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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .......... to ...........
Commission file number: 0-19696
MICRO FOCUS GROUP PUBLIC LIMITED COMPANY
(Exact name of Registrant as specified in its charter)
ENGLAND AND WALES
(Jurisdiction of incorporation or organization)
The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG141QN, England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares of 10p each.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None.
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the Annual
Report: 15,168,375 Ordinary Shares of 10p each.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 Item 18 X
---- ----
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TABLE OF CONTENTS
Page
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General Introduction.........................................................................1
PART I
Item 1. Description of Business............................................................2
Item 2. Description of Property...........................................................14
Item 3. Legal Proceedings.................................................................14
Item 4. Control of Registrant.............................................................14
Item 5. Nature of Trading Market..........................................................15
Item 6. Exchange Controls and Other Limitations Affecting Security-Holders................16
Item 7. Taxation..........................................................................16
Item 8. Selected Financial Data...........................................................20
Item 9. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................21
Item 10. Directors and Officers of Registrant..............................................21
Item 11. Compensation of Directors and Officers............................................23
Item 12. Options to Purchase Securities from Registrant or Subsidiaries....................24
Item 13. Interest of Management in Certain Transactions....................................25
PART II
Item 14. Description of Securities to be Registered........................................25
PART III
Item 15. Defaults Upon Senior Securities...................................................29
Item 16. Changes in Securities and Changes in Security for Registered Securities...........29
PART IV
Item 18. Financial Statements..............................................................29
Item 19. Financial Statements and Exhibits.................................................29
Signatures..................................................................................32
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Omitted Items are inapplicable.
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GENERAL INTRODUCTION
As used herein, the terms "Micro Focus" and the "Group" refer to Micro
Focus Group Public Limited Company and its subsidiaries, and the term "Company"
refers to Micro Focus Group Public Limited Company.
Micro Focus(R), COBOL Workbench(R), Animator(R), Revolve(R) and
Visual(R) are registered trademarks of the Group, and Micro Focus COBOL, CCI,
Fileshare, Dialog System, Fileshare NLM, 370 Assembler with Animator, Object
COBOL, Remote IMS, IMS Option, IMS Production Option and NetExpress are
trademarks of the Group. Certain other trademarks belonging to other companies
appear in this Annual Report.
In this Annual Report, references to "US dollars" or "$" are to US
currency and references to "GB pounds," "GBP" or "p" are to UK currency.
This Annual Report contains translations of certain amounts in GB pounds
to US dollars. Such translations have been made at the noon buying rates in New
York City for cable transfers in foreign currencies as announced for customs
purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") on the
relevant dates. These translations should not be construed as representations
that the GB pound amounts actually represent such US dollar amounts or could be
converted into US dollars at the rates indicated or at any other rate. The
exchange rates used by Micro Focus in the preparation of its consolidated
financial statements are based on month end rates published at the close of
business in London. Such rates may differ from the Noon Buying Rates. For
additional information on exchange rates between GB pounds and US dollars, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Exchange Rate Fluctuations" on pages 14 and 39 in the Company's
Annual Report to Shareholders for the year ended January 31, 1997 contained in
the Report of Foreign Issuer on Form 6-K furnished to the Commission on March
28, 1997 (the "Micro Focus 1996 Annual Report to Shareholders"), which sections
of the Micro Focus 1996 Annual Report to Shareholders are incorporated herein by
reference. On April 8, 1997, the Noon Buying Rate was $1.62 = GBP 1.
The Company publishes annual reports containing annual audited
consolidated financial statements and opinions thereon by independent public
accountants. Such financial statements are prepared on the basis of accounting
principles generally accepted in the United Kingdom ("UK GAAP") expressed in GB
pounds and on the basis of generally accepted accounting principles in the
United States ("US GAAP") expressed in US dollars. There are differences between
UK GAAP and US GAAP in the treatment of goodwill and other intangibles acquired
in connection with the purchase of subsidiaries, with respect to the methods of
computing earnings per share, which is calculated using different formulae under
UK GAAP and US GAAP, and with respect to certain disclosures and presentation.
The Company has published quarterly updates and semi-annual reports containing
unaudited financial information prepared on the same basis as its audited
consolidated financial statements. The Company is not required to report
quarterly financial information. Such annual reports, quarterly updates and
semi-annual reports are furnished to The Bank of New York as "Depositary" under
a Deposit Agreement dated as of March 1, 1990 by and among the Company, The Bank
of New York and all owners and holders from time to time of American Depositary
Receipts ("ADRs") issued by the Bank of New York (the "Deposit Agreement"). Upon
receipt thereof, the Depositary generally will mail all such reports to record
holders of ADRs evidencing American Depositary Shares ("ADSs"). The Company also
furnishes to the Depositary all notices of shareholders' meetings and other
reports and communications that are made generally available to shareholders of
the Company. The Depositary makes such notices, reports and communications
available for inspection by
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record holders of ADRs and mails to all record holders of ADRs notices of
shareholders' meetings received by the Depositary.
The Financial Statements and other financial information in this Annual
Report do not comprise "statutory accounts" within the meaning of Section 240 of
the Companies Act 1985 of Great Britain. Statutory accounts for the years ended
January 31, 1997, 1996 and 1995 have been delivered to the Registrar of
Companies for England and Wales. The auditor's reports on such accounts for
fiscal years 1996, 1995 and 1994 were unqualified.
The Company's fiscal year ends on January 31 of each year. The
references in this Annual Report and the financial statements incorporated
herein by reference for fiscal years 1996, 1995 and 1994 are for the years ended
January 31, 1997, 1996 and 1995, respectively.
The discussion below contains certain "forward-looking statements" (as
such term is defined in the rules promulgated pursuant to the Securities Act)
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 Private Securities Litigation Reform Act of 1995. The Company's
actual results, performance or achievements in fiscal 1997 and beyond could
differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in the
section entitled "Risk Factors" set forth below in Item 1 of this Form 20-F, as
well as those discussed elsewhere in this Form 20-F and in the documents
incorporated herein by reference. 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 Form
20-F. See "Part I, Item 1 - Description of Business, Forward-Looking
Statements."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Micro Focus designs, develops, markets and supports application
development tools and services for business application development. The Group's
products focus primarily on markets using the Common Business Oriented Language
("COBOL"). The Group's products permit users to analyze, create, re-engineer and
deploy software applications for a complete range of computer equipment, from
personal computer workstations to mainframe computers. In addition, the Group's
products and services enable enterprise application development and
reengineering of applications, including the analysis and repair of programs to
meet the requirements of the Year 2000.
Micro Focus Limited was established in England in August 1976 and became
a wholly-owned subsidiary of the Company in May 1983. The Company was
incorporated in England in March 1983 as a public limited company under the
Companies Acts 1948 to 1981 of Great Britain and is the holding company for a
number of subsidiary companies. In May 1983, the Company obtained a quotation on
the Unlisted Securities Market of The International Stock Exchange of the United
Kingdom and Republic of Ireland Limited, which is now the London Stock Exchange
Limited (the "London Stock Exchange"), and in June 1984, the Company became a
fully listed company on the London Stock Exchange. In May 1992, the Company
became listed on The NASDAQ Stock Market.
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Industry Background
The software industry is divided into many subcategories: operating
systems such as UNIX and Windows, end-user software applications for the average
desktop user such as word processing and spreadsheet programs, application
development tools such as compilers and rapid application development tools,
enterprise-wide packaged software applications which are sold as packages and
then customized for each enterprise based upon the needs of the individual user,
such as accounting software, and custom applications which may address a wide
variety of needs but are typically created for a single enterprise to meet
unique corporate objectives.
Micro Focus provides application development tools and related services.
Application development tools are used for the creation and incremental
improvement of enterprise computing applications.
Micro Focus has focused from the beginning on delivering application
programming tools and services to meet the needs of enterprise application
programmers. Customers for such tools and services are providers of enterprise
and custom business applications. In many cases, these providers are departments
within companies which develop, maintain and deploy enterprise applications. In
some cases, the customers are outside providers of these services, or sellers of
prepackaged applications.
Products
COBOL is the industry standard computer language for writing business
applications running on mainframe computers ("mainframes") and minicomputers.
Many enterprises have massive investments in trained programmers and working
applications often consisting of many hundreds of thousands of lines of COBOL
code. The Group's product and service offerings are concentrated primarily on
the COBOL language and the delivery of application development tools that meet
the needs of these programmers. COBOL was developed in the late 1950s and, since
the early 1960s, has been the subject of national standards committees that have
continually modified and modernized the language to meet changing technologies
and programmer needs.
Micro Focus has built a full range of programming tools and provides
services and training to COBOL programmers. These tools primarily operate in the
highly interactive environments of personal computer ("PC") and UNIX
workstations. These tools include a COBOL compiler, integrated debugging and
editing tools, program understanding tools, tools which emulate various
mainframe programming and operating environments, and connectivity software.
Some of these tools have been extended to include other programming languages,
such as PL/I and Assembler.
Market
Micro Focus has targeted three enterprise computing market segments in
which it believes its tools and services offer significant value to customers.
Such market segments are Year 2000 Solutions, Distributed Computing Solutions
and Legacy Systems Solutions.
Year 2000 Solutions
In the early years of mainframe computing, in order to save on memory
disk storage costs and processing time, years were typically represented by two
digits, such as 1997 being denoted by "97." This
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identification was not considered a problem until recently when it became
apparent that applications which use this two-digit year date convention will
fail to function properly when referring to years after 1999. After that date,
applications using two-digit dates will in many cases believe the year to be
1900 or some other year prior to 2000. As a result, this two-digit date
convention will lead to malfunctions in a large number of mission-critical
business applications. For example, banking applications may fail to compute
principal and interest payments properly, inventory programs may conclude that
all inventory is too old (having apparently been acquired in the year 1900), air
traffic and other traffic control systems may malfunction forcing airplanes,
trains and other vehicles to stop running and paralyzing mass transit, telephone
and other telecommunication systems may stop working or inaccurately record user
access and billing information, vital military and defense systems may fail,
government tax systems may generate inaccurate taxpayer and tax liability
information, and government benefit programs may not be able to generate
accurate payment information for welfare, social security and other benefit
recipients.
A large number of the programs affected by the Year 2000 problem are
mainframe programs written in COBOL and other popular mainframe languages such
as PL/1 and Assembler. Micro Focus' market position as a provider of
productivity tools for this environment and its current set of available tools
has resulted in a leadership position for offering customers Year 2000
solutions.
Micro Focus currently offers Revolve/2000, its program understanding and
analysis tool with specialized scripting features and services, as an effective
means for customers to assess the potential for Year 2000 problems in
applications, and as an effective toolset in combination with other Micro Focus
tools for finding and replacing date deficient code. Micro Focus' COBOL
Workbench is also in use by some customers as a means of correcting date
deficient code.
Industry estimates are that the expenditure worldwide to correct and
test the Year 2000 problem could exceed $300 billion. During 1997, Micro Focus
intends to enhance its product offerings for the Year 2000 problem and to offer
a greater level of services to support customers facing Year 2000 problems.
Micro Focus believes that many companies are only now beginning to invest
significant resources in correcting the Year 2000 problem and that its highly
interactive Revolve tool will continue to be well received in meeting the needs
of customers as they attempt to assess and correct their Year 2000 problem.
Distributed Computing Solutions
Originally, computers were standalone machines. Each computer had a
single input and output mechanism. Over time as computers became capable of
processing significant amounts of data, the need for multiple input and output
capabilities resulted in the creation of terminals which permitted more than one
person to work with the computer at a time. The invention of the PC created an
environment in which each user had powerful computing capabilities at the
desktop, yet it was still a single machine. The creation of networks of PC's and
the explosive growth of those networks over the past ten years has created a
need for application development tools and services that allow for the creation
of applications that take advantage of the distributed nature of today's
computing power. More recently, the Internet and intranets have added to the
need for powerful tools to deliver enterprise applications to these new
computing platforms.
Micro Focus offers a full range of programming tools and technologies to
deliver distributed computing solutions. These tools include the Micro Focus
Developer Suite, which is an integrated COBOL development environment for all
major UNIX platforms. Micro Focus also offers tools that permit the creation of
applications for the popular Windows 95 and NT platforms. Recently, Micro Focus
announced
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its plans to offer NetExpress, a new set of COBOL development tools designed to
simplify the creation of enterprise quality programming for the Internet and
intranets. Micro Focus believes that it is well-positioned to capitalize on the
need for enterprise application development tools for distributed computing
based upon its ability to deliver tools and services for enterprise
applications.
Legacy Systems Solutions
"Legacy Systems" is a term that is used to describe primary
mainframe-based business software applications that have been in place meeting
customer needs for many years. The most obvious examples of these systems are
the many business applications that have been created to meet individual
information processing needs of a business and which by their nature are
believed to provide an enterprise with competitive advantage in its market.
Examples include specialized insurance rate quote software, and statistical
applications that assist in key business decisions. These applications were
often among the first that were computerized in an enterprise, and in many
cases, the original applications have never been abandoned but instead
continuously upgraded and improved. These Legacy Systems can be among the most
valuable intangible assets that an enterprise may own.
Micro Focus offers its tools and services to meet the needs of
application developers who create, maintain and extend legacy applications.
Since most of these applications are written in COBOL, Micro Focus believes that
its core competency with the COBOL language and its continuing efforts to
develop more efficient and productive development environments offers these
customers a highly valued solution to maintain and extend Legacy Systems.
Micro Focus tools operate in the highly interactive PC environment, but
emulate key aspects of the mainframe environment, which permits programmers to
develop, maintain and extend these key legacy assets. In addition, Micro Focus
tools provide the ability to move these program assets to platforms other than
the mainframe by offering compatible COBOL compilers across the range of UNIX
and PC computing platforms.
Direct Sales, Support, Maintenance and Training Services
Micro Focus licenses its products directly to end users through a direct
sales force. In addition, this direct channel offers maintenance and support
programs for the full range of Micro Focus' products. Micro Focus' standard
maintenance and support program includes call-in technical support, receipt of
interim product updates and, in the United States for most products, the right
to receive any major product upgrade during the annual maintenance term. In
Europe, maintenance entitles customers to a lower price upgrade in addition to
receiving the services described above.
Product support and maintenance are important components of Micro Focus'
business as customers are increasingly dependent upon the ability to receive
technical assistance regarding the use and operation of products in order to
deploy them effectively. Micro Focus' policy of providing a continuously
improving product set strengthens its support and maintenance offering.
In addition to support services, the direct business provides customer
training in both on-site and public classes. Such classes are designed to train
customers in the use of Micro Focus' products.
OEM Business Products, Support and Maintenance
Micro Focus also licenses its products through an OEM sales channel. The
OEM sales channel
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provides Micro Focus technologies and products to computer manufacturers
worldwide for distribution with their computer equipment. OEM's distribute Micro
Focus development tools in order to attract customers to their hardware and
operating system offering as the availability of good development tools is a key
OEM selling strength.
OEM products that are licensed to US and European OEMs are targeted
primarily at the UNIX environment. Products that are licensed to OEM's in Japan
are predominantly intended for Windows operating systems.
In a typical arrangement, Micro Focus licenses its products to equipment
manufacturers and agrees to enable the products to run on the agreed platform in
exchange for certain engineering and porting fees in addition to distribution
license fees. Micro Focus uses a proprietary Template Native Code Generator
("TNCG") technology to create and implement a native code COBOL compiler for
each computer system to provide high performance products to its OEM customers
for use by their end user customers.
For the Japanese market, Micro Focus localizes its products by
enhancement to include double byte character support for Japanese character
processing and translations of documentation and text into the Japanese
language. Such products are based upon those products made available for the
English language market and therefore typically exhibit similar if not identical
functions.
Micro Focus offers its OEM customers maintenance and support services
for the full range of technologies and products licensed. Such services include
product engineering to permit operation on the OEMs' computer systems, the
provision of annual maintenance and support services, and technical consultation
services.
Research and Development
Micro Focus has a policy of consistently updating its software products
for the various operating systems consistent with customer demand. Each new
release adds greater functionality and more features to the products. Research
and development expenditures in the years ended January 31, 1997, 1996 and 1995,
respectively, were GBP 19.2m/$30.1m, GBP 24.1m/$38.2m, and GBP 23.5m/$36.3m
which represented approximately 26%, 31% and 26%, respectively, of the Group's
revenue. Of these expenditures, GBP 5.3m/$8.3m, GBP 9.9m/$15.6m and GBP
9.7/$15.0m, respectively, were capitalized as software product assets. For the
same years, GBP 8.1m/$12.7m, GBP 12.6m/$19.9m and GBP 7.1m/$10.9m, respectively,
were amortized and included in research and development costs resulting in total
development charges of GBP 24.3m/$34.5m, GBP 26.8m/$42.4m and GBP 20.9m/$32.3m,
respectively. The amortization charge for 1995 included GBP 3.8m/$5.9m which
represented additional write-downs of software product assets following a review
of their carrying value.
Certain Micro Focus products are developed by third parties and are
provided to Micro Focus under license and distribution arrangements that require
Micro Focus to pay license fees. These third parties have a continuing
obligation to improve and maintain the products supplied to Micro Focus. For the
year ended January 31, 1997, revenue from such products accounted for
approximately 3% of Micro Focus' total revenue.
Products shipped by Micro Focus are comprised primarily of printed
material on paper and software programs copied onto diskettes, tape media or
CD-ROM. These raw materials are widely available.
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Sales and Marketing
Micro Focus has local sales and marketing operations in the United
Kingdom, the United States, Canada, Japan, Germany, France, Spain and India.
Over the past three years, sales by geographic region have been distributed as
follows: 9% in the United Kingdom, 56% in the United States, 5% in Japan, 24% in
Continental Europe and 6% in the rest of the world.
Micro Focus end-user customers consist of corporate data processing
centers, independent software vendors, individual software developers,
value-added resellers and computer equipment manufacturers. The customer base is
very broad, with no individual customer accounting for more than 3% of total
revenue in the year ended January 31, 1997.
As of January 31, 1997, the Group's sales and sales support organization
consisted of 45 people in the United Kingdom, 173 people in the United States
and 58 people located in other countries, and Micro Focus had distributors
representing its products throughout the world.
Micro Focus sponsors an Academic Grant Program which allows Micro Focus
COBOL Workbench and related products to be used in accredited curriculum studies
and for research. As of April 8, 1997, over 350 universities, colleges and other
educational institutions had become participants in the Program.
Employees
As of January 31, 1997, Micro Focus had 626 employees, of whom 236 were
located in the United Kingdom, 304 were located in the United States and 86 were
located in other countries. None of the Group's employees is represented by a
labor union. Micro Focus has experienced no work stoppages and believes its
relations with its employees are good.
Micro Focus has adopted policies with regard to issuance of share
options to its employees. Micro Focus has an ongoing policy of paying cash
bonuses based upon the Group's performance relative to its financial plan. These
policies, together with certain of its sales, marketing and financial practices,
are designed to encourage employee performance and minimize employee turnover,
although there can be no assurance that such policies and practices will be
successful.
Recent Acquisitions or Dispositions
On April 30, 1997, the Company acquired all the share capital of
Millennium (UK) Limited ("Millennium") for total consideration of approximately
GBP 4m/$6.5m, which consisted of a payment of GBP 2m/$3.25m in cash and the
issuance of 149,142 Ordinary Shares of the Company with a value of approximately
GBP 2m/$3.25 on the date the acquisition was completed. Based in Bournemouth,
England, Millennium provides specialized Year 2000 consulting services.
Millennium has performed work for many blue chip UK companies on Year 2000
projects and has expertise in the estimating, planning and management of Year
2000 compliance projects for large scale systems. In addition, Millennium
provides services in the areas of project management and planning, business
process prioritization, resources strategies, risk assessment, impact analysis,
forward failure analysis, vendor management, automation strategies, training,
implementation support and management, and testing procedures and standards.
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Risk Factors
Potential Fluctuations in Operating Results
The Group's revenue, margins and operating results are subject to
quarterly and annual fluctuations due to a variety of factors, including demand
for the Group's products, the size and timing of customer orders, product life
cycles, the ability of the Group to develop, introduce and market new and
enhanced versions of the Group's products on a timely basis, the introduction
and acceptance of new products and product enhancements by the Group or its
competitors, customer order deferrals in anticipation of enhancements or new
products, changes in the mix of distribution channels through which the Group's
products are offered, purchasing patterns of distributors and retailers, the
quality of products sold, price and other competitive conditions in the
industry, changes in the Group's level of operating expenses, changes in the
Group's sales incentive plans, budgeting cycles of its customers, the
cancellation of licenses during the warranty period, nonrenewal of maintenance
agreements, economic conditions generally or in various geographic areas, and
other factors discussed elsewhere in these "Risk Factors." A relatively high
percentage of the Group's expenses is fixed over the short term and, as a
result, if anticipated revenue in any quarter does not occur or is delayed,
expenditure levels could be disproportionately high as a percentage of total
revenue and the Group's operating results for that quarter would be immediately
and adversely affected. The Group historically has operated with little
backlog because its products are generally shipped as orders are received. As a
result, revenue in any quarter depends on the volume and timing of, and the
ability to fill, orders received in that quarter. In addition, the Group has at
times recognized a substantial portion of its total revenue from sales booked
and shipped in the last month of the quarter such that the magnitude of
quarterly fluctuations may not become evident until late in, or at the end of, a
particular quarter. Furthermore, the Group expects that sales derived through
indirect channels, which are harder to predict and may have lower margins than
direct sales, will increase as a percentage of total revenue.
Seasonality of Operating Results
Although historically the Group's business has not been subject to
seasonal variations, the Group's customers tend to make product purchase
decisions in the fourth quarter of the Company's fiscal year as a result of
purchase cycles related to expiration or renewal of budgetary authorizations. As
a result, the Group typically experiences lower revenue for the first quarter
of a fiscal year than in the fourth quarter of the prior fiscal year. The
Group has typically recognized 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 customers orders. Quarterly results
therefore can vary to the extent that sales for a quarter are delayed,
particularly since a large portion of the Company's expenses do not vary with
revenue. In addition, the Group's revenue is also affected by seasonal
fluctuations resulting from lower sales that typically occur during the summer
months in Europe and other parts of the world. Due to all of the foregoing
factors, it is possible that in some future quarters the Group's operating
results will be below the expectations of stock market analysts and investors.
In such event, the price of the Company's securities would likely be materially
adversely affected.
Product Concentration
Substantially all of the Group's revenue is currently, and is expected
to continue in the future to be, derived from products and related services for
mainframe applications development in the COBOL language and COBOL compilers
running on workstations and PC's. As a result, the
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Company's future operating results depend upon continued market acceptance and
use of the COBOL language. The COBOL language was developed in the late 1950's
and there can be no assurance as to how long it will continue to be a viable
computer language, especially in view of the trends toward Windows-based
distributed network computing. Similarly, there can be no assurance as to how
long existing mainframe users will continue to use their systems in ways that
benefit from use of the Group's application development tools. Any decline in
demand for, or market acceptance or use of, the COBOL language or mainframes as
a result of competition, technological change or other factors would have a
material adverse effect on the Group's business, financial condition and results
of operations.
Lengthy Sales Cycle
The purchase of the Group's application development tools involves a
significant commitment of capital, with the attendant delays frequently
associated with customers' internal procedures to approve such expenditures. In
addition, customers tend to be cautious in making decisions regarding
acquisition of products that affect mission-critical operations. For these and
other reasons, the sales cycle associated with the purchase of the Group's
products is typically lengthy and subject to a number of significant risks,
including customers' budgetary constraints and internal acceptance reviews, over
which the Group has little or no control. Because of the lengthy sales cycle, if
revenue forecasted from a specific customer for a particular quarter were not
realized in that quarter, the Company likely would not be able to generate
revenue from alternate sources in time to compensate for the shortfall. As a
result, and due to the typical size of customers' orders, a lost or delayed sale
would have a material adverse effect on the Group's quarterly operating
results and cash flow. Moreover, to the extent that significant sales occur
earlier than expected, operating results for subsequent quarters may be
adversely affected.
Dependence on New Products and Technological Change
The Group must continually change and improve its products in response
to changes in operating systems, application software, computer hardware and
software, programming tools and computer language technology. The introduction
of products embodying new technologies and the emergence of new industry
standards can render existing products obsolete and unmarketable. The Group's
growth and future financial performance will depend upon its ability on a timely
and cost-effective basis to develop and introduce enhancements of existing
products and new products that accommodate the latest technological advances and
standards, customer requirements and market conditions.
There can be no assurance that the Group will be successful in
developing and marketing, on a timely basis or at all, fully functional and
integrated product enhancements or new products which respond to changing market
conditions, that its enhanced or new products will achieve market acceptance, or
that other software vendors will not develop and market products which are
superior to the Group's products. Furthermore, customers may delay purchases in
anticipation of technological changes. In the past, the Group has experienced
delays and increased expenses in developing its new products. The Group's
ability to develop and market new products depends upon its ability to attract
and retain qualified employees. Any failure by the Group 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 Group's business,
results of operations and financial condition.
Risk of Product Defects
Software products as complex as those offered by the Group may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite
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testing by the Group and testing and use by current and potential customers,
errors will not be found in new products after commencement of commercial
shipments. The occurrence of such errors could result in loss of or delay in
market acceptance of the Group's products, which could have a material adverse
effect on the Group's business, financial condition and results of operations.
See "Business -- Product Development."
Dependence on Proprietary Technology
The Group's success is heavily dependent upon its proprietary software
technology. The Group relies on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual rights to protect its
proprietary rights. The Group has also filed for patents on certain of its
technology, but there can be no assurance that such filings will be successful
or that patents will be granted to the Group. As part of its confidentiality
procedures, the Group generally enters into non-disclosure agreements with its
employees, consultants, distributors and corporate partners, and limits access
to and distribution of its software, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise to obtain and use the Group's products or technology without
authorization, or to develop similar technology independently. In addition,
effective protection of intellectual property rights may be unavailable or
limited in certain countries.
Infringement of Intellectual Property Rights
There are currently no notices or pending claims that the Group's
products, trademarks or other proprietary rights infringe the proprietary rights
of third parties. However, there can be no assurance that the Group will not
receive communications in the future from third parties asserting that the
Group's products infringe, or may infringe, on their proprietary rights. If it
is necessary or desirable, the Group may seek licenses under such intellectual
property rights. However, there can be no assurance that licenses to disputed
third-party technology would be available on reasonable commercial terms, if at
all. The failure to obtain a license from a third party for technology used by
the Group could cause the Group to incur substantial liabilities and to suspend
the production and sale of certain of its products. In addition, the Group may
initiate claims or litigation against third parties for infringement of the
Group's proprietary rights or to establish the validity of the Group's
proprietary rights. Litigation to determine the validity of any claims could
result in significant expense to the Group and divert the efforts of the Group's
technical and management personnel from operating activities, whether or not
such litigation is determined in favor of the Group. In the event of an adverse
ruling in any such litigation, the Group may be required to pay substantial
damages, discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to the
infringed technology. In the event of a successful claim against the Group and
the failure of the Group to develop or license a substitute technology, the
Group's business, financial condition and results of operations would be
adversely affected. As the number of software products in the industry increases
and the functionality of these products further overlaps, the Group believes
that software developers may become increasingly subject to infringement claims.
Any such claims against the Group, with or without merit, as well as claims
initiated by the Group against third parties, can be time consuming and
expensive to defend or prosecute and to resolve.
Highly Competitive Markets
The markets in which the Group competes are characterized by rapid
technological change and aggressive competition. The Group competes with other
COBOL vendors that offer compilers and application development tools. The
following companies distribute COBOL compilers for operation on personal
computers and workstations: Computer Associates International, Inc., Liant
Software
10
<PAGE> 13
Corporation, Acucobol, Inc. and International Business Machines Corporation. In
addition, Micro Focus competes with non-COBOL language and application
development vendors, including vendors of fourth generation language products,
database vendors with application development tools, vendors of object oriented
programming tools, some CASE tool companies and mainframe compiler and tool
vendors. The Group also competes with many vendors of Year 2000 tools and
services.
The Group expects competition to increase in the future from existing
competitors and from other companies that may enter the Group's existing or
future markets with similar or substitute solutions that may be less costly or
provide better performance or functionality. Some of the Group's competitors
have greater financial, marketing or technical resources than Micro Focus and
may be able to adapt more quickly to new or emerging technologies, or devote
greater resources to the promotion and sale of their products than can Micro
Focus. There can be no assurance that other companies with substantially greater
resources than the Group, 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.
The Group believes that the principal competitive factors in the
Group's markets are product performance and reliability, functionality,
integration, product quality, application portability, product enhancement,
price, training and support; the success and timing of new product development
efforts; changes affecting the hardware, operating systems or database systems
which the Group supports; the level of demonstrable economic benefits for users
relative to cost; ease of installation; and vendor reputation, experience and
financial stability. The Group believes that it competes favorably with respect
to all of these factors. To be successful in the future, the Group must continue
to respond promptly and effectively to the challenges of changing customer
requirements, technological change and competitors' innovations. There can be no
assurance that the Group will be able to compete successfully with existing or
new competitors.
The Group also encounters competition from a broad range of firms in the
market for professional services. Many of the Group's current and prospective
competitors in the professional services market have significantly greater
financial, technical, recruiting and marketing resources devoted to professional
services than the Group. The competitive factors affecting the market for the
Group's professional services include responsiveness to customer needs,
productivity and the ability to demonstrate achievement of results, breadth and
depth of services offered, the ability to hire and retain qualified technical
personnel, price and reputation. There can be no assurance that the Group will
be able to compete effectively in the future in the professional services
market, and in particular in the Year 2000 professional services market, nor
that future competition for professional services will not have a material
adverse effect on the Group's business, results of operations and financial
condition.
Susceptibility to General Economic Conditions
The Group's revenue and results of operations will be subject to
fluctuations in general economic conditions. If there were a general economic
downturn or a recession in the United States or certain other markets, the Group
believes that certain of its customers might reduce or delay their purchases of
the Group's products or services, leading to a reduction in the Group's revenue.
The factors that might influence current and prospective customers to reduce
their information technology budgets under these circumstances are beyond the
Group's control. In the event of an economic downturn, the Group's business,
results of operations and financial condition could be materially adversely
affected.
11
<PAGE> 14
Risks Associated with Global Operations
For the fiscal years ended January 31, 1997, 1996 and 1995, sales to
customers outside of the United States represented approximately 47%, 45% and
41%, respectively, of the Micro Focus' total net revenue. The Group intends to
continue to expand its operations outside of the United States and enter
additional international markets. The Group has committed and continues to
commit significant time and resources to developing international sales and
support channels. There can be no assurance that such efforts will be
successful. The failure of such efforts could have a material adverse effect on
the Group's business, financial condition and results of operations. The risks
inherent in conducting international business generally include exposure to
exchange rate fluctuations, longer payment cycles, greater difficulties in
accounts receivable collection and enforcing agreements, tariffs and other
restrictions on foreign trade, U.S. export requirements, economic and political
instability, withholding and other tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that the factors described above will
not have an adverse effect on the Group's future international revenue and,
consequently, on the Group's business, results of operations and financial
condition.
Reliance on Operations in the United Kingdom; English Corporation
The Group's primary engineering and research and development operations
are located in the United Kingdom. The geographic distance between the Group's
engineering personnel in the United Kingdom on the one hand and the Group's
primary markets in the United States on the other hand has in the past led and
could in the future lead to logistical and communication difficulties. There can
be no assurance that the geographic and cultural differences between the Group's
United States and United Kingdom personnel and operations will not result in
problems that materially adversely affect the Company's business, financial
condition and results of operations. Further, because the Group's research and
development operations are located in the United Kingdom, its operations and the
market price of its securities are directly affected by economic and political
conditions in the United Kingdom.
In addition, the right of holders of Ordinary Shares and, therefore,
certain of the rights of holder of ADRs, are governed by English law, including
the Companies Act 1985, and by the Company's Memorandum and Articles of
Association. These rights differ in certain respects from the rights of
shareholders in typical United States corporations.
Volatility of Market Price
The market price of the Company's securities has experienced significant
price volatility and such volatility may occur in the future. Factors such as
actual or anticipated fluctuations in the Company's operating results,
announcements of technological innovations, new products or new contracts by the
Group 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. Further, the stock
market has experienced extreme volatility that has particularly affected the
market prices of equity securities of many high technology companies and that
often has been unrelated or disproportionate to the operating performance of
such companies. These market fluctuations, as well as general economic,
political and market conditions such as recessions or international currency
fluctuations, may adversely affect the market price of the Company's securities.
12
<PAGE> 15
Dependence on Key Personnel
Competition for qualified personnel in the software industry is intense,
and there can be no assurance that the Group will be able to attract and retain
a sufficient number of qualified personnel to conduct its business in the
future. The Group'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 Group does not have employment agreements with most of
its key personnel, nor does it maintain key man life insurance on any of these
persons. Several senior management personnel are relatively new to the Group and
the Group's success will depend in part on the successful assimilation and
performance of these individuals. As the business of the Group grows, it may
become increasingly difficult for it to hire, train and assimilate the number of
new employees required. In addition, it is possible that the business changes or
uncertainty brought about by acquisitions may cause key employees to leave the
Group, and certain key members of the management of acquired companies may not
continue with the Group. Any difficulty in attracting and retaining key
personnel could have a material adverse effect on the Group's business,
results of operations and financial condition.
Year 2000 Business
The Group markets certain of its products and services to customers for
managing the maintenance and redevelopment of mission-critical computer software
systems. In addition, an increasing proportion of the Group's business is
devoted to providing solutions for the Year 2000 problem, which affects the
performance and reliability of many mission-critical systems. The Group's
agreements with its customers typically contain provisions designed to limit the
Group's exposure to potential product and service liability claims. It is
possible, however, that the limitation of liability provisions contained in the
Group's customer agreements may not be effective as a result of existing or
future federal, state, local or foreign laws or ordinances or unfavorable
judicial decisions. Although the Group has not experienced any product or
service liability claims to date, the sale and support of its products and
services may entail the risk of such claims, particularly in the year 2000
market, which could be substantial in light of the use of its products and
services in mission-critical applications. A successful product or service
liability claim brought against the Group could have a material adverse effect
upon the Company's business, operating results and financial condition.
Furthermore, the Company anticipates that demand in the year 2000 market will
decline, perhaps rapidly, following the year 2000 and the demand for the
Company's year 2000 solutions and products may also decline significantly as a
result of new technologies, competition or other factors. If this decline in
demand were to occur, the Group's license revenue and professional services
fees could be materially and adversely affected.
Forward-Looking Statements
This Form 20-F contains, and incorporates by reference, certain
forward-looking statements (as such term is defined in the rules promulgated
pursuant to the Securities Act) 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 Private Securities Litigation Reform Act of 1995.
When used in this document and in the documents incorporated herein by
reference, 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 materialize, or should underlying assumptions prove
incorrect, the
13
<PAGE> 16
Company's actual results, performance or achievements in fiscal 1997 and beyond
could differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed below in
"Risk Factors", as well as those discussed elsewhere in this Form 20-F and in
the documents incorporated herein by reference. 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 Form 20-F.
ITEM 2. DESCRIPTION OF PROPERTY
The Group's worldwide headquarters consist of approximately 80,000
square feet of office space located on an 8-acre site in Newbury, England, which
is owned by the Group. Micro Focus also leases approximately 4,690 square feet
at a nearby production facility, and the lease for this facility expires in
2009.
Micro Focus maintains a U.S. headquarters in Palo Alto, California,
where it leases office space of approximately 44,650 square feet located at 2465
East Bayshore Road, Palo Alto, California 94303. Micro Focus also leases a
nearby production facility that covers approximately 7,580 square feet. The
leases for these locations expire in September 1997.
Micro Focus has entered into a lease for office and production space for
approximately 56,000 square feet. The lease relates to a facility that is to be
constructed at 701 Middlefield Road, Mountain View, California. Micro Focus
intends to vacate the premises in Palo Alto at such time as the Mountain View
facility is complete. Current plans call for this to occur in September 1997.
Micro Focus also maintains facilities in the following areas: Philadelphia,
Pennsylvania; Chicago, Illinois; New York, New York; Cedarberg, Wisconsin;
Boston, Massachusetts; Raleigh, North Carolina; Toronto, Canada; Paris, France;
Munich, Germany; Barcelona and Madrid, Spain; Tokyo, Japan; and Bangalore,
India.
Micro Focus considers that its premises are generally suitable and
adequate for the purposes for which they are used.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or any
of its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. CONTROL OF REGISTRANT
As far as is known to the Company, it is not directly or indirectly
owned or controlled by one or more corporations or a foreign government.
The following table sets forth certain information as of April 8, 1997,
with respect to the Company's outstanding Ordinary Shares held by: (i) any
person who is known by the Company to be the owner of more than 10% of the
Company's Ordinary Shares; and (ii) all directors and officers of the Company as
a group.
14
<PAGE> 17
<TABLE>
<CAPTION>
Identity of Person or Group Amount Owned Percent of Class
- --------------------------- ------------ ----------------
<S> <C> <C>
Bank of New York (1) 2,844,118 18.75%
Fidelity Corporation (2) 1,583,875 10.44%
The Prudential Corporation Group 1,574,099 10.38%
All directors and officers
as a group (12 persons) 169,452 1.12%
</TABLE>
- --------------------
(1) Held beneficially as the depositary of the Company's ADSs for which ADRs
have been issued.
(2) Certain of these shares are held in the form of ADRs and so are included in
the total held by the Bank of New York.
The Company knows of no arrangements the operation of which may at a
subsequent date result in a change of control of the Company.
ITEM 5. NATURE OF TRADING MARKET
The Company's Ordinary Shares are listed on the London Stock Exchange
and ADSs, each representing one Ordinary Share, are traded in the United States.
The ADSs are evidenced by ADRs issued by the Depositary pursuant to the terms
and conditions of the Deposit Agreement.
In 1992, the Company listed its ADSs on the U.S. National Association of
Securities Dealers, The Nasdaq Stock Market where they trade under the symbol
MIFGY. In connection with such listing, the Company has sought and received a
waiver of the NASDAQ Stock Market corporate governance requirements that were
not then commonly observed by companies organized in the United Kingdom (which
include requirements for at least two external directors and an audit
committee).
The following table sets forth for the periods indicated (i) the high
and low middle market quotations for the Ordinary Shares, as derived from the
Daily Official List of the London Stock Exchange and (ii) the equivalent US
dollar prices translated at the Noon Buying Rate on the date of such high and
low quotations.
<TABLE>
<CAPTION>
Ordinary Shares
---------------
Fiscal Years Ended
January 31, High Low High Low
- ----------- ------------ -------------
(in GB Pounds) (in US Dollars)
1996
- ----
<S> <C> <C> <C> <C>
First Quarter 8.23 7.58 12.42 12.27
Second Quarter 7.83 7.00 12.48 11.07
Third Quarter 7.90 5.73 12.65 9.06
Fourth Quarter 6.78 5.60 10.68 8.84
1997
- ----
First Quarter 13.35 5.58 20.29 8.48
Second Quarter 10.10 6.43 15.05 9.90
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C>
Third Quarter 10.40 7.00 16.64 10.85
Fourth Quarter 11.40 7.92 18.58 13.15
</TABLE>
The table below shows the high and low closing prices for the ADSs in US
Dollars as reported by the Nasdaq National Market System for the periods
indicated.
<TABLE>
<CAPTION>
American Depositary Shares
--------------------------
Fiscal Years Ended
January 31, High Low
----------- ------------------
(in US Dollars)
1996
- ----
<S> <C> <C>
First Quarter 13.88 11.00
Second Quarter 12.75 10.88
Third Quarter 12.75 9.25
Fourth Quarter 10.50 8.25
1997
- ----
First Quarter 19.50 8.38
Second Quarter 15.75 9.75
Third Quarter 16.13 10.50
Fourth Quarter 19.13 13.00
</TABLE>
As of April 8, 1997, 170,613 Ordinary Shares and 2,829,118 ADSs (each
representing one Ordinary Share) were held of record in the United States. These
Ordinary Shares and ADSs were held by 78 record holders and 2,500 record
holders, respectively, and represented 1.12% and 18.65%, respectively, of the
total number of Ordinary Shares outstanding. Since certain of these Ordinary
Shares and ADSs were held by brokers or other nominees, the number of record
holders in the United States is not representative of the number of beneficial
holders or of where the beneficial holders are resident.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS
Although there are currently no UK laws, decrees or regulations that
restrict the export or import of capital, including foreign exchange controls,
or that affect the remittance of dividends, interest or other payments to non-UK
resident holders of Ordinary Shares or ADSs, dividends may not be paid under
current English law to the governments of Iraq or Libya (or persons exercising
public functions in such countries) or to any resident of Iraq or any person
treated as so resident (each of the foregoing, a "Prohibited Person"). No
dividends have ever been paid by the Company. See "Item 8-Selected Financial
Data - Dividends."
