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1999 ANNUAL REPORT
ZOOM
[MERANT LOGO (TM)]
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[The word "ACCELERATE" running across the top of pages 2 and 3]
REVENUE
(in millions of U.S. dollars)
Years Ended April 30
1997 1998 1999
290 379 374
CASH AND SHORT
TERM INVESTMENTS
(in millions of U.S. dollars)
At April 30
1997 1998 1999
94 127 121
COMPANY PROFILE
MERANT is a leading supplier of enterprise application development solutions.
Enterprise application development is where businesses today create their
competitive advantage. We empower organizations to transform enterprise
applications for the changing technology and business requirements of the
e-business environment, manage the application development process, and provide
integrated data connectivity across the enterprise, from the mainframe to the
Internet. MERANT has more than 5 MILLION CUSTOMER LICENSES at over 35,000
CUSTOMER SITES around the world, including ALL THE FORTUNE 100 and TWO-THIRDS OF
THE GLOBAL 500, and partners with over 550 technology companies. We have nearly
2,000 employees, with a presence in 50 countries worldwide. MERANT is publicly
traded on the London Stock Exchange under the symbol MRN, and on Nasdaq under
the symbol MRNT.
MERANT'S MISSION is to ACCELERATE OUR CUSTOMER'S BUSINESS through the
application of innovative information technologies.
FINANCIAL HIGHLIGHTS
YEARS ENDED APRIL 30 (U.S. GAAP)
(amounts in thousands, except per ADS data) 1999 1998 1997
....................................................................................................................
Revenues $374,202 $379,025 $290,353
Pretax income before non-recurring charges 22,938 52,114 14,995
Pretax (loss) income (26,724) 34,646 (13,938)
Net income per ADS, before non-recurring charges 0.52 1.20 0.36
Net (loss) income per ADS (1.00) 0.84 (0.70)
Cash and short-term investments 121,384 126,907 93,797
The financial information shown above for 1998 and 1997 is unaudited pro forma
data.
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MERANT'S INDUSTRY-LEADING
ENTERPRISE APPLICATION DEVELOPMENT
SOLUTIONS ARE ACCELERATING
BUSINESS FOR ALL OF THE FORTUNE 100
AND 2/3 OF THE GLOBAL 500.
AND THAT'S JUST FOR STARTERS.
In this technology-driven world, where the planet's largest companies must
reinvent their businesses to compete with the smallest Internet-savvy upstarts,
thousands of companies around the globe are relying on MERANT solutions and
expertise to differentiate -- and outdistance -- themselves from their
competitors. MERANT is helping organizations everywhere transform their
enterprise applications for the changing requirements of the rapidly expanding
e-business marketplace. We're enabling them to integrate data connectivity
across their enterprises, from the mainframe to the Internet, protecting and
extending their existing investments. And we're helping them manage the
application development process itself, for swifter, more effective results.
Facing today's fast-changing business models and markets, more and more leading
companies are depending on MERANT's products, people and processes to catapult
them into the new driver's seat, and to keep them zooming in the fast lane at
Internet speed.
[Graphic of collage of computer screen running MERANT products, a globe of the
world and a computer monitor]
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TO OUR SHAREHOLDERS
[Photograph of Gary Greenfield and Michael Gullard]
Gary Greenfield Michael Gullard
President and CEO Chairman of the Board
MERANT has recreated itself during the past year to capitalize on the
fundamental changes in business and commerce being driven by information
technology. The Internet and the emergence of e-business as competitive
imperatives are forcing major global enterprises to change their business models
to compete in the new economy. These major global enterprises form the bedrock
of our customer base. All of the Fortune 100 and a majority of the Global 500
use our products. They depend on MERANT solutions to develop and maintain the
applications that run their business; to manage, protect, and accelerate their
application development process; and to access and integrate data, the
intellectual assets of the enterprise.
The key issue every major company faces is the need to integrate the new
e-processes and systems with the existing systems that are the heart and soul of
the enterprise. No major company in the world can simply erase the past and
start over. All must make what they already have work to provide them a
competitive advantage in the new environment. We can help. Because of the
changes we have made, MERANT is now uniquely positioned to partner with our
customers to move them to the next level -- to e-enable their business for
e-business.
HOW DID WE GET HERE?
The management of Micro Focus, led by CEO Martin Waters, determined to
reposition the company to take advantage of emerging opportunities in the
enterprise application market. INTERSOLV CEO Gary Greenfield, sharing a vision
of the opportunities ahead, agreed that a combination with Micro Focus would
create a stronger, more strategic competitor in the IT marketplace. On September
24, 1998, we merged the two companies. On November 30, 1998, following
completion of the merger, Martin Waters retired as President and CEO, and
continued as a Director of the company. The Board appointed Gary Greenfield
President and CEO of Micro Focus. Gary reorganized the senior management team,
naming Rick Van Hoesen and Buff Jones to lead the Micro Focus and PVCS product
business units, respectively. Panos Anastassiadis was named to run worldwide
sales, and Ken Sexton was added as CFO. Regrettably, J. Sid Webb, a MERANT
non-executive Director, died in March 1999, after an illness. His wise counsel
and contribution to the Board will be missed.
The merger was strategically important because it enabled us to address our
customers' urgent and changing needs. Enterprises are now finding it necessary
to develop applications at Internet speed, and e-business is becoming an
essential part of every enterprise's business strategy. Also, with customers'
desire for fewer, more strategic suppliers and best-of-breed solutions, it is
essential that we deliver more complete solutions to our customers. The
combination of Micro Focus' enterprise strength in application creation and
transformation with INTERSOLV's consulting expertise and leadership in
application development management tools and data connectivity software enabled
us to become a much more significant supplier to our customers.
CREATING THE NEW COMPANY
With the merger of Micro Focus and INTERSOLV, we doubled the size of the
company in terms of both revenue and employees. We also significantly expanded
our capabilities to serve the application development and data integration needs
of our customers.
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To signal our new capability as a strategic partner to help customers
prepare for the future, we adopted a new name and identity. MERANT officially
was launched in February 1999. We will continue to build our new brand as the
critical source for enterprise application development.
FINANCIAL RESULTS
Revenues for MERANT's combined operations under U.S. generally accepted
accounting principles were $374 million for the fiscal year ended April 30,
1999, down 1% for the comparable period last year. Net earnings, excluding
non-recurring charges, were $14.9 million, or $0.52 per American Depositary
Share, versus $34.5 million for the prior year. Under U.K. generally accepted
accounting principles, profit after taxation for the fifteen-month period ended
April 30, 1999, excluding goodwill amortization and restructuring charges, was
GBP 14.0 million, or 13.1 pence per ordinary share. We ended the fiscal year in
a strong financial position with cash and short-term investments of $121.4
million (GBP 75.4 million).
Integrating the two companies presented a number of substantial early
challenges. Our financial results for the quarter in which the merger was
finalized did not meet expectations. The second half saw increased focus and
energy from the new leadership, resulting in improved execution, strong sales,
and momentum for fiscal 2000.
By fiscal year end, most of the integration challenges were behind us, and
the next order of business -- implementing a plan to become increasingly
important to our customers' IT strategies -- was underway. This requires working
with customers to develop products and services which will, in the short term,
help move them into the e-business world and, in the long term, help them deal
with a more distributed and complex IT infrastructure.
OBJECTIVES FOR THE NEW YEAR
We have set three key objectives for our new fiscal year, with the goal to
position MERANT as the leader in enterprise application development:
- To build awareness of MERANT as the leader in enterprise application
development
- To expand our products and services that extend customers' existing systems
to the world of e-business
- To improve our own e-business model to enhance relationships with our
customers and increase sales productivity.
COMMITTED TO CUSTOMER SUCCESS
Today, MERANT works as a strategic partner to companies who understand the
urgency of moving successfully at Internet speed into new business environments.
Enterprise application development is now the competitive driving force in
business and will continue to grow as an essential element in corporate
strategies. Our enterprise application development solutions assist companies to
better serve their customers, more effectively manage their operations, improve
their products, and remain competitive by accelerating delivery of innovative
information technology.
United around the Company's core values, the MERANT team is committed to
making our customers successful and increasing shareholder value. In fact,
MERANT pledges to each customer that "your success is our success," and we would
like to thank each of our employees for taking the individual responsibility to
deliver on that promise every day.
Going forward, we will continue to focus on our core strengths, investing
in the products, people, and processes that our customers rely on for their
ongoing success. Our momentum is strong, and we are moving ahead aggressively.
We thank you for your support as we accelerate our customers, and MERANT, into
the next century.
/s/ GARY GREENFIELD
- -- Gary Greenfield, President and CEO
/s/ J. MICHAEL GULLARD
- -- J. Michael Gullard, Chairman of the Board
This Letter to Shareholders contains certain "forward-looking statements" that
are based on the beliefs of the Company's management, as well as assumptions
made by, and information currently available to, the Company's management. The
Company's actual results, performance or achievements in fiscal year 2000 and
beyond could differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in the
Company's financial statements for fiscal year 1999 under the heading "Factors
that may influence future operating results" as well as those discussed
elsewhere in this Annual Report. The Company undertakes no obligation to release
publicly any updates or revisions to any such forward-looking statements that
may reflect events or circumstances occurring after the date of this Annual
Report. For more information regarding "forward-looking statements," see
"Special Note on Forward-Looking Statements" on page 15 herein.
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THE FAST TRACK TO E-BUSINESS
[Graphic of collage of portion of globe and finger pushing computer-keyboard
key]
At a time when "e" begins just about everything, everywhere, established
businesses around the world must leverage and extend their existing applications
to succeed in the planet's increasingly electronic economy. To get up to speed
creating or transforming the type of business applications required for the new
ways of doing business, leading organizations in industries from finance to
manufacturing to healthcare rely on MERANT Micro Focus solutions for their
continued success. Our customers are using Micro Focus products to rapidly
Web-enable their legacy applications for e-business every day.
OUR CUSTOMERS ARE USING MERANT PRODUCTS
TO RAPIDLY WEB-ENABLE THEIR LEGACY
APPLICATIONS FOR E-BUSINESS EVERY DAY.
LEVERAGING VALUABLE LEGACIES
The incredible growth of commerce on the Internet has unleashed tremendous
new competitive forces. Major IT organizations are under "bet your business"
pressure to extend existing applications rapidly to global users, capitalizing
on their unique competitive assets -- the vast stores of data and knowledge
currently secured in their mainframe environments.
The fact is, more than 70 percent of corporate data resides on mainframes
today, with over 150 billion lines of COBOL code, the leading mainframe
programming language, running businesses worldwide. Rather than rewriting this
code for the new business environment -- essentially throwing away millions of
dollars a company may have invested over decades -- more and more organizations
are using MERANT Micro Focus solutions to leverage their most valuable
resources: their existing software applications, data, and internal expertise.
In fact, according to market research firm GartnerGroup, up to 85 percent of
mainframe-based application functions that manage companies' data will be
reused, rather than replaced, in the next generation of software applications.
By adopting this strategy, and the MERANT Micro Focus solutions that make it
possible, businesses are able to transform their applications at a fraction of
the cost of new development, in a fraction of the time.
MERANT MICRO FOCUS: THE LEADING BRAND
A leading brand for application creation and transformation, MERANT Micro
Focus solutions enable companies to extend their IT assets into new business
applications in three key areas: distributed computing, application
transformation, and mainframe development.
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Our distributed computing solutions enable customers to develop, maintain,
and deploy applications across multiple platforms. With the ability to reuse and
distribute existing business logic, IT organizations can reduce risk with
applications that have demonstrated their reliability in business-critical
environments time after time, while saving thousands of development hours and
dollars. MERANT Micro Focus distributed computing products help companies
exploit the cost-effectiveness of the Windows NT platform, the scalability of
UNIX solutions, and the power and reach of the Internet.
Our application transformation solutions help organizations accelerate
change safely. Application transformation focuses on making wholesale changes to
a software portfolio to capture technology-driven opportunities, such as
e-business, or to meet new market requirements, such as euro enablement or year
2000 compliance.
With approximately five trillion dollars invested in legacy business
systems globally, mainframe applications remain the lifeblood of the world's
leading companies. MERANT Micro Focus mainframe development solutions extend a
company's development environment to the workstation, providing transparent
access to mainframe resources directly from the desktop. Offering an integrated
development environment that simplifies application analysis, maintenance, and
testing, MERANT mainframe development solutions can dramatically increase
productivity, while breathing new life into existing resources.
"MERANT Micro Focus allowed us to increase overall productivity and bring new
programmers up-to-speed 300 percent faster."
- -- Mike Crowder
IT Applications Manager
Beverly Enterprises
"The MERANT Micro Focus products have reduced the demands on our mainframe,
helped our programmers do more in less time, and generally improved the way we
do business."
- -- Conda W. Lashley
Senior Vice President
Systems Development
Belk Stores Services Inc.
"Our team of renovation practitioners is using the Micro Focus solutions to
assess, fix, and unit-test up to two million lines of code per week. In
conjunction with MERANT Micro Focus, we're able to get our error rates to such a
small percentage per million lines of code that it's virtually immeasurable."
- -- Chan Preston
Director
KPMG
"For over 104 years, AAFES has had a proud tradition of delivering customer
service that is second to none. When we were tasked with developing an on-line
Internet shopping system, we knew we needed to make it happen quickly and
cost-effectively. Extending our legacy code was the logical answer and MERANT's
e-business solutions were the logical choice. Our experiences with MERANT's
products, services, and people have been very positive, and we consider MERANT's
e-business solutions integral to AAFES' on-line merchandising success."
- -- Clyde Todd
Section Chief
Fast Action Support Team
Army and Air Force Exchange Service
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POWERING CONNECTIONS ACROSS THE ENTERPRISE
[The word "RAPIDLY" running across the top of pages 8 and 9]
[Graphic of two computer cords linked by three interlocking cord segments with
a background of a rapidly spinning globe]
To be a competitor in the increasingly aggressive global fast lane, companies
must provide access to the right information to the right people at the right
time, all the time. That, however, is easier said than done, especially since
the data in most organizations reside on multiple platforms, in numerous formats
across diverse locations. Only a flexible information platform that unlocks
closed data assets, while maintaining security and control, can enable companies
to provide the requisite links and rapidly integrate vital new systems -- such
as e-business -- that extend their existing production environments. MERANT's
industry-leading DataDirect solutions provide that flexible information
platform, powering the connections that enable our customers to leverage their
legacy systems and harness innovative new technologies for greater advantage.
OUR SOLUTIONS PROVIDE THE NECESSARY LINKS
TO ACHIEVE A COMPETITIVE EDGE IN THE
GROWING ELECTRONIC MARKETPLACE.
MERANT DATADIRECT: INTEGRATING THE ENTERPRISE
Most organizations today have dozens, or even hundreds, of applications and
systems: mainframe-based customer tracking, order processing on the local area
network, accounting as part of an enterprise resource planning (ERP) system, to
name just a few. Rather than building a host of new systems for the rapidly
changing business landscape, companies around the world are saving significant
time and money by reusing and extending their existing systems and data to meet
the new ways of conducting business.
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And they're doing it in "Web time," with MERANT DataDirect middleware solutions.
These solutions let companies easily develop and deploy a strategic information
platform for enterprise-class applications, such as e-business,
transaction-based systems, knowledge management, and corporate portals.
MERANT DataDirect products extend the reach, range, and speed of data
access and integration across new and existing systems, from the Internet to the
mainframe. Our solutions enable companies to integrate varied systems,
applications, and data across their enterprise, and provide the necessary links
between their customers, partners, and employees to achieve a competitive edge
in the growing electronic marketplace.
DEFINING THE STANDARDS, LEADING THE WAY
MERANT DataDirect products lead the industry in standards-based data
connectivity, and provide best-in-class data integration with all major database
vendors. Our products continue to be at the cutting edge, helping to define data
connectivity standards along with ANSI, ISO, Sun JavaSoft, Microsoft, and the
W3C.
MERANT product technology powers much of the Internet today, providing
connectivity solutions for such leading Internet portals as InfoSeek. More than
four million licenses and more than 500 leading vendors worldwide -- including
Computer Associates, IBM, Informix, Microsoft, Oracle, Sun JavaSoft, and Sybase
- -- have established MERANT DataDirect as the standard for enterprise data access
and integration.
"We regard MERANT DataDirect as one of the key pillars to our IT strategy. With
our rapid growth in distributed application development, we need a solid data
access framework on which to build. We've been a long-time partner with MERANT,
and look forward to a continued close relationship."
- -- David Pennington
Chief System Engineer
Home Depot
"We chose MERANT DataDirect because it fits our needs for connectivity, now and
for the future. We have realized that the reliability and performance we've seen
from DataDirect is crucial for our critical business applications. Our goal is
to develop this relationship into a long-term partnership."
- -- Edna Edelman
Vice President of Application Tools & Technology
Lehman Brothers
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SPEEDING DELIVERY OF HIGH-QUALITY SOFTWARE
[Graphic of collage of two globes and numerous computer screens]
[The word "SPEED" running across the center of pages 10 and 11]
Delivering innovative applications faster than the competition is becoming the
only way for companies to stay alive, let alone thrive. The competitive
battleground has shifted to the IT organization's ability to accelerate business
through powerful enterprise applications. Whether via breakthrough products, new
ways to reach and serve customers, or creative ways to link with partners, a
company's enterprise applications are the new drivers of competitive advantage.
And today's dynamic environment demands that application development teams be
able to adapt to changing requirements on the fly, focus on new projects in
record time, and speed delivery because, bottom line, the market just won't
wait. Plus, in the Internet world, "development" is no longer limited to
developers. New groups with new tools and no training are building applications
and deploying them on the Web. IT departments must support this spread of
development, while ensuring control, performance, and reliability. To meet these
vital, time-critical challenges, companies worldwide rely on industry-leading
MERANT PVCS software configuration management solutions.
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MERANT PVCS: CHANGING THE WAY TEAMS MANAGE DEVELOPMENT
Our PVCS solutions are changing the way teams manage application
development by automating and integrating the management of content, issues, and
processes -- the three main disciplines of software configuration management.
PVCS products enable greater reuse of code and automate manual development,
build, and testing tasks to eliminate the surprises and unpredictability that
can cause crippling delays. Using our MERANT PVCS products, development teams
can focus on developing great software rather than having to manage more mundane
tasks. The result is higher-quality applications in record-breaking time,
providing MERANT customers with a competitive edge while saving them significant
development costs.
THE GLOBAL STANDARD FOR SOFTWARE CONFIGURATION MANAGEMENT
More than 500,000 users at such major companies as Chrysler, MCI, Nike, and
PaineWebber have made MERANT PVCS an undisputed global leader in software
configuration management. Even technology leaders like Cisco, Compaq,
Hewlett-Packard, Intel, and PSINet trust MERANT solutions as the best way to
manage their own application development programs.
COMPLETE SOLUTIONS FOR WHATEVER DEVELOPS
As business models and applications continue to evolve, being able to
swiftly manage change is the one capability that will provide lasting value.
MERANT PVCS solutions keep our customers current with changing times.
A complete suite of configuration and change-management products, MERANT
PVCS provides a reliable, flexible, and reusable team development infrastructure
that can be easily configured for any project, whether it's managing software
code, documentation, or Web content. Our PVCS solutions scale to support any
size team -- from small tactical projects to strategic enterprise-wide programs
- -- located anywhere in the world. And PVCS products can be used across the
broadest range of platforms, interfaces, and development environments to speed
client/server, Internet, and intranet application development. With more than 70
PVCS development partners, MERANT is able to quickly deliver solutions tailored
to individual requirements, helping our customers make the most of whatever
develops next.
"For us, achieving process improvement is critical as we are now seeking to
reach CMM level 4 and CMM level 5. Established by the Software Engineering
Institute (SEI), CMM level 4 represents an organization deriving metrics, and
CMM level 5, an enterprise achieving continuous process improvement and
technology change management. In this framework of operations, MERANT PVCS plays
a critical role in our efforts to reach these two major objectives."
- -- Bob Ventimiglia
Environment, Tools, and Software
Configuration Manager
Software Engineering Process Department
Lockheed Martin Aeronautical Systems
"Market forces require that we conduct business and react at great speed and
that we modify our course of action according to the changing needs of
customers. As we are compelled to refine our business daily, we are constantly
evolving the use of PVCS Tracker. The flexibility of the tool makes a
significant difference in accelerating our time to market."
- -- Lori Crew
Project Manager, Information Systems
PSINet Inc.
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ENSURING CUSTOMER SUCCESS
MERANT is focused on making our customers successful. In fact, virtually
everything we do derives from how we can help customers accelerate their
business for strategic advantage. So beyond our three leading product brands --
MERANT Micro Focus, MERANT PVCS, and MERANT DataDirect -- that enable customers
to accelerate their business through enterprise application development, there's
also MERANT Consulting. MERANT Consulting partners with companies to push the
envelope even further, helping our customers achieve positive results even
faster.
MERANT CONSULTING: EXPERTISE FOR WORKING SMARTER
MERANT Consulting believes the intelligent alternative to replacing
existing systems is to revitalize them with new functionality, extending their
life and increasing return on investment. MERANT's comprehensive understanding
of the software development lifecycle enables us to help companies develop
smarter methods and processes to create and extend applications that give their
customers precisely what they expect in today's marketplace -- instant access to
goods, services, and information.
VIRTUALLY EVERYTHING WE DO
DERIVES FROM HOW WE CAN HELP
CUSTOMERS ACCELERATE THEIR BUSINESS
FOR STRATEGIC ADVANTAGE.
MERANT Consulting supports the IT industry with application development
experience in distributed computing, mainframe development, software
configuration management, and data connectivity solutions. This experience,
combined with our expertise in MERANT and third-party products, gives us the
ability to apply customer-tailored technology to resolve urgent business issues.
INNOVATING ENTERPRISE SOLUTIONS
MERANT Consulting provides the added element companies need in order to
accelerate their business: expertise. And with MERANT's products, people and
processes, it can happen very quickly. MERANT Consulting is expert at planning,
executing, and managing change through the application of innovative information
technology in four key areas: e-business, application transformation, enterprise
application integration, and infrastructure modernization. Our solutions allow
organizations to leverage their existing investments and develop new
applications, extending and integrating technology for competitive advantage
across their enterprise, around the world.
[The word "QUICKLY" running across the bottom of pages 12 and 13]
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Bottom line: the race to accelerate business is on. MERANT Consulting helps
transform the way IT performs, positioning our customers to outdistance their
competitors with enterprise applications that accelerate their business in a
rapidly changing world.
MERANT CONSULTING PROVIDES THE ONE
THING COMPANIES NEED IN ORDER TO ACCELERATE
THEIR BUSINESS: THE WAY TO DO IT.
[Graphic of collage of woman using a cellular phone, man in a business suit
rushing somewhere, part of the face of a clock, a computer screen and a
computer keyboard]
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INFORMATION FOR SHAREHOLDERS
DUAL LISTING
MERANT's ordinary shares are listed on the London Stock Exchange under the
symbol MRN. MERANT's shares are also traded on the Nasdaq Stock Market in the
U.S. in the form of American Depository Shares ("ADS") under the symbol MRNT.
Due to a stock split (or subdivision) of MERANT's ordinary shares in March of
1998, each MERANT ADS represents five MERANT ordinary shares.
MERANT reports its financial results in accordance with U.S. Generally Accepted
Accounting Principles (GAAP) and U.K. GAAP.
CONDENSED FINANCIAL STATEMENTS
The Financial Statements included in this Annual Report have been produced to
allow readers to understand the financial results, without the need to refer to
the more detailed full annual accounts. Along with this Annual Report,
shareholders will receive a copy of full detailed Financial Statements, together
with the Directors Report and other statutory information.
U.S. FINANCIAL STATEMENTS
The condensed financial information contained on pages 16 to 18 does not
constitute complete financial statements in accordance with U.S. GAAP. The
condensed financials are based on the audited financial statements of the
Company which will be filed with the Securities and Exchange Commission ("SEC").
The auditors report on the U.S. financial statements for the year ended April
30, 1999 was unqualified.
Effective November 30, 1998, MERANT changed its fiscal year end and accounting
reference date to April 30 from January 31. The Company is therefore reporting
results for the fiscal year ended April 30, 1999 ("fiscal 1999"). This report
also discloses results for the three-month fiscal period ended April 30, 1998,
which were the basis of a Transition Report filed with the SEC on Form 20-F.
The merger with INTERSOLV, Inc, was accounted for using the pooling-of-interests
method, the condensed financial data at January 31, 1998, and for the years
ended January 31, 1998 and 1997, have been restated to include the financial
results of INTERSOLV, Inc at April 30, 1998, and for the years ended April 30,
1998 and 1997, respectively. Consequently, INTERSOLV's financial data for the
three months ended April 30, 1998 are included in both the three months ended
April 30, 1998 and the year ended January 31, 1998.
REPORT OF INDEPENDENT AUDITORS ON CONDENSED FINANCIAL STATEMENTS
The Board of Directors and Shareholders, MERANT plc
We have audited, in accordance with United Kingdom auditing standards, which do
not differ in any significant respect from United States generally accepted
auditing standards, the consolidated balance sheets of MERANT plc and
subsidiaries at April 30, 1999 and 1998, and the related consolidated statements
of income, shareholders' equity, and cash flows for the year ended April 30,
1999, the three-month period ended April 30, 1998 and for each of the two years
in the period ended January 31, 1998 (not presented separately herein), and in
our report dated August 4, 1999, we expressed an unqualified opinion on those
consolidated financial statements, based on our audits and the report of other
auditors.
We did not audit the financial statements of INTERSOLV, Inc., which statements
reflect total assets constituting 40% of the related consolidated financial
statement total at April 30, 1998, and which reflect net revenue constituting
55%, 54% and 57% of the related consolidated financial statement totals for the
three month period ended April 30, 1998 and the years ended January 31, 1998 and
1997, respectively. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to amounts
included for INTERSOLV, Inc. for 1998 and 1997, is based solely on the report of
the other auditors.
In our opinion, based on our audits and the report of other auditors, the
information set forth in the accompanying condensed consolidated financial
statements on pages 16 to 18 is fairly stated in all material respects in
relation to the consolidated financial statements from which it has been
derived.
Ernst & Young
Reading, England
August 4, 1999
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U.K. FINANCIAL STATEMENTS
The financial information contained on pages 19 to 21 does not constitute
statutory accounts as defined in Section 240 of the U.K. Companies Act 1985. The
figures for the fifteen-month period ended April 30, 1999 are based on the
audited financial statements which will be filed with the U.K. Registrar of
Companies. The auditors' report on the U.K. financial statements for the
fifteen-month period ended April 30, 1999 was unqualified.
Effective November 30, 1998, MERANT changed its fiscal year end and accounting
reference date to April 30 from January 31. The Company is, therefore, reporting
results for the 15-month period ended April 30, 1999.
The merger with INTERSOLV, Inc. was accounted for as an acquisition.
Consequently, MERANT's financial data include INTERSOLV's results from the
merger date of September 24, 1998.
AUDITORS' REPORT
Statement of the auditors to the members of MERANT plc:
We have examined the financial information set out on pages 19 to 21.
The financial information is the responsibility of the directors. Our respon-
sibility is to report to you our opinion on its preparation and consistency
with the annual accounts.
In our opinion the financial information on pages 19 to 21 has been properly
extracted from the annual accounts of MERANT plc for the fifteen months ended
April 30, 1999.
Ernst & Young
Reading, England
August 4, 1999
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
MERANT is subject to various U.S. securities laws and regulations relating to
the disclosure of information. In particular, the Private Securities Litigation
Reform Act of 1995 (the "Securities Litigation Reform Act"), applies to the
Company and its disclosure of information and provides that the Company can be
exempt from liability for making forward-looking statements if certain
cautionary language is included along with such statements. This Annual Report
contains certain forward-looking statements (as such term is defined under U.S.
securities laws) that are based on the beliefs of the Company's management, as
well as assumptions made by and information currently available to the Company's
management. Such forward-looking statements are subject to the safe harbor
created by the Securities Litigation Reform Act. When used in this document, the
words "anticipate," "believe," "estimate," "expect" and similar expressions, as
they relate to the Company or its management, are intended to identify such
forward-looking statements. Such statements reflect the current views of the
Company or its management with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialise, or should underlying assumptions prove incorrect,
the Company's actual results, performance or achievements in fiscal 2000 and
beyond could differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in the
Company's financial statements for fiscal 1999 under the heading "Factors that
may influence future operating results," as well as those discussed elsewhere in
the Annual Report. The inclusion of such forward-looking information should not
be regarded as a representation by the Company or any other person that the
future events, plans or expectations contemplated by the Company will be
achieved. The Company undertakes no obligation to release publicly any updates
or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of the Annual Report.
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U.S. FINANCIALS
CONSOLIDATED STATEMENTS OF INCOME U.S. CONDENSED FORMAT
MERANT plc
In thousands, Year Three months Year Year
except per share and ADS data ended ended ended ended
April 30, April 30, January 31, January 31,
1999 1998 1998 1997
NET REVENUE
Product revenue $193,144 $61,384 $198,793 $162,439
Maintenance revenue 98,858 24,533 88,015 75,524
Service revenue 82,200 21,070 76,111 45,677
TOTAL NET REVENUE 374,202 106,987 362,919 283,640
COST OF REVENUE
Cost of product revenue 14,390 3,392 13,255 12,304
Cost of maintenance revenue 24,445 5,599 20,446 22,958
Cost of service revenue 68,074 17,409 62,376 31,705
TOTAL COST OF REVENUE 106,909 26,400 96,077 66,967
GROSS PROFIT 267,293 80,587 266,842 216,673
OPERATING EXPENSES
Research and development 59,851 14,551 60,828 64,311
Sales and marketing 155,680 40,137 134,671 126,642
General and administrative 35,158 7,414 27,737 23,440
Non-recurring charges 49,662 17,292 17,468 37,603
TOTAL OPERATING EXPENSES 300,351 79,394 240,704 251,996
(LOSS) INCOME FROM OPERATIONS (33,058) 1,193 26,138 (35,323)
Interest income, net 6,334 1,151 3,935 2,946
(LOSS) INCOME BEFORE INCOME TAXES (26,724) 2,344 30,073 (32,377)
Income taxes (1,808) (855) (9,925) (3,479)
NET (LOSS) INCOME $(28,532) $1,489 $20,148 $(35,856)
Net (loss) income per share: basic $(0.20) $0.01 $0.15 $(0.27)
Net (loss) income per ADS: basic $(1.00) $0.05 $0.73 $(1.35)
Shares used in computing net (loss) income per share: basic 143,130 137,823 137,351 132,327
ADSs used in computing net (loss) income per ADS: basic 28,626 27,565 27,470 26,465
Net (loss) income per share: diluted $(0.20) $0.01 $0.14 $(0.27)
Net (loss) income per ADS: diluted $(1.00) $0.05 $0.70 $(1.35)
Shares used in computing net (loss) income per share: diluted 143,130 145,618 144,326 132,327
ADSs used in computing net (loss) income per ADS: diluted 28,626 29,124 28,865 26,465
The condensed consolidated financial statements presented in this report should
be read in conjunction with the audited consolidated financial statements and
notes thereto (not presented herein).
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U.S. FINANCIALS
CONSOLIDATED BALANCE SHEET U.S. CONDENSED FORMAT
MERANT plc
In thousands April 30, April 30,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $86,580 $86,459
Short-term investments 34,804 40,448
Accounts receivable, net 111,317 101,847
Prepaid expenses and other assets 13,485 11,871
TOTAL CURRENT ASSETS 246,186 240,625
FIXED ASSETS:
Property, plant and equipment, net 46,090 52,212
Goodwill, net 10,239 6,520
Software product assets, net 17,007 25,234
Other assets 3,560 9,124
TOTAL ASSETS $323,082 $333,715
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loan $2,716 $5,137
Accounts payable 12,150 15,170
Accrued employee compensation and commissions 24,352 25,860
Income taxes payable 18,325 15,583
Deferred revenue 69,155 55,477
Other current liabilities 29,869 21,670
TOTAL CURRENT LIABILITIES 156,567 138,897
LONG-TERM DEBT AND OTHER LIABILITIES - 648
DEFERRED INCOME TAXES 14,304 14,727
TOTAL LIABILITIES 170,871 154,272
SHAREHOLDERS' EQUITY:
Ordinary shares 4,691 4,679
Additional paid-in capital 154,868 153,171
Treasury stock (7,552) (7,769)
Retained earnings 8,850 37,382
Accumulated other comprehensive loss (8,646) (8,020)
TOTAL SHAREHOLDERS' EQUITY 152,211 179,443
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $323,082 $333,715
The condensed consolidated financial statements presented in this report should
be read in conjunction with the audited consolidated financial statements and
notes thereto (not presented herein).
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U.S. FINANCIALS
CONSOLIDATED STATEMENTS OF CASH FLOW U.S. CONDENSED FORMAT
MERANT plc
In thousands Year Three months Year Year
ended ended ended ended
April 30, April 30, January 31, January 31,
1999 1998 1998 1997
OPERATING ACTIVITIES
NET (LOSS) INCOME $(28,532) $1,489 $20,148 $(35,856)
Adjustments to reconcile net (loss) income to cash
provided by operations
Depreciation of fixed assets 12,571 4,716 14,476 22,856
Amortization of software product assets 14,751 2,782 12,716 12,690
Amortization of goodwill 3,585 464 1,391 -
Write-down of software and intangible assets 2,000 - - 22,535
Write-down of purchased research and development - 15,739 15,739 -
Gain on sale of discontinued product lines - 423 423 -
Payment of restructuring/acquisition charges 4,774 (496) (496) (3,247)
Loss on sale of fixed assets - 1,780 207 504
Deferred income taxes (423) (4,426) - 2,004
Changes in operating assets and liabilities 9,589 8,623 (20,547) 5,058
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,315 31,094 44,057 26,544
INVESTING ACTIVITIES
Purchases of property, plant and equipment (6,449) (4,815) (18,269) (11,932)
Software product assets (8,524) (2,480) (10,285) (17,739)
Proceeds from sale of discontinued product lines - 1,200 1,200 -
Acquisition of subsidiaries, net of cash balances acquired (7,076) 1,589 (1,848) -
Available-for-sale securities 5,649 (4,132) (33,639) 1,654
Disposals of property, plant and equipment - 13 570 916
Other - - - (209)
NET CASH USED BY INVESTING ACTIVITIES (16,400) (8,625) (62,271) (27,310)
FINANCING ACTIVITIES
Issuance of ordinary shares, net of expenses 1,709 2,613 9,879 4,770
Own shares 217 - 1,190 (3,445)
Borrowings - - - 6,422
Repayment of borrowings (3,051) (7,705) (3,509) -
Repayment of capital leases (18) (1) (73) (233)
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (1,143) (5,093) 7,487 7,514
Adjustment for INTERSOLV cash flow previously reported - (13,420) - -
Effect of exchange rate changes on cash (651) 247 (316) (1,139)
Increase (decrease) in cash 121 4,203 (11,043) 5,609
Cash at beginning of period 86,459 82,256 93,299 87,690
CASH AT END OF PERIOD $86,580 $86,459 $82,256 $93,299
The condensed consolidated financial statements presented in this report should
be read in conjunction with the audited consolidated financial statements and
notes thereto (not presented herein).
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U.K. FINANCIALS
CONSOLIDATED PROFIT AND LOSS ACCOUNT U.K. FORMAT
MERANT plc
In thousands of GB pounds, Fifteen months ended April 30, 1999 Year ended Year ended
except per share data Continuing January 31, January 31,
operations Acquisitions Total 1998 1997
REVENUE
Product revenue 78,446 39,799 118,245 60,480 42,020
Maintenance revenue 36,452 20,002 56,454 28,233 29,516
Service revenue 17,670 23,104 40,774 8,302 1,553
TOTAL REVENUE 132,568 82,905 215,473 97,015 73,089
COSTS OF REVENUE
Cost of product revenue 6,302 3,063 9,365 6,990 6,406
Cost of maintenance revenue 10,940 6,058 16,998 6,984 10,703
Cost of service revenue 12,353 16,894 29,247 8,861 1,189
TOTAL COST OF REVENUE 29,595 26,015 55,610 22,835 18,298
GROSS PROFIT 102,973 56,890 159,863 74,180 54,791
OPERATING EXPENSES
Research and development 25,459 8,860 34,319 19,679 24,299
Sales and marketing 55,735 33,426 89,161 35,477 30,146
General and administrative 25,980 14,432 40,412 6,288 7,854
TOTAL OPERATING EXPENSES 107,174 56,718 163,892 61,444 62,299
OPERATING (LOSS)/PROFIT (4,201) 172 (4,029) 12,736 (7,508)
Exceptional item (11,831) - -
(LOSS)/PROFIT AFTER EXCEPTIONAL ITEM (15,860) 12,736 (7,508)
INTEREST INCOME 4,433 2,551 1,720
Interest expense (145) (70) (21)
(LOSS)/PROFIT BEFORE TAXATION (11,572) 15,217 (5,809)
Taxation (3,707) (4,791) (1,472)
(LOSS)/PROFIT RETAINED FOR THE YEAR (15,279) 10,426 (7,281)
(Loss)/earnings per share: basic (14.3p) 14.0p (10.2p)
(Loss)/earnings per share: diluted (14.3p) 13.3p (10.2p)
The consolidated financial statements presented in this report should be read in
conjunction with the audited consolidated financial statements and notes thereto
(not presented herein).
