cash, subject to potential
post-closing adjustments based on the value of assets transferred. As the
transaction was conditional upon shareholder approval and other customary
conditions of closing, MERANT held an extraordinary general meeting of
shareholders on July 23 2001, at which our shareholders approved the
transaction. An initial cash payment of $54,500,000 was received from the
purchasers. Under the terms of
107
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT -- (CONTINUED)
NOTE 26 SUBSEQUENT EVENTS -- (CONTINUED)
the agreement, final settlement of the sale price is due in the second half of
the year ended April 30 2002. The following table discloses the operating
results of the ACT Division for each of the last three financial years:
<Table>
<Caption>
FIFTEEN MONTHS
YEAR ENDED YEAR ENDED ENDED
APRIL 30 APRIL 30 APRIL 30
2001 2000 1999
L'000 L'000 L'000
---------- ---------- --------------
Net revenue............................. 83,513 99,043 133,500
Operating income/(loss) before
taxation.............................. 3,581 (7,708) 18,909
Profit/(loss) after taxation............ 3,581 (7,708) 18,909
</Table>
Operating income for 2000 included a non-recurring charge of L8,491,000
resulting from management actions to reduce expenses relative to the decline in
demand for Year 2000 and COBOL-based products and services. The charge was made
up of a L4,657,000 non-cash write-off of previously capitalised software product
assets, and provisions of L3,834,000 for severance costs for approximately 50
employees in the Company's Year 2000 and COBOL-related businesses and for other
costs primarily associated with the closure of excess facilities.
On September 11 2001 the Company announced that it had agreed to sell its
Enterprise Data Connectivity Division to Golden Gate Capital for $29,250,000
(approximately L20,600,000), subject to adjustment for changes in book value of
the business prior to closing. Completion of the transaction is subject to
certain conditions, including approval by MERANT shareholders and customary
regulatory approvals. The Company will seek shareholder approval at an
extraordinary general meeting, to be held on October 30 2001. Subject to
approval, completion of the transaction is expected shortly afterwards. The
Company expects to record a small gain on the disposal of the EDC Division. At
the same time, the Company announced that it proposes to return excess capital
to shareholders following completion of the sale of the EDC Division.
On September 14 2001 the Company signed an agreement to sell its freehold
premises in Newbury, Berkshire. The Company will rent a suite of offices within
the Newbury property, which will remain its head and registered office. The sale
was completed on October 12 2001.
On September 20 2001 the Company announced the appointment of Gerald Perkel
as President and Chief Executive Officer. Mr. Perkel succeeds Gary Greenfield,
who announced in June that he proposed to step down once a new CEO had been
identified. At the same time, the Company also announced that its operational
headquarters would move from Rockville, Maryland, U.S.A. to Hillsboro, Oregon,
U.S.A., which is the primary development, sales and support location for the
Company's ECM Division. The cost of the relocation is expected to be between
L10,500,000 and L14,000,000.
108
MERANT PLC
FINANCIAL STATEMENTS 2001
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.
109
MERANT PLC
FINANCIAL STATEMENTS 2001
REPORT OF THE AUDITORS
UK FORMAT
To the shareholders of MERANT plc
We have audited the financial statements on pages 78 to 108, 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 85 to
88.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors are responsible for preparing the Annual Report. As described
on page 109, this includes responsibility for preparing the financial statements
in accordance with applicable 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 1985. 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 review whether the corporate governance statement on pages 12 to 15
reflects the Company's compliance with the seven 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 consider whether the board's statement on internal control
covers all risks and controls, or to form an opinion on the effectiveness of
either the Company's corporate governance procedures or its risk and control
procedures.
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.
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 2001 and of the
loss of the group for the year then ended and have been properly prepared in
accordance with the Companies Act 1985.
Ernst & Young LLP
Registered Auditor
Reading
October 26, 2001
110
MERANT PLC
FINANCIAL STATEMENTS 2001
FURTHER INFORMATION FOR SHAREHOLDERS
U.S. SECURITIES LAW MATTERS
MERANT is required to comply with various U.S. securities laws and
regulations because it has American depositary shares registered with the U.S.