There are no limitations under English law or in the Memorandum and
Articles of Association of the Company that are applicable only to non-UK
shareholders relating to the right to hold or exercise voting rights attaching
to the Ordinary Shares or ADSs. However, under current English law, Ordinary
Shares or ADSs may not be owned by a Prohibited Person.
16
<PAGE> 19
ITEM 7. TAXATION
This summary does not purport to address all material tax consequences
of the ownership of Ordinary Shares or ADSs, and does not take into account the
specific circumstances of any particular shareholders (such as tax-exempt
entities, certain insurance companies, broker dealers, shareholders liable for
alternative minimum tax, shareholders that actually or constructively own 10% or
more of the voting shares of the Company, shareholders that hold Ordinary Shares
or ADSs as part of a straddle or a hedging or conversion transaction, or
shareholders whose functional currency is not the US dollar), some of which may
be subject to special rules. Holders of Ordinary Shares or ADSs should consult
their own tax advisors as to the particular tax consequences to them of
ownership of the Ordinary Shares or ADSs.
UK Income Taxation of Dividends
No dividends have ever been paid by the Company. However, in the event
dividends were to be paid, the following would apply.
The Company is required when paying a dividend to account to the UK
Inland Revenue for an advance payment of corporation tax ("ACT"). The rate of
ACT is currently 25/75 of any dividend paid to shareholders, which is equivalent
to 25% of the combined dividend paid and related ACT.
An individual shareholder resident in the United Kingdom is for UK
income tax purposes treated as having taxable income equal to the sum of the
dividend paid to him plus a tax credit, which equals the ACT in respect of his
dividend. The tax credit is available to be set against the individual's tax
liability on the dividend and may in appropriate cases be refunded to him.
Under the current double income taxation convention between the United
Kingdom and the United States, subject to certain exceptions, a shareholder who
is a US resident individual, including an ADR holder, will be entitled under the
convention and current UK law to receive, in addition to any dividend paid by
the Company, the tax credit in respect of such dividend, but reduced by a UK
withholding tax equal to 15% of the sum of the dividend paid and the tax credit.
US corporate shareholders are generally treated in the same way as individuals,
provided, however, that in the case of a corporate shareholder that controls,
directly or indirectly, 10% of the voting shares of the Company a reduced credit
and a lower rate of withholding apply.
No credit is available and no withholding tax applies to a shareholder
whose holdings are effectively connected with either a permanent establishment
in the United Kingdom from which the shareholder carries on a business in the
United Kingdom or a fixed base in the United Kingdom from which the shareholder
performs independent personal services. Special rules apply in the case of
shareholders that are US corporations, and are either: (a) residents in the
United Kingdom; or (b) US corporations at least 25% of the capital of which is
held, directly or indirectly, by persons that are not individual residents or
nationals of the United States and that satisfy certain other conditions.
Further special rules may apply if the shareholder: (i) is a partnership, an
estate or a trust that is a resident of the United States; (ii) is exempt from
taxation in the United States on dividends paid by the Company; or (iii) owns
10% or more of the class of shares of the Company paying the dividend.
In the event of a dividend, the Bank of New York can arrange, subject to
certain exceptions, for the tax credit (net of the withholding tax) to be
refunded, at the same time as and together with any dividend being paid to a US
ADR holder otherwise entitled to a refund, if the ADR holder completes the
declaration on the reverse of the dividend check and presents the check for
payment within three months from the date of
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<PAGE> 20
issue of the check. ADR holders who do not satisfy these requirements must, in
order to obtain a refund of the tax credit (net of the withholding tax), file in
the manner and at the time described in Revenue Procedure 80-18, 1980-1 C.B.623
and Revenue Procedure 81-58, 1981-2 C.B.678, a claim for refund of the tax
credit identifying the dividends with respect to which the tax credit was paid.
These arrangements do not apply to certain shareholders or ADR holders,
including certain investment or holding companies and bodies exempt from US tax
on the dividends received, who must make a direct claim, as summarized below.
Claims for refund of tax credit (less UK withholding tax) must be made
within six years of the UK year of assessment (generally the 12-month period
ending April 5 in each year) in which the related dividend was paid, in
accordance with the procedures set out below.
The first claim by a shareholder for a refund of tax credit is made by
sending the appropriate UK form in duplicate to the Director of the Internal
Revenue Service Center with which the shareholder's last federal income tax
return was filed. Forms may be obtained from the IRS Assistant Commissioner
(International), 950 L'Enfant Plaza South S.W. Washington, DC 20024. Because a
refund claim is not considered made until the UK tax authorities receive the
appropriate form from the Internal Revenue Service, forms should be sent to the
Internal Revenue Service well before the end of the application limitation
period. Any claim for refund of tax credit by a US shareholder after the first
claim should be filed directly with the Financial Intermediaries and Claims
Office (International), Fitz Roy House, P.O. Box 46, Nottingham NG2 1BD,
England.
US Federal Income Taxation of Dividends
For US income tax purposes, a US holder of ADRs will realize dividend
income in an amount equal to the sum of any cash dividend paid and the related
tax credit, without reduction for any UK withholding tax thereon. Such dividend
income will generally not be eligible for the dividends received deduction
allowed to corporations. Subject to certain limitations, the UK withholding tax
will be treated as a foreign income tax that may be claimed as a credit against
any US federal income tax liability. The dividend income will, for purposes of
computing the foreign tax credit, constitute income from a source outside the
United States but, with certain exceptions, will also be treated together with
other items of "passive" or "financial service" income.
Taxation on Capital Gains
Under the current double income taxation convention between the United
Kingdom and the United States, each country generally may tax capital gains in
accordance with the provisions of its domestic law. Under present UK law,
residents of the United States who are not resident or ordinarily resident in
the United Kingdom will not be liable for UK capital gains tax on capital gains
made on the disposal of their Ordinary Shares unless such shares are held in
connection with a trade carried on in the United Kingdom through a permanent
establishment. US citizens or corporations who are also liable for UK tax may be
liable for both UK and US tax in respect of a gain on the disposal of ADSs.
However, subject to the limitations set out in the Code, such persons may be
entitled to a tax credit against their federal tax liability for the amount of
the UK tax paid in respect of such gain. A US resident holder of an ADR will be
liable for US federal income tax on such gains to the same extent as on any
other gains from sales of stock.
UK Inheritance Tax
Under the current double estates and gift taxation convention between
the United States and the United Kingdom, Ordinary Shares held by an individual
shareholder who is domiciled for the purpose of
18
<PAGE> 21
the convention in the United States and is not for the purposes of the
convention a national of the United Kingdom will not, provided any tax
chargeable in the United States is paid, be subject to UK inheritance tax on the
disposal of shares by way of gift or upon the individual's death unless the
shares are part of the business property of a permanent establishment of the
individual in the United Kingdom or, in the case of a shareholder who performs
independent personal services, pertain to a fixed base situated in the United
Kingdom. In the exceptional case where the shares are subject both to UK
inheritance tax and to US federal gift or estate tax, the convention generally
provides for double taxation to be relieved by means of credit relief.
UK Stamp Duty and Stamp Duty Reserve Tax
Charges to UK stamp duty and/or stamp duty reserve tax ("SDRT") may be
imposed in respect of, inter alia, the following transactions:
(a) the transfer of an ADS;
(b) the transfer of an Ordinary Share;
(c) the deposit of an Ordinary Share with the Custodian under the
Deposit Agreement and the subsequent issue of an ADR; and
(d) the transfer of an Ordinary Share on surrender of an ADS.
This section discusses in turn each such possible charge.
No UK stamp duty will be payable on any transfer of an ADS provided that
the instrument or transfer is executed and remains outside the UK, nor will
there be any liability to SDRT in respect of any agreement for the transfer of
ADSs.
Ad valorem stamp duty will be charged on conveyances or transfers of
Ordinary Shares at the rate of 1/2% of the consideration, if any, for the
transfer.
SDRT will be imposed, at the rate of 1/2% of the consideration for
transaction, if an agreement is made for the sale of Ordinary Shares, unless an
instrument of transfer of the Ordinary Shares in favor of the purchaser or its
nominee is executed and duly stamped. SDRT is in general payable by the
purchaser of Ordinary Shares, but regulations have been made which provide for
collection from other persons in certain circumstances.
Ad valorem stamp duty will be imposed on any instrument transferring
Ordinary Shares to a nominee or agent for a depositary which then issues
depositary receipts (such as the ADRs). Where the instrument is liable to stamp
duty as a "conveyance on sale" (because it completes a sale of Ordinary Shares
or ADSs), then the rate of duty will be 1 1/2% of the consideration for the sale
implemented by the instrument. Where the instrument of transfer is not stampable
as a conveyance on sale, then the rate of duty will be 1 1/2% of the market
value of the security transferred by the instrument, except that the rate of
duty will be reduced to 1% in the case of certain transfers effected by a
qualified dealer in securities (as defined in the UK Finance Act 1986).
There is also a potential charge to SDRT which will apply where Ordinary
Shares are transferred to a nominee or agent for the Depositary under an
arrangement under which the Depositary issues ADRs.
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<PAGE> 22
SDRT, which will be payable by the Depositary, will be charged at a rate of 1
1/2% of the consideration for the transfer. Where there is no such
consideration, the rate of the SDRT will be 1 1/2% of the market value of the
securities transferred, except that the rate of SDRT will be reduced to 1% in
the case of certain transfers effected by a qualified dealer in securities (as
defined in the UK Finance Act 1986). The charge to SDRT will, however, be
reduced by the amount, if any, of ad valorem stamp duty paid on the instrument
transferring the Ordinary Shares.
A transfer of Ordinary Shares from the Depositary or its agent or
nominee to an ADR holder, or a person designated by such holder, on cancellation
of an ADS which is liable to duty as a "conveyance of sale" because it completes
a sale of such Ordinary Shares, will be liable to ad valorem stamp duty, payable
by the purchaser, at the rate of 1/2% of the consideration, if any, for the
transfer. A transfer of Ordinary Shares from the Depositary or its agent or
nominee to an ADR holder on cancellation of an ADS which is not liable to duty
as a "conveyance on sale" will be liable to a fixed stamp duty of 50p.
ITEM 8. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
The Selected Consolidated Financial Data in US Format set forth on page
8 and the Selected Consolidated Financial Data in UK Format set forth on page 34
of the Micro Focus 1996 Annual Report to Shareholders are incorporated herein by
reference.
Exchange Rates
The following table sets forth, for the periods and as of dates
indicated, the average, high, low and end of period Noon Buying Rates for GB
pounds in US dollars per GBP 1.
<TABLE>
<CAPTION>
Fiscal Year Ended January 31, Average* High Low Period End
- ----------------------------- -------- ---- --- ----------
<S> <C> <C> <C> <C>
1993. . . . . . . . . . . . . . . 1.73 2.00 1.49 1.49
1994. . . . . . . . . . . . . . . 1.50 1.59 1.42 1.49
1995. . . . . . . . . . . . . . . 1.55 1.64 1.46 1.58
1996. . . . . . . . . . . . . . . 1.57 1.61 1.51 1.51
1997. . . . . . . . . . . . . . . 1.58 1.71 1.49 1.60
</TABLE>
* The average of the exchange rates on the last day of each calendar month
during the period.
On April 8, 1997, the Noon Buying Rate was $1.62 per GBP 1.
Fluctuations in the exchange rate between the GB pound and the US dollar
will affect the US dollar amounts received by holders of the ADSs upon
conversion by the Depositary of cash dividends paid in GB pounds on the Ordinary
Shares represented by the ADSs and may affect the relative market prices of the
ADSs in the United States and the Ordinary Shares in the United Kingdom.
With respect to the effect of exchange rate fluctuations on the Group's
results of operations, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Exchange Rate Fluctuations" on pages 14 and
39 of the Micro Focus 1996 Annual Report to Shareholders, which sections on
exchange rate fluctuations are incorporated herein by reference.
20
<PAGE> 23
Dividends
The Company has never paid cash dividends on its Ordinary Shares. The
Company has investigated the possibility of paying dividends and reviews the
issue from time to time.
If dividends were paid, they would probably be paid in GB pounds and
exchange rate fluctuations would affect the US dollar amounts that holders of
Ordinary Shares would receive on conversion by them, or in the case of ADR
holders the Depositary, of such cash dividends. Moreover, fluctuations in the
exchange rate between the GB pound and the US dollar affect the dollar
equivalent of the sterling price of Ordinary Shares on the London Stock
Exchange.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Management's Discussions and Analyses of Results of Operations and
Financial Condition for the fiscal years ended January 31, 1997, 1996 and 1995,
which are contained on pages 9 through 14 and pages 35 through 39 of the Micro
Focus 1996 Annual Report to Shareholders, are incorporated herein by reference.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The Memorandum and Articles of Association of the Company provide that,
unless otherwise determined by ordinary resolution of the Company, the number of
directors shall be not less than two in number. There are currently five
directors. At each annual general meeting, one-third of the directors who are
subject to retirement by rotation (or, if their number is not three or a
multiple of three, the number nearest to but not exceeding one-third) shall
retire from office. A director appointed by the directors to an executive office
is not subject to retirement by rotation. However, notwithstanding such
provision, the directors have since the formation of the Company retired by
rotation.
Executive officers of the Company serve at the discretion of the Board
of Directors.
The directors and executive officers of the Company, effective April 8,
1997, are as follows:
<TABLE>
<CAPTION>
Board of Directors
- ------------------
Date Initially Elected or Appointed
Name Position as Director of the Company
- ---- -------- --------------------------
<S> <C> <C>
Paul A. Adams Director and Vice President, November 1986
International Sales
Ronald H. Forbes Director and Vice President, November 1986
International Finance
J. Michael Gullard Director and Chairman May 1995
Marcelo Gumucio Director and Chief January 1996
Executive Officer
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
Harold Hughes Director December 1993
Executive Officers
- ------------------
Name Position Date Appointed
- ---- -------- --------------
<S> <C> <C>
Clive Beavis Vice President, September 1992
Product Development
Stanley Blaustein Vice President, November 1996
Chief Information Officer
Richard Butts Vice President, Human Resources June 1996
Robert A. Connors Vice President, December 1996
Corporate Development
Chris Christides Vice President, August 1996
North American Sales
Loren E. Hillberg Vice President, General August 1993
Counsel and Secretary
Anthony R. Muller Senior Vice President and September 1996
Chief Financial Officer
</TABLE>
Biographical information with respect to the directors and officers is
shown below. Note that Micro Focus Limited was established in England in 1976
and became a wholly-owned subsidiary of the Company in May 1983.
Mr. Adams has been a director for the Company since 1986, has served in
various executive capacities with the Company since 1978 and is currently Vice
President, International Sales of the Company.
Mr. Forbes has been a director of the Company since 1986, has served in
various executive capacities with the Company since 1984 and is currently Vice
President, International Finance of the Company.
Mr. Gullard has been a non-executive director of the Company since May
1995. He is General Partner of the venture capital firm of Cornerstone
Management.
Mr. Gumucio has been a director of the Company since January 1996 and
became Chief Executive Officer of the Company effective April 1, 1996.
Mr. Hughes has been a non-executive director of the Company since
December 1993. He is Corporate Vice President and Director of Planning and
Logistics for Intel Corporation.
22
<PAGE> 25
Mr. Beavis has served in various executive capacities with the Company
since 1980 and is currently Vice President, Product Development.
Mr. Blaustein joined the Company in November 1996 as its Vice President
and Chief Information Officer.
Mr. Butts has served in various capacities with the Company since 1983
and is currently Vice President, Human Resources.
Mr. Christides joined the Company as its Vice President, North American
Sales in August 1996.
Mr. Connors has served in various executive capacities with the Company
since 1984 and is currently Vice President, Corporate Development of the
Company.
Mr. Hillberg has served in various capacities with the Company since
1989 and is currently Vice President, General Counsel and Secretary of the
Company.
Mr. Muller joined the Company in September 1996 as its Senior Vice
President and Chief Financial Officer.
There are no family relationships between any director or executive
officer and any other director or executive officer and there are no
arrangements or understandings between any executive officer or director and any
other person pursuant to which an executive officer or director was or is to be
selected to such position.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
For the fiscal year ended January 31, 1997, the aggregate amount of
compensation paid by Micro Focus to all directors and officers as a group (15
persons) for services in all capacities totaled GBP 1,363,100/$2,181,000. For
the same period, the compensation of the chairmen of Micro Focus was GBP
82,000/$131,200. The aggregate amount set aside or accrued by Micro Focus for
the fiscal year ended January 31, 1997 to provide pension, retirement or similar
benefits for directors and officers of Micro Focus, pursuant to any existing
plan provided or contributed to by Micro Focus, totaled GBP 13,290/$21,260.
The amounts paid to the directors and officers as a group may be divided
as follows: GBP 758,900/$1,214,200 was paid as salary, GBP 84,000/$134,400 was
paid as director's fees, other benefits of GBP 29,000/$46,400 to one director,
consulting fees of GBP 90,100/$144,160 paid to one former officer, compensation
payments for loss of office of GBP 30,000/$48,000 to one director, and the
remainder was payable under three different cash bonus programs. Each cash bonus
program sets certain operating plans, and bonus amounts are paid based upon the
Group's performance against the operating plan. Further compensation information
is provided under "Executive Remuneration Committee's Report - Directors
Remuneration Policy" on page 31 of the Micro Focus 1996 Annual Report to
Shareholders, which compensation information is incorporated herein by
reference.
Upon the resignation of a director of the Company in March 1996, the
Company entered into an agreement with an entity with which such director is
affiliated that provides for the Company to receive
23
<PAGE> 26
management and technology consulting services in exchange for payment of GBP
500,000/$800,000, and the transfer to the entity of certain computer and
telecommunications equipment which the Company has valued at GBP
155,000/$249,000. As expected, the bulk of the services that were anticipated to
be performed under the agreement were performed during 1996.
Upon the registration of another director of the Company in April 1996,
the Company entered into a consultancy agreement with an entity with which such
director is affiliated to provide management consulting services to the Company
in exchange for a payment of GBP 490,000/$750,000, plus reimbursement of
expenses. As expected, the bulk of the services that were anticipated to be
performed under the agreement were performed during 1996.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company has four share option plans, the Micro Focus Share Option
Plan 1983-1984, the Micro Focus Share Option Plan 1991, the Micro Focus Group
Employee Benefit Trust 1994 (the "1994 Plan") and the Micro Focus Share Option
Plan 1996 (the "1996 Plan"). The share option plans provide for the granting of
options to purchase Ordinary Shares in the Company to Micro Focus employees and
consultants. The Company currently has the authority to grant options under the
1994 Plan and the 1996 Plan.
At April 8, 1997, there were outstanding options to purchase 1,781,504
Ordinary Shares with exercise prices ranging from GBP 5.42 to GBP 18.73. At the
same date, the following directors (and directors and officers as a group) held
options to purchase the number of shares set forth opposite their respective
names:
<TABLE>
<CAPTION>
Number of Shares Option Price Expiration Date
---------------- ------------ ---------------
<S> <C> <C> <C>
Marcelo Gumucio 10,000 GBP 6.05 January 30, 2006
362,500 GBP 6.53 April 1, 2003
362,500 GBP 8.35 June 21, 2006
Paul A. Adams 1,600 GBP 5.42 August 8, 1998
57,300 GBP 6.85 April 9, 2003
10,000 GBP 10.59 March 5, 2007
Ronald H. Forbes 51,300 GBP 6.85 April 9, 2003
Harold Hughes 10,000 GBP 14.98 August 19, 2002
2,000 GBP 11.98 June 16, 2004
J. Michael Gullard 10,000 GBP 10.67 June 2, 2004
50,000 GBP 8.35 June 21, 2006
Directors and Officers
as a group
(12 persons) 4,000 GBP 5.42 August 8, 1998
10,000 GBP 6.05 January 30, 2006
362,500 GBP 6.53 April 1, 2003
</TABLE>
24
<PAGE> 27
<TABLE>
<S> <C> <C>
260,100 GBP 6.85 April 9, 2003
245,000 GBP 7.33 September 11, 2006
412,500 GBP 8.35 June 21, 2006
30,000 GBP 9.05 December 3, 2006
10,000 GBP 10.59 March 5, 2007
10,000 GBP 10.67 June 2, 2004
2,000 GBP 11.98 June 16, 2004
10,000 GBP 14.98 August 19, 2002
</TABLE>
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
As at January 31, 1997, Micro Focus had outstanding a loan to one of its
officers in the principal face amount of GBP 57,000/$91,200, and as at January
31, 1996, Micro Focus had outstanding two loans to two of its officers in the
aggregate principal face amount of GBP 117,000/$176,670.
See also Item 11 for a description of the consultancy agreements entered
into by the Company during the Company's last fiscal year with two of its former
directors.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
The Registrant has elected to respond to this Item.
Description of the Ordinary Shares
The following is a description of the Company's Ordinary Shares based on
the Company's Articles of Association (the "Articles") and English law in force
as of the date of this Annual Report. The description does not purport to be
complete and is qualified in its entirety by reference to the full Articles
which have been filed as an exhibit to this Annual Report.
Share Capital
At the present time, the authorized share capital of the Company is GBP
2,250,000 divided into 22,500,000 Ordinary Shares of 10p each, of which
15,168,375 Ordinary Shares were outstanding on January 31, 1997. Each of the
issued Ordinary Shares is fully paid and not subject to any further calls or
assessments by the Company. There are no conversion rights, redemption
provisions or sinking fund provisions related to the Ordinary Shares.
Articles of Association
The Articles, the amendment of which requires the passing of a special
resolution by the Company in general meeting, contain provisions, inter alia, to
the following effect:
Dividends and Other Distributions
All dividends on the Ordinary Shares shall be declared and paid
according to the amount paid up on the
25
<PAGE> 28
Ordinary Shares (otherwise than in advance of calls) but no dividend shall be
declared in excess of the amount recommended by the directors. The directors may
from time to time pay to the members of the Company such interim dividends as
appear to the directors to be justified by the profits of the Company available
for distribution. There are no fixed dates on which entitlement to dividends
arise on the Ordinary Shares.
Any dividend unclaimed after a period of 12 years from the date when it
became due for payment shall, if the directors so resolve, be forfeited and
shall cease to remain owing by the Company.
Voting Rights
The holders of Ordinary Shares shall be entitled to attend and vote at
any general meeting of the Company. Subject to disenfranchisement in the event
of non-compliance with a statutory notice requiring disclosure as to beneficial
ownership and subject to any rights or restrictions attached to any shares, on a
show of hands every member who (being an individual) is present in person or by
proxy or (being a corporation) is present by a duly authorized representative or
proxy shall have one vote, and on a poll every member shall have one vote for
every share of which he is the holder.
Pre-Emptive Rights
Under Part III of the Companies Act 1985 of Great Britain, no equity
securities which are, or are to be, paid for wholly in cash (except shares held
under an employees' share scheme) may be allotted by the Company unless the
Company has made an offer to the holders of its Ordinary Shares to allot the
equity securities to them on the same or more favorable terms and in proportion
to their shareholdings. In this context, equity securities generally means, in
relation to the Company, Ordinary Shares, i.e., shares with no restrictions on
the amounts receivable in a distribution of dividends or capital and all rights
to subscribe for or convert into such shares.
This statutory pre-emption right does not, however, apply where the
right has been disapplied by a special resolution of the shareholders of a
company. In the case of the Company, by a special resolution passed at the
annual general meeting of the Company on June 19, 1996, the statutory
pre-emption right was disapplied in respect of the allotment of equity
securities for cash in connection with (a) a rights issue in favor of ordinary
shareholders where the equity securities respectively attributable to the
interests of all ordinary shareholders are proportionate (as nearly as may be)
to the respective numbers of Ordinary Shares held by them but subject to such
exclusions as the directors may consider appropriate to deal with fractional
entitlements or holders of shares outside the United Kingdom or (b) the
allotment of equity securities up to an aggregate nominal value of GBP 75,736.
This disapplication will, unless extended or renewed, expire on the date of the
annual general meeting of the Company in 1997, or if earlier, on September 19,
1997.
Variation of Rights and Share Capital
The Company may by ordinary resolution increase its share capital,
consolidate and divide all or any of its shares into shares of larger amounts
and, subject to the provisions of the Companies Acts, subdivide its shares into
shares of smaller amount or cancel shares which have not been taken or agreed to
be taken by any person. Subject to the provisions of the Companies Acts, the
Company may by special resolution reduce its share capital, capital redemption
reserve and any share premium account. The Company may also, subject to such
approvals as are required by the Companies Acts, purchase its own shares.
26
<PAGE> 29
Subject to the provisions of the Companies Acts, the rights attached to
any class of shares may be varied with the consent in writing of the holders of
three-fourths in nominal value of the issued shares of that class, or with the
sanction of an extraordinary resolution passed at a separate meeting of the
holders of the shares of that class.
Distribution of Assets on Liquidation
In the event of a winding-up or reduction of capital of the Company
involving repayment, the assets of the Company available for distribution among
the members shall be divided between the holders of the Ordinary Shares
according to the respective number of shares held by them and in accordance with
the provisions of the Companies Acts. The liquidator may, with the sanction of
an extraordinary resolution of the Company and subject to the Companies Acts,
divide among the members in specie the whole or any part of the assets of the
Company.
Description of American Depositary Receipts
The Depositary for the Company's ADSs is The Bank of New York with an
address at 101 Barclay Street, New York, New York 10286.
The following summary of the terms of the ADRs, evidencing the ADSs, is
qualified in its entirety by the terms of the ADRs that are printed on each ADR.
(i) Name: The Bank of New York American Depositary Receipt for
Fully Paid Ordinary Shares of 10p Each in the Capital of Micro Focus Group
Public Limited Company.
(ii) ADR Unit Represented: Each ADR evidences a specified number
of ADSs, each representing, as of the date hereof, one Ordinary Share, 10p.
(iii) Procedure for Voting: Upon receipt of notice from the
Company that a meeting of the holders of Ordinary Shares is to be held, the
Depositary must provide notice to ADR holders of the meeting and ADR holders
are, subject to the provisions of the Company's charter documents, entitled to
instruct the Depositary in writing regarding the exercise of the ADR holders
voting rights, if any. Absent instructions from ADR holders, the Depositary will
provide a discretionary proxy to the Company in the form provided by the Company
to a person designated by the Company.
(iv) Collection and Distribution of Dividends and Distributions:
Cash dividends and other distributions are collected by the Depositary and, if
reasonable in the judgment of the Depositary, converted into US dollars and
thereafter distributed to ADR holders as of the record date fixed for the
dividend or distribution. Non-cash distributions and dividends are distributed
as of the record date in any manner that the Depositary deems equitable and
practicable for accomplishing such distribution. This may include sale of the
aggregate non-cash distribution or dividend and distribution of the net proceeds
as if such distribution or dividend had been made in cash.
(v) Transmission of Notices, Reports and Proxy Materials: The
Depositary must distribute such materials as and when received from the Company
or, if appropriate, can prepare its own proxy material with respect to
instructions for voting.
(vi) Sale or Exercise of Rights: In the event the Company offers
or causes holders of Ordinary Shares to have rights to subscribe for additional
shares or any other rights, the Depositary will have
27
<PAGE> 30
discretion as to the procedure to be followed in making rights available to ADR
holders or in disposing of such rights on behalf of ADR holders and making the
net proceeds available to ADR holders, provided that the Depositary will make
any such rights available to ADR holders if it determines it to be lawful and
feasible.
(vii) Amendment, Extension or Termination of Deposit Agreement:
The Deposit Agreement may be amended by the Company and the Depositary and such
amendment will become effective immediately provided that any amendment which
prejudices a substantial existing right of the ADR holders will not become
effective until the expiration of three months after notice of amendment has
been given to the ADR holders. In the event of termination of the deposit, the
Depositary shall provide 30 days' written notice to each of the ADR holders. The
ADR holders are entitled to receive the Ordinary Shares to which such holder is
entitled subject to payment of any fees and/or applicable taxes associated with
such delivery.
(viii) Rights of Holders of ADRs to Inspect the Transfer Books of
the Depositary: The Depositary will keep books for the registration of ADRs and
transfers of ADRs, which at all reasonable times will be open for inspection by
ADR holders provided that the inspection is not for the purpose of communicating
with ADR holders in the interest of a business or object other than the business
of the Company or a matter related to the deposit agreement or the ADRs.
(ix) Restrictions Upon the Right to Deposit or Withdraw Ordinary
Shares: The only restrictions with respect to the deposit or withdrawal of
Ordinary Shares is the payment of appropriate fees associated with the deposit
or withdrawal.
(x) Limitation on the Liability of Depositary: The Depositary
will not incur any liability to any ADR holder if it is prevented in carrying
out its responsibilities or obligations under the Deposit Agreement due to acts
of God, intervention by governmental authorities or limitations with respect to
the Articles of the Company, nor will it be liable for any non-performance or
delay caused in the performance of its responsibilities because of any exercise
of or failure to exercise its discretion as provided under the Agreement.
(xi) Expenses: Each ADR holder will directly bear the expense of
fees resulting from the deposit or withdrawal of Ordinary Shares, and the
creation of additional ADRs with respect to share dividends. ADR holders will
indirectly bear the expense of the distribution of proceeds, if any, of
dividends or distributions to the ADR holders, any taxes or governmental charges
and any expenses incurred in the conversion of foreign currency by the
Depositary into US dollars under the terms of the Deposit Agreement.
In its capacity as Depositary, the Depositary will lend neither the
Ordinary Shares held under the Deposit Agreement nor the ADRs; provided,
however, that the Depositary reserves the right to (i) execute and deliver ADRs
prior to the receipt of Ordinary Shares and (ii) deliver Ordinary Shares prior
to the receipt and cancellation of ADRs, including ADRs which were issued under
(i) above but for which Ordinary Shares may not have been received. The
Depositary may receive ADRs in lieu of Ordinary Shares under (i) above and
receive Ordinary Shares in lieu of ADRs under (ii) above. Each such transaction
will be (a) preceded or accompanied by a written representation from the person
to whom ADRs or Ordinary Shares are to be delivered that such person, or its
customer, owns the Ordinary Shares or ADRs to be remitted, as the case may be,
(b) at all times fully collateralized with cash or such other collateral as the
Depositary deems appropriate, (c) terminable by the Depositary on not more than
five (5) business days notice, and (d) subject to such further indemnities and
credit regulations as the Depositary deems appropriate. The Depositary will
normally limit the number of ADRs and Ordinary Shares involved
28
<PAGE> 31
in such transactions at any one time to thirty percent (30%) of the ADSs
outstanding (without giving effect to the ADSs evidenced by ADRs outstanding
under (i) above), or Ordinary Shares held under the Deposit Agreement,
respectively; provided, however, that the Depositary reserves the right to
change or disregard such limit from time to time as it deems appropriate. The
Depositary will also set limits with respect to the number of ADRs and Ordinary
Shares involved in transactions to be done under the Deposit Agreement with any
one person on a case by case basis as it deems appropriate.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
None.
PART IV
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements
filed as part of this Annual Report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
1. The following audited consolidated financial statements,
together with the related reports of Ernst & Young, are incorporated herein by
reference from the Micro Focus 1996 Annual Report to Shareholders:
US Format
---------
Audited Financial Statements
Consolidated Statements of Income for the years ended
January 31, 1997, 1996 and 1995
Consolidated Balance Sheets at January 31, 1997 and 1996
Consolidated Statements of Cash Flow for the years ended
January 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the
years ended January 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of the Independent Auditors
29
<PAGE> 32
UK Format
---------
Audited Financial Statements
Consolidated Profit and Loss Account for the years ended
January 31, 1997, 1996 and 1995
Consolidated Balance Sheet at January 31, 1997 and 1996
Consolidated Cash Flow Statement for the years ended
January 31, 1997, 1996 and 1995
Notes to Consolidated Cash Flow Statement for the years
ended January 31, 1997, 1996 and 1995
Company Balance Sheet at January 31, 1997 and 1996
Statement of Total Recognized Gains and Losses for the
years ended January 31, 1997, 1996 and 1995
Movement in Shareholders' Funds for the years ended
January 31, 1997,1996 and 1995
Notes to the Financial Statements
2. The following financial statement schedules and reports of
Ernst & Young have been filed as part of this Annual Report:
US Format
---------
Report of the Independent Auditors on the Schedule
Schedule for the years ended January 31, 1997, 1996 and 1995
Schedule II - Valuation and Qualifying Accounts
UK Format
---------
Report of the Independent Auditors
Schedule for the years ended January 31, 1997, 1996 and 1995
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required
information is not significant or is not applicable.
(b) Exhibits.
Exhibit 2.01* Memorandum of Association of the Company dated
as of March 28, 1983, as amended and restated to date.
Exhibit 2.02* Articles of Association of the Company adopted
as of June 19, 1996, as amended and restated to date.
Exhibit 2.03(1) Form of Specimen Certificate for the Company's
Ordinary Shares at GBP 0.10 each.
Exhibit 2.04(1) Deposit Agreement, dated as of March 1, 1990,
among the Company, the
30
<PAGE> 33
Bank of New York and all owners and holders from time
to time of American Depositary Receipts.
Exhibit 2.05(3)+ The Company's 1983-1984 Share Option Plan, as
amended, and related documents.
Exhibit 2.06(3)+ The Company's 1991 Share Option Plan, as amended,
and related documents.
Exhibit 2.07(3)+ The Company's 1994 Employee Benefit Trust and
related documents.
Exhibit 2.08(3)+ The Company's 1996 Share Option Plan and related
documents.
Exhibit 2.09* Form of Indemnification Agreement entered into
by the Company with each of its directors and certain
executive officers.
Exhibit 2.10* Form of Indemnity Agreement entered into by
Micro Focus Incorporated, a subsidiary of the Company
("Micro Focus Incorporated"), with each of its
directors and certain executive officers of the
Company and Micro Focus Incorporated.
Exhibit 2.11(2) Master Lease Agreement dated as of March 24,
1992 between Micro Focus Incorporated and Mayfair
Investments, Inc.
Exhibit 2.12* Lease Agreement dated as of January 8, 1997
between Micro Focus Incorporated and
Passantino-Vidovich Limited Partnership.
Exhibit 13.01* The portions of the Micro Focus 1996 Annual
Report to Shareholders incorporated herein by
reference.
Exhibit 23.01* Consent of Ernst & Young dated March 6, 1997.
Exhibit 23.02* Consent of Ernst & Young dated May 2, 1997.
- --------------------
(1) Filed on November 27, 1991 as an exhibit to the Company's Annual Report on
Form 20-F, as amended, and incorporated herein by reference.
(2) Filed on March 15, 1993 as an exhibit to the Company's Annual Report on Form
20-F, and incorporated herein by reference.
(3) Filed on April 9, 1997 as an exhibit to the Company's Registration Statement
on Form S-8 (File No. 333-24867), and incorporated herein by reference.
+ Indicates a management contract or compensatory plan or arrangement
* Filed herewith
31
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this Annual Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: May 2, 1997 MICRO FOCUS GROUP PLC
By: /s/ M.A. Gumucio
-------------------------
Marcelo A. Gumucio
Chief Executive Officer
32
<PAGE> 35
REPORT OF THE INDEPENDENT AUDITORS US FORMAT
- --------------------------------------------------------------------------------
MICRO FOCUS GROUP PLC
To the Board of Directors and Shareholders
of Micro Focus Group Plc
We have audited the consolidated financial statements of Micro Focus Group Plc
and subsidiaries as of January 31 1997 and 1996 and for each of the three years
in the period ended January 31 1997 set forth on pages 15 to 25 of the Annual
Report to Shareholders for 1996. Our audit also included the financial
statement schedule set forth on page S-2 herein. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young
Ernst & Young
Chartered Accountants
Registered Auditor
Reading, England
March 6 1997
<PAGE> 36
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS US FORMAT
- --------------------------------------------------------------------------------
MICRO FOCUS GROUP PLC
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Balance at Charged Charged Balance
beginning of to costs and to other at end of
Description period expenses accounts (*) Deductions period
GBP '000 GBP '000 GBP '000 GBP '000 GBP '000
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for bad and doubtful debts
------------------------------------
Years ended January 31:
1995 380 255 60 (209) 486
1996 486 457 (3) (295) 645
1997 645 327 (21) 115 1,066
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(*) Exchange rate adjustments
S-2
<PAGE> 37
REPORT OF THE INDEPENDENT AUDITORS UK FORMAT
- --------------------------------------------------------------------------------
MICRO FOCUS GROUP PLC
To the Board of Directors and Shareholders
of Micro Focus Group Plc
We have audited the balance sheets of Micro Focus Group Plc and the
consolidated balance sheets of Micro Focus Group Plc and subsidiaries as of
January 31 1996 and 1997 and the related consolidated profit and loss accounts,
statements of total recognised gains and losses and cash flow statements for
each of the three years in the period ended January 31 1997 set forth on pages
40 to 55 of the Annual Report to Shareholders for 1996. Our audit also included
the financial statement schedule set forth on page S-4 herein. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on those financial statements and
schedule based on our audits.
We conducted our audits in accordance with United Kingdom auditing standards
and United States generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principals used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of Micro Focus Group Plc and the
consolidated financial position of Micro Focus Group Plc and subsidiaries at
January 31 1997 and 1996 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended January 31
1997 in conformity with accounting principles generally accepted in the United
Kingdom. Also, in our opinion the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young
Ernst & Young
Chartered Accountants
Registered Auditor
Reading, England
March 6 1997
S-3
<PAGE> 38
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS UK FORMAT
- --------------------------------------------------------------------------------
MICRO FOCUS GROUP PLC
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Balance at Charged Charged Balance
beginning of to costs and to other at end of
Description period expenses accounts (*) Deductions period
GBP '000 GBP '000 GBP '000 GBP '000 GBP '000
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for bad and doubtful debts
------------------------------------
Years ended January 31:
1995 253 166 27 (141) 305
1996 305 288 20 (186) 427
1997 427 207 (41) 73 666
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(*) Exchange rate adjustments
S-4
<PAGE> 39
EXHIBIT INDEX
Exhibit
No. Document
Exhibit 2.01* Memorandum of Association of the Company dated as of
March 28, 1983, as amended and restated to date.
Exhibit 2.02* Articles of Association of the Company adopted as of
June 19, 1996, as amended and restated to date.
Exhibit 2.03(1) Form of Specimen Certificate for the Company's
Ordinary Shares at GBP 0.10 each.
Exhibit 2.04(1) Deposit Agreement, dated as of March 1, 1990, among
the Company, the Bank of New York and all owners and
holders from time to time of American Depositary
Receipts.
Exhibit 2.05(3)+ The Company's 1983-1984 Share Option Plan, as
amended, and related documents.
Exhibit 2.06(3)+ The Company's 1991 Share Option Plan, as amended,
and related documents.
Exhibit 2.07(3)+ The Company's 1994 Employee Benefit Trust and
related documents.
Exhibit 2.08(3)+ The Company's 1996 Share Option Plan and related
documents.
Exhibit 2.09* Form of Indemnification Agreement entered into
by the Company with each of its directors and certain
executive officers.
Exhibit 2.10* Form of Indemnity Agreement entered into by
Micro Focus Incorporated, a subsidiary of the Company
("Micro Focus Incorporated"), with each of its
directors and certain executive officers of the
Company and Micro Focus Incorporated.
Exhibit 2.11(2) Master Lease Agreement dated as of March 24,
1992 between Micro Focus Incorporated and Mayfair
Investments, Inc.
Exhibit 2.12* Lease Agreement dated as of January 8, 1997
between Micro Focus Incorporated and
Passantino-Vidovich Limited Partnership.
Exhibit 13.01* The portions of the Micro Focus 1996 Annual
Report to Shareholders incorporated herein by
reference.
Exhibit 23.01* Consent of Ernst & Young dated March 6, 1997.
Exhibit 23.02* Consent of Ernst & Young dated May 2, 1997.