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U.K. FINANCIALS
CONSOLIDATED BALANCE SHEET U.K. FORMAT
MERANT plc
In thousands of GB pounds April 30, January 31,
1999 1998
FIXED ASSETS
Intangible fixed assets 133,976 12,394
Tangible fixed assets 28,633 23,836
Investments 4,691 4,886
TOTAL FIXED ASSETS 167,300 41,116
CURRENT ASSETS
Stocks 1,780 317
Debtors 77,887 30,873
Cash and bank deposits 75,394 51,518
TOTAL CURRENT ASSETS 155,061 82,708
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 92,691 46,513
NET CURRENT ASSETS 62,370 36,195
TOTAL ASSETS LESS CURRENT LIABILITIES 229,670 77,311
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 6 12
PROVISIONS FOR LIABILITIES AND CHARGES 12,555 6,407
NET ASSETS 217,109 70,892
CAPITAL AND RESERVES
Called up share capital L2,873 L1,588
Share premium account and other reserves 189,261 30,196
Profit and loss account 24,975 39,108
TOTAL SHAREHOLDERS' FUNDS 217,109 70,892
The consolidated financial statements presented in this report should be read in
conjunction with the audited consolidated financial statements and notes thereto
(not presented herein).
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U.K. FINANCIALS
CONSOLIDATED CASH FLOW STATEMENT U.K. FORMAT
MERANT plc
In thousands of GB pounds Fifteen months Year Year
ended ended ended
April 30, January 31, January 31,
1999 1998 1997
NET CASH INFLOW FROM OPERATING ACTIVITIES 33,864 17,767 12,135
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 4,433 2,519 1,803
Interest paid (145) (70) (21)
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE 4,288 2,449 1,782
TAXATION
U.K. corporation tax (paid) 1,297 (599) (88)
Overseas tax refunded/(paid) (582) (262) 70
TAX PAID 715 (861) (18)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (8,906) (8,263) (2,500)
Capitalised software product assets (5,853) (5,688) (5,258)
Investment in own shares 195 748 -
Disposal of tangible fixed assets - 447 546
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT (14,564) (12,756) (7,212)
ACQUISITIONS AND DISPOSALS
Investment in subsidiary undertakings 16,048 (2,000) -
Net cash acquired with subsidiaries (17,928) 961 -
NET CASH OUTFLOW FROM ACQUISITIONS AND DISPOSALS (1,880) (1,039) -
CASH INFLOW BEFORE FINANCING 22,423 5,560 6,687
FINANCING
Issue of ordinary shares 2,139 1,517 138
Expenses attributable to issue of ordinary shares (2,654) - -
Capital element of finance lease obligations (9) (65) (131)
Bank loan 689 1,007 -
NET CASH INFLOW FROM FINANCING 165 2,459 7
INCREASE IN CASH 22,588 8,019 6,694
The consolidated financial statements presented in this report should be read in
conjunction with the audited consolidated financial statements and notes thereto
(not presented herein).
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CORPORATE INFORMATION
INVESTOR RELATIONS
MERANT
9420 Key West Avenue
Rockville, MD 20850, USA
www.merant.com
e-mail: IR@merant.com
REGISTRAR AND TRANSFER AGENT
Lloyds TSB Registrars
The Causeway, Worthing
West Sussex BN99 6DA, UK
ADR DEPOSITORY
Bank of New York
ADR Division
101 Barclay Street
22nd Floor
New York, NY 10286, USA
REGISTERED OFFICE
MERANT plc
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN, UK
REGISTERED NO: 1709998
STOCKBROKERS
Warburg Dillon Read
1 Finsbury Avenue
London, EC2M 2PP, UK
and The Stock Exchange
London, EC2N 1HP, UK
AUDITORS
Ernst & Young
Apex Plaza
Reading,
Berkshire RG1 1YE, UK
LEGAL COUNSEL/SOLICITORS
Jonathan Philip Davies, Partner
Memery Crystal
31 Southampton Row
London WC1B 5HT, UK
MARKET FOR STOCK
Nasdaq, National Market symbol: MRNT,
London Stock Exchange symbol: MRN.
FORM 20-F
A copy of MERANT's Annual Report on Form 20-F, for the year ended April 30,
1999, as filed with the Securities and Exchange Commission, will be sent to
shareholders free of charge upon written request to: Investor Relations, MERANT,
9420 Key West Avenue, Rockville, MD 20850 USA. Form 20-F is similar to Form
10-K, and filed with the SEC by foreign private issuers
ELECTRONIC FILINGS
The SEC maintains a World Wide Web site located at http://www.sec.gov that
contains a searchable database of filings, reports, and other information
regarding issuers that file electronically with the SEC. Foreign private issuers
such as MERANT are not currently required to file electronically with the SEC
but may choose to do so. As of March 1997, MERANT began voluntarily submitting
its filings electronically to the SEC.
ANNUAL GENERAL MEETING
Shareholders and visitors are cordially invited to attend the Company's Annual
General Meeting of Shareholders, on September 16, 1999, at The Vineyard, at
Stockcross, Newbury, UK.
BOARD OF DIRECTORS
J. Michael Gullard
Chairman of the Board
General Partner,
Cornerstone Management
Gary Greenfield
President and Chief Executive Officer
Michel Berty
Founder,
MBY Consultants, Inc.
Kevin Burns
Managing Principal,
Lazard Technology Partners
Harold Hughes
Chief Executive Officer,
Pandesic LLC
Martin Waters
Chairman
InvestorIQ
SENIOR MANAGEMENT
Gary Greenfield
President & Chief Executive Officer
Ken Sexton
Senior Vice President & Chief Financial Officer
Panos Anastassiadis
Executive Vice President,
Worldwide Distribution
Greg Gehring
Senior Vice President,
Chief Information Officer
Dean Genge
Senior Vice President,
Corporate Marketing
Buff Jones
Senior Vice President, General Manager,
MERANT PVCS
Rick Van Hoesen
Senior Vice President, General Manager,
MERANT Micro Focus
Andrew Weiss
Chief Technology Officer
Gary Wright
Senior Vice President,
MERANT Consulting
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OFFICE LOCATIONS
USA WEST COAST
701 East Middlefield Road
Mountain View, CA 94043
Tel: (+1) 650-938-3700
Fax: (+1) 650-404-7414
USA EAST COAST
9420 Key West Avenue
Rockville, MD 20850
Tel: (+1) 301-838-5000
Fax: (+1) 301-838-5432
AUSTRALIA
Level 1, 845 Pacific Highway
Chatswood, New South Wales 2067
Sydney, Australia
Tel: (+61) 2 9904 6111
Fax: (+61) 2 9904 6007
BELGIUM/BENELUX
A.Stocletlaan 87
B-2570 Duffel, Belgium
Tel: (+32) 15 30 77 00
Fax: (+32) 15 32 12 60
CANADA
One City Center Drive
Suite 301
Mississauga, Ontario LB5 1M2
Canada
Tel: (+1) 905-306-7280
Fax: (+1) 905-306-7530
FRANCE
Tour Franklin - Defense 8
92042 Paris-La-Defense
CED France
Tel: (+33) 1 47 75 75 75
Fax: (+33) 1 47 75 75 80
GERMANY
Carl-Zeiss-Ring 5
D-85737 Ismaning
Germany
Tel: (+49) 89 962 71-0
Fax: (+49) 89 962 71-111
INDIA
#1/a Church St.
TNA Chamber
First Floor
Bangalore 560001
India
Tel: (+91) 80 509-1215
Fax: (+91) 80 559 2647
ITALY
Viale Erminio Spalla, 41
00142 Roma
Italy
Tel: (+39) 06 51 53 93 1
Fax: (+39) 06 51 95 65 89
JAPAN
Atago Toyo Building
1-3-4 Atago
Minato-Ku Tokyo 105-0002
Japan
Tel: (+81) 3 5401 9600
Fax: (+81) 3 5401 9697
SINGAPORE
#07-08 International Building
360 Orchard Road
Singapore 238869
Tel: (+65) 834 9880
Fax: (+65) 836 3119
SPAIN
Auturo Soria, 343 90
28033 Madrid
Spain
Tel: (+34) 1 302 82 26
Fax: (+34) 1 302 51 95
NETHERLANDS
Kaap Hoorndreef 30
3563 AT Utrecht
Netherlands
Tel: (+31) 30 2651 750
Fax: (+31) 30 2651 758
UNITED KINGDOM
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN, UK
Tel: (+44) 01635 32646
Fax: (+44) 01635 33966
[MERANT LOGO]
WHEN DEVELOPMENT MEANS BUSINESS
www.merant.com
Copyright (C) 1999 MERANT. All rights reserved. DataDirect, INTERSOLV, Micro
Focus, PVCS and Revolve are registered trademarks, and MERANT, the MERANT logo,
PVCS Dimensions and PVCS Tracker are trademarks of MERANT. All other trademarks
referenced herein are the property of their respective owners.
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24
[MERANT LOGO(TM)]
25
[MERANT LOGO(TM)]
1999 ANNUAL REPORT
DETAIL
================================================================================
26
TABLE OF CONTENTS
PAGE
----
Directors' Report........................................... 3
Report on Corporate Governance.............................. 8
Remuneration Committee's Report............................. 12
U.S. Financial Statements
Selected Financial Data................................... 16
Management's Discussion & Analysis........................ 17
Consolidated Financial Statements & Notes................. 31
Report of Independent Auditors............................ 56
U.K. Financial Statements
Selected Financial Data................................... 57
Management Discussion & Analysis.......................... 58
Consolidated Financial Statement & Notes.................. 72
Statement of Director's Responsibilities.................. 103
Report of the Auditors.................................... 104
Further Information for Shareholders........................ 106
This Annual Report Detail has been produced to supplement the Summary
Annual Report.
For the benefit of U.S. and U.K. based shareholders and customers of
MERANT, the financial statements are presented in both U.S. and U.K. formats in
separate sections of this Report.
The accounting policies adopted by MERANT are within the framework of U.K.
accounting standards and are also in line with U.S. generally accepted
accounting principles as they apply to U.S. software companies.
On November 30, 1998, the Company announced a change of its financial year
end and accounting reference date to April 30 from January 31. Consequently, the
U.K. format results shown in this Report are for the fifteen-month period ended
April 30, 1999; comparative figures are for the twelve-month periods ended
January 31, 1998 and January 31, 1997.
In accordance with U.S. accounting practice, the Company prepared and filed
a Transition Report on Form 20-F in respect of the three-month period ended
April 30, 1998; consequently the U.S. format results shown in this Report are
for the twelve-month period ended April 30, 1999; comparative figures are shown
for the three-month period ended April 30,1998, and for the years ended January
31, 1998 and January 31, 1997.
MERANT plc, Registered office The Lawn, 22-30 Old Bath Road, Newbury, Berkshire
RG14 1QN, U.K. Registered in England No. 1709998.
- --------------------------------------------------------------------------------
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MERANT PLC
DIRECTORS' REPORT
UK FORMAT
FIFTEEN MONTHS ENDED APRIL 30 1999
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 fifteen-month period ended April
30, 1999.
On February 16 1999, the Company changed its corporate name from Micro
Focus Group Plc to MERANT plc.
PRINCIPAL ACTIVITIES
The principal activities of MERANT are the design, development and
marketing of software products and services for enterprise application
development. Enterprise application development is where businesses accelerate
the application of innovative information technology to create a competitive
advantage. MERANT's solution offerings empower organisations to transform their
enterprise applications for the changing technology and business requirements of
the e-business environment, manage the application development process, and
provide integrated data connectivity across the enterprise, from the mainframe
to the Internet.
TRADING RESULTS
On November 30, 1998 the Company announced a change of its financial
year-end and accounting reference date from January 31 to April 30. Consequently
the current results are for the fifteen-month period from February 1, 1998 to
April 30, 1999. Comparative figures are for the twelve-month periods ended
January 31, 1998 and 1997. The table below summarises the trading results as
disclosed in the consolidated profit and loss account.
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED: GBP'000 GBP'000 GBP'000
-------------- -------- ---------- ----------
Revenue........................................ 215,473 97,015 73,089
Operating (loss) profit........................ (4,029) 12,736 (7,508)
Exceptional charges............................ (11,831) -- --
(Loss) profit before taxation.................. (11,572) 15,217 (5,809)
(Loss) profit after taxation................... (15,279) 10,426 (7,281)
The results for the current period include the results of INTERSOLV, Inc
("INTERSOLV") from September 24 1998, the date of its acquisition, until April
30, 1999. They also include a charge of GBP 21,153,000 for amortisation of the
goodwill which arose on the acquisition. Further details of this acquisition are
set out in note 3 to the financial statements on page 85.
DIVIDEND
Following customary practice the directors will not be recommending payment
of a dividend.
FUTURE PROSPECTS
A review of the business and an indication of future prospects is given in
the Letter to Shareholders on pages 4 and 5 of the accompanying Annual Report.
DIRECTORS
Mr J Sidney Webb, a non-executive director of the Company since 1997, died
on March 24, 1999. His wise counsel and contribution to the Board will be
missed.
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The other directors who served during the period are as follows:
Non-executive directors:
J Michael Gullard, Chairman (a)(c)
Harold Hughes, Deputy Chairman (a)(b)
Michel Berty (appointed September 24 1998) (b)(c)
Kevin J Burns (appointed September 24 1998) (a)(b)
Martin Waters
Chief Executive Officer:
Gary Greenfield (appointed September 24 1998)
- ---------------
Notes:
(a) Member of Audit Committee
(b) Member of Executive Remuneration Committee
(c) Member of Nomination Committee
In addition to the above, Ron Forbes, who is 52, served as an executive
director from November 18, 1986 until his resignation on May 13 1998, the date
of his retirement from the Company. Paul Adams, 47, also served as an executive
director from November, 1986 until his resignation on September 24, 1998, the
date of the acquisition of INTERSOLV. Mr Adams is currently Vice President,
Sales -- MERANT Micro Focus.
Michel Berty, Kevin Burns and Gary Greenfield were directors of INTERSOLV
and were appointed to the Board of MERANT at the time of the acquisition of
INTERSOLV in order to provide the Board with the appropriate balance of
expertise from both companies.
The Company's chairman, Mr. Gullard, is 54 and is a U.S. citizen. 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, USA-based
venture capital organisation. Mr. Gullard is also a director of JDA Software
Group, Inc., a publicly-quoted U.S. Company.
Mr. Hughes is 53 and is also a U.S. citizen. He was appointed a
non-executive director in December 1993. Mr. Hughes is Chairman and Chief
Executive Officer of Pandesic LLC, an e-commerce joint venture between Intel and
SAP. Prior to joining Pandesic in 1998, he worked for 23 years with Intel. At
Intel he held a number of senior positions in financial and operational
management, most recently as Director of Planning and Logistics. He is currently
a member of the Boards of the London Pacific Group and Hummingbird
Communications.
Mr. Berty is a U.S. citizen, aged 60. He had been a non-executive director
of INTERSOLV since 1997. 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. He is also on the boards of directors of Ascent Logic, Buysmart,
Elligent, Level 8, Mastech and Sapiens International, all of which are
U.S.-based corporations.
Mr. Burns is 50 and a U.S. citizen. Mr. Burns was appointed as a
non-executive director on September 24, 1998, the date of the acquisition of
INTERSOLV, Inc. Mr. Burns founded INTERSOLV in 1982 and served as INTERSOLV's
Chief Executive Officer from 1986 to 1996 and INTERSOLV's chairman from 1990 to
1998. Mr. Burns is currently a managing principal of Lazard Technology Partners,
a venture organisation. He is also a director of Object Design and several
private information technology companies based in the United States.
Mr. Waters was appointed to the Board in June 1997 and served as Chief
Executive Officer of the Company from that time until December 1998. Mr. Waters,
who is 55, is British and will not be offering himself for re-election at the
1999 annual general meeting.
Mr. Greenfield was appointed a non-executive director of the Company on
September 24, 1998, the date of completion of the acquisition of INTERSOLV. He
was appointed Chief Executive Officer on December 1, 1998, following the
resignation from that position of Martin Waters. Mr. Greenfield had held senior
4
29
management positions at INTERSOLV since 1987, and since 1996 had been Chief
Executive Officer. He is also a director of Hyperion Solutions, Inc. and
Chairman of the Information Technology Association of America, a trade
association representing the U.S. information technology industry. He is a U.S.
citizen, aged 44.
The Company's Articles of Association require that directors who have been
appointed since the last general meeting must seek election at the next annual
general meeting. Mr Berty, Mr Burns and Mr Greenfield, having been appointed to
the Board since the last annual general meeting, will therefore retire at the
1999 annual general meeting and, being eligible, will offer themselves for
re-election. Neither Mr Berty nor Mr Burns has a service contract with the
Company. Mr. Greenfield has signed a three-year service contract effective from
December 31, 1999, the date of his appointment as President and Chief Executive
Officer of the Company.
The Company's Articles of Association require that at least one-third of the
Board members retire by rotation each year and submit themselves for
re-election. Accordingly, Mr Gullard will retire at the 1999 annual general
meeting and, being eligible, will offer himself for re-election. Mr Gullard does
not have a service contract with the Company.
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, are set out
in the Remuneration Committee's Report on page 12 to 15.
DIRECTORS' RESPONSIBILITIES
A statement of the directors' responsibilities in respect of the financial
statements is set out on page 103.
SUB-COMMITTEES OF THE BOARD
The Audit Committee, Remuneration Committee and Nomination Committee are
formally constituted sub-committees of the Board. Details of the members of
these committees and their roles is set out in the Directors' Report on
Corporate Governance on pages 8 to 11.
SUBSTANTIAL SHAREHOLDERS
The following interests of 3% or more in the share capital of the Company
have been reported as at August 1, 1999:
ORDINARY PERCENTAGE
SHARES HELD HOLDING
----------- ----------
The Prudential Corporation Group...................... 14,407,245 10.0%
Fidelity Corporation.................................. 10,084,507 7.0%
Philips & Drew........................................ 6,497,353 4.5%
At April 30, 1999 the Bank of New York, acting as Depositary Bank, held
approximately 31% of the Company's shares in respect of which American
Depositary Shares ("ADSs") have been issued, evidenced by American Depositary
Receipts. The ADSs are traded in the United States on the Nasdaq Stock Market.
Certain of the holdings reported above are held in the form of ADSs. With effect
from the close of business on March 13, 1998 the Company split its ordinary
shares on a 5-for-1 basis. The Company's ADSs did not split and, for the
purposes of the table above, have been converted to 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 given in the Letter to Shareholders. Research and development costs
are summarised in note 4 to the financial statements on page 88.
5
30
CORPORATE GOVERNANCE
The Hampel Committee on Corporate Governance published its Principles of
Good Governance and Code of Best Practice in 1998. The Company's statement of
compliance with the code is set out in the Directors' Report on Corporate
Governance on pages 8 to 11.
EMPLOYEE INVOLVEMENT
MERANT places considerable value on the involvement of its employees and on
good relations and communication with them.
Wide employee consultation takes place on matters affecting their
interests. Employee involvement in the business is encouraged in many ways,
including the holding of regular company-wide meetings and, specifically,
awareness of MERANT's financial performance is maintained through the
participation of employees in the MERANT bonus scheme.
The majority of employees are eligible to become MERANT shareholders
through the ownership of options to acquire ordinary shares in the Company under
the MERANT share option plans (see note 24 to the financial statements on page
100).
DISABLED EMPLOYEES
MERANT gives consideration to applications for employment from disabled
persons where the requirement of the job may be adequately covered by a
handicapped or disabled person. If necessary MERANT endeavours to retrain any
member of staff who develops disability during employment with MERANT and to
provide career development and promotion opportunities wherever appropriate.
ENVIRONMENT
MERANT recognises its responsibilities for the environment, and the
possible effects of its businesses on the environment are given due
consideration when decisions are taken in such areas as minimisation of waste
and energy use.
SUPPLIER PAYMENT POLICY AND PRACTICE
It is the policy of the Company to settle the terms of payment with
suppliers when agreeing the terms of transactions, to ensure that suppliers are
made aware of the terms of payment, and to comply with those contractual
arrangements. At April 30, 1999 the Group had an average of 27 days purchases
outstanding in trade creditors.
SPECIAL BUSINESS AT THE ANNUAL GENERAL MEETING
Resolutions will also be proposed at the annual general meeting on the following
matters:
- appointing Barry X. Lynn as a Director;
- amending the MERANT 1998 Share Option Plan;
- adopting the MERANT plc 1999 Employee Share Purchase Plan;
- renewing the directors' authority to issue shares;
- amending the Company's Articles of Association; and
- authorizing market purchases by the Company of its own shares.
The annual general meeting will be held in Newbury on September 16, 1999. The
full text of all resolutions, together with an explanatory letter, will be set
out in the notice of meeting which will be distributed to shareholders in due
course.
6
31
AUDITORS
Ernst & Young have expressed their willingness to continue in office as
auditors and a resolution proposing their re-appointment will be proposed at the
annual general meeting.
By Order of the Board
/s/ KEN SEXTON
Ken Sexton
Company Secretary
August 4, 1999
7
32
MERANT PLC
REPORT ON CORPORATE GOVERNANCE
UK FORMAT
FIFTEEN MONTHS ENDED APRIL 30 1999
BACKGROUND
This report is an integral part of the Company's 1999 Annual Report
Detailed and is devoted entirely to the subject of corporate governance. Its
purpose is to clarify and explain to the Company's shareholders, many of whom
live outside the United Kingdom, the issues surrounding corporate governance in
the United Kingdom
The London Stock Exchange published its Principles of Good Governance and
Code of Best Practice ("the Combined Code") in June 1998, together with new
Listing Rules which apply for accounting periods ending on or after December 31,
1998. The Combined Code is based on the recommendations of the Hampel Committee
on Corporate Governance and from the earlier reports of the Cadbury and
Greenbury Committees. With regard to Section 1 of the Combined Code companies
are required to describe how they are applying the principles and the extent to
which they have complied with the provisions set out in the code.
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.
Since the Company's acquisition of INTERSOLV, Inc, the Board has been
constituted in line with American practice, and now consists of a non-executive
Chairman, four other independent non-executive directors and one executive
director, the Chief Executive Officer. Senior management is represented on the
Board by the Chief Executive Officer of the Company, whose role is therefore
separate and distinct from that of the Chairman. Two of the non-executive
directors previously held executive positions within the group, and all have had
senior executive experience in other companies and offer independent judgment on
Board matters.
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.
New appointments to the board are recommended by the nomination committee.
Prior to that committees formation, appointment of directors involved approval
by the Board as a whole. Such appointments are subject to subsequent
confirmation by the shareholders.
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.
Sub-committees of the Board:
The audit committee consists of Mr. Hughes (chairman), Mr. Burns and Mr.
Gullard. Mr. Webb was a member of the audit committee until his resignation, and
the appointment of Mr. Burns, on December 16, 1998. The committee meets
quarterly to consider the adequacy of the group's internal financial controls,
policies and procedures and the outcome of the external audit. Its meetings are
normally attended by the Chief Executive Officer and the Chief Financial Officer
and the external auditor. 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.
8
33
The executive remuneration committee consists of Mr. Burns (chairman), Mr.
Hughes and Mr. Berty. Mr. Webb, the former chairman of the remuneration
committee, died on March 24, 1999. Mr. Burns was appointed to the committee on
April 15, 1999, to replace Mr. Webb. Mr. Berty was appointed to the committee on
December 16, 1998 to replace Mr. Gullard, who resigned from the committee on
that date. 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. All members of the remuneration committee are non-executive independent
directors.
Full disclosure of directors' remuneration and benefits is made in the
Directors' Remuneration Report on pages 12 to 15.
The nomination committee was formed on December 16, 1998 and meets from
time to time when required to do so. Its members are Mr. Gullard (chairman), Mr.
Greenfield and Mr. Berty. The nomination committee makes recommendations to the
Board on all proposed new appointments of directors.
Shareholder relations
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 London Stock Exchange.
All shareholders are invited to participate in the annual general meeting,
where both the Chairman and the Chief Executive Officer will be available to
answer questions. Proxy votes received will be disclosed to the meeting after
each resolution has been dealt with on a show of hands.
Internal control and audit
The Board is responsible for the Company's systems of internal financial
control. It recognises that such systems can only provide reasonable and not
absolute assurance against material loss or material mis-statement in the
financial statements.
It is MERANT's aim to maintain firm financial disciplines and to minimise
risk. Although considerable responsibility is devolved to operating company
management, the Company defines and documents those contracts and other matters
of significance, commitment and potential risk which require authorisation by
executive management or the Board. Company management is responsible on behalf
of the Board for maintaining the effectiveness of financial controls and for
addressing any identified shortcomings in order to safeguard shareholder
investment and company assets.
The system of internal financial control includes:
- comprehensive annual financial plans approved by the board;
- periodic consideration by the board of actual results compared to plans
and forecasts;
- capital investment procedures which require the authority of the board or
group management above stated levels;
- review and approval by the board of all major acquisitions and
divestments;
- consideration by executive management of contracts which are large or
outside the ordinary course of business or other matters involving large
or long-term commitment;
- acknowledgement by local managements of their responsibility in operating
companies for maintenance and review of financial control systems;
- a formally documented assessment of the risks and related actions in
respect of Year 2000 issues; and
- periodic monitoring of the operation of controls in the group by senior
executives.
9
34
The Board is reviewing the Company's internal control systems and will
report on this review next year. In the meantime, as permitted by the London
Stock Exchange, the Company has complied with Code provision D.2.1. on internal
control by reporting on internal financial control in accordance with the
guidelines issued in December 1994.
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 in operational existence for the foreseeable future. For
this reason they continue to adopt the going concern basis in preparing the
financial statements.
COMPLIANCE WITH THE CODE OF BEST PRACTICE
The Company is required to report on compliance with the detailed
provisions of Section 1 of the Combined Code throughout the fifteen-month period
ended April 30 1999 even though the final version of the Code, which introduced
several changes to previous corporate governance guidelines, was not issued
until June 1998. Except as detailed in this Report on Corporate Governance, the
directors consider that the Company has complied throughout the period under
review within the provisions of Section 1 of the Combined Code.
In previous years, it has not been seen as a requirement to announce proxy
voting figures at shareholder meetings. Last year's annual general meeting was
held before the provisions of the Code came into force and proxy voting figures
were not disclosed which does not comply with the combined code. With the new
requirement, proxy voting figures will be advised to shareholders attending
these meetings after a show of hands for each resolution.
All directors are eligible to participate in the Company's share option
plan, and have been granted options as referred to in the Remuneration
Committee's Report on page 15 and detailed in note 24 to the financial
statements on page 100. Share option grants to directors are not
performance-related. This does not comply with the Combined Code but the
Directors believe it is appropriate for a software company whose business is
primarily in the United States.
All of the non-executive directors are based in the United States, where
current practice demands that the Company offer such incentives to its
non-executive directors as are customary in the United States, in order to
attract and retain individuals of the appropriate calibre. The non-executive
directors do not have service contracts and are free from management, and the
Board considers that the incentives which are required to retain them do not
materially interfere with the exercise of their independent judgment.
The Board is reviewing the requirements of the Combined Code with a view to
the appointment of non-executive directors of appropriate experience, caliber
and knowledge of the Company. The Directors did not comply with the Combined
Code in that a Nomination Committee was only established in December 1998.
Under the Articles of Association one-third of the Directors are obliged to
seek re-election every three years. This does not comply with the Combined Code
which requires each Director to seek re-election at least every three years non
executive directors to be appointed for specific terms. It is the Board's policy
however that each Director should seek re-election every three years and an
amendment to the Company's Articles of Association to this effect will be
proposed at the forthcoming Annual General Meeting. The Board intends to put
into place letters of appointment specifying the terms of engagement of the
non-executive directors shortly.
The Chief Executive Officer has been appointed for a three-year term ending
on December 1, 2001, which the remuneration committee considers is reasonable
and proper for the Company's market position and growth and is an appropriate
term for a Chief Executive Officer based in the United States. At the end of the
three year term, the Chief Executive Officer's appointment can be extended for a
one year period, unless the Company provides proper notice not to extend.
10
35
The Combined Code requires that the Board should have an objective to
reduce notice or contract periods to one year or less. The remuneration
committee considers the Chief Executive Officers contract as appropriate, given
the Company's market position and growth and as such does not comply with the
Combined Code in respect of this objective.
/s/ KEN SEXTON
Ken Sexton
Company Secretary
August 4, 1999
11
36
MERANT PLC
REMUNERATION COMMITTEE'S REPORT
UK FORMAT
FIFTEEN MONTHS ENDED APRIL 30 1999
The MERANT Executive Remuneration Committee consists of Mr. Burns
(Chairman), Mr. Berty and Mr. Hughes.
The Committee ensures that remuneration is appropriate to each executive
director's responsibilities, taking into consideration the overall financial and
business position of the Company, the highly competitive industry of which
MERANT is part, salary scales within the Company, and the importance of
recruiting and retaining management of the appropriate calibre.
EXECUTIVE DIRECTORS' REMUNERATION POLICY
The chief components of remuneration are as follows:
Basic salary: Salary rates for executive directors are determined by
reference to relevant market data for the countries in which the directors
perform their duties, and are normally reviewed on an annual basis. In
general, the Committee's philosophy is to have base salary rates lower than
those of others in the market, with higher rates of pay for performance. In
addition, the rates for executive directors take into account the salary
levels of staff as a whole in each country.
Performance-related pay: Executive directors are eligible for annual
performance-related bonuses, which are calculated based on fixed formulae
measuring MERANT's performance against targets set at the beginning of each
year. Such bonuses are earned on a pro-rata basis in proportion to the
level of achievement relative to the performance targets set, subject to
certain minimum thresholds.
The philosophy is to offer greater than market opportunities in terms
of bonus compensation, scaling upwards if the performance of MERANT exceeds
the targets set out at the beginning of the period. In the current period
such bonuses were based on targets measuring achievement against
performance, measured in terms of audited earnings per share. On the basis
of that achievement, executive directors could earn bonuses up to 150% of
their basic salary entitlements.
Pension contributions: The Company does not operate a pension scheme
for its directors, but has made contributions to an executive director's
own personal pension in lieu of salary entitlement.
Compensation for loss of office: The level of compensation offered by
the Company is determined by the need to provide executive directors with
competitive packages in accordance with the criteria described elsewhere in
this "Directors' Remuneration Policy" section, but would not exceed the
equivalent of two years' pay (salary plus calculated portion of bonus, or
performance-related pay).
Share options: Executive directors are eligible to participate in the
MERANT share option plans, details of which are set out in note 24 to the
financial statements on page 100. The grant of share options to directors
is designed to ensure that an element of their remuneration is directly
related to long-term growth in shareholder value.
Long term incentives: Executive directors are not eligible for any
other long-term incentive payments.
Service agreements: Upon his appointment the Chief Executive Officer
entered into a three-year service agreement with the Company, expiring on
December 1, 2001. On early termination by the Company, he is entitled to
one year's salary and bonus and a further one year salary and bonus for
services to be rendered to the Company over 18 months and for a
non-competition covenant. The agreement stipulates that in the event of a
change in control, the agreement is automatically extended for a three-year
term commencing on the date of change in control.
12
37
REMUNERATION FOR NON-EXECUTIVE DIRECTORS
Remuneration for non-executive directors is determined by the Board based
upon the advice of an independent advisor who has provided details of
comparables. Directors are not involved in any discussions or decisions about
their own remuneration.
Non-executive directors receive an annual retainer and earn additional fees
for attendance at Board meetings and for time spent on other Company-related
business. Fees are set within the limits stipulated in the Company's Articles of
Association.
Non-executive directors are eligible to participate in the MERANT share
option plans, details of which are set out in note 24 to the financial
statements on page 100.
None of the non-executive directors have a service contracts with a notice
period in excess of one year, or with provision for predetermined compensation
on termination of an amount which equals or exceeds one year's salary and
benefits.
DIRECTORS' REMUNERATION
The following table analyses the remuneration earned by each director in
the fifteen month period ended April 30, 1999 and for the year ended January 31,
1998:
PERFORMANCE- BENEFITS- COMPENSATION
SALARY RELATED PAY PENSION IN-KIND FOR LOSS TOTAL TOTAL
------- ------------ FEES CONTRIBUTIONS GBP'000 OF OFFICE 1999 1998
GBP'000 GBP'000 GBP'000 GBP'000 (b) GBP'000 GBP'000 GBP'000
------- ------------ ------- ------------- --------- ------------ ------- -------
Fifteen months ended April 30
1999
J Michael Gullard.............. 94 24 118 50
Harold Hughes.................. 27 12 39 18
J Sidney Webb (died March 24
1999)........................ 23 23 5
Martin Waters.................. 207 451 7 12 788 1,465 489
Michel Berty (appointed
September 24 1998)........... 10 12 22 --
Kevin Burns (appointed
September 24 1998)........... 11 12 121 144 --
Gary Greenfield (appointed
September 24 1998) (a)....... 195 151 1,281 1,627 --
Paul Adams (resigned September
24 1998)..................... 126 122 5 253 210
Ron Forbes (resigned May 14
1998)........................ 24 69 1 94 164
Marcelo Gumucio (resigned June
21 1997)..................... -- -- -- -- -- -- -- 629
--- --- --- -- -- ----- ----- -----
552 793 172 6 72 2,190 3,785 1,565
=== === === == == ===== ===== =====
- ---------------
(a) Compensation for loss of office and non-competition covenants for Mr. Burns
and Mr. Greenfield related to payments made under existing INTERSOLV
contracts assumed in the acquisition.
(b) Benefits in kind relate to the purchase of shares for the benefit of
directors.
13
38
The following table summarises directors' remuneration, including gains realised
on exercise of share options.
1999 1998
PERIODS ENDED GBP'000 GBP'000
------------- ------- -------
All directors:
Aggregate emoluments........................................ 3,779 1,559
Sums paid to third parties for directors' services.......... 6 6
Gain on exercise of share options........................... 28 889
----- -----
3,813 2,454
----- -----
Highest paid director:
Aggregate emoluments........................................ 1,627 629
Gain on exercise of share options........................... -- 889
----- -----
1,627 1,518
----- -----
Gains on exercise of share options are calculated as at the date of
exercise although the shares may have been retained.
Upon Mr. Forbes' resignation as a director, the Company entered into a
consultancy agreement with an entity with which Mr. Forbes is affiliated to
provide management consulting services to the Company for a two-year period. The
agreement provided for the sum of GBP 75,800 (exclusive of VAT) to be paid in
advance. For hours worked in excess of the minimum, payment will be made by the
Company at the rate of GBP 200 per hour.
Upon the resignation of Mr. Waters as Chief Executive Officer of the
Company on December 1, 1998, the Company entered into a settlement agreement and
release with Mr. Waters, pursuant to which the Company agreed to make a payment
of U.S. $1,300,000 to Mr. Waters. In addition the Company entered into a
consultancy agreement with Mr. Waters under the terms of which Mr. Waters will
receive $200,000 for services provided over a period of one year from the date
of his resignation.
DIRECTORS' SHAREHOLDINGS
The beneficial interests of the current directors in the share capital of
MERANT are as follows:
APRIL 30 JANUARY 31
1999 1998
-------- ----------
J Michael Gullard, Chairman.............................. 77,500 5,000
Harold Hughes............................................ 110,000 100,000
Martin Waters............................................ 10,000 --
Michel Berty............................................. 10,000 --*
Kevin Burns.............................................. 60,000 --*
Gary Greenfield , Chief Executive Officer................ 25,155 --*
------- -------
- ---------------
* At date of appointment in the cases of Mr. Berty, Mr. Burns and Mr. Greenfield
The shareholdings quoted above have been restated to give effect to the
sub-division of the Company's ordinary shares, which took effect on March 13,
1998 (see note 25 to the financial statements on page 102). Certain of these
holdings are held in the form of ADSs. There have been no changes in these
holdings since the year end.
14
39
DIRECTORS' SHARE OPTIONS
The following table sets out the numbers of options to acquire ordinary
shares or ADSs held by each director, including the changes in holdings during
the period. The numbers and prices of the options quoted below have been
restated to give effect to the sub-division of the Company's ordinary shares.
NUMBER OF OPTIONS
OPTION ----------------------------------------------------------
DATE OF PRICE JANUARY 31 APRIL 30 LATEST
OPTION GRANT (IN GBP) 1998 (1) GRANTED EXERCISED LAPSED 1999 (2) EXERCISE DATE
----------------- -------- ---------- -------- --------- ---------- --------- --------------
J Michael Gullard.... June 2 1994 2.13 50,000 50,000 June 2 2004
June 21 1996 1.67 250,000 250,000 June 21 2006
Harold Hughes........ August 19 1992 3.00 50,000 50,000 August 19 2002
June 16 1994 2.40 10,000 10,000 June 16 2004
Martin Waters........ September 16 1997 4.20 1,187,500 (1,187,500) 0 n/a
September 16 1997 4.20 1,812,500 (1,812,500) 0 n/a
September 24,
Michel Berty......... 3.49(4) 50,415 50,415 2007
February 15,
Kevin J. Burns....... 5.02(4) 546,565 546,565 2006
Gary Greenfield...... 6.42(4) 2,819,550 2,819,550 May 1, 2008
January 4 1999 1.05 3,250,000 3,250,000 January 4 2009
- ---------------
(1) Or date of appointment, if later
(2) Or date of resignation, if earlier
(3) Gains on exercise of share options are calculated as at the date of exercise
although the shares may have been retained.
(4) The options held by M Berty, Mr Burns and Mr Greenfield at the date of their
appointment represent options issued to them by INTERSOLV, Inc which were
converted into options to acquire ADSs in the Company, as explained in note
24 to the financial statements. They are denominated in U.S. dollars, and
for the above disclosures have been converted to pounds sterling using the
exchange rate as at April 30, 1999 of GBP 1.00 = $1.61.
Prior to his resignation, Paul Adams exercised 8,000 options on August 7,
1998, which he had been granted in 1990 at GBP 1.084 per share. On the date of
exercise, the market price was GBP 4.62 per share, which represented a gain of
GBP 28,288. No other directors exercised any options during the period.