Securities and Exchange Commission (the SEC) which are traded in the United
States on the Nasdaq National Market.
SEC Filings. As a foreign private issuer in the United States, we are
required to make certain filings with the SEC, including periodic filings on
Form 6-K and an annual report on Form 20-F.
We are required to file by means of Form 6-K any information that we make
public (or are required to make public) in accordance with U.K. law, any
information that we file (or are required to file) with the London Stock
Exchange or the Financial Services Authority, and any information that we
distribute (or are required to distribute) to our shareholders.
Form 20-F is similar to the annual Form 10-K filing required of U.S. public
companies, except that Form 20-F makes allowances for the differences in legal
and regulatory obligations applicable to non-U.S. companies. The filing includes
a general introduction to MERANT, and sections discussing, among other items,
information regarding our directors and officers, financial information, risk
factors regarding the Company, a description of our business, our facilities,
the nature of our trading markets and our principal shareholders. Portions of
the financial statements included in this report will be incorporated by
reference into our next Form 20-F. Unless a portion of these financial
statements is specifically incorporated by reference into the Form 20-F, these
financial statements are not considered to be a part of our Form 20-F filing.
We plan to file a Form 20-F with the SEC for the fiscal year ended April
30, 2001 in late October, 2001. You may obtain a copy of this Form 20-F without
charge by contacting "Investor Relations" at our offices in either Newbury or
Rockville listed at the back of this Annual Report.
Special Note on Forward-Looking Statements. MERANT is also subject to
various U.S. securities laws and regulations relating to the disclosure of
information. In particular, the U.S. Private Securities Litigation Reform Act of
1995 applies to the Company and its disclosure of information and provides that
the Company can be exempt from liability for making forward-looking statements
if cautionary language is included along with the statements. Forward-looking
statements are defined in the U.S. federal securities laws, and the regulations
promulgated thereunder.
This Annual Report contains forward-looking statements that include
statements regarding expectations for our business strategy, prospects and
growth, including the growth of our enterprise change management business and
related revenues, the return of excess capital to shareholders, 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" "realize",
"likely", "unlikely" 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 focus on its enterprise change
management products and services and away from certain of its past primary
markets, including the market for Year 2000 products and services, the market
for application, creation and transformation, or COBOL, mainframe software
products and services, and the market for enterprise data connectivity, or
middleware, software products and services. MERANT's ability to recruit and
retain key personnel, especially in the sales and business units and at the
senior management level, could materially alter financial results and plans for
the sales and business units. Other factors that could cause actual results to
differ materially include, among others, the ability of
111
MERANT to effectively manage its 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, the ability of MERANT to develop, release, market and sell products
and services to customers in the highly dynamic market for enterprise change
management products, the potential need for enterprise change management
products to shift based on changes in technology and customer needs, the effect
of competitors' efforts to enter MERANT's markets and the possible success of
existing competitors in those markets, the possibility that the sale of the
DataDirect enterprise data connectivity business will not proceed as planned or
may not be completed at all, and MERANT's ability to manage and integrate
recently acquired businesses or other businesses that it may acquire in the
future as well as efficiently dispose of, and manage the provision or receipt,
as the case may be, of certain services related to, businesses or products which
are not a part of MERANT's business strategy, including MERANT's ability to
complete and manage obligations related to, the sale of the DataDirect
enterprise data connectivity division and the earlier disposal of the Micro
Focus application, creation and transformation division.
Electronic Filings. The SEC maintains a web site located at
http://www.sec.gov. that contains a searchable database of filings, reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. As a foreign private issuer, MERANT is not
currently required to file electronically but as of March 1997, we began doing
so on a voluntarily basis.
ANNUAL GENERAL MEETING OF SHAREHOLDERS
The 2001 annual general meeting of MERANT plc will be held in London on
November 28, 2001. The full notice of meeting is being sent to shareholders with
this Annual Report.