- --------------------
(1) Filed on November 27, 1991 as an exhibit to the Company's Annual Report on
Form 20-F, as amended, and incorporated herein by reference.
(2) Filed on March 15, 1993 as an exhibit to the Company's Annual Report on Form
20-F, and incorporated herein by reference.
(3) Filed on April 9, 1997 as an exhibit to the Company's Registration Statement
on Form S-8 (File No. 333-24867), and incorporated herein by reference.
+ Indicates a management contract or compensatory plan or arrangement
* Filed herewith
<PAGE> 1
EXHIBIT 2.01
No. 1709998
THE COMPANIES ACTS 1948 to 1981
-----------------------
COMPANY LIMITED BY SHARES
-----------------------
MEMORANDUM OF ASSOCIATION
OF
MICRO FOCUS GROUP
PUBLIC LIMITED COMPANY
-----------------------
1. The name of the Company is "MICRO FOCUS GROUP PUBLIC LIMITED
COMPANY."
2. The Company is to be a public company.
3. The registered office of the Company will be situate in England.
4. The objects for which the Company is established are:
(A) To carry on the business of a holding company in all its
branches, to coordinate the policy and administration of
any companies, corporations or undertakings in which the
Company is a member or participant or which are controlled
by or associated with the Company in any manner, to
guarantee, assist financially, subsidize or enter into
subvention agreements with any such companies,
corporations or undertakings and to provide for them
administrative, executive, managerial, secretarial and
accountancy services or staff, office accommodation or
social or welfare services and facilities, to act as
secretaries, directors, registrars, managers and agents
thereof and to do anything which will or may promote the
efficiency and profitability of the businesses carried on
by any such companies, corporations or undertakings.
<PAGE> 2
(B) To acquire any shares, stock, debentures, debenture stock,
bonds, notes, obligations, or securities by original
subscription, contract, tender, purchase, exchange,
underwriting, participation in syndicates or otherwise,
and whether or not fully paid up, and to subscribe for the
same subject to such terms and conditions (if any) as may
be thought fit.
(C) To exercise and enforce all rights and powers conferred by
or incident to the ownership of any such shares, stock,
obligations or other securities including without
prejudice to the generality of the foregoing all such
powers of veto or control as may be conferred by virtue of
the holding by the company of some special proportion of
the issued or nominal amount thereof and to provide
managerial and other executive, supervisory and consultant
services for or in relation to any company in which the
Company is interested upon such terms as may be thought
fit.
(D) To acquire by any means any real or personal property or
rights whatsoever.
(E) To carry on any other business which may seem to the
Company capable of being conducted directly or indirectly
for the benefit of the Company.
(F) To make experiments in connection with any business or
proposed business of the Company, and to apply for or
otherwise acquire in any part of the world any patents,
patent rights, licenses, protections and concessions which
may appear likely to be advantageous or useful to the
Company, and to use and manufacture under or grant
licenses or privileges in respect of the same, and to
expend money in experimenting upon and testing and in
improving or seeking to improve any patents, inventions or
rights which the Company may acquire or propose to
acquire.
(G) To acquire by any means the whole or any part of the
assets, and to undertake the whole or any part of the
liabilities, of any person carrying on or proposing to
carry on any business which the Company is authorized to
carry on or which can be carried on in connection
therewith, or to acquire an interest in, amalgamate or
enter into any arrangement for sharing profits, or for
cooperation, or for limiting competition, or for mutual
assistance, with any such person and to give or accept, by
way of consideration for any of the acts or things
aforesaid or property acquired, any shares, whether fully
or partly paid up, debentures, or other securities or
rights that may be agreed upon.
(H) To lend money or give credit to such persons on such terms
as may seem expedient.
(I) To borrow money and to secure by mortgage, charge or lien
upon the whole or any part of the Company's property or
assets (whether present or future),
2
<PAGE> 3
including its uncalled capital, the discharge by the
Company or any other person of any obligation or liability.
(J) To guarantee the performance of any obligation by any
person whatsoever.
(K) To draw, make, accept, endorse, discount, execute and
issue promissory notes, bills of exchange, bills of
lading, warrants, debentures and other negotiable or
transferable instruments.
(L) To apply for, promote and obtain any Act of Parliament,
charters, privileges, concessions, licenses or
authorizations of any government, state or municipality,
Provisional Order or License of the Department of Trade or
other authority for enabling the Company to carry any of
its objects into effect or for extending any of the
Company's powers or for effecting any modification of the
Company's constitution, or for any other purpose which may
seem expedient, and to oppose any actions, steps,
proceedings or applications which may seem calculated
directly or indirectly to prejudice the interests of the
Company or of its Members.
(M) To enter into any arrangement with any governments or
authorities (supreme, municipal, local or otherwise), or
any corporation, companies or persons that may seem
conducive to the Company's objects or any of them, and to
obtain from any such government, authority, corporation,
company or person any charters, contracts, decrees,
rights, privileges and concessions which the Company may
think desirable, and to carry out, exercise and comply
with any such charters, contracts, decrees, rights,
privileges and concessions.
(N) To establish and maintain, or procure the establishment
and maintenance of, any employees share schemes, share
option schemes or incentive schemes of whatever nature,
any pension or superannuation funds (whether contributory
or otherwise) for the benefit of, and to give or procure
the giving of donations, gratuities, pensions, allowances
and emoluments to any persons who are or were at any time
in the employment or service of the Company, or of any
company which is a subsidiary of the Company or is allied
to or associated with the Company, or any such subsidiary
or of any of the predecessors of the Company or any such
other company as aforesaid, or who may be or have been
Directors or officers of the Company, or of any such other
company as aforesaid, and the wives, widows, families and
dependents of any such persons, and to establish,
subsidize and subscribe to any institutions, associations,
societies, trusts, clubs or funds calculated to be for the
benefit of, or to advance the interests and well-being of,
the Company or of any other company as aforesaid, or of
any such persons as aforesaid and to make payments for or
towards the insurance of any such persons as aforesaid,
and to subscribe or guarantee money for charitable or
benevolent objects, or for any exhibition or
3
<PAGE> 4
for any public, general or useful object, and to do any of
the matters aforesaid either alone or in conjunction with
any such other company as aforesaid.
(O) To procure the Company to be registered or recognized in
any part of the world.
(P) To promote any other company for the purpose of acquiring
all or any of the property and/or undertaking any of the
liabilities of the Company, or of undertaking any business
or operations which may appear likely to assist or benefit
the Company, and to place or guarantee the placing of,
underwrite, subscribe for, or otherwise acquire all or any
part of the shares, debentures or other securities of any
such company as aforesaid.
(Q) To dispose by any means of the whole or any part of the
assets of the Company.
(R) To do all or any of the above things in any part of the
world, and either as principal, agent, trustee, contractor
or otherwise, and either alone or in conjunction with
others, and either by or through agents, trustees,
sub-contractors or otherwise.
(S) To do all such other things as may be deemed incidental or
conducive to the attainment of the above objects or any of
them.
And it is hereby declared that the word "company" in this clause, except where
used in reference to the Company, shall be deemed to include any partnership or
other body of persons, whether corporate or unincorporate, and whether
domiciled in the United Kingdom or elsewhere, and the objects specified in each
of the paragraphs of this clause shall be regarded as independent objects, and
accordingly shall in nowise be limited or restricted (except where otherwise
expressed in such paragraphs) by reference to or inference from the terms of
any other paragraph or the name of the Company.
5. The liability of the Members is limited.
6*. The share capital of the Company is GBP 50,000 divided into fifty
thousand shares of GBP 1 each.
*NOTE: On 4th May, 1983, by special resolution the authorised capital was
increased and reorganised so as to be GBP 1,250,000 divided into 12,500,000
ordinary shares of 10p each.
*NOTE: On 2nd April, 1984, by special resolution, the authorised capital
was increased so as to be GBP 1,650,000 divided into 16,500,000 ordinary shares
of 10p each.
*NOTE: On 19th June 1996, by special resolution, the authorised capital
was increased so as to be GBP 2,250,000 divided into 22,500,000 ordinary shares
of 10p each.
4
<PAGE> 5
WE, the several persons whose names, addresses and descriptions are subscribed,
are desirous of being formed into a Company in pursuance of this Memorandum of
Association and we respectively agree to take the number of shares in the
capital of the Company set opposite our respective names.
- --------------------------------------------------------------------------
NAMES, ADDRESSES AND NUMBER OF SHARES TAKEN
DESCRIPTIONS BY EACH SUBSCRIBER
OF SUBSCRIBERS
- --------------------------------------------------------------------------
PETER MICHAEL SHIRLEY, ONE
Watling House,
35/37 Cannon Street,
London EC4M 5SD
Solicitor
PHILIPPE JEAN LOUIS OLLIVIER, ONE
Watling House,
35/37 Cannon Street,
London EC4M 5SD
Trainee Solicitor
- --------------------------------------------------------------------------
DATED this 22nd day of February, 1983.
WITNESS to the above signatures:
HELEN M. GAVIN,
Watling House,
35/37 Cannon Street,
London EC4M 5SD
Trainee Solicitor
5
<PAGE> 1
EXHIBIT 2.02
NO: 1709998
THE COMPANIES ACTS 1985 TO 1989
___________________________________
A PUBLIC COMPANY LIMITED BY SHARES
____________________________________
A R T I C L E S O F A S S O C I A T I O N
(adopted by Special Resolution passed on June 19 1996)
of
Micro Focus Group Plc
________________________________________________________
1. No regulations set out in any schedule to any statute concerning
companies shall apply as regulations or articles of the Company.
2. (1) In these articles if not inconsistent with the subject or
context, the following words shall bear the following meanings:-
"the Acts" means every statute from time to time in force
concerning companies insofar as the same applies to
the Company;
"the means the Uncertificated Securities Regulations 1995
Uncertificated in so far as the same applies to the Company and
Regulations" Securities includes:
(i) any enactment or subordinate legislation
which amends or supersedes those
Uncertificated Securities Regulations;
(ii) any applicable rules made under those
Uncertificated Securities Regulations or any
such enactment or subordinate legislation for
the time being in force;
"CREST" means the relevant system operated by Crest Co.
Limited in terms of the Uncertificated Securities
Regulations, which enables title to shares or other
securities to be evidenced and transferred without
a written instrument.
"these articles" means these articles of association of the Company as
originally adopted or from time to time altered;
"executed" includes any mode of execution whether under seal or
under hand;
"office" means the registered office of the Company;
"the holder" in relation to shares means the member whose name is
entered in the register of members as the holder of
the shares;
<PAGE> 2
"the seal" means the common seal of the Company (if any) and
includes the official seal (if any) kept by the
Company by virtue of the Acts;
"secretary" means any person appointed to perform the duties of
the secretary of the Company; and
"the Group" means the Company and any subsidiary or subsidiaries
for the time being of the Company.
"the London means The London Stock Exchange Limited.
Stock Exchange"
(2) References to writing shall include typewriting, printing,
lithography, photography and any other modes of representing or reproducing
words in a legible and non-transitory form.
(3) Where for any purpose an ordinary resolution of the Company is
required a special or extraordinary resolution shall also be effective and
where for any purpose an extraordinary resolution of the Company is required a
special resolution shall be effective.
(4) Unless the context otherwise requires, words or expressions
contained in these articles bear the same meaning as in the Acts or the
Uncertificated Securities Regulations (as the case may be) or any statutory
modification or re-enactment of it or them in force when these regulations
become binding on the Company.
(5) A reference to shares in "uncertificated form" means shares,
the title to which is recorded in the register of members as being held in such
form and which by virtue of the Uncertificated Securities Regulations may be
transferred by means of a relevant system and reference to shares in
"certificated form" means shares, the title to which is not and may not be
transferred.
SHARE CAPITAL
3.1 The share capital of the Company is GBP 2,250,000 divided into
22,500,000 Ordinary Shares of 10 pence each ("Ordinary Shares").
3.2 The Ordinary Shares shall rank pari passu in all respects and the
holders of the Ordinary Shares shall be entitled to attend and vote at
any general meeting of the Company.
4. Subject to the provisions of the Acts and in particular to those
conferring rights of pre-emption and without prejudice to any rights attached
to any shares for the time being in issue, any share may be issued with or have
attached thereto such rights or restrictions as the Company may by ordinary
resolution determine or have attached thereto or if there has not been any such
determination or so far as the same shall not make specific provision, as the
directors may determine.
5. Subject to the provisions of the Acts and to any special rights
conferred on the holders of any shares or class of shares, any shares may with
the sanction of a special resolution be issued which are to be redeemed or are
to be liable to be redeemed at the option of the Company or the holder.
6. Subject to the provisions of the Acts, the Company is hereby
authorised to enter into any contract for the purchase of all or any of its
shares of any
2
<PAGE> 3
class (including any redeemable shares) and any contract under which it may,
subject to any conditions, become entitled or obliged to purchase all or any of
such shares. Every contract entered into in pursuance of this article shall be
authorised by such resolution of the Company as may be required by the Acts,
but subject thereto the directors shall have full power to determine or approve
the terms of any such contract. Any contract which the Company is hereby
authorised to enter into may be or provide for the purchase of shares by
private treaty, on a stock exchange or otherwise and neither the Company nor
the directors shall be required to select the shares in question rateably or in
any other particular manner as between the holders of shares of the same class
or as between them and the holders of shares of any other class or in
accordance with the rights as to dividends or capital conferred by any class of
shares. Subject to the provisions of the Acts the Company may agree to the
variation of any contract entered into in pursuance of this article and to
release any of its rights or obligations under any such contract.
Notwithstanding anything to the contrary contained in these articles, the
rights and privileges attached to any class of shares shall be deemed not to be
modified or abrogated by anything done by the Company in pursuance of this
article.
7. The Company may exercise the powers of paying commissions conferred by
the Acts. Subject to the provisions of the Acts, the commission may be
satisfied by the payment of cash or by the allotment of fully or partly paid
shares or partly in one way and partly in the other. The Company may also on
any issue of share capital pay such brokerage as may be lawful.
8. Except as required by law, no person shall be recognised by the
Company as holding any share upon any trust and (except as by these articles or
by law otherwise provided) the Company shall not be bound by or to recognise
(even when having notice thereof) any interest in any share except an absolute
right to the entirety thereof in the holder.
VARIATION OF RIGHTS
9. Subject to the Acts, all or any of the special rights for the time
being attached to any class of shares for the time being issued may from time
to time (whether or not the Company is being wound-up) be altered or abrogated
with the consent in writing of the holders of not less than three-fourths of
the issued shares of that class or with the sanction of an extraordinary
resolution passed at a separate general meeting of the holders of such shares.
To any such separate general meeting all the provisions of these articles as to
general meetings of the Company shall mutatis mutandis apply, but so that the
necessary quorum shall be one or more persons holding or representing by proxy
not less than one-third of the issued shares of the class, that every holder of
shares of the class shall be entitled on a poll to one vote for every such
share held by him, that any holder of shares of the class present in person or
by proxy may demand a poll and that at any adjourned meeting of such holders
one holder present in person or by proxy (whatever the number of shares held by
him) shall be a quorum.
10. The special rights conferred upon the holders of any shares or class
of shares shall not, unless otherwise expressly provided in the rights
attaching to or the terms of issue of such shares, be deemed to be altered by
the creation or issue of further shares ranking pari passu therewith.
SHARE CERTIFICATES
11. Every person (except a stock exchange nominee in respect of whom the
Company is not by law required to complete and have ready for delivery a
certificate) whose name is entered as a holder of any shares in the register
3
<PAGE> 4
of members of the Company shall be entitled, without payment, to receive within
two months after allotment or lodgment of a transfer to him of the shares in
respect of which he is so registered (or within such other period as the terms
of issue shall provide) one certificate for all such shares of any one class or
several certificates each for one or more of such shares of such class upon
payment for every certificate after the first of such reasonable out-of-pocket
expenses as the directors may from time to time determine. In the case of a
share held jointly by several persons, delivery of a certificate to one or
several joint holders shall be sufficient delivery to all. A member (except
such a nominee as aforesaid) who has transferred part of the shares comprised
in his registered holding shall be entitled to a certificate for the balance
without charge.
12. All forms of certificate for shares/or loan capital or other
securities of the Company (other than letters of allotment, scrip certificates
and other like documents) shall, except to the extent that the terms and
conditions for the time being relating thereto otherwise provide, be issued
under seal affixed only with the authority of the Board or in such other manner
as the Board having regard to the terms of issue, the Acts and the regulations
of the London Stock Exchange may authorise. The directors may by resolution
determine, either generally or in any particular case or cases, that any
signatures on any such certificates need not be autographic but may be affixed
to such certificates by some mechanical means or may be printed thereon or that
such certificates need not be signed by any person.
13.1 If a share certificate is defaced, worn-out, lost or destroyed, it may
be replaced without fee but on such terms (if any) as to evidence and
indemnity and payment of the exceptional out of pocket expenses
incurred by the Company in investigating such evidence and preparing
such indemnity as the directors may determine and where it is defaced
or worn out, after delivery up of the old certificate to the Company
and in any event no replacement of a lost certificate will be issued
unless the Company is satisfied beyond reasonable doubt that the
original has been destroyed.
13.2 Notwithstanding the terms of articles 11, 12 and 13.1 above, where, in
accordance with the terms of Article 13.3 hereof, any shares or other
securities of the Company are issued, transferred, registered or
otherwise dealt with in uncertificated form, any references in these
articles requiring title to shares or other securities to be evidenced
by or transferred by reference to share certificates or any other form
of written instrument shall not apply and the holding, transfer,
recording of title to and, registration of, uncertificated securities
issued by the Company will be governed by reference to the provisions
of Article 13.3 hereof.
13.3 (i) Nothing in these articles shall preclude any share or other
security of the Company from being issued, held, registered,
converted, transferred or otherwise dealt with in an
uncertificated form in accordance with the Uncertificated
Securities Regulations and any rules or requirements laid down
from time to time by CREST or any other relevant system
operated pursuant to the Uncertificated Securities
Regulations.
(ii) In relation to any share or other security which is in
uncertificated form, the articles of association shall have
effect subject to the provisions of the Uncertificated
Securities Regulations and (so far as consistent with them) to
the following provisions:
4
<PAGE> 5
(a) the Company shall not be obliged to issue a
certificate evidencing title to shares and all
references to a certificate in respect of any shares
or securities held in uncertificated form in these
articles shall be deemed inapplicable to such shares
or securities which are in uncertificated form and
furthermore shall be interpreted as a reference to
such form of evidence of title to uncertificated
shares or securities as the Uncertificated Securities
Regulations prescribe or permit;
(b) the registration of title to and transfer of any
shares or securities in an uncertificated form shall
be effected in accordance with the Uncertificated
Securities Regulations and there shall be no
requirement for a written instrument of transfer;
(c) a properly authenticated dematerialised instruction
given in accordance with the Uncertificated
Securities Regulations shall be given effect in
accordance with the Uncertificated Securities
Regulations;
(d) any communication required or permitted by these
articles to be given by a person to the Company may
be given in accordance with and in any manner
(whether or not in writing) prescribed or permitted
by the Uncertificated Securities Regulations;
(e) if a situation arises where any provision of these
articles is inconsistent in any respect with the
terms of the Uncertificated Securities Regulations in
relation to shares or securities of the Company which
are in an uncertificated form then:-
(i) the Uncertificated Securities Regulations
will be given effect thereto in accordance
with their terms; and
(ii) the directors shall have power to implement
any procedures they may think fit and as may
accord with the Uncertificated Securities
Regulations for the recording and
transferring of title to shares and
securities in uncertificated form and for the
regulation of those proceedings and the
persons responsible for or involved in their
operation;
(iii) the directors shall have the specific powers
to elect, without further consultation with
the holders of any shares or securities of
the Company (except where such shares or
securities are constituted by virtue of some
other deed, document or other source), that
any single or all classes of shares and
securities of the Company become capable of
being traded in uncertificated form in
accordance with the Uncertificated Securities
Regulations on CREST or any other Operator of
a relevant system.
DESTRUCTION OF DOCUMENTS
14. The Company may destroy:-
(a) any share certificate which has been cancelled at any time after
5
<PAGE> 6
the expiry of one year from the date of such cancellation;
(b) any dividend mandate or any variation or cancellation thereof
or any notification of change of name or address at any time
after the expiry of two years from the date such mandate
variation cancellation or notification is recorded by the
Company;
(c) any instrument of transfer of shares which has been registered
at any time after the expiry of six years from the date of
registration; and
(d) any other documents on the basis of which any entry in the
register of members is made at any time after the expiry of
twelve years from the date an entry in the register of members
was first made in respect of it;
and it shall conclusively be presumed in favour of the Company that
every share certificate so destroyed was a valid certificate duly and
properly cancelled and that every instrument of transfer so destroyed
was a valid and effective instrument duly and properly registered and
that every other document destroyed hereunder was a valid and
effective document in accordance with the recorded particulars thereof
in the books or records of the Company: PROVIDED ALWAYS that:-
(i) the foregoing provisions of this article shall apply only to
the destruction of a document in good faith and without
express notice to the Company that the preservation of such
document was relevant to a claim;
(ii) nothing contained in this article shall be construed as
imposing upon the Company any liability in respect of the
destruction of any such document earlier than as aforesaid or
in any case where the conditions of proviso (i) above are not
fulfilled; and
(iii) references in this article to the destruction of any document
include references to its disposal in any manner.
UNTRACED SHAREHOLDERS
15.1.1 The Company shall be entitled to sell the shares of a member or the
shares to which a person is entitled by death, bankruptcy or
operation of law by instructing a member of the London Stock
Exchange to sell them at best if and PROVIDED THAT:-
(a) during a period of 12 years all warrants and cheques
in respect of at least 3 dividends declared by the
Company in respect of the member's shares sent by the
Company through the post in a prepaid letter
addressed to the member at his registered address or
to the person so entitled at the address shown in the
register of members as his address and have become
payable and remain unclaimed and uncashed or have
been returned undelivered; and
(b) the Company shall insert advertisements in a national
daily newspaper and a newspaper circulated in the
area in which the last known address of the member or
the address at which service of notices in the manner
authorised by these articles may be effected, giving
notice of its intention to sell the said shares; and
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(c) during the said period of 12 years and the period of
3 months following the said advertisements the
Company has had no indication that such member or
person can be traced; and
(d) where any shares in the capital of the Company are
listed or dealt in on the London Stock Exchange
notice is first given to the London Stock Exchange of
its intention so to do.
15.1.2 To give effect to such sale the Company may appoint any person to
execute an instrument of transfer of the share or in the case
of shares for the time being in uncertificated form to take
such other steps in the name of the holder as may be necessary
to transfer the shares sold, then the instrument or steps (as
the case may be) shall be as effective as if it had been
executed or they had been taken by the registered holder of,
or person entitled by transmission to, the share. The Company
shall account to the member or other person entitled to such
shares for the net proceeds of such sale and shall be deemed
to be his debtor and not a trustee for him in respect of the
same and no interest shall be payable by the Company to the
member or other person entitled to such shares.
15.1.2 Any moneys not accounted for to the member or other person entitled to
such shares shall be carried to a separate account and shall
be a permanent debt of the Company. Moneys carried to such
separate accounts may either be employed in the business of
the Company or invested in such investments (other than shares
of the Company or its holding Company if any) as the directors
may from time to time think fit.
15.2 If on two consecutive occasions dividend warrants and/or Notices have
been sent through the post to any member at his registered address or
his address for the service of Notices but have been left uncashed
and/or returned undelivered or if, after one such occasion reasonable
enquiries have failed to establish any new address of the registered
member, such member shall not thereafter be entitled to receive
dividend warrants and/or Notices by post from the Company until he
shall have communicated with the Company and supplied in writing to
the office a new registered address or address within the United
Kingdom for service of the Notices.
LIEN
16. The Company shall have a first and paramount lien on every share (not
being a fully paid share) for all moneys (whether presently payable or not)
payable at a fixed time or called in respect of that share. The directors may
at any time declare any share to be wholly or in part exempt from the
provisions of this regulation. The Company's lien on a share shall extend to
all moneys payable in respect of it.
17. The Company may sell in such manner as the directors determine any
shares on which the Company has a lien if a sum in respect of which the lien
exists is presently payable and is not paid within fourteen days after notice
has been given to the holder of the share or the person entitled to it by
reason of the death or bankruptcy of the holder demanding payment of the sum
presently payable and stating that if the notice is not complied with the
shares may be sold.
18. To give effect to a sale the directors may authorise some person to
execute an instrument of transfer of the shares sold, or in the case of shares
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for the time being in uncertificated form to take such other steps in the name
of the holder as may be necessary to transfer the shares sold to, or in
accordance with the directions of, the purchaser. The purchaser shall be
registered as the holder of the share and he shall not be bound to see the
application of the purchase money. The title of the transferee to the shares
shall not be affected by any irregularity in or invalidity of the proceedings
in reference to the sale.
19. The net proceeds of the sale, after payment of the costs, shall be
applied in payment of so much of the sum for which the lien exists as is
presently payable, and any residue shall, in the case of shares in certificated
form (upon surrender to the Company for cancellation of the certificate for the
shares sold and subject to a like lien for any moneys not presently payable as
existed upon the shares before the sale) be paid to the person entitled to the
shares immediately before the date of the sale.
CALLS ON SHARES AND FORFEITURE
20. Subject to the provisions of these articles and to the terms of issue,
the directors may make calls upon the members in respect of any moneys unpaid
on their shares and not by the terms of issue thereof made payable at a date
fixed by or in accordance with such terms of issue (whether in respect of
nominal value or premium) and each member shall (subject to receiving at least
fourteen clear days' notice specifying when and where payment is to be made)
pay to the Company as required by the notice the amount called on his shares. A
call may be required to be paid by instalments. A call may, before receipt by
the Company of a sum due thereunder, be revoked in whole or in part and payment
of a call may be postponed in whole or part. A member shall remain liable for
calls made upon him notwithstanding the subsequent transfer of the shares in
respect whereof the call was made.
21. A call shall be deemed to have been made at the time when the
resolution of the directors authorising the call was passed.
22. The joint holders of a share shall be jointly and severally liable to
pay all calls in respect thereof.
23. If a call remains unpaid after it has become due and payable the
person from whom the sum is due shall pay interest on the unpaid sum from the
day it became due until it is paid at the rate fixed by the terms of allotment
of the share or in the notice of the call or, if no rate is fixed, at such rate
not exceeding 15 per cent. per annum as the directors may determine but the
directors may waive payment of the interest wholly or in part. The Company may
also recover any costs, charges and expenses incurred by reason of the
non-payment of any call.
24. A sum payable in respect of a share on allotment or at any fixed date,
whether in respect of nominal value or premium or as an instalment of a call,
shall be deemed to be a call and if it is not paid the provisions of these
articles shall apply as if that sum had become due and payable by virtue of a
call.
25. Subject to the terms of allotment the directors may on the issue of
shares differentiate between the allottees or holders as to the amount of calls
to be paid and the times of payment.
26. The directors may receive from any member willing to advance the same
all or any part of the money unpaid upon the shares held by him beyond the sums
actually called up thereon as a payment in advance of calls, and such payment
in advance of calls shall extinguish, so far as the same shall extend,
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the liability upon the shares in respect of which it is advanced, and the
Company may pay interest upon the money so received, or so much thereof as from
time to time exceeds the amount of the calls then made upon the shares in
respect of which it has been received, at such rate as the member paying such
sum and the directors agree; but provided that any such payment in advance of
calls shall not entitle the holder of the shares to participate in respect
thereof in a dividend subsequently declared by reference to a record date
earlier than the due date for the call. The directors may repay any amount
paid in advance of call, upon giving the member concerned at least three
months' notice in writing.
27. If a call or instalment of a call remains unpaid after it has become
due and payable the directors may give to the person from whom it is due not
less than fourteen clear days' notice requiring payment of the amount unpaid
together with any interest which may have accrued. The notice shall name the
place where payment is to be made and shall state that if the notice is not
complied with the shares in respect of which the call was made or instalment is
payable will be liable to be forfeited.
28. If the notice is not complied with any share in respect of which it
was given may, before the payment required by the notice has been made, be
forfeited by a resolution of the directors and the forfeiture shall include all
dividends or other moneys payable in respect of the forfeited shares and not
paid before the forfeiture. Where any share has been forfeited in accordance
with the articles of association, the Company will serve a notice of forfeiture
on the person who was the holder of the share before forfeiture. The
accidental omission to give notice or the non-receipt of notice will not
invalidate the forfeiture.
29. Subject to the provisions of the Acts, a forfeited share may be sold,
re-allotted or otherwise disposed of on such terms and in such manner as the
directors determine either to the person who was before the forfeiture the
holder or to any other person upon such terms and in such manner as the
directors think fit and at any time before a sale, re-allotment or other
disposition the forfeiture may be annulled by the directors on such terms as
they think fit. Where for the purposes of its disposal a forfeited share is to
be transferred to any person the directors may authorise some person to execute
an instrument of transfer of the share, or in the case of a share for the time
being in uncertificated form to take such steps in the name of the holder as
may be necessary to transfer the share to that person.
30. A person any of whose shares have been forfeited shall cease to be a
member in respect of them and, in the case of shares in certificated form shall
surrender to the Company for cancellation the certificate for the shares
forfeited but shall remain liable to the Company for all moneys which at the
date of forfeiture were presently payable by him to the Company in respect of
those shares with interest at such rate as may be fixed by the terms of
allotment of the share or in the notice of the call or, if no rate is fixed, at
the appropriate rate (as defined in the Acts) from the date of forfeiture until
payment but the directors may waive payment wholly or in part or enforce
payment without any allowance for the value of the shares at the time of
forfeiture or for any consideration received on their disposal. Forfeiture of
a share shall extinguish all interest and all claims and demands against the
Company in respect of that share.
31. A statutory declaration by a director or the secretary that a share
has been forfeited on a specified date shall be conclusive evidence of the
facts stated in it as against all persons claiming to be entitled to the share
and the declaration shall (subject to the execution of an instrument of
transfer if necessary) constitute a good title to the share and the person to
whom the
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share is disposed of shall not be bound to see to the application of the
consideration, if any, nor shall his title to the share be affected by any
irregularity in the proceedings in reference to the forfeiture or disposal of
the share.
DISCLOSURE OF INTEREST
32.1 No member shall, unless the Directors otherwise determine, be entitled
in respect of any share held by him to vote (either in person or by
representative or proxy) at any general meeting or at any separate
meeting of the holders of any class of shares, or to exercise any
other right conferred by membership in relation to any such meeting if
he or any other person appearing to be interested in the share(s) has
been given a notice under Section 212 of the Companies Act 1985 ("a
Section 212 notice") and has failed to give the Company the
information thereby required within 14 days from the date of the
notice.
32.2 Without prejudice to the provisions of sub-clause 1 of this article,
no member holding shares representing 0.25 per cent or more in nominal
value of the issued shares of any class of capital in the Company
shall, unless the Directors otherwise determine, be entitled:
(a) in respect of any such shares, to vote (either in person or by
representative or proxy) at any general meeting or at any
separate meeting of the holders of any class of shares, or to
exercise any other right conferred by membership in relation
to any such meeting; or
(b) to receive payment of any dividend (including shares in lieu
of dividend) or other distribution payable in respect of any
such shares; or
(c) to transfer any such shares otherwise than:
(i) pursuant to acceptance of a take-over offer;
(ii) through a recognised investment exchange or other
recognised market; or
(iii) in any other manner which the Directors are
satisfied is bona fide and at arm's length; (in each
case hereinafter referred to as an "arm's length
sale") if he or any person appearing to be
interested in such shares has been given a Section
212 notice and has failed to give the Company the
information thereby required within 14 days from the
date of the notice provided that upon receipt by the
Company of notice that the shares have been
transferred pursuant to any arm's length sale or
upon all information required by the Section 212
notice being given, such restrictions shall cease to
apply in respect of such shares and any dividend
withheld shall be paid.
32.3 For the purposes of this article:
(a) a person other than the member holding a share shall be
treated as appearing to be interested in that share if the
member has informed the Company that the person is, or may be,
so interested, or if the Company (after taking account of any
information obtained from the member or, pursuant to a Section
212 notice, from anyone else) knows or has reasonable cause to
believe that
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the person is, or may be, so interested;
(b) "interested" shall be construed as it is for the purpose of
Section 212 of the Companies Act 1985;
(c) "take-over offer" shall have the meaning ascribed to it in
Part XIII A of the Companies Act 1985;
(d) "recognised investment exchange" shall have the meaning
ascribed to it in Section 207(1) of the Financial Services Act
1986; and
(e) "at arm's length" means a transfer to a person who is
unconnected with the members and with any other person
appearing to be interested in the shares; and
(f) reference to a person having failed to give the Company the
information required by a Section 212 notice includes (i)
reference to his having failed or refused to give all or any
part of it and (ii) reference to his having given information
which he knows to be false in a material particular or having
recklessly given information which is false in a material
particular.
32.4 Where on the basis of information obtained from a member in respect of
any share held by him, the Company gives a Section 212 notice to any
other person, it shall at the same time send a copy of the notice to
the member, but the accidental omission to do so, or the non-receipt
by the member of the copy, shall not invalidate or otherwise affect
the application of sub-clauses 1 and 2 of this article.
32.5 Any sanctions imposed upon a shareholding in respect of a person
having failed to give the Company the information required by a
section 212 notice will cease to apply 7 days after the earlier of:-
(i) receipt by the Company of notice that the shareholding has
been sold to a third party in the manner described above; and
(ii) due compliance to the satisfaction of the Company, with the
notice under section 212.
32.6 Nothing in these articles shall limit the powers of the Company under
Section 216 of the Companies Act 1985 or any other powers whatsoever.
TRANSFER OF SHARES
33.1 Subject to such of the restrictions of these articles as may be
applicable, any member may transfer all or any of his shares. The
instrument of transfer of a share in certificated form may be in any
usual form or in any other form which the directors may approve and
shall be executed by or on behalf of the transferor and, unless the
share is fully paid, by or on behalf of the transferee.
33.2 Nothing in these articles shall require title to any securities of the
Company to be evidenced or transferred by a written instrument, the
regulations from time to time made under the Acts so permitting. The
Board shall have power to implement any arrangements it may think fit
for such evidencing and transfer which accord with those regulations.
34. The directors may, in their absolute discretion and without giving any
reason, refuse to register the transfer of a share in certificated form which
is not fully paid or of a share on which the Company has a lien.
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35.1 The directors may also decline to recognise an instrument of transfer
in respect of shares in certificated form unless:-
(a) it is lodged duly stamped at the office or at such other place
as the directors may appoint and is accompanied by the
certificate for the shares to which it relates and such other
evidence as the directors may reasonably require to show the
right of the transferor to make the transfer;
(b) it is in respect of only one class of share; and
(c) it is in favour of not more than four transferees.
35.2 In the case of shares for the time being in uncertificated form
transfers shall be registered only in accordance with the terms of the
Uncertificated Securities Regulations but so that the directors may
refuse to register a transfer which would require shares to be held
jointly by more than four persons.
36. If the directors decline to register a transfer they shall within two
months after the date on which the transfer was lodged with the Company or in
the case of uncertificated shares the Operator-instruction was received by the
Company send to the transferee notice of the refusal.
37. The registration of transfers of shares or debentures or of any class
of shares or debentures may be suspended at such times and for such periods
(not exceeding thirty days in any year) as the directors may determine but so
that such a suspension shall only apply to uncertificated shares with the prior
consent of the Operator.
38. No fee shall be charged for the registration of any instrument of
transfer or other document or instructions relating to or affecting the title
to any share or for otherwise making any entry in the register of members
relating to any share.
39. Subject to article 14, all instruments of transfer which are
registered shall be retained by the Company, but any instrument of transfer
which the directors refuse to register shall be returned to the person
depositing it.
40. Nothing in these articles shall preclude the directors from
recognising a renunciation of the allotment of any share by the allottee in
favour of some other person.
TRANSMISSION OF SHARES
41. If a member dies the survivor or survivors where he was a joint
holder, and his personal representatives where he was a sole holder or the only
survivor of joint holders, shall be the only persons recognised by the Company
as having any title to his interest; but nothing herein contained shall release
the estate of a deceased member from any liability in respect of any share held
by him solely or which had been jointly held by him.
42. A person becoming entitled to a share in consequence of the death or
bankruptcy of a member or otherwise by operation of law may, upon such evidence
being produced as the directors may properly require, elect to become the
holder of the share or in the case of certificated shares alternatively elect
to have some person nominated by him registered as the transferee. If he elects
to become the holder he shall give notice to the Company to that effect. If he
elects to have another person registered he shall execute an instrument of
transfer of the share to that person. All the
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provisions of these articles relating to the transfer of shares shall apply to
the notice or instrument of transfer as if it were an instrument of transfer
signed by the member and the death or bankruptcy of the member had not
occurred. Nothing in these articles shall preclude the transfer of shares or
other securities of the Company in uncertificated form in accordance with the
terms of Article 13.3 hereof, and any references contained in these Articles in
relation to the execution of any instrument of transfer or the registration of
any transfer of shares or other securities of the Company in uncertificated
form shall be read in accordance with the terms of Article 13.3 hereof.
43. A person becoming entitled to a share by reason of the death or
bankruptcy of a member or otherwise by operation of law shall (upon such
evidence being produced as may from time to time be required by the directors
as to his entitlement) have the rights to which he would be entitled if he were
the holder of the share, except that he shall not, before being registered as
the holder of the share, be entitled in respect of it to attend or vote at any
meeting of the Company or at any separate meeting of the holders of any class
of shares in the Company. The Board may at any time give notice requiring the
person to elect either to be registered himself or to transfer the share and if
the Notice is not complied with within 60 days the Board may withhold payment
of all dividends and other monies payable in respect of the share until the
requirements of the Notice have been complied with.
STOCK
44. The Company may by ordinary resolution convert any paid up shares into
stock, and re-convert any stock into paid up shares of any denomination. After
the passing of any resolution converting all the fully paid up shares of any
class in the capital of the Company into stock, any shares of that class which
subsequently become fully paid up and rank pari passu in all other respects
with such shares shall by virtue of this article and such resolution be
converted into stock transferable in the same units as the shares already
converted.
45. The holders of stock may transfer the same or any part thereof in the
same manner, and subject to the same regulations, as would have applied to the
shares from which the stock arose if they had not been converted, or as near
thereto as circumstances admit, but the directors may from time to time, if
they think fit, fix the minimum amount of stock transferable, but so that such
minimum shall not exceed the nominal amount of each of the shares from which
the stock arose.
46. The holders of stock shall, according to the amount of the stock held
by them, have the same rights, privileges and advantages in all respects as if
they held the shares from which the stock arose provided that no such privilege
or advantage (except participation in dividends and profits of the Company and
in the assets on a winding up) shall be conferred by an amount of stock which
would not, if existing in shares, have conferred such privilege or advantage.
47. All the provisions of these articles applicable to paid up shares
shall apply to stock and in all such provisions the words "share" and "member"
shall include "stock" and "stockholder" respectively.
ALTERATION OF CAPITAL
48. The Company may from time to time by ordinary resolution:-
(a) increase the share capital by new shares of such amount as the
resolution prescribes;
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(b) consolidate and divide all or any of its shares into shares of
a larger amount than its existing shares;
(c) subject to the provisions of the Acts, sub-divide its shares,
or any of them, into shares of smaller amount than is fixed by
the Memorandum of Association (subject nevertheless to the
Acts) and the resolution may determine that, as between the
holders of the shares resulting from the sub-division, one or
more of the shares may have any such preferred or other
special rights over, or may have such deferred qualified
rights or be subject to any such restrictions as compared
with, the others as the Company has power to attach to
unissued or new shares; and
(d) cancel shares which, at the date of the passing of the
resolution, have not been taken or agreed to be taken by any
person, and diminish the amount of its share capital by the
amount of the shares so cancelled.
49. Whenever as a result of a consolidation of shares any members would
become entitled to fractions of a share, the directors may, on behalf of those
members, sell the shares representing the fractions for the best price
reasonably obtainable to any person (including the Company) and distribute the
proceeds of sale in due proportion among those members, and the directors may
authorise some person to execute an instrument of transfer of the shares, or in
the case of shares for the time being in uncertificated form to take such other
steps in the name of the holder as may be necessary to transfer shares sold to,
or in accordance with the directions of, the purchaser. The transferee shall
not be bound to see to the application of the purchase money nor shall his
title to the shares be affected by any irregularity in or invalidity of the
proceedings in reference to the sale.