The market price of the shares at April 30, 1999 was GBP 1.47 and the
range during the fifteen month period was GBP 0.97 to GBP 7.18.
On behalf of the Committee
/s/ KEVIN BURNS
Kevin J. Burns
Chairman of the Executive Remuneration Committee
August 4, 1999
15
40
MERANT PLC
FINANCIAL STATEMENTS 1999
SELECTED CONSOLIDATED FINANCIAL DATA
US FORMAT
The following selected financial data should be read in conjunction with,
and is qualified in its entirety by reference to, the financial statements of
MERANT, expressed in U.S. dollars, set forth on pages 31 to 55 of this report.
THREE MONTHS
YEAR ENDED ENDED YEARS ENDED JANUARY 31,
(IN THOUSANDS OF U.S. DOLLARS -- EXCEPT PER SHARE APRIL 30, APRIL 30, -----------------------------------------
AND ADS DATA, PERCENTAGES AND EMPLOYEES) 1999 1998 1998 1997 1996 1995
- ------------------------------------------------- ---------- ------------ -------- -------- -------- --------
RESULTS OF OPERATIONS:
Net revenue................................. $374,202 $106,987 $362,919 $283,640 $280,097 $285,529
Income before non-recurring items........... 16,604 18,485 43,606 2,280 6,734 41,133
Non-recurring items (see note 2, below)..... (49,662) (17,292) (17,468) (37,603) (23,069) (18,265)
Income (loss) before income taxes........... (26,724) 2,344 30,073 (32,377) (11,628) 19,840
Net income (loss)........................... (28,532) 1,489 20,148 (35,856) (14,867) 7,467
Net income (loss) per share (note 3, below):
Basic................................... (0.20) 0.01 0.15 (0.27) (0.11) 0.06
Diluted................................. (0.20) 0.01 0.14 (0.27) (0.11) 0.06
Basic -- per ADS........................ (1.00) 0.05 0.73 (1.35) (0.57) 0.29
Diluted -- per ADS...................... (1.00) 0.05 0.70 (1.35) (0.57) 0.29
Weighted average number of shares outstanding, in
thousands
Basic................................... 143,130 137,823 137,351 133,002 130,602 130,893
Diluted................................. 143,130 145,618 144,326 133,002 130,602 130,893
Basic -- ADS equivalent................. 28,626 27,565 27,470 26,600 26,120 26,179
Diluted -- ADS equivalent............... 28,626 29,124 28,865 26,600 26,120 26,179
FINANCIAL POSITION AT END OF PERIOD:
Cash and short-term investments............. 121,384 126,907 118,572 95,876 92,077 121,171
Total assets................................ 323,082 333,715 333,074 257,887 272,523 302,521
Long term obligations....................... -- 648 612 1,314 3,018 1,367
Shareholders' equity........................ 152,211 179,442 172,073 123,493 157,109 175,868
FINANCIAL CONDITION:
Working capital............................. $ 89,619 $101,727 $ 94,230 $ 62,421 $ 69,005 $102,961
Current ratio............................... 1.57 1.64 1.64 1.52 1.71 2.09
Return on net revenue: excluding non-recurring
items..................................... -7.6% 12.2% 9.5% n/m -0.2% 6.9%
Return on average equity: excluding non-
recurring items (annualized).............. n/m 29.1% 23.3% n/m 0.4% 11.0%
EMPLOYEE INFORMATION:
Average number of employees................. 2,014 1,970 1,852 1,711 1,667 1,559
Number of employees at end of period........ 2,018 1,963 1,900 1,698 1,708 1,618
Net revenue per employee (annualized)....... $ 186 $ 217 $ 196 $ 166 $ 168 $ 183
- ---------------
n/m not a meaningful number.
NOTES:
1. Data for all periods presented has been restated to include business
combinations which have been accounted for using the pooling-of-interests
method (see note 2 to the consolidated financial statements on page 40).
2. Details of the non-recurring items are set out in note 5 to the consolidated
financial statements on page 44.
3. For years through January 31, 1998, annual amounts reflect the financial data
of INTERSOLV, Inc on an April 30 year. Financial data for the three months
ended April 30, 1998 are included in both the "Three months ended April 30,
1998" and the year ended January 31, 1998.
4. Shares and per-share data for all periods presented have been restated to
comply with SFAS 128 "Earnings per share" and to reflect the 5-for-1 stock
split of the Company's ordinary shares, which was effective as of the close
of business on March 13, 1998 (see note 14 to the consolidated financial
statements on page 54). Each American Depositary Share represents five
ordinary shares.
16
41
MERANT PLC
FINANCIAL STATEMENTS 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION US FORMAT
The following discussion should be read in conjunction with the financial
statements of MERANT plc and its subsidiaries ("MERANT" or "the Company") in
U.S. dollars, on pages 31 to 55.
This discussion contains certain "forward-looking statements" (as such term
is defined in Section 27A of the U.S. Securities Act of 1933, as amended). Such
statements involve a number of risks, uncertainties and other factors that could
cause actual results to differ materially from those indicated by the forward
looking statements as a result of the factors set forth below under the section
"Risk factors that may influence future operating results."
Effective February 16, 1999, the Company changed its corporate name from
"Micro Focus Group Plc" to "MERANT plc".
Effective November 30, 1998, the Company elected to change its fiscal year
end and accounting reference date to April 30 from January 31. The Company is
therefore reporting results for the fiscal year ended April 30, 1999 ("fiscal
1999"). References to fiscal 1998 and fiscal 1997 are to the years ended January
31, 1998 and January 31, 1997, respectively. This report also discloses results
for the three-month fiscal period ended April 30, 1998 (referred to as "the 1998
transition period"), which were the basis of a Transition Report filed with the
SEC on Form 20-F.
RESULTS OF OPERATIONS
On September 24, 1998, the Company merged with INTERSOLV, Inc in a
transaction accounted for using the pooling-of-interests method. Accordingly the
Company's financial statements for all periods prior to the merger have been
restated to reflect the merger. The consolidated financial statements at January
31, 1998, and for the years ended January 31, 1998 and 1997, have been restated
to include the financial results of INTERSOLV, Inc at April 30, 1998, and for
the years ended April 30, 1998 and 1997, respectively. Also during fiscal 1999,
the Company acquired two of its foreign distributors in transactions accounted
for as purchases. For further information on these transactions, see the
sections entitled "Business combinations" on pages 22 to 23.
MERANT reported a net loss for fiscal 1999 of $28.5 million or $1.00 per
American Depositary Share ("ADS") as compared to net income of $1.5 million or
$0.05 per ADS diluted in the 1998 transition period, net income of $20.1 million
or $0.70 per ADS diluted in fiscal 1998 and a net loss of $35.9 million or $1.35
per ADS in fiscal 1997. These results include non-recurring charges of $49.7
million, $17.3 million, $17.5 million and $37.6 million in 1999, the 1998
transition period, 1998 and 1997, respectively.
The table below sets forth results of operations as a percentage of net
revenue for fiscal 1999, the 1998 transition period and fiscal 1998 and 1997 and
also shows the percentage change between the three fiscal years.
PERCENTAGE OF NET REVENUE YEAR TO YEAR
--------------------------------------------------- PERCENTAGE CHANGE
THREE MONTHS YEAR ENDED YEAR ENDED -------------------------
YEAR ENDED ENDED JANUARY JANUARY FISCAL 1998 FISCAL 1997
APRIL 30, APRIL 30, 31, 31, TO TO
1999 1998 1998 1997 FISCAL 1999 FISCAL 1998
---------- ------------ ---------- ---------- ----------- -----------
NET REVENUE
Product revenue............. 52% 57% 55% 57% -3% 22%
Maintenance revenue......... 26% 23% 24% 27% 12% 17%
Service revenue............. 22% 20% 21% 16% 8% 67%
---- ---- ---- ---- ----- -----
TOTAL NET REVENUE........ 100% 100% 100% 100% 3% 28%
---- ---- ---- ---- ----- -----
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PERCENTAGE OF NET REVENUE YEAR TO YEAR
--------------------------------------------------- PERCENTAGE CHANGE
THREE MONTHS YEAR ENDED YEAR ENDED -------------------------
YEAR ENDED ENDED JANUARY JANUARY FISCAL 1998 FISCAL 1997
APRIL 30, APRIL 30, 31, 31, TO TO
1999 1998 1998 1997 FISCAL 1999 FISCAL 1998
---------- ------------ ---------- ---------- ----------- -----------
COST OF REVENUE
Cost of product revenue..... 4% 3% 4% 4% 9% 8%
Cost of maintenance
revenue.................. 7% 5% 6% 8% 20% -11%
Cost of service revenue..... 18% 17% 17% 11% 9% 97%
---- ---- ---- ---- ----- -----
TOTAL COST OF REVENUE.... 29% 25% 27% 24% 11% 43%
---- ---- ---- ---- ----- -----
Gross profit.................. 71% 75% 73% 76% 0% 23%
---- ---- ---- ---- ----- -----
OPERATING EXPENSES
Research and development.... 16% 14% 17% 23% -2% -5%
Sales and marketing......... 42% 37% 37% 45% 16% 6%
General and
administrative........... 9% 7% 7% 8% 27% 18%
Non-recurring charges....... 13% 16% 5% 13% 184% -54%
---- ---- ---- ---- ----- -----
TOTAL OPERATING
EXPENSES............... 80% 74% 66% 89% 25% -4%
---- ---- ---- ---- ----- -----
(LOSS) INCOME FROM
OPERATIONS.................. -9% 1% 7% -12% -226% -174%
Interest income, net.......... 2% 1% 1% 1% 61% 34%
---- ---- ---- ---- ----- -----
(LOSS) INCOME BEFORE INCOME
TAXES....................... -7% 2% 8% -11% -189% -193%
Income taxes.................. -1% -1% -3% -1% -82% 185%
---- ---- ---- ---- ----- -----
NET (LOSS) INCOME............. -8% 1% 6% -13% -242% -156%
---- ---- ---- ---- ----- -----
Net revenue
The Company's products are generally licensed to end users pursuant to
license agreements.
The Company also offers its customers a broad range of services, including
maintenance, support, training and consulting. Maintenance services consist
primarily of enhancements and upgrades to products as well as telephone support
concerning the use of the Company's products. Training and consulting services
are focused on assisting customers in using the Company's products along with
assisting customers in application development needs.
The Company's product and service offerings are focused in four primary
solution areas: Application Development Management ("ADM", or MERANT PVCS
series), Enterprise Data Connectivity ("EDC", or MERANT DataDirect series),
Application Creation and Transformation ("ACT", or MERANT Micro Focus series)
and Enterprise Consulting Solutions ("ECS", or MERANT Consulting). These four
solution areas are collectively referred to as the Company's key products or
solution areas.
Revenue by Solution Area
Total net revenue for fiscal 1999 was $374.2 million, which is a 3%
increase over fiscal 1998.
ACT and ADM revenues grew due to increased license and service fee
revenues, reflecting continuing increased demand for these products. ECS revenue
growth was constant reflecting increased competition for products and services
to support Year 2000 renewal projects. These increases were partially offset by
a decrease in revenues for EDC, which declined 5% primarily due to decreased
revenue in the Asia-Pacific area caused by a downturn in the general business
climate partially offset by revenue increases in other geographic areas.
Total revenue for fiscal 1998 was $362.9 million, which was a 28% increase
over fiscal 1997. Growth was driven by increased revenue for ACT and ADM, which
grew 26% and 32%, respectively. Revenues for these solution areas grew due to
increased license and service fee revenue, reflecting increased demand for these
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products. The increase in ACT in fiscal 1998 reflected initial worldwide sales
of the Company's Softfactory 2000 and NetExpress products, increased UNIX
product sales and revenue from consulting. ECS also grew rapidly, due to
increased demand for transformation services focused on Year 2000 remediation.
Product revenue
Product revenue decreased by $5.6 million or 3% to $193.1 million in fiscal
1999 relative to fiscal 1998, having previously increased by $36.4 million or
22% to $198.8 million in fiscal 1998 relative to 1997. The decrease in revenue
in 1999 was primarily due to the weakness in North American revenue caused by a
decrease in the demand for the Company's Year 2000 products, along with
integration issues related to the INTERSOLV acquisition. The Company's North
American Year 2000 business continued to be affected by declining market prices
and declining demand for inventory and remediation product and services
offerings. The decrease in ACT product revenue was somewhat offset by the
increase in ADM product revenue.
The increase in revenue in 1998 reflected higher sales of ACT's Year 2000
and ADM products. EDC product revenue was down slightly, due to lower revenues
in the Asia-Pacific area, and the Company exited from certain non-strategic
areas.
Maintenance revenue
Maintenance revenue increased by $10.8 million or 12% to $98.9 million in
fiscal 1999 relative to fiscal 1998, and by $12.5 million or 17% to $88.0
million in fiscal 1998 relative to 1997. The increases in fiscal 1999 and 1998
resulted from a combination of growth in the installed customer base and renewal
of existing maintenance contracts for all key products.
Service revenue
Service revenue increased by $6.1 million or 8% to $82.2 million in fiscal
1999 relative to fiscal 1998, and by $30.4 million or 67% to $76.1 million in
fiscal 1998 relative to 1997. Higher demand for consulting and training services
in all solution areas in 1999 more than offset the decrease experienced in Year
2000 transformation projects. The increase in 1998 resulted mainly from
increased demand for Year 2000 renewal services and the acquisition of the
consulting organization of Millennium UK Limited.
North American revenue
In fiscal 1999, North America revenue declined 5% to $223.0 million. In
fiscal 1998 North American revenue increased 30% to $235.5 million. In fiscal
1999, the Company experienced a decline for ACT products. In fiscal 1998 the
Company had experienced growth in all key solution areas.
International revenue
In fiscal 1999, international revenue was $151.2 million or 20% greater
than fiscal 1998. The increase reflects growth within European markets including
the acquisition of certain distributors.
Cost of revenue
Cost of product revenue is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media and printing of manuals), packaging and distribution costs, and
royalties to third party software developers for the licensing of certain add-on
software products. Such costs increased by $1.1 million or 9% to $14.4 million
in fiscal 1999 relative to fiscal 1998, and by $1.0 million or 8% to $13.3
million in fiscal 1998 relative to 1997 and represented 7%, 7% and 8% of product
revenue in fiscal years 1999, 1998 and 1997, respectively.
Cost of maintenance revenue is comprised principally of compensation for
technical support personnel. Such costs increased by 20% to $24.4 million in
fiscal 1999 relative to fiscal 1998, having previously decreased by 11% to $20.5
million in fiscal 1998. Cost of maintenance revenue represented 25%, 23% and 30%
of maintenance revenue in fiscal years 1999, 1998 and 1997, respectively. The
cost increases in 1999 reflect the
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growth in maintenance revenue as well as the addition of personnel to the
telephone support functions, to support the growing customer base. The cost
decreases in fiscal 1998 were the result of lower costs resulting from the
restructuring of operations in 1997.
Cost of service revenue is comprised principally of compensation and
expenses of training and consulting personnel. Such costs increased by $5.7
million or 9% to $68.1 million in fiscal 1999 relative to fiscal 1998, and by
$30.7 million or 97% to $62.4 million in fiscal 1998 relative to 1997, and
represented 83%, 82% and 69% of service revenue in fiscal years 1999, 1998 and
1997, respectively. The increases in amount and as a percentage of revenue
during this three year period were primarily the result of increased investment
in personnel needed to support the growing demand for consulting and training
services in all solution areas. The acquisition of Millennium U.K. Limited, a
consulting organization, also contributed to the increase.
Research and development
Research and development costs consist principally of compensation for
software developers and related costs incurred, after adjusting for the
proportion of such costs capitalized (in accordance with Statement of Financial
Accounting Standard No. 86) and the amortization of previously capitalized
software costs. Research and development spending supports the development and
enhancement of new and existing products and is consistent with the Company's
strategy of investing heavily to improve and expand its product lines.
Expenditure on internal software research and development decreased by $2.6
million or 5% to $53.6 million in fiscal 1999 relative to fiscal 1998, and by
$4.5 million or 7% to $56.2 million in fiscal 1998 relative to fiscal 1997 and
represented 14%, 15% and 21% of net revenue in fiscal years 1999, 1998 and 1997,
respectively. The decreases in research and development expenditure in fiscal
1998 reflect a lower relative cost structure following the restructuring of
operations in 1997.
In fiscal 1999, 1998 and 1997, $8.5 million, $10.3 million, and $17.7
million, representing 16%, 18% and 29%, respectively, of these costs, were
capitalized as software product assets, and will be amortized over their
estimated economic lives of three or four years. Amortization in fiscal 1999,
1998 and 1997, excluding non-recurring items, amounted to $14.8 million, $14.9
million, and $21.4 million, resulting in a net charge to research and
development costs in those years of $6.2 million, $4.6 million, and $3.7
million, respectively.
The Company believes that ongoing development of new products and features
is required to maintain and enhance its competitive position. Accordingly, while
the Company will continue to control expenses where possible, the Company
anticipates that aggregate research and development expenses will increase over
time, and may not be directly related to the level of net revenue realized in
future quarters.
Sales and marketing
Sales and marketing costs include compensation, travel and facility costs
for sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows. Such costs increased by $21.0 million or 16% to
$155.7 million in fiscal 1999 relative to fiscal 1998, and by $8.0 million or 6%
to $134.7 million in fiscal 1998 relative to 1997, and represented 42%, 37% and
45% of net revenue in fiscal years 1999, 1998 and 1997, respectively. The
increase in sales and marketing costs in fiscal 1999 and 1998 reflected sales
force expansion, higher commissions and higher advertising and marketing costs,
including those associated with the new corporate name and product launches. The
increase in costs as percentage of revenue in fiscal 1999 was the result of
lower than expected revenue in the North American market relative to our
investment in the sales and marketing organizations. The decrease in costs as a
percentage of revenue in fiscal 1998 was the result of the Company's ability to
effectively focus its sales and marketing efforts on its primary solution areas
combined with savings realized in certain non-strategic areas.
The Company believes that continued investments in sales, marketing,
customer support and promotional activities are essential to maintaining its
competitive position. The Company is expanding its sales and support staffs and,
accordingly, anticipates that sales and marketing expenses will be higher in
future periods, but decrease from fiscal 1999 levels as a percentage of net
revenue.
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General and administrative
General and administrative costs include the Company's group management,
finance, legal and human resources operations. Such costs increased by $7.4
million or 27% to $35.2 million in fiscal 1999 relative to fiscal 1998, and by
$4.3 million or 18% to $27.7 million in fiscal 1998 relative to 1997, and
represented 9%, 7% and 8% of revenue in fiscal years 1999, 1998 and 1997,
respectively. The increase in 1999 was due to higher costs resulting from the
merger of INTERSOLV along with continued investment in infrastructure and
systems and higher goodwill amortization from acquisitions accounted for under
purchase accounting. Fiscal 1998 costs increased to support our rapidly
expanding business along with additional goodwill charges resulting from recent
acquisitions.
The Company anticipates that general and administrative expenses will
increase in future quarters, but decrease as a percentage of net revenue.
Non-recurring charges
The Company has recorded non-recurring charges of $49.7 million, $17.5
million and $37.6 million in fiscal 1999, 1998 and 1997, respectively.
In the second quarter of fiscal 1999, the Company recorded a charge of
$49.7 million in respect of the merger with INTERSOLV, and the subsequent
restructuring of the combined businesses. Aggregate direct transaction costs of
$24.5 million represented charges for investment bankers, employee contractual
obligations, stamp duties and listing fees associated with the issuance and
listing of new shares on the London Stock Exchange and other professional fees.
In addition, a charge of $25.2 million was recorded to reflect costs associated
with integration efforts. This charge was primarily comprised of the write-off
of redundant or impaired assets and severance costs.
In fiscal 1998, the Company recognized non-recurring costs of $17.5
million, net. This charge included a $15.7 million write off of purchased
research and development costs arising from the SQL acquisition, with the
balance principally related to costs of $2.0 million which arose when INTERSOLV
exited selected non-strategic product areas.
In fiscal 1997, the Company incurred non-recurring costs of $37.6 million.
As a result of a comprehensive business strategy review of its primary market
opportunities, INTERSOLV recorded a charge of $28.9 million to write down
capitalized and purchased software and certain related intangible assets to
their net realizable values. In addition, the Company incurred costs totalling
$8.7 million in connection with a reduction in the Company's workforce of
approximately 95 people, facility closures and consolidations, and asset
write-downs.
Interest income
Interest earned on cash short-term investments, net of interest expense,
increased by $2.4 million or 61% to $6.3 million in fiscal 1999 relative to
fiscal 1998, and by $1.0 million or 34% to $3.9 million in fiscal 1998 relative
to 1997. The increases in fiscal 1999 and 1998 represented the impact of higher
cash balances.
The Company has a hedging program to minimize foreign exchange gains or
losses, where possible, from recorded foreign-currency denominated assets and
liabilities. This program involves the use of borrowings and forward foreign
exchange contracts in certain European currencies, including the euro. The
Company does not hedge anticipated foreign currency revenues and expenses not
yet incurred.
Income taxes
The Company's reported tax rates in fiscal 1999, 1998 and 1997 were -7%,
33% and -11%, respectively, which compare to U.K. statutory rates applicable to
the Company of 31%, 31% and 33%, respectively.
The tax rate in both 1999 and 1997 was significantly affected by
non-recurring charges, certain of which were not deductible for tax purposes.
The differences between the reported tax rates and the U.K. statutory rates
principally reflect the impact of permanent differences between accounting
profits and taxable profits,
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primarily the difference in the treatment of amortisation of goodwill. The
Company's tax rate is also affected by the distribution of taxable profits and
losses among the tax jurisdictions in which the Company operates.
An analysis of the charge for income taxes, including an analysis of
differences between the effective rate and the U.K. statutory rates, is given in
note 11 to the consolidated financial statements on page 47.
The income tax returns of certain of the Company's U.S. subsidiaries for
fiscal years ended January 31, 1993 through 1997 are under examination by the
Internal Revenue Service, which has proposed increases to the amount of U.S.
income taxes due in respect of those fiscal years. Any adjustments that may
result from this examination are not expected to have a material adverse impact
on the Company's consolidated operating results or its financial position.
Business combinations
During fiscal 1999, MERANT completed three acquisitions.
On May 15, 1998, the company acquired all of the outstanding stock of its
Italian distributor, Micro Focus Italia, s.r.l., for total consideration of
approximately $4.6 million. On August 13, 1998, the Company acquired all of the
outstanding stock of its Australian distributor, Advanced Software Engineering
Pty Ltd., for total consideration of approximately $2.5 million. These
transactions have been accounted for using the purchase method. Accordingly, the
excess of the purchase price over the respective estimated fair value of the net
tangible assets of each company, which amounted to $7.3 million in the
aggregate, was allocated to goodwill, and is being amortized over its economic
life which is estimated to be four years.
On September 24, 1998, the Company completed the merger with INTERSOLV in a
transaction accounted for using the pooling-of-interests method. Under the terms
of the agreement, each common share of INTERSOLV was exchanged for 0.55 MERANT
American Depositary Shares ("ADSs"). In addition, each outstanding option or
right to purchase or acquire shares of INTERSOLV common stock was assumed by the
Company and became an option or right to purchase or acquire MERANT ADSs, with
appropriate adjustments to the price and number of shares based on the exchange
ratio of 0.55 ADSs per INTERSOLV share. The merger was structured as a tax-free
reorganization under U.S. tax law. The Company issued approximately 12.6 million
new MERANT ADSs (representing approximately 63.1 million new MERANT ordinary
shares) in exchange for INTERSOLV's common stock and share equivalents
outstanding, which at the time of the completion of the transaction represented
approximately 46% of MERANT's share capital on a fully-diluted basis. Prior to
the merger, INTERSOLV was a Rockville, Maryland-based public corporation listed
on the Nasdaq National Market. INTERSOLV was a provider of software solutions
that facilitate the development, delivery and deployment of business information
systems. INTERSOLV's products and services were focused primarily in the areas
of application development management, enterprise data connectivity and
enterprise application renewal.
During the three-month fiscal period ended April 30, 1998, INTERSOLV
acquired all of the outstanding stock of SQL Software Ltd in exchange for
1,251,450 common shares in INTERSOLV (equivalent to 3,441,488 ordinary shares in
the Company). The transaction was accounted for using the purchase method. The
cost of the acquisition was $19.2 million, of which $15.7 million was allocated
to purchased research and development and written off on completion of the
acquisition since no technological feasibility or alternative future use could
be demonstrated. Additionally, $2.4 million was allocated to goodwill and other
intangibles, and is being amortized over its economic life which is estimated to
be five years.
In fiscal 1998, the Company made two acquisitions.
On January 20, 1998, the Company acquired all of the outstanding stock of
XDB Systems, Inc. ("XDB") in exchange for 1,891,975 ordinary shares in the
Company. XDB, a privately-held corporation based in Columbia, Maryland, was a
provider of DB2 database development, maintenance and connectivity solutions.
The combination was accounted for using the pooling-of-interests method.
Also in fiscal 1998, the Company acquired all of the outstanding stock of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, in
exchange for 745,710 ordinary shares in the Company
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and a cash payment of $3.2 million. Millennium provided consulting and project
management services and had specialized expertise in the estimating, planning
and management of Year 2000 compliance projects. The transaction was accounted
for using the purchase method. Accordingly, the excess of the purchase price
over the estimated fair value of the net tangible assets, which amounted to $6.7
million, was allocated to goodwill, and is being amortised over its economic
life, which is primarily estimated to be three years.
Further informations on these transactions is given in note 2 to the
consolidated financial statements on page 40.
Year 2000 consideration.
The Year 2000 problem is the result of the widespread practice since the
early days of computing of using only two digits to refer to a year (such as
"98" for "1998") instead of four digits in computer systems. When the Year 2000
arrives or the computer system refers to dates after December 31, 1999, such
systems will interpret the two digits "00" as "1900" as opposed to "2000".
Failure to address this problem could cause results ranging from system failures
to erroneous calculations in date-dependent operations for dates falling after
December 31, 1999. The Company has instituted various projects to become Year
2000 ready. "Year 2000 ready" as used herein means that the performance or
functionality of the Company's internal systems will not be significantly
affected by the dates prior to, during and after the Year 2000.
State of Readiness
The Company has developed and implemented an enterprise-wide plan to
analyze and address potential Year 2000 issues affecting its internal systems,
its interaction with third party vendors and suppliers, and its products and
services.
The Company has established a Year 2000 Project Team to implement a
comprehensive four-phase Year 2000 readiness plan addressing the Year 2000
readiness of the Company's internal systems. The Year 2000 readiness plan is
comprised of four phases (inventory, analysis, remediation and validation
phases). The inventory, analysis and remediation stages of the Year 2000
readiness plan have been substantially completed in all material respects with
respect to the Company's material internal systems, and the Company expects to
substantially complete the validation phase of the plan in all material respects
by August 31, 1999. The Year 2000 readiness plan covers IT systems (desktop,
laptop, servers, routers, hubs, switches, and remote access systems, operating
systems, software and critical business systems), non-IT embedded systems
(telephone, voice messaging, teleconferencing, data services and equipment, fax,
copiers and similar equipment), facilities (elevators, security systems, card
access systems and similar systems), and the Company's vendors and suppliers. As
part of the inventory phase, the Company sought confirmation from its material
suppliers on the current Year 2000 readiness of their systems and/or their
intended time schedule for achieving Year 2000 readiness. During the remainder
of calendar 1999, the Company will also be completing, reviewing and updating
its contingency and disaster recovery plans and preparing a detailed action plan
for the crossover of the Company into the next millennium.
With respect to its software products, each of the Company's product
business units have completed a Year 2000 assessment of its currently offered
products. In preparing for the Year 2000 date change, the Company has adopted
the Year 2000 compliance standard published by the British Standards Institute
(BSI) -- BSI DISC PD2000-1 "A Definition of Year 2000 Conformity Requirements."
As a result of this assessment, the Company believes that the vast majority of
its currently offered products are Year 2000 compliant, and expects virtually
all of its remaining currently offed products to become compliant during
calendar 1999 through new releases. In any event, the Company expects that all
the then current versions of its offered products will be Year 2000 compliant
before the end of calendar 1999. Because Year 2000 compliance is generally
integrated into its normal product development activities, the Company has not
incurred and does not expect to incur any significant incremental expenses in
addressing this issue in its product lines. The Company believes that a small
number of customers who receive product support from the Company are operating
product versions that may not be Year 2000 compliant or products that the
Company has replaced or intends to replace with comparable Year 2000 compliant
products. The Company believes that the vast
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majority of such customers are migrating and will continue to migrate to
compliant versions and products through new releases, which the Company is
strongly encouraging. In addition, certain former customers may be operating
non-compliant versions of products in respect of which the Company's agreed-upon
product support and warranty periods have expired. The Company has not
undertaken, and does not plan to undertake in the future, an assessment of
whether these former customers are taking appropriate steps to address any
related Year 2000 issues.
The Company does not expect customers who license or migrate to Year 2000
compliant versions of its products to experience any material Year 2000 failures
caused by such products. In addition, the Company believes that its licenses and
other agreements contain customary and appropriate limitations on the Company's
obligations with respect to any Year 2000 failures that may be caused by its
current or former products. However, there can be no assurance that the
Company's expectations and beliefs as to these matters will prove to be
accurate. Moreover, the Company's products are used in IT systems containing
third-party hardware and software, some of which may not be Year 2000 compliant.
Many of the Company's customers use legacy computer systems that are expected to
be particularly susceptible to Year 2000 compliance issues. Various commentators
have predicted that a significant amount of litigation may arise out of Year
2000 compliance issues. While the Company has not been subject to any Year 2000
product claims or lawsuits to date, there can be no assurance that customers or
former customers will not bring claims or lawsuits against the Company seeking
compensation for losses associated with Year 2000-related failures. A material
adverse outcome in a Year 2000 claim or lawsuit could have a material adverse
effect on the Company's business, financial condition and results of operations.
A small number of the products the Company sells are licensed from third
parties. Although the current versions of these products have generally been
warranted to the Company as being Year 2000 compliant, these products have
generally not been subjected to the same extensive Company testing as those
products developed or acquired by the Company. The Company is therefore working
with these third party suppliers to obtain assurance of Year 2000 compliance.
The Company has designated its website as the Company's "Year 2000 Internet
Website" under the terms of the Year 2000 Information and Readiness Disclosure
Act (the "Act") (S.2392). The information provided on past and present pages on
this website regarding the Year 2000 compliance of Company products has been
designated as "Year 2000 Readiness Disclosures." The pages on this website have
been and will continue to be the Company's primary means for communicating to
customers regarding the Year 2000 compliance of its products.
Demand for Year 2000 Remediation Products and Services
The Company anticipates that demand in the Year 2000 product and service
market will decline, perhaps rapidly, in anticipation of or following the Year
2000, and the demand for the Company's Year 2000 compliance products and
services may also decline significantly as a result of new technologies,
competition or other factors. In the quarter ended October 31, 1998, the
Company's Year 2000 business was affected by customers moving to the later
stages of their remediation processes, for which the Company did not have the
appropriate products generally available until November, 1998. If these factors
were to continue, the Company's license revenue and professional service fees
could be materially and adversely affected.
Costs and Risks Associated with Year 2000 Issues; Contingency Plans
The Company currently does not anticipate that it will incur material
operating expenses or be required to invest heavily in internal systems
improvements as a result of Year 2000 readiness issues. In addition, the Company
has not incurred and does not currently expect to incur any significant
incremental expenses in addressing this issue in its product and services. Total
expenditures, excluding personnel costs of existing staff, related to the Year
2000 readiness of the Company's internal systems is not expected to be material.
However, there can be no assurance that the Company will not experience
significant additional expenses for unforeseen Year 2000 issues, including those
out of the reasonable control of the Company.
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Although the Company believes that its Year 2000 readiness efforts are
designed to appropriately identify and address those Year 2000 issues that are
within the Company's control, there can be no assurance that the Company's
efforts will be fully effective or that Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition or
results of operations. The novelty and complexity of the issues presented and
the Company's dependence on the preparedness of third parties are among the
factors that could cause the Company's efforts to be less than fully effective.
Moreover, Year 2000 issues present many risks that are simply beyond the
Company's control, such as the potential effects of Year 2000 issues on the
economy in general and on the Company's business partners and customers in
particular. The Company intends to continue to evaluate both existing and newly
identified Year 2000 risks and to develop and implement such further responsive
measures as it deems appropriate.
The Company is developing a contingency plan and a disaster recovery plan,
as well as an action plan for the crossover of the Company into the next
millennium. Such plans seek to minimize the impact of the Year 2000 problem on
the Company's business, financial condition and results of operations. During
the remainder of calendar 1999, the Company will be reviewing and updating such
plans.
Euro considerations
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the euro as their legal currency. Beginning on such date,
the participating countries established fixed euro conversion rates between
their existing sovereign currencies and the euro. The euro now trades on
currency exchanges and is available for non-cash transactions. As of May 1,
1999, the Company's internal systems have the ability to price and invoice
customers in the euro. The Company is also engaging in foreign exchange and
hedging activities in the euro. The Company will continue to modify the internal
systems that will be affected by this conversion during fiscal 2000, and does
not expect the costs of further system modifications to be material. There can
be no assurance, however, that the Company will be able to complete such
modifications to comply with euro requirements, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company will continue to evaluate the impact of the introduction
of the euro on its foreign exchange and hedging activities, functional currency
designations, and pricing strategies in the new economic environment. In
addition, the Company faces risks to the extent that banks and vendors upon whom
the Company relies and their suppliers are unable to make appropriate
modifications to support the Company's operations with respect to euro
transactions. While the Company will continue to evaluate the impact of the
euro, management does not believe its introduction will have a material adverse
effect upon the Company's business, financial condition or results of
operations.
Risk Factors that may influence future operating results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. This section of
the discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
The factors set forth below as well as statements made elsewhere in the
Company's Annual Report contain certain forward-looking statements that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
Company's actual results, performance or achievements in the remainder of fiscal
2000 and beyond could differ materially from those expressed in, or implied by,
any such forward-looking statements.
Factors that could cause or contribute to such material differences
include, but are not limited to, those discussed in this section below, as well
as those discussed elsewhere in the Company's Annual Report and these financial
statements. The Company undertakes no obligation to release publicly any updates
or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of the Company's Annual Report. For more
information regarding forward-looking statements, see Further Information for
Shareholders -- Special Note on Forward-Looking Statements on page 106 of this
Report.
Year 2000 Spending Policies. Many of our customers and potential customers
could potentially implement policies that prohibit or strongly discourage making
changes or additions to their internal computer
25
50
systems until after January 1, 2000. If companies implement such a policy, we
could experience lower revenues if potential customers who might otherwise
purchase our products or services delay purchases until after January 1, 2000 in
an effort to stabilize their internal computer systems in order to cope with the
Year 2000 problem or because their information technology budgets have been
diverted to address Year 2000 issues. If our potential customers delay
purchasing our products and services in preparation for Year 2000 problem, our
business could be seriously harmed.
Integration of INTERSOLV; Synergies. In September 1998, the Company
acquired all the share capital of INTERSOLV. The Company acquired INTERSOLV with
the expectation that the acquisition will result in long-term strategic
benefits. Realization of these anticipated benefits depends in part on whether
the operations and administration of the companies are fully integrated in an
efficient and effective manner. There can be no assurance that this will occur.
The combined company's integration efforts have yet to be fully completed and
are still ongoing. The successful integration of MERANT and INTERSOLV will
require, among other things, integration of the product offerings of the
companies, sales and marketing and research and development efforts, the
cooperation and coordination of the business managers of the two companies, and
the integration of globally dispersed operations. It is possible that this
integration will not be accomplished smoothly or successfully, and that efforts
to achieve integration may require more time, expense and management attention
than anticipated. The diversion of management's attention from day-to-day
operations and any difficulties encountered in the integration process could
have a material adverse effect on the Company's business, financial condition
and results of operations. If the integration of the Company's and INTERSOLV's
operations is not successful, if the combined companies do not achieve the
operational efficiencies and other business synergies that are anticipated or if
those synergies are not achieved as quickly as may be expected by financial
analysts or at the level expected by financial analysts, or if the effect of the
merger on earnings per share is not in line with the expectation of financial
analysts, the market price of the MERANT ordinary shares or the MERANT ADSs
could be significantly and adversely affected.
Fluctuations in Operating Results; Absence of Significant Backlog. The
Company's future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders and the lengthy sales cycle,
product life cycles, the ability of the Company to introduce and market new and
enhanced versions of the Company's products on a timely basis, the introduction
and acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of new or enhanced
products or technologies, the timing of product introductions or enhancements by
the Company or its competitors, technological changes in the software industry,
changes in the mix of distribution channels through which the Company's products
are offered, purchasing patterns of distributors and retailers, including
customer budgeting cycles, the quality of products sold, price and other
competitive conditions in the industry, changes in the Company's level of
operating expenses, changes in the Company's sales incentive plans, the
cancellation of licenses during the warranty period, non-renewal of maintenance
agreements, the effects of extended payment terms (particularly for
international customers), economic conditions generally or in various geographic
areas, and other factors discussed in this section.
A relatively high percentage of the Company's operating expenses is fixed
over the short term and if anticipated revenue for a fiscal quarter does not
occur or is delayed, the operating results for that quarter will be immediately
and adversely affected. The Company historically has operated with little
product backlog, because its products are generally shipped as orders are
received. As a result, revenue of the Company in any quarter will depend on the
volume and timing of, and the ability to fill, orders received in that quarter.
In addition, a substantial portion of the Company's revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter.