ORDINARY SHARES
The Company's ordinary shares are listed on the London Stock Exchange under
the symbol MRN. They are also traded on the Nasdaq Stock Market in the United
States in the form of ADSs, evidenced by American depositary receipts, under the
symbol MRNT. In March 1998, the Company undertook a subdivision (or stock split)
of its ordinary shares on a 5-for-1 basis and adjusted the value of its ADSs
such that each ADS now represents five ordinary shares. All share and per-share
references included in this report reflect the impact of this stock split.
The table below shows, in respect of each of the Company's last eight
quarters:
- the highest and lowest middle market quotation as reported in the Daily
Official List of the London Stock Exchange (in respect of ordinary
shares) and
- the highest and lowest bid price as reported by the Nasdaq National
Market System (in respect of ADSs, each of which represents five ordinary
shares).
<Table>
<Caption>
LONDON STOCK
EXCHANGE NASDAQ
(IN G.B. POUNDS) (IN U.S. DOLLARS)
---------------- ------------------
MERANT QUARTERS: HIGH LOW HIGH LOW
---------------- ----- ----- ------ ------
2000
First quarter............................. 3.11 1.47 23.69 12.13
Second quarter............................ 3.03 2.43 24.13 19.31
Third quarter............................. 4.67 2.40 37.00 19.13
Fourth quarter............................ 4.87 1.56 39.00 12.50
2001
First quarter............................. 1.65 1.31 14.75 9.38
Second quarter............................ 1.41 0.71 10.88 5.00
Third quarter............................. 1.10 0.77 8.69 5.19
Fourth quarter............................ 1.03 0.62 8.00 4.05
</Table>
112
INVESTOR RELATIONS
MERANT
9420 Key West Avenue
Rockville, MD 20850, USA
www.merant.com
e-mail: investor-relations@merant.com
REGISTRAR AND TRANSFER AGENT
LLOYDS TSB REGISTRARS
The Causeway, Worthing
West Sussex BN99 6DA, UK
ADR DEPOSITARY
BANK OF NEW YORK
ADR Division
45 West 18th Street
6th Floor
New York, NY 10011, USA
REGISTERED OFFICE
MERANT PLC
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 IQN, UK
REGISTERED NO: 1709998
STOCKBROKERS
UBS WARBURG
1 Finsbury Avenue
London, EC2M 2PP, UK
and The Stock Exchange
London, EC2N 1HP, UK
AUDITORS
ERNST & YOUNG LLP
Apex Plasa
Reading
Berkshire RG1 1YE, UK
ERNST & YOUNG LLP
8484 Westpark Drive
McLean, VA 22102, USA
LEGAL COUNSEL/SOLICITORS
Jonathan Philip Davies, Partner
MEMERY CRYSTAL
31 Southampton Row
London WC1B 5HT, UK
MARKETS FOR SHARES
Nasdaq National Market symbol: MRNT
London Stock Exchange symbol: MRN
BOARD OF DIRECTORS
(effective September 20 2001)
J. MICHAEL GULLARD
Chairman of the Board
General Partner, Cornerstone Management
GERALD R PERKEL
President and Chief Executive Officer
GARY GREENFIELD
Executive Director
MICHEL BERTY
Founder, MBY Consultants, Inc
HAROLD HUGHES
Former Chief Executive Officer, Pandesic LLC
BARRY X LYNN
President & CEO, Be eXceL management inc.
DON C WATTERS
Former Director, McKinsey & Company
Member of McKinsey & Company Advisory Council
SENIOR MANAGEMENT
(effective September 20 2001)
GERALD R PERKEL
President and Chief Executive Officer
KEN SEXTON
Senior Vice President & Chief Financial Officer
HUGH MCCARTNEY
Senior Vice President,
Worldwide ECM Sales & Service
EDWARD PETERS
Senior Vice President,
General Manager, EDC
ANDREW WEISS
Senior Vice President,
Chief Technology Officer & ECM Product Operations
DEAN GENGE
Senior Vice President,
ECM Marketing
LEO MILLSTEIN
Vice President
General Counsel & Company Secretary
[Logo] MERANT