50. Subject to the provisions of the Acts, the Company may by special
resolution reduce its authorised or issued share capital, any capital
redemption reserve, and any share premium account in any way.
GENERAL MEETINGS
51. All general meetings other than annual general meetings shall be
called extraordinary general meetings.
52. The directors may call general meetings. If at any time there are not
within the United Kingdom sufficient Directors capable of acting to form a
quorum, any Director or any two members of the Company may convene an
extraordinary general meeting in the same manner as nearly as possible as that
in which meetings may be convened by the Directors.
NOTICE OF GENERAL MEETINGS
53. Subject to the provisions of the Acts, an annual general meeting and
an extraordinary general meeting for the passing of a special resolution or a
resolution appointing a person as a director shall be called by twenty-one
days' notice at the least, and all other extraordinary general meetings shall
be called by fourteen days' notice at the least. The notice shall be exclusive
of the day on which it is served, or deemed to be served, and of the day for
which it is given. Every notice shall be in writing and shall specify the
place, the day and the time of meeting, and (in the case of special business)
the general nature of such business, and in the case of an annual general
meeting shall specify the meeting as such and the notice convening a meeting to
pass a special or extraordinary resolution shall specify the intention to
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propose the resolution as a special or extraordinary resolution as the case may
be. Notices shall be given in manner hereinafter mentioned to all the members,
other than those who under the provisions of these articles or under the rights
attached to the shares held by them are not entitled to receive the notice, and
to the auditors for the time being of the Company. Notwithstanding that a
meeting of the Company is called by shorter notice than that specified in this
article, it shall be deemed to have been duly called if it is so agreed:-
(a) in the case of a meeting called as an annual general meeting, by all
the members entitled to attend and vote thereat; and
(b) in the case of any other meeting, by a majority in number of the
members having a right to attend and vote at the meeting, being a
majority together holding not less than 95 per cent. in nominal value
of the shares giving that right.
54. The Board may convene an Extraordinary General Meeting whenever it
thinks fit and, upon receipt of a requisition of members pursuant to
the provisions of the Acts, shall forthwith convene such a meeting for
a date not later than 28 days after the date of the Notice convening
the meeting.
55.1 The accidental omission to give notice of a meeting or (in cases where
instruments of proxy are sent out with the notice) the accidental
omission to send such instrument of proxy to, or the non-receipt of
notice of a meeting or such instrument of proxy by, any person
entitled to receive notice shall not invalidate the proceedings at
that meeting.
55.2 The directors may determine that persons entitled to receive notices
of meetings are those persons entered on the register of members at
the close of business on a day determined by the directors being not
more than 21 days before the day that the notices are sent and may
specify in the notice of the meeting a time, not more than 48 hours
before the time fixed for the meeting, by which a person must be
entered on the register of members in order to have the right to
attend or vote at the meeting. Changes to entries on the register of
members after the time so specified shall be disregarded in
determining the rights of any person to attend or vote at the meeting.
PROCEEDINGS AT GENERAL MEETINGS
56. All business shall be deemed special that is transacted at an
extraordinary general meeting. All business that is transacted at an annual
general meeting shall also be deemed special, with the exception of declaring
dividends, the consideration of the accounts and balance sheet and the reports
of the directors and auditors and other documents required to be annexed to the
balance sheet, the appointment of directors in the place of those retiring by
rotation or otherwise and the reappointment of the retiring auditors (other
than retiring auditors who have been appointed by the directors to fill a
casual vacancy) and the fixing of or the determining of the method of fixing
the remuneration of the auditors and the directors.
57. No business shall be transacted at any meeting unless a quorum is
present but the absence of a quorum shall not preclude the appointment, choice
or election of a chairman which shall not be treated as part of the business of
the meeting. Two persons entitled to vote upon the business to be transacted,
each being a member or a proxy for a member or a duly authorised representative
of a corporation, shall be a quorum.
58. If a quorum is not present within five minutes (or such longer time
not exceeding one hour as the chairman of the meeting may determine to wait)
from the time appointed for the meeting, or if during a meeting a quorum ceases
to
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be present, the meeting if convened on the requisition of, or by members, shall
be dissolved. In any other case it shall stand adjourned to such other day not
being less than fourteen nor more than twenty-eight days thereafter and at such
other time and place as the directors may determine. At such adjourned meeting
one member present in person or proxy (whatever the number of shares held by
him) shall be a quorum. The Company shall give not less than seven days' notice
in writing of any meeting adjourned through want of a quorum and such notice
shall state that one member present in person or by proxy (whatever the number
of shares held by him) shall be a quorum.
59. The directors may make arrangements for simultaneous attendance and
participation in general meetings by members and proxies entitled to attend
such meetings at places other than the place specified in the notice convening
the meeting ("the specified place"). Any arrangements for simultaneous
attendance at other places shall operate so that any members and proxies
excluded from attendance at the specified place are able to attend at one or
more of the other places. For the purpose of all other provisions of these
articles any such meeting shall be treated as being held and taking place at
the specified place. The right of any member or proxy otherwise entitled to
attend a general meeting at the specified place shall be subject to any
arrangements that the directors may at their discretion make from time to time
(whether before or after the date of the notice convening the meeting) for
facilitating the organisation and administration of any general meeting by
requiring any such person (selected on such basis as the directors may at their
discretion decide) to attend the meeting at one or more of the other places.
60.1 The chairman, if any, of the board of directors or in his absence the
deputy-chairman, or in the absence of both the chairman and the
deputy-chairman some other director nominated by the directors shall
preside as chairman of the meeting, but if neither the chairman nor
the deputy-chairman nor such other director (if any) be present within
five minutes after the time appointed for holding the meeting, or if
present is unwilling to act, the directors present shall elect one of
their number to be chairman.
60.2 If no director is willing to act as chairman, or if no director is
present within five minutes after the time appointed for holding the
meeting, the members present and entitled to vote shall choose one of
their number to be chairman, and will remain chairman for the duration
of the relevant meeting.
61.1 A director shall, notwithstanding that he is not a member, be entitled
to attend and speak at any general meeting and at any separate meeting
of the holders of any class of shares in the Company.
61.2 Where shares are held by nominee shareholders the directors may make
arrangements for the holders of the beneficial interest in shares to
attend and speak (but not vote) at general meetings notwithstanding
that the names do not appear on the Register of Members. Any person
invited by the Chairman to do so may attend and speak at any general
meeting.
62. The chairman may, with the consent of a meeting at which a quorum is
present (and shall if so directed by the meeting), adjourn the meeting from
time to time and from place to place.
In addition, the Chairman may at any time without the consent of the meeting,
adjourn any meeting to another time or place if it appears to the Chairman
that:-
(a) The number of persons wishing to attend cannot be conveniently
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accommodated in the place(s) appointed for the meeting, or
(b) The unruly conduct of persons attending the meeting prevents
or is likely to prevent the orderly continuation of the
business of the meeting, or
(c) An adjournment is otherwise necessary so that the business of
the meeting may be properly conducted.
No business shall be transacted at an adjourned meeting other than business
which might lawfully have been transacted at the meeting from which the
adjournment took place.
63.1.1 In the case of a Resolution duly proposed as a Special or
Extraordinary Resolution, no amendment thereto (other than an
amendment to correct a patent error) may be considered or
voted upon and in the case of a Resolution duly proposed as an
Ordinary Resolution, no amendment thereto (other than an
amendment to correct a patent error) may be considered or
voted upon unless at least 48 hours prior to the time
appointed for holding the meeting or adjourned meeting at
which such Resolution is to be proposed notice in writing of
the terms of the amendment and intention to vote to move the
same have been lodged at the office.
63.1.2 If an amendment shall be proposed to any resolution under
consideration but shall in good faith be ruled out of order by
the Chairman of the meeting, the proceedings on the
substantive resolution shall not be invalidated by any error
in such ruling.
63.2 A resolution put to the vote of a meeting shall be decided on a show
of hands unless (before or on the declaration of the result of the
show of hands or on the withdrawal of any other demand for a poll) a
poll is duly demanded. Subject to the provisions of the Acts, a poll
may be demanded:-
(a) by the chairman of the meeting; or
(b) by at least two members having the right to vote at the
meeting; or
(c) by a member or members representing not less than one-tenth of
the total voting rights of all the members having the right to
vote at the meeting; or
(d) by a member or members holding shares conferring a right to
vote at the meeting being shares on which an aggregate sum has
been paid up equal to not less than one-tenth of the total sum
paid up on all the shares conferring that right;
and a demand by a proxy for a member shall be the same as a demand by a member.
64. Unless a poll is duly demanded and the demand is not withdrawn a
declaration by the chairman that a resolution has, on a show of hands, been
carried or carried unanimously, or by a particular majority, or lost, or not
carried by a particular majority shall be final and an entry to that effect in
the minutes of the meeting shall be conclusive evidence of the fact without
proof of the number or proportion of the votes recorded in favour of or against
the resolution.
65. The demand for a poll may, before the poll is taken, be withdrawn with
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the consent of the chairman and a demand so withdrawn shall not be taken to
have invalidated the result of a show of hands declared before the demand was
made.
66. A poll on any question other than the election of the Chairman shall
be taken as the chairman directs, including the use of ballot or voting papers
or tickets, and he may appoint scrutineers (who need not be members) and fix a
time and place for declaring the result of the poll. The result of the poll
shall be deemed to be the resolution of the meeting at which the poll was
demanded.
67. In the case of an equality of votes, whether on a show of hands or on
a poll, the chairman shall be entitled to a second or casting vote in addition
to any other vote he may have.
68. A poll demanded on the election of a chairman or on a question of
adjournment shall be taken forthwith. A poll demanded on any other question
shall be taken either forthwith or at such time and place as the chairman
directs not being more than thirty days from the conclusion of the meeting. The
demand for a poll shall not prevent the continuance of a meeting for the
transaction of any business other than the question on which the poll was
demanded, and it may be withdrawn with the consent of the chairman at any time
before the close of the meeting or the taking of the poll, whichever is the
earlier. If a poll is demanded before the declaration of the result of a show
of hands and the demand is duly withdrawn, the meeting shall continue as if the
demand had not been made.
69. No notice need be given of a poll not taken forthwith if the time and
place at which it is to be taken are announced at the meeting in respect of
which it is demanded. In any other case at least seven clear days' notice shall
be given specifying the time and place at which the poll is to be taken.
VOTES OF MEMBERS
70. Subject to any rights or restrictions attached to any shares, on a
show of hands every member who (being an individual) is present in person or
(being a corporation) is present by a duly authorised representative, not being
himself a member entitled to vote, shall have one vote, and on a poll every
member present in person or by proxy shall have one vote for each share of
which he is the holder.
71. In the case of joint holders the vote of the senior who tenders a
vote, whether in person or by proxy, shall be accepted to the exclusion of the
votes of the other joint holders; and seniority shall be determined by the
order in which the names of the holders stand in the register of members.
72. A member in respect of whom an order has been made by any competent
court or official on the ground that he is or may be suffering from mental
disorder or is otherwise incapable of managing his affairs may vote, whether on
a show of hands or on a poll, by his receiver or other person authorised in
that behalf and such person may vote on a poll by proxy. Evidence to the
satisfaction of the directors of the authority of the person claiming to
exercise the right to vote shall be deposited at the office or at such other
place as is specified in accordance with the articles for the deposit of
instruments of proxy, not less than 48 hours before the time appointed for
holding the meeting or adjourned meeting at which the right to vote is to be
exercised and in default the right to vote shall not be exercisable.
73. Unless the directors otherwise determine, no member shall be entitled
to receive notice of or to vote at any general meeting, either in person or by
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proxy, in respect of any share held by him unless all moneys presently payable
by him in respect of that share have been paid.
74. No objection shall be raised to the qualification of any voter except
at the meeting or adjourned meeting at which the vote objected to is tendered,
and every vote not disallowed at the meeting shall be valid. Any objection made
in due time shall be referred to the chairman whose decision shall be final and
conclusive.
75. On a poll votes may be given either personally or by proxy. A member
entitled to more than one vote need not, if he votes, use all his votes or cast
all the votes he uses the same way.
76. The instrument appointing a proxy shall be in writing in any usual
form or in any other form which the directors may approve and for the avoidance
of doubt may be in the form of a two way proxy form and shall be executed by or
on behalf of the appointor. A corporation may execute a form of proxy under the
hand of a duly authorised officer. A member may appoint more than one proxy
(who need not be a member) to attend on the same occasion. Deposit of an
instrument of proxy shall not preclude a member from attending and voting at
the meeting or at any adjournment thereof.
77. The instrument appointing a proxy and any authority under which it is
executed or a copy certified notarially or in some other way approved by the
directors shall be deposited by physical delivery either by post or by hand at
the office (or at such other place within the United Kingdom as is specified in
the notice convening the meeting or on any notice or any adjustment or, in
either case, in any document sent therewith) not less than 48 hours before the
time for holding the meeting or adjourned meeting at which the person named in
the instrument proposes to vote or, in the case of a poll taken subsequently to
the date of a meeting, not less than 24 hours before the time appointed for the
taking of the poll, and in default the instrument of proxy shall be invalid.
When two or more valid but differing instruments of proxy are delivered in
respect of the same share for use at the same meeting, the one which is last
delivered (regardless of its date or of the date of its execution) shall be
treated as replacing and revoking the others as regards that share: If the
Company is unable to determine which was last delivered, none of them shall be
treated as valid in respect of that share.
78. A vote given or poll demanded by proxy or by the duly authorised
representative of a corporation shall be valid notwithstanding the previous
determination of the authority of the person voting or demanding a poll unless
notice of the determination was received by the Company at the office or at
such other place in the United Kingdom as may be specified for the delivery of
instruments of proxy in the notice convening the meeting or other document sent
therewith one hour at least before the commencement of the meeting or adjourned
meeting at which the vote is given or the poll demanded or (in the case of a
poll taken otherwise than on the same day as the meeting or adjourned meeting)
the time appointed for taking the poll.
79.1 The instrument appointing a proxy to vote at a meeting shall be deemed
also to confer authority (a) to demand or join in demanding a poll
(and for the purposes of article 62 a demand by a person as proxy for
a member shall be the same as a demand by the member); and (b) to vote
on a poll on the election of a chairman and on a motion to adjourn a
meeting.
79.2 No instrument appointing a proxy shall be valid after the expiration
of twelve months from the date named in it as the date of its
execution, except at an adjourned meeting or on a poll demanded at a
meeting or an
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adjourned meeting in cases where the meeting was originally held
within twelve months from such date.
80. If any votes are counted which ought not to have been counted, or
might have been rejected, the error shall not vitiate the result of the voting
unless it is pointed out at the same meeting, or at any adjournment thereof,
and it is in the opinion of the chairman of the meeting of sufficient magnitude
to vitiate the result of the voting.
REPRESENTATION OF CORPORATIONS
81. Any Corporation being a member may, by resolution of its directors or
other governing body, authorise such person as it thinks fit to act as its
representative (or, as the case may be, representatives) at any general meeting
of the Company or any class meeting of the members of the Company. A person so
authorised shall be entitled to exercise the same powers on behalf of the
grantor as the Grantor could exercise if it were an individual member of the
Company and each person so authorised shall, if present at any such meeting,
for the purpose of these Articles be deemed to be a member present in person at
such meeting.
NUMBER AND QUALIFICATION OF DIRECTORS
82. Unless otherwise determined by ordinary resolution the number of
directors (other than alternate directors) shall be not less than two in
number. The Company may from time to time by ordinary resolution fix a maximum
number of directors and from time to time vary that maximum number. No
shareholding qualification for directors shall be required.
ALTERNATE DIRECTORS
83. Any director (other than an alternate director) may appoint any other
director, or any other person approved by the directors, to be an alternate
director and may remove from office an alternate director so appointed by him.
An alternate director shall be entitled to receive notices of all meetings of
directors, to attend and vote at any such meeting at which the director
appointing him is not personally present, and generally to perform all the
functions of his appointor as a director in his absence. An alternate director
shall cease to be an alternate director if his appointor ceases to be a
director; but, if a director retires by rotation or otherwise but is
reappointed or deemed to have been re-appointed at the meeting at which he
retires, any appointment of an alternate director made by him which was in
force immediately prior to his retirement shall continue after his
reappointment. Every appointment and removal of an alternate director shall be
in writing executed by the director making or revoking the appointment and (in
the case of an appointment) by the person appointed and shall be deposited at
the office or tendered at a meeting of the directors or in any other manner
approved by the directors.
84. Every person acting as an alternate director shall (save as regards
the power to appoint an alternate director and remuneration) be subject in all
respects to the provisions of these articles relating to directors and shall
alone be responsible for his own acts and defaults and he shall not be deemed
to be the agent of the director appointing him. The remuneration of any
alternate director shall be payable out of the remuneration payable to the
director appointing him, and shall consist of such part (if any) of the
last-mentioned remuneration as shall be agreed between the alternate director
and the director appointing him.
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POWERS OF DIRECTORS
85. Subject to the provisions of the Acts and these articles and to any
directions given by special resolution, the directors may exercise all the
powers of the Company. No alteration of the articles and no such direction
shall invalidate any prior act of the directors which would have been valid if
that alteration had not been made and that direction had not been given. The
powers given by this article shall not be limited by any special power given to
the directors by the articles and a meeting of directors at which a quorum is
present may exercise all powers exercisable by the directors.
86.1 The directors may exercise all the powers of the Company to borrow
money and to mortgage or charge its undertaking, property and assets
(present and future) and uncalled capital, or any part thereof, and
subject to the Acts to issue debentures and other securities whether
outright or as collateral security for any debt liability or
obligation of the Company or of any third party. The directors shall
restrict the borrowings of the Company and exercise all voting and
other rights or powers of control exercisable by the Company in
relation to its subsidiaries (if any) so as to secure (as regards
subsidiaries so far as by such exercise they can secure) that, save
with the previous sanction of an ordinary resolution, no money shall
be borrowed if the aggregate principal amount (including any premium
payable on final repayment) outstanding of all moneys borrowed by the
Group (excluding amounts borrowed by any member of the Group from any
other member of the Group) then exceeds or would as a result of such
borrowing exceed an amount equal to four times the aggregate of:-
(a) the amount paid up or credited as paid up on the share capital
of the Company; and
(b) the total of the capital and revenue reserves of the Group
(including any share premium account, capital redemption
reserve and credit balance on the combined profit and loss
account) but excluding sums set aside for taxation and amounts
attributable to outside shareholders in subsidiaries of the
Company and deducting any debit balance on the combined profit
and loss account except to the extent that such deductions
have already been made
all as shown in the then latest audited balance sheet of the Group,
but adjusted as may be necessary in respect of any variation in the
paid up share capital or share premium account or capital redemption
reserve of the Company since the date of its latest audited balance
sheet.
86.2 For the purposes of this article:-
(a) the amount outstanding in respect of acceptances by any member
of the Group or by any bank or accepting house under any
acceptance credit opened on behalf of any member of the Group
(not being acceptances in relation to the purchase of goods in
the ordinary course of business) shall be taken into account
as moneys borrowed;
(b) moneys borrowed for the purpose of repaying the whole or any
part of any moneys previously borrowed and then outstanding
(including any premium payable on final repayment thereof) and
applied for that purpose within four months of such borrowing
shall not, pending such application, be taken into account as
moneys borrowed; and
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(c) the principal amount (including any premium payable on final
repayment) of any debentures issued in whole or in part for a
consideration other than cash shall be taken into account as
moneys borrowed by the member of the Group issuing the same.
86.3 Where the aggregate principal amount of borrowings required to be
taken into account for the purposes of this article on any particular
date is being ascertained any of such moneys denominated or repayable
in a currency other than sterling shall be converted for the purpose
of calculating the sterling equivalent at the rate of exchange
prevailing on such date in London provided that any of such moneys
shall be converted at the rate of exchange prevailing in London six
months before such date if thereby such aggregate amount would be less
(and so that for this purpose the rate of exchange shall be taken as
the middle market rate as at the close of business).
86.4 A certificate or report by the Auditors for the time being of the
Company as to the amount of the adjusted capital and reserves or the
amount of any borrowings or to the effect that the limit imposed by
this article has not been or will not be exceeded at any particular
time or times shall be conclusive evidence of such amount or fact for
the purposes of this article.
86.5 No debt incurred or security given in respect of moneys borrowed or to
be taken into account as moneys borrowed in excess of the aforesaid
limit shall be invalid or ineffectual except in the case of express
notice to the lender or the recipient of the security at the time when
the debt was incurred or security given that the limit hereby imposed
had been or was thereby exceeded, but no lender or other person
dealing with the Company shall be concerned to see or enquire whether
such limit is observed.
87. If any uncalled capital of the Company is included in or charged by
any mortgage or other security, the directors may delegate to the person in
whose favour such mortgage or security is executed, or to any other person in
trust for him, the power to make calls on the members in respect of such
uncalled capital, and to sue in the name of the Company or otherwise for the
recovery of moneys becoming due in respect of calls so made and to give valid
receipts for such moneys, and the power so delegated shall subsist during the
continuance of the mortgage or security, notwithstanding any change of
directors, and shall be assignable if expressed so to be.
88. All cheques, promissory notes, drafts, bills of exchange, and other
instruments whether negotiable or transferable or not, and all receipts for
moneys paid to the Company shall be signed, drawn, accepted, endorsed or
otherwise executed, as the case may be, in such manner as the directors may
from time to time by resolution determine.
DELEGATION OF DIRECTORS' POWERS
89. The directors may delegate any of their powers:-
(a) to any Managing Director or any director holding any other
executive office; and
(b) to any committee consisting of one or more directors or to
any committee consisting of directors and co-opted persons not
being directors.
Subject to the above the delegation may be made subject to any conditions the
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directors may impose, and either collaterally with or to the exclusion of their
own powers and may be varied or revoked. Subject to any such conditions and the
above, the proceedings of a committee with two or more members shall be
governed by the articles regulating the proceedings of directors so far as they
apply.
90. The directors may from time to time, and at any time, appoint any
corporation, firm or person, or any fluctuating body of persons, whether
nominated directly or indirectly by the directors, to be the agent of the
Company for such purposes and with such powers, authorities and discretions
(not exceeding those vested in or exercisable by the directors under these
articles) and for such period and subject to such conditions as they may think
fit, and any such appointment may contain such provisions for the protection
and convenience of persons dealing with any such agent as the directors may
think fit, and may also authorise any such agent to sub-delegate all or any of
the powers, authorities and discretions vested in him.
91. The directors may cause to be kept in any part of Her Majesty's
Dominions outside the United Kingdom, the Channel Islands or the Isle of Man in
which the Company transacts business a branch register or registers of members
resident in such part of the said Dominions, and the directors may (subject to
the provisions of the Acts) make and vary such regulations as they may think
fit respecting the keeping of any such register.
APPOINTMENT AND RETIREMENT OF DIRECTORS
92. At each annual general meeting one-third of the directors including
the Managing Director and any director holding any other executive office for
the time being who are subject to retirement by rotation or, if their number is
not three or a multiple of three, then the number nearest to but not exceeding
one-third shall retire from office; but, if there are only two directors
subject to retirement by rotation, one of them shall retire and if there is
only one director who is subject to retirement by rotation, he shall retire.
Subject to article 98, a director retiring at a meeting aforesaid shall retain
office until the dissolution of that meeting.
93. Subject to the provisions of the Acts, the directors to retire by
rotation shall be those who have been longest in office since their last
appointment or reappointment, but as between persons who became or were last
reappointed directors on the same day those to retire shall (unless they
otherwise agree among themselves) be determined by lot.
94. If the Company, at the meeting at which a director retires by
rotation, does not fill the vacancy the retiring director shall, if willing to
act, be deemed to have been reappointed unless at the meeting it is resolved
not to fill the vacancy or unless a resolution for the reappointment of the
director is put to the meeting and lost.
95. No person other than a director retiring at a meeting shall, unless
recommended by the directors, be appointed or reappointed a director at any
general meeting unless, not less than seven nor more than a maximum of
forty-two days before the date appointed for the meeting, notice executed by a
member qualified to vote at the meeting (not being the person to be proposed)
has been given to the Company of the intention to propose that person for
appointment or reappointment stating the particulars which would, if he were so
appointed or reappointed, be required to be included in the Company's register
of directors together with notice executed by the person being proposed of his
willingness to be appointed.
96. Subject to article 95 the Company may by ordinary resolution appoint a
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person to be a director either to fill a vacancy or as an additional director
and may also determine the rotation in which any additional directors are to
retire.
97. The directors may appoint a person to be a director, either to fill a
vacancy or as an additional director, provided that the appointment does not
cause the number of directors to exceed any number fixed by or in accordance
with the articles as the maximum number of directors. A director so appointed
shall hold office only until the next following annual general meeting and, if
not then reappointed, shall vacate office and shall not be taken into account
in determining the directors or the number of directors who are to retire by
rotation at the meeting.
98. Subject to the provisions of these articles, the Company at the meeting at
which a director retires in manner aforesaid may fill the vacated office by
electing a person thereto and in default the retiring director shall, if
willing to continue to act, be deemed to have been re-elected, unless at such
meeting it is expressly resolved not to fill such vacated office or unless a
resolution for the re-election of such director shall have been put to the
meeting and lost.
99.1 Any contract of employment entered into by a director with the Company
shall not include a term that it is to be for a period exceeding five
years unless such term is first approved by ordinary resolution.
99.2 Any provisions of the Acts which but for this Article, would have the
effect of rendering any person ineligible for appointment as a
Director or liable to vacate office as a Director on account of his
having reached any specified age, or of requiring special notice or
any other special formality in connection with the appointment of any
Director over a specified age, shall not apply to the Company.
DISQUALIFICATION AND REMOVAL OF DIRECTORS
100. Without prejudice to the provisions of the Acts, the Company may, by
special resolution or by ordinary resolution of which special notice has been
given in accordance with the Acts, remove a director before the expiration of
his period of office (but such removal shall be without prejudice to any claim
such director may have for breach of any contract of service between him and
the Company) and may, by ordinary resolution, appoint another person in his
stead. The person so appointed shall be subject to retirement at the same time
as if he had become a director on the day on which the director in whose place
he is appointed was last appointed or reappointed a director.
101. Without prejudice to the provisions for retirement by rotation
contained herein the office of a director shall be vacated if:-
(a) he ceases to be a director by virtue of any provision of the
Acts or is removed from office pursuant to these articles; or
(b) he becomes prohibited by law from being a director; or
(c) he becomes bankrupt or makes any arrangement or composition
with his creditors generally; or
(d) an order is made by a court of competent jurisdiction by
reason of his mental disorder for his detention or for the
appointment of any person to exercise powers with respect to
his property or affairs; or
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(e) not being a director whose contract of employment precludes
resignation, he resigns his office by notice to the Company;
or
(f) he shall for more than six months have been absent without
permission of the directors from meetings of directors held
during that period and his alternate director (if any) shall
not during that period have attended any such meeting in his
stead and the directors resolve that his office be vacated; or
(g) if he shall be removed from office by notice in writing served
upon him signed by all his co-directors and all of the other
directors are not less than three in number, but so that if he
holds an appointment to an executive office which thereby
automatically determines such removal shall be deemed to be an
act of the Company and shall have effect without prejudice to
any claim for damages for breach of any contract of service
between him and the Company.
REMUNERATION OF DIRECTORS
102. The directors shall be entitled to directors' fees in aggregate not
exceeding ,50,000 per annum, or such other higher amount as the Company by
ordinary resolution may from time to time determine, which shall (unless
otherwise determined by the resolution by which it is voted) be divided between
the directors as they may agree or, failing agreement, equally. The directors'
remuneration shall be deemed to accrue from day to day. The directors shall
also be entitled to be paid all travelling, hotel and other expenses properly
incurred by them in connection with the business of the Company, or in
attending and returning from meetings of the directors or of committees of the
directors or general meetings.
103. Any director who serves on any committee or who devotes special
attention to the business of the Company, or who otherwise performs services
which in the opinion of the directors are outside the scope of the ordinary
duties of a director, may be paid such extra remuneration by way of salary,
participation in profits or otherwise as the directors may determine.
DIRECTORS' APPOINTMENTS AND INTERESTS
104. The directors may from time to time appoint any one or more of their
body to be a Managing Director or to be the holder of any other executive
office on such terms as they think fit, and may revoke or vary any such
appointment. The appointment of a Managing Director or of a director to any
executive office as aforesaid shall automatically be terminated if in either
case he ceases for any reason to be a director. Any revocation or termination
of any such appointment shall be without prejudice to any claim for breach of
any contract between the director and the Company. A Managing Director or a
director appointed to such other executive office as aforesaid shall receive
such remuneration (whether by way of salary, commission, participation in
profits and partly in one way and partly in another or others, or otherwise) as
the directors may determine.
105. The directors may entrust to and confer upon any director appointed to
any such executive office any of the powers exercisable by them as directors,
other than the power to make calls or forfeit shares, upon such terms and
conditions and with such restrictions as they think fit, and either
collaterally with or to the exclusion of their own power, and may from time to
time revoke, withdraw, alter or vary all or any of such powers.
106. A director, including an alternate director, may hold any other office or
place of profit under the Company (other than the office of auditor of the
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Company or any subsidiary of the Company) in conjunction with his office of
director for such period and upon such terms as the directors may determine,
and may act in a professional capacity to the Company, on such terms as to
tenure of office, remuneration and otherwise as the directors may determine.
107. Subject to the Acts and to the provisions of these articles, no
director or intending director, including an alternate director, shall be
disqualified by his office from contracting with the Company either with regard
to his tenure of any other office or place of profit, or as vendor, purchaser
or otherwise, nor shall any such contract, or any contract or arrangement
entered into by or on behalf of the Company in which any director is in any
way, whether directly or indirectly, interested, be liable to be avoided, nor
shall any director so contracting or being so interested be liable to account
to the Company for any remuneration, profit or other benefit realised by any
such contract or arrangement, by reason of such director holding that office or
of the fiduciary relation thereby established.
108. Any director, including an alternate director, may continue to be or
become a director or other officer or member of or otherwise interested in any
other company promoted by the Company or in which the Company may be
interested, as a member or otherwise, or which is a holding company of the
Company or a subsidiary of any such holding company, and no such director shall
be accountable for any remuneration or other benefits received by him as a
director or other officer or member of, or from his interest in, any such other
company. The directors may exercise the voting power conferred by the shares of
any other company held or owned by the Company or exercisable by them as
directors of any such holding company or subsidiary in such manner in all
respects as they think fit (including the exercise thereof in favour of any
resolution appointing themselves or any of them directors or other officers of
such company, or voting or providing for the payment of remuneration to the
directors or other officers of such company).
109. A director, including an alternate director, who is to his knowledge
in any way, whether directly or indirectly, interested in a contract or
arrangement or proposed contract or arrangement with the Company shall declare
the nature of his interest at a meeting of directors. In the case of a proposed
contract or arrangement the declaration shall be made at the meeting of the
directors at which the question of entering into the contract is first taken
into consideration if he knows his interest then exists, or, if the director
was not at the date of that meeting interested in the proposed contract or
arrangement, at the next meeting of directors held after he became so
interested if he knows his interest then exists. In a case where the director
becomes interested in a contract or arrangement after it is made or becomes
aware of his interest the declaration shall be made at the first meeting of the
directors held after the director becomes so interested or knows that he is or
has become so interested. In a case where the director is interested in a
contract or arrangement which has been made before he was appointed a director
the declaration shall be made at the first meeting of the directors held after
he is so appointed.
110. For the purposes of the last preceding article a general notice given
to the directors by any director to the effect that:-
(a) he is a member of any specified company or firm and is to be regarded
as interested in any contract or arrangement which may, after the date
of the notice, be made with the Company or firm; or
(b) he is to be regarded as interested in any contract or arrangement
which may after the date of the notice be made with a specified person
who is connected with him
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(if such director shall give the same at a meeting of the directors or shall
take reasonable steps to secure that it is brought up and read at the next
meeting of the directors after it is given) shall be deemed a sufficient
declaration of interest in relation to any contract so made.
DIRECTORS' GRATUITIES AND PENSIONS
111. The directors may establish and maintain, or procure the establishment
and maintenance of, any pension or superannuation funds (whether contributory
or otherwise) for the benefit of, and give or procure the giving of donations,
gratuities, pensions, allowances and emoluments to, any persons who are or were
at any time in the employment or service of the Company, or of any company
which is a subsidiary of the Company or is allied to or associated with the
Company or any such subsidiary or of any of the predecessors in business of the
Company or any such other company as aforesaid, or who may be or have been
directors or officers of the Company or of any such other company as aforesaid
and who hold or have held executive positions or agreements for service with
the Company or any such other company as aforesaid,and the wives, widows,
families, connections and dependants of any such persons, and also establish,
subsidise and subscribe to any institutions, associations, societies, clubs or
funds calculated to be for the benefit of, or to advance the interests and
well-being of the Company or of any such other company as aforesaid, or of any
such person as aforesaid, and make payments for or towards the insurance of any
such person as aforesaid and subscribe or guarantee money for charitable or
benevolent objects, or for any exhibition or for any public, general or useful
object, and do any of the matters aforesaid either alone or in conjunction with
any such other company as aforesaid. Subject to particulars with respect to the
proposed payment being disclosed to the members of the Company and to the
proposal being approved by the Company by ordinary resolution, if the Acts
shall so require, any director who holds or has held any such executive
position or agreement for services shall be entitled to participate in and
retain for his own benefit any such donation, gratuity, pension, allowance or
emolument.
PROCEEDINGS OF DIRECTORS
112. The directors may regulate their proceedings as they think fit. A
director may, and the secretary at the request of a director shall, call a
meeting of the directors. It shall not be necessary to give notice of a meeting
to a director who is absent from the United Kingdom. Any director may waive
notice of any meeting and such waiver may be retrospective. Questions arising
at a meeting shall be decided by a majority of votes. In case of an equality of
votes, the chairman of the meeting shall have a second or casting vote. Every
person acting as an alternate director shall have one vote for each director
for whom he acts as alternate (in addition to his own vote if he is also a
director). The signature of an alternate director to any resolution in writing
of the directors or a committee of the directors shall, unless the notice of
his appointment provides to the contrary, be as effective as the signature of
his appointor.
113. The quorum for the transaction of the business of the directors may be
fixed by the directors and unless so fixed at any other number shall be two. An
alternate director who is not himself a director shall be counted in the
quorum. Any director or member of a committee of the directors may participate
in a meeting of the directors or such committee by means of conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear each other and participation in the meeting in such
manner shall be deemed to constitute presence in person at such meeting and
that person shall be entitled to vote or be counted in a
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quorum accordingly. Such meeting shall be deemed to take place where the
largest group of those participating is assembled, or, if there is no such
group, where the Chairman of the meeting then is.
114. The continuing directors or a sole continuing director may act
notwithstanding any vacancies in their number, but, if the number of directors
is less than the number fixed by or in accordance with these articles, the
continuing directors or director, notwithstanding that the number of directors
is below the number fixed by or in accordance with these articles as the quorum
or that there is only one continuing director, may act only for the purpose of
filling vacancies or of calling a general meeting of the Company but not for
any other purpose.
115. The directors may appoint one or more of their number to be the
chairman or the deputy chairman of the board of directors and may at any time
remove any director so appointed from office and appoint another director in
his place. The director appointed as chairman, or, in his absence, as deputy
chairman shall preside at every meeting of directors at which he is present,
but if there is no director holding either such office, or if no director
holding either such office is present within five minutes after the time
appointed for the meeting the directors present may appoint one of their number
to be chairman of the meeting.
116. All acts done by a meeting of directors, or of a committee of
directors, or by a person acting as a director or member of a committee of
directors shall, notwithstanding that it be afterwards discovered that there
was a defect in the appointment of any director or that any of them were
disqualified from holding office, or had vacated office, or were not entitled
to vote, be as valid as if every such person had been duly appointed and was
qualified and had continued to be a director or member of a committee of
directors and had been entitled to vote.
117.1 A resolution in writing executed by all the directors for the time
being entitled to receive notice of a meeting of directors or by all
the members for the time being of a committee of directors (not being
less, in either case, than a quorum) shall be as valid and effectual
as if it had been passed at a meeting of directors or (as the case
may be) a committee of directors duly convened and constituted. Such
resolution may be contained in one document or in several documents
in the like form each signed by one or more directors or members of
the committee concerned.
117.2 All or any of the members of the Board or any committee of the Board
may participate in a meeting of the Board or that committee by means
of a conference telephone or any communication equipment which allows
all persons participating in the meeting to hear each other. A person
so participating shall be deemed to be present in person at the
meeting and shall be entitled to vote or be counted in a quorum
accordingly. Such a meeting shall be deemed to take place where the
largest group of those participating has assembled, or, if there is
no such group, where the Chairman of the meeting then is.
118.1 Save as otherwise provided by these articles, a director shall not
vote (nor be counted in the quorum) on any resolution of the
directors or a committee of the directors in respect of any contract
or arrangement in which he (together with any persons connected with
him) is to his knowledge materially interested, and if he shall do so
his vote shall not be counted, but this prohibition shall not apply
to any of the following matters, namely:-
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(i) any contract or arrangement for giving to such director any
security, guarantee or indemnity in respect of money lent by
him or obligations undertaken by him at the request of or for
the benefit of the Company or any of its subsidiary
undertakings;
(ii) any contract or arrangement for the giving by the Company of
any security to a third party in respect of a debt or
obligation of the Company or any of its subsidiary
undertakings which the director has himself guaranteed or
secured in whole or in part;
(iii) any contract or arrangement by a director to subscribe for
shares, debentures or other securities of the Company
issued or to be issued pursuant to any offer or
invitation to members or debenture holders of the
Company or any class thereof or to the public or any
section thereof, or to underwrite any shares,
debentures or other securities of the Company;
(iv) any contract or arrangement in which he is interested
by virtue of his interest in shares or debentures or
other securities of the Company or by reason of any
other interest in or through the Company;
(v) any contract or arrangement concerning any other company (not
being a company in which the director and any persons
connected with him do not to his knowledge hold an interest in
shares, as that term is used in sections 198 to 211 Companies
Act 1985 representing one per cent or more of any class of
the equity share capital of, or the voting rights in, such
company) in which he is interested directly or indirectly
whether as an officer, share- holder, creditor or otherwise
howsoever;
(vi) any proposal concerning the adoption, modification or
operation of a pension fund or retirement death or disability
benefits scheme which relates both to directors and employees
of the Company or of any of its subsidiaries and does not
provide in respect of any director as such any privilege or
advantage not accorded to the employees to which such scheme or
fund relates;
(vii) any arrangement for the benefit of employees of the Company or
of any of its subsidiaries under which the director benefits in
a similar manner as the employees and which does not accord to
any director as such any privilege or advantage not accorded to
the employees to whom such arrangement relates;
(viii) any proposal, contract, transaction or arrangement concerning
the purchase or maintenance of insurance for the benefit of
the directors or for the benefit of persons who include
directors.
118.2 A company shall be deemed to be a company in which a director owns one
per cent. or more if and so long as (but only if and so long as) he is (either
directly or indirectly) the holder of or beneficially interested in one per
cent. or more of any class of the equity share capital of such company or of the
voting rights available to members of such company. For the purpose of this
paragraph there shall be disregarded any shares held by a director as bare or
custodian trustee and in which he has no beneficial interest, any shares
comprised in a trust in which the director's interest is in reversion or
remainder if and so long as some other person is entitled to receive the income
thereof, and any shares comprised in an authorised unit trust scheme in which
the director is interested only as a unit holder.
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118.3 Where a company in which a director holds one per cent. or more is
materially interested in a transaction, then that director shall also be deemed
materially interested in such transaction.
119. A director shall not be counted in the quorum present at a meeting in
relation to a resolution on which he is not entitled to vote.
120. The Company may by ordinary resolution suspend or relax to any
extent, either generally or in respect of any particular matter, any provision
of the articles prohibiting a director from voting at a meeting of directors or
of a committee of directors and may ratify any transactions not duly authorised
by reason of a contravention of these articles.
121. Where proposals are under consideration concerning the appointment
including the arrangement or variation of the terms thereof or the termination
thereof of two or more directors to offices or employments with the Company or
any body corporate in which the Company is interested the proposals may be
divided and considered in relation to each director separately and (provided he
is not for another reason precluded from voting) each of the directors
concerned shall be entitled to vote and be counted in the quorum in respect of
each resolution except that concerning his own appointment or the arrangement
or variation of the terms thereof or the termination thereof.