Seasonality of Operating Results. The Company's revenue also is affected
by seasonal fluctuations resulting from lower sales that typically occur during
the summer months in Europe and other parts of the world. In addition, the
Company has historically experienced lower revenue for the first quarter of a
fiscal year than in the fourth quarter of the prior fiscal year. The Company
typically has recognized a high proportion of its quarterly revenue during the
last month of a fiscal quarter and significant fluctuations in new order revenue
26
51
can occur due to the timing of customer orders. Quarterly results therefore can
vary to the extent that sales for a quarter are delayed, particularly since a
relatively high proportion of the Company's expenses do not vary with revenue.
Due to all of the foregoing factors, it is possible that in some future quarters
the Company's operating results will be below the expectations of stock market
analysts and investors and that the Company's share price would likely be
materially adversely affected.
Product Concentration. A large portion of the Company's total net revenue
is derived from products and related services for mainframe application
development in the COBOL language and COBOL compilers running on workstations
and personal computers. The Company expects that a substantial portion of its
total net revenue will be derived from such products and services in the future.
As a result, the Company's future operating results depend upon continued market
acceptance and use of the COBOL language. Any decline in the demand for or
market acceptance or use of the COBOL language or mainframes as a result of
competition, technological change or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Year 2000 Business and Compliance Issues. Information concerning the
Company's state of Year 2000 readiness, the demand for its Year 2000 remediation
products and services, the costs associated with its Year 2000 issues and its
contingency plans, and the Company's state of euro readiness is incorporated
herein by reference to the information included above in this Annual Report
Detail under the captions entitled "Year 2000 considerations" and "Euro
considerations" in the "Management's Discussion and Analysis of Results of
Operations and Financial Condition" section.
Rapid Technological Change; Dependence on New Products. The Company is in
a market that is subject to rapid technological change. The Company must
continually adapt to that change by improving its products and introducing new
products, technologies and services. The growth and financial performance of the
Company will depend in part on its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market enhancements of existing products and new products depends in part on
its ability to attract and retain qualified employees. In the past, the Company
has experienced delays and increased expenses in developing certain new
products. Any failure by the Company to anticipate or respond adequately to
changes in technology and market conditions, to complete product development and
introduce new products on a timely basis and with an adequate level of
performance and functionality, or to attract and retain qualified employees,
could materially adversely affect the Company's business, financial condition
and results of operations.
Competition. The markets in which the Company competes are characterized
by rapid technological change and aggressive competition. The Company expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets with similar
or substitute solutions that may be less costly or provide better performance or
functionality than the Company's products. Some of the Company's current and
prospective competitors in its product and service markets have greater
financial, marketing or technical resources than the Company and may be able to
adapt more quickly to new or emerging technologies, or devote greater resources
to the promotion and sale of their products than can the Company. There can be
no assurance that other companies will not develop competitive products in the
future. In addition, the software industry is characterized generally by low
barriers to entry, as a result of which new competitors possessing
technological, marketing or other competitive advantages may emerge and rapidly
acquire market share. Furthermore, there can be no assurance that the Company
will be able to compete effectively in the future in the professional services
market.
Susceptibility to General Economic Conditions. The Company's revenue and
results of operations are subject to fluctuations in the general economic
conditions in the various areas of the world in which it does business. The
risks inherent in conducting international business generally include exposure
to exchange rate fluctuations (see the section entitled "Exchange rate
fluctuations" below), longer payment cycles, greater difficulties in accounts
receivable collection and enforcing agreements, tariffs and other restrictions
on foreign trade, U.S. export requirements, economic and political instability,
withholding and other tax consequences, restrictions on repatriation of
earnings, and the burdens of complying with a wide variety of foreign laws. In
27
52
addition, the laws of certain foreign countries in which the Company's products
may be marketed may not protect the Company's intellectual property rights to
the same extent, as do the laws of the United States and Europe.
There can be no assurance that the factors described above will not have an
adverse effect on the Company's future international revenue
Dependence on Key Personnel. Several of the senior management personnel of
the Company are relatively new to the Company, including the Company's Chief
Executive Officer and Chief Financial Officer, and the Company's success will
depend in part on the successful assimilation and performance of these
individuals. Competition for qualified personnel in the software industry is
intense, and there can be no assurance that the Company will be able to attract
and retain a sufficient number of qualified personnel to conduct its business in
the future. The Company's success depends to a significant degree upon the
continued contributions of its key management, marketing, product development,
professional services and operational personnel, including key personnel of
acquired companies. The Company will not have employment agreements with most of
its key personnel, nor does it maintain key person life insurance on any of
these persons.
Management of Growth. Both the Company and INTERSOLV have recently
experienced a period of rapid growth in net revenue. This growth has placed a
significant strain on the financial, management, operational and other resources
of the combined companies, and if it continues is expected to continue to place
a significant strain on the Company's financial, management, operational and
other resources. There can be no assurance that the Company's management
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations.
Volatility of Stock Price. The market price of the Company's securities
has experienced significant price volatility, particularly since the
announcement of the Company's proposed acquisition of INTERSOLV in June 1998,
and such volatility may occur in the future. Factors such as actual or
anticipated fluctuations in the Company's operating results, changes in
financial estimates by securities analysts, announcements of technological
innovations, new products or new contracts by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the software and other technology industries, adoption
of new accounting standards affecting the software industry, general market
conditions and other factors may have a significant impact on the market price
of the Company's securities. Furthermore, the stock market has experienced
extreme volatility that has particularly affected the market prices of equity
securities of many high technology companies. These market fluctuations, as well
as general economic, political and market conditions may adversely affect the
market price of the Company's securities.
Recent and Future Acquisitions. The challenges of integrating the
organizations and operations of the Company and INTERSOLV have been compounded
by ongoing efforts associated with the integration of recent acquisitions by
both companies, including the acquisitions by the Company of Millennium UK
Limited in April 1997, XDB Systems, Inc. in January 1998, Micro Focus Italia
S.r.L. in May 1998 and Advanced Software Engineering Pty. Ltd. in August 1998
and the acquisition by INTERSOLV of SQL Software, Ltd. in March 1998. The
Company also acquired Essential Software, Inc. (dba The Marathon Group) in
August 1999. The Company is still in the process of integrating the operations
acquired in these transactions with its own. There can be no assurance that the
anticipated benefits of recently concluded business combinations will be
realized. In addition, these acquisitions have required significant additional
management resources and attention. The Company expects to continue growing its
business through acquisitions. If the Company is unsuccessful in integrating and
managing the recently acquired businesses or other businesses it may acquire in
the future, the Company's business, financial condition and results of
operations could be adversely affected in future periods.
Enforceability of U.S. Judgments. The Company is a public limited company
organized under the laws of England and Wales. Judgments of U.S. courts,
including judgments against the Company, predicated on the civil liability
provisions of the federal securities laws of the United States, may not be
enforceable in English courts.
28
53
Exchange rate fluctuations
MERANT prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates.
Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of the Company's net revenue arises in U.S. dollars
(approximately 60% in 1999), whereas its costs are incurred approximately
equally in U.S. dollars and other currencies, predominately G.B. pounds.
Consequently fluctuations in exchange rates, particularly between the U.S.
dollar and the G.B. pound, may have a significant impact on the Company's
operating results, notably when expressed in G.B. pounds.
In 1999, 1998 and 1997, fluctuations between the U.S. dollar and the G.B.
pound have not been significant, and net exchange rate gains or losses on
operational transactions have been immaterial.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, operating activities generated $18.3 million in cash.
Investing activities used $16.4 million, primarily due to investment of $8.5
million in capitalized and purchased software and $6.4 million in fixed assets.
Financing activities in the form of share option exercises and purchases
under the employee stock purchase plan generated $1.9 million which offset the
$3.1 million net repayment of various debt obligations. Overall cash increased
$0.1 million.
In fiscal 1998, operating activities generated $44.1 million in cash, after
spending $3.5 million for various acquisition-related costs. Investing
activities used $62.3 million, as the Company invested $10.3 million in
capitalized and purchased software and $18.3 million in fixed assets. Financing
activities in the form of share option exercises and purchases under the
employee stock purchase plan generated $11.0 million which partially offset the
$3.5 million net repayment of various debt obligations. Overall cash decreased
$11.0 million.
In fiscal 1997, operating activities generated $26.5 million in cash, after
spending $3.2 million for various acquisition-related costs.
Investing activities used $27.3 million, as the Company invested $17.7
million in capitalized and purchased software and $11.0 million, net, in fixed
assets. Financing activities in the form of share option exercises and
repurchases of Company's common stock, net, generated $1.3 million. In addition
borrowings under the line of credit increased $6.4 million. Overall cash
increased $5.6 million.
At April 30, 1999 the Company had cash and short-term investments amounting
to $121.4 million. (1998: $126.9 million).
The Company has in place a line of credit under the terms of which
unsecured financing of up to $8.0 million is available until January 2001. At
April 30, 1999, borrowings totalling $2.7 million had been made against this
line of credit compared to $1.7 million at the end of fiscal 1998 (1998: $1.7
million).
MERANT believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid money
market investments. The Company's investment policy is designed to minimize risk
while maximizing return on cash given such levels of risk, and to keep
uninvested cash at a minimum. Cash management is centralized, although some cash
is held at various subsidiaries around the world to meet local operating
requirements.
The Company believes that existing cash balances in combination with
internally generated funds and its available bank line of credit will be more
than sufficient to meet cash requirements in fiscal 2000.
29
54
MARKET RISK
The Company is exposed to financial market risks, including interest rates
and foreign currency exchange rates. The Company does not use derivative
financial instruments for speculative or trading purposes.
The primary objective of the Company's investment policy is to preserve
principal while maximising yield without significantly increasing risk. At April
30, 1999, the fair value of the Company's financial instruments with exposure to
interest rate risk was $35,000,000. A hypothetical 50 basis point increase in
interest rates would result in an approximate $174,000 decrease in the fair
value of the Company's securities. This sensitivity analysis is performed on the
Company's financial positions at April 30, 1999. Actual results may differ
materially from this analysis.
The Company is exposed to the effects of foreign currency exchange rate
fluctuations, particularly, but not exclusively, between the U.S. dollar and
G.B. pounds sterling. The Company has established a hedging program utilising
foreign currency forward contracts, which substantially have maturities of sixty
days or less, to hedge the value of assets and liabilities recorded in foreign
currencies against fluctuations in exchange rates. The foreign exchange forward
contracts used are non-leveraged, over the counter instruments that involve
little complexity. No foreign currency exchange contracts were outstanding at
April 30, 1999.
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55
MERANT PLC
FINANCIAL STATEMENTS 1999
CONSOLIDATED STATEMENTS OF OPERATIONS
US FORMAT
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND ADS DATA 1999 1998 1998 1997
- --------------------------------------------------- ---------- ------------ ----------- -----------
NET REVENUE
Product revenue................................. $193,144 $61,384 $198,793 $162,439
Maintenance revenue............................. 98,858 24,533 88,015 75,524
Service revenue................................. 82,200 21,070 76,111 45,677
-------- ------- -------- --------
TOTAL NET REVENUE............................ 374,202 106,987 362,919 283,640
-------- ------- -------- --------
COST OF REVENUE
Cost of product revenue......................... 14,390 3,392 13,255 12,304
Cost of maintenance revenue..................... 24,445 5,599 20,446 22,957
Cost of service revenue......................... 68,074 17,409 62,376 31,706
-------- ------- -------- --------
TOTAL COST OF REVENUE........................ 106,909 26,400 96,077 66,967
-------- ------- -------- --------
GROSS PROFIT...................................... 267,293 80,587 266,842 216,673
-------- ------- -------- --------
OPERATING EXPENSES
Research and development (note 4)............... 59,851 14,551 60,828 64,311
Sales and marketing............................. 155,680 40,137 134,671 126,642
General and administrative...................... 35,158 7,414 27,737 23,440
Non-recurring charges (note 5).................. 49,662 17,292 17,468 37,603
-------- ------- -------- --------
TOTAL OPERATING EXPENSES..................... 300,351 79,394 240,704 251,996
-------- ------- -------- --------
(LOSS) INCOME FROM OPERATIONS..................... (33,058) 1,193 26,138 (35,323)
Interest income, net.............................. 6,334 1,151 3,935 2,946
-------- ------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES................. (26,724) 2,344 30,073 (32,377)
Income taxes (note 11)............................ (1,808) (855) (9,925) (3,479)
-------- ------- -------- --------
NET (LOSS) INCOME................................. $(28,532) $ 1,489 $ 20,148 $(35,856)
-------- ------- -------- --------
Net (loss) income per share: basic (note 6)....... $ (0.20) $ 0.01 $ 0.15 $ (0.27)
Net (loss) income per ADS: basic (note 6)......... $ (1.00) $ 0.05 $ 0.73 $ (1.35)
Shares used in computing net (loss) income per
share: basic (note 6)........................... 143,130 137,823 137,351 132,327
ADSs used in computing net (loss) income per ADS:
basic (note 6).................................. 28,626 27,565 27,470 26,465
Net (loss) income per share: diluted (note 6)..... $ (0.20) $ 0.01 $ 0.14 $ (0.27)
Net (loss) income per ADS: diluted (note 6)....... $ (1.00) $ 0.05 $ 0.70 $ (1.35)
Shares used in computing net (loss) income per
share: diluted (note 6)......................... 143,130 145,618 144,326 132,327
ADSs used in computing net (loss) income per ADS:
diluted (note 6)................................ 28,626 29,124 28,865 26,465
- ---------------
NOTE: Share and per share data for all periods presented has been restated to
comply with SFAS 128 -- Earnings Per Share (see note 1 to the consolidated
financial statements on page 36) and to reflect the 5-for-1 stock split of
the Company's Ordinary Shares, which was effective as of the close of
business on March 13, 1998 (see note 14 to the consolidated financial
statements on page 54.) Each American Depositary Share ("ADS") represents
five Ordinary Shares.
See accompanying notes to consolidated financial statements on pages 35 to 55.
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MERANT PLC
FINANCIAL STATEMENTS 1999
CONSOLIDATED BALANCE SHEETS
US FORMAT
APRIL 30, APRIL 30,
AMOUNTS IN THOUSANDS 1999 1998
-------------------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 86,580 $ 86,459
Short-term investments.................................... 34,804 40,448
Accounts receivable, net of allowances for doubtful
accounts of $4,785 ($5,133 in 1998).................... 111,317 101,847
Prepaid expenses and other assets......................... 13,485 11,871
-------- --------
TOTAL CURRENT ASSETS................................... 246,186 240,625
-------- --------
FIXED ASSETS:
Property, plant and equipment, net (note 7)............... 46,090 52,212
Goodwill, net of amortization of $7,271 ($3,686 in
1998).................................................. 10,239 6,520
Software product assets, net of amortization of $129,060
($113,027 in 1998)..................................... 17,007 25,234
Other assets.............................................. 3,560 9,124
-------- --------
TOTAL ASSETS........................................... $323,082 $333,715
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings (note 8)....................................... $ 2,716 $ 5,137
Accounts payable.......................................... 12,150 15,170
Accrued employee compensation and commissions............. 24,352 25,860
Income taxes payable...................................... 18,325 15,583
Deferred revenue.......................................... 69,155 55,477
Other current liabilities................................. 29,869 21,670
-------- --------
TOTAL CURRENT LIABILITIES.............................. 156,567 138,897
-------- --------
Long term debt and other liabilities........................ -- 648
Deferred income taxes (note 11)............................. 14,304 14,727
-------- --------
TOTAL LIABILITIES...................................... $170,871 $154,272
-------- --------
COMMITMENTS AND CONTINGENCIES (notes 9 and 10)
SHAREHOLDERS' EQUITY:
Ordinary shares: 2 pence (G.B.) par value 212,000 shares
authorized 143,673 shares issued and outstanding
(142,012 in 1998)...................................... $ 4,691 $ 4,679
Additional paid-in capital................................ 154,868 153,171
Treasury stock (3,810 shares; 1998: 3,926 shares)......... (7,552) (7,769)
Retained earnings......................................... 8,850 37,382
Accumulated other comprehensive loss...................... (8,646) (8,020)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................. 152,211 179,443
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $323,082 $333,715
-------- --------
- ---------------
NOTE: Share data for all periods presented has been restated to reflect the
5-for-1 stock split of the Company's Ordinary Shares, which was effective
as of the close of business on March 13, 1998 (see note 14 to the
consolidated financial statements on page 54.) Each American Depositary
Share ("ADS") represents five Ordinary Shares.
See accompanying notes to consolidated financial statements on pages 35 to 55.
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MERANT PLC
FINANCIAL STATEMENTS 1999
CONSOLIDATED STATEMENTS OF CASH FLOW
US FORMAT
THREE MONTHS YEAR YEAR
YEAR ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
IN THOUSANDS 1999 1998 1998 1997
- ------------ ---------- ------------ ----------- -----------
OPERATING ACTIVITIES
NET (LOSS) INCOME........................................ $(28,532) $ 1,489 $ 20,148 $(35,856)
Adjustments to reconcile net (loss) income to cash
provided by operations
Depreciation of fixed assets........................... 12,571 4,166 12,276 14,156
Amortization of software product assets................ 14,751 3,332 14,916 21,390
Amortization of goodwill............................... 3,585 464 1,391 --
Write-down of software and intangible assets........... 2,000 -- -- 22,535
Write-down of purchased research and development....... -- 15,739 15,739 --
Gain on sale of discontinued product lines............. -- 423 423 --
Restructuring/acquisition charges...................... 4,774 (496) (496) (3,247)
Loss on sale of fixed assets........................... -- 1,780 207 504
Deferred income taxes.................................. (423) (4,426) -- 2,004
Changes in operating assets and liabilities:
Accounts receivable.................................... (4,134) 2,840 (42,287) 878
Prepaid expenses and other assets...................... (1,614) (1,500) (942) 3,987
Accounts payable....................................... (3,020) 5,162 2,992 (457)
Accrued employee compensation.......................... (1,508) (3,403) 6,581 (890)
Income taxes payable................................... 2,742 3,059 6,219 (2,204)
Deferred revenue....................................... 13,678 (349) 5,524 191
Other current liabilities.............................. 3,445 2,814 1,366 3,553
-------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 18,315 31,094 44,057 26,544
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net of
capital lease obligations incurred..................... (6,449) (4,815) (18,269) (11,932)
Software product assets.................................. (8,524) (2,480) (10,285) (17,739)
Proceeds from sale of discontinued product lines......... -- 1,200 1,200 --
Acquisition of subsidiaries, net of cash balances
acquired............................................... (7,304) 1,589 (1,848) --
Available-for-sale securities............................ 5,649 (4,132) (33,639) 1,654
Disposals of property, plant and equipment............... -- 13 570 916
Other.................................................... -- -- -- (209)
-------- -------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES...................... (16,628) (8,625) (62,271) (27,310)
-------- -------- -------- --------
FINANCING ACTIVITIES
Issuance of ordinary shares, net of expenses............. 1,709 2,613 9,879 4,770
Own shares............................................... 217 -- 1,190 (3,445)
Borrowings............................................... -- -- -- 6,422
Repayment of borrowings.................................. (3,051) (7,705) (3,509) --
Repayment of capital leases.............................. (18) (1) (73) (233)
-------- -------- -------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES........... (1,143) (5,093) 7,487 7,514
-------- -------- -------- --------
Effect of exchange rate changes on cash.................... (651) 247 (316) (1,139)
-------- -------- -------- --------
Increase (decrease) in cash................................ 121 17,623 (11,043) 5,609
Adjusted for INTERSOLV cash flow previously reported....... -- (13,420) -- --
Cash at beginning of period................................ 86,459 82,256 93,299 87,690
-------- -------- -------- --------
CASH AT END OF PERIOD...................................... $ 86,580 $ 86,459 $ 82,256 $ 93,299
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid during the period...................... $ 4,317 $ 207 $ 1,464 $ 1,291
======== ======== ======== ========
Interest paid during the period.......................... $ 239 $ 116 $ 976 $ 789
======== ======== ======== ========
See accompanying notes to consolidated financial statements on pages 35 to 55.
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MERANT PLC
FINANCIAL STATEMENTS 1999
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
US FORMAT
ACCUMULATED
ORDINARY ADDITIONAL COMPREHENSIVE OTHER
NUMBER SHARES PAID-IN TREASURY RETAINED INCOME COMPREHENSIVE
IN THOUSANDS OF SHARES AMOUNT CAPITAL STOCK EARNINGS (LOSS) INCOME (LOSS) TOTAL
- ------------ --------- -------- ---------- -------- -------- ------------- ------------- --------
BALANCE, JANUARY 31,
1996................... 131,876 $4,553 $118,318 $ (8,959) $ 47,758 $(5,793) $155,877
Share options
exercised.............. 885 4 2,843 1,922 -- -- 4,769
Repurchase of ordinary
shares................. (1,048) -- -- (3,445) -- -- (3,445)
Conversion of loan
notes.................. 2,607 9 3,580 3,589
Comprehensive (loss):
Net (loss)............. -- -- -- -- (35,856) $(35,856) -- (35,856)
Unrealised (loss) on
marketable
securities, net of
taxes................ -- -- -- -- -- (92) (92) (92)
Currency translation
adjustment........... -- -- -- -- -- (1,349) (1,349) (1,349)
--------
Comprehensive (loss)... (37,297)
------- ------ -------- -------- -------- -------- ------- --------
BALANCE, JANUARY 31,
1997................... 134,320 4,566 124,741 (10,482) 11,902 (7,234) 123,493
Share options
exercised.............. 3,204 37 8,272 2,713 -- -- 11,022
Issued for
acquisitions........... 4,186 37 18,741 -- -- -- 18,778
Conversion of loan
notes.................. 36 -- 48 -- -- -- 48
Comprehensive income:
Net income............. -- -- -- -- 20,148 20,148 -- 20,148
Unrealised gain on
marketable
securities, net of
taxes................ -- -- -- -- -- 134 134 134
Currency translation
adjustment........... -- -- -- -- -- (1,550) (1,550) (1,550)
--------
Comprehensive income... 18,732
------- ------ -------- -------- -------- -------- ------- --------
BALANCE, JANUARY 31,
1998................... 141,746 4,640 151,802 (7,769) 32,050 (8,650) 172,073
Share options
exercised.............. 266 39 1,369 -- -- -- 1,408
Comprehensive income:
Net income............. -- -- -- -- 1,489 1,489 -- 1,489
Unrealised gain on
marketable
securities, net of
taxes................ -- -- -- -- -- (72) (72) (72)
Currency translation
adjustment........... -- -- -- -- -- 696 696 696
--------
Comprehensive income... 2,113
Adjustments re transition
period................. 3,843 6 3,849
------- ------ -------- -------- -------- -------- ------- --------
BALANCE, APRIL 30,
1998................... 142,012 4,679 153,171 (7,769) 37,382 (8,020) 179,443
Share options
exercised.............. 1,661 12 1,697 217 1,926
Comprehensive (loss):
Net (loss)............. -- -- -- -- (28,532) (28,532) (28,532)
Unrealised (loss) on
marketable
securities, net of
taxes................ -- -- -- -- -- 5 5 5
Currency translation
adjustment........... -- -- -- -- -- (631) (631) (631)
--------
Comprehensive (loss)... (29,158)
------- ------ -------- -------- -------- -------- ------- --------
BALANCE, APRIL 30 1999... 143,673 $4,691 $154,868 $ (7,552) $ 8,850 $(8,646) $152,211
======= ====== ======== ======== ======== ======== ======= ========
See accompanying notes to consolidated financial statements on pages 35 to 55.
34
59
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
US FORMAT
Effective November 30, 1998, MERANT plc ("the Company") elected to change
its fiscal year end and accounting reference date to April 30 from January 31.
The Company is therefore reporting results for the fiscal year ended April 30,
1999 ("fiscal 1999"). References to fiscal 1998 and fiscal 1997 are to the years
ended January 31, 1998 and January 31, 1997, respectively. This report also
discloses results for the three-month fiscal period ended April 30, 1998, which
were the basis of a Transition Report filed with the SEC on Form 20-F.
The Company statutory accounts, within the meaning of section 240 of the
Companies Act 1985 of Great Britain, are drafted in accordance with accounting
principles generally accepted in the U.K. ("U.K. GAAP"). Copies of those
financial statements, for the fifteen-month period ended April 30, 1999, are
available from the Company's offices in Newbury and Rockville.
Effective February 16, 1999, the Company changed its corporate name from
Micro Focus Group Plc to MERANT plc.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
MERANT designs, develops and markets computer software products and
provides related support services. Approximately 55% of its revenue is derived
from the license of software products, either directly to end-users or in the
form of distribution rights to original equipment manufacturers. Approximately
25% is derived from the provision of product support and maintenance services,
and the balance from the provision of professional services, principally
training and consulting. Product licenses are sold and supported in more than 60
countries. The principal market is the United States, which accounts for
approximately 60% of revenue; a further 20% of revenue is derived from customers
in Europe and approximately 10% is earned in the Pacific Rim, and the remaining
10% from customers located in the rest of the world.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, including INTERSOLV, Inc, which
merged with the Company effective September 24, 1998. They have been prepared in
accordance with U.S. GAAP, which differs from U.K. GAAP, particularly as to the
treatment of acquisitions and goodwill and the presentation of certain items in
the financial statements.
As more fully described in Note 2, the Company has concluded several
business combinations in the past three fiscal years. These transactions have
been accounted for either under the pooling-of-interests method or the purchase
method, as appropriate. With respect to the merger with INTERSOLV, Inc, which
was accounted for using the pooling-of-interests method, the consolidated
financial statements at January 31, 1998, and for the years ended January 31,
1998 and 1997, have been restated to include the financial results of INTERSOLV,
Inc at April 30, 1998, and for the years ended April 30, 1998 and 1997,
respectively. Consequently, financial data for the three months ended April 30,
1998 are included in both the three months ended April 30, 1998 and the year
ended January 31, 1998. All significant inter-company balances and transactions
have been eliminated on consolidation.
Certain reclassifications of data presented in the 1998 and 1997 financial
statements and related notes have been made to conform with the 1999
presentation. Specifically, the presentation of net revenue and cost of revenue
in the statements of income has been revised in order to analyse service revenue
and related direct costs between maintenance and other services. The results of
operations of the Company are not affected by this changed presentation.
35
60
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of estimates
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue recognition
The Company has adopted Statement of Position ("SOP") 97-2 "Software
Revenue Recognition with Respect to Certain Transactions". Adoption of SOP 97-2
did not have a material effect on the Company's results of operations or
financial condition.
Product revenue: the Company's standard end user license agreement for the
Company's products provides for an initial fee to use the product in perpetuity
up to a maximum number of users. The Company also enters into other types of
license agreements, typically with major end user customers, which allow for the
use of the Company's products, usually restricted by the number of employees,
the number of users, or the license term. Fees from licenses are recognized as
revenue upon product shipment, provided a signed agreement is in place, fees are
fixed or determinable, and collection of the resulting receivable is deemed
probable. Fees from licenses sold together with consulting services are
generally recognized upon shipment provided that the above criteria have been
met and payment of the license fees is not dependent upon the performance of the
consulting services. In instances where the aforementioned criteria have not
been met, both the license and consulting fees are recognized under the
percentage of completion method of contract accounting. The Company provides for
sales returns based on historical rates of return.
Maintenance revenue: maintenance agreements generally call for the Company
to provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognized ratably over the term
of the support agreement. Payments for maintenance fees are generally made in
advance and are nonrefundable.
Service revenue: the Company provides consulting and education services to
its customers. Revenue from such services is generally recognized as the
services are performed.
Advertising costs
Advertising costs are charged to operations when incurred. Advertising
expense, which includes media, agency and promotional expenses, amounted to
$12,984,000, $2,704,000 $8,791,000 and $14,388,000 in fiscal 1999, the three
month fiscal period to April 30, 1998 and in fiscal 1998 and 1997, respectively.
Net income per share
The Company adopted SFAS 128 "Earnings per Share" in the third quarter of
fiscal 1998. All prior year net income per share data reported herein has been
restated accordingly.
Basic net income per share is calculated as net income divided by the
weighted average number of ordinary shares outstanding during the period.
Diluted net income per share is calculated as net income divided by the
weighted average number of ordinary shares outstanding during the period,
including dilutive ordinary share equivalents, represented by shares issuable
upon exercise of share options. The computation assumes the proceeds from the
exercise of
36
61
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
share options are used to repurchase the Company's ordinary shares at their
average market price during each period.
Earnings per share data is set out in note 6 to the consolidated financial
statements on page 45. The Company also reports net earnings per American
Depositary Share ("ADS") equivalent; each ADS represents five ordinary shares.
Income taxes
The provision for income taxes includes U.K., U.S. and other income taxes
currently payable and those deferred because of temporary differences between
financial and tax reporting.
Cash, cash equivalents and short-term investments
Cash and cash equivalents include cash placed on short-term deposit and
short-term money market instruments where the maturity date is less than three
months from the initial date of deposit.
In accordance with SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities," the appropriate classification of debt securities is
determined at the time of purchase and re-evaluated at each balance sheet date.
Debt securities that the Company has the intent and the ability to hold until
maturity are classified as held-to-maturity, and all other debt securities are
classified as available-for-sale.
Short-term investments represents available-for-sale securities with
original maturities in excess of three months from the initial date of
investment. The cost of securities sold is based on the specific identification
method.
Derivative financial instruments
The Company enters into forward foreign currency contracts to hedge the
value of assets and liabilities recorded in foreign currencies against
fluctuations in exchange rates.
For these financial instruments, no impact on financial position or results
of operations would result from a change in the underlying exchange rate, as a
change in the derivatives value would be offset by an opposite change in the
hedged exposure. The Company does not hold or issue derivatives for speculative
trading purposes.
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk, as defined by SFAS 105 "Disclosure of Information
about Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentration of Credit Risk", consist principally of
short-term investments, foreign exchange contracts and trade receivables.
MERANT places its short-term investments only in high quality financial
instruments and limits the amounts invested with any one issuer. The Company is
exposed to credit risk in the event of default by these institutions to the
extent of the amount recorded on the balance sheet. The counterparties to the
agreements relating to the Company's foreign exchange contracts are financial
institutions of high credit standing. Concentrations of credit risk with respect
to trade receivables are limited due to the large, widespread customer base
which encompasses many different industries and countries. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves
37
62
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
for potential losses, and such losses have been within management's
expectations. No single customer represented more than 5% of MERANT's revenue in
1999, 1998 or 1997.
Translation of foreign currencies
Assets and liabilities denominated in currencies other than US dollars are
translated at exchange rates in effect at the balance sheet date. Revenue, costs
and expenses are translated using average rates. Translation adjustments
resulting from the process of translating financial statements denominated in
currencies other than U.S. dollars are dealt with separately in shareholders'
equity.
Inventories
Inventories, consisting principally of diskettes and technical manuals, are
stated at the lower of cost or market, using the first-in, first-out method.
Contracts in progress, representing engineering costs associated with
non-cancelable license agreements prior to delivery, are included in inventories
and expensed when the related revenue is recognized. Inventories are included in
the balance sheet under Prepaid Expenses and Other Assets.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is computed using
the straight-line method over estimated economic lives from the time the asset
is put into use. Present estimated economic lives are as follows:
Office buildings......................................... 40 years
Leasehold improvements................................... over the lease term
Computer equipment....................................... 3-5 years
Office equipment......................................... 7-11 years
Transportation equipment................................. 3-4 years
Leasing
Leases which transfer substantially all the benefits and risks of ownership
of an asset to the Company are capitalized as fixed assets. The amount
capitalized is the net present value of future lease payments, this sum also
being treated as a liability.
Depreciation on such leased assets is provided at rates calculated to write
off the capitalized cost over the shorter of the lease term and the asset's
economic life. Lease payments are apportioned between finance charges (computed
on the basis of implicit interest rates) and a reduction in the original
liability.
Rentals paid under operating leases are expensed on a straight line basis
over the term of the lease.
Goodwill
Goodwill represents the excess of amounts paid on business acquisitions
over the aggregate fair value of the net assets acquired. Goodwill arising on a
purchase is capitalized as an intangible fixed asset and amortized over its
estimated useful life. The estimated life will depend on the length of the
future period expected to benefit from the purchase. Where there is a potential
impairment of goodwill, based on cash flow projections of the businesses
acquired, amortization is accelerated.
38
63
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Software product assets (capitalized software development costs)
Costs related to the initial development and design of new software
products prior to the establishment of technological feasibility are written off
as research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalized as software product
assets, in compliance with Statement of Financial Accounting Standards ("SFAS")
No. 86 "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed".
Software licensed for inclusion in the MERANT product set, including
software acquired through acquisitions which meets the provisions for
capitalization under SFAS 86, is also included in software product assets.
During fiscal 1999, the three-month fiscal period ended April 30, 1998, and
fiscal 1998 and 1997, purchased software totaling $--, $--, $1.1 million and
$--, respectively was added to software product assets.
Software product assets are amortized using the straight line method over
the economic life of the products, which in most cases is estimated to be three
to four years. Where a shortfall in future revenue from a product is
anticipated, amortization is accelerated. In the event that the remaining
estimated economic life of a product is judged to be reduced significantly, the
carrying amount of the capitalized software costs may be reduced.
Amortization of software product assets is included in research and
development costs.
Stock based compensation
The Company accounts for its stock-based employee compensation plans using
the intrinsic value method prescribed by APB Opinion No. 25 "Accounting for
Stock Options Issued to Employees", and accordingly, since all options are
granted with an exercise price equal to the fair value of the shares at the date
of grant, recognizes no compensation expense for share option grants.
Pro-forma disclosures of net income (loss) and net income (loss) per share
computed as if the fair-value-based method had been applied are made in
accordance with SFAS 123 "Accounting for Stock Based Compensation".
Other recent pronouncements
In fiscal 1999, the Company adopted SFAS 130 "Reporting Comprehensive
Income", SFAS 131 "Disclosures About Segments of an Enterprise and Related
Information", and SFAS 132 "Disclosures About Pension and Other Post-Retirement
Benefits". SFAS 130 requires disclosure of comprehensive income, represented by
net income plus other changes in non-owner shareholders' equity, including
unrealised gains and losses on SFAS 115 securities and foreign currency
translation adjustments. The Company discloses this data in its Consolidated
Statements of Shareholders' Equity.
SFAS 131 changes the way in which corporations identify and report
operating segments in annual and interim financial statements. The statement
requires selected information and related disclosure about products and
services, geographic areas and major customers. Such information is reported in
note 12 to the
39
64
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
consolidated financial statements. Compliance with the requirements of these
statements did not affect the Company's results from operations or financial
position.
SFAS 132 standardises disclosure requirements for pensions and other
post-retirement benefits.
In December 1998 the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-9 "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions". SOP 98-9 rescinds
certain provisions of 97-2 and permits the residual method for the calculation
of residual amounts for delivered elements. Adoption of this standard is not
expected to have a material effect on the Company's results from operations or
financial position.
In June, 1998 the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition and measurement of all derivatives as assets or
liabilities. The Company will be required to adopt SFAS 133 in fiscal 2002.
Compliance is not expected to have a material effect on the Company's results
from operations or financial position.
NOTE 2 BUSINESS COMBINATIONS
During fiscal 1999 MERANT completed three acquisitions.
On May 15, 1998 the Company acquired all of the outstanding stock of its
Italian distributor, Micro Focus Italia, s.r.l. for total consideration of
$4,600,000. MF Italia changed its name to MERANT s.r.l. on March 1, 1999.
On August 13, 1998 the Company acquired all of the outstanding stock of its
Australian distributor, Advanced Software Engineering Pty, Ltd for total
consideration of $2,480,000. ASE changed its name to MERANT Pty Limited on
February 16, 1999.
Both transactions have been accounted for using the purchase method.
Accordingly, the excess of the estimated purchase price over the estimated fair
value of the net tangible assets of each of the acquired companies has been
allocated to goodwill, and the net assets and results of operations of both
companies have been combined with those of MERANT as of the respective dates of
acquisition and for the periods subsequent to acquisition, respectively.
Goodwill arising on the acquisitions, which amounted to $7,304,000, is being
amortised over its estimated economic life of four years.
The results of operations of both these acquired companies prior to the
acquisitions were not material, and thus pro forma information has not been
provided.
On September 24, 1998 the Company acquired all of the outstanding stock of
INTERSOLV, Inc ("INTERSOLV") in exchange for 63,084,000 ordinary shares in the
Company which represented a value of $272,000,000 on the date the merger was
completed. INTERSOLV, a public corporation based in Maryland, U.S.A., and listed
on the Nasdaq National Market, was a provider of software solutions that
facilitate the development, delivery and deployment of business information
systems. INTERSOLV's products and services were focused primarily in the areas
of application development management, enterprise data connectivity and
enterprise application renewal.
Immediately prior to the transaction, INTERSOLV had a total of 22,940,000
outstanding shares. Under the terms of the agreement, each common share of
INTERSOLV was exchanged for 0.55 MERANT American Depositary Shares ("ADSs"). In
addition, each outstanding option or right to purchase or acquire shares of
INTERSOLV stock was assumed by the Company and became an option or right to
purchase or
40
65
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 2 BUSINESS COMBINATIONS -- (CONTINUED)
acquire MERANT ADSs, with appropriate adjustments to the price and number of
shares based on the exchange ratio of 0.55 ADSs per INTERSOLV share. The merger
was structured as a tax-free reorganization under U.S. tax law. The Company
issued 12,617,000 new MERANT ADSs (representing 63,084,000 new MERANT ordinary
shares) in exchange for INTERSOLV's common stock and share equivalents
outstanding, which at the time of the completion of the transaction represented
approximately 46% of MERANT's share capital on a fully-diluted basis.
The combination has been accounted for using the pooling-of-interests
method, and previously reported consolidated financial statements have been
restated to include the financial position and results of operations of
INTERSOLV. The following table reconciles the operating results for prior
periods to the amounts reflecting restatement of prior years to include
INTERSOLV operations.
FROM MAY 1, THREE MONTHS
1998 TO ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 24, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1998 1998 1998 1997
- -------------- ------------- ------------ ----------- -----------
Net revenue:
MERANT......................... $ 68,256 $ 48,650 $167,309 $123,227
INTERSOLV...................... 67,033 58,369 196,480 160,413
Eliminations................... -- (32) (870)
-------- -------- -------- --------
As restated.................... $135,289 $106,987 $362,919 $283,640
-------- -------- -------- --------
Net income (loss):
MERANT......................... $ 1,099 $ 5,337 $ 14,633 $(14,690)
INTERSOLV...................... (2,138) (3,848) 5,515 (21,166)
-------- -------- -------- --------
As restated.................... $ (1,039) $ 1,489 $ 20,148 $(35,856)
-------- -------- -------- --------
The Company recorded a charge of $49,662,000 in the second quarter of 1999
in connection with the INTERSOLV merger (see note 5 to the consolidated
financial statements on page 44).
During the three-month fiscal period ended April 30, 1998, the Company
acquired, through its subsidiary, INTERSOLV, Inc, all of the outstanding stock
of SQL Software Ltd ("SQL") in exchange for the equivalent of 3,441,488 ordinary
shares in the Company. SQL was a privately-held UK-based provider of process
automation tools.
The transaction was accounted for using the purchase method. The cost of
the transaction, including acquisition costs, was $19,200,000, of which
$15,739,000 was allocated to purchased research and development and was written
off at the time of acquisition since no technological feasibility or alternative
future use could be demonstrated. Additionally, $2,400,000 allocated to goodwill
and other intangibles, and is being amortized over its estimated economic life
which is estimated to be five years.
In fiscal 1998 the Company completed two acquisitions.
On January 20, 1998, the Company acquired all of the outstanding stock of
XDB Systems, Inc ("XDB") in exchange for 1,891,975 ordinary shares in the
Company which represented a value of $14,243,000 on the date the merger was
completed. The combination was accounted for using the pooling-of-interests
method. XDB, a privately-held corporation based in Columbia, Maryland, was a
provider of DB2 database development, maintenance and connectivity solutions.
The Company incurred charges in the third quarter of 1998 of approximately $1.6
million in connection with activities to complete this acquisition.
41
66
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 2 BUSINESS COMBINATIONS -- (CONTINUED)
On April 30, 1997, the Company acquired all of the outstanding stock of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, for a
total consideration of $6,400,000, satisfied by a cash payment of $3,200,000 and
the issue of 745,710 ordinary shares in the Company. Millennium provided
specialized consulting and project management services. The transaction was
accounted for using the purchase method. Accordingly, the excess of the purchase
price over the estimated fair value of the net tangible assets, which amounted
to $6,737,000, was allocated to goodwill and is being amortised over its
estimated economic life, which is estimated to be three years.
NOTE 3 FINANCIAL INSTRUMENTS
The Company invests its excess cash in accordance with an investment policy
approved by the Board of Directors. This policy authorizes investment in U.S.
government securities, municipal bonds, certificates of deposit with
highly-rated financial institutions and other specified money market instruments
of similar liquidity and credit quality.
The Company has classified all of its investment securities as
available-for-sale and carries such securities at fair value, based on quoted
market prices. Unrealized gains and losses are reported as a separate component
of shareholders' equity. Available-for-sale securities with original maturities
of less than three months are classified as cash equivalents.
Estimated fair values of financial instruments are based on quoted market
prices. The carrying amounts and fair value of the Company's financial
instruments are as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- -------------- --------- ---------
Cash and cash equivalents................................. $86,580 $86,459
Short term investments.................................... 34,804 40,448
------- -------
Cash, cash equivalents and short term investments include the following
available-for-sale securities as defined in note 1:
GROSS UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS (LOSSES) FAIR VALUE
- -------------- ------- ---------------- ----------
At April 30, 1999:
Money market funds.......................... $ 173 -- $ 173
Commercial paper............................ 9,062 $ 1 9,063
Variable rate notes......................... 4,409 -- 4,409
Federal agency issues....................... 8,306 (21) 8,285
Corporate bonds and notes................... 22,595 (3) 22,592
------- ---- -------
$44,545 $(23) $44,522
------- ---- -------
At April 30, 1998:
Money market funds.......................... $ 815 -- $ 815
Commercial paper............................ 20,721 $ 10 20,731
Certificates of deposit..................... 7,971 10 7,981
Federal agency issues....................... 3,870 5 3,875
Auction rate securities..................... 3,319 -- 3,319
Corporate bonds and notes................... 22,954 42 22,996
------- ---- -------
$59,650 $ 67 $59,717
------- ---- -------
42
67
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 3 FINANCIAL INSTRUMENTS -- (CONTINUED)
The cost and estimated fair values of available-for-sale securities at
April 30, 1999 are set forth below:
ESTIMATED
GROSS UNREALIZED FAIR
(IN THOUSANDS) COST GAINS (LOSSES) VALUE
- -------------- ------- ---------------- ---------
Less than three months...................... $ 9,717 $ 1 $ 9,718
Between 3-12 months......................... 14,749 7 14,756
Over 12 months.............................. 20,079 (31) 20,048
------- ---- -------
$44,545 $(23) $44,522
------- ---- -------
For balance sheet presentation, available-for-sale securities are
classified as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- -------------- --------- ---------
Cash and cash equivalents................................. $ 9,718 $19,269
Short term investments.................................... 34,804 40,448
------- -------
$44,522 $59,717
------- -------
Due to its worldwide operations, the Company is exposed to the effects of
foreign currency exchange rate fluctuations, particularly, but not exclusively,
between the U.S. dollar and G.B. pounds sterling. The Company uses derivative
financial instruments to reduce its exposure to market risks from changes in
foreign currency exchange rates. The derivative instruments used, which are
foreign exchange forward contracts, are non-leveraged, over-the-counter
instruments which involve little complexity.
The notional amounts of foreign currency contracts were $-- and $4,800,000
at April 30, 1999 and April 30, 1998, respectively, and were predominantly to
exchange U.S. dollars for G.B. pounds sterling. Substantially all forward
foreign currency contracts entered into by the Company have maturities of 60
days or less.
Sale of receivables
In fiscal 1998 the Company entered into agreements to sell $2,536,000 in
accounts receivable at a net discount of approximately 7.25%, which was charged
to operations as incurred. $2,161,000 of these accounts receivable were sold on
a recourse basis, of which $520,000 remains outstanding at April 30, 1999 for
which the Company remains liable in the event of default.
NOTE 4 RESEARCH AND DEVELOPMENT COSTS
THREE MONTHS YEAR YEAR
YEAR ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- -------------- ---------- ------------- ----------- -----------
Research and development
costs, before
capitalization............. $53,624 $13,699 $ 56,197 $ 60,660
Costs capitalized as software
product assets............. (8,524) (2,480) (10,285) (17,739)
Amortisation of capitalized
costs...................... 14,751 3,332 14,916 21,390
------- ------- ---------- -----------
$59,851 $14,551 $ 60,828 $ 64,311
------- ------- ---------- -----------
43
68
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 5 NON-RECURRING ITEMS
During the second quarter of fiscal 1999, the Company incurred charges
amounting to $49,662,000 in respect of the acquisition of INTERSOLV, Inc and the
subsequent restructuring of the combined businesses. Aggregate direct
transaction costs totaling $24,549,000 were incurred for investment banker fees,
employee contractural obligations, the cost of listing new shares on the London
Stock Exchange and other professional fees. Costs associated with subsequent
integration efforts totaled $25,113,000 and were primarily comprised of the
write-off of redundant assets, distributor agreement buyouts and severance
costs. The write-off of redundant assets results primarily from duplicative
facilities and assets. Severance costs of $982,000 related to approximately 75
employees in the Company's administrative functions.
Provisions for restructuring charges, included in other current liabilities
amounted to $5,910,000 and $--at April 30, 1999 and April 30, 1998 respectively.
In the transition period to April 30, 1998, the Company recognized
non-recurring costs of $17,468,000, net, in its subsidiary company, INTERSOLV,
Inc. This charge included a $15,739,000 write off of purchased research and
development costs arising from the SQL acquisition, and costs of $1,800,000 on
exiting non-strategic product lines.
As explained in note 1, the Company's results for fiscal 1998 include the
results of INTERSOLV, Inc for the year ended April 30, 1998 and consequently
also include the above non-recurring charge of $17,468,000.
In fiscal 1997, the Company recorded non-recurring charges of $37,603,000.
INTERSOLV, Inc completed a comprehensive business strategy review of its primary
market opportunities, which led the company to record a charge of $28,933,000 to
write down capitalized and purchased software and certain related intangible
assets to their net realizable values. In addition, the Company incurred costs
totalling $8,670,000 in connection with a workforce reduction, facility closures
and consolidations, and asset write-downs.
44
69
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 6 EARNINGS PER SHARE
The following table discloses the net (loss) income per share and net
(loss) income per ADS equivalent; each ADS represents five ordinary shares. In
1999 3,435,000 ordinary share equivalents were antidilutive and therefore
excluded from the computation.
THREE MONTHS YEAR YEAR
YEAR ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
IN THOUSANDS 1999 1998 1998 1997
------------ ---------- ------------ ----------- -----------
Net (loss) income per share:
Numerator for basic and diluted
net (loss) income per share:
net (loss) income.............. $(28,532) $ 1,489 $ 20,148 $(35,856)
-------- -------- -------- --------
Denominator for basic net (loss)
income per share -- weighted
average shares outstanding..... 143,130 137,823 137,351 132,327
Dilutive share options........... -- 7,795 6,975 --
-------- -------- -------- --------
Denominator for diluted net
(loss) income per share........ 143,130 145,618 144,326 132,327
-------- -------- -------- --------
Net (loss) income per ADS:
Numerator for basic and diluted
net (loss) income per ADS: net
(loss) income.................. $(28,532) $ 1,489 $ 20,148 $(35,856)
-------- -------- -------- --------
Denominator for basic net (loss)
income per ADS -- weighted
average ADSs outstanding....... 28,626 27,565 27,470 26,465
Dilutive share options........... -- 1,559 1,395 --
-------- -------- -------- --------
Denominator for diluted net
(loss) income per ADS.......... 28,626 29,124 28,865 26,465
-------- -------- -------- --------
NOTE 7 PROPERTY, PLANT AND EQUIPMENT
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- -------------- --------- ---------
Land and buildings...................................... $ 22,263 $ 22,679
Leasehold improvements.................................. 9,964 9,595
Computer and communications equipment & software........ 70,845 73,413
Office equipment........................................ 13,387 8,881
Transportation equipment................................ 383 268
-------- --------
Property, plant and equipment -- at cost................ 116,842 114,836
Less: accumulated depreciation and amortization......... (70,752) (62,624)
-------- --------
Property, plant and equipment -- net.................... $ 46,090 $ 52,212
-------- --------
45
70
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 7 PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)
During fiscal 1999, the three-month fiscal period ended April 30, 1998 and
fiscal 1998 and 1997 depreciation expense, including depreciation on leased
assets, totalled $12,571,000, $4,166,000, $12,276,000 and $14,156,000
respectively.
NOTE 8 BORROWINGS
Short term borrowings consist of:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- -------------- --------- ---------
Bank loan.................................................. $2,716 $1,652
Notes payable.............................................. -- 3,485
------ ------
$2,716 $5,137
------ ------
The bank loan represents borrowings against an unsecured revolving
multi-currency facility, under the terms of which financing of up to
GBP 5,000,000 ($8,050,000 at April 30, 1999) or its equivalent in such other
currency as the Company may determine, is available until January 2001.
Borrowings under this facility bear interest at 0.75% above the London Interbank
Offered Rate ("LIBOR"). The amount outstanding against this credit line at April
30, 1999 represented loans totaling 2.6 million euros which were incurring
interest at a composite rate of 3.5%. The amount outstanding at April 30, 1998
represented a loan of 10 million French francs, which was incurring interest at
3.6%.
The notes payable represented an unsecured credit arrangement with two
banks which expired in September, 1998. The weighted average interest rate
during fiscal 1998 was 8.5%.
NOTE 9 COMMITMENTS
The Company leases office space and equipment under operating leases
expiring at various dates through 2017. In most cases, it is anticipated that
these leases will be renewed or replaced by other leases in the normal course of
business.
The Company also leases transportation equipment under capital leases.
Minimum lease commitments as at April 30, 1999 are as follows:
(IN THOUSANDS)
YEARS ENDED APRIL 30 OPERATING LEASES
- -------------------- ----------------
2000........................................................ $12,509
2001........................................................ 9,402
2002........................................................ 7,472
2003........................................................ 6,205
2004 and thereafter......................................... 8,443
-------
Total minimum lease payments................................ $44,031
-------
Less: amount representing interest..........................
Present value of net minimum lease payments.................
During fiscal 1999, the three-month fiscal period ended April 30, 1998 and
fiscal 1998 and 1997, rent expense totalled $12,086,000 $2,592,000, $10,206,000
and $9,793,000 respectively.
46
71
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 10 CONTINGENCIES
In December 1998 and January 1999, seven class action securities complaints
were filed in the United States District Court for the Southern District of New
York against the Company and certain of its officers and directors. The Court
ordered the seven cases consolidated, appointed lead plaintiffs and lead
counsel, and ordered the filing of a consolidated complaint, which was filed on
June 9, 1999. The lead plaintiffs seek to have the matter certified as a class
action of purchasers of the American Depository Shares of the Company during the
period from June 17, 1998 to November 12, 1998, including the former
shareholders of INTERSOLV, Inc who acquired American Depositary Shares in
connection with the merger involving the two companies. The consolidated
complaint alleges various violations of the federal securities laws and seeks
unspecified compensatory damages for alleged failure to disclose material
nonpublic information concerning the Company's business condition and prospects.
The Company has filed a motion to transfer the matter to the Northern
District of California. The Company intends to defend all of this litigation
vigorously. However, due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of the litigation. Any
unfavorable outcome of litigation could have an adverse impact on the Company's
business, financial condition and results of operations.
The Company and its subsidiaries are also involved in legal proceedings,
claims and litigation arising in the ordinary course of business. Although the
ultimate results of these legal proceedings, claims and litigation are not
currently determinable, in the opinion of management these matters will not
materially affect the Company's financial position, results of operations, or
liquidity.
NOTE 11 INCOME TAXES
Income taxes consist of:
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- -------------- ---------- ------------- ----------- -----------
Current:
U.K. .......................... $(1,535) $(726) $5,319 $ 760
U.S. federal................... -- -- 1,910 (88)
U.S. state..................... 250 118 669 (91)
Other.......................... 3,711 1,755 1,917 893
------- ----- ------ ------
2,426 1,147 9,815 1,474
------- ----- ------ ------
Deferred:
U.K. .......................... (618) (292) 110 1,489
U.S. federal................... -- -- -- 439
U.S. state..................... -- -- -- 77
------- ----- ------ ------
(618) (292) 110 2,005
------- ----- ------ ------
Total:........................... $ 1,808 $ 855 $9,925 $3,479
------- ----- ------ ------
47
72
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 11 INCOME TAXES -- (CONTINUED)
The following table analyzes the differences between the U.K. statutory tax
rate and the effective tax rate for fiscal 1999.
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
1999 1998 1998 1997
---------- ------------ ----------- -----------
U.K. statutory tax rate...... 30.9% 31.0% 31.3% 33.0%
Goodwill..................... -2.5% -- -- --
Permanent differences and
other items................ 6.6% 5.5% 1.7% -5.8%
Non-recurring charges........ -41.8% -- -- -37.9%
------ ----- ----- ------
Effective tax rate........... -6.8% 36.5% 33.0% -10.7%
------ ----- ----- ------
Deferred income taxes, all of which are non-current, are as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- -------------- --------- ---------
Capitalized software...................................... $ 9,651 $10,648
Valuation allowances...................................... 5,502 6,774
Property.................................................. (1,287) (811)
Bad debts................................................. -- (984)
Tax losses................................................ (2,950) (2,786)
Mark to market............................................ 773 --
Research and development credits.......................... (2,368) (800)
Other..................................................... 4,983 2,686
------- -------
$14,304 $14,727
------- -------
Deferred tax relative to the different tax jurisdictions is as follows:
APRIL 30, APRIL 30,
(IN THOUSANDS) 1999 1998
- -------------- --------- ---------
U.K. ..................................................... $ 8,323 $10,111
U.S.A. ................................................... 5,981 4,616
------- -------
$14,304 $14,727
------- -------
The corporate income tax returns of certain U.S. subsidiaries are under
examination by the Internal Revenue Service, which has proposed certain
adjustments. The Company believes that the outcome of the examination will not
give rise to any material adjustment to the financial statements.
NOTE 12 BUSINESS SEGMENT INFORMATION
As explained in note 1 to the consolidated financial statements on page 39,
the Company has adopted SFAS 131 "Disclosures About Segments of an Enterprise
and Related Information", which establishes new standards for the way in which
corporations identify and report operating segments in annual and interim
financial statements. The statement requires selected information and related
disclosure about products and
48
73
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 12 BUSINESS SEGMENT INFORMATION -- (CONTINUED)
services, geographic areas and major customers. Adoption of SFAS 131 does not
effect the Company's consolidated financial position, results of operations, or
liquidity.
The Company operates in four business segments, as indicated below. The
products and services of each segment are marketed throughout the world. The
major product and service lines by segment are as follows:
Application Creation and Transformation ("ACT")
Application Development Management ("ADM")
Enterprise Data Connectivity ("EDC")
Enterprise Consulting Solutions ("ECS")
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies. Intersegment sales
and transfers are priced as if the sales or transfers were to third parties. The
Company evaluates business segment performance on operating income before income
taxes and exclusive of restructuring charges and other non-recurring items. The
Company currently does not separately accumulate and report asset information by
market segment.
No single customer accounts for more than 5% of revenue.
A summary of the Company's operations by business segment, net of
inter-segment trading, is shown below:
THREE MONTHS YEAR
YEAR ENDED ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- -------------- ---------- ------------ ----------- -----------
Net revenues
ACT.............................. $178,033 $ 49,640 $174,983 $138,343
ADM.............................. 116,772 34,425 107,463 81,155
EDC.............................. 41,610 12,850 43,878 48,501
ECS.............................. 35,975 9,525 35,845 12,399
Discontinued products............ 1,812 547 1,750 3,242
-------- -------- -------- --------
$374,202 $106,987 $362,919 $283,640
-------- -------- -------- --------
Operating income, before non-
recurring charges
ACT.............................. 12,680 12,834 38,941 11,122
ADM.............................. 29,624 11,744 31,149 15,648
EDC.............................. 6,748 3,164 6,042 5,091
ECS.............................. 4,263 152 6,323 (249)
Discontinued products............ -- 307 (3,242) --
-------- -------- -------- --------
$ 53,315 $ 28,201 $ 79,213 $ 31,612
-------- -------- -------- --------
49
74
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 12 BUSINESS SEGMENT INFORMATION -- (CONTINUED)
Presented below is a reconciliation of segmental operating income, before
non-recurring charges, to consolidated income before income taxes:
THREE MONTHS YEAR
YEAR ENDED ENDED ENDED YEAR ENDED
JANUARY 31, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- -------------- ----------- ------------ ----------- -----------
Segment operating income......... $ 53,315 $ 28,201 $ 79,213 $ 31,612
Corporate non-allocated costs.... (24,043) (7,414) (27,737) (23,440)
Non-recurring charges............ (49,662) (17,292) (17,468) (37,603)
Interest income, net............. (6,334) (1,151) (3,935) (2,946)
-------- -------- -------- --------
$(26,724) $ 2,344 $ 30,073 $(32,377)
-------- -------- -------- --------
Presented below is an analysis of the Company's revenue, based on the
location of the selling organization, and long-lived assets:
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- -------------- ---------- ------------ ----------- -----------
Revenue:
United States.................. $222,967 $ 66,818 $235,549 $178,456
United Kingdom................. 72,090 24,189 57,627 40,562
Europe (excluding U.K.)........ 61,986 10,387 46,306 44,901
Other.......................... 17,159 5,593 23,437 19,721
-------- -------- -------- --------
$374,202 $106,987 $362,919 $283,640
-------- -------- -------- --------
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- -------------- -------- -------- -------- --------
Long-lived assets:
United States.................. $ 20,760 $ 28,692 $ 28,341 $ 21,014
United Kingdom................. 53,341 61,232 55,511 47,338
Europe (excluding U.K.)........ 2,183 2,473 2,419 2,157
Other.......................... 612 693 5,678 6,154
-------- -------- -------- --------
$ 76,896 $ 93,090 $ 91,949 $ 76,663
======== ======== ======== ========
NOTE 13 EMPLOYEE BENEFIT PLANS
Share option plans
The Company's share option plans provide for the grant of options to
acquire shares to persons who devote substantially all their working time to
MERANT and such other eligible persons as the Board may determine. The exercise
price of options issued under these plans is 100% of the fair market value at
the time such options are granted. Options are generally exercisable in monthly
or annual installments commencing one year after the date of grant. Unexercized
options lapse when the optionholder ceases to be employed by MERANT or at a
predetermined expiry date (of up to ten years from the date of grant), whichever
occurs first.
50
75
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
In September 1998 shareholders approved the 1998 Share Option Plan, which
authorized the Company to grant options over a maximum of 15,079,000 shares.
Such authority will expire on September 24, 2008. During the year 6,453,000
options were granted under this plan, of which 25% become exercisable one year
from the date of grant and the remaining 75% in equal monthly installments over
the following three years.
Options are no longer issuable under any of the Company's previous share
option plans, but options granted under those plans continue to be exercisable
in accordance with the original grant rules.
The 1996 Share Option Plan was approved by shareholders in June 1996 and
authorised the Company to grant options over a maximum of 3,786,845 shares
(representing 5% of the issued share capital of the Company at that time); such
authority expired on June 18, 1999. During the year, 938,705 options were
granted under this plan, exercisable in annual installments over a five-year
period commencing one year from the date of grant. No further options will be
granted under this plan.
Options are also outstanding under share option plans adopted by MERANT as
a result of recent corporate acquisitions, as set forth below. No further
options will be granted under these plans.
Pursuant to the combination with INTERSOLV, Inc, ("INTERSOLV"), the Company
adopted INTERSOLV's 1997 Employee Stock Option Plan, 1992 Stock Option Plan,
1982 Stock Option Plan, and the option plans previously assumed by INTERSOLV
from companies which it had acquired. Under the agreement, each outstanding
option or right to purchase or acquire shares of INTERSOLV stock was assumed by
the Company and became an option or right to purchase or acquire American
Depositary Shares ("ADSs") in the Company, with appropriate adjustments to the
price and number of shares based on the exchange ratio of 0.55 ADSs per
INTERSOLV share. During fiscal 1999, but prior to its acquisition by the
Company, INTERSOLV granted 528,711 options to acquire shares of its common stock
(equivalent to 1,453,955 options to acquire shares in the Company) under its
1997 Employee Stock Option Plan, exercisable in annual installments over a
four-year period commencing one year from the date of grant. The agreement
entitles option-holders to acquire ADSs at U.S. dollar-denominated amounts; for
the purposes of the following disclosures, option prices have been converted
from U.S. dollars to pounds sterling using the exchange rate at April 30, 1999,
which was GBP 1.00=$1.61; and options and prices are converted to
share-equivalents.
Pursuant to the agreement to acquire XDB Systems, Inc, ("XDB") in fiscal
1998, the Company adopted XDB's 1992 Share Option Plan and 1996 Share Option
Plan. Under the agreement, XDB's former option-holders are entitled to exercise
their options in return for shares in the Company. At April 30, 1999, 124,548 of
these options remained outstanding.
In addition to options granted by the Company, MERANT Trustees Limited
("MTL") is permitted to acquire ordinary shares in the Company and to grant
options over them, under the terms of the Micro Focus Group Employee Benefit
Trust 1994 ("the Trust"). The Trust was established to further the Company's
policy of encouraging share ownership by its employees. At April 30 1999, MTL
owned 3,810,075 shares. Options granted by MTL and outstanding at April 30 1999
totaled 2,938,800, and a further 110,000 shares were reserved for options
granted before MTL purchased the shares. The remaining 761,275 shares were
available for the grant of further options. The shares held by the Trust are
shown in the balance sheet as treasury stock within shareholder's equity.
51
76
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Share option activity under all of the Company's share option plans is
summarized below:
NUMBER OPTION PRICE PER
OF SHARES SHARE IN G.B. POUNDS
----------- --------------------
Outstanding, January 31, 1996................. 16,853,835 GBP0.11-GBP5.77
Options granted............................... 13,933,979 GBP1.17-GBP1.94
Options exercised............................. (127,655) GBP0.11-GBP1.93
Options cancelled............................. (10,182,097) GBP0.11-GBP5.77
----------- ---------------
Outstanding, January 31, 1997................. 20,478,062 GBP0.11-GBP4.32
Options granted............................... 10,738,678 GBP0.97-GBP7.41
Options exercised............................. (2,597,688) GBP0.11-GBP3.70
Options cancelled............................. (6,639,266) GBP0.11-GBP4.52
----------- ---------------
Outstanding, January 31, 1998................. 21,979,786 GBP0.11-GBP7.41
Options granted............................... 947,870 GBP6.25-GBP7.15
Options exercised............................. (398,843) GBP0.11-GBP3.49
Options cancelled............................. (625,429) GBP0.11-GBP4.20
----------- ---------------
Outstanding, April 30, 1998................... 21,903,384 GBP0.11-GBP7.41
Options granted............................... 10,648,660 GBP1.06-GBP6.28
Options exercised............................. (807,512) GBP0.11-GBP3.70
Options cancelled............................. (6,066,428) GBP0.11-GBP4.52
----------- ---------------
Outstanding, April 30, 1999................... 25,678,104 GBP0.11-GBP7.15
----------- ---------------
The following tables summarize information about share options outstanding
at April 30, 1999:
AUTHORITY FOR NUMBER OPTION PRICE PER
ISSUANCE OF OPTIONS OF SHARES SHARE IN G.B. POUNDS
------------------- ---------- --------------------
1991 Share Option Plan......................... 2,215,429 GBP1.13-GBP3.49
1996 Share Option Plan......................... 2,978,640 GBP1.47-GBP7.15
1998 Share Option Plan......................... 6,453,000 GBP1.06-GBP1.49
XDB plans...................................... 44,530 GBP5.39-GBP7.41
INTERSOLV plans................................ 10,937,930 GBP0.11-GBP3.61
---------- ---------------
Options over unissued shares................... 22,629,304 GBP0.11-GBP7.41
The Trust...................................... 3,048,800 GBP1.37-GBP4.85
---------- ---------------
25,678,104 GBP0.11-GBP7.41
NUMBER OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGES OF AT APRIL 30, CONTRACTUAL LIFE EXERCISE PRICE
EXERCISE PRICES 1999 (MONTHS) (IN G.B. POUNDS)
- --------------- ------------------ ---------------- ----------------
GBP0.10-GBP2.00................... 13,262,144 102 1.26
GBP2.01-GBP3.00................... 7,570,625 87 2.44
GBP3.01-GBP7.41................... 4,845,335 100 4.09
---------- --- ----
25,678,104 97 2.14
---------- --- ----
52
77
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
An analysis of those options currently exercisable as of April 30, 1999 is
set forth below:
NUMBER EXERCISABLE WEIGHTED AVERAGE
RANGES OF AT APRIL 30, EXERCISE PRICE
EXERCISE PRICES 1999 (IN G.B. POUNDS)
- --------------- ------------------ ----------------
GBP0.10-GBP2.00.................................. 3,671,859 1.56
GBP2.01-GBP3.00.................................. 5,442,154 2.44
GBP3.01-GBP7.41.................................. 2,557,508 4.09
---------- ----
11,671,521 2.43
---------- ----
Pro-forma data
As stated in note 1, the Company has elected to follow APB 25 and related
Interpretations in accounting for its employee share options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires the use of option valuation models that were not developed for use
in valuing employee share options. Under APB 25, because the exercise price of
the Company's options equals the market price of the underlying shares on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123, and has been determined as if the Company had
accounted for employee share options granted since January 31, 1995 under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1999, 1998 and 1997: risk-free
interest rate based on Treasury Strip, No Principal from the Wall Street Journal
for maturity of six years, based on the date of grant; dividend yields of 0%;
volatility factors of the expected market price of 0.647 in 1999 and 0.378 in
1998 and 1997; and an average expected life of the option of six years.
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the option valuation models require the input of
highly subjective assumptions including the expected share price volatility.
Because the Company's options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the Company's options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income (loss) and diluted net income (loss) per share data is set
forth below:
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
JANUARY 31, APRIL 30, JANUARY 31, JANUARY 31,
(IN THOUSANDS) 1999 1998 1998 1997
- -------------- ----------- ------------ ----------- -----------
Net loss (income) (in
thousands)..................... ($37,646) ($ 380) $14,012 ($40,026)
Net loss (income) per share...... ($ 0.26) ($0.00) $ 0.10 ($ 0.30)
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of such effects in future years since SFAS 123 is applicable
only to options granted since January 31, 1995. The effect will not be fully
reflected in the pro forma disclosures until 2001.
53
78
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 13 EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Employee stock purchase plan
Most INTERSOLV employees were eligible to participate in the INTERSOLV
employee stock purchase plan, which was authorized to grant rights to purchase
INTERSOLV's common stock. Eligible employees could purchase shares of
INTERSOLV's common stock at a purchase price equivalent to 85% of market value.
The plan was terminated effective September 24, 1998. During fiscal 1999,
the three-month fiscal period ended April 30, 1998 and fiscal 1998 and 1997,
respectively, are equivalent to 465,515, --, 787,480 and 558,460 shares in the
Company were purchased under this plan.
Warrants
In fiscal 1997, INTERSOLV issued warrants to purchase 140,000 INTERSOLV
shares at an exercise price of $10.375. These warrants were assumed by the
Company and became warrants to acquire ADSs in the Company at $5.70625 per ADS.
At April 30, 1999, the warrants were fully exercisable; they expire in 2006.
Retirement plans
MERANT has entered into arrangements to provide pensions for its employees
on a defined contribution basis. Contributions, which are independently
administered by insurance companies and other financial institutions, are
expensed in the year in which they become payable.
In the United States, MERANT's plan qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, MERANT matches contributions made by
participating employees up to certain predetermined thresholds. Arrangements for
employees in other countries have been established on similar bases, subject to
local conditions and practices in the countries concerned.
In fiscal 1999, the three-month fiscal period ended April 30, 1998 and
fiscal 1998 and 1997, contributions totalling $1,934,000, $483,000, $1,202,000
and $1,125,000 respectively, have been expensed.
NOTE 14 SHARE SPLIT
The Company's ordinary shares were split on a 5-for-1 basis with effect
from close of business on March 13, 1998. The Company's American Depositary
Shares ("ADSs") did not split, although the conversion rights of such ADSs were
adjusted such that each ADS represents five ordinary shares.
NOTE 15 COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consists of the following:
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
1999 1998 1998 1997
---------- ------------ ----------- -----------
Foreign currency translation
adjustments............................ $(8,629) $(7,998) $(8,694) $(7,144)
Unrealized gain (loss) on marketable
securities, net of tax................. (23) (28) 44 (90)
Other.................................... 6 6 -- --
------- ------- ------- -------
$(8,646) $(8,020) $(8,650) $(7,234)
======= ======= ======= =======
54
79
MERANT PLC
FINANCIAL STATEMENTS 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
US FORMAT
NOTE 16 SUBSEQUENT EVENT
On August 3, 1999, the Company completed the acquisition of Essential
Software, Inc. (d/b/a The Marathon Group), a privately-held Internet
professional services firm based in Raleigh, North Carolina for a total
consideration of $15 million payable in cash.
NOTE 17 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 1999 and 1998, and for the
fiscal quarter ended April 30, 1998 is as follows:
FIRST SECOND THIRD FOURTH
IN THOUSANDS (EXCEPT PER ADS DATA) QUARTER QUARTER QUARTER QUARTER TOTAL
- ---------------------------------- ------- ------- ------- -------- --------
Year ended April 30, 1999:
Net revenue.................................. $95,275 $87,159 $95,717 $ 96,051 $374,202
Non-recurring items.......................... -- (49,662) -- -- (49,662)
Operating income (loss)...................... 9,591 (49,497) 6,104 744 (33,058)
Net income (loss)............................ 7,229 (42,304) 5,212 1,331 (28,532)
Net income (loss) per ADS: basic............. 0.25 (1.47) 0.18 0.05 (1.00)
Net income (loss) per ADS: diluted........... 0.24 (1.47) 0.18 0.05 (1.00)
------- ------- ------- -------- --------
Fiscal quarter ended April 30, 1998:
Net revenue.................................. $106,987 $106,987
Non-recurring items.......................... (17,292) (17,292)
Operating income............................. 1,193 1,193
Net income................................... 1,489 1,489
Net income per ADS: basic.................... 0.05 0.05
Net income per ADS: diluted.................. 0.05 0.05
------- ------- ------- -------- --------
Year ended January 31, 1998:
Net revenue.................................. $73,175 $86,895 $92,494 $110,355 $362,919
Non-recurring items.......................... (176) -- -- (17,292) (17,468)
Operating income............................. 3,566 8,108 13,271 1,193 26,138
Net income................................... 2,980 5,886 9,793 1,489 20,148
Net income per ADS: basic.................... 0.11 0.21 0.36 0.05 0.73
Net income per ADS: diluted.................. 0.11 0.20 0.34 0.05 0.70
------- ------- ------- -------- --------
- ---------------
NOTES: Data for all periods presented has been restated to reflect the
pooling-of-interest accounting in connection with the acquisitions made
during 1999 and 1998 (see note 2 to the consolidated financial statements
on page 40).
Share and per share data has been restated to reflect the 5-for-1 stock
split of the Company's ordinary shares (see note 14 to the consolidated
financial statements on page 54).
55
80
MERANT PLC
FINANCIAL STATEMENTS 1999
REPORT OF INDEPENDENT AUDITORS
US FORMAT
To the Board of Directors and Shareholders
of MERANT plc
We have audited the accompanying consolidated balance sheets of MERANT plc
and subsidiaries as of April 30, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for the year ended
April 30, 1999, the three-month period ended April 30, 1998 and for each of the
two years in the period ended January 31, 1998 on pages 31 to 55. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
The consolidated financial statements give retroactive effect to the
combination of the Company and INTERSOLV, Inc. which has been accounted for
using the pooling-of-interests method as described in note 2 to the financial
statements on page 40.
We did not audit the financial statements of INTERSOLV, Inc, which
statements reflect total assets constituting 39% of the related consolidated
financial statement total at April 30, 1998, and net revenue constituting
approximately 55%, 54% and 57% of the related consolidated financial statement
totals for the three month period ended April 30, 1998 and for the years ended
January 31, 1998 and January 31, 1997, respectively. Those statements, which
were prepared in accordance with accounting principles generally accepted in the
United States, were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to amounts included for INTERSOLV,
Inc for 1998 and 1997, is based solely on the report of the other auditors.
We conducted our audits in accordance with United Kingdom auditing
standards which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MERANT plc at April
30, 1999 and 1998, and the consolidated results of its operations and its
consolidated cash flows for the year ended April 30, 1999, the three-month
period ended April 30, 1998 and for each of the two years in the period ended
January 31, 1998, in conformity with accounting principles generally accepted in
the United States.
Ernst & Young
Reading, England
August 4 1999
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81
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
SELECTED CONSOLIDATED FINANCIAL DATA
UK FORMAT
The following selected financial data should be read in conjunction with,
and is qualified in its entirety by reference to, the financial statements of
MERANT, expressed in G.B. pounds, set out on pages 72 to 103 of this report.
PERIODS ENDED:
------------------------------------------------------------
IN THOUSANDS OF G.B. POUNDS APRIL 30 JANUARY 31 JANUARY 31 JANUARY 31 JANUARY 31
(EXCEPT PER SHARE DATA, PERCENTAGES AND EMPLOYEES) 1999 1998 1997 1996 1995
- -------------------------------------------------- -------- ---------- ---------- ---------- ----------
OPERATING RESULTS FOR THE PERIOD:
Revenue....................................... 215,473 97,015 73,089 77,258 89,885
Profit/(loss) before taxation and exceptional
items....................................... 259 15,217 (614) (541) 12,871
Exceptional items............................. (11,831) -- (5,195) (6,001) (4,148)
(Loss)/profit before taxation................. (11,572) 15,217 (5,809) (6,542) 8,723
Retained (loss)/profit for the period......... (15,279) 10,426 (7,281) (6,470) 4,590
(Loss)/Earnings per share: basic.............. (14.3P) 14.0p (10.2p) (8.7p) 6.4p
(Loss)/Earnings per share: diluted............ (14.3P) 13.3p (10.2p) (8.7p) 6.4p
Average number of shares in issue (thousands)... 110,714 78,735 75,780 74,215 71,680
FINANCIAL POSITION AT END OF PERIOD:
Cash and bank deposits........................ 75,394 51,518 44,725 38,972 55,823
Total assets.................................. 322,361 123,824 100,204 111,828 124,302
Creditors: amounts falling due after more than one
year........................................ -- 12 15 66 193
Total shareholders funds...................... 217,109 70,892 61,124 70,187 72,856
FINANCIAL CONDITION:
Working capital............................... 62,370 36,195 26,611 27,306 36,554
Current ratio................................. 1.67 1.78 1.81 1.76 1.80
Return on revenue: excluding exceptional items... N/A 11% n/a n/a 10%
Return on average equity: excluding exceptional
items....................................... N/A 16% n/a n/a 12%
EMPLOYEE INFORMATION
Average number of employees................... 1,461 768 646 735 751
Period end number of employees................ 2,018 827 626 708 788
Revenue per employee (annualised)............. 147 126 113 105 120
(Loss) profit after taxation per employee:
excluding exceptional items (annualised).... (5) 14 (3) (2) 12
- ---------------
NOTES: Details of the exceptional items are set out in note 8 to the
consolidated financial statements on page 89.