122. If a question arises at a meeting of directors or of a committee of
directors as to the right of a director other than the chairman of the meeting
to vote or be counted in a quorum, the question may, before the conclusion of
the meeting, be referred to the chairman of the meeting and his ruling in
relation to any director other than himself shall be final and conclusive
except in a case where the nature or extent of the interest of the director
concerned as known to such director has not been fairly disclosed to the
directors. If any question as aforesaid shall arise in respect of the chairman
of the meeting such question shall be decided by a resolution of the directors
(for which purpose such chairman shall be counted in the quorum but shall not
vote thereon) and such resolution shall be final and conclusive except in a
case where the nature or extent of the interest of such chairman as known to
such chairman has not been fairly disclosed to the directors.
MINUTES
123. The directors shall cause minutes to be made in books kept for the
purpose:-
(a) of all appointments of officers made by the directors;
(b) of the names of the directors present at each meeting of
directors and of any committee of directors;
(c) of all resolutions and proceedings at meetings of the Company
and of the holders of any class of shares in the Company and
of the directors and of committees of directors.
SECRETARY
124. The secretary shall be appointed by the directors for such term, at
such remuneration and upon such conditions as they think fit and any secretary
so appointed may be removed by the directors.
125. Anything by the Acts required or authorised to be done by or to the
secretary may, if the office is vacant or there is for any other reason no
secretary capable of acting, be done by or to any assistant or deputy
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secretary or, if there is no assistant or deputy secretary capable of acting,
by or to any officer of the Company authorised generally or specially in that
behalf by the directors: provided that any provision of the Acts or of these
articles requiring or authorising a thing to be done by or to a director and
secretary shall not be satisfied by its being done by or to the same person
acting both as director and as, or in the place of, the secretary.
THE SEAL
126. The Company may have a seal if it so resolves. In such case the
directors shall provide for the custody of every seal. The seal shall only be
used by the authority of the directors or of a committee of directors
authorised by the directors in that behalf. The directors may determine who
shall sign any instrument to which the seal is affixed and unless otherwise so
determined it shall be signed by a director and by the secretary or by a second
director. Any instrument to which an official seal is affixed need not, unless
the directors for the time being otherwise determine or the law otherwise
requires be signed by any person.
DIVIDENDS
127. Subject to the provisions of the Acts the Company may by ordinary
resolution declare dividends to be paid to members in accordance with the
respective rights and their interests in the profits available for
distribution, but no dividend shall exceed the amount recommended by the
directors.
128. Subject to the provisions of the Acts and of these articles, the
directors may pay interim dividends if it appears to them that they are
justified by the profits of the Company available for distribution. If the
share capital is divided into different classes, the directors may pay interim
dividends on shares which confer deferred or non-preferred rights with regard
to dividend as well as on shares which confer preferential rights with regard
to dividend, but no interim dividend shall be paid on shares carrying deferred
or non-preferred rights if, at the time of payment, any preferential dividend
is in arrear. The directors may also pay at intervals settled by them any
dividend payable at a fixed rate if it appears to them that the profits
available for distribution justify the payment. Provided the directors act in
good faith they shall not incur any liability to the holders of shares
conferring preferred rights for any loss they may suffer by the lawful payment
of an interim dividend on any shares having deferred or non-preferred rights.
129. Except as otherwise provided by the rights attached to or the terms
of issue of shares, all dividends shall be declared and paid on the Ordinary
Share capital according to the amounts paid up on such shares otherwise than in
advance of calls on which the dividend is paid. Subject as aforesaid, all
dividends shall be apportioned and paid proportionately to the amounts paid up
on the shares otherwise than in advance of calls during any portion or portions
of the period in respect of which the dividend is paid.
130. The directors may deduct from any dividend or other moneys payable to
any member on or in respect of any share any moneys presently payable by him to
the Company on account of calls or otherwise in respect of shares of the
Company.
131.1 A general meeting declaring a dividend may, upon the recommendation
of the directors, direct that it shall be satisfied wholly or partly
by the distribution of specific assets and in particular of paid-up
shares or debentures of any other company and, where any difficulty
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arises in regard to the distribution, the directors may settle the
same and in particular may issue fractional certificates or authorise
any person to sell and transfer any fractions or may ignore fractions
altogether and may fix the value for distribution purposes of any
such specific assets and may determine that cash shall be paid to any
member upon the footing of the value so fixed in order to secure
equality of distribution and may vest any such specific assets in
trustees.
131.2.1 The Directors may, with the sanction of an Ordinary Resolution
of the Company, offer holders of Ordinary Shares the right to
elect to receive in respect of all or part of their holdings
of Ordinary Shares additional Ordinary Shares in the Company,
credited as fully paid, instead of cash in respect of all or
part of such dividend or dividends whether interim or final
and (subject to the following provisions of this article) upon
such terms and conditions and in such manner as may be
specified in such Ordinary Resolution and otherwise as the
Directors may determine. Any such resolution may specify a
particular dividend and/or all of any dividends (or part of
such dividends) declared or paid within a specified period,
but no such period may end later than the beginning of the
Annual General Meeting in the calendar year next following the
date on which such Ordinary Resolution is passed.
131.2.2 When any such right of election is offered to the holders of
Ordinary Shares pursuant to this Article, the Directors shall
make such offer to such holders in writing (conditionally if
the necessary Ordinary Resolution has yet to be passed, upon
such resolution being passed) and shall make available to or
provide such holders with forms of election (in such form as
the Directors may approve) whereby such holders may exercise
such right and shall notify such holders of the procedure to
be followed and of the place at which and the latest date and
time by which, duly completed forms of election must be lodged
in order to be effective.
131.2.3 Each holder of Ordinary Shares who elects to receive
additional Ordinary Shares in the Company under a right
offered to him pursuant to this Article shall be entitled to
receive such whole number of additional Ordinary Shares as is
as nearly as possible equal in value (calculated on the basis
of the Market Value of an additional Ordinary Share in the
Company) to (but not in excess of) the cash amount that such
holder would otherwise have received by way of dividend. For
the purposes of this Article, the "Market Value" of an
additional Ordinary Share in the Company shall be the average
of the prices at which business is done in the Ordinary Shares
(derived from the Daily Official List of the London Stock
Exchange) on such five consecutive dealing days as the
Directors shall determine (save that the first of such dealing
days shall be on or after the day when the issued Ordinary
Shares in the Company are first quoted "ex" the relevant
dividend, unless no business is done during such dealing days,
when in that case the first of such dealing days should be the
latest practicable date at least five days prior to the date
when the issued Ordinary Shares in the Company are first
quoted "ex" the relevant dividend when business is done in the
Ordinary Shares) or the nominal value of an Ordinary Share in
the Company (whichever is the higher).
131.2.4 Following an election by holders of Ordinary Shares in
accordance with this article, the relevant dividend (or that
part of a
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dividend in respect of which a right of election has been
offered) shall not be payable on the Ordinary Shares issued
pursuant to the election but in lieu thereof, the Directors
shall capitalise out of any undistributed profits of the
Company not required for paying any preferential dividend
(whether or not they are available for distribution) or out of
any sum standing to the credit of the Company's share premium
account or capital reserves (including any capital redemption
reserve), as the Directors may determine a sum equal to the
aggregate nominal value of the number of additional Ordinary
Shares required to be allotted to the holders of Ordinary
Shares who have made such election and shall apply such sum in
paying up in full such number of additional Ordinary Shares
and shall allot and distribute the same to and amongst such
holders on the basis set out in sub-clause 3 of this article
save that the foregoing provisions of this paragraph shall be
subject to any right of the Directors under these articles to
retain any dividend or other monies payable on or in respect
of the Ordinary Shares of a particular member.
131.2.5 The additional new Ordinary Shares so allotted shall rank pari
passu with the fully paid Ordinary Shares in the Company then
in issue save that they shall not be entitled to participate
in the dividend in relation to which the relevant election was
made.
131.2.6 A resolution of the Directors capitalising any part of the
reserves or profits hereinbefore mentioned shall have the same
effect as if such capitalisation had been declared by Ordinary
Resolution of the Company in accordance with these Articles
and in relation to any such capitalisation the Directors may
exercise all the powers, other than the powers to allot
fractional shares, conferred on them by Article 136 without
the need for any such Ordinary Resolution.
131.2.7 The Directors may at their discretion make any rights of
election offered pursuant to this Article subject to such
exclusions or arrangements as they may consider necessary or
expedient to deal with any legal or other difficulties which
would or may otherwise arise under laws of, or the
requirements of any recognised regulatory body or any stock
exchange in, any territory.
131.2.8 Every duly effected election shall be binding on every
successor in title to the Ordinary Shares or any of the
members who have effected the same.
132. Any dividend or other monies payable in cash or in respect of a share
may be paid by cheque, or other instrument sent through the post to the
registered address of the person entitled or, if two or more persons are the
holders of the share or are jointly entitled to it by reason of the death or
bankruptcy of the holder, to the registered address of that one of those
persons who is first named in the register of members or to such person and to
such address as the person or persons entitled may in writing direct. Every
such cheque, warrant or other instrument shall be made payable to or to the
order of the person or persons entitled or to such other person as the person
or persons entitled may in writing direct. Any such cheque, warrant or other
instrument may be crossed "account payee only" although the Company shall not
be obliged to do so. Any such dividend or other monies may also be paid by any
bank or other funds transfer system as the directors may consider appropriate
and to or through such person as the person or persons entitled thereto may in
writing director and the Company shall have no responsibility for any such
dividend or other monies lost or delayed in the course of such transfer or when
it is acted upon such direction. Payment of the cheque,
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warrant or other instrument by the bank upon whom it is drawn or transfer of
the funds by the bank instructed to make the same shall be a good discharge to
the Company. Every such cheque, warrant or other instrument shall be sent and
every such transfer of funds shall be made at the risk of the person or persons
entitled to the money represented thereby. If any such cheque, warrant or
other instrument has or shall be alleged to have been lost, stolen or
destroyed, the directors may at the request of the person entitled thereto
issue a replacement cheque, warrant or other instrument subject to compliance
with such conditions as to evidence and indemnity and the payment of such out
of pocket expenses incurred by the Company in connection with the request as
the directors may think fit.
133. All unclaimed dividends or other moneys payable on or in respect of a
share may be invested or otherwise made use of by the directors for the benefit
of the Company until claimed. No dividend or other moneys payable in
respect of a share shall bear interest against the Company unless otherwise
provided by the rights attached.
134. Any dividend which has remained unclaimed for twelve years from the
date of declaration of such dividend or (if later) the date such dividend became
due for payment shall, if the directors so resolve, be forfeited and shall
revert to the Company and the payment by the directors of any unclaimed
dividend, interest or other sum payable on or in respect of a share into a
separate account shall not constitute the Company a trustee in respect
thereof.
RESERVES
135. The directors may before recommending any dividend, whether
preferential or otherwise, carry to reserve out of the profits of the Company
(including any premiums received upon the issue of debentures or other
securities of the Company) such sums as they think proper as a reserve or
reserves, which shall, at the discretion of the directors, be applicable for
any purpose to which the profits of the Company may properly be applied and,
pending such application, may at the like discretion either be employed in the
business of the Company or be invested in such investments (subject to the
provisions of the Acts) as the directors may from time to time think fit. The
directors may also, without placing the same to reserve, carry forward any
profits which they may think prudent not to distribute.
CAPITALISATION OF PROFITS
136. The directors may with the authority of an ordinary resolution of the
Company:-
(a) subject as hereinafter provided, resolve to capitalise any
undistributed profits of the Company not required for paying
any preferential dividend (whether or not they are available
for distribution) or any sum standing to the credit of the
Company's share premium account or capital redemption reserve;
(b) appropriate the sum resolved to be capitalised to the members
in proportion to the nominal amounts of the shares (whether or
not fully paid) held by them respectively which would entitle
them to participate in a distribution of that sum if it were
then distributable and it were distributed by way of dividend
and apply such sum on their behalf either in or towards paying
up the amounts, if any, for the time being unpaid on any
shares held by them respectively, or in paying up in full
unissued shares or debentures of the Company of a nominal
amount equal to that sum, and allot the shares or debentures
credited as fully paid to those
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members, or as they may direct, in those proportions, or
partly in one way and partly in the other but the share
premium account, the capital redemption reserve, and any
profits which are not available for distribution may for the
purposes of this regulation, only be applied in paying up
unissued shares to be issued to members credited as fully
paid;
(c) resolve that any shares so allotted to any member in respect
of a holding by him of any partly paid shares shall so long as
such shares remain partly paid rank for dividend only to the
extent that the latter shares rank for dividend;
(d) where any difficulty arises in regard to any distribution
under this article the directors may settle the same as they
think expedient and in particular may issue fractional
certificates or authorise any person to sell and transfer any
fractions or may resolve that the distribution should be as
nearly as may be practicable in the correct proportion but not
exactly so or may ignore fractions altogether, and may
determine that cash payments shall be made to any members in
order to adjust the rights of all parties, as may seem
expedient to the directors;
(e) authorise any person to enter on behalf of all the members
concerned into an agreement with the Company providing for the
allotment to them respectively, credited as fully paid, of any
further shares or debentures to which they are entitled upon
such capitalisation, any agreement made under such authority
being binding on all such members; and
(f) generally do all acts and things required to give effect to
such resolution as aforesaid.
NOTICES
137. Any notice to be given pursuant to the articles shall be in writing
and the Company may give any such notice to a member either personally or by
sending it by post in a prepaid envelope addressed to the member at his
registered address or by leaving it at that address. In the case of joint
holders of a share, all notices shall be given to the joint holder whose name
stands first in the register of members in respect of the joint holding and
notice so given shall be sufficient notice to all the joint holders.
138. A member whose registered address is not within the United Kingdom
and who gives to the Company an address within the United Kingdom at which
notices may be given to him shall be entitled to have notices given to him at
that address, but otherwise no such member shall be entitled to receive any
notice from the Company.
139. A member present, either in person or by proxy, at any meeting of the
Company or of the holders of any class of shares in the Company shall be deemed
to have received notice of the meeting and, where requisite, of the purposes
for which it was called.
140. Every person who becomes entitled to a share shall be bound by any
notice which, before his name is entered in the register of members, has been
given to the person from whom he derives his title.
141. If at any time by reason of the suspension or curtailment of postal
services within the United Kingdom or any part thereof the Company is unable
effectively to convene a general meeting by notices sent through the post, a
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general meeting may be convened by a notice advertised on the same date in at
least one leading national daily newspapers with appropriate circulation and
such notice shall be deemed to have been duly served on all members entitled
thereto and persons entitled by transmission who are entitled to have notice of
the meeting served upon them at noon on the day when the advertisement appears.
In any such case the Company shall send confirmatory copies of the notice by
post if at least seven days prior to the meeting the posting of notices to
addresses throughout the United Kingdom or such part thereof again becomes
practicable.
142. A notice sent by the Company by first-class post shall be deemed to
have been given at the expiration of 24 hours after the envelope containing it
was posted and if sent by second class post shall be deemed to have been given
at the expiration of 72 hours after the envelope containing it was posted and
proof that the envelope containing the notice was properly addressed, prepaid
and posted shall be conclusive evidence that the notice was given. A notice
given by advertisement shall be deemed to have been served on the day on which
the advertisement appears. Any notice delivered or left at a registered address
otherwise than by post shall be deemed to have been given on the day it was so
delivered or left.
143. A notice or other document delivered or sent by post to the
registered address of a member pursuant to the articles shall, notwithstanding
that the member be then dead, bankrupt, mentally disordered or that any other
event has occurred and whether or not the Company has notice of the death,
bankruptcy mental disorder or other event be deemed to have been given in
respect of any share registered in the name of such member as sole or joint
holder unless before the day of posting (or if it is not sent by post before
the day of service or delivery) of the notice or document, his name has been
removed from the Register as the holder of the share, and such service or
delivery of such notice or document. A notice so given shall be deemed a
sufficient notice to all persons interested (whether jointly with or as
claiming through or under the member) in the share.
RECORD DATES
144. Notwithstanding any other provision of these articles but subject
always to the Act, the Company or the directors may by resolution specify any
date ("the Record Date") as the date at the close of business (or such other
time as the Directors may determine) on which persons registered as the holders
of shares or other securities shall be entitled to receipt of any dividend,
distribution, interest, allotment, issue notice, information, document or
circular and such Record Date may be on or at any time before the date on which
the same is paid or made or (in the case of any dividend, distribution,
interest, allotment or issue) at any time after the same is recommended,
resolved, declared or announced, but without prejudice to the rights inter se
in respect of the same of transferors and transferees of any such shares or
other securities.
ACCOUNTS
145. The accounting records shall be kept at the office, or (subject to
the provisions of the Acts) at such other place as the directors think fit, and
shall always be open to inspection by the officers of the Company. No member
(other than a director) shall have any right of inspection of any account or
book or document of the Company except as conferred by statute or authorised by
the directors or by the Company in general meeting.
146. A printed copy of the directors' and auditors' reports accompanied by
printed copies of the balance sheet, profit and loss account and other
documents required by the Acts to be annexed to the balance sheet shall, not
36
<PAGE> 37
less than twenty-one days before the general meeting before which they are to be
laid, be delivered or sent by post to the registered address of every member and
holder of debentures of the Company, and to the auditors for the time being of
the Company, and, if all or any of the shares in or debentures of the Company
are for the time being listed on any stock exchange, there shall at the same
time be forwarded to the secretary of such stock exchange such number of copies
of each of these documents as may be required by the regulations for the time
being of such stock exchange. Provided that the Company need not, subject to
the provisions of the Acts and the regulations of the London Stock Exchange so
permitting and if the Board so decides, send the copies of such documents to
members, but instead send them a summary financial statement derived from the
Company's annual accounts and the directors' report, in such form and containing
such information as may be required by the Acts and provided further that copies
of the Company's annual accounts (together with the directors' report for the
financial year and the auditor's report on those accounts) shall be sent to any
Member who wishes to receive them and the Company shall comply with any
provisions of the Acts as to the manner in which it is to ascertain whether a
Member wishes to receive them.
WINDING UP
147. If the Company is wound up, the liquidator may, with the sanction of
an extraordinary resolution of the Company and any other sanction required by
the Acts, divide among the members in specie the whole or any part of the assets
of the Company and whether or not the assets consist of property of one kind or
of properties of different kinds may, for that purpose value any assets and
determine how the division shall be carried out as between the members or
different classes of members. The liquidator may, with the like sanction, vest
the whole or any part of the assets in trustees upon such trusts for the benefit
of the members as he with the like sanction determines, but no member shall be
compelled to accept any assets upon which there is a liability.
INDEMNITY
148. Subject to the provisions of the Acts, every director or other officer
and auditor of the Company shall be indemnified out of the assets of the Company
against all costs, charges, expenses, losses and liabilities which he may
sustain or incur in or about the execution of his office or otherwise in
relation thereto. Pursuant to the provisions of Section 310(3) of the Companies
Act 1985 (as amended by the Companies Act 1989) the Company may for the purposes
of this Article purchase and maintain insurance to indemnify any director,
officer, manager or auditor of the Company, or any company which is a member of
the Group.
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<PAGE> 1
EXHIBIT 2.09
MICRO FOCUS GROUP plc
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made effective as of
_______ ___, 1997 by and between Micro Focus Group plc, a corporation organized
under the laws of England and Wales (the "Company"), and ______________, the
undersigned officer or director of the Company and/or one or more of its
subsidiaries ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining directors' and officers' liability insurance, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available
as adequate under the present circumstances, and Indemnitee and other officers
and directors of the Company and/or its subsidiaries may not be willing to
serve, or to continue to serve, as officers and directors thereof without
additional protection;
WHEREAS, the Company desires to attract and to retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and
directors of the Company and/or its subsidiaries and to indemnify such officers
and directors so as to provide them with the maximum protection permitted by
law;
WHEREAS, by means of this Agreement, the Company seeks to provide
contractual protection for officers and directors of both the Company and its
subsidiaries, and the Board of Directors of the Company ("Board") has
determined that adequate consideration and direct and indirect benefit to the
Company exists for the indemnification obligations hereby created;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. EFFECTIVENESS OF AGREEMENT
To the extent that the indemnification permitted under the
terms of certain provisions of this Agreement exceeds the scope of the
indemnification permitted to be given by the Company under the laws of England
(including, without limitation, Sections 310 and 727 of the Companies Act
1985), such provisions shall not be effective and in particular shall not apply
to indemnify the Indemnitee against any fine which may be imposed upon the
Indemnitee in any criminal proceedings or against any liability to the Company
which the Indemnitee may be adjudged to have in any civil proceedings or may
agree to discharge in the course of settlement of any civil proceedings. In
all other respects, the balance of this Agreement shall be effective as of the
date set forth above and may apply to acts or omissions of Indemnitee which
occurred prior to such date if Indemnitee was an officer, director, employee or
other agent of the Company and/or one of its subsidiaries, or was serving at
the request of the Company and/or one of its subsidiaries
<PAGE> 2
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, at the time such act or omission
occurred.
2. INDEMNIFICATION
(a) Third Party Proceedings. The Company shall indemnify
Indemnitee if Indemnitee is or was a party, or is threatened to be made a
party, to any threatened, pending or completed action or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company or any subsidiary of the
Company ("Subsidiary"), by reason of any action or inaction on the part of
Indemnitee while an officer or director or by reason of the fact that
Indemnitee is or was serving at the request of the Company or any Subsidiary as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against judgments, fines, amounts
paid in settlement (if such settlement is approved in advance by the Company,
which approval shall not be unreasonably withheld) and, to the fullest extent
permitted by law, expenses (including reasonable attorney's fees) actually and
reasonably incurred by Indemnitee in connection with such action or proceeding;
provided, however, that the Company may only indemnify Indemnitee with respect
to the defense of a part of a proceeding (whether civil or criminal) which
relates to any negligence, default, breach of duty or breach of trust of
Indemnitee if: (i) the judgment in such part of the proceeding is given in
Indemnitee's favor or Indemnitee is acquitted; or (ii) a court of competent
jurisdiction determines, based on all the facts and circumstances, that
Indemnitee acted honestly and reasonably under the circumstances and grants
relief to Indemnitee pursuant to Section 727 of the Companies Act 1985.
(b) Proceedings By or in the Right of the Company. In the
event that the Indemnitee was or is a party or is threatened to be made a party
to any threatened, pending or completed action or proceeding by or in the right
of the Company or any Subsidiary to procure a judgment in its favor by reason of
the fact that Indemnitee is or was a director, officer, employee or agent of the
Company or any Subsidiary by reason of any action or inaction on the part of
Indemnitee while an officer or director or by reason of the fact that Indemnitee
is or was serving at the request of the Company or any Subsidiary as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, the Company shall indemnify the Indemnitee, to the
fullest extent permitted by law, against expenses (including attorney's fees)
and amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense of such action
or proceeding; provided, however, that the Company may only indemnify
Indemnitee with respect to the defense of any part of such proceeding which
relates to any negligence, default, breach of duty or breach of trust of
Indemnitee if: (i) the judgment in such part of the proceeding is given in
Indemnitee's favor; or (ii) a court of competent jurisdiction determines, based
on all the facts and circumstances, that Indemnitee acted honestly and
reasonably under the circumstances and grants relief to Indemnitee pursuant to
Section 727 of the Companies Act 1985.
3. NOTICE AND OTHER INDEMNIFICATION PROCEDURES;
DETERMINATION OF RIGHT TO INDEMNIFICATION
(a) Notice of Claim. Promptly after receipt by
Indemnitee of notice of the commencement of or the threat of commencement of
any proceeding, Indemnitee shall, if Indemnitee believes that indemnification
with respect thereto may be sought from the Company
2
<PAGE> 3
under this Agreement, notify the Company of the commencement or threat of
commencement thereof.
(b) Notice to Insurer. If, at the time of the receipt of
a notice of the commencement of a proceeding pursuant to Section 3(a) hereof,
the Company has directors' and officers' insurance in effect with respect to
Indemnitee, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter use its reasonable efforts to
cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a
result of such proceeding in accordance with the terms of such directors' and
officers' insurance policies.
(c) Assumption of Defense. In the event the Company
shall be obligated to indemnify the Indemnitee with respect to any proceeding
against Indemnitee, the Company, if appropriate, shall be entitled to assume
the defense of such proceeding, with counsel approved by Indemnitee (which
approval shall not be unreasonably withheld), upon the delivery to Indemnitee
of written notice of its election to do so. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee through the engagement
of separate counsel with respect to the same proceeding; provided, however,
that: (a) Indemnitee shall have the right to employ his own counsel in any
such proceeding at Indemnitee's expense; and (b) Indemnitee shall have the
right to employ his own counsel in connection with any such proceeding, at the
expense of the Company, if (i) the employment of such counsel by Indemnitee has
been previously authorized by the Company, (ii) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between the
Company or any Subsidiary and Indemnitee in the conduct of any such defense or
(iii) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding.
(d) Indemnification Upon Prevailing on the Merits. To
the extent Indemnitee has been successful on the merits or otherwise in defense
of any proceeding referred to in Section 2 of this Agreement or in the defense
of any claim, issue or matter described therein, the Company shall indemnify
Indemnitee against expenses actually and reasonably incurred by him in
connection with the investigation, defense or appeal of such proceeding, or
such claim, issue or matter, as the case may be.
(e) Indemnity Unless Ineligible. In the event that
Section 3(d) is inapplicable, or does not apply to the entire proceeding, the
Company shall nonetheless indemnify Indemnitee to the fullest extent permitted
by law, subject to the limitations expressly specified in this Agreement. The
rights of the Company or Indemnitee to appeal any court decision shall be
governed by the applicable laws and rules governing appeals of such court
decision.
(f) Dispute Expenses. Notwithstanding any other
provision in this Agreement to the contrary, the Company shall indemnify
Indemnitee against all expenses incurred by Indemnitee in connection with any
hearing or proceeding between the Company and Indemnitee involving the
interpretation or enforcement of the rights of Indemnitee under this Agreement
unless a court of competent jurisdiction finds that each of the material claims
and/or defenses of Indemnitee in any such proceeding was frivolous or not made
in good faith.
3
<PAGE> 4
4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY
(a) Scope. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the Company's
Articles of Association or by statute. In the event of any change, after the
date of this Agreement, in any applicable law, statute or rule which expands the
right of an English company to indemnify a member of its board of directors or
any other officer, such changes shall be, ipso facto, within the purview of
Indemnitee's rights and Company's obligations, under this Agreement. In the
event of any change in any applicable law, statute or rule which narrows the
right of an English company to indemnify a member of its Board of Directors or
any other officer, such changes, to the extent not otherwise required by such
law, statute or rule to be applied to this Agreement, shall have no effect on
this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may be
entitled under the Company's Articles of Association (including any similar
indemnification agreement between Indemnitee and any Subsidiary), any agreement,
any vote of shareholders or disinterested directors, or otherwise, both as to
action in Indemnitee's official capacity and as to action in another capacity
while holding such office. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity even though he may have ceased to serve in such
capacity at the time of any action or other covered proceeding.
(c) Exception for Amounts Otherwise Covered. Notwith-
standing any other provisions hereof, the Company shall not be obligated to
indemnify Indemnitee for liabilities of any type whatsoever (including, but not
limited to, judgments, fines, excise taxes or penalties assessed with respect to
employee benefit plans, and amounts paid in settlement) to the extent such have
been paid directly to Indemnitee by directors' and officers' insurance or by any
Subsidiary pursuant to any indemnification agreement, any provision of any
Subsidiary's charter documents, applicable law or otherwise.
5. PARTIAL INDEMNIFICATION
If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by him
in the investigation, defense, appeal or settlement of any civil or criminal
action or proceeding, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGMENT
Both the Company and Indemnitee acknowledge that in certain
instances, English law, U.S. federal or state law or applicable public policy
may prohibit the Company from indemnifying its directors and officers under this
Agreement or otherwise. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future
4
<PAGE> 5
to undertake with the U.S. Securities and Exchange Commission to submit the
question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
7. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
The Company shall, from time to time, make the good faith
determination whether or not it is practicable for the Company or a Subsidiary
to obtain and maintain a policy or policies of directors' and officers'
liability insurance with reputable insurance companies providing Indemnitee
with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of directors' and officers' liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded other similarly situated officers and directors.
Notwithstanding the foregoing, the Company shall have no obligation to obtain
or maintain such insurance if the Company determines in good faith that such
insurance is not reasonably available, if the premium costs for such insurance
are disproportionate to the amount of coverage provided, if the coverage
provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
8. SEVERABILITY
Nothing in this Agreement is intended to require or shall be
construed as requiring the Company to do or fail to do any act in violation of
applicable law. The Company's inability, pursuant to court order, to perform
its obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable as provided in
this Section 8. If any provision of this Agreement shall be found to unenforce-
able or invalidated on any ground by any court of competent jurisdiction, then
it shall be interpreted, to the extent possible, to enhance its enforceability,
or if necessary, stricken from this Agreement, in order to best achieve the
intent of the parties to this Agreement and to indemnify Indemnitee to the
fullest extent permitted by applicable law. Nonetheless, the unenforceability
or invalidity of any provision of this Agreement as applied to certain
circumstances shall not effect the enforceability or validity of such provision
applied to other circumstances or any other provision of this Agreement.
9. EXCEPTIONS
Any other provision herein to the contrary notwithstanding,
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts
or omissions or transactions from which an officer or director may not be
relieved of liability, or against which an officer or director may not be
indemnified, under English law.
(b) Claims Initiated by Indemnitee. To indemnify
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense or mandatory counterclaim,
except with respect to proceedings specifically authorized by the Board or
brought to establish or enforce a right to indemnification arising under this
Agreement, the charter documents of the Company or any Subsidiary, or any
statute or law or otherwise, but such
5
<PAGE> 6
indemnification may be provided by the Company in specific cases if the Board
finds it to be appropriate and permissible under English law; or
(c) Lack of Good Faith. To indemnify Indemnitee with
respect to any proceeding instituted by Indemnitee to enforce or interpret this
Agreement, if a court of competent jurisdiction determines that each of the
material assertions made by the Indemnitee in such proceeding was not made in
good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for
liabilities of any type whatsoever (including, without limitation, judgments,
fines, excise taxes or penalties relating to employee benefit plans, taxes or
penalties, and amounts paid in settlement) which have been paid directly to
Indemnitee by an insurance carrier under a policy of directors' and officers'
liability insurance maintained by the Company or any Subsidiary; or
(e) Claims Under Section 16(b). To indemnify Indemnitee
for expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute; or
(f) Unauthorized Settlements. To indemnify Indemnitee
hereunder for any amounts paid in settlement of a proceeding unless the Company
consents in advance in writing to such settlement, which consent shall not be
unreasonably withheld.
10. CONSTRUCTION OF CERTAIN PHRASES
For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company or any
Subsidiary" shall include any service as a director, officer, employee or agent
of the Company or any Subsidiary which imposes duties on, or involves services
by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants, or beneficiaries.
11. COUNTERPARTS
This Agreement may be executed in one or more counterparts,
each of which shall constitute an original.
12. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon the Company and its
successors and assigns, and shall inure to the benefit of Indemnitee and
Indemnitee's estate, heirs, legal representative and assigns.
13. ATTORNEYS' FEES
In the event that any action is instituted by Indemnitee under
this Agreement to enforce or interpret any of the terms hereof, Indemnitee
shall be entitled to be paid all court costs and expenses, including reasonable
attorneys' fees, incurred by Indemnitee with respect to such action, unless as
a part of such action, a court of competent jurisdiction determines that each
of the material assertions made by Indemnitee as a basis for such action were
not made in good faith
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<PAGE> 7
or were frivolous. In the event of an action instituted by or in the name of
the Company under this Agreement or to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all court costs and
expenses, including attorneys' fees, incurred by Indemnitee in defense of such
action (including with respect to Indemnitee's counterclaims and cross-claims
made in such action), unless as a part of such action the court determines that
each of Indemnitee's material defenses to such action were made in bad faith or
were frivolous.
14. NOTICE
All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given: (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt; (ii) if mailed by domestic certified or registered mail, return
receipt requested, with postage prepaid to a third party addressee located in
the same country, on the third business day after the date postmarked; or (iii)
if mailed by an internationally recognized express courier with written
confirmation of delivery, upon delivery to the third party addressee.
Addresses for notice to either party are as shown on the signature page of this
Agreement, or as subsequently modified by written notice.
15. CONSENT TO JURISDICTION
The Company and Indemnitee each hereby irrevocably consent to
the jurisdiction of the courts of the State of California, U.S.A. and the
courts of England for all purposes in connection with any action or proceeding
which arises out of or relates to this Agreement and agree that, unless
otherwise provided in this Agreement, any action instituted under this
Agreement shall be brought only in the state courts of the State of California,
U.S.A. or, if the parties hereto mutually agree, in the courts of England.
Service may be made by first class mail with respect to any actions arising out
of or relating to this Agreement.
16. CHOICE OF LAW
This Agreement shall be governed by and its provisions
construed in accordance with the laws of the State of California, U.S.A. as
applied to contracts between California residents entered into and to be
performed entirely within the State of California, U.S.A., except to the extent
that the Companies Act of 1985 or other laws of England apply to govern or
limit the rights and obligations hereby created.
[The remainder of this page is left intentionally blank]
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
<TABLE>
<S> <C>
MICRO FOCUS GROUP plc INDEMNITEE
By:
---------------------------------- -----------------------------------
(Signature)
Name: Name:
------------------------------- -----------------------------
Title: Address:
------------------------------ ---------------------------
---------------------------
Address: The Lawn, Old Bath Road ---------------------------
Newbury, RG 14 1QN
United Kingdom
</TABLE>
8
<PAGE> 1
EXHIBIT 2.10
MICRO FOCUS INCORPORATED
INDEMNITY AGREEMENT
This Indemnity Agreement (this "Agreement") is entered into as of
________ ___, 1997 between Micro Focus Incorporated, a California corporation
(the "Company"), and ______ ______________ ("Indemnitee").
WHEREAS, the Company is a wholly-owned subsidiary of Micro Focus Group
plc, a corporation organized under the laws of England and Wales ("Parent"),
and Indemnitee is a director, officer and/or other agent of Parent and/or the
Company;
WHEREAS, the Company and Parent are aware that competent and
experienced persons are increasingly reluctant to serve as agents of
corporations unless they are protected by comprehensive liability insurance
and/or indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
agents;
WHEREAS, based upon their experience as business managers, the Board
of Directors of each of Parent and the Company have concluded that, to retain
and attract talented and experienced individuals to serve as agents of the
Company, Parent and/or their subsidiaries and to encourage such individuals to
take the business risks necessary for the success of the Company, Parent and/or
their subsidiaries, it is necessary for Parent and the Company to contractually
indemnify such agents, and to assume for themselves maximum liability for
expenses and damages in connection with claims against such agents in
connection with their service to Parent and/or the Company. Parent has entered
into separate indemnification agreements with agents of Parent and the Company
and by this Agreement the Company seeks to provide similar contractual
protection for certain agents of the Company, and the Board of Directors of the
Company (the "Board") has determined that adequate consideration and direct and
indirect benefit to the Company exists for the indemnification obligations
created hereby;
WHEREAS, the Company desires to provide for the indemnification of,
and the advancing of expenses to, Indemnitee to the fullest extent permitted by
law, subject to the limited exceptions set forth in this Agreement;
NOW, THEREFORE, in consideration of the above premises and the
promises set forth herein, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the
capitalized terms listed below shall have the meanings ascribed to them as
follows:
1.1 Board. The Board of Directors of the Company.
1.2 Expenses. Any expense, liability, or loss, including
attorneys' fees, judgments, fines, excise taxes and penalties assessed with
respect to an employee benefit plan,
<PAGE> 2
amounts paid or to be paid in settlement, any interest, assessments or other
charges imposed thereon, and any federal, state, local or foreign taxes imposed
as a result of the actual or deemed receipt of any payments under this
Agreement, paid or incurred in connection with investigating, defending, being
a witness in, participating in (including on appeal) or preparing for any of
the foregoing, in any Proceeding relating to any Indemnifiable Event.
1.3 Indemnifiable Event. Any event or occurrence that
takes place either prior to or after the execution of this Agreement, related
to the fact that Indemnitee:
(a) is or was a director, officer or other agent
of the Company, Parent or a subsidiary; or
(b) while a director, officer or other agent of
the Company, Parent or a subsidiary, is or was serving at the request of the
Company as a director, officer, employee, trustee, agent or fiduciary of
another foreign or domestic corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise; or
(c) was a director, officer or other agent of a
foreign or domestic corporation that was a predecessor corporation of the
Company, Parent or a subsidiary or was a director, officer, employee, trustee,
agent, or fiduciary of another enterprise at the request of such predecessor
corporation; and
related to anything done or not done by Indemnitee in any such capacity,
whether or not the basis of the Proceeding is alleged action in an official
capacity while serving as described in clauses (a) through (c) above.
1.4 Proceeding. Any threatened, pending or completed
action, suit or proceeding, or any inquiry, hearing or investigation that
Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise.
1.5 Subsidiary. For purposes of this Agreement,
"subsidiary" means any corporation of which more than 50% of the outstanding
voting securities is owned directly or indirectly by the Company, by the
Company and one or more of its subsidiaries, or by one or more of the Company's
subsidiaries.
2. Directors' and Officers' Insurance. The Company shall, from
time to time, make the good faith determination whether or not it is
practicable for the Company, Parent or a subsidiary to obtain and a policy or
policies of directors' and officers' liability insurance ("D&O Insurance") with
reputable insurance companies providing Indemnitee with coverage for losses
from wrongful acts, or to ensure the Company's performance of its
indemnification obligations under this Agreement. Among other considerations,
the Company will weigh the costs of obtaining such insurance coverage against
the protection afforded by such coverage. In all policies of D&O Insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded other similarly
situated agents. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such D&O Insurance if the Company determines
in good faith that such insurance is not reasonably available, if the premium
costs for such insurance are disproportionate to the amount of coverage
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<PAGE> 3
provided, if the coverage provided by such insurance is limited by exclusions
so as to provide an insufficient benefit, or if Indemnitee is covered by
similar insurance maintained by Parent or a subsidiary.
3. Agreement to Indemnify. In the event Indemnitee was, is or
becomes a party to, or witness or other participant in, or is threatened to be
made a party to, or witness or other participant in, a Proceeding by reason of
(or arising in part out of) and Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent permitted
by law, as the same exists or may hereafter be amended or interpreted (but in
the case of any such amendment or interpretation, only to the extent that such
amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior thereto). The rights to receive
indemnification and the advancement of Expenses under this Agreement are not
exclusive of any other rights which Indemnitee may be entitled or subsequently
entitled under any statute, the Company's Articles of Incorporation or Bylaws,
by vote of the shareholders or the Board, or otherwise. To the extent that a
change in applicable law (whether by statute or judicial decision) or the
Company's Articles of Incorporation or Bylaws permits greater indemnification
than is currently provided for an Indemnifiable Event, Indemnitee shall be
entitled to such greater indemnification under this Agreement.
3.1 Partial Indemnification. If Indemnitee is entitled
under any provision of this Agreement to indemnification by the Company for a
portion of Expenses, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion of such Expenses to
which Indemnitee is entitled.
3.2 Contribution. If the Indemnitee is not entitled to
the indemnification provided in this Agreement for any reason, then in respect
of any threatened, pending or completed Proceedings in which the Company is
jointly liable with the Indemnitee (or would be if joined in such Proceedings),
the Company shall contribute to the amount of Expenses payable by the Indemnitee
in such proportion as is appropriate to reflect: (i) the relative benefits
received by the Company on the one hand and the Indemnitee on the other hand
from the transaction from which such proceeding arose; (ii) the relative fault
of the Company on the one hand and of the Indemnitee on the other hand in
connection with the Indemnifiable Events which resulted in such Expenses; and
(iii) any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the Indemnitee on the other hand shall be
determined by reference to, among other things, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent the
circumstances resulting in such Expenses. The Company agrees that it would not
be just and equitable if contribution pursuant to this section were determined
by pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable considerations.