Shares and per-share data for prior periods has been restated to comply
with FRS 14 -- Earnings per Share and to reflect the 5-for-1 sub-division
of the Company's ordinary shares, which took effect from the close of
business on March 13, 1998 (see note 25 to the consolidated financial
statements on page 102).
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82
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
UK FORMAT
This discussion has been prepared in accordance with U.S. reporting
practice and is presented here so that readers of the U.K. format financial
statements have the same information as readers of the U.S. format financial
statements. It should be read in conjunction with the financial statements of
MERANT plc and its subsidiary undertakings ("MERANT") in G.B. pounds, on pages
72 to 103.
On February 16 1999, the Company changed its corporate name from "Micro
Focus Group Plc" to "MERANT plc".
On September 24, 1998, the Company acquired INTERSOLV, Inc. ("INTERSOLV")
in a transaction which approximately doubled the size of the Company in terms of
revenue, costs and employees, and resulted in the Company incurring significant
charges against current operations. Also, the Company elected to change its
financial year end and accounting reference date to April 30 from January 31 and
is therefore reporting results for the fifteen-month period ended April 30,
1999.
For these two reasons, the reported results for 1999 are difficult to
compare with the results for 1998, and consideration of these factors should be
made in any review of variances in revenue and costs.
RESULTS OF OPERATIONS
The Company has reported a loss for the period, after taxation, of
GBP 15.3m or 14.3 pence per share as compared to a profit after taxation in
1998 of GBP 10.4m or 13.3 pence per share diluted. The loss for the current
period is after providing for certain charges resulting from the acquisition of
INTERSOLV.
The Company's results include the results of INTERSOLV from September 24,
1998, the date of its acquisition (or the "INTERSOLV Acquisition"). Goodwill
arising on the acquisition--representing the excess of the consideration over
the net value of the assets acquired--totalled GBP 140.1m. This amount has been
capitalised as an intangible asset, which will be amortised through the profit
and loss account over a four year period. Amortisation of this goodwill is
therefore expected to result in an annual charge of approximately GBP 35m,
subject to any future reviews an of impairment. In the period up to April 30
1999, the Company recorded a charge of GBP 21.2m, which is included in the
profit and loss account under general and administrative costs. In addition,
the Company recorded a one-time exceptional charge of GBP 11.8m in connection
with the costs incurred to restructure the combined business following the
merger of the two companies. Because of the fundamental nature of this
restructuring, this charge is disclosed separately in the profit and loss
account, below. The Company does not expect to incur any additional costs in
connection with the merger
During 1999 the Company also acquired two of its foreign distributors.
Details of the acquisitions are set out below under the section "Acquisitions"
on page 63.
The following table discloses operating results as a percentage of revenue
for each of last three financial years and the percentage changes relative to
the previous year for each of the last two years. Throughout this
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83
discussion, references to 1999 are to the fifteen-month period ended April 30,
1999, and references to 1998 and 1997 are to the years ended January 31, 1998
and January 31, 1997 respectively.
PERCENTAGE OF NET REVENUE
------------------------------------------ YEAR TO YEAR
FIFTEEN MONTHS PERCENTAGE CHANGE
ENDED YEAR ENDED YEAR ENDED --------------------------------
APRIL 30, JANUARY 31, JANUARY 31, 1998 TO 1997 TO
1999 1998 1997 1999 1998
-------------- ----------- ----------- ------------ -----------------
(ANNUALISED)
REVENUE
Product revenue............... 55% 62% 58% 56% 44%
Maintenance revenue........... 26% 29% 40% 60% -4%
Service revenue............... 19% 9% 2% 293% 434%
---- ---- ---- ----- -----
TOTAL REVENUE.............. 100% 100% 100% 78% 33%
---- ---- ---- ----- -----
COST OF REVENUE
Cost of product revenue....... 4% 8% 9% 7% 9%
Cost of maintenance revenue... 8% 7% 14% 95% -35%
Cost of service revenue....... 14% 9% 2% 164% 645%
---- ---- ---- ----- -----
TOTAL COST OF REVENUE...... 26% 24% 25% 95% 25%
---- ---- ---- ----- -----
GROSS PROFIT.................... 74% 76% 75% 72% 35%
---- ---- ---- ----- -----
OPERATING EXPENSES
Research and development...... 16% 20% 33% 40% -19%
Sales and marketing........... 41% 37% 41% 101% 18%
General and administrative.... 19% 6% 11% 414% -20%
---- ---- ---- ----- -----
TOTAL OPERATING EXPENSES... 76% 63% 85% 113% -1%
---- ---- ---- ----- -----
OPERATING (LOSS)/PROFIT......... -2% 13% -10% -125% -270%
Exceptional item -- fundamental
restructuring................. -5% -- -- -- --
---- ---- ---- ----- -----
(LOSS)/PROFIT AFTER EXCEPTIONAL
ITEM.......................... -7% 13% -10% -200% -270%
Interest income................. 2% 3% 2% 39% 48%
Interest expense................ -- -- -- 66% 233%
---- ---- ---- ----- -----
(LOSS)/PROFIT BEFORE TAXATION... -5% 16% -8% -161% -362%
Taxation........................ -2% -5% -2% -38% 225%
---- ---- ---- ----- -----
RETAINED (LOSS)/PROFIT
FOR THE PERIOD................ -7% 11% -10% -217% -243%
Revenue
The Company's products are generally licenced to end users pursuant to a
licence agreement that restricts the use of the product to a designated number
of developers. The Company also offers its customers a broad range of services,
including maintenance, support, training and consulting. Maintenance services
consist primarily of enhancements and upgrades to products as well as telephone
support concerning the use of the Company's products. Training and consulting
services are focused on assisting customers in using the Company's products.
The Company's product and service offerings are focused in four primary
solution areas: Application Development Management (or "ADM", which includes
MERANT PVCS series), Enterprise Data Connectivity (or "EDC", which includes
MERANT DataDirect series), Application Creation and Transformation (or "ACT",
which includes MERANT Micro Focus series) and Enterprise Consulting Solutions
(or "ECS", which includes MERANT Consulting). These four solution areas are
collectively referred to as the Company's key products or solution areas.
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84
Total revenue for the fifteen-month period ended April 30 1999 increased by
GBP 118.5m or 122% to GBP 215.5m relative to the twelve month period ended
January 31 1998 and by GBP 23.9m or 33% to GBP 97.0m in 1998. Most of the
1999 increase was the result of the INTERSOLV Acquisition combined with the
additional three months in 1999. Revenue from the business prior to the
INTERSOLV Acquisition ("Existing Business") increased by 9% in 1999 on an
annualised basis. The increase in 1998 reflected initial worldwide sales of the
Company's SoftFactory 2000 and NetExpress products, increased UNIX product
sales and revenue from consulting services.
Revenue by Solution Area
Total revenue for the fifteen-month period ended April 30 1999 increased
by GBP 118.5m or 122% to GBP 215.5m relative to the twelve month period ended
January 31 1998 and by GBP 23.9m or 33% to GBP 97.0m in 1998. Most of the
1999 increase was the result of the INTERSOLV Acquisition combined with the
additional three months in 1999. Revenue from Existing Business increased by 9%
in 1999 on an annualised basis. The Existing Business increase in fiscal 1998
reflected initial worldwide sales of the Company's SoftFactory 2000 and
NetExpress products, increased UNIX product sales and revenue from consulting.
Product revenue
Product revenue increased by GBP 57.8m or 96% to GBP 118.2 million
relative to 1998, having previously increased by GBP 18.5m or 44% to GBP
60.5m in 1998 relative to 1997. Most of the 1999 increase was the result of the
INTERSOLV Acquisition combined with the additional three months in 1999.
Revenue from Existing Business increased by 4% on an annualised basis. Growth
in European markets in 1999, more than offset weakness in North American
revenue caused by a decrease in the Company's Year 2000 business, the effects
of the Company's sales force reorganization and integration issues related to
the INTERSOLV acquisition. The increase in revenue in 1998 reflected higher
sales of ACT product revenue in all geographies.
Maintenance revenue
Maintenance revenue increased by GBP 28.2m or 100% to GBP 56.5m relative
to 1998, having previously decreased by GBP 1.3m or 4% to GBP 28.2m in 1998
relative to 1997. Most of the 1999 increase was the result of the INTERSOLV
Acquisition combined with the additional three months in 1999. Revenue from
Existing Business increased by 3% in 1999 on an annualised basis. The decrease
in 1998 was the result of lower than expected maintenance contract renewals.
Service revenue
Service revenue increased by GBP 32.5m or 391% to GBP 40.8m relative to
1998, having previously increased by GBP 6.7m or 434% to GBP 8.3m in 1998
relative to 1997, and represented 19% of total revenue in 1999 (1998: 9%; 1997:
2%). The significant growth in service revenue is attributable to the INTERSOLV
Acquisition in 1999 and of Millennium UK Ltd in 1998.
Geographic revenue
In 1999, 62% of revenue arose in the U.S.A., compared to 51% in 1998. U.K.
revenue increased to 14% of total revenue (1998: 12%). In the fifteen-month
period ended April 30, 1999, U.S. revenue increased by 171%, U.K. revenue by
154% and revenue from the rest of the world by 42%. Most of the 1999 increase
was the result of the INTERSOLV Acquisition combined with the additional three
months in 1999. The INTERSOLV Acquisition also changed the geographic mix of
the Company somewhat.
There can be no assurance that the market for the Company's products will
grow in future periods at its historical rate of growth, that certain segments
will not decline, or that the Company will be able to increase or maintain its
market share in the future or achieve its historical revenue growth rates.
60
85
Cost of revenue
Cost of product revenue is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media, and printing of manuals), packaging and distribution costs,
and royalties to third party software developers for the licencing of certain
add-on software products. Such costs increased by GBP 2.4m or 34% to GBP 9.4m
for the fifteen-month period ended April 30 1999, having previously increased
by GBP 0.6m or 9% to $7.0m in 1998 relative to 1997 and represented 8%, 12% and
15% of product revenue in 1999, 1998 and 1997 respectively. These percentage
reductions principally reflect savings in product materials arising from the
documentation being supplied on CD-ROM.
Cost of maintenance revenue is comprised principally of remuneration for
technical support personnel. Such costs increased by GBP 10.0m or 143% to
GBP 17.0m for the fifteen-month period ended April 30 1999, having previously
decreased by GBP 3.7m or 35% to $7.0m in 1998 relative to 1997 and represented
30%, 25% and 36% of maintenance revenue in 1999, 1998 and 1997 respectively.
Cost of service revenue is comprised principally of remuneration and
expenses of training and consulting personnel. Such costs increased by GBP
20.4m or 230% to GBP 29.2m for the fifteen-month period ended April 30 1999,
having previously increased by GBP 7.7m or 645% to $8.9m in 1998 relative to
1997 and represented 72%, 107% and 77% of service revenue in 1999, 1998 and
1997 respectively.
Gross profit
Gross profit represented 74%, 76% and 75% of revenue in 1999, 1998 and
1997 respectively. The decrease in 1999 primarily reflects proportionately
higher maintenance and service revenues.
The Company's gross margin can be affected by a number of factors,
including changes in product or distribution channel mix, the mix of product
and service revenue, and competitive pressures on pricing. Gross margin is also
dependent on discounts selectively provided to customers in competitive sales
situations. In addition, gross margin may be adversely affected by expansion of
the Company's consulting organisation and the ability to deploy its capacity to
revenue generating projects. As a result of the above factors, gross margin
fluctuations are difficult to predict, and gross margins may decline from
current levels in future periods.
Research and development
Research and development costs consist principally of remuneration for
software developers and related costs, less the proportion of those costs
capitalised, plus the charge for amortisation of previously capitalised costs.
The Company's high level of research and development spending supports the
development and enhancement of new and existing products and is consistent with
the Company's strategy of investing heavily to improve and expand its product
lines.
In fiscal 1999 and 1998, research and development has been principally
directed towards improvement and enhancements to existing solution areas.
Efforts are generally focused in areas of most promise.
Expenditure on internal software research and development increased by
GBP 14.6m or 74% to GBP 34.3m for the fifteen-month period to April 30 1999,
having decreased by GBP 4.6m or 19% to GBP 19.7m in 1998 relative to 1997 and
represented 16%, 20% and 33% of revenue in 1999, 1998 and 1997 respectively.
Most of the 1999 increase was the result of the INTERSOLV acquisition combined
with the additional three months in 1999. The decrease in 1998 development
expenditure reflect a lower relative cost structure following the restructuring
of operations in fiscal 1997.
In 1999 GBP 5.9m, representing 19% of these costs, were capitalised as
software product assets (1998: 32%, 1997: 27%). Provisions for amortisation
amounted to GBP 9.7m (1998: GBP 7.8m; 1997: GBP 8.1m) resulting in a net
charge to profit and loss in 1999 of GBP 3.8m (1998: GBP 2.1m; 1997: GBP
2.8m).
The Company believes that ongoing development of new products and features
is required to maintain and enhance its competitive position. Accordingly,
while the Company will continue to control expenses where possible, the Company
anticipates that aggregate research and development expenses will increase over
time, and may not be directly related to the level of revenue realised in
future quarters.
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86
Sales and marketing
Sales and marketing costs include remuneration, travel and facility costs
for sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows. Such costs increased by GBP 53.7m or 151% to
GBP 89.2m for the fifteen-month period ended April 30 1999 relative to the year
ended January 31 1998, and by GBP 5.3m or 18% to GBP 35.5m in 1998 relative
to 1997 and represented 41% of revenue in 1999 (1998: 37%, 1997: 41%). Most of
the 1999 increase was the result of the INTERSOLV Acquisition combined with the
additional three months in 1999. In addition, fiscal 1999 includes costs
associated with the new corporate name.
The Company believes that continued investments in sales, marketing,
customer support and promotional activities are essential to maintaining its
competitive position. The Company is expanding its sales and support staffs
and, accordingly, anticipates that sales and marketing expenses will be higher
in future periods, but as a function of revenue will decrease.
General and administrative
General and administrative costs include the Company's group management,
finance, legal and human resources operations. Such costs increased by GBP
34.1m or 543% to GBP 40.4m for the fifteen-month period ended April 30 1999
relative to the year ended January 31 1998, having decreased by GBP 1.6m or
20% to GBP 6.3m in 1998 relative to 1997 and represented 19% of revenue in
1999 (1998: 6%, 1997: 11%.)
In the current period, the Company adopted Financial Reporting Standard 10
"Goodwill and Intangible Assets" (see under "New accounting standards" in note
1 to the financial statements on page 83). Accordingly, the Company has
capitalised goodwill totaling GBP 144.4m in the current period, and
amortisation of this balance will be charged to general and administrative
costs over the estimated economic life of the goodwill acquired. Amortisation
charged in the current period amounted to GBP 21.9m. Exclusive of that charge,
general and administrative costs increased by 194% and represent 9% of revenue.
Most of the 1999 increase was the result of the INTERSOLV Acquisition combined
with the additional three months in 1999.
The total for 1997 included GBP 1.9m of restructuring costs (see
Exceptional items, below). The underlying increase in 1998 reflected higher
bonus accruals and staff additions.
The Company is investing to strengthen its infrastructure and anticipates
that general and administrative expenses will increase in future quarters, but
decrease as a percentage of revenue.
Exceptional items
During the current period the Company provided for costs of GBP 11.9m in
connection with a fundamental restructuring of its operations. Following the
acquisition of INTERSOLV in September 1998, the senior management of the
Company realigned the Company to complete the integration of the combined
operations. As part of this realignment, the Company has incurred charges
consisting principally of the write-off of redundant or impaired assets and
severance costs. Because of the fundamental nature of this reorganisation, the
related costs have been disclosed as an exceptional item on the face of the
profit and loss account.
In the year ended January 31 1997 the Company recorded a restructuring
charge of GBP 5.2m, representing the costs associated with a workforce
reduction of approximately 65 people, facility closures and consolidations, and
asset write-downs. Due to the nature of the restructuring, the amounts booked
were charged against operating profit.
Interest income
Interest earned on cash and short-term investments increased by GBP 1.9m
or 74% to GBP 4.4m for the fifteen-month period ended April 30 1999 relative
to the year ended January 31 1998 and by GBP 0.8m or 48% to GBP 2.6m in 1998
relative to 1997 and represented 2% of revenue in 1999 (1998: 3%, 1997: 2%.)
The increase in 1999 represented the impact of higher cash balances. The
increase in 1998 reflected higher average cash balances
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87
and also higher investment yields resulting from the investment of funds in
money market instruments instead of bank certificates of deposit.
The Company has a hedging programme to minimise foreign exchange gains or
losses, where possible, from recorded foreign-currency denominated assets and
liabilities. This programme involves the use of borrowings and forward foreign
exchange contracts in certain European currencies, including the euro. No
hedging contracts were outstanding at the year end.
Taxation
The Company's effective tax rate in the current period is significantly
distorted by the impact of provisions for amortisation of goodwill, which is not
an allowable expense. (See "General and administrative costs", above) The
current period rate is also impacted by corporate profits and losses arising in
different tax jurisdictions. The Company's effective tax rate is expected to be
significantly impacted by provisions for amortisation of goodwill for the next
four years.
In prior years the effective tax rate was distorted by the impact of
disallowable exceptional items, and losses incurred in the United States which
can only be offset against profits arising in the U.S. in future periods.
The income tax returns of certain of the Company's U.S. subsidiary
undertakings for the years ended January 31, 1993 to 1997 are under examination
by the U.S. Internal Revenue Service, which has proposed increases to the amount
of U.S. income taxes due in respect of those years. Any adjustments that may
result from this examination are not expected to have a material adverse impact
on the Company's consolidated operating results or its financial position.
An analysis of the charge for income taxes is given in note 10 to the
financial statements on page 90.
Acquisitions
In the current financial year MERANT completed three acquisitions at a
total cost of GBP 165,012,000.
On May 15, 1998, the Company acquired all of the share capital of its
Italian distributor, Micro Focus Italia, s.r.l. ("MF Italia"), for total
consideration of approximately GBP 2.6m. The Company made an initial cash
payment of GBP 2.4m, with the balance payable in cash, dependent on future
results of MF Italia. MF Italia changed its name to MERANT s.r.l. on March 1,
1999.
On August 13, 1998, the Company acquired all of the share capital of its
Australian distributor, Advanced Software Engineering Pty Ltd. ("ASE"), for
total consideration of approximately GBP 1.5m. The Company made an initial cash
payment of GBP 1.0m, with the balance payable in cash, dependent on future
results of ASE. ASE changed its name to MERANT Pty Ltd on February 16, 1999.
On September 24, 1998, the Company completed the acquisition of INTERSOLV,
a U.S. public corporation based in Maryland, and listed on the Nasdaq National
Market. INTERSOLV was a provider of software solutions that facilitate the
development, delivery and deployment of business information systems.
INTERSOLV's products and services are focused primarily in the areas of
application development management, enterprise data connectivity and enterprise
application renewal.
Under the terms of the agreement, each common share of INTERSOLV was
exchanged for 0.55 MERANT American Depositary Shares ("ADSs"). In addition, each
outstanding option or right to purchase or acquire shares of INTERSOLV common
stock was assumed by the Company and became an option or right to purchase or
acquire MERANT ADSs, with appropriate adjustments to the price and number of
shares based on the exchange ratio of 0.55 ADSs per INTERSOLV share. The merger
was structured as a tax-free reorganization under U.S. tax law. The Company
issued approximately 12.6 million new MERANT ADSs (representing approximately
63.1 million new MERANT ordinary shares) in exchange for INTERSOLV's common
stock and share equivalents outstanding, which at the time of the completion of
the transaction represented approximately 46% of MERANT's share capital on a
fully-diluted basis.
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Further information on these transactions is given in note 3 to the
financial statements on page 86.
In the year ended January 31 1998 the Company completed two acquisitions.
On April 30 1997 the Company acquired all of the share capital of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, for a
consideration of GBP 4.0m paid in a combination of GBP 2.0m in cash and the
issue of 747,060 ordinary shares in the Company. Millennium was a consulting
and project management services company which brought to MERANT specialised
expertise in the estimating, planning and management of Year 2000 compliance
projects.
On January 20 1998 the Company acquired all of the share capital of XDB
Systems, Inc ("XDB") in exchange for 1,891,975 ordinary shares in the Company,
which represented a value of GBP 8.7m on the date of the acquisition. XDB, a
privately-held corporation based in Maryland, USA, was a provider of DB2
database development, maintenance and connectivity solutions.
Year 2000 considerations
The Year 2000 problem is the result of the widespread practice since the
early days of computing of using only two digits to refer to a year (such as
"98" for "1998") instead of four digits in computer systems. When the Year 2000
arrives or the computer system refers to dates after December 31, 1999, such
systems will interpret the two digits "00" as "1900" as opposed to "2000".
Failure to address this problem could cause results ranging from system failures
to erroneous calculations in date-dependent operations for dates falling after
December 31, 1999. The Company has instituted various projects to become Year
2000 ready. "Year 2000 ready" as used herein means that the performance or
functionality of the Company's internal systems will not be significantly
affected by the dates prior to, during and after the Year 2000.
State of Readiness
The Company has developed and implemented an enterprise-wide plan to
analyse and address potential Year 2000 issues affecting its internal systems,
its interaction with third party vendors and suppliers, and its products and
services.
The Company has established a Year 2000 Project Team to implement a
comprehensive four-phase Year 2000 readiness plan addressing the Year 2000
readiness of the Company's internal systems. The Year 2000 readiness plan is
comprised of four phases (inventory, analysis, remediation and validation
phases). The inventory, analysis and remediation stages of the Year 2000
readiness plan have been substantially completed in all material respects with
respect to the Company's material internal systems, and the Company expects to
substantially complete the validation phase of the plan in all material respects
by August 31 1999. The Year 2000 readiness plan covers IT systems (desktop,
laptop, servers, routers, hubs, switches, and remote access systems, operating
systems, software and critical business systems), non-IT embedded systems
(telephone, voice messaging, teleconferencing, data services and equipment, fax,
copiers and similar equipment.), facilities (elevators, security systems, card
access systems and similar systems), and the Company's vendors and suppliers. As
part of the inventory phase, the Company sought confirmation from its material
suppliers on the current Year 2000 readiness of their systems and/or their
intended time schedule for achieving Year 2000 readiness. During the remainder
of calendar 1999, the Company will also be completing, reviewing and updating
its contingency and disaster recovery plans and preparing a detailed action plan
for the crossover of the Company into the next millennium.
With respect to its software products, each of the Company's product
business units has completed a Year 2000 assessment of its currently offered
products. In preparing for the Year 2000 date change, the Company has adopted
the Year 2000 compliance standard published by the British Standards Institute
(BSI)--BSI DISC PD2000-1 "A Definition of Year 2000 Conformity Requirements." As
a result of this assessment, the Company believes that the vast majority of its
currently offered products are Year 2000 compliant, and expects virtually all of
its remaining currently offered products to become compliant during calendar
1999 through new releases. In any event, the Company expects that all the then
current versions of its offered products will be Year 2000 compliant before the
end of calendar 1999. Because Year 2000 compliance
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is generally integrated into its normal product development activities, the
Company has not incurred and does not expect to incur any significant
incremental expenses in addressing this issue in its product lines. The Company
believes that a small number of customers who receive product support from the
Company are operating product versions that may not be Year 2000 compliant or
products that the Company has replaced or intends to replace with comparable
Year 2000 compliant products. The Company believes that the vast majority of
such customers are migrating and will continue to migrate to compliant versions
and products through new releases, which the Company is strongly encouraging. In
addition, certain former customers may be operating non-compliant versions of
products in respect of which the Company's agreed-upon product support and
warranty periods have expired. The Company has not undertaken, and does not plan
to undertake in the future, an assessment of whether these former customers are
taking appropriate steps to address any related Year 2000 issues.
The Company does not expect customers who licence or migrate to Year 2000
compliant versions of its products to experience any material Year 2000 failures
caused by such products. In addition, the Company believes that its licences and
other agreements contain customary and appropriate limitations on the Company's
obligations with respect to any Year 2000 failures that may be caused by its
current or former products. However, there can be no assurance that the
Company's expectations and beliefs as to these matters will prove to be
accurate. Moreover, the Company's products are used in IT systems containing
third-party hardware and software, some of which may not be Year 2000 compliant.
Many of the Company's customers use legacy computer systems that are expected to
be particularly susceptible to Year 2000 compliance issues. Various commentators
have predicted that a significant amount of litigation may arise out of Year
2000 compliance issues. While the Company has not been subject to any Year 2000
product claims or lawsuits to date, there can be no assurance that customers or
former customers will not bring claims or lawsuits against the Company seeking
compensation for losses associated with Year 2000-related failures. A material
adverse outcome in a Year 2000 claim or lawsuit could have a material adverse
effect on the Company's business, financial condition and results of operations.
A small number of the products the Company sells are licenced from third
parties. Although the current versions of these products have generally been
warranted to the Company as being Year 2000 compliant, these products have
generally not been subjected to the same extensive Company testing as those
products developed or acquired by the Company. The Company is therefore working
with these third party suppliers to obtain assurance of Year 2000 compliance.
The Company has designated its website as the Company's "Year 2000 Internet
Website" under the terms of the Year 2000 Information and Readiness Disclosure
Act (the "Act") (S.2392). The information provided on past and present pages on
this website regarding the Year 2000 compliance of Company products has been
designated as "Year 2000 Readiness Disclosures." The pages on this website have
been and will continue to be the Company's primary means for communicating to
customers regarding the Year 2000 compliance of its products.
Demand for Year 2000 Remediation Products and Services
The Company anticipates that demand in the Year 2000 product and service
market will decline, perhaps rapidly, in anticipation of or following the Year
2000, and the demand for the Company's Year 2000 compliance products and
services may also decline significantly as a result of new technologies,
competition or other factors. In the quarter ended October 31, 1998, the
Company's Year 2000 business was affected by customers moving to the later
stages of their remediation processes, for which the Company did not have the
appropriate products generally available until November, 1998. If these factors
were to continue, the Company's licence revenue and professional service fees
could be materially and adversely affected.
Costs and Risks Associated with Year 2000 Issues; Contingency Plans
The Company currently does not anticipate that it will incur material
operating expenses or be required to invest heavily in internal systems
improvements as a result of Year 2000 readiness issues. In addition, the Company
has not incurred and does not currently expect to incur any significant
incremental expenses in addressing this issue in its product and services. Total
expenditures, excluding personnel costs of existing staff, related to the Year
2000 readiness of the Company's internal systems is not expected to be material.
However,
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there can be no assurance that the Company will not experience significant
additional expenses for unforeseen Year 2000 issues, including those out of the
reasonable control of the Company. Although the Company believes that its Year
2000 readiness efforts are designed to appropriately identify and address those
Year 2000 issues that are within the Company's control, there can be no
assurance that the Company's efforts will be fully effective or that Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition or results of operations. The novelty and complexity of the
issues presented and the Company's dependence on the preparedness of third
parties are among the factors that could cause the Company's efforts to be less
than fully effective. Moreover, Year 2000 issues present many risks that are
simply beyond the Company's control, such as the potential effects of Year 2000
issues on the economy in general and on the Company's business partners and
customers in particular. The Company intends to continue to evaluate both
existing and newly identified Year 2000 risks and to develop and implement such
further responsive measures as it deems appropriate.
The Company is developing a contingency plan and a disaster recovery plan,
as well as an action plan for the crossover of the Company into the next
millenium. Such plans seek to minimise the impact of the Year 2000 problem on
the Company's business, financial condition and results of operations. During
the remainder of calendar 1999, the Company will be reviewing and updating such
plans.
Euro considerations
With effect from January 1 1999 eleven of the fifteen member countries of
the European Union adopted the euro as their legal currency. From that date, the
participating countries established fixed euro conversion rates between their
existing sovereign currencies and the euro. The euro now trades on currency
exchanges and is available for non-cash transactions. With effect from May 1
1999 the Company's internal systems have the ability to price and invoice
customers in the euro. The Company is also engaging in foreign exchange and
hedging activities in the euro. The Company will continue to modify the internal
systems that will be affected by this conversion during fiscal 2000, and does
not expect the costs of further system modifications to be material. There can
be no assurance, however, that the Company will be able to complete such
modifications to comply with euro requirements, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company will continue to evaluate the impact of the introduction
of the euro on its foreign exchange and hedging activities, functional currency
designations, and pricing strategies in the new economic environment. In
addition, the Company faces risks to the extent that banks and vendors upon whom
the Company relies and their suppliers are unable to make appropriate
modifications to support the Company's operations with respect to euro
transactions. While the Company will continue to evaluate the impact of the
euro, management does not believe its introduction will have a material adverse
effect upon the Company's business, financial condition or results of
operations.
Factors that may influence future operating results
The following comments are included in both the U.S. and U.K. format of the
Management's Discussion and Analysis in this Annual Report in accordance with
the U.S. Private Securities Litigation Reform Act 1995. For more information on
U.S. Securities Law Matters see page 106.
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. This section of
the discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
The factors set forth below as well as statements made elsewhere in the
Company's Annual Report and these financial statements contain certain
forward-looking statements that are based on the beliefs of the Company's
management, as well as assumptions made by, and information currently available
to, the Company's management. The Company's actual results, performance or
achievements in the remainder of fiscal 2000 and beyond could differ materially
from those expressed in, or implied by, any such forward-looking statements.
Factors that could cause or contribute to such material differences include, but
are not limited to, those discussed in this section below, as well as those
discussed elsewhere in the Company's Annual Report and these financial
statements. The Company undertakes no obligation to release publicly any updates
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or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of the Company's Annual Report. For more
information regarding forward-looking statements, see Further Information for
Shareholders--Special Note on Forward-Looking Statements on page 106 of this
Report.
Year 2000 Spending Policies. Many of our customers and potential customers
could potentially implement policies that prohibit or strongly discourage making
changes or additions to their internal computer systems until after January 1,
2000. If companies implement such a policy, we could experience lower revenues
if potential customers who might otherwise purchase our products or services
delay purchases until after January 1, 2000 in an effort to stabilize their
internal computer systems in order to cope with the Year 2000 problem or because
their information technology budgets have been diverted to address Year 2000
issues. If our potential customers delay purchasing our products and services in
preparation for Year 2000 problem, our business could be seriously harmed.
Integration of INTERSOLV; Synergies. In September 1998, the Company
acquired all the share capital of INTERSOLV. The Company acquired INTERSOLV with
the expectation that the acquisition will result in long-term strategic
benefits. Realization of these anticipated benefits depends in part on whether
the operations and administration of the companies are fully integrated in an
efficient and effective manner. There can be no assurance that this will occur.
The combined company's integration efforts have yet to be fully completed and
are still ongoing. The successful integration of MERANT and INTERSOLV will
require, among other things, integration of the product offerings of the
companies, sales and marketing and research and development efforts, the
cooperation and coordination of the business managers of the two companies, and
the integration of globally dispersed operations. It is possible that this
integration will not be accomplished smoothly or successfully, and that efforts
to achieve integration may require more time, expense and management attention
than anticipated. The diversion of management's attention from day-to-day
operations and any difficulties encountered in the integration process could
have a material adverse effect on the Company's business, financial condition
and results of operations. If the integration of the Company's and INTERSOLV's
operations is not successful, if the combined companies do not achieve the
operational efficiencies and other business synergies that are anticipated or if
those synergies are not achieved as quickly as may be expected by financial
analysts or at the level expected by financial analysts, or if the effect of the
merger on earnings per share is not in line with the expectation of financial
analysts, the market price of the MERANT ordinary shares or the MERANT ADSs
could be significantly and adversely affected.
Fluctuations in Operating Results; Absence of Significant Backlog. The
Company's future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders and the lengthy sales cycle,
product life cycles, the ability of the Company to introduce and market new and
enhanced versions of the Company's products on a timely basis, the introduction
and acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of new or enhanced
products or technologies, the timing of product introductions or enhancements by
the Company or its competitors, technological changes in the software industry,
changes in the mix of distribution channels through which the Company's products
are offered, purchasing patterns of distributors and retailers, including
customer budgeting cycles, the quality of products sold, price and other
competitive conditions in the industry, changes in the Company's level of
operating expenses, changes in the Company's sales incentive plans, the
cancellation of licences during the warranty period, non-renewal of maintenance
agreements, the effects of extended payment terms (particularly for
international customers), economic conditions generally or in various geographic
areas, and other factors discussed in this section.
A relatively high percentage of the Company's operating expenses is fixed
over the short term and if anticipated revenue for a fiscal quarter does not
occur or is delayed, the operating results for that quarter will be immediately
and adversely affected. The Company historically has operated with little
product backlog, because its products are generally shipped as orders are
received. As a result, revenue of the Company in any quarter will depend on the
volume and timing of, and the ability to fill, orders received in that quarter.
In addition, a substantial portion of the Company's revenue for most quarters is
booked and shipped in the last
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month of the quarter such that the magnitude of the quarterly fluctuations may
not become evident until late in or even at the end of the particular quarter.
Seasonality of Operating Results. The Company's revenue also is affected
by seasonal fluctuations resulting from lower sales that typically occur during
the summer months in Europe and other parts of the world. In addition, the
Company has historically experienced lower revenue for the first quarter of a
fiscal year than in the fourth quarter of the prior fiscal year. The Company
typically has recognised a high proportion of its quarterly revenue during the
last month of a fiscal quarter and significant fluctuations in new order revenue
can occur due to the timing of customer orders. Quarterly results therefore can
vary to the extent that sales for a quarter are delayed, particularly since a
relatively high proportion of the Company's expenses do not vary with revenue.
Due to all of the foregoing factors, it is possible that in some future quarters
the Company's operating results will be below the expectations of stock market
analysts and investors and that the Company's share price would be materially
adversely affected.
Product Concentration. A large portion of the Company's revenue is derived
from products and related services for mainframe application development in the
COBOL language and COBOL compilers running on workstations and personal
computers. The Company expects that a substantial portion of its revenue will be
derived from such products and services in the future. As a result, the
Company's future operating results depend upon continued market acceptance and
use of the COBOL language. Any decline in the demand for or market acceptance or
use of the COBOL language or mainframes as a result of competition,
technological change or other factors could have a material adverse effect on
the Company's business, financial condition and results of operations.
Year 2000 Business and Compliance Issues. Information concerning the
Company's state of Year 2000 readiness, the demand for its Year 2000 remediation
products and services, the costs associated with its Year 2000 issues and its
contingency plans, and the Company's state of euro readiness are incorporated
herein by reference to the information included above in these financial
statements under the captions entitled "Year 2000 considerations" and "Euro
considerations" in the "Management's Discussion and Analysis of Results of
Operations and Financial Condition" section.
Rapid Technological Change; Dependence on New Products. The Company is in
a market that is subject to rapid technological change. The Company must
continually adapt to that change by improving its products and introducing new
products, technologies and services. The growth and financial performance of the
Company will depend in part on its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market enhancements of existing products and new products depends in part on
its ability to attract and retain qualified employees. In the past, the Company
has experienced delays and increased expenses in developing certain new
products. Any failure by the Company to anticipate or respond adequately to
changes in technology and market conditions, to complete product development and
introduce new products on a timely basis and with an adequate level of
performance and functionality, or to attract and retain qualified employees,
could materially adversely affect the Company's business, financial condition
and results of operations. to new or emerging technologies, or devote greater
resources to the promotion and sale of their products than can the Company.
There can be no assurance that other companies will not develop competitive
products in the future. In addition, the software industry is characterised
generally by low barriers to entry, as a result of which new competitors
possessing technological, marketing or other competitive advantages may emerge
and rapidly acquire market share. Furthermore, there can be no assurance that
the Company will be able to compete effectively in the future in the
professional services market.
Susceptibility to General Economic Conditions. The Company's revenue and
results of operations are subject to fluctuations in the general economic
conditions in the various areas of the world in which it does business. The
risks inherent in conducting international business generally include exposure
to exchange rate fluctuations (see the section entitled "Exchange rate
fluctuations" below), longer payment cycles, greater difficulties in debt
collection and enforcing agreements, tariffs and other restrictions on foreign
trade, export requirements, economic and political instability, withholding and
other tax consequences, restrictions on
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repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. In addition, the laws of certain countries in which the Company's
products may be marketed may not protect the Company's intellectual property
rights to the same extent, as do the laws of the United States and Europe. There
can be no assurance that the factors described above will not have an adverse
effect on the Company's future international revenue.
Dependence on Key Personnel. Several of the senior management personnel of
the Company are relatively new to the Company, including the Company's Chief
Executive Officer and Chief Financial Officer, and the Company's success will
depend in part on the successful assimilation and performance of these
individuals. Competition for qualified personnel in the software industry is
intense, and there can be no assurance that the Company will be able to attract
and retain a sufficient number of qualified personnel to conduct its business in
the future. The Company's success depends to a significant degree upon the
continued contributions of its key management, marketing, product development,
professional services and operational personnel, including key personnel of
acquired companies. The Company will not have employment agreements with most of
its key personnel, nor does it maintain key person life insurance on any of
these persons.
Management of Growth. Both the Company and INTERSOLV have recently
experienced a period of rapid growth in revenue. This growth has placed a
significant strain on the financial, management, operational and other resources
of the combined companies, and if it continues is expected to continue to place
a significant strain on the Company's financial, management, operational and
other resources. There can be no assurance that the Company's management
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations.
Volatility of Stock Price. The market price of the Company's securities
has experienced significant price volatility, particularly since the
announcement of the Company's proposed acquisition of INTERSOLV in June 1998,
and such volatility may occur in the future. Factors such as actual or
anticipated fluctuations in the Company's operating results, changes in
financial estimates by securities analysts, announcements of technological
innovations, new products or new contracts by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the software and other technology industries, adoption
of new accounting standards affecting the software industry, general market
conditions and other factors may have a significant impact on the market price
of the Company's securities. Furthermore, the stock market has experienced
extreme volatility that has particularly affected the market prices of equity
securities of many high technology companies. These market fluctuations, as well
as general economic, political and market conditions may adversely affect the
market price of the Company's securities.
Recent and Future Acquisitions. The challenges of integrating the
organizations and operations of the Company and INTERSOLV have been compounded
by ongoing efforts associated with the integration of recent acquisitions by
both companies, including the acquisitions by the Company of Millennium UK
Limited in April 1997, XDB Systems, Inc. in January 1998, Micro Focus Italia
S.r.L. in May 1998 and Advanced Software Engineering Pty. Ltd. in August 1998
and the acquisition by INTERSOLV of SQL Software, Ltd. in March 1998. The
Company also acquired Essential Software, Inc. (trading as The Marathon Group)
in August 1999. The Company is still in the process of integrating the
operations acquired in these transactions with its own. There can be no
assurance that the anticipated benefits of recently concluded business
combinations will be realised. In addition, these acquisitions have required
significant additional management resources and attention. The Company expects
to continue growing its business through acquisitions. If the Company is
unsuccessful in integrating and managing the recently acquired businesses or
other businesses it may acquire in the future, the Company's business, financial
condition and results of operations could be adversely affected in future
periods.
Enforceability of U.S. Judgments. The Company is a public limited company
organised under the laws of England and Wales. Judgments of U.S. courts,
including judgments against the Company, predicated on the civil liability
provisions of the federal securities laws of the United States, may not be
enforceable in English courts.
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Derivatives and other financial instruments
MERANT's principal financial instruments, other than derivatives, comprise
bank loans, cash and short-term deposits. The main purpose of these financial
instruments is to fund the operations of the business. The Company has various
other financial instruments, such as trade debtors and trade creditors, that
arise directly from its operations.
MERANT also enters into derivative transactions (principally forward
currency contracts). The purpose is to manage the currency risks arising from
the group's operations and its sources of finance.
It is, and has been throughout the period under review, the group's policy
that no trading in financial instruments shall be undertaken.
The main risks arising from the group's operations are liquidity risk and
foreign currency risk. The board reviews and agrees policies for managing each
of these risks and they are summarised below. These policies have remained
unchanged during the period under review.
Liquidity risk
The group's objective is to maintain a balance between maximisation of
investment returns and liquidity by restriction of the permitted investments and
the duration to maturity of those investments.
Foreign currency risk
As a result of the significant investment in overseas operations, the
group's balance sheet can be significantly affected by movements in foreign
currency exchange rates. The group seeks to mitigate the effect of this
structural currency exposure by entering into foreign exchange hedges. In
managing its structural currency exposures, the group's objectives are to
maintain a low cost of borrowings and to retain some potential for
currency-related appreciation while partially hedging against currency
depreciation. No hedging contracts were outstanding at April 30, 1999.
The group also has transactional currency exposures. Such exposures arise
from sales or purchases by an operating unit in currencies other than that
unit's functional currency. The group uses its multi-currency bank facility to
minimise such currency exposures.
Exchange rate fluctuations
MERANT prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates.
Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of the Company's revenue arises in U.S. dollars (approximately
two-thirds in 1999), whereas its costs are incurred approximately equally in
U.S. dollars and other currencies, predominately G.B. pounds. Consequently
fluctuations in exchange rates, particularly between the U.S. dollar and the
G.B. pound, may have a significant impact on the Company's operating results,
notably when expressed in G.B. pounds.
In 1999, 1998 and 1997, fluctuations between the U.S. dollar and the G.B.
pound have not been significant, and net exchange rate gains or losses on
operational transactions have been immaterial.
Liquidity and capital resources
MERANT continues to fund its activities through cash from operating
activities. In 1999 cash provided by operating activities was GBP 33.9m (1998:
GBP 17.8m).
In 1999 MERANT invested GBP 8.9m (1998: GBP 8.3m) in computer equipment
and other tangible fixed assets and GBP 5.9m (1998: GBP 5.7m) in software
product assets.
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Investment in 1998 included GBP 2.7m in connection with the relocation of
the Company to new U.S. facilities in Mountain View, California and Wayne,
Pennsylvania, and GBP 3.2m for the installation and implementation of new
internal recording and reporting systems.
Net of these expenditures, cash and short-term investments increased by
GBP 23.9m to GBP 75.4m (1998: increased by GBP 6.8m to GBP 51.5m).
The Company has in place a line of credit under the terms of which
unsecured financing of up to GBP 5.0m is available until January 2001.
At April 30 1999 borrowings totalling GBP 1.7m had been made against this
line of credit (January 31 1998: GBP 1.0m).
MERANT believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid money
market investments. The Company's investment policy is designed to minimise risk
while maximizing return on cash given such levels of risk, and to keep
uninvested cash at a minimum. Cash management is centralised, although some cash
is held at various subsidiaries around the world to meet local operating
requirements. All cash is freely remittable.
The Company believes that existing cash balances in combination with
internally generated funds and its available bank lines of credit will be more
than sufficient to meet cash requirements in 2000.
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
CONSOLIDATED PROFIT AND LOSS ACCOUNT
UK FORMAT
FIFTEEN MONTHS ENDED
APRIL 30 1999
----------------------------------- YEAR ENDED YEAR ENDED
CONTINUING ACQUISITIONS JANUARY 31 JANUARY 31
OPERATIONS (NOTE 3) TOTAL 1998 1997
NOTES GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----- ---------- ------------ ------- ---------- ----------
REVENUE
Product revenue.................. 78,446 39,799 118,245 60,480 42,020
Maintenance revenue.............. 36,452 20,002 56,454 28,233 29,516
Service revenue.................. 17,670 23,104 40,774 8,302 1,553
------- ------ ------- ------ ------
TOTAL REVENUE................. 2 132,568 82,905 215,473 97,015 73,089
------- ------ ------- ------ ------
COSTS OF REVENUE
Cost of product revenue.......... 6,302 3,063 9,365 6,990 6,406
Cost of maintenance revenue...... 10,940 6,058 16,998 6,984 10,703
Cost of service revenue.......... 12,353 16,894 29,247 8,861 1,189
------- ------ ------- ------ ------
TOTAL COST OF REVENUE......... 29,595 26,015 55,610 22,835 18,298
------- ------ ------- ------ ------
GROSS PROFIT....................... 102,973 56,890 159,863 74,180 54,791
------- ------ ------- ------ ------
OPERATING EXPENSES
Research and development......... 4 25,459 8,860 34,319 19,679 24,299
Sales and marketing.............. 55,735 33,426 89,161 35,477 30,146
General and administrative....... 5 25,980 14,432 40,412 6,288 7,854
------- ------ ------- ------ ------
TOTAL OPERATING EXPENSES...... 107,174 56,718 163,892 61,444 62,299
------- ------ ------- ------ ------
OPERATING (LOSS)/PROFIT............ 6 (4,201) 172 (4,029) 12,736 (7,508)
Exceptional item -- fundamental
restructuring.................... 8 (11,831) -- --
------- ------ ------
(LOSS)/PROFIT AFTER EXCEPTIONAL
ITEM............................. (15,860) 12,736 (7,508)
Interest income.................... 4,433 2,551 1,720
Interest expense................... 9 (145) (70) (21)
------- ------ ------
(LOSS)/PROFIT BEFORE TAXATION...... (11,572) 15,217 (5,809)
Taxation........................... 10 (3,707) (4,791) (1,472)
------- ------ ------
RETAINED (LOSS)/PROFIT FOR THE
PERIOD........................... (15,279) 10,426 (7,281)
======= ====== ======
(LOSS)/EARNINGS PER SHARE: BASIC... 11 (14.3p) 14.0p (10.2p)
(LOSS)/EARNINGS PER SHARE: DILUTED. 11 (14.3p) 13.3p (10.2p)
------- ------ ------
- ---------------
NOTE: Share and per share data for prior periods has been restated to comply
with FRS 14 -- Earnings Per Share (see note 1 on page 82) and to reflect
the 5-for-1 sub-division of the Company's ordinary shares, which took
effect on March 13, 1998 (see note 25 on page 102).
The notes on pages 79 to 102 form part of these financial statements.
72
97
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
CONSOLIDATED BALANCE SHEET
UK FORMAT
APRIL 30 JANUARY 31
1999 1998
NOTES GBP'000 GBP'000
----- -------- ----------
FIXED ASSETS
Intangible fixed assets................................... 12 133,976 12,394
Tangible fixed assets..................................... 13 28,633 23,836
Investments............................................... 14 4,691 4,886
------- ------
TOTAL FIXED ASSETS..................................... 167,300 41,116
------- ------
CURRENT ASSETS
Stocks.................................................... 15 1,780 317
Debtors................................................... 16 77,887 30,873
Cash and bank deposits.................................... 75,394 51,518
------- ------
TOTAL CURRENT ASSETS................................... 155,061 82,708
------- ------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR.............. 17 92,691 46,513
------- ------
NET CURRENT ASSETS.......................................... 62,370 36,195
------- ------
TOTAL ASSETS LESS CURRENT LIABILITIES.................. 229,670 77,311
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR..... 18 6 12
PROVISIONS FOR LIABILITIES AND CHARGES...................... 21 12,555 6,407
------- ------
NET ASSETS.................................................. 217,109 70,892
======= ======
CAPITAL AND RESERVES
Called up share capital................................... 2,873 1,588
Share premium account..................................... 189,261 30,196
Profit and loss account................................... 24,975 39,108
------- ------
TOTAL SHAREHOLDERS' FUNDS.............................. 217,109 70,892
======= ======
The financial statements on pages 72 to 102 were approved by the Board of
directors on August 4 1999
Gary Greenfield J. Michael Gullard
Director Director
The notes on pages 79 to 102 form part of these financial statements.
73
98
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
CONSOLIDATED CASH FLOW STATEMENT
UK FORMAT
YEAR ENDED YEAR ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
--------- ---------- ----------
NET CASH INFLOW FROM OPERATING ACTIVITIES (NOTE I).......... 33,864 17,767 12,135
------- ------- ------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received......................................... 4,433 2,519 1,803
Interest paid............................................. (145) (70) (21)
------- ------- ------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE................................................... 4,288 2,449 1,782
------- ------- ------
TAXATION
U.K. corporation tax refunded (paid)...................... 1,297 (599) (88)
Overseas tax refunded/(paid).............................. (582) (262) 70
------- ------- ------
TAX PAID.................................................... 715 (861) (18)
------- ------- ------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets......................... (8,906) (8,263) (2,500)
Capitalised software product assets....................... (5,853) (5,688) (5,258)
Investment in own shares.................................. 195 748 --
Disposal of tangible fixed assets......................... -- 447 546
------- ------- ------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT................................................ (14,564) (12,756) (7,212)
------- ------- ------
ACQUISITIONS AND DISPOSALS
Investment in subsidiary undertakings..................... 16,048 (2,000) --
Net cash acquired with subsidiaries....................... (17,928) 961 --
------- ------- ------
NET CASH OUTFLOW FROM ACQUISITIONS AND DISPOSALS............ (1,880) (1,039) --
------- ------- ------
CASH INFLOW BEFORE FINANCING................................ 22,423 5,560 6,687
------- ------- ------
FINANCING
Issue of ordinary shares.................................. 2,139 1,517 138
Expenses attributable to issue of ordinary shares......... (2,654) -- --
Capital element of finance lease obligations.............. (9) (65) (131)
Bank loan................................................. 689 1,007 --
------- ------- ------
NET CASH INFLOW FROM FINANCING.............................. 165 2,459 7
------- ------- ------
INCREASE IN CASH............................................ 22,588 8,019 6,694
======= ======= ======
The notes on pages 79 to 102 form part of these financial statements.
74
99
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO CONSOLIDATED CASH FLOW STATEMENT
UK FORMAT
FIFTEEN MONTHS
ENDED YEAR ENDED YEAR ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------------- ---------- ----------
(i) RECONCILIATION OF OPERATING PROFIT TO "NET CASH INFLOW
FROM OPERATING ACTIVITIES"
Operating (loss)/profit.................................... (4,029) 12,736 (7,508)
Depreciation charges....................................... 8,512 4,534 5,655
Amortisation charges....................................... 30,390 7,765 8,067
Loss on sale of tangible fixed assets...................... 3,032 72 221
Exceptional item........................................... (6,918) -- --
(Increase)/decrease in stocks.............................. (1,419) 154 1,171
(Increase)/decrease in debtors............................. (7,229) (14,460) 8,012
Increase/(decrease) in creditors........................... 11,525 6,966 (3,483)
------ ------- ------
NET CASH INFLOW FROM OPERATING ACTIVITIES.................. 33,864 17,767 12,135
------ ------- ------
(ii) RECONCILIATION TO NET FUNDS
Increase in cash in the period............................. 22,588 8,019 6,694
Cash inflow/(outflow) from increase/(decrease) in debt and
lease financing.......................................... (680) (942) 131
------ ------- ------
21,908 7,077 6,825
Translation difference..................................... 1,288 (1,226) (941)
------ ------- ------
23,196 5,851 5,884
------ ------- ------
Net funds, beginning of period............................. 50,493 44,642 38,758
------ ------- ------
NET FUNDS, END OF PERIOD................................... 73,689 50,493 44,642
====== ======= ======
BALANCES BALANCES
AT JANUARY CASH EXCHANGE AT APRIL 30,
31, 1998 FLOW DIFFERENCES 1999
---------- ------ ----------- ------------
(iii) ANALYSIS OF NET FUNDS:
Cash.................................................. 51,518 22,588 1,288 75,394
Short term loans...................................... (1,007) (689) -- (1,696)
Finance lease obligations............................. (18) 9 -- (9)
------ ------ ----- ------
50,493 21,908 1,288 73,689
------ ------ ----- ------
The notes on pages 79 to 102 form part of these financial statements.
75
100
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
COMPANY BALANCE SHEET
UK FORMAT
APRIL 30 JANUARY 31
1999 1998
NOTES GBP'000 GBP'000
----- -------- ----------
FIXED ASSETS
Tangible fixed assets..................................... 13 2,945 2,971
Investments............................................... 14 206,479 45,086
------- ------
TOTAL FIXED ASSETS..................................... 209,424 48,057
------- ------
CURRENT ASSETS
Amounts owed by subsidiary undertakings................... 9,353 8,989
Other debtors............................................. -- 40
Cash and bank deposits.................................... 68 738
------- ------
TOTAL CURRENT ASSETS................................... 9,421 9,767
------- ------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Amounts owed to subsidiary undertakings................... 7,548 9,153
Trade creditors........................................... 3 69
Corporation tax........................................... -- 63
Accrued expenses.......................................... 580 206
------- ------
NET CURRENT ASSETS.......................................... 1,290 276
------- ------
TOTAL ASSETS LESS CURRENT LIABILITIES.................. 210,714 48,333
PROVISIONS FOR LIABILITIES AND CHARGES...................... 21 -- 19
------- ------
NET ASSETS.................................................. 210,714 48,314
======= ======
CAPITAL AND RESERVES
Called up share capital................................... 2,873 1,588
Share premium account..................................... 189,261 30,196
Profit and loss account................................... 18,580 16,530
------- ------
TOTAL SHAREHOLDERS' FUNDS.............................. 210,714 48,314
======= ======
The financial statements on pages 72 to 102 were approved by the Board of
directors on August 4 1999
Gary Greenfield J. Michael Gullard
Director Director
This is the balance sheet of MERANT plc, the holding company of the MERANT group
of companies, which is presented in accordance with section 226 of the Companies
Act 1985 of Great Britain. No profit or loss account is presented for MERANT plc
as provided by section 230 of the same Act.
The notes on pages 79 to 102 form part of these financial statements.
76
101
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
UK FORMAT
FIFTEEN MONTHS ENDED YEAR ENDED YEAR ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------------------- ---------- ----------
(Loss)/profit for the period.......................... (15,279) 10,426 (7,281)
Currency translation adjustment....................... 1,146 (1,122) (1,920)
------- ------ ------
TOTAL RECOGNISED GAINS AND LOSSES FOR THE
PERIOD......................................... (14,133) 9,304 (9,201)
The notes on pages 79 to 102 form part of these financial statements.
77
102
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
MOVEMENT IN SHAREHOLDERS' FUNDS
UK FORMAT
ORDINARY SHARES OF 2P EACH:
----------------------------- SHARE RETAINED
AUTHORISED ISSUED AMOUNT PREMIUM EARNINGS TOTAL
'000 '000 GBP'000 GBP'000 GBP'000 GBP'000
---------- ------- ------ ------- -------- -------
BALANCE, JANUARY 31 1996.............. 82,500 75,720 1,514 17,936 50,737 70,187
Increase in authorised share
capital............................. 30,000 -- -- -- -- --
Share options exercised............... -- 120 3 135 -- 138
(Loss) for the year................... -- -- -- -- (7,281) (7,281)
Currency translation adjustment....... -- -- -- -- (1,920) (1,920)
------- ------- ----- ------- ------- -------
BALANCE, JANUARY 31 1997.............. 112,500 75,840 1,517 18,071 41,536 61,124
Issued on acquisitions................ -- 2,635 52 10,627 -- 10,679
Goodwill arising on acquisitions...... -- -- -- -- (11,732) (11,732)
Share options exercised............... -- 940 19 1,498 -- 1,517
Profit for the year................... -- -- -- -- 10,426 10,426
Currency translation adjustment....... -- -- -- -- (1,122) (1,122)
------- ------- ----- ------- ------- -------
BALANCE, JANUARY 31 1998.............. 112,500 79,415 1,588 30,196 39,108 70,892
Increase in authorised share capital.. 99,500 -- -- -- -- --
Issued on acquisitions................ -- 63,084 1,262 159,603 -- 160,865
Acquisition costs..................... -- -- -- (2,654) -- (2,654)
Share options exercised............... -- 1,174 23 2,116 -- 2,139
(Loss) for the period................. -- -- -- -- (15,279) (15,279)
Currency translation adjustment....... -- -- -- -- 1,146 1,146
------- ------- ----- ------- ------- -------
BALANCE, APRIL 30 1999................ 212,000 143,673 2,873 189,261 24,975 217,109
------- ------- ----- ------- ------- -------
- ---------------
NOTES: 1. The authorised share capital was increased by GBP 1,990,000 by the
creation of 99,500,000 ordinary shares of 2p each
2. The issued ordinary shares are allotted, called up and fully paid.
3. MERANT plc has been authorised by its members to make market
purchases of its own shares (within the meaning of section 163(3) of
the Companies Act 1985).
4. Share data for prior periods has been restated to reflect the 5-for-1
sub-division of The Company's ordinary shares, which took effect on
March 13, 1998 (see note 25 on page 102).
The cumulative value of goodwill written off on acquisitions between December 23
1989 and April 30 1999 was GBP 11,732,000 (January 31 1998: GBP 11,732,000).
The notes on pages 79 to 102 form part of these financial statements.
78
103
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS
UK FORMAT
The statutory financial statements of MERANT plc ("the Company"), within
the meaning of section 240 of the Companies Act 1985 of Great Britain, for the
accounting period ended April 30 1999, are contained on pages 72 to 102.
On November 30 1998, the Company announced a change of its financial year
end and accounting reference date to April 30 from January 31. Consequently, the
results shown in this report are for the fifteen-month period ended April 30
1999; comparative figures are for the twelve month periods ended January 31,
1998 and 1997.
On February 16, 1999, the Company changed its corporate name from Micro
Focus Group Plc to MERANT plc.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared under the historical cost
convention and in accordance with applicable U.K. Accounting Standards, which,
as applied by MERANT, differ in certain respects from U.K. GAAP, particularly as
to the treatment of acquisitions and goodwill and the presentation of certain
items in the financial statements.
Certain reclassifications of data presented in the 1998 and 1997 financial
statements and related notes amounts have been made to conform with the 1999
presentation. Specifically, the presentation of revenue and cost of revenue in
the profit and loss account has been expanded to analyse service revenue and
related direct costs between maintenance and other services. The results of
operations of the Company are not affected by this changed presentation.
Basis of consolidation
The consolidated financial statements are those of MERANT plc and all of
its subsidiary undertakings (collectively "MERANT") for the accounting period
ended April 30 1999. All significant inter-company balances and transactions
have been eliminated on consolidation.
Acquisitions are accounted for using the acquisition method of accounting.
Accordingly the profit and loss account and cash flow statement include the
results and cash flows for the period of ownership. The cost of acquisition
represents the cash value of the consideration and/or the market value of the
shares issued on the date the offer became unconditional, plus expenses. The
purchase consideration is allocated between the identifiable tangible assets and
liabilities on the basis of fair value at the date of acquisition. The excess is
attributed to goodwill and is amortised over its estimated economic life.
Revenue recognition
Product revenue: the Company's standard end user licence agreement for the
Company's products provides for an initial fee to use the product.
The Company also enters into other types of licence agreement, typically
with major end user customers, which allow for the use of the Company's
products, usually restricted by the number of employees, the number of users, or
the licence term. Fees from licences are recognised as revenue upon product
shipment, provided a signed agreement is in place, fees are fixed or
determinable, and collection of the resulting debt is deemed probable. Fees from
licences sold together with consulting services are generally recognised upon
shipment provided that the above criteria have been met and payment of the
licence fees is not dependent
79
104
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
upon the performance of the consulting services. In instances where the
aforementioned criteria have not been met, both the licence and consulting fees
are recognised under the percentage of completion method of contract accounting.
The Company provides for sales returns based on historical rates of return.
Maintenance revenue: maintenance agreements generally call for the Company
to provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognised over the term of the
support agreement on a pro-rata basis. Payment for maintenance fees are
generally made in advance and are nonrefundable.
Service revenue: The Company provides consulting and education services to
its customers. Revenue from such services is generally recognised as the
services are performed.
Software product assets -- development costs
Costs related to the initial development and design of new software
products prior to the establishment of technological feasibility are written off
as research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalised as software product
assets.
Software purchased for inclusion in the MERANT product set, including
software acquired on acquisitions, is also included in software product assets.
Software product assets are amortised using the straight line method over
the estimated economic life of the products, which in most cases is assumed to
be three or four years. Where a shortfall in future revenue from a product is
anticipated, amortisation is accelerated. Software product assets are reviewed
for impairment if events or circumstances indicate that the carrying value may
not be recoverable.
Amortisation of software product assets is included in research and
development costs.
Goodwill
Goodwill is stated at cost, less accumulated amortisation. Cost represents
the excess of amounts paid on the acquisition of businesses over the aggregate
fair value of the net assets acquired. Amortisation is computed using the
straight-line method over the estimated economic life of the asset. The
estimated life will depend on the length of the future period expected to
benefit from the purchase. Present estimated economic lives are between three
and five years. Goodwill is reviewed for impairment if events or circumstances
indicate that the carrying value may not be recoverable.
Prior to January 31 1998 goodwill was written off directly to reserves as
incurred.
If a subsidiary or business is subsequently sold or closed, any goodwill
arising on acquisition that was written off directly to reserves or has not been
fully amortised through the profit and loss account is taken into account in
determining the profit or loss on the sale or closure.
80
105
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Tangible fixed assets
Tangible fixed assets are stated at cost less accumulated depreciation and
amortisation. Depreciation and amortisation is computed using the straight-line
method over estimated economic lives from the time the asset is put into use.
Present estimated economic lives are as follows:
Freehold office buildings................................ 40 years
Leasehold improvements................................... over the lease term
Computer equipment....................................... 3-5 years
Office equipment......................................... 7-11 years
Transportation equipment................................. 3-4 years
Leasing
Leases which transfer substantially all the risks and rewards of ownership
of an asset to MERANT are capitalised as fixed assets. The amount capitalised is
the net present value of the future lease payments, this sum also being treated
as a liability. Depreciation on such leased assets is provided at rates
calculated to write off the capitalised cost over the shorter of the lease term
and the asset's economic life. Lease payments are apportioned between finance
charges (computed on the basis of implicit interest rates) and a reduction in
the original liability.
Rentals paid under operating leases are charged to income on a
straight-line basis over the lease term.
Deferred taxation
Deferred taxation is provided on the liability method on all timing
differences to the extent that they are expected to reverse in the future
without being replaced, calculated at the rate at which it is anticipated the
timing differences will reverse.
Stocks
Stocks, consisting principally of diskettes and technical manuals, are
stated at the lower of cost and net realisable value, using the first-in,
first-out method. Contracts in progress, representing engineering costs
associated with non-cancellable licence agreements prior to delivery, are
included in stocks and charged to income when the related revenue is recognised.
Cash and bank deposits
Cash and bank deposits includes cash placed on deposit where the maturity
date is between three and twelve months from the initial date of deposit. All
such cash balances are repayable on demand and can be withdrawn at any time
without notice or penalty.
Investments
Investments are recorded at cost less any provision for impairment.
81
106
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Derivative instruments
MERANT uses forward foreign currency contracts to reduce exposure to
changes in foreign exchange rates. The criteria for forward foreign currency
contracts are:
- the instrument must be related to a foreign currency asset or liability
that is probable and whose characteristics have been identified
- it must involve the same currency as the hedged item (except that euros
may be used to hedge the currencies directly linked to the euro by fixed
rates)
- it must reduce the risk of foreign currency exchange movements on the
group's operations.
The rates under such contracts are used to record the hedge item. As a
result, gains and losses are offset against the foreign exchange gains and
losses on the related financial assets and liabilities.
Translation of foreign currencies
MERANT's policy on foreign currency translation complies with Statement of
Standard Accounting Practice No. 20 "Foreign Currency Translation".
Assets and liabilities denominated in currencies other than G.B. pounds are
translated at exchange rates in effect at balance sheet date. Revenue, costs and
expenses are translated using average rates.
Translation adjustments resulting from the process of translating financial
statements denominated in currencies other than G.B. pounds are dealt with
through reserves.
Earnings/(loss) per share
Basic earnings/(loss) per share is computed in accordance with Financial
Reporting Standard ("FRS") 14, and is computed as the profit/(loss) for the
period after taxation, divided by the weighted average number of ordinary shares
outstanding during the period, excluding shares held by the employee share
ownership trust (see note 14, below).
Diluted earnings per share is computed based on basic earnings/(loss) per
share, as adjusted for shares issuable upon exercise of dilutive share options.
The computation assumes the proceeds from the exercise of dilutive share options
are used to repurchase the Company's ordinary shares at their average market
price during each period.
Pensions
MERANT has entered into arrangements under which it makes defined
contributions to personal pension schemes operated by its employees.
Contributions, which are independently administered by insurance companies and
other financial institutions, are charged to income in the year in which they
become payable.
New accounting standards
During 1997 and 1998 the Accounting Standards Board has issued five new
accounting standards with which the Company is required to comply with effect
from this financial year.
82
107
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
FRS 10 "Goodwill and Intangible Assets" requires, inter alia, that goodwill
arising as part of a business acquisition, which previously could be written off
directly to reserves, is instead capitalised as an intangible fixed asset, and
amortised over its estimated useful life, such amortisation being charged
through the profit and loss account. As set out in note 3, below, the Company
has recorded goodwill on acquisitions made during the current period. The
amounts of goodwill capitalised are shown in note 12, below. The Company has
charged amortisation on such goodwill to general and administrative costs, as
shown in note 5, below.
FRS 11 "Impairment of Fixed Assets and Goodwill" requires that where the
value of fixed assets or goodwill may have been impaired, such values should be
reviewed and any impairment losses written off in the profit and loss account.
The Company has not recorded any impairment losses in the current period.
FRS 12 "Provisions and Contingencies" sets out detailed rules on the
recognition, measurement and disclosure of provisions and contingencies. The
provision for restructuring has been reclassified in accordance with this
standard.
FRS 13 "Derivatives and Other Financial Instruments -- Disclosures"
requires narrative and numerical disclosures regarding a company's objectives,
policies and strategies in respect of financial instruments. The Company's
disclosures are set out in note 22, below.
FRS 14 "Earnings per Share" introduces new computation, presentation and
disclosure requirements for earnings per share data. The disclosures required by
FRS 14 are set out in note 11, below; prior year data has been restated in
accordance with FRS 14.
On February 18 1999 the Accounting Standards Board issued FRS 15 "Tangible
Fixed Assets", which deals with the cost, depreciation and valuation of tangible
fixed assets. Compliance with FRS 15, which the Company will adopt in 2000, is
not expected to have a significant impact on results of operations or financial
condition of the Company.
NOTE 2 SEGMENTAL INFORMATION
MERANT operates in one business segment -- the development and licencing of
computer software products and related services. The following table analyses
revenue by geographical area, based on customer location:
YEAR YEAR
FIFTEEN MONTHS ENDED ENDED ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------------------- ---------- ----------
United Kingdom......................... 30,123 11,864 6,811
United States.......................... 133,269 49,037 38,640
Europe (excluding U.K.)................ 36,095 18,498 19,297
Japan.................................. 6,371 3,964 3,519
Other.................................. 9,615 13,652 4,822
------- ------ ------
215,473 97,015 73,089
------- ------ ------
83
108
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 2 SEGMENTAL INFORMATION -- (CONTINUED)
The following table analyses worldwide operations by geographical area,
based on the location of MERANT facilities.
YEAR YEAR
FIFTEEN MONTHS ENDED ENDED ENDED
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------------------- ---------- ----------
Revenue:
United Kingdom....................... 59,512 43,249 33,974
United States........................ 141,734 56,846 42,856
Europe (excluding U.K.).............. 55,286 23,554 20,588
Other................................ 13,953 7,858 1,910
------- ------- -------
270,485 131,507 99,328
------- ------- -------
Inter-segment revenue:
United Kingdom....................... (14,613) (21,003) (15,900)
United States........................ (20,402) (4,199) (3,501)
Europe (excluding U.K.).............. (17,062) (9,077) (6,381)
Other................................ (2,935) (213) (457)
------- ------- -------
215,473 97,015 73,089
------- ------- -------
Operating profit/(loss):
United Kingdom....................... (24,308) 5,498 (2,960)
United States........................ 495 1,041 (4,699)
Europe (excluding U.K.).............. 15,608 896 (220)
Other................................ 4,176 5,301 371
------- ------- -------
(4,029) 12,736 (7,508)
------- ------- -------
Net operating assets/(liabilities):
United Kingdom....................... 114,399 14,174 16,075
United States........................ 11,856 2,930 (8,199)
Europe (excluding U.K.).............. 5,489 (4,112) 2,988
Other................................ 6,985 2,521 (16)
------- ------- -------
138,729 15,513 10,848
------- ------- -------
Inter-segment revenue principally represents licence fees and charges for
research and development between locations. Operating profit/(loss) excludes
interest income and expense and, correspondingly, net
84
109
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 2 SEGMENTAL INFORMATION -- (CONTINUED)
operating assets/(liabilities) exclude interest-bearing assets and liabilities.
A reconciliation of the net operating assets/(liabilities) as shown above to net
assets as shown in the balance sheet is as follows:
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
GBP'000 GBP'000 GBP'000
-------- ---------- ----------
Net operating assets........................... 138,729 15,513 10,848
Cash and bank deposits......................... 73,698 50,511 44,725
Investment in own shares....................... 4,691 4,886 5,634
Finance lease obligations...................... (9) (18) (83)
------- ------ ------
Net assets..................................... 217,109 70,892 61,124
------- ------ ------
NOTE 3 ACQUISITIONS
In the current financial year MERANT completed three acquisitions at a
total cost of GBP 165,012,000.
Each transaction has been accounted for as an acquisition, as set out in
note 1 on page 85. Accordingly, the results of operations and cash flows of the
acquired businesses have been combined with those of MERANT for the periods
subsequent to their acquisition, and the acquisition cost has been allocated
between the identifiable tangible assets and liabilities of the acquired
entities based on their respective fair values, with the difference allocated to
goodwill.
On May 15 1998 the Company acquired all of the share capital of its Italian
distributor, Micro Focus Italia, s.r.l., ("MF Italia"), for a total
consideration estimated at GBP 2,644,000. The Company made an initial cash
payment of GBP 2,470,000, with the balance payable in cash dependent on future
results of MF Italia.
The following table sets out the allocation of the estimated cost of
acquisition between the tangible assets and liabilities of MF Italia, and the
resultant goodwill.
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
GBP'000 GBP'000 GBP'000
---------- ----------- --------------
Cash........................................ 40 40
Accounts receivable......................... 1,735 (376) 1,359
Other current assets........................ 223 223
Tangible fixed assets....................... 147 147
Bank overdraft.............................. (172) (172)
Current liabilities......................... (1,785) (1,785)
------ ----- ------
Total net liabilities....................... 188 (376) (188)
------ -----
Goodwill arising............................ 2,832
------
2,644
------
Purchase consideration payable to vendors... 2,644
------
Fair value adjustments related to an increase in provisions for doubtful
accounts.
85
110
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 3 ACQUISITIONS -- (CONTINUED)
MF Italia reported a profit after taxation of GBP 482,000 in its financial
year ended December 31 1997. In the subsequent period to May 15 1998, the date
of its acquisition, MF Italia recorded a profit after taxation of GBP 106,000.
MF Italia changed its name to MERANT s.r.l. on March 1, 1999.
On August 13 1998 the Company acquired all of the share capital of its
Australian distributor, Advanced Software Engineering Pty, Ltd ("ASE"), for a
total consideration estimated at GBP 1,503,000. The Company made an initial
cash payment of GBP 970,000, with the balance dependent on future results of
ASE.
The following table sets out the allocation of the estimated cost of
acquisition between the tangible assets and liabilities of ASE, and the
resultant goodwill.
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
GBP'000 GBP'000 GBP'000
---------- ----------- --------------
Cash........................................ 270 270
Accounts receivable......................... 213 213
Other current assets........................ 107 107
Tangible fixed assets....................... 103 103
Current liabilities......................... (693) (693)
---- -------- -----
Total net assets............................ 0 0
---- -------- -----
Goodwill arising............................ 1,503
-----
Purchase consideration payable to vendors... 1,503
-----
The Company made no fair value adjustments to the assets and liabilities
reported by ASE.
ASE reported a profit after taxation of GBP 46,000 in its financial year
ended June 30 1998. In the subsequent period to August 13 1998, the date of its
acquisition, ASE recorded a profit after taxation of GBP 4,000.
ASE changed its name to MERANT Pty Ltd on February 16, 1999.
On September 24 1998 the Company acquired all of the share capital of
INTERSOLV, Inc ("INTERSOLV"), in exchange for 63,084,000 ordinary shares in the
Company, which represented a value of GBP 160,865,000 on the date the
acquisition was completed. INTERSOLV, a publicly-held corporation based in
Maryland, USA, is a provider of database development, maintenance and
connectivity solutions.
86
111
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 3 ACQUISITIONS -- (CONTINUED)
The following table sets out the allocation of the estimated cost of
acquisition between the tangible assets and liabilities of INTERSOLV, and the
resultant goodwill.
NET ASSETS FAIR VALUE FAIR VALUES ON
ACQUIRED ADJUSTMENTS ACQUISITION
GBP'000 GBP'000 GBP'000
---------- ----------- --------------
Cash........................................ 17,567 17,567
Accounts receivable......................... 29,632 29,632
Other current assets........................ 3,521 3,521
Intangible fixed assets..................... 932 932
Tangible fixed assets....................... 6,971 6,971
Other assets................................ 5,496 5,496
Current liabilities......................... (27,712) (27,712)
Deferred taxation........................... (3,747) (3,747)
------- -- -------
Total net assets............................ 32,660 0 32,660
------- --
Goodwill arising............................ 140,061
-------
172,721
-------
Purchase consideration payable to vendors... 160,865
Costs of acquisition -- cash paid........... 11,856
-------
172,721
-------
The Company made no fair value adjustments to the assets and liabilities
reported by INTERSOLV.
INTERSOLV reported a profit after taxation of GBP 3,425,000 in its
financial year ended April 30 1998. For the subsequent period ended September
24 1998, the date of its acquisition, INTERSOLV's results are summarised as
follows:
GBP'000
-------
Summarised profit and loss account:
Revenue..................................................... 40,724
Operating profit............................................ (1,564)
Profit before taxation...................................... (1,356)
Taxation.................................................... 501
Retained profit for the period.............................. (854)
------
Statement of recognised gains and losses:
Retained profit for the period, as above.................... (854)
Foreign currency translation adjustment..................... (271)
------
Total recognised gains and losses................. (1,125)
------
The information shown in the above statement has been prepared on the basis
of INTERSOLV's accounting policies prior to its acquisition.
At the time of the acquisition, provision was made for costs amounting to
GBP 11,831,000 in connection with the fundamental reorganisation of the
businesses of the combined companies. These costs have been disclosed as an
exceptional item in the current period.
87
112
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 3 ACQUISITIONS -- (CONTINUED)
As explained in note 1, the Company has applied the provisions of FRS 10 to
these acquisitions. Accordingly, goodwill arising on these acquisitions has been
capitalised as an intangible asset (see note 12).
NOTE 4 RESEARCH AND DEVELOPMENT COSTS
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- ------- ---------- ----------
Research and development costs, before
capitalisation................................ 30,455 17,602 19,235
Costs capitalised as software product assets.... (5,853) (5,688) (5,258)
Amortisation of capitalised costs............... 9,717 7,765 8,067
Restructuring costs............................. -- -- 2,255
------ ------ ------
34,319 19,679 24,299
------ ------ ------
NOTE 5 GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs includes provisions for amortisation of
the goodwill arising on acquisitions amounting to GBP 21,915,000 (1998: GBPnil;
1997: GBPnil).