3.3 Mandatory Indemnification. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits (within the meaning of Section 317(d) of the California
Corporations Code) in defense of any Proceeding relating in whole or in part to
an Indemnifiable Event or in defense of any issue or matter therein, Indemnitee
shall be indemnified against all Expenses incurred in connection therewith;
provided, however, that the Company shall not be obligated to indemnify
Indemnitee for Expenses to the extent such have been paid directly to Indemnitee
by D&O Insurance or by Parent or any subsidiary pursuant
3
<PAGE> 4
to any indemnification agreement, any provision of any such entity's charter
documents, applicable law or otherwise.
4. Expense Advances.
4.1 Advance of Expenses to Indemnitee. Expenses incurred
by Indemnitee in any Proceeding for which indemnification may be sought under
this Agreement shall be advanced by the Company to Indemnitee within thirty
(30) days after receipt by the Company of a statement or statements from
Indemnitee requesting such advance and reasonably evidencing the Expenses
incurred by Indemnitee (an "Expense Advance"). If it is ultimately determined
by a final judicial decision (from which there is no right of appeal) that
Indemnitee is not entitled to be indemnified by the Company, Indemnitee hereby
agrees to repay any amounts advanced by the Company under this Section 4.
Indemnitee agrees to execute any further agreements regarding the repayment of
Expenses as the Company may reasonably request prior to receiving any such
advance.
4.2 Exceptions. Notwithstanding Section 4.1, the Company
shall not be obligated for any Expense Advance under this Section 4 for any
Expenses incurred by the Indemnitee to the extent such arise from a lawsuit
filed directly by the Company or Parent against the Indemnitee if an absolute
majority of the members of the Board reasonably determines in good faith,
within forty-five (45) days of Indemnitee's request to be advanced expenses,
that the facts known to them at the time such determination is made demonstrate
clearly and convincingly that the Indemnitee acted in bad faith or in a manner
that such person did not believe to be in, or not opposed to, the best
interests of the Company or Parent. If such a determination is made,
Indemnitee may have such decision reviewed by another forum, in the manner set
forth in Section 6.2 hereof, with all references therein to "indemnification"
being deemed to refer to "advancement of expenses", and the burden of proof
shall be on the Company to demonstrate that, based on the facts known at the
time, Indemnitee acted in a manner set forth in the previous sentence. The
Company may not avail itself of this Section 4.2 as to a given lawsuit if, at
any time after the occurrence of the activities or omissions that are the
primary focus of the lawsuit, the Company or Parent has undergone a change in
control. For this purpose, a change in control shall mean a given shareholder
or group of affiliated shareholders increasing their beneficial ownership
interest in the Company by at least 20 percentage points without advance
approval of the Board of Directors of such company.
4.3 Amounts Otherwise Covered. Notwithstanding the
foregoing, the Company shall not be obligated to advance any Expenses to
Indemnitee to the extent such have been advanced by Parent pursuant to any
indemnification agreement, any provision of Parent's charter documents,
applicable law or otherwise.
5. Notification and Defense of Proceeding.
5.1 Notice of Claim. Indemnitee shall give written
notice to the Company promptly after Indemnitee has actual knowledge of any
Proceeding as to which indemnification may be sought under this Agreement. The
failure of Indemnitee to give notice, as provided in this Section 5.1, shall
not relieve the Company of its obligations to provide indemnification under
this Agreement; however, the amounts to which Indemnitee may be indemnified
shall be reduced to the extent that the Company has been prejudiced by such
failure to give notice.
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<PAGE> 5
5.2 Notice to Insurer. If, at the time of the receipt of
a notice of the commencement of a proceeding pursuant to Section 5.1 hereof,
the Company has D&O Insurance in effect with respect to Indemnitee, the Company
shall give prompt notice of the commencement of such proceeding to the insurers
in accordance with the procedures set forth in the respective policies. The
Company shall thereafter take all necessary or desirable action to cause such
insurers to pay, on behalf of Indemnitee, all amounts payable as a result of
such proceeding in accordance with the terms of such D&O Insurance policies.
5.3 Defense. With respect to any Proceeding, the Company
will be entitled to participate in the Proceeding at its own expense and,
except as otherwise provided below, to the extent the Company so desires, the
Company may assume the defense thereof with counsel reasonably satisfactory to
Indemnitee. However, the Company shall not be entitled to assume the defense
of any Proceeding: (i) brought by the Company or Parent; or (ii) as to which
Indemnitee has reasonably determined that there may be a conflict of interest
between Indemnitee and the Company or Parent in the defense of the Proceeding
and Indemnitee does in fact assume and conduct the defense.
5.3.1 If the Company assumes the defense, Indemnitee
shall furnish such information regarding Indemnitee or the Proceeding in
question, as the Company may reasonably request and as may be required in
connection with the defense or settlement of such Proceeding and shall fully
cooperate with the Company in every other respect. Except as provided in
Section 5.3 below, if the Company assumes the defense of the Proceeding, the
Company shall take all necessary steps in good faith to defend, settle or
otherwise dispose of the Proceeding.
5.3.2 In the event the Company shall be obligated to
indemnify the Indemnitee with respect to any Proceeding, the Company, if
appropriate, shall be entitled to assume the defense of such Proceeding, with
counsel approved by Indemnitee (which approval shall not be unreasonably
withheld), upon the delivery to Indemnitee of written notice of its election to
do so. After delivery of such notice, approval of such counsel by Indemnitee
and the retention of such counsel by the Company, the Company will not be liable
to Indemnitee under this Agreement for any fees of counsel subsequently incurred
by Indemnitee through the engagement of separate counsel with respect to the
same Proceeding; provided, however, that: (a) Indemnitee shall have the right
to employ his own counsel in any such Proceeding at Indemnitee's expense; and
(b) Indemnitee shall have the right to employ his own counsel in connection with
any such Proceeding, at the expense of the Company, if (i) the employment of
such counsel by Indemnitee has been previously authorized by the Company, (ii)
Indemnitee shall have reasonably determined that there may be a conflict of
interest between Indemnitee and the Company or Parent in the conduct of any such
defense or (iii) the Company shall not, in fact, have employed counsel to assume
the defense of such Proceeding.
5
<PAGE> 6
6. Determination of Right to Indemnification.
6.1 Indemnification Unless Ineligible. In the event that
Section 3.3 is inapplicable, or does not apply to the entire Proceeding, the
Company shall nonetheless indemnify Indemnitee unless the Company shall prove
to a forum listed in Section 6.2 below that Indemnitee has not met the
applicable standard of conduct required to entitle Indemnitee to
indemnification or is not otherwise entitled to indemnification hereunder.
6.2 Forum. The forum in which the validity of the
Company's claim under Section 6.1 hereof that Indemnitee is not entitled to
indemnification will be heard shall be selected from among the following, with
the actual forum to be chosen by the mutual agreement of the Company and
Indemnitee:
(a) A quorum of the Board of Directors of the
Company or of Parent consisting of directors who are not parties to the
proceeding for which indemnification is being sought;
(b) The shareholders of Parent;
(c) Legal counsel selected by Indemnitee, and
reasonably approved by the Board, which counsel shall make such determination
in a written opinion;
(d) A panel of three arbitrators, one of whom is
selected by the Company, another of whom is selected by Indemnitee, and the
last of whom is selected by the first two arbitrators so selected; or
(e) Any court in the State of California having
jurisdiction of subject matter and the parties (a "California Court").
In the event that the Company and Indemnitee do not reach agreement on
a forum from the above list within thirty (30) days after the Company notifies
Indemnitee that it does not believe that Indemnitee has met the applicable
standard of conduct required to entitled Indemnitee to indemnification, then
the forum shall be a California Court selected by the quorum of directors
specified in Section 6.2 (a) above, after consulting with counsel for the
Company.
6.3 Claim by Company. As soon as practicable, and in no
event later than sixty (60) days after the Company notifies Indemnitee that it
does not believe that Indemnitee has met the applicable standard of conduct
required to entitle Indemnitee to indemnification, the Company shall, at its
own expense, submit to the forum selected in accordance with Section 6.2 hereof
its claim that Indemnitee is not entitled to indemnification; and the Company
shall act in the utmost good faith to assure Indemnitee a complete opportunity
to defend against such claim.
6.4 Defenses; Burden of Proof. It shall be a defense to
any action brought by Indemnitee or the Company concerning enforceability of
this Agreement that it is not permissible under applicable law for the Company
to indemnify Indemnitee for the amount claimed. In connection with any such
action or any determination as to whether Indemnitee is entitled
6
<PAGE> 7
to be indemnified hereunder, the burden of proof shall be on the Company to
prove by clear and convincing evidence that Indemnitee is not entitled to be
indemnified hereunder.
6.5 Presumptions. Neither the failure of the Company
(including its Board or Parent's shareholders) to have made a determination
prior to the commencement of such action that indemnification is proper under
the circumstances because Indemnitee has met the standard of conduct set forth
in applicable law, nor an actual determination by the Company (including its
Board or Parent's shareholders) that Indemnitee has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that Indemnitee has not met the applicable standard of conduct. For purposes
of this Agreement, the termination of any Proceeding, by judgment, order,
settlement (whether with or without court approval), conviction, or upon a plea
of nolo contendere, or its equivalent, shall not create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law.
6.6 Appeals. If the forum selected in accordance with
Section 6.2 hereof is not a court, then after the final decision of such forum
is rendered, the Company or Indemnitee shall have the right to apply to a
California Court, the court in which the proceeding giving rise to Indemnitee's
claim for indemnification is or was pending, or any other court of competent
jurisdiction, for the purpose of appealing the decision of such forum, provided
that such right is exercised within sixty (60) days after the final decision of
such forum is rendered. If the forum selected in accordance with Section 6.2
hereof is a court, then the rights of the Company or Indemnitee to appeal any
decision of such court shall be governed by the applicable laws and rules
governing appeals of the decision of such court.
6.7 Equitable Relief. The Company agrees that the
Company's failure to make indemnification payments or Expense Advances to
Indemnitee shall cause irreparable damage to Indemnitee, the exact amount of
which is impossible to ascertain, and for this reason agrees that Indemnitee
shall be entitled to such injunctive or other equitable relief as shall be
necessary to adequately provide for payment or reasonably anticipated payments.
6.8 Indemnification for Expenses Incurred in Enforcing
Rights. Except as set forth in Sections 4.2 and 7 or unless a court of
competent jurisdiction finds that each of the material claims and/or defenses
of Indemnitee in any applicable Proceeding was frivolous or not made in good
faith, the Company shall indemnify Indemnitee against any and all Expenses and,
if requested by Indemnitee, shall (within thirty (30) days after such request)
advance such Expenses to Indemnitee, that are incurred by Indemnitee in
connection with any claim or action asserted against or brought by Indemnitee
for indemnification of Expenses or payment of Expense Advances by the Company
under this Agreement or any other agreement or under applicable law or the
Company's Articles of Incorporation or Bylaws now or hereafter in effect
relating to indemnification for Indemnifiable Events. Any Expenses so paid
shall be considered Expense Advances under Section 4 above.
7. Exceptions. Subject only to Section 3.3 above and
notwithstanding any other provision of this Agreement, the Company shall not be
obligated pursuant to the terms of this Agreement:
7
<PAGE> 8
7.1 Claims Initiated by Indemnitee. To indemnify or
advance expenses to the Indemnitee in connection with any Proceeding initiated
by Indemnitee unless the Company has joined in, or the Board has consented to,
the initiation of such Proceeding, or the Proceeding is one to enforce rights
under this Agreement, the charter documents of the Company, Parent or any of
their subsidiaries, or any statute or law or otherwise, but such
indemnification or advancement of expenses may be provided by the Company in
specific cases if the Board finds it to be appropriate;
7.2 Unauthorized Settlements. To indemnify Indemnitee to
the extent Indemnitee settles or otherwise disposes of a Proceeding or causes
the settlement or disposal of a Proceeding without the Company's express prior
written consent (which shall not be unreasonably withheld), unless Indemnitee
receives court approval for such settlement or other disposition where the
Company had the opportunity to oppose Indemnitee's request for such court
approval;
7.3 No Opportunity to Defend. To indemnify or advance
expenses to Indemnitee with regard to any judicial award if the Company was not
given a reasonable and timely opportunity, at its expense, to participate in
the defense of such action unless the Company's participation in such
Proceeding was barred by this Agreement or the court in such Proceeding;
7.4 Securities Law Actions. To indemnify the Indemnitee
on account of any suit in which judgment is rendered against the Indemnitee for
an accounting of profits made from the purchase or sale by the Indemnitee of
securities of Parent or the Company pursuant to the provisions of Section 16(b)
of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
7.5 Proceeding to Enforce Agreement. To indemnify or
advance expenses to the Indemnitee for any expenses incurred by the Indemnitee
with respect to any Proceeding instituted by Indemnitee to enforce or interpret
this Agreement, if a court of competent jurisdiction determines that each of
the material assertions made by the Indemnitee in such Proceeding was not made
in good faith or was frivolous; or
7.6 Unlawful Indemnification. To indemnify or advance
expenses for any acts, omissions, transactions or circumstances for which
indemnification is prohibited by applicable state or federal law or until any
preconditions imposed upon, or agreed to by, the Company by or with any court
or governmental agency are satisfied.
8. Insurance; Subrogation. The Company shall not be liable under
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise received payment (under any
D&O Insurance policy, Bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
9. Non-Exclusivity. The provisions for indemnification and
advancement of expenses set forth in this Agreement shall not be deemed
exclusive of any other rights which Indemnitee
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<PAGE> 9
may have under any provision of law, the Company's Articles of Incorporation or
Bylaws, the vote of the Parent's shareholders or disinterested directors, other
agreements (including the similar agreement between Indemnitee and Parent) or
otherwise, both as to action in Indemnitee's official capacity and to action in
another capacity while occupying his position as an agent of the Company, and
Indemnitee's rights hereunder shall continue after Indemnitee has ceased acting
as an agent of the Company, Parent or any subsidiary and shall inure to the
benefit of Indemnitee's heirs, executors and administrators.
10. General Provisions.
10.1 Amendment of this Agreement. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
both parties hereto. No waiver of any of the provisions of this Agreement shall
operate as a waiver of any other provisions hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver. Except as specifically
provided herein, no failure to exercise or any delay in exercising any right or
remedy hereunder shall constitute a waiver thereof.
10.2 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, spouses, heirs, and personal and legal
representatives. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity pertaining to an Indemnifiable Event even though Indemnitee
may have ceased to serve in such capacity at the time of any Proceeding.
10.3 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof.
10.4 Remedies Cumulative. The rights and remedies provided in
this Agreement and by law shall be cumulative and the exercise of any particular
right or remedy shall not preclude the exercise of any other right or remedy in
addition to, or as an alternative to, such right or remedy.
10.5 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed
duly given: (i) if delivered by hand and receipted for by the party addressee,
on the date of such receipt; (ii) if mailed by domestic certified or registered
mail, return receipt requested, with postage prepaid to a third party addressee
located in the same country, on the third business day after the date post-
marked; or (iii) if mailed by an internationally recognized express courier
with written confirmation of delivery, upon delivery to the third party
addressee. Addresses for notice to either party are as shown on the signature
page of this Agreement, or as subsequently modified by written notice.
10.6 Headings. Descriptive headings contained herein are
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
10.7 References. Any reference in this Agreement to the
indemnity provisions of the Company's Articles of Incorporation or Bylaws, the
California Corporations Code or to any applicable law shall refer to such
provisions as they shall be amended from time to time or to any successor
provision, except that any change in the Company's Articles of Incorporation or
Bylaws
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<PAGE> 10
shall only apply to the extent that such amendment permits the Company to
provide broader indemnification rights to Indemnitee than currently provided.
10.8 Severability. Any provision of this Agreement, which
is unenforceable in any jurisdiction, shall be ineffective in such jurisdiction
to the extent of such unenforceability without invalidating the remaining
provisions of this Agreement, and any unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction.
10.9 Applicable Law. The rights and obligations under this
Agreement shall be governed by, and construed in accordance with, the laws of
the State of California applicable to contracts between California residents
made and to be performed entirely within such State.
10.10 Consent to Jurisdiction. The Company and Indemnitee
each hereby irrevocably consent to the jurisdiction of the courts of the State
of California for all purposes in connection with any action or proceeding
which arises out of or relates to this Agreement. Service may be made by first
class mail with respect to any actions arising out of or relating to this
Agreement.
10.11 Mutual Acknowledgment. Both the Company and Indemnitee
acknowledge that in certain instances U.S. Federal or state law or applicable
public policy may prohibit the Company from indemnifying or advancing expenses
to its agents under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the U.S. Securities and Exchange Commission to submit the
question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
10.12 Interpretation of Agreement. It is understood that
the parties hereto intend this Agreement to be interpreted and enforced so as
to provide indemnification and advancement of expenses to the Indemnitee to the
fullest extent now or hereafter permitted by law, except as expressly limited
herein.
10.13 Counterparts. This Agreement may be executed in one
or more counterparts, which shall together constitute one agreement.
[The remainder of this page is left intentionally blank]
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<PAGE> 11
IN WITNESS WHEREOF, this Indemnity Agreement has been entered into
effective as of the date first written above.
<TABLE>
<S> <C>
MICRO FOCUS INCORPORATED INDEMNITEE
By:
--------------------------------- -------------------------------------
(Signature)
Name: Name:
------------------------------- --------------------------------
Title: Address:
------------------------------ ----------------------------
----------------------------
----------------------------
Address: 2465 East Bayshore Road
Palo Alto, CA 94303-3297
</TABLE>
11
<PAGE> 1
EXHIBIT 2.12
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
January 8, 1997, is made by and between Passantino-Vidovich Limited
Partnership, a California Limited Partnership ("Lessor") and Micro Focus, Inc.,
a California corporation ("Lessee"), (collectively the "Parties," or
individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 701 Middlefield Road, Mountain View, located in
the County of Santa Clara, State of California and generally described as
(describe briefly the nature of the property) Two story office building
("Premises"). (See Paragraph 2 for further provisions.)
1.3 Term: 10 years and 0 months ("Original Term") commencing
____________________________("Commencement Date") and ending ("expiration
Date"). (See paragraph 3 for further provisions.)
1.4 Early Possession: __________________________________ ("Early
possession date"). (See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 Base Rent: $81,200 per month ("Base Rent"), payable on the 1st
day of each month commencing ___. (See Paragraph 4 for further provisions.)
[X] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $81,200 as Base Rent for the period
first month's rent.
1.7 Security Deposit: $100,000 ("Security Deposit"). (See Paragraph 5 for
further provisions.)
1.8 Permitted Use: First class office and R&D use. (See Paragraph 6 for
further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated
herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
Cornish & Carey Commercial represents [x] Lessor exclusively ("Lessor's
Broker"); [ ] both Lessor and Lessee, and BT Commercial Real Estate represents
[x] Lessee exclusively ("Lessee's Broker"); [ ] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
<PAGE> 2
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by Micro Focus Group ("Guarantor"). (See Paragraph 37 for further
provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 61 and Exhibits A, B, C & D all of which constitute a
part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date. If a non-compliance with said warranty
exists as of the Commencement Date, Lessor shall, except as otherwise provided
in this Lease, promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such non-compliance, rectify
same at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
six (6) months following the Commencement Date, correction of that
non-compliance shall be the obligation of Lessee at Lessee's sole cost and
expense.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such investigation
as it deems necessary with reference to such matters and assumes all
responsibility therefor as the same relate to Lessee's occupancy of the
Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties
with respect to the said matters other than as set forth in this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense,
<PAGE> 3
correct any non-compliance of the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease,
however, (including but not limited to the obligations to pay Real Property
Taxes and insurance premiums and to maintain the Premises) shall be in effect
during such period. Any such early possession shall not affect nor advance the
Expiration Date of the Original Term.
Initials [initialed]
NET PAGE 1 ___________
(C)1990-American Industrial Real Estate Association FORM 204N-R-12/91
3.3 Delay In Possession. If for any reason Lessor, cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease,
or the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to
pay rent or perform any other obligation of Lessee under the terms of this
Lease until Lessor delivers possession of the Premises to Lessee. If possession
of the Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10)
day period, Lessee's right to cancel this Lease shall terminate and be of no
further force or effect. Except as may be otherwise provided, and regardless of
when the term actually commences, if possession is not tendered to Lessee when
required by this Lease and Lessee does not terminate this Lease, as aforesaid,
the period free of the obligation to pay Base Rent, if any, that Lessee would
otherwise have enjoyed shall run from the date of delivery of possession and
continue for a period equal to what Lessee would otherwise have enjoyed under
the terms hereof, but minus any days of delay caused by the acts, changes or
omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction, on or
before the day on which it is due under the terms of this Lease. Base Rent and
all other rent and charges for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of the calendar month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to time designate in
writing to Lessee.
<PAGE> 4
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or
retain all or any portion of said Security Deposit for the payment of any
amount due Lessor or to reimburse or compensate Lessor for any liability, cost,
expense, loss or damage (including attorneys' fees) which Lessor may suffer or
incur by reason thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall within ten (10) days after written request
therefor deposit moneys with Lessor sufficient to restore said Security Deposit
to the full amount required by this Lease. Any time the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor sufficient to maintain the same ratio
between the Security Deposit and the Base Rent as those amounts are specified
in the Basic Provisions. Lessor shall not be required to keep all or any part
of the Security Deposit separate from its general accounts. Lessor shall, at
the expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum,
<PAGE> 5
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a
permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority.
Reportable Use shall also include Lessee's being responsible for the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Law requires that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but in compliance with all Applicable Law,
use any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of Lessee's business permitted on the Premises, so
long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to the use or presence of any
Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion,
deems necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give
Lessor a copy of any statement, report, notice, registration, application,
permit, business plan, license, claim, action or proceeding given to, or
received from, any governmental authority or private party, or persons entering
or occupying the Premises, concerning the presence, spill, release, discharge
of, or exposure to, any Hazardous Substance or contamination in, on, or about
the Premises, including but not limited to all such documents as may be
involved in any Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include,
but not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing),
removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or
<PAGE> 6
release agreement entered into by Lessor and Lessee shall release Lessee from
its obligations under this Lease with respect to Hazardous Substances or
storage tanks, unless specifically so agreed by Lessor in writing at the time
of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law," which term is used in
this Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any
manner to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or
not reflecting a change in policy from any previously existing policy. Lessee
shall, within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or
the Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance; Repairs; Utility Installations; Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants,
etc.),
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7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee
<PAGE> 7
shall, at Lessee's sole cost and expense and at all times, keep the Premises
and every part thereof in good order, condition and repair, structural and
non-structural (whether or not such portion of the Premises requiring repairs,
or the means of repairing the same, are reasonably or readily accessible to
Lessee, and whether or not the need for such repairs occurs as a result of
Lessee's use, any prior use, the elements or the age of such portion of the
Premises), including, without limiting the generality of the foregoing, all
equipment or facilities serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing system, including fire alarm and/or smoke
detection systems and equipment, fire hydrants, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be
spilled or released in, on, under or about the Premises (including through the
plumbing or sanitary sewer system) and shall promptly, at Lessee's expense,
take all investigatory and/or remedial action reasonably recommended, whether
or not formally ordered or required, for the cleanup of any contamination of,
and for the maintenance, security and/or monitoring of the Premises, the
elements surrounding same, or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or for
Lessee or under its control. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof
in good order, condition and state of repair. If Lessee occupies the Premises
for seven (7) years or more, Lessor may require Lessee to repaint the exterior
of the buildings on the Premises as reasonably required, but not more
frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms
of this Lease govern the respective obligations of the Parties as to
maintenance and repair of the Premises. Lessee and Lessor expressly waive the
benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease with respect to, or which affords
Lessee the right to make repairs at the expense of Lessor or to terminate this
Lease
<PAGE> 8
by reason of any needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor as
defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior
written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof), as long as
they are not visible from the outside, do not involve puncturing, relocating or
removing the roof or any existing walls, and the cumulative cost thereof during
the term of this Lease as extended does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent
specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities, (ii) the furnishing of
copies of such permits together with a copy of the plans and specifications for
the Alteration or Utility Installation to Lessor prior to commencement of the
work thereon, and (iii) the compliance by Lessee with all conditions of said
permits in a prompt and expeditious manner. Any Alterations or Utility
Installations by Lessee during the term of this Lease shall be done in a good
and workmanlike manner, with good and sufficient materials, and in compliance
with all Applicable Law. Lessee shall promptly upon completion thereof furnish
Lessor with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Leesee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times
the estimated cost of such Alteration or Utility Installation and/or upon
Leesee's posting an additional Security Deposit with Lessor under Paragraph 36
hereof.
(c) Indemnification. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the
<PAGE> 9
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal
or become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain
upon and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris
and in good operating order, condition and state of repair, ordinary wear and
tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered, shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums
for policy periods commencing prior to or extending beyond the Lease term shall
be prorated to correspond to the Lease term. Payment shall be made by Lessee to
Lessor within ten (10) days following receipt of an invoice for any amount due.
8.2 Liability Insurance.
<PAGE> 10
(a) Carried by Lessee. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance to be carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) Carried By Lessor. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
Initials [initialed]
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8.3 Property Insurance--Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss or
damage to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than
full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under
Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for any additional
costs resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or
replacement of any undamaged sections of the Premises required to be demolished
or removed by reason of the enforcement of any building, zoning, safety or land
use laws as the result of a covered cause of loss. Said policy or policies
shall also contain an agreed valuation provision in lieu of any coinsurance
clause, waiver of subrogation, and inflation guard protection causing an
increase in the annual property insurance coverage amount by a factor of not
less than the adjusted U.S. Department of Labor Consumer Price Index for All
Urban Consumers for the city nearest to where the Premises are located. If
<PAGE> 11
such insurance coverage has a deductible clause, the deductible amount shall
not exceed $1,000 per occurrence, and Lessee shall be liable for such
deductible amount in the event of an insured Loss, as defined in Paragraph
9.1(c).
(b) Rental Value. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the
full rental and other charges payable by Lessee to Lessor under this Lease for
one (1) year (including all real estate taxes, insurance costs, and any
scheduled rental increases). Said insurance shall provide that in the event the
Lease is terminated by reason of an insured loss, the period of indemnity for
such coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be
liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in
the premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility Installations.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property or the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and shall provide
Lessor with written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B +, V, or such other rating as may be required by a Lender
having a lien on the Premises, as set forth in the most current issue of
"Best's Insurance Guide." Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies referred to in this Paragraph 8.
If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of such insurance with the insureds and loss payable
clauses as required by this Lease. No such policy shall be cancelable or
subject to modification except
<PAGE> 12
after thirty (30) days prior written notice to Lessor. Lessee shall at least
thirty (30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party
shall fail to procure and maintain the insurance required to be carried by the
Insuring Party under this Paragraph 8, the other Party may, but shall not be
required to, procure and maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured
against under Paragraph 8. The effect of such releases and waivers of the right
to recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely
manner of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought
against Lessor by reason of any of the foregoing matters, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property
of Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether the said injury or damage results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part, or from other sources or places, and regardless of whether the
cause of such damage or injury or the means of repairing the same is accessible
or not. Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
<PAGE> 13
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less than 50%
of the then Replacement Cost of the Premises immediately prior to such damage
or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or destruction to the
Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to improvements on
the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage--Insured Loss. If a Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the
insurance proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or
the insurance proceeds are not sufficient to effect such repair, the Insuring
Party shall promptly contribute the shortage in proceeds (except as to the
deductible which is Lessee's responsibility) as and when required to complete
said repairs. In the event, however, the shortage in proceeds was due to the
fact that, by reason of the unique nature of the improvements, full replacement
cost insurance coverage was not commercially reasonable and available, Lessor
shall have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee provides Lessor
with the funds to cover same, or adequate assurance thereof, within ten (10)
days following receipt of written notice of such shortage and request therefor.
If Lessor receives said funds or adequate assurance thereof within said ten
(10) day period, the party responsible for making the repairs shall complete
them as soon as reasonably possible and this Lease shall remain in full force
and effect. If Lessor does not receive such funds or assurance within said
period, Lessor may nevertheless elect by written notice to Lessee within ten
(10) days thereafter to make such restoration and repair as is commercially
reasonable with Lessor paying any shortage in proceeds, in which case this
Lease shall remain in full force and
<PAGE> 14
effect. If in such case Lessor does not so elect, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right
to reimbursement from Lessor for
Initials [initialed]
NET PAGE 4 _________
any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to Paragraph
9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available for
the repairs if made by either Party.
9.3 Partial Damage--Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or
satisfactory assurance thereof within thirty (30) days following Lessee's said
commitment. In such event this Lease shall continue in full force and effect,
and Lessor shall proceed to make such repairs as soon as reasonably possible
and the required funds are available. If Lessee does not give such notice and
provide the funds or assurance thereof within the times specified above, this
Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of occurrence
of such damage. Provided, however, if Lessee at that time has an exercisable
option to extend this Lease or to purchase the Premises, then Lessee may
preserve this Lease by, within twenty (20) days following the occurrence of the
damage, or before the expiration of the time provided in such option for its
exercise, whichever is earlier ("Exercise Period"), (i) exercising such option
and (ii)
<PAGE> 15
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option
during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall,
at Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's option terminate this Lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage--Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at any
time prior to the commencement of such repair or restoration, give written
notice to Lessor and to any Lenders of which Lessee has actual notice of
Lessee's election to terminate this Lease on a date not less than sixty (60)
days following the giving of such notice. If Lessee gives such notice to Lessor
and such Lenders and such repair or restoration is not commenced within thirty
(30) days after receipt of such notice, this Lease shall terminate as of the
date specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and rernediation thereof required by Applicable
Law and this Lease shall continue in full force and effect, but subject to
Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) if the estimated cost to
investigate and remediate such condition exceeds twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater, give written notice to
Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days
<PAGE> 16
following the giving of such notice. In the event Lessor elects to give such
notice of Lessor's intention to terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's commitment to pay for the investigation and
remediation of such Hazardous Substance Condition totally at Lessee's expense
and without reimbursement from Lessor except to the extent of an amount equal
to twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with the funds required of Lessee or
satisfactory assurance thereof within thirty (30) days following Lessee's said
commitment. In such event this Lease shall continue in full force and effect,
and Lessor shall proceed to make such investigation and remediation as soon as
reasonably possible and the required funds are available. If Lessee does not
give such notice and provide the required funds or assurance thereof within the
times specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination. If a Hazardous Substance Condition occurs for
which Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve (12) months.
9.8 Termination--Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor under
the terms of this Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period
of time prior to or after the expiration or earlier termination of the term
hereof, Lessee's share of such taxes shall be equitably prorated to cover only
the period of time within the tax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any overpayment after such proration. If
Lessee shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) Advance Payment. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor reserves the
right, at Lessor's option, to estimate the current Real Property Taxes
applicable to the Premises, and to require such current year's Real Property
Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum
amount equal to the installment due, at least twenty (20) days prior to the
applicable delinquency date, or (ii) monthly in advance with the payment of the
Base Rent. If Lessor elects to require payment monthly in advance, the monthly
payment shall be that equal monthly amount which, over the number of months
remaining before the month in which the applicable tax installment would
<PAGE> 17
become delinquent (and without interest thereon), would provide a fund large
enough to fully discharge before delinquency the estimated installment of taxes
to be paid. When the actual amount of the applicable tax bill is known, the
amount of such equal monthly advance payment shall be adjusted as required to
provide the fund needed to pay the applicable taxes before delinquency. If the
amounts paid to Lessor by Lessee under the provisions of this Paragraph are
insufficient to discharge the obligations of Lessee to pay such Real Property
Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand,
such additional sums as are necessary to pay such obligations. All moneys paid
to Lessor under this Paragraph may be intermingled with other moneys of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of the obligations of Lessee under this Lease, then any balance of
funds paid to Lessor under the provisions of this Paragraph may, subject to
proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated
as an additional Security Deposit under Paragraph 5.
10.2 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or
federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, Lessor's right to rent or other income therefrom,
and/or Lessor's business of leasing the Premises. The term "Real Property
Taxes" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring, or changes in
applicable law taking effect, during the term of this Lease, including but not
limited to a change in the ownership of the Premises or in the improvements
thereon, the execution of this Lease, or any modification, amendment or
transfer thereof, and whether or not contemplated by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
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NET PAGE 5 _____
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided
<PAGE> 18
in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or
in the Premises without Lessor's prior written consent given under and subject
to the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five percent
(25%) of such Net Worth of Lessee as it was represented to Lessor at the time
of the execution by Lessor of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment
of this Lease by Lessee to which Lessor may reasonably withhold its consent.
"Net Worth of Lessee" for purposes of this Lease shall be the net worth of
Lessee (excluding any guarantors) established under generally accepted
accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1 (c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent
then in effect, whichever is greater. Pending determination of the new fair
market rental value, if disputed by Lessee, Lessee shall pay the amount set
forth in Lessor's Notice, with any overpayment credited against the next
installment(s) of Base Rent coming due, and any underpayment for the period
retroactively to the effective date of the adjustment being due and payable
immediately upon the determination thereof. Further, in the event of such
Breach and market value adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment to
the then fair market value (without the Lease being considered an encumbrance
or any deduction for depreciation or obsolescence, and considering the Premises
at its highest and best use and in good condition), or one hundred ten percent
(110%) of the price previously in effect, whichever is greater, (ii) any
<PAGE> 19
index-oriented rental or price adjustment formulas contained in this Lease
shall be adjusted to require that the base index be determined with reference
to the index applicable to the time of such adjustment, and (iii) any fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased in the same ratio as the new market rental bears to the Base Rent in
effect immediately prior to the market value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee
or to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their
consent, and such action shall not relieve such persons from liability under
this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the current monthly
Base Rent, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply
with each and every term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
<PAGE> 20
other than such obligations as are contrary to or inconsistent with provisions
of an assignment or sublease to which Lessor has specifically consented in
writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under such sublease. Lessor shall not, by reason of
this or any other assignment of such sublease to Lessor, nor by reason of the
collection of the rents from a sublessee, be deemed liable to the sublessee for
any failure of Lessee to perform and comply with any of Lessee's obligations to
such sublessee under such sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents and other charges due and to become due
under the sublease. Sublessee shall rely upon any such statement and request
from Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by
said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior
Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
<PAGE> 21
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "Default" is defined as
a failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach"
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is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary
payment required to be made by Lessee hereunder, whether to Lessor or to a
third party, as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which
endangers or threatens life or property, where such failure continues for a
period of three (3) days following written notice thereof by or on behalf of
Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law
per Paragraph 6.3, (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1 (b), (iii) the recission of an unauthorized
assignment or subletting per Paragraph 12.1 (b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations
under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution
of any document requested under Paragraph 42 (easements), or (viii) any other
documentation or information which Lessor may reasonably require of Lessee
under the terms of this Lease, where any such failure continues for a period of
ten (10) days following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with
<PAGE> 22
or performed by Lessee, other than those described in subparagraphs (a), (b) or
(c), above, where such Default continues for a period of thirty (30) days after
written notice thereof by or on behalf of Lessor to Lessee; provided, however,
that if the nature of Lessee's Default is such that more than thirty (30) days
are reasonably required for its cure, then it shall not be deemed to be a
Breach of this Lease by Lessee if Lessee commences such cure within said thirty
(30) day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. '101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets located
at the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution
or other judicial seizure of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach of
this Lease by Lessee, as defined in Paragraph 13.1, with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from
<PAGE> 23
Lessee: (i) the worth at the time of the award of the unpaid rent which had
been earned at the time of termination; (ii) the worth at the time of award of
the amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
the Lessee proves could have been reasonably avoided; (iii) the worth at the
time of award of the amount by which the unpaid rent for the balance of the
term after the time of award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (iv) any other amount necessary
to compensate Lessor for all the detriment proximately caused by the Lessee's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, including but not limited
to the cost of recovering possession of the Premises, expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorneys' fees, and that portion of the leasing commission paid by Lessor
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the prior sentence shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease
shall not waive Lessor's right to recover damages under this Paragraph. If
termination of this Lease is obtained through the provisional remedy of
unlawful detainer, Lessor shall have the right to recover in such proceeding
the unpaid rent and damages as are recoverable therein, or Lessor may reserve
therein the right to recover all or any part thereof in a separate suit for
such rent and/or damages. If a notice and grace period required under
subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay
rent or quit, or to perform or quit, as the case may be, given to Lessee under
any statute authorizing the forfeiture of leases for unlawful detainer shall
also constitute the applicable notice for grace period purposes required by
subparagraphs 13.1 (b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.l(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two such grace periods
shall constitute both an unlawful detainer and a Breach of this Lease entitling
Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and abandonment and recover the rent as it becomes due, provided Lessee
has the right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver
to protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to
<PAGE> 24
or for Lessee of any cash or other bonus, inducement or consideration for
Lessee's entering into this Lease, all of which concessions are hereinafter
referred to as "Inducement Provisions," shall be deemed conditioned upon
Lessee's full and faithful performance of all of the terms, covenants and
conditions of this Lease to be performed or observed by Lessee during the term
hereof as the same may be extended. Upon the occurrence of a Breach of this
Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision
shall automatically be deemed deleted from this Lease and of no further force
or effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, and recoverable by
Lessor as additional rent due under this Lease, notwithstanding any subsequent
cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of
the Breach which initiated the operation of this Paragraph shall not be deemed
a waiver by Lessor of the provisions of this Paragraph unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after
such notice are reasonably required for its performance, then Lessor shall not
be in breach of this Lease if performance is commenced within such thirty (30)
day period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes
<PAGE> 25
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title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, Lessee may,
at Lessee's option, to be exercised in writing within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the Base Rent shall be reduced
in the same proportion as the rentable floor area of the Premises taken bears
to the total rentable floor area of the building located on the Premises. No
reduction of Base Rent shall occur if the only portion of the Premises taken is
land on which there is no building. Any award for the taking of all or any part
of the Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any compensation separately awarded
to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade
Fixtures. In the event that this Lease is not terminated by reason of such
condemnation, Lessor shall to the extent of its net severance damages
recovered, over and above the legal and other expenses incurred by Lessor in
the condemnation matter, repair any damage to the Premises caused by such
condemnation, except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such
repair.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement
between Lessor and said Brokers, the sum of $_______________________________)
for brokerage services rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) or any Option subsequently granted which is substantially
similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires
any rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (c) if Lessee remains in possession of the
Premises, with the consent of Lessor, after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation
of an escalation clause herein, then as to any of said transactions, Lessor
shall pay said Brokers a fee in accordance with the schedule of
<PAGE> 26
said Brokers in effect at the time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee
and such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes
herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants
under this Lease thereafter to be performed by the Lessor. Subject to the
foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as
determined by a court of
<PAGE> 27
competent jurisdiction, shall in no way affect the validity of any other
provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises. Brokers
have no responsibility with respect thereto or with respect to any default or
breach hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail.
If notice is received on a Sunday or legal holiday, it shall be deemed received
on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of
<PAGE> 28
any subsequent Default or Breach by Lessee of the same or of any other term,
covenant or condition hereof. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to,
or approval of, any subsequent or similar act by Lessee, or be construed as the
basis of an estoppel to enforce the provision or provisions of this Lease
requiring such consent. Regardless of Lessor's knowledge of a Default or Breach
at the time of accepting rent, the acceptance of rent by Lessor shall not be a
waiver of any preceding Default or Breach by Lessee of any provision hereof,
other than the failure of Lessee to pay the particular rent so accepted. Any
payment given Lessor by Lessee may be accepted by Lessor on account of moneys
or damages due Lessor, notwithstanding any qualifying statements or conditions
made by Lessee in connection therewith, which such statements and/or conditions
shall be of no force or effect whatsoever unless specifically agreed to in
writing by Lessor at or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
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27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor under
this Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the
cure of said default before invoking any remedies Lessee may have by reason
thereof. If any Lender shall elect to have this Lease and/or
<PAGE> 29
any Option granted hereby superior to the lien of its Security Device and shall
give written notice thereof to Lessee, this Lease and such Options shall be
deemed prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from
the Lender that Lessee's possession and this Lease, including any options to
extend the term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal
action is subsequently commenced in connection with such Default or resulting
Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part, as Lessor may reasonably deem necessary.
Lessor may at any time place on or about the Premises or building any ordinary
"For Sale" signs and Lessor may at any time during the last one hundred twenty
(120) days of the term hereof place on or about the Premises any ordinary "For
Lease" signs. All such activities of Lessor shall be without abatement of rent
or liability to Lessee.
<PAGE> 30
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one or
all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor's
election to have such event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to
Lessor upon receipt of an invoice and supporting documentation therefor.
Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor
may, as a condition to considering any such request by Lessee, require that
Lessee deposit with Lessor an amount of money (in addition to the Security
Deposit held under Paragraph 5) reasonably calculated by Lessor to represent
the cost Lessor will incur in considering and responding to Lessee's request.
Except as otherwise provided, any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is
<PAGE> 31
being given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessee
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal
to purchase the Premises, or the right of first offer to purchase the Premises,
or the right to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor, or the right of first offer to
purchase other property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
Initials [initialed]
NET PAGE 9 _________
39.3 Multiple Options. In the event that Lessee has any Multiple Options to
extend or
<PAGE> 32
renew this Lease, a later Option cannot be exercised unless the prior Options
to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three (3) or more notices of Default under Paragraph
13.1, whether or not the Defaults are cured, during the twelve (12) month
period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the term
of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of Default under Paragraph
13.1 during any twelve (12) month period, whether or not the Defaults are
cured, or (iii) if Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for
the management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred
in connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
<PAGE> 33
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION
<PAGE> 34
TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF
THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN
ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
<TABLE>
<S> <C>
Executed at Sunnyvale, CA Executed at Palo Alto,California
on 29 January 97 on January 27, 1997
by LESSOR: by LESSEE:
Passantino - Vidovich Limited Partnership Micro Focus, Inc.
By: /s/ John T. Vidovich By: /s/ Loren E. Hillberg
------------------------ ---------------------------
Name Printed: John T. Vidovich Name Printed: Loren E. Hillberg
Title: General Partner Title: Vice President
By____________________________________________ By_______________________________________
Name printed _________________________________ Name printed_____________________________
Title ________________________________________ Title____________________________________
Address ______________________________________ Address__________________________________
Tel. No. ( )________ Fax No. ( )__________ Tel. No. ( )________ Fax No. ( )_____
</TABLE>
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form: American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-l, Los Angeles, CA
90071. (213) 687-8777. Fax. No. (213) 687-8616.
(C) Copyright 1996 By American Industrial Real Estate Association.
Al1 rights reserved. No part of these works may be reproduced in
any form without permission in writing. FORM 204N-R-12/91
<PAGE> 35
LEASE ADDENDUM
This is an addendum to that certain lease (the "Lease") between Passantino -
Vidovich Limited Partnership, a California limited partnership as Lessor and
Micro Focus, Inc., a California corporation as Lessee with regard to those
certain premises commonly known as 701 Middlefield Road, Mountain View,
California (the "Premises").
This addendum shall have priority over the terms of the Lease, and to the
extent of a conflict between this addendum and the Lease, the terms of the
addendum shall prevail. If a term is defined in the Lease, the term shall have
the same meaning in this addendum.
49. Paragraph 1.2 of the Lease is amended by adding the following language:
"The Premises consist of the real property described in the attached Exhibit A,
together with the landscaping, parking lot and building and other improvements
to be constructed by Lessor on the property. The landscaping, parking lot and
building and other improvements are described in the Work Letter attached as
Exhibit B."
50. Paragraph 1.3 of the Lease is amended by adding the following language:
"The Term shall be ten (10) years plus the partial month, if any, that will
result if the Commencement Date is other than the first day of the month.
The Commencement Date shall be sixty (60) days after Substantial Completion of
the Shell. After the Commencement Date has been determined, Lessor and Lessee
shall execute a certificate confirming the Commencement Date."
51. Paragraph 1.4 of the Lease is amended by adding the following language:
"Early Possession shall be allowed as provided in the Work Letter. Following
Substantial Completion and prior to the Commencement Date, Lessee shall have
Early Possession of the Premises."
52. Paragraph 1.5 of the Lease is amended by adding the following:
"Base Rent shall begin to accrue and be payable sixty (60) days after Lessor
has substantially completed the improvements to be constructed by Lessor, as
defined in the Work Letter. If the date of Substantial Completion is a day
other than the first day of the month, then Lessee shall pay on the sixtieth
(60th) day after Substantial Completion the Base Rent multiplied by the number
of days remaining in the month and divided by the total number of days in the
month. Thereafter, Base Rent shall be paid on the first day of each month.
Commencing with the thirteenth (13th) full calendar month after Tenant is
obligated to pay Base Rent under this Lease, and at the end of each twelfth
(12th) month afterwards during the Term, including any extensions or renewals,
the Base Rent for the ensuing twelve (12) month period
<PAGE> 36
(Adjustment Period) shall increase by the amount of two thousand eight hundred
dollars ($2,800) per month.
PMH January 23, 1997 1
After completion of the Shell, Lessor's space planner shall certify by by
letter to Lessee the Construction Area of the building. The Construction Area
shall be determined in accordance with the Building Owners and Managers
Association ("BOMA"), American National Standard (Reprinted May, 1981) as set
forth in ANSI Z65.1-1980 ("BOMA Standard"). The parties are aware that the BOMA
standard was revised in late 1996, but have elected to continue to use the 1980
standard. The total Construction Area of the building shall be fifty six
(56,000) thousand square feet.
Lessee shall have ten (10) days from receipt of the certification letter from
Lessor's space planner to review the calculations and to remeasure the
building. If Lessee disagrees with the final square footage, Lessor's and
Lessee's space planners shall meet to resolve the difference. If a dispute
occurs as to the final square footage, the square footage will be determined by
arbitration in accordance with the provisions of California Code of Civil
Procedure '1283.05 or any successor or amended statute or law containing
similar provisions.
If the final square footage varies from fifty six (56,000) thousand square feet
by more than one thousand (1,000) square feet, then the Base Rent shall be
adjusted in proportion to the variance and reduced or increased to reflect the
variance. The adjustment shall be retroactive as to any Base Rent previously
paid. Until the final square footage is determined, Base Rent of eighty one
thousand two hundred dollars ($81,200) shall be paid, with any difference
either paid to Lessor or refunded to Lessee after determination of the final
square footage."
53. Paragraph 2.3 of the Lease is amended by adding the following:
"Lessor warrants to Lessee that the improvements to be constructed by Lessor
will comply with all applicable laws and regulations in effect as of the date
of the issuance of the building permit, including but not limited to, the
Uniform Building Code, Title 24 and the Americans with Disabilities Act, as
interpreted and applied by the City of Mountain View or any other agency which
has reviewed and approved Lessor's plans and specifications. Lessor will assign
to Lessee all representations and warranties that it receives from its
contractors, subcontractors, and suppliers. Lessee shall design and construct
the improvements to be constructed by it in a manner that ensures that the
improvements constructed by Lessor remain in compliance with all applicable
laws and regulations."
54. Paragraph 3.3 of the Lease is amended by adding the following:
"Lessor estimates that the Substantial Completion of the Shell will occur no
later than October 1, 1997. On or about March 15, 1997, Lessor may give Lessee
a revised estimate setting a later date. If the revised estimate sets a later
date, then Lessee has the option of either consenting to the later date or
terminating the Lease. The option shall be exercised in a writing delivered to
<PAGE> 37
Lessor no later than ten (10) calendar days after Lessee's receipt of the
revised estimate. A failure to exercise the option shall be deemed to be a
consent to the later date."
If the Substantial Completion of the Shell is delayed beyond October 1, 1997 or
such later date as may be consented to by Lessee as provided above, then for
every three (3) days past October 1, 1997 before Substantial Completion is
achieved, the Commencement Date shall be deferred by an additional one (1) day.
If the Substantial Completion of the Shell is delayed beyond the later of (i)
November 1, 1997; or (ii) thirty (30) days past any revised estimated date
which has been consented to by Lessee; then Lessee may terminate this Lease by
written notice to Lessor. Said termination shall be effective ten (10) days
after receipt of the notice by Lessor, unless Lessor achieves Substantial
Completion of the Shell within that ten (10) day period, in which case the
Lease shall continue. If the Lease continues, the Commencement Date shall be
deferred as provided above.
PMH January 23, 1997 2
55. Paragraph 6.2 (c) of the Lease is amended by adding the following:
"Lessor shall indemnify and hold Lessee harmless from any claim, loss or
expense arising from any Hazardous Substance located on the Premises as of the
Commencement Date."
56. Paragraph 7.3 of the Lease is amended by adding the following:
"As material consideration to Lessor, Lessee agrees to complete the work
described as A lessee's Work in the Work Letter in a timely, workmanlike manner
and with a level of design and materials suitable for use a first class office
and R & D project. In addition to the provisions of the Work Letter, the
requirements of Paragraph 7.3 shall also apply to Lessee's Work."
57. Paragraph 7.4 of the Lease is amended by adding the following:
"Unless Lessor's written consent to Lessee's Work otherwise provides as to a
particular part of Lessee' Work, Lessee shall not be required to remove at the
expiration or earlier expiration of the Term any of Lessee's Work as described
in Paragraph 53 of the Lease Addendum and the Work Letter. As to Alterations
and Utility Additions made to the Premises subsequent to the completion of
Lessee's Work, Lessor may condition its consent to the Alterations or Utility
Additions with the requirement that the Alteration or Utility Addition be
removed at or prior to the expiration or earlier termination of the Lease and
the Premises returned to its condition prior to the Alteration or Utility
Addition. Unless Lessor so conditions its consent, then as to any Alteration or
Utility Addition for which Lessee has obtained Lessor's written consent, Lessee
need not remove the Alteration or Utility Addition."
58. Paragraph 12 of the Lease is amended by deleting Paragraphs 12 (b) and
(c) and replacing them with the following:
<PAGE> 38
"Notwithstanding any other provisions of this Section 12, Lessor's written
consent shall not be required for (a) any assignment or sublease by Lessee to a
parent, subsidiary or affiliate of Lessee, provided that Lessee provides Lessor
with prior written notice of such assignment or sublease, that the assignee (if
applicable) shall expressly assume in writing, for the benefit of Lessor, the
obligations of Lessee under this Lease, and that all other provisions of this
Article 12 shall remain applicable to such assignment or sublease; or (b) any
consolidation, merger or other reorganization of Lessee or sale of substantially
all of the stock and assets of Lessee, provided that the successor (if a
different legal entity from Lessee) or asset purchaser shall expressly assume in
writing for the benefit of Lessor, the obligations of Lessee under this Lease,
that such successor or asset purchaser shall have a net worth and net current
assets (each determined in accordance with generally accepted accounting
principles) not materially less than those of Lessee both at the execution of
this Lease and immediately prior to the applicable transaction, that all other
provisions of this Article 12 shall remain applicable to the parties to such
transaction, and that Lessee shall
PMH January 23, 1997 3
provide Lessor with prior written notice of the transaction and with evidence
reasonably satisfactory to Lessor of the satisfaction of the foregoing
conditions.
In addition, Lessee shall have the right to sublease up to ten thousand
(10,000) square feet of the Premises without the prior written consent of
Lessor."
59. Paragraph 13.4 of the Lease is amended by adding the following:
"No late charge shall be payable by Lessee unless Lessor fails to receive the
rent or other amount due no later than five (5) days after written notice to
Lessee by Lessor that the rent has not been paid. However, if a late charge is
incurred by Lessee, then for the next six (6) months, the late charge will
become payable without notice from Lessor if the rent is not received by Lessor
within five (5) days after the rent or other amount is due."
60. Paragraph 15 is amended by adding the following:
"One half of the brokerage commission shall be payable on March 15, 1997 if
Lessor does not extend the estimated completion date, or upon lessee's consent
to the extended expiration date if Lessor does extend the estimated completion
date. The second half of the commission is payable upon Lessee's occupancy of
the Premises and commencement of its business operations from the Premises. If
Tenant elects to terminate the Lease pursuant to Paragraph 54 of the Lease,
Lessor shall be reimbursed the cost of the brokerage commission paid to BT
Commercial Real Estate from the Security Deposit, with the remaining balance of
the security deposit returned to Lessee."
61. Paragraph 35 of the Lease is amended by adding the following:
"Lessor consents to such signs on the Premises that conform to the sign
regulations of the City of Mountain View and which are approved by the City of
Mountain View."
<PAGE> 39
62. A new Paragraph 39.5 is added to the Lease, as follows:
"39.5 Option to Extend. Lessee shall have one (1) option to extend the Term for
a period of five (5) years. The option shall be exercised by providing to Lessor
a written notice of exercise of the option no later than twelve (12) months
prior to the expiration of the Term. The Base Rent shall be adjusted to the
greater of (1) the Base Rent applicable for the last month of the Term if the
Term were not extended, disregarding any abatement that may then be in effect;
or (2) ninety-five percent (95%) of the Fair Market Rental Value for the
Premises as of the last month of the Term if the Term were not extended. The
parties shall attempt to agree upon the Fair Market Rental Value for the
Premises. If the parties are unable to agree at least six (6) months prior to
the expiration of the Term if the Term had not been extended, then the Fair
Market Rental Value shall be determined by arbitration in accordance with the
provisions of California Code of Civil Procedure '1283.05 or any successor or
amended statute or law containing similar provisions, but modified as follows:
(a) Any arbitrator shall be a member of the American Institute of Real Estate
Appraisers (or its successor organization) with a then current designation of
MAI (or then comparable designation) and shall have at least ten (10) years
experience in appraising commercial properties in Santa Clara County. Fair
Market Rental Value shall be determined using the following assumptions: (a)
that Lessor is the owner of all improvements then located on the property; (b)
the Fair Market Rental Value shall be based upon the fair market value of the
Premises as then improved, disregarding any damage to the Premises that will be
repaired pursuant to the provisions of the Lease; (c) that Lessor
PMH January 23, 1997 4
shall not be required to make any rental concessions, including but not limited
to free rent or a refurbishment allowance; and (d) that the Base Rent shall
include annual rent increases as provided in this Lease."
63. Lessor's obligations under this Lease are conditioned upon Lessor
complying with the City of Mountain View's conditions of approval for the
project. A copy of the approval is attached as Exhibit D. Lessor agrees to use
commercially reasonable efforts to comply with the conditions of approval. One
of the conditions of approval is that Lessor must obtain an encroachment permit
from the State of California Department of Transportation. If the encroachment
permit is not issued, it may be necessary to reduce the usable area of the
building in proportion to the reduction in on-site parking. In that event,
Lessee shall continue to be obligated under this Lease, but the Base Rent shall
be equitably adjusted.
DATED this 29th day of January, 1997.
LESSOR: LESSEE:
/s/ John Vidovich /s/ Loren E. Hillberg
- --------------------------- ----------------------------
Loren E. Hillberg
Vice President
<PAGE> 1
EXHIBIT 13.01
FINANCIAL STATEMENTS US FORMAT
FINANCIAL STATEMENTS PREPARED IN ACCORDANCE
WITH U.S. GAAP (IN U.S. DOLLARS)
SELECTED CONSOLIDATED FINANCIAL DATA 8
MANAGEMENT'S DISCUSSION AND ANALYSIS 9
CONSOLIDATED STATEMENTS OF INCOME 15
CONSOLIDATED BALANCE SHEETS 16
CONSOLIDATED STATEMENTS OF CASH FLOW 17
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY 18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1 Significant accounting policies 19
2 Acquisitions 21
3 Research and development costs 22
4 Non-recurring items 22
5 Property, plant and equipment 22
6 Lines of credit 22
7 Commitments 23
8 Income taxes 23
9 Business segment information 24
10 Employee share and retirement plans 24
11 Quarterly financial information (unaudited) 26
REPORT OF THE INDEPENDENT AUDITORS 26
7
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL DATA (US FORMAT)
The following selected financial data should be read in conjunction with, and is
qualified in its entirety by reference to, the financial statements of Micro
Focus, expressed in U.S. dollars, set forth on pages 15 to 26 of this report.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
In thousands of U.S. dollars Years ended January 31: 1997 1996
(except per share data, percentages Annual Report: 1996 1995
and employees)
OPERATING RESULTS FOR THE YEAR:
<S> <C> <C>
Net revenue 115,409 121,956
Non-recurring items * (8,000) (9,469)
(Loss) income before income taxes (8,383) (10,536)
Net (loss) income (10,508) (10,436)
Net (loss) income per share ($0.69) ($0.69)
Weighted average number of shares outstanding (thousands) 15,234 15,101
FINANCIAL POSITION AT END OF YEAR:
Cash and short-term investments 71,560 58,848
Total assets 151,311 160,354
Long-term obligations 24 100
Shareholders' equity 88,783 97,474
FINANCIAL CONDITION:
Working capital 42,578 41,231
Current ratio 1.81 1.76
Return on net revenue: excluding non-recurring items * n/a n/a
Return on average equity: excluding non-recurring items * n/a n/a
EMPLOYEE INFORMATION:
Average number of employees 646 735
Number of employees at year-end 626 708
Net revenue per employee 179 166
- -----------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------
In thousands of U.S. dollars Years ended January 31: 1995 1994 1993
(except per share data, percentages Annual Report: 1994 1993 1992
and employees)
OPERATING RESULTS FOR THE YEAR:
<S> <C> <C> <C>
Net revenue 138,459 125,468 118,629
Non-recurring items * (18,265) - -
(Loss) income before income taxes 1,550 32,528 38,532
Net (loss) income (4,860) 22,044 26,160
Net (loss) income per share ($0.33) $1.52 $1.80
Weighted average number of shares outstanding (thousands) 14,706 14,535 14,512
FINANCIAL POSITION AT END OF YEAR:
Cash and short-term investments 88,758 86,316 79,777
Total assets 197,640 164,873 144,368
Long-term obligations 307 605 4,041
Shareholders' equity 115,842 112,650 90,218
FINANCIAL CONDITION:
Working capital 58,122 73,027 62,688
Current ratio 1.80 2.68 2.43
Return on net revenue: excluding non-recurring items * 10.0% 17.6% 22.1%
Return on average equity: excluding non-recurring items * 12.0% 28.4% 39.4%
EMPLOYEE INFORMATION:
Average number of employees 751 667 599
Number of employees at year-end 788 698 636
Net revenue per employee 184 188 198
- -----------------------------------------------------------------------------------------------
</TABLE>
* Details of the non-recurring items are set out in note 4 to the consolidated
financial statements on page 22.
8
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (US FORMAT)
The following discussion should be read in conjunction with the financial
statements of Micro Focus Group Plc and its subsidiaries ("Micro Focus") in U.S.
dollars, on pages 15 to 26. In this discussion, references to fiscal years 1996,
1995 and 1994 are to the years ended January 31 1997, 1996 and 1995
respectively.
RESULTS OF OPERATIONS
Micro Focus reported a net loss for fiscal 1996 of $10.5m and a net loss for
fiscal 1995 of $10.4m. These results include non-recurring charges of $8.0m in
1996 and $9.5m in 1995.
The table below sets forth operating results as a percentage of net revenue for
the three fiscal years ended January 31 1997. To further aid comparison,
non-recurring items are identified separately in the table, and percentages
shown against other cost categories are exclusive of non-recurring items.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
PERCENTAGE OF NET REVENUE
1996 1995 1994
<S> <C> <C> <C>
NET REVENUE
Product revenue 58 57 70
Service revenue 42 43 30
- ---------------------------------------------------------------
TOTAL NET REVENUE 100 100 100
- ---------------------------------------------------------------
COSTS AND EXPENSES
Cost of product revenue 9 11 12
Cost of service revenue 16 16 12
Research and development 30 29 23
Sales and marketing 40 41 35
General and administrative 8 7 6
Non-recurring charges 7 8 12
- ---------------------------------------------------------------
TOTAL COSTS AND EXPENSES 110 112 100
- ---------------------------------------------------------------
(LOSS) FROM OPERATIONS (10) (12) -
Interest income (net) 3 3 2
Acquisition charges - - (1)
- ---------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (7) (9) 1
Income taxes (2) - (5)
- ---------------------------------------------------------------
NET (LOSS) (9) (9) (4)
- ---------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------
PERCENTAGE CHANGE
1995 1994
TO 1996 TO 1995
<S> <C> <C>
NET REVENUE
Product revenue (4) (28)
Service revenue (7) 26
- --------------------------------------------------------
TOTAL NET REVENUE (5) (12)
- --------------------------------------------------------
COSTS AND EXPENSES
Cost of product revenue (27) (16)
Cost of service revenue (5) 15
Research and development (2) 9
Sales and marketing (7) 2
General and administrative 13 6
Non-recurring charges n/a n/a
- --------------------------------------------------------
TOTAL COSTS AND EXPENSES (7) (2)
- --------------------------------------------------------
(LOSS) FROM OPERATIONS n/a n/a
Interest income (net) (21) 1
Acquisition charges n/a n/a
- --------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (20) n/a
Income taxes n/a n/a
- --------------------------------------------------------
NET (LOSS) 1 115
- --------------------------------------------------------
</TABLE>
NET REVENUE
Micro Focus derives its net revenue from the license of software products and
related support and maintenance ("direct revenue") and from the licensing of
distribution rights to software products to original equipment manufacturers
("OEM revenue"). Direct revenue represented 90%, 89% and 86% of total net
revenue in fiscal 1996, 1995 and 1994 respectively.
Net revenue is analyzed between product revenue, which consists of licensing of
software products to end-users and OEMs, and service revenue, consisting of
maintenance and other support services, including training and consulting.
Total net revenue decreased by $6.6m or 5% to $115.4m in fiscal 1996, and by
$16.5m or 12% to $122.0m in fiscal 1995.
Product revenue decreased by $2.9m or 4% to $66.5m in fiscal 1996, and by $27.4m
or 28% to $69.4m in fiscal 1995.
Service revenue decreased by $3.6m or 7% to $48.9m in fiscal 1996, having
increased by $10.9m or 26% to $52.6m in 1995.
Net revenue by customer location was contributed as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
FISCAL YEARS: 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
United Kingdom 9% 9% 9%
United States 53% 55% 59%
Other 38% 36% 32%
- -----------------------------------------------------------
100% 100% 100%
- -----------------------------------------------------------
</TABLE>
9
<PAGE> 4
The decrease in net revenue in fiscal 1996 arose during the first two quarters
with flat sales comparisons in the second half of the year. Net revenue
decreased by 10% in the United States. Non-U.S. territories showed no overall
sales increase, with growth in the United Kingdom, France and Japan being offset
by decreased sales to certain distributors, notably those in Italy and Brazil.
Factors contributing to the decline in net revenue in the first half of 1996
included slow conversion to 32-bit products and continuing uncertainties arising
from the fundamental changes caused by the Internet. The improved performance in
the second half of the year reflected increased sales of products to address the
century date change or "Year 2000" problem.
In 1995 net revenue decreases were reported in the United States, and in other
territories. Factors contributing to the fall in net revenue included postponed
investment decisions caused by uncertainties arising from the impact of the
Internet and the launch of Windows 95, and from delayed delivery of 32-bit
products.
COST OF PRODUCT REVENUE
Cost of product revenue is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media, and printing of manuals), packaging and distribution costs,
and royalties to third party software developers for the licensing of certain
add-on software products.
Excluding non-recurring items, such costs decreased by $3.7m or 27% to $10.0m in
fiscal 1996 and by $2.6m or 16% to $13.7m in fiscal 1995 and represented 15%,
20% and 17% of product revenue in 1996, 1995 and 1994 respectively.
The decrease in product costs during 1996 reflected savings in product materials
arising from the documentation being supplied on CD-ROM.
The decrease in 1995 reflected the decline in revenue.
COST OF SERVICE REVENUE
Cost of service revenue is comprised principally of compensation for technical
support personnel, plus the costs associated with training and consulting.
Excluding non-recurring items, such costs decreased by $0.9m or 5% to $18.6m in
fiscal 1996, having increased by $2.5m or 15% to $19.5m in fiscal 1995, and
represented 38%, 37% and 41% of service revenue in 1996, 1995 and 1994
respectively. The decrease in 1996 reflected reductions taken to better align
expenses with revenue. The increase in 1995 resulted from increases in product
support for client/server and rehosting programs.
RESEARCH AND DEVELOPMENT
Research and development costs consist principally of compensation for software
developers and related costs incurred, after adjusting for the proportion of
such costs capitalized (in accordance with Statement of Financial Accounting
Standard No. 86) and the amortization of previously capitalized software costs.
Micro Focus' high level of research and development spending supports the
development and enhancement of new and existing products and is consistent with
the Company's strategy of investing heavily to improve and expand its product
lines.
Research and development spending in 1996 was directed principally towards
further development of Revolve/2000 (TM) products which address the Year 2000
problem; NetExpress (TM), a complete set of tools for developing business
applications targeted at graphical PC workstations, distributed computer
environments and the Internet; and tools to enhance the functionality and
capability of the core legacy COBOL Workbench product line for workstation
development of IBM mainframe applications.
Research and development spending in 1995 and 1994 was directed principally
towards enabling Micro Focus products to operate across multiple operating
systems and graphical user interfaces; development of new 32-bit products;
further development of client/server solutions; object oriented programming in
COBOL; and tools for downsizing from IBM mainframes.
Expenditure on internal software research and development, before
capitalization, decreased by $6.9m or 19% to $30.1m in fiscal 1996, having
increased by $0.8m or 2% to $37.1m in fiscal 1995 and represented 26%, 30% and
26% of net revenue in fiscal 1996, 1995 and 1994 resectively. The decrease in
1996 reflected the impact of the restructuring announced in the first quarter of
1996 (see "Non-recurring items" below).
In fiscal 1996, 1995 and 1994, $8.3m, $15.6m and $15.0m, representing 27%, 42%
and 41% of such costs, respectively, were capitalized as software product
assets. Provisions for amortization in those years, excluding non-recurring
items, amounted to $12.7m, $13.9m and $10.9m, resulting in a net charge to
income in 1996 of $4.4m, compared to net credits of $1.7m and $4.0m in 1995 and
1994 respectively.
Total research and development costs also include restructuring costs of $3.5m
and $7.0m in 1996 and
10
<PAGE> 5
1995 (see "non-recurring items", below, and notes 3 and 4 to the consolidated
financial statements on page 22).
SALES AND MARKETING
Sales and marketing costs include compensation, travel and facility costs for
sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows.
Excluding non-recurring items, such costs decreased by $3.5m or 7% to $45.9m in
fiscal 1996, having increased by $1.0m or 2% to $49.4m in fiscal 1995 and
represented 40%, 41% and 35% of net revenue in fiscal 1996, 1995 and 1994. The
decrease in 1996 reflects the impact of the worldwide cost reductions
implemented in the first quarter. The increase in 1995 was mainly in respect of
increased marketing activity including advertising, seminars and user
conferences.
GENERAL AND ADMINISTRATIVE
General and administrative costs include the group management, finance, legal
and human resources operations of Micro Focus.
Excluding non-recurring items, such costs increased by $1.1m or 13% to $9.4m in
fiscal 1996, having increased by $0.5m or 6% to $8.3m in fiscal 1995 and
represented 8%, 7% and 6% of net revenue in fiscal 1996, 1995 and 1994. In 1996
general and administrative costs have increased following the strengthening of
the Micro Focus management team.
NON-RECURRING ITEMS
In the first quarter of 1996 Micro Focus incurred a restructuring charge of
$8.0m. The charge consisted of costs associated with a reduction in the
Company's workforce of approximately 65 people, with facility closures and
consolidations, and with asset write-downs. The restructuring was essentially
completed during the year, but payments estimated at $2.3m remain to be paid in
1997.
Non-recurring items recorded in 1995 consisted of a charge of $10.5m for
restructuring costs and a credit of $1.0m in respect of an employer loan to the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust").
Restructuring costs of $5.0m incurred in the first quarter of 1995, principally
reflected employee terminations (including salary, benefit continuation and
outplacement costs for approximately 75 employees), closure of surplus office
facilities, and write-downs of related fixed assets. An additional charge of
$5.5m, booked in the fourth quarter of 1995, reflected a reduction in the
carrying values of software product assets in line with future revenue
expectations from certain products.
In 1994 Micro Focus recorded charges of $18.3m, of which $12.8m represented the
write-off of purchased research and development costs, goodwill and other
charges incurred in connection with the purchase of Burl Software Laboratories,
Inc. ("Burl"); and $5.5m related to other acquisitions made during that year
(see Acquisitions, below).
INTEREST INCOME
Interest income represents interest earned on cash and short-term investments.
Interest income decreased by $0.7m or 21% to $2.7m in fiscal 1996, having
remained constant at $3.4m in 1995 and 1994. The current decrease principally
reflects lower average cash balances, and to a lesser degree, lower interest
rates.
INCOME TAXES
A tax provision of $2.1m was recorded for 1996. The effective tax rate in both
1996 and 1995 was affected by the distribution of taxable profits and losses
among the tax jurisdictions in which Micro Focus operates. The Company has not
recognised the tax effects of operating losses in U.S. subsidiaries. In 1994 the
Company expensed a non-recurring charge of $11,765,000 representing purchased
research and development costs. These costs were non-deductible for tax purposes
and resulted in a significant distortion of the effective tax rate in that year.
An analysis of the charge for income taxes, including an analysis of differences
between the effective rate and the U.K. statutory rates, is given in note 8 to
the consolidated financial statements on page 23.
ACQUISITIONS
In 1995 Micro Focus completed the agreed acquisition of Burl (see note 2 to the
consolidated financial statements on page 21). The transaction had been
accounted for as a purchase in 1994.
In 1994 Micro Focus acquired the intellectual property rights to certain
development tools from mbp, a German subsidiary of EDS, for $5.0m and the Expert
Consulting Division of The Systems Group for $1.0m.
11
<PAGE> 6
FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS
Micro Focus operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. This section highlights
some of these factors and the possible impact of these factors on future results
from operations.
The factors set forth below contain certain forward-looking statements that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
Company's actual results, performance or achievements in fiscal 1997 and beyond
could differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in this
section below, as well as those in the Letter to Shareholders above and those
discussed elsewhere in this Annual Report. The Company undertakes no obligation
to release publicly any updates or revisions to any such forward-looking
statements that may reflect events or circumstances occurring after the date of
this Annual Report. For more information regarding forward-looking statements,
see Further Information for Shareholders- Special Note on Forward-Looking
Statements.
Micro Focus' future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders, product life cycles, the
ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis, the introduction and
acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of enhancements or new
products, changes in the mix of distribution channels through which the
Company's products are offered, purchasing patterns of distributors and
retailers, quality control of products sold, price and other competitive
conditions in the industry, changes in the Company's level of operating
expenses, changes in the Company's sales incentive plans, budgeting cycles of
its customers, the cancellation of licenses during the warranty period,
nonrenewal of maintenance agreements, economic conditions generally or in
various geographic areas, and other factors discussed in this section.
A high percentage of Micro Focus' operating expenses are fixed over the short
term and if anticipated revenue does not occur or is delayed, the operating
results for that quarter will be immediately and adversely affected. In
addition, a substantial portion of Micro Focus' revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter. Furthermore, while the Company's business has not
been subject to seasonal variations, the Company's customers tend to make
product purchase decisions in the fourth quarter of a fiscal year as a result of
purchase cycles related to expiration of budgetary authorizations. As a result,
the Company experiences lower revenue for the first quarter of a fiscal year
than in the fourth quarter of the prior fiscal year. The Company's revenue is
also affected by seasonal fluctuations resulting from lower sales that typically
occur during the summer months in Europe and other parts of the world. Due to
all of the foregoing factors, it is possible that in some future quarters Micro
Focus' operating results will be below the expectations of stock market analysis
and investors and that the share price would likely be materially adversely
affected.
Micro Focus is in a market that is subject to rapid technological change. Micro
Focus must continually adapt to that change by improving its products and
introducing new products and technologies. The growth and financial performance
of Micro Focus will depend upon its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market enhancements of existing products and new products depends upon its
ability to attract and retain qualified employees. In the past, Micro Focus has
experienced delays and increased expenses in developing new products. Any
failure by the Company to anticipate or respond adequately to changes in
technology and market conditions, to complete product development and introduce
new products on a timely basis or to attract and retain qualified employees,
could materially adversely affect the Company's business, results of operations
and financial condition.
Substantially all of Micro Focus' revenue is currently, and is expected to
continue to be derived from products and services related to applications
development in the COBOL language. As a result, Micro Focus' future operating
results depend upon market acceptance of the COBOL language. Any decline in the
demand for or market acceptance of the COBOL language or mainframe computers
where COBOL is a as
12
<PAGE> 7
a result of competition, technological change or other factors would have a
material adverse effect on Micro Focus' business, financial condition and
results of operations.
The markets in which the Company competes are characterized by rapid
technological change and aggressive competition. The Company believes that the
principal competitive factors in the Company's markets are product performance
and reliability, functionality, product quality, application portability,
product enhancement, price, training, support and the quality of service
offerings. The Company expects competition to increase in the future from
existing competitors and from other companies that may enter the Company's
existing or future markets with similar or substitute solutions including
database vendors of tools and other programming languages that may be less
costly or provide better performance or functionality. Some of the Company's
current and prospective competitors in the products and services markets have
greater financial, marketing or technical resources than Micro Focus and may be
able to adapt more quickly to new or emerging technologies, or devote greater
resources to the promotion and sale of their products than can Micro Focus.
There can be no assurance that other companies will not develop competitive
products in the future. In addition, the software industry is characterized
generally by low barriers to entry, as a result of which new competitors
possessing technological, marketing or other competitive advantages may emerge
and rapidly acquire market share. Further more, there can be no assurance that
the Company will be able to compete effectively in the future in the
professional services market and, particularly, the Year 2000 professional
services market.
The market price of the Company's securities has experienced significant price
volatility and such volatility may occur in the future. Factors such as actual
or anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software industry
general market conditions and other factors may have a significant impact on the
market price of the Company's securities. Further, the stock market has
experienced extreme volatility that has particularly affected the market prices
of equity securities of many high technology companies. These market
fluctuations, as well as general economic, political and market conditions, may
adversely affect the market price of the Company's securities.
Micro Focus is subject to the general economic climate in the various areas of
the world in which it does business. The risks inherent in conducting
international business generally include exposure to exchange rate fluctuations
(see "Exchange rate fluctuations" below), longer payment cycles, greater
difficulties in accounts receivable collection and enforcing agreements, tariffs
and other restrictions on foreign trade, U.S. export requirements, economic and
political instability, withholding and other tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that the factors described above will
not have an adverse effect on the Company's future international revenues.
The Company markets certain of its products and services to customers for
managing development and maintenance of mission-critical computer software
systems. In addition, an increasing portion of the Company's business is devoted
to addressing the Year 2000 problem, which affects the performance and
reliability of many mission-critical systems. The Company's agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product and service liability claims. It is possible, however, that
the limitation of liability provisions contained in the Company's customer
agreements may not be effective as a result of existing or future federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions.
Although the Company has not experienced any product or service liability claims
to date, the sale and support of its products and services may entail the risk
of such claims, particularly in the Year 2000 market. A successful product or
service liability claim brought against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition. Furthermore, the Company anticipates that demand in the Year 2000
market will decline, perhaps rapidly, following the year 2000 and the demand for
the Company's Year 2000 solutions, products and services may also as a result of
new technologies, competition or other factors. If this decline in demand were
to occur, the Company's license revenues and professional services fees could be
materially and adversely affected.
13
<PAGE> 8
EXCHANGE RATE FLUCTUATIONS
Micro Focus prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates.
Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of Micro Focus' net revenue arises in U.S. dollars (approximately
two-thirds in 1996) whereas its costs and expenses are incurred approximately
equally in U.S. dollars and other currencies, predominately G.B. pounds.
Consequently fluctuations in exchange rates, particularly between the U.S.
dollar and the G.B. pound, may have a significant impact on Micro Focus'
operating results, notably when expressed in G.B. pounds.
In 1996 and 1995 fluctuations between the U.S. dollar and the G.B. pound have
not been significant, and net exchange rate gains or losses on operational
transactions have been immaterial.
LIQUIDITY AND CAPITAL RESOURCES
Micro Focus continues to fund its activities through cash from operations. In
1996 cash provided by operating activities was $24.4m (1995: $13.7m).
In 1996 Micro Focus invested $3.9m (1995: $13.7m) in property, plant and
equipment and $8.3m (1995: $16.0m) in software product assets. Investment in
1995 included $7.0m in the redevelopment of the Company's U.K. headquarters
office in Newbury, England. In 1995 the Company also paid $6.3m in connection
with the acquisition of Burl and spent $8.0m on the purchase of shares in the
Company for the benefit of the Micro Focus Group Employee Benefit Trust 1994.
Net of these expenditures, cash and short-term investments increased by $12.7m
to $71.6m (1995: decreased by $29.9m to $58.8m).
Micro Focus may invest a further $10.0m on capital during 1997 in connection
with occupying a new U.S. facility, and on communications software and other
information systems improvements.
The Company has in place a line of credit under the terms of which unsecured
financing of up to $8.0m is available until December 1997. There have been no
borrowings under this line of credit to date.
Micro Focus believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid money
market investments. The Company's investment policy is designed to minimize
risk while maximizing return on cash given such levels of risk, and to keep
uninvested cash at a minimum. Cash management is centralized, although some cash
is held at various subsidiaries around the world to meet local operating
requirements. All cash is freely remittable.
Micro Focus believes that existing cash balances in combination with internally
generated funds and its available bank lines of credit will be sufficient to
meet cash requirements in 1997.
14
<PAGE> 9
CONSOLIDATED STATEMENTS OF INCOME (US FORMAT)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
In thousands of U.S. dollars JANUARY 31 JANUARY 31 JANUARY 31
(except share and per share data) 1997 1996 1995
<S> <C> <C> <C>
NET REVENUE
Product revenue $66,466 $69,399 $96,807
Service revenue 48,943 52,557 41,652
- -----------------------------------------------------------------------------
TOTAL NET REVENUE 115,409 121,956 138,459
=============================================================================
COSTS AND EXPENSES
Cost of product revenue 10,016 13,709 16,311
Cost of service revenue 18,580 19,520 17,034
Research and development (note 3) 34,544 35,337 32,299
Sales and marketing 45,884 49,429 48,456
General and administrative 9,442 8,343 7,835
Non recurring charges (note 4) 8,000 9,469 16,765
- -----------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 126,466 135,807 138,700
=============================================================================
(LOSS) FROM OPERATIONS (11,057) (13,851) (241)
Interest income 2,706 3,432 3,408
Interest expense (32) (117) (117)
Acquisition costs - - (1,500)
- -----------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (8,383) (10,536) 1,550
Income taxes (note 8) (2,125) 100 (6,410)
- -----------------------------------------------------------------------------
NET (LOSS) ($10,508) ($10,436) ($4,860)
=============================================================================
NET (LOSS) PER SHARE (NOTE 1) ($0.69) ($0.69) ($0.33)
=============================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (THOUSANDS) 15,234 15,101 14,706
=============================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.
15
</TABLE>
<PAGE> 10
CONSOLIDATED BALANCE SHEETS (US FORMAT)
<TABLE>
<CAPTION>
In thousands of U.S. dollars JANUARY 31 JANUARY 31
(except share and per share data) 1997 1996
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and short-term investments $ 71,560 $ 58,848
Accounts receivable, net of allowance for
doubtful accounts of $1,066 ($645 in 1995) 20,275 30,975
Inventories 774 2,573
Prepaid expenses and other assets 2,490 3,379
- ----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 95,099 95,775
============================================================================
Property, plant and equipment, net (note 5) 32,868 37,615
Software product assets, net of accumulated
amortization of $95,402 ($79,968 in 1995) 23,344 26,964
- ----------------------------------------------------------------------------
TOTAL ASSETS $151,311 $160,354
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,886 $ 8,038
Product and royalties payable 963 977
Accrued employee compensation and commissions 5,811 6,733
Accrued payroll taxes 838 676
Capital leases (note 7) 109 224
Income taxes payable 4,142 3,022
Deferred revenue 26,635 29,686
Other current liabilities 9,137 5,188
- ----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 52,521 54,544
============================================================================
Capital leases (note 7) 24 100
Deferred income taxes (note 8) 9,983 8,236
- ----------------------------------------------------------------------------
TOTAL LIABILITIES 62,528 62,880
============================================================================
Commitments (note 7)
Shareholders' equity:
Ordinary shares: 10 pence (G.B.) par value,
22,500,000 shares authorized,
15,168,000 shares issued and outstanding
(15,144,000 in 1995) 2,389 2,386
Additional paid-in capital 27,468 27,257
Treasury stock (8,959) (8,959)
Retained earnings 70,276 80,784
Currency translation adjustment (2,391) (3,994)
- ----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 88,783 97,474
============================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $151,311 $160,354
============================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.