NOTE 6 OPERATING (LOSS)/PROFIT
Operating (loss)/profit is stated after charging:
APRIL 30 JANUARY JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- -------- ------- ---------
Auditors' remuneration: audit services: U.K....... 204 117 105
audit services: overseas........................ 333 110 93
non-audit services: U.K......................... 740 230 181
non-audit services: overseas.................... 531 289 218
Operating lease rentals:
equipment....................................... 2,639 756 743
land and buildings.............................. 3,799 1,780 1,811
Depreciation of tangible fixed assets:
owned........................................... 8,512 4,495 5,616
leased.......................................... -- 39 39
Amortisation of intangible fixed assets........... 31,632 7,765 8,067
------ ----- -----
The profit attributable to the ordinary shareholders of MERANT plc, dealt
with in the financial statements of MERANT, is GBP 2,050,000 (1998: GBP
805,000; 1997: GBP 716,000). There were no other movements on reserves other
than the movement on share premium shown in the Movement in Shareholders' Funds
on page 78.
88
113
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 7 DIRECTORS AND EMPLOYEES
An analysis of the directors' remuneration, pension entitlements and share
options and the relevant disclosures specified for audit by the London Stock
Exchange are set out under the headings "Directors' remuneration" and "Directors
share options" within the Remuneration Committee's Report on pages 12 to 15.
The average monthly numbers of staff employed by MERANT was as follows:
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED NO. NO. NO.
------------- -------- ---------- ----------
U.K. ........................................... 393 252 255
U.S. ........................................... 785 355 310
Other........................................... 283 112 81
----- --- ---
1,461 719 646
----- --- ---
Staff costs, which include salaries, bonus and commissions, amounted to:
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- ------- --------- ---------
U.K. ........................................... 21,707 10,324 9,173
U.S. ........................................... 45,371 22,803 16,758
Other........................................... 15,689 5,184 3,554
------ ------ ------
82,767 38,311 29,485
Social security costs........................... 9,514 2,979 2,797
Other pension costs............................. 2,417 432 437
------ ------ ------
94,698 41,722 32,719
------ ------ ------
Other pension costs principally represent amounts paid by MERANT to
personal pension schemes operated by its employees. In the United Kingdom,
MERANT matches contributions made by participating employees up to certain
predetermined thresholds. Arrangements for employees in other countries have
been established on similar bases, subject to local regulations and practices in
the countries concerned.
NOTE 8 EXCEPTIONAL ITEMS
During the current period the Company provided for costs of GBP 11,831,000
in connection with a fundamental restructuring of its operations. Following the
acquisition of INTERSOLV, Inc in September 1998, the senior management of the
Company was changed, and the new team proposed to realign the Company's
operations into four business units, one of which closely aligns the
pre-acquisition operations of the Company. As part of this realignment, the
Company has incurred charges consisting principally of the write-off of
redundant or impaired assets and severance costs. Because of the fundamental
nature of this reorganisation, the related costs have been disclosed as an
exceptional item on the face of the profit and loss account. As at April 30
1999, outstanding amounts totalling GBP 3,671,000 remained payable.
In the year ended January 31 1997 the Company booked a restructuring charge
of $5,195,000, representing the costs associated with a reduction in the
Company's workforce of approximately 65 people, facility closures and
consolidations, and asset write-downs. Due to the nature of the restructuring,
the amounts booked were charged against operating profit.
89
114
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 9 INTEREST EXPENSE
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- -------- ---------- ----------
On bank loans and overdrafts.................... 123 65 3
On other loans.................................. 21 -- --
Finance charges payable under finance leases.... 1 5 18
--- -- --
145 70 21
--- -- --
NOTE 10 TAXATION
The taxation charge consists of the following:
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- -------- ---------- ----------
U.K. corporation tax............................ 2,645 3,244 237
Deferred taxation............................... (1,198) (71) 870
Double taxation relief.......................... -- (162) (174)
Overseas taxation:
US federal.................................... 1,079 542 4
US state...................................... 63 128 1
Other........................................... 2,180 958 276
------ ----- -----
4,769 4,639 1,214
Taxation (overprovided)/under-provided in
previous years:
Corporation tax................................. (1,062) -- 258
Deferred taxation............................... -- 152 --
------ ----- -----
3,707 4,791 1,472
------ ----- -----
Effective tax rates............................. -32% 31% -25%
------ ----- -----
The Company's effective tax rate in the current period is significantly
distorted by the impact of provisions for amortisation of goodwill (see note 5)
for which there is no tax deduction. Excluding that charge, the tax rate in the
current period would be 36%. The current period rate is also impacted by
corporate profits and losses arising in different tax jurisdictions. The tax
effect of the exceptional items disclosed in the profit and loss account was not
significant.
In prior years the effective tax rate was distorted by the impact of
disallowable exceptional items, and losses incurred in the United States which
can only be offset against profits arising in future periods.
The Company's effective tax rate is expected to be significantly impacted
by provisions for amortisation of goodwill for the next four years.
The corporation tax returns of certain U.S. subsidiary undertakings are
under examination by the U.S. Internal Revenue Service, which has proposed
certain adjustments. The Company believes that the outcome of the examination
will not give rise to any material adjustment to the financial statements.
90
115
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 11 (LOSS)/EARNINGS PER SHARE
(Loss)/earnings per share is computed from the following data and in
accordance with the bases set out in note 1.
APRIL 30 JANUARY 31 JANUARY 31
1999 1998 1997
PERIODS ENDED GBP'000 GBP'000 GBP'000
------------- -------- ---------- ----------
(Loss)/profit after taxation................... (15,279) 10,426 (7,281)
------- ------ ------
Weighted average number of ordinary shares:
In issue..................................... 110,714 78,735 75,780
Owned by employee share ownership trust
(note 14)................................. (3,834) (4,109) (4,170)
------- ------ ------
Used in computing basic (loss)/earnings
per share.................................... 106,880 74,626 71,610
Dilutive options............................... -- 3,900 --
------- ------ ------
Used in computing diluted (loss)/earnings per
share........................................ 106,880 78,526 71,610
------- ------ ------
(Loss)/earnings per share: basic............... (14.3p) 14.0p (10.2p)
(Loss)/earnings per share: diluted............. (14.3p) 13.3p (10.2p)
In 1999 and 1997 share options were anti-dilutive and are therefore
excluded from the computations.
NOTE 12 INTANGIBLE FIXED ASSETS
SOFTWARE PRODUCT
ASSETS GOODWILL TOTAL
GBP'000 GBP'000 GBP'000
---------------- -------- -------
COST:
At January 31 1998.......................... 79,149 -- 79,149
Currency fluctuations....................... 91 -- 91
Arising on acquisitions..................... 4,935 1,125 6,060
Purchased goodwill and other additions...... 5,853 144,396 150,249
------ ------- -------
At April 30 1999............................ 90,028 145,521 235,549
------ ------- -------
DEPRECIATION:
At January 31 1998.......................... 66,755 -- 66,755
Currency fluctuations....................... 30 -- 30
Arising on acquisitions..................... 2,963 193 3,156
Provision for the period.................... 9,717 21,915 31,632
------ ------- -------
At April 30 1999............................ 79,465 22,108 101,573
------ ------- -------
NET BOOK VALUES:
At January 31 1998.......................... 12,394 -- 12,394
------ ------- -------
At April 30 1999............................ 10,563 123,413 133,976
------ ------- -------
91
116
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 13 TANGIBLE FIXED ASSETS
(a) MERANT:
COMPUTER &
COMMUNICATIONS
FREEHOLD LAND LEASEHOLD OFFICE EQUIPMENT & TRANSPORTATION
AND BUILDINGS IMPROVEMENTS EQUIPMENT SOFTWARE EQUIPMENT TOTAL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------- ------------ --------- -------------- -------------- ------
Cost:
At January 31 1998...... 13,828 2,575 4,651 27,822 126 49,002
Currency fluctuations... -- 107 120 532 3 762
Arising on
acquisitions.......... 150 3,214 2,946 11,401 28 17,739
Additions............... -- 294 859 7,641 112 8,906
Disposals............... (150) (1) (261) (3,393) (31) (3,836)
------ ----- ----- ------ --- ------
At April 30 1999........ 13,828 6,189 8,315 44,003 238 72,573
------ ----- ----- ------ --- ------
Depreciation:
At January 31 1998...... 659 817 2,698 20,922 70 25,166
Currency fluctuations... -- 43 72 432 1 548
Arising on
acquisitions.......... 7 1,354 1,752 7,394 11 10,518
Provision for the
period................ 27 744 914 6,802 25 8,512
Disposals............... (7) -- (98) (691) (8) (804)
------ ----- ----- ------ --- ------
At April 30 1999........ 686 2,958 5,338 34,859 99 43,940
------ ----- ----- ------ --- ------
Net book values:
At January 31 1998...... 13,169 1,758 1,953 6,900 56 23,836
------ ----- ----- ------ --- ------
At April 30 1999........ 13,142 3,231 2,977 9,144 139 28,633
------ ----- ----- ------ --- ------
The above figures include transportation equipment held under finance
leases as follows:
NET BOOK
COST DEPRECIATION VALUE
GBP'000 GBP'000 GBP'000
----- ------------ --------
At January 31 1998................. 125 66 59
Provision for the period
Disposals.......................... (125) (66) (59)
---- --- ---
At April 30 1999................... -- -- --
---- --- ---
92
117
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 13 TANGIBLE FIXED ASSETS -- (CONTINUED)
(b) COMPANY:
The Company's tangible fixed assets consist of freehold land and buildings,
valued at cost which includes capitalised interest amounting to GBP 385,000.
NET BOOK
COST DEPRECIATION VALUE
GBP'000 GBP'000 GBP'000
----- ------------ --------
At January 31 1998............................... 3,088 117 2,971
Provision for the period......................... -- 26 (26)
----- --- -----
At April 30 1999................................. 3,088 143 2,945
----- --- -----
NOTE 14 INVESTMENTS
(a) GROUP:
Investment in own shares represents the cost of shares acquired by MERANT
Trustees Limited on behalf of the Micro Focus Group Employee Benefit Trust 1994
("the Trust") (see note 24, below).
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Beginning of period....................................... 4,886 5,634
Sold on exercise of options............................... (195) (748)
----- -----
End of period............................................. 4,691 4,886
----- -----
As at April 30 1999 the Trust owned 3,810,075 shares. The market value of
these shares was GBP 5,620,000 (January 31 1998: GBP 20,729,000); if they had
been sold at this value a liability to corporation tax of approximately GBP
300,000 (January 31 1998: GBP 4,500,000) would have arisen. The Trust has not
waived its right to dividends in respect of this shareholding. The assets and
liabilities of the Trust, as well as its operating costs, are included in
MERANT's consolidated financial statements.
(b) COMPANY:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Investments in subsidiary undertakings:
Beginning of period..................................... 40,200 27,175
Acquisitions............................................ 170,573 12,679
Disposals............................................... (185,207) --
Additional investment................................... 176,222 309
Effect of exchange rate changes......................... -- 37
-------- ------
End of period........................................... 201,788 40,200
Investment in own shares (see (a) above)................ 4,691 4,886
-------- ------
206,479 45,086
-------- ------
93
118
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 14 INVESTMENTS -- (CONTINUED)
The principal subsidiary undertakings, all of which are wholly-owned, are:
COUNTRY OF INCORPORATION
NOTES AND OPERATION
----- ------------------------
MERANT Holdings Limited........................... 1 U.K.
MERANT International Limited...................... 1 U.K.
MERANT Asia Limited............................... 2 U.K.
MERANT Solutions, Inc............................. 2 U.S.A.
MERANT, Inc....................................... 2 U.S.A.
XDB Systems, Inc.................................. 2 U.S.A.
MERANT Pty Limited................................ 2 Australia
MERANT NV......................................... 2 Belgium
MERANT (Canada) Limited........................... 2 Canada
MERANT Solutions SARL............................. 2 France
MERANT SA......................................... 2 France
MERANT Gmbh....................................... 2 Germany
MERANT Solutions Gmbh............................. 2 Germany
MERANT Solutions Pvt Limited...................... 2,4 India
MERANT s.r.l...................................... 1 Italy
MERANT KK......................................... 2 Japan
MERANT Solutions KK............................... 2 Japan
MERANT Investments Limited........................ 1,3 Jersey
MERANT BV......................................... 2 Netherlands
System Focus BV................................... 2 Netherlands
MERANT Solutions SA............................... 2 Spain
- ---------------
(1) Held directly by the Company
(2) Held by a subsidiary undertaking
(3) Operating as a financing company. The activities of the other subsidiary
undertakings are described in the Directors' Report.
(4) MERANT Solutions Pvt. Limited has a financial year-end of March 31, which
corresponds with its permanent tax year-end.
NOTE 15 STOCKS
The replacement value of stocks is not considered to be materially
different from its balance sheet value.
NOTE 16 DEBTORS
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Trade debtors............................................. 70,682 29,145
Other debtors and prepaid expenses........................ 7,205 1,728
------ ------
77,887 30,873
------ ------
94
119
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 16 DEBTORS -- (CONTINUED)
Trade debtors includes GBP 1,784,000 (1998: GBP nil) which is due more
than twelve months from the balance sheet date. Other debtors and prepaid
expenses includes GBP nil (1998: GBP 74,000) which is due more than twelve
months from the balance sheet date.
NOTE 17 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Bank loan (note 22)....................................... 1,696 1,007
Obligations under finance leases (note 19)................ 3 6
Trade creditors........................................... 7,546 4,241
Current corporation tax................................... 11,534 6,428
Other taxes and social security costs..................... 1,345 1,725
Product royalties and purchases........................... 776 845
Accrued employee compensation and commissions............. 15,126 7,481
Deferred revenue.......................................... 42,954 20,030
Other accrued expenses.................................... 11,711 4,750
------ ------
92,691 46,513
------ ------
Accrued expenses includes GBP 161,000 (1998: GBP 116,000) in respect of
an unfunded defined benefit scheme operated by a foreign subsidiary
undertaking, and other outstanding contributions payable by MERANT in
connection with employees' pension arrangements.
NOTE 18 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Creditors due after more than one year represent obligations under lease
commitments (see note 19).
NOTE 19 LEASE COMMITMENTS
Financial commitments for future periods under lease agreements existing at
April 30 1999 are as follows:
FINANCE LEASES:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Amounts payable within one year........................... 3 6
Amounts payable from one to two years..................... 6 15
-- --
9 21
Less finance charges allocated to future periods.......... -- (3)
-- --
9 18
Finance leases are shown as:
Amounts due within one year (note 17)..................... 3 6
Amounts due after more than one year...................... 6 12
-- --
9 18
-- --
95
120
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 19 LEASE COMMITMENTS -- (CONTINUED)
OPERATING LEASES:
LAND AND BUILDINGS
------------------- OTHER
1999 1998 1999 1998
GBP'000 GBP'000 GBP'000 GBP'000
------ ------ ----- -----
Annual commitment under leases which
expire:
within one year...................... 990 263 1,249 4
in the second to fifth years
inclusive......................... 3,389 1,576 1,566 541
thereafter........................... 2,175 469 83 --
----- ----- ----- ---
6,554 2,308 2,898 545
----- ----- ----- ---
NOTE 20 CAPITAL COMMITMENTS
At April 30 1999 and January 31 1998 MERANT had no material capital
expenditure commitments.
NOTE 21 PROVISIONS FOR LIABILITIES AND CHARGES
RESTRUCTURING DEFERRED
PROVISION TAXATION TOTAL
GBP'000 GBP'000 GBP'000
------------- -------- ------
As at January 31, 1998.......................... -- 6,407 6,407
Arising during the period....................... 11,831 11,831
INTERSOLV balance............................... -- 3,675 3,675
Utilised........................................ (8,160) (1,198) (9,358)
------ ------ ------
As at April 30, 1999............................ 3,671 8,884 12,555
------ ------ ------
The restructuring provision arose in respect of a fundamental restructuring
of the Company's operations, as described in note 8, above. It is expected that
the outstanding amounts will be settled during the current financial year.
Deferred taxation has been fully provided as follows:
(a) MERANT:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Capital allowances in advance of depreciation and
amortisation............................................ (96) 89
Other timing differences.................................. 8,980 6,318
----- -----
8,884 6,407
----- -----
96
121
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 21 PROVISIONS FOR LIABILITIES AND CHARGES -- (CONTINUED)
The movement of deferred taxation during the period is as follows:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Balances, beginning of period............................. 6,407 6,239
Movement on capital allowances in advance of depreciation
and amortisation........................................ (185) (80)
Movement in other timing differences...................... 2,662 248
------ -----
Balances, end of period................................... 8,884 6,407
------ -----
(b) COMPANY:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Capital allowances in advance of depreciation and
amortisation............................................ -- 19
-- --
-- 19
-- --
NOTE 22 FINANCIAL INSTRUMENTS
An explanation of the group's objectives, policies and strategies for the
role of financial instruments in creating and changing the risks of the group in
its activities is included in the Management's Discussion and Analysis on page
58. The disclosures below exclude short term debtors and creditors.
INTEREST RATE EXPOSURES:
The interest rate risk profile of the Company's financial liabilities is as
follows:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Floating rate financial liabilities:
Euros..................................................... 1,696 --
French francs............................................. -- 1,007
Sterling.................................................. 9 18
----- -----
1,705 1,025
----- -----
Weighted average interest rate:
Euros..................................................... 3.5% --
French francs............................................. -- 3.6%
Sterling.................................................. N/A n/a
----- -----
3.5% 3.6%
----- -----
The liabilities denominated in euros and French francs represent borrowings
against an unsecured revolving multi-currency facility, under the terms of which
financing of up to GBP 5,000,000, or its equivalent in
97
122
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 22 FINANCIAL INSTRUMENTS -- (CONTINUED)
such other currency as the Company may determine, is available until January
2001. Borrowings under this facility bear interest at 0.75% above the London
Interbank Offered Rate ("LIBOR").
The sterling liability represents outstanding finance lease obligations.
The group's financial liabilities at April 30 1999 all mature within one
year, or on demand.
The interest rate risk profile of the Company's financial assets is as
follows:
APRIL 30 JANUARY 31
1999 1998
GBP'000 GBP'000
-------- ----------
Floating rate financial assets:
U.S. dollars.............................................. 44,890 42,297
Sterling.................................................. 20,045 5,794
Deutschemarks............................................. 4,193 464
French francs............................................. 1,389 245
Australian dollars........................................ 1,083 --
Indian rupees............................................. 839 1,102
Japanese yen.............................................. 751 141
Spanish pesetas........................................... 695 741
Dutch florins............................................. 605 10
Italian lire.............................................. 413 --
Canadian dollars.......................................... 320 724
Belgian francs............................................ 171 --
------ ------
75,394 51,518
------ ------
Floating rate financial assets comprise cash balances on current accounts
and money market deposits at call.
CURRENCY EXPOSURES:
The group's objectives in managing currency exposures arising from its net
investments overseas are explained on page 70.
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123
MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 22 FINANCIAL INSTRUMENTS -- (CONTINUED)
Net foreign currency monetary assets/liabilities held by the group's
sterling, U.S. dollar and other operations are as follows:
FUNCTIONAL CURRENCY OF STERLING U.S. DOLLAR OTHER TOTAL
OPERATIONS: GBP'000 GBP'000 GBP'000 GBP'000
---------------------- -------- ----------- ------ ------
At April 30, 1999:
Sterling.................................. 20,136 -- -- 20,136
U.S. dollar............................... 4,325 40,490 -- 44,815
Other..................................... 297 -- 10,146 10,443
------ ------ ------ ------
Total..................................... 24,758 40,490 10,146 75,394
------ ------ ------ ------
At January 31, 1998:
Sterling.................................. 6,612 -- -- 6,612
U.S. dollar............................... 2,256 39,228 -- 41,484
Other..................................... 342 -- 3,080 3,422
------ ------ ------ ------
Total..................................... 9,210 39,228 3,080 51,518
------ ------ ------ ------
The amounts shown above take into account the effect of forward foreign
currency contracts entered into to manage these currency exposures.
FAIR VALUES:
The fair values of all the group's financial assets and liabilities as set
out below equate to book value:
BOOK VALUE FAIR VALUE
GBP'000 GBP'000
---------- ----------
At April 30, 1999:
Primary financial instruments:
Short term borrowings................................. (1,705) (1,705)
Cash.................................................. 75,394 75,394
Derivative financial instruments:
Forward foreign exchange contracts.................... -- --
------ ------
At January 31, 1998:
Primary financial instruments:
Short term borrowings................................. (1,025) (1,025)
Cash.................................................. 51,518 51,518
Derivative financial instruments:
Forward foreign exchange contracts.................... (4,800) (4,800)
------ ------
Fair values have been determined on the basis of market value.
NOTE 23 CONTINGENT LIABILITY
In December 1998 and January 1999, seven class action securities complaints
were filed in the United States District Court for the Southern District of New
York against the Company and certain of its officers and directors. The Court
ordered the seven cases consolidated, appointed lead plaintiffs and lead
counsel, and
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 23 CONTINGENT LIABILITY -- (CONTINUED)
ordered the filing of a consolidated complaint, which was filed on June 9, 1999.
The lead plaintiffs seek to have the matter certified as a class action of
purchasers of the American Depository Shares of the Company during the period
from June 17, 1998 to November 12, 1998, including the former shareholders of
INTERSOLV, Inc who acquired American Depositary Shares in connection with the
merger involving the two companies. The consolidated complaint alleges various
violations of the federal securities laws and seeks unspecified compensatory
damages for alleged failure to disclose material nonpublic information
concerning the Company's business condition and prospects.
The Company has filed a motion to transfer the matter to the Northern
District of California. The Company intends to defend all of its litigation
vigorously. However, due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of the litigation. Any
unfavourable outcome of litigation could have an adverse impact on the Company's
business, financial condition and results of operations.
NOTE 24 SHARE OPTION PLANS
The Company's share option plans provide for the grant of options to
acquire shares to all persons who devote substantially all their working time to
MERANT and such other eligible persons as the Board may determine. The exercise
price of options issued under these plans is 100% of the fair market value at
the time such options are granted. Options are generally exercisable in monthly
or annual installments commencing one year after the date of grant. Unexercised
options lapse as a consequence of an optionholder ceasing to be employed by
MERANT or at a predetermined expiry date (of up to ten years from the date of
grant), whichever occurs first.
In September 1998 shareholders approved the 1998 Share Option Plan, which
authorised the Company to grant options over a maximum of 15,879,000 shares.
Such authority will expire on September 24, 2008. During the year 6,453,000
options were granted under this plan, of which 25% become exercisable one year
from the date of grant and the remaining 75% in equal monthly installments over
the following three years.
Options are no longer issuable under any of the Company's previous share
option plans, but options granted under those plans continue to be exercisable
in accordance with the original grant rules.
The 1996 Share Option Plan was approved by shareholders in June 1996 and
authorised the Company to grant options over a maximum of 3,786,845 shares
(representing 5% of the issued share capital of the Company at that time); this
authority expired on June 18 1999. During the current period 1,886,075 options
were granted under this plan, exercisable in annual installments over a
five-year period commencing one year from the date of grant. Prior to 1996,
authority to issue options under similar terms had been granted pursuant to the
1991 Share Option Plan; such authority expired in 1996.
Options are also outstanding under share option plans adopted by MERANT as
a result of the acquisitions of INTERSOLV and XDB.
Pursuant to the agreement to acquire INTERSOLV, the Company adopted
INTERSOLV's 1997 Employee Stock Option Plan, 1992 Stock Option Plan, 1982 Stock
Option Plan, and the option plans previously assumed by INTERSOLV from companies
which it had acquired. Under the agreement, each outstanding option or right to
purchase or acquire shares of INTERSOLV stock was assumed by the Company and
became an option or right to purchase or acquire ADS in the Company, with
appropriate
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 24 SHARE OPTION PLANS -- (CONTINUED)
adjustments to the price and number of shares based on the exchange ratio of
0.55 ADSs per INTERSOLV share.
Pursuant to the agreement to acquire XDB in 1998, the Company adopted XDB's
1992 Share Option Plan and 1997 Share Option Plan. Under the agreement, XDB's
former option-holders are entitled to exercise their options in return for
shares in the Company.
In addition to options granted by the Company, MERANT Trustees Limited
("MTL") is permitted to acquire ordinary shares in the Company and to grant
options over them, under the terms of the Micro Focus Group Employee Benefit
Trust 1994 ("the Trust"). The Trust was established to further the Company's
policy of encouraging share ownership by its employees. At April 30 1999 MTL
owned 3,810,075 shares. Options granted by MTL and outstanding at April 30 1999
totalled 2,938,800, and a further 110,000 shares were reserved for options
granted before MTL purchased the shares. The remaining 761,275 shares were
available for the grant of further options. The shares held by the Trust are
included in Investments (see note 14, above).
Share option activity under all of the Company's share option plans is
summarised below:
NUMBER OPTION PRICE
OF SHARES PER SHARE IN GB POUNDS
---------- -----------------------
Outstanding, January 31 1996........................ 10,293,845 GBP1.08-GBP5.77
Options granted..................................... 11,504,150 GBP1.17-GBP1.94
Options exercised................................... (120,780) GBP1.08-GBP1.93
Options cancelled................................... (9,202,055) GBP1.08-GBP5.77
---------- ---------------
Outstanding, January 31 1997........................ 12,475,160 GBP1.08-GBP4.32
Options granted..................................... 6,622,725 GBP0.97-GBP7.41
Options exercised................................... (1,553,705) GBP1.08-GBP3.70
Options cancelled................................... (5,674,775) GBP0.97-GBP4.52
---------- ---------------
Outstanding, January 31 1998........................ 11,869,405 GBP0.97-GBP7.41
Options obligations assumed......................... 11,424,537 GBP0.11-GBP3.61
Options granted..................................... 10,142,575 GBP1.06-GBP7.15
Options exercised................................... (1,160,885) GBP0.11-GBP3.70
Options cancelled................................... (6,597,528) GBP0.11-GBP4.52
---------- ---------------
Outstanding, April 30 1999.......................... 25,678,104 GBP0.11-GBP7.41
---------- ---------------
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
UK FORMAT
NOTE 24 SHARE OPTION PLANS -- (CONTINUED)
Options outstanding at April 30, 1999 were granted under the authorities
indicated below:
AUTHORITY FOR NUMBER OPTION PRICE PER
ISSUANCE OF OPTIONS OF SHARES SHARE IN G.B. POUNDS
------------------- ---------- --------------------
1991 Share Option Plan......................... 2,215,429 GBP1.13-GBP3.49
1996 Share Option Plan......................... 2,978,640 GBP1.47-GBP7.15
1998 Share Option Plan......................... 6,453,000 GBP1.06-GBP1.49
XDB plans...................................... 44,305 GBP5.39-GBP7.41
INTERSOLV plans................................ 10,937,930 GBP0.11-GBP3.61
---------- ---------------
22,629,304 GBP0.11-GBP7.41
The Trust...................................... 3,048,800 GBP1.37-GBP4.85
---------- ---------------
Outstanding, April 30 1999..................... 25,678,104 GBP0.11-GBP7.41
---------- ---------------
The outstanding options are exercisable between 1999 and 2009. The proceeds
on exercise at April 30, 1999 would be GBP 54,990,000 (January 31, 1998;
GBP 21,579,000).
At April 30, 1999 options for 11,671,000 shares (January 31, 1998 1,270,000
shares) were currently exercisable at prices per shares of between GBP 0.11 and
GBP 7.41; the proceeds of such options at April 30, 1999 would be GBP
28,391,000 (January 31, 1998, GBP 2,586,000).
NOTE 25 SUB-DIVISION OF ORDINARY SHARES
On March 12 1998 shareholders approved a 5-for-1 sub-division of the
Company's ordinary shares. The sub-division became effective as at the close of
business on Friday, March 13 1998. The Company's American Depositary Shares
("ADSs") which are traded on the Nasdaq Stock Market in the U.S.A., did not
split, although the conversion rights of such ADSs were adjusted such that each
ADS now represents five ordinary shares.
NOTE 26 SUBSEQUENT EVENT
On August 3 the Company completed the acquisition of Essential Software,
Inc. (trading as The Marathon Group), a privately-owned Internet professional
services firm based in Raleigh, North Carolina, U.S.A. for a total consideration
$15 million payable in cash.
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF
THE FINANCIAL STATEMENTS
UK FORMAT
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
Company and of the group and of the profit or loss of the group for that period.
In preparing those financial statements the directors are required to:
(a) select suitable accounting policies and then apply them
consistently;
(b) make judgments and estimates that are reasonable and prudent; and
(c) state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the financial
statements.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
group and to enable them to ensure that the financial statements comply with the
U.K. Companies Act 1985. They are also responsible for safeguarding the assets
of the group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
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MERANT PLC
FINANCIAL STATEMENTS
FIFTEEN MONTHS ENDED APRIL 30 1999
REPORT OF THE AUDITORS
UK FORMAT
To the members of MERANT plc
We have audited the financial statements on pages 72 to 102, which have
been prepared under the historical cost convention and on the basis of the
accounting policies set out in note 1 to the financial statements on pages 79 to
83.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors are responsible for preparing the Annual Report including, as
described above, the financial statements. Our responsibilities, as independent
auditors, are established by statute, the Auditing Practices Board, the Listing
Rules of the London Stock Exchange and by our profession's ethical guidance.
We report to you our opinion as to whether the financial statements give a
true and fair view and are properly prepared in accordance with the Companies
Act. We also report to you if, in our opinion, the directors' report is not
consistent with the financial statements, if the Company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if the information specified by law or the Listing
Rules regarding directors' remuneration and transactions with the Company is not
disclosed.
We read the other information contained in the Annual Report and consider
whether it is consistent with the audited financial statements. We consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements.
We review whether the statement on page 10 reflects the Company's
compliance with those provisions of the Combined Code specified for our review
by the Stock Exchange, and we report if it does not. We are not required to form
an opinion on the effectiveness of either the Company's corporate governance
procedures or its internal controls.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgments made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the group's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material mis-statement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
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OPINION
In our opinion the financial statements give a true and fair view of the
state of affairs of the Company and of the group as at April 30 1999 and of the
loss of the group for the period then ended and have been properly prepared in
accordance with the U.K. Companies Act 1985.
Ernst & Young
Registered Auditor
Reading
August 4 1999
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FURTHER INFORMATION FOR SHAREHOLDERS
US SECURITIES LAW MATTERS
MERANT is required to comply with various U.S. securities laws and
regulations because it has American Depository Shares registered with the U.S.
Securities and Exchange Commission ("SEC") which are traded in the U.S. on The
Nasdaq National Market.
SEC Filings. As a foreign private issuer in the U.S., the Company is
required to make certain filings with the SEC, including periodic filings on
Form 6-K and an annual report on Form 20-F.
The Company is required to file with the SEC by means of Form 6-K any
information that MERANT makes or is required to make public pursuant to the laws
of the U.K., files or is required to file with the London Stock Exchange, or
distributes or is required to distribute to its shareholders.
Form 20-F is similar to the annual Form 10-K filing required of U.S. public
companies, except that Form 20-F makes allowances for the differences in legal
and regulatory obligations applicable to non-U.S. companies. Portions of these
financial statements will be incorporated by reference into the Company's next
Form 20-F. Unless a portion of these financial statements are specifically
incorporated by reference into the Form 20-F, these financial statements are not
considered to be a part of the Company's Form 20-F filing. The filing includes a
general introduction to MERANT, and sections discussing, among other items, a
description of its business, its property, its principal shareholders, the
nature of the trading markets, taxation issues, information regarding its
directors and officers, as well as risk factors regarding the Company.
The Company currently plans to file its next Form 20-F with the SEC in
September, 1999. A copy of such Form 20-F may be obtained without charge by
contacting "Investor Relations" at MERANT offices in either Newbury or Rockville
listed at the back of The 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
1996 (the "Securities Litigation Reform Act"), applies to the Company and its
disclosure of information and provides that the Company can be exempt from
liability for making forward-looking statements if certain cautionary language
is included along with such statements. This Annual Report contains certain
forward-looking statements (as such term is defined in the rules promulgated
pursuant to the U.S. Securities Act of 1933, as amended) that are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Such forward-
looking statements are subject to the safe harbor created by the Securities
Litigation Reform Act. When used in this document, the words "anticipate,"
"believe," estimate, "expect" and similar expressions, as they relate to the
Company or its management, are intended to identify such forward-looking
statements. These forward-looking statements concern matters such as operating
expenses, Year 2000 readiness, exchange rate fluctuations and the Company's
capital needs. Such statements reflect the current views of the Company or its
management with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialise, or should underlying assumptions prove incorrect, the
Company's actual results, performance or achievements in 2000 and beyond could
differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in
Management Discussion and Analysis under the heading "Risk Factors that may
influence future operating results", as well as those discussed elsewhere in
this Annual Report. The inclusion of such forward-looking information should not
be regarded as a representation by the Company or any other person that the
future events, plans or expectations contemplated by the Company will be
achieved. The Company undertakes no obligation to release publicly any updates
or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of this Annual Report.
Electronic Filings. The SEC maintains a World Wide Web site located at
http://www.sec.gov. that contains a searchable database of filings, reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. Foreign private issuers such as MERANT are not
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131
currently required to file electronically with the SEC but may choose to do so.
As of March 1997, MERANT began voluntarily submitting its filings electronically
to the SEC.
ANNUAL GENERAL MEETING OF SHAREHOLDERS
The 1999 annual general meeting of MERANT plc will be held in The Vineyard,
Stockcross, Newbury, Berkshire, on September 16 1999. The full notice of meeting
will be sent to shareholders with this report.
ORDINARY SHARES
The Company's ordinary shares have been listed on the London Stock Exchange
since 1983. The current symbol is MRN. Since 1992 the Company's ordinary shares
have also been traded on The Nasdaq Stock Market in the United States in the
form of American Depositary Shares, evidenced by American Depositary Receipts.
The current symbol is MRNT. The Company undertook a subdivision (or stock split)
of its ordinary shares on a 5-for-1 basis effective March 13, 1998 and adjusted
the value of its ADSs such that each ADS represents 5 ordinary shares. All share
and per-share references included in these financial statements reflect the
impact of the above-mentioned stock split.
The table below shows, in respect of each of the Company's last nine
quarters, the highest and lowest middle market quotation as reported in the
Daily Official List of the London Stock Exchange (in respect of ordinary shares)
and the highest and lowest closing sales price as reported by the Nasdaq
National Market System (in respect of ADSs, each of which represents 5 ordinary
shares).
LONDON STOCK
EXCHANGE NASDAQ
(IN G.B. POUNDS) (IN U.S. DOLLARS)
MERANT QUARTERS: HIGH LOW HIGH LOW
---------------- ---- ---- ----- ------
1998
First quarter.......................... 2.75 2.04 22.50 16.35
Second quarter......................... 3.85 2.65 33.40 21.25
Third quarter.......................... 4.66 3.27 39.15 26.25
Fourth quarter......................... 5.66 3.88 47.50 32.90
1999
First quarter.......................... 7.18 5.10 60.63 39.13
Second quarter......................... 6.75 4.27 57.25 32.00
Third quarter.......................... 4.80 1.90 39.38 15.25
Fourth quarter......................... 2.40 0.97 19.63 7.90
Fifth quarter.......................... 1.52 1.06 12.56 8.13
---- ---- ----- -----
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INVESTOR RELATIONS BOARD OF DIRECTORS
MERANT J. Michael Gullord
9420 Key West Avenue Chairman of the Board
Rockville, MD 20850, USA General Partner,
www.merant.com Cornerstone Management
e-mail: IR@merant.com
Gary Greenfield
REGISTRAR AND TRANSFER AGENT President and Chief Executive Officer
Lloyds TSB Registrars
The Causeway, Worthing Michel Berty
West Sussex BN99 6DA, UK Founder,
MBY Consultants, Inc.
ADR DEPOSITORY
Bank of New York Kevin Burns
ADR Division Managing Principal,
101 Barclay Street Lazard Technology Partners
22nd Floor
New York, NY 10286, USA Harold Hughes
Chief Executive Officer,
REGISTERED OFFICE Pandesic LLC
MERANT plc
The Lawn Martin Waters
22-30 Old Bath Road Chairman
Newbury InvestorIQ
Berkshire RG14 IQN, UK
REGISTERED NO: 1709998 SENIOR MANAGEMENT
Gary Greenfield
STOCKBROKERS President & Chief Executive Officer
Warburg Dillon Read
1 Finsbury Avenue Ken Sexton
London, EC2M 2PP, UK Senior Vice President & Chief Financial Officer
and The Stock Exchange
London, EC2N 1HP, UK Panos Anastassiodis
Executive Vice President,
AUDITORS Worldwide Distribution
Ernst & Young
Apex Plaza Greg Gehring
Reading Senior Vice President,
Berkshire RG1 1YE, UK Chief Information Officer
LEGAL COUNSEL/SOLICITORS Dean Genge
Jonathan Philip Davies, Partner Senior Vice President,
Memery Crystal Corporate Marketing
31 Southampton Row
London WC1B 5HT, UK Buff Jones
Senior Vice President, General Manager,
MARKET FOR STOCK MERANT PVCS
Nasdaq, National Market symbol: MRNT,
London Stock Exchange symbol: MRN. Rick Van Hoesen
Senior Vice President, General Manager,
MERANT Micro Focus
Andrew Weiss
Chief Technology Officer
Gary Wright
Senior Vice President,
MERANT Consulting