16
</TABLE>
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOW (US FORMAT)
<TABLE>
<CAPTION>
In thousands of U.S. dollars
- -------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31 JANUARY 31 JANUARY 31
1997 1996 1995
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net (loss) ($10,508) ($10,436) ($4,860)
Adjustments to reconcile net (loss) to cash
provided by operations
Depreciation of fixed assets 8,931 9,759 6,654
Amortization of software product assets 12,690 19,862 10,929
Loss on sale of fixed assets 528 107 16
Amortization of goodwill - - 500
Purchased in-process technology - - 11,265
Other acquisition costs - - 1,500
Deferred income taxes 1,374 (374) 589
Changes in operating assets and liabilities:
Decrease in accounts receivable 10,663 3,952 2,803
Decrease (increase) in inventories 1,895 185 (520)
Decrease in prepaid expenses and other assets 1,041 202 2,007
(Decrease) increase in accounts payable (3,130) 1,005 379
(Decrease) increase in product royalties payable (18) 312 (274)
(Decrease) increase in accrued employee
compensation and commissions payable (890) (908) 1,664
Increase (decrease) in accrued payroll taxes 158 (105) (838)
Increase (decrease) in income taxes payable 690 (4,266) (5,104)
(Decrease) increase in deferred revenue (2,958) (4,141) 5,303
Increase (decrease) in other current liabilities 3,890 (1,477) 3,037
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,356 13,677 35,050
=================================================================================================
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
net of capital lease obligations incurred (3,887) (13,726) (18,660)
Software product assets (8,261) (15,989) (15,477)
Own shares - (7,954) -
Settlement of deferred purchase consideration - (6,252) -
Disposals of property, plant and equipment 899 472 232
Short-term investments - - 51,227
- -------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (11,249) (43,449) 17,322
=================================================================================================
FINANCING ACTIVITIES
Issuance of ordinary shares, net of expenses 215 446 336
Repayment of capital leases (233) (467) (481)
- -------------------------------------------------------------------------------------------------
NET CASH (USED) BY FINANCING ACTIVITIES (18) (21) (145)
=================================================================================================
EFFECT OF EXCHANGE RATE CHANGES ON CASH (377) (117) 1,382
- -------------------------------------------------------------------------------------------------
Increase (decrease) in cash 12,712 (29,910) 53,609
Cash at beginning of year 58,848 88,758 35,149
- -------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $71,560 $58,848 $88,758
=================================================================================================
Supplemental disclosure of cash flow information:
Income taxes paid during the year 61 4,569 10,925
Interest paid during the year 32 117 117
=================================================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.
17
</TABLE>
<PAGE> 12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (US FORMAT)
<TABLE>
<CAPTION>
In thousands of U.S. dollars
------------------------------------------------------------------------------------------
ORDINARY ADDITIONAL DEFERRED
NUMBER SHARES PAID-IN TREASURY PURCHASE
OF SHARES AMOUNT CAPITAL STOCK CONSIDERATION
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31 1994 14,217 $2,238 $19,235 - -
Share options exercised 147 22 314 - -
Transfer between reserves - - - - -
Agreed acquisition of Burl - - - - 5,311
Net loss - - - - -
Currency translation adjustment - - - - -
------------------------------------------------------------------------------------------
BALANCE, JANUARY 31 1995 14,364 2,260 19,549 - 5,311
Share options exercised 115 19 474 - -
Agreed acquisition of Burl 665 107 7,234 - (5,311)
Treasury stock - - - (8,959) -
Net loss - - - - -
Currency translation adjustment - - - - -
------------------------------------------------------------------------------------------
BALANCE, JANUARY 31 1996 15,144 2,386 27,257 (8,959) -
Share options exercised 24 3 211 - -
Net loss - - - - -
Currency translation adjustment - - - - -
------------------------------------------------------------------------------------------
BALANCE, JANUARY 31 1997 15,168 $2,389 $27,468 ($8,959) -
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
In thousands of U.S. dollars
-----------------------------------------------------------------------------
CURRENCY
OTHER RETAINED TRANSLATION
RESERVES EARNINGS ADJUSTMENT TOTAL
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31 1994 ($29) $96,109 ($4,903) $112,650
Share options exercised - - - 336
Transfer between reserves 29 (29) - -
Agreed acquisition of Burl - - - 5,311
Net loss - (4,860) - (4,860)
Currency translation adjustment - - 2,405 2,405
-----------------------------------------------------------------------------
BALANCE, JANUARY 31 1995 - 91,220 (2,498) 115,842
Share options exercised - - - 493
Agreed acquisition of Burl - - - 2,030
Treasury stock - - - (8,959)
Net loss - (10,436) - (10,436)
Currency translation adjustment - - (1,496) (1,496)
-----------------------------------------------------------------------------
BALANCE, JANUARY 31 1996 - 80,784 (3,994) 97,474
Share options exercised - - - 214
Net loss - (10,508) - (10,508)
Currency translation adjustment - - 1,603 1,603
-----------------------------------------------------------------------------
BALANCE, JANUARY 31 1997 - $70,276 ($2,391) $88,783
=============================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.
18
</TABLE>
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US FORMAT)
The statutory financial statements of Micro Focus, within the meaning of section
240 of the Companies Act 1985 of Great Britain, for the year ended January 31
1997 are contained on pages 40 to 55.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
To enable the reader to see immediately any information provided in addition to
the common policy statements, the text of this note and the corresponding note 1
to the U.K. format financial statements on page 46 is italicized where the
text is identical.
NATURE OF OPERATIONS
Micro Focus designs and develops computer software products. Approximately 90%
of its revenue is derived from the sale of software product licenses and related
support and maintenance to end users. The remaining 10% is derived from the
licensing of distribution rights to software products to original equipment
manufacturers.
Product licenses are sold and supported in more than 60 countries. The principal
market is the United States, which accounts for approximately 55% of revenue.
Approximately 30% of revenue is derived from customers in Europe and
approximately 10% is earned in the Pacific Rim.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are those of Micro Focus Group Plc and all
of its subsidiaries ("Micro Focus"). They have been prepared under the
historical cost convention and in accordance with U.S. generally accepted
accounting principles ("GAAP"), which, as applied by Micro Focus, do not differ
in any significant respect from U.K. GAAP, except with regard to the treatment
of acquisitions and goodwill and the presentation of certain items in the
financial statements. All significant inter-company balances and transactions
have been eliminated on consolidation.
In accordance with industry trends, the Company has revised the presentation of
accounts receivable and deferred income for all years presented. This revision,
in essence a reclassification, has not affected the results of operations or
financial position of the Company.
REVENUE RECOGNITION
Net revenue represents the amounts derived from the provision of goods and
services which fall within Micro Focus' ordinary activities, stated net of
applicable taxes.
Revenue from sales of software packaged products to end users and resellers is
recognized when the product is delivered.
Revenue from sales to original equipment manufacturers ("OEMs") under
non-cancelable license agreements generally provide for development fees and
initial license fees, which are recognized at the later of (a) the date product
is delivered to the OEM and (b) the date payment becomes due within twelve
months and (c) the date of receipt of monies if collection cannot be assessed
with reasonable assurance. When sales by the OEM exceed the initial license fee
commitment, revenue is recognized as unit shipments are reported by the OEM.
Revenue from maintenance agreements is recognized pro-rata over the life of the
agreement corresponding to notional delivery of the service.
SOFTWARE PRODUCT ASSETS (CAPITALIZED SOFTWARE DEVELOPMENT COSTS)
Costs related to the initial development and design of new software products
prior to the establishment of technological feasibility are written off as
research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalized as software product
assets, in compliance with Statement of Financial Accounting Standards No. 86
("SFAS 86") "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed".
Software purchased for inclusion in the Micro Focus product set, including
software acquired on acquisitions, which meets the provisions for
capitalizations under SFAS 86, is also included in software product assets.
During the years ended January 31 1997, 1996 and 1995 purchased software,
totaling $nil, $350,000 and $843,000 respectively, was added to software product
assets.
19
<PAGE> 14
Software product assets are amortized using the straight line method over the
estimated economic life of the products, which in most cases is assumed to be
four years. Where market expectations dictate, amortization is accelerated.
Amortization of software product assets is included in research and development
costs.
GOODWILL
Goodwill represents the excess of the amount paid on the acquisition of a
business over the aggregate fair value of the net assets acquired. Goodwill
arising on a purchase is capitalized as an intangible fixed asset and amortized
over its estimated useful life.
The estimated lives will depend on the length of the future period expected to
benefit from the purchase. Where there is doubt over expected future benefits,
amortization is accelerated.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization is computed using the
straight-line method over estimated economic lives from the time the asset is
put into use. Present estimated economic lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Office buildings 40 years
Leasehold improvements over the lease term
Computer equipment 3 - 5 years
Office equipment 7 years
Transportation equipment 3 - 4 years
</TABLE>
LEASING
Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are capitalized as fixed assets. The amount capitalized
is that sum for which the leased asset could be purchased at the start of the
lease, this sum also being treated as a liability.
Depreciation on such leased assets is provided at rates calculated to write off
the capitalized cost over the shorter of the lease term and the asset's economic
life. Lease payments are apportioned between finance charges (computed on the
basis of implicit interest rates) and a reduction in the original liability.
Rentals paid under operating leases are expensed on a straight line basis
over the term of the lease.
INCOME TAXES
The provision for income taxes includes U.S., U.K. and other income taxes
currently payable and those deferred because of timing differences between
financial and tax reporting.
INVENTORIES
Inventories, consisting principally of diskettes and technical manuals, are
stated at the lower of cost or market, using the first-in, first-out method.
Contracts in progress, representing engineering costs associated with
non-cancelable license agreements prior to delivery, are included in
inventories and expensed when the related revenue is recognized.
CASH AND SHORT-TERM INVESTMENTS
Cash includes cash equivalents which represent cash placed on short-term deposit
where the maturity date is less than three months from the initial date of
deposit.
Short-term investments represents cash placed on deposit where the maturity
date is between three and twelve months from the initial date of deposit.
TRANSLATION OF FOREIGN CURRENCIES
Micro Focus' policy on foreign currency translation complies with SFAS 52
"Foreign Currency Translation".
Assets and liabilities denominated in currencies other than U.S. dollars are
translated at exchange rates in effect at the balance sheet date. Closing U.S.
dollar to G.B. pound rates at January 31 1997, 1996 and 1995 were $1 = GBP
0.625, $1 = GBP 0.662 and $1 = GBP 0.629 respectively. Revenue, costs and
expenses are translated using average rates. Monthly average U.S. dollar to G.B.
pound rates used during 1996 range between $1 = GBP 0.585 and $1 = GBP 0.667,
and average $1 = GBP 0.633 (1995: $1 = GBP 0.634; 1994: $1 = GBP 0.648).
Translation adjustments resulting from the process of translating financial
statements denominated in currencies other than U.S. dollars are dealt with
separately in stockholders' equity.
20
<PAGE> 15
NET (LOSS) PER SHARE
Net (loss) per share is based on net (loss) and on the weighted average
number of ordinary shares outstanding during the period, including common share
equivalents, represented by shares issuable upon exercise of share options. The
computation assumes the proceeds from the exercise of share options are used to
repurchase the Company's ordinary shares at their average market price during
each period. In 1994 and 1995 common stock equivalents were antidilutive and
therefore excluded from the computation.
Pro-forma net (loss) per share calculated on the fair-value-based method is
disclosed in accordance with SFAS 123 (see "Stock based compensation", below).
USE OF ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Micro Focus to concentrations of
credit risk consist principally of short-term investments and trade receivables.
Micro Focus places its short-term investments only in financial high quality
instruments and, by policy, limits the amounts invested with any one issuer.
Concentrations of credit risk with respect to trade receivables are limited due
to the large, widespread customer base which encompasses many different
industries and countries. No single customer represented more than 10% of Micro
Focus' revenue in 1996, 1995 and 1994.
OTHER RISKS AND UNCERTAINTIES
Micro Focus' policy is to amortize capitalized software using the straight-line
method over the remaining estimated economic life of the product. In the event
that the remaining estimated economic life of a product is judged to be reduced
significantly, the carrying amount of such capitalized software costs would be
reduced.
STOCK BASED COMPENSATION
The Company grants share options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for share option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no
compensation expense for the share option grants.
Financial Accounting Board Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued in October 1995 and is effective for
fiscal 1996. As set out in note 10 the Company has elected to apply the
disclosure provisions of the standard and has therefore added pro forma
disclosures of net income and earnings per share as if the fair-value-based
method had been applied.
NOTE 2 ACQUISITIONS
There were no acquisitions in 1996.
In May 1995 Micro Focus completed the agreed acquisition of Burl Software
Laboratories, Inc. for a total of $13,500,000, which was satisfied by the issue
of 664,979 ordinary shares and the payment of $6,251,000 in cash. The
acquisition was accounted for as a purchase.
In 1994 Micro Focus acquired the Expert Consulting Division of The Systems
Group, a consultancy business based in Massachusetts. In addition, the
intellectual property rights to certain development tools were purchased from
mbp Softwareentwickslungs GmbH, a German subsidiary of EDS, a U.S. corporation,
at a cost of $5,000,000.
21
<PAGE> 16
NOTE 3 RESEARCH AND DEVELOPMENT COSTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Research and development costs,
before capitalization $30,126 $37,059 $36,243
Costs capitalized as software
product assets (8,272) (15,639) (14,977)
Amortization of capitalized costs 12,690 13,917 10,929
Previously deferred costs expensed
on contract completion 104
- ----------------------------------------------------------------------
$34,544 $35,337 $32,299
======================================================================
</TABLE>
NOTE 4 NON-RECURRING ITEMS
Non-recurring items recorded in 1996 represent a charge of $8,000,000 for
restructuring costs. The charge consists of the costs associated with a
reduction in the Company's workforce of approximately 65 people, with facility
closures and consolidations, and with asset write-downs. The restructuring was
essentially completed during the year, but payments estimated at $2,300,000
remain to be paid in 1997.
Non-recurring items recorded in 1995 consist of a charge of $10,502,000 for
restructuring costs and a credit of $1,033,000 in respect of an employer loan to
the Micro Focus Group Employee Benefit Trust 1994.
Restructuring costs of $5,031,000 incurred in the first quarter of 1995 related
to employee terminations, closure of surplus office facilities, and fixed asset
write-downs. Additional asset write-downs of $5,471,000 booked in the fourth
quarter of 1995 were primarily the result of a review into the carrying value of
software product assets.
In 1994 Micro Focus recorded a charge of $18,265,000 related to acquisitions
made during that year. This charge included $12,765,000 representing the
write-off of purchased research and development costs, goodwill and other
charges incurred in connection with the purchase of Burl Software Laboratories,
Inc.; and $5,000,000 of intellectual property rights acquired
from mbp.
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
(in thousands) 1996 1995
<S> <C> <C>
Land and buildings $ 21,690 $ 19,845
Leasehold improvements 1,343 2,994
Computer and communications
equipment & software 38,328 37,772
Office equipment 7,503 7,326
Transportation equipment 467 897
- --------------------------------------------------------------------
Property, plant and equipment - at cost 69,331 68,834
Less: accumulated depreciation
and amortization (36,463) (31,219)
- --------------------------------------------------------------------
Property, plant and equipment - net $ 32,868 $ 37,615
====================================================================
</TABLE>
The above figures include assets under capital leases as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
<S> <C> <C>
Cost $200 $564
Less: accumulated depreciation
and amortization (105) (249)
- -------------------------------------------------------
$95 $315
=======================================================
</TABLE>
During the years ended January 31 1997, 1996 and 1995 depreciation expense,
including depreciation on leased assets, totalled $8,931,000, $9,759,000 and
$6,654,000 respectively.
NOTE 6 LINES OF CREDIT
Micro Focus has in place a line of credit under the terms of which financing is
available until December 1997, either in G.B. pounds or such other currency as
Micro Focus may determine, of up to the equivalent of GBP 5,000,000 ($8,000,000
at January 31 1997). Any borrowings under this line of credit will bear interest
at 1% above the London Interbank Offered Rate (LIBOR) and would be unsecured.
There have been no borrowings under this line of credit to date.
22
<PAGE> 17
NOTE 7 COMMITMENTS
Micro Focus has entered into both capital and operating leases. The capital
leases are principally for transportation equipment. The operating leases are
for buildings, furniture and equipment and generally contain renewal options at
rates which approximate the anticipated market rate at expiration. In most
cases, it is expected that the operating leases will be renewed or replaced by
other leases in the normal course of business.
Minimum rental payments due under the leases described above are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(in thousands) Capital Operating
Years ended January 31 Leases Leases
<S> <C> <C>
1998 $113 $2,741
1999 24 1,983
2000 - 1,663
2001 - 1,483
2002 - 1,447
Thereafter - 7,509
- ----------------------------------------------------------
Total minimum lease payments 137 16,826
Less: amount representing interest (4)
- ----------------------------------------------------------
Present value of net minimum
lease payments $133
- ----------------------------------------------------------
</TABLE>
During the years ended January 31 1997, 1996 and 1995 rent expense totalled
$4,006,000, $4,809,000 and $4,726,000 respectively.
NOTE 8 INCOME TAXES
Income taxes consist of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Current: U.K $ 375 $ 210 $3,045
U.S. federal 6 297 181
U.S. state 1 (3) 116
Other 369 (230) 2,402
- ----------------------------------------------------------
751 274 5,744
==========================================================
Deferred: U.K 1,489 (235) 1,617
U.S. federal (115) (113) (956)
U.S. state -- (26) 5
- ----------------------------------------------------------
1,374 (374) 666
==========================================================
Total: $2,125 $(100) $6,410
==========================================================
</TABLE>
Deferred taxes result from timing differences in the recognition of revenues
and expenses for tax and financial statement purposes. The sources of these
differences and the tax effect of each were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
in thousands 1996 1995 1994
<S> <C> <C> <C>
Software development costs and other $1,571 ($620) $907
Depreciation and amortization (197) 246 (241)
- ------------------------------------------------------------------
$1,374 ($374) $666
==================================================================
</TABLE>
Micro Focus has not recognized the tax effects of operating losses in U.S.
subsidiaries. The following table analyses the differences between the U.K. tax
rate and the effective tax rate:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
U.K. statutory tax rate 33.0% 33.0% 33.0%
Tax effect of earnings of foreign subsidiaries (37.3) 7.2 2.8
Permanent differences and other items (21.0) (39.2) (3.5)
Non-recurring charges - - 381.2
- -------------------------------------------------------------------------
Effective tax rate (25.3%) 1.0% 413.5%
=========================================================================
</TABLE>
In 1994 the Company expensed non-recurring charges of $16,765,000. These charges
reduced income before income taxes by 92% from $18,315,000 to GBP 1,550,000 and,
since a significant proportion of these charges were non deductable for tax
purposes, increased the effective tax rate from 32.3% to 413.5%
Deferred income taxes, all of which are non-current, are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(in thousands) 1996 1995
<S> <C> <C>
Software development costs and other $9,712 $7,768
Depreciation and amortization 271 468
- -----------------------------------------------------------
$9,983 $8,236
===========================================================
</TABLE>
Deferred tax relative to the different tax jurisdictions is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(in thousands) 1996 1995
<S> <C> <C>
U.K. $9,983 $8,121
U.S. - 115
- ---------------------------------------------------------
$9,983 $8,236
=========================================================
</TABLE>
23
<PAGE> 18
NOTE 9 BUSINESS SEGMENT INFORMATION
Micro Focus operates in one business segment - the development and marketing of
computer software products. The following table analyzes worldwide operations by
geographical segment, based on the location of Micro Focus facilities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Revenue:
United States $ 67,388 $ 78,118 $ 90,065
United Kingdom 53,859 53,578 55,310
Europe (excluding U.K. 32,866 32,125 38,856
Other 3,048 2,051 2,119
- ----------------------------------------------------------------
157,161 165,872 186,350
Inter-segment revenue:
United States (5,470) (7,498) (4,261)
United Kingdom (25,217) (26,369) (23,993)
Europe (excluding U.K.) (10,331) (8,708) (18,154)
Other (734) (1,341) (1,483)
- ----------------------------------------------------------------
Total net revenue 115,409 121,956 138,459
================================================================
Income from operations:
United States (7,522) (7,278) (14,431)
United Kingdom (3,789) 1,913 8,980
Europe (excluding U.K.) (441) (7,760) 6,523
Other 695 (726) (1,313)
- ----------------------------------------------------------------
(11,057) (13,851) (241)
================================================================
Total assets:
United States 18,246 36,041 47,289
United Kingdom 70,11 59,506 64,622
Europe (excluding U.K.) 62,305 64,120 84,680
Other 646 687 1,049
- ----------------------------------------------------------------
$ 151,311 $160,35 $ 197,640
================================================================
</TABLE>
Inter-segment revenue principally represents license fees and sub-contracted
development charges between locations.
NOTE 10 EMPLOYEE STOCK AND RETIREMENT PLANS
SHARE OPTION PLANS
Micro Focus operates two plans both of which provide for the grant of share
options to acquire shares to all persons who devote substantially all their
working time to Micro Focus and such other eligible persons as the Board may
determine. The terms and exercise prices of options issued under these plans are
determined at the time the options are granted. Unexercised options lapse when
the optionholder ceases to be employed by Micro Focus or at a predetermined
expiry date (of up to ten years from the date of grant), whichever occurs first.
The Micro Focus Share Option Plan ("the Plan") was established in 1984. It meets
the terms and conditions required by the U.S. Internal Revenue Code in order
that the options will qualify as Incentive Stock Options, and as required by the
U.K. Inland Revenue in order to qualify as an approved Company Share Option
Plan. Options issued under the Plan are generally exercisable in five equal
cumulative annual instalments commencing one year after the date of grant.
At January 31 1997 1,769,342 options were issued and outstanding under the Plan,
and a further 427,911 had been approved for grant by shareholders of the Company
but were currently unissued.
In 1994 Micro Focus established a discretionary employee benefit trust, the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust"), the purpose of
which is to further Micro Focus' policy of encouraging share ownership by its
employees. Under the terms of the Trust, Micro Focus Trustees Limited ("MFTL")
is permitted to acquire ordinary shares of Micro Focus Group Plc and to issue
options over those shares to directors and employees.
In 1995 MFTL purchased 915,216 shares in the Company and granted options on
530,700 of these shares at a price of GBP 6.97 (G.B. pounds) per share. Under
the terms of the grant these options vest, and therefore become exercisable, in
five equal annual instalments only on the achievement by Micro Focus of certain
predetermined annual earnings per share targets in respect of each of the
financial years ended January 31 1996 to January 31 2000. In March 1996
one-fifth of the options lapsed when the announcement of financial results for
the year ended January 31 1996 indicated that the target in respect of that year
had not been achieved. In April 1996 376,840 of the remaining options were
exchanged for 282,630 new options, issued at a price of GBP 6.85 (G.B. pounds)
per share. These new options are exercisable in five equal cumulative annual
instalments commencing one year after the date of grant.
At January 31 1997 693,690 of the options issued by MFTL in 1995 and 1996 were
outstanding. A further 32,000 shares over which options had been granted prior
to their acquisition by MFTL remained outstanding at January 31 1997 at prices
between GBP 6.05 and GBP 14.98 (G.B. pounds). The remaining 189,526 shares were
available for the grant of further options. Options issued by the Trust do not
qualify as Incentive Stock Options (for U.S. taxation purposes), nor does the
plan qualify as an approved Company Share Option Plan (for U.K. taxation
purposes).
The shares held by the Trust are shown in the Balance Sheet as Treasury Stock
within Shareholders' Equity.
24
<PAGE> 19
Share option activity under the plans was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Option price
Number per share
of shares (in G.B. pounds)
<S> <C> <C>
Outstanding, January 31 1994 1,310,176 0.92-28.83
Options granted 608,416 8.16-16.38
Options exercised (148,206) 0.92-7.63
Options cancelled (41,512) 2.20-28.83
- -------------------------------------------------------------
Outstanding, January 31 1995 1,728,874 0.92-28.83
Options granted 603,795 5.65-8.20
Options exercised (114,865) 2.20-5.42
Options cancelled (159,035) 2.20-28.83
- -------------------------------------------------------------
Outstanding, January 31 1996 2,058,769 5.42-28.83
Options granted 2,300,830 5.83-9.60
Options exercised (24,156) 5.42-9.66
Options cancelled (1,840,411) 5.42-28.83
- -------------------------------------------------------------
Outstanding, January 31 1997 2,495,032 5.42-21.61
- -------------------------------------------------------------
</TABLE>
The following tables summarize information about share options outstanding at
January 31 1997:
Options outstanding:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Ranges of Number Weighted Weighted
exercise prices outstanding average average
(in G.B. pounds) at January contractual life exercise price
31 1997 (months) (in G.B. pounds)
<S> <C> <C> <C>
5.42-7.50 1,748,302 110 6.83
7.51-10.00 525,340 113 8.45
10.01-21.61 221,390 101 15.36
- --------------------------------------------------------------------
2,495,032 110 7.93
- --------------------------------------------------------------------
</TABLE>
Options exercisable:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Ranges of Number Weighted
exercise prices exercisable average
(in G.B. pounds) at January exercise price
31 1997 (in G.B. pounds)
<S> <C> <C>
5.42-7.50 45,502 5.58
7.51-10.00 7,644 8.18
10.01-21.61 114,916 15.48
- ----------------------------------------------------------
168,062 12.47
- ----------------------------------------------------------
</TABLE>
As stated in note 1, the Company has elected to follow APB 25 and related
Interpretations in accounting for its employee share options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee share options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995: risk free interest rate based on Treasury Strip, No Principal from the
Wall Street Journal for maturity of six years, based on the date of grant,
dividend yields of 0%, volatility factors of the expected market price of 0.378
and an average expected life of the option of six years.
The Black-Scholes valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are transferable.
In addition, the option valuation models require the input of highly subjective
assumptions including the expected share price volatility. Because the Company's
employee share options have characteristics significantly different from those
of traded options and changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee share options.
For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss was $11,779,000 and $10,639,000 and pro forma loss per share was
$0.77 and $0.70 in fiscal 1996 and 1995 respectively.
The effects on net loss and loss per share are not likely to be representative
of the effects on reported net income for future years since 1995 reflects
expense for only one year's vesting.
RETIREMENT PLANS
Micro Focus has entered into arrangements to provide pensions for its employees
on a defined contribution basis. Contributions, which are independently
administered by insurance companies and other financial institutions, are
expensed in the year in which they become payable.
In the United States, Micro Focus' plan qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, Micro Focus matches contributions made by
participating employees up to certain predetermined thresholds. Arrangements for
employees in other countries have been established on similar bases, subject to
local conditions and practices in the countries concerned.
In the years ended January 31 1997, 1996 and 1995 contributions totalling
$690,000, $949,000 and $1,086,000 respectively have been expensed.
25
<PAGE> 20
NOTE 11 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the two years ended January 31 1997 is as
follows:
<TABLE>
<CAPTION>
In thousands (except per share data)
- -------------------------------------------------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter Year
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended January 31 1997:
Net revenue 24,169 28,088 28,285 34,867 115,409
Restructuring charges (8,000) -- -- -- (8,000)
Operating (loss) income (13,747) (1,963) 1,101 3,552 (11,057)
Net (loss) income (13,096) (1,207) 1,080 2,715 (10,508)
Net (loss) income per share ($0.86) ($0.08) $0.07 $0.18 ($0.69)
- -------------------------------------------------------------------------------------------------
Year ended January 31 1996:
Net revenue 28,683 30,147 27,841 35,285 121,956
Restructuring charges (5,031) -- -- (5,471) (10,502)
Operating (loss) income (9,883) 776 (1,200) (3,544) (13,851)
Net (loss) income (8,279) 984) (516) (2,625) (10,436)
Net (loss) income per share ($0.55) $0.07 ($0.03) ($0.17) ($0.69)
- -------------------------------------------------------------------------------------------------
</TABLE>
REPORT OF THE INDEPENDENT AUDITORS (US FORMAT)
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MICRO FOCUS GROUP Plc
We have audited the consolidated balance sheets of Micro Focus Group Plc and
subsidiaries as of January 31 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended January 31 1997 on pages 15 to 25. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with United Kingdom auditing standards and
United States generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Micro Focus Group
Plc and subsidiaries at January 31 1997 and 1996 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended January 31 1997 in conformity with United States generally accepted
accounting principles.
Ernst & Young
Chartered Accountants
Registered Auditor
Reading, England
March 6 1997
26
<PAGE> 21
FINANCIAL STATEMENTS UK FORMAT
FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH U.K.
ACCOUNTING PRINCIPLES (IN GB POUNDS)
DIRECTORS' REPORT 28
EXECUTIVE REMUNERATION COMMITTEE'S REPORT 31
SELECTED CONSOLIDATED FINANCIAL DATA 34
MANAGEMENT'S DISCUSSION AND ANALYSIS 35
CONSOLIDATED PROFIT AND LOSS ACCOUNT 40
CONSOLIDATED BALANCE SHEET 41
CONSOLIDATED CASH FLOW STATEMENT 42
NOTES TO CONSOLIDATED CASH FLOW STATEMENT 43
COMPANY BALANCE SHEET 44
STATEMENT OF TOTAL RECOGNISED GAINS
AND LOSSES 45
MOVEMENT IN SHAREHOLDERS' FUNDS 45
NOTES TO THE FINANCIAL STATEMENTS
1 Significant accounting policies 46
2 Revenue (turnover) 48
3 Research and development costs 48
4 Operating (loss)/profit 48
5 Directors and employees 49
6 Interest expense 49
7 Exceptional items 49
8 Taxation 50
9 (Loss)/earnings per share 50
10 Intangible fixed assets 50
11 Tangible fixed assets 51
12 Investments 51
13 Stocks 52
14 Debtors 52
15 Creditors: amounts falling due within one year 52
16 Creditors: amounts falling due after more than one year 53
17 Lease commitments 53
18 Deferred taxation 53
19 Capital commitments 53
20 Segmental information 54
21 Share option plans 54
27
<PAGE> 22
EXECUTIVE REMUNERATION COMMITTEE'S REPORT (UK FORMAT)
The Micro Focus Executive Remuneration Committee was established in December
1993. At present the Committee comprises the two non-executive directors, J.
Michael Gullard and Harold Hughes.
The remuneration of the executive directors is determined by the Committee. The
Commitee ensures that remuneration is appropriate to each executive director's
responsibilities, taking into consideration the overall financial and business
position of the Company, the highly competitive industry of which Micro Focus is
part, and the importance of recruiting and retaining management of the
appropriate calibre. The Company has complied with Section A of the Best
Practice Provisions annexed to the Listing Rules of the London Stock Exchange.
The Report of the Auditors on page 56 confirms that the scope of that report
covers the disclosures contained in this report that are specified for review by
the London Stock Exchange.
DIRECTORS' REMUNERATION POLICY
In framing its remuneration policy, the Committee has given full consideration
to Section B of the Best Practice Provisions annexed to the listing rules of the
London Stock Exchange. The chief components of remuneration are as follows:
BASIC SALARY: Salary rates for the executive directors are determined by
reference to relevant market data for the countries in which the directors
perform their duties, and are normally reviewed on an annual basis. In general,
the Committee's philosophy is to have base salary rates lower than those of
others in the market, with higher rates of pay for performance.
FEES: Non-executive directors receive an annual retainer and earn additional
fees for attendance at Board meetings and for time spent on other
company-related business. Such fees are determined in advance by the Executive
Directors and not by the Committee.
PERFORMANCE-RELATED PAY: Executive directors are eligible for annual
performance-related bonuses, which are calculated based on fixed formulae
measuring Micro Focus' performance against targets set at the beginning of each
year. Such bonuses are earned on a pro-rata basis in proportion to the level of
achievement relative to the performance targets set, subject to certain minimum
thresholds. The philosophy is to offer greater than market opportunities in
terms of bonus compensation, scaling upwards if the performance of Micro Focus
exceeds the targets set out at the beginning of the year.
In 1996 such bonuses were based on achievement against targets measuring
performance (measured in terms of earnings per share, excluding exceptional
items) for the ten month period ended January 31 1997. On the basis of that
achievement, executive directors would earn bonuses equivalent to between 33%
and 133% of their basic salary entitlements.
PENSION CONTRIBUTIONS: The Company does not operate a pension scheme for its
directors, but does make contributions to a director's own personal pension in
lieu of salary entitlement.
OTHER BENEFITS: Other benefits principally relate to the use of corporate
communications facilities by, and personal travel provided for, a former
director.
LONG-TERM INCENTIVES/SHARE OPTIONS: All of the directors are eligible to
participate in the Micro Focus share option plans, details of which are set out
in note 21 to the financial statements on page 54. The grant of share options to
directors is designed to ensure that an element of their remuneration is
directly related to long-term growth in shareholder value.
None of the directors is eligible for any other long-term incentive payments.
SERVICE AGREEMENTS: None of the directors has a service contract with a notice
period in excess of one year, or with provision for predetermined compensation
on termination of an amount which equals or exceeds one year's salary and
benefits.
31
<PAGE> 23
DIRECTORS' REMUNERATION
The following table analyses the remuneration earned by each director in 1996
and 1995.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
(In thousands of G.B. pounds) Performance-
related Other
Salary Fees pay benefits
<S> <C> <C> <C> <C>
1996: J Michael Gullard -- 63 -- --
Harold Hughes -- 20 -- --
Marcelo Gumucio 101 1 129 --
Paul Adams 79 -- 50 --
Ron Forbes 79 -- 16 --
Brian Reynolds -- -- -- 29
(resigned March 24 1996)
Paul O'Grady 24 -- -- --
(resigned April 1 1996)
------------------------------------------------------------------------------
283 84 195 29
------------------------------------------------------------------------------
1995: J Michael Gullard -- 62 -- --
(appointed May 2 1995)
Harold Hughes -- 34 -- --
Marcelo Gumucio -- 1 -- --
(appointed January 27 1996)
Paul Adams 143 -- -- --
Ron Forbes 76 -- 3 --
Brian Reynolds -- -- -- 117
Paul O'Grady 120 -- 11 --
------------------------------------------------------------------------------
339 97 14 117
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------
Compensation
for loss Pension
of office contributions TOTAL
<S> <C> <C> <C>
1996: J Michael Gullard -- -- 63
Harold Hughes -- -- 20
Marcelo Gumucio -- -- 231
Paul Adams -- -- 129
Ron Forbes -- 6 101
Brian Reynolds -- -- 29
(resigned March 24 1996)
Paul O'Grady 30 -- 54
(resigned April 1 1996)
------------------------------------------------------------------
30 6 627
------------------------------------------------------------------
1995: J Michael Gullard -- -- 62
(appointed May 2 1995)
Harold Hughes -- -- 34
Marcelo Gumucio -- -- 1
(appointed January 27 1996)
Paul Adams -- -- 143
Ron Forbes -- 6 85
Brian Reynolds -- -- 117
Paul O'Grady -- -- 131
------------------------------------------------------------------
-- 6 573
------------------------------------------------------------------
</TABLE>
Upon the resignation of Paul O'Grady, the Company entered into a consultancy
agreement with an entity with which Mr. O'Grady is affiliated to provide
management consulting services to the Company in exchange for a payment of
$750,000 (GBP 490,000), plus reimbursement of expenses. As expected, the bulk of
the services that were anticipated to be performed under the agreement were
performed during 1996.
In the case of Brian Reynolds, the Company entered into an agreement with an
entity with which Mr. Reynolds is affiliated that provides for the Company to
receive management and technology consulting services in exchange for a payment
of $800,000 (GBP 500,000) and the transfer to the entity of certain computer and
telecommunications equipment which the Company has valued at $249,000 (GBP
155,000). As expected, the bulk of the services that were anticipated to be
performed under the agreement were performed during 1996.
The following additional information is provided in accordance with the
requirements of the Companies Act 1985.
In 1996 Ron Forbes was the highest-paid U.K. director. In 1995 Paul O'Grady was
the highest-paid U.K. director. The remuneration of the chairmen was as follows:
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995
<S> <C> <C>
Paul O'Grady (February 1 1995 - May 2 1995) - 42
Brian Reynolds (May 2 1995 - March 24 1996) 29 89
J. Michael Gullard (since March 24 1996) 53 -
- -----------------------------------------------------------------
</TABLE>
The emoluments, excluding pension contributions, of the individual directors
fell within the following ranges:
<TABLE>
<CAPTION>
(In G.B. pounds) 1996 1995
No. No.
<S> <C> <C>
20,001 - 25,000 1 -
75,001 - 80,000 - 1
90,001 - 95,000 1 -
130,001 - 135,000 - 1
Directors working mainly outside
the United Kingdom 5 5
- ---------------------------------------------------
</TABLE>
32
<PAGE> 24
DIRECTORS' SHAREHOLDINGS
The interests of the directors (all of which are beneficial) in the share
capital of Micro Focus Group Plc are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
January 31 January 31
1997 1996
<S> <C> <C>
J Michael Gullard, Chairman
1,000 -
Harold Hughes, Deputy Chairman 20,000 -
Marcelo Gumucio, Chief Executive Officer - -
Paul Adams 106,600 106,300
Ron Forbes 23,676 23,676
- ---------------------------------------------------------------------
</TABLE>
There have been no changes in these holdings since the year end.
DIRECTORS' SHARE OPTIONS
The following table sets out the number of options held by each director in
1996, including the changes in holdings during the year. No options were
exercised by any of the directors during the year.
<TABLE>
<CAPTION>
Number of options
------------------------------------- Option Latest
January January Date price exercise
31 1996 Granted Lapsed 31 1997 of grant (in G.B. pounds) date
<S> <C> <C> <C> <C> <C> <C> <C>
J. Michael Gullard 10,000 10,000 June 2 1994 10.67 June 2 2004
50,000 50,000 June 21 1996 8.35 June 21 2006
Harold Hughes 10,000 10,000 August 19 1992 14.98 August 19 2002
2,000 2,000 June 16 1994 11.98 June 16 2004
Marcelo Gumucio 10,000 10,000 January 30 1996 6.05 January 30 2006
362,500 362,500 April 1 1996 6.53 April 1 2006
362,500 362,500 June 21 1996 8.35 June 21 2006
Paul Adams 1,600 1,600 May 8 1990 5.42 August 8 1998
18,400 (18,400) - July 11 1991 16.72 July 11 2001
16,000 (16,000) - August 19 1992 14.98 August 19 2002
6,000 (6,000) - September 21 1993 17.45 September 21 2003
6,000 (6,000) - June 2 1994 10.67 June 2 2004
6,000 (6,000) - June 16 1994 11.98 June 16 2004
30,000 (30,000) - August 8 1995 6.97 August 8 2005
57,300 57,300 August 10 1996 6.85 April 10 2006
Ron Forbes 18,400 (18,400) - July 11 1991 16.72 July 11 2001
16,000 (16,000) - August 19 1992 14.98 August 19 2002
6,000 (6,000) - September 21 1993 17.45 September 21 2003
6,000 (6,000) - June 2 1994 10.67 June 2 2004
6,000 (6,000) - June 16 1994 11.98 June 16 2004
20,000 (20,000) - August 8 1995 6.97 August 8 2005
51,300 51,300 April 10 1996 6.85 April 10 2006
- ---------------------------------------------------------
</TABLE>
Notes: 1) In April 1996 the Company offered all employees the opportunity to
cancel all outstanding options above the then fair market value and
receive instead a new option, with a new vesting schedule, for three
new shares for each four shares then under option. Mr. Adams and Mr.
Forbes accepted these offers.
2) The market price of the shares at January 31 1997 was GBP 10.55 and
the range during the year was GBP 5.58 to GBP 13.35.
On behalf of the Committee
/s/ Harold Hughes
Harold Hughes
Chairman of the Executive
Remuneration Committee
March 4 1997
33
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA (UK FORMAT)
The following selected financial data should be read in conjunction with, and is
qualified in its entirety by reference to, the financial statements of Micro
Focus, expressed in G.B. pounds, set out on pages 40 to 55 of this report.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
In thousands of G.B. pounds (except per Years ended January 31: 1997 1996
share data, percentages and employees) Annual Report: 1996 1995
<S> <C> <C>
OPERATING RESULTS FOR THE YEAR:
Revenue 73,089 77,258
Exceptional items * (5,195) (6,001)
(Loss)/profit before taxation (5,809) (6,542)
Retained (loss)/profit for the year (7,281) (6,470)
(Loss)/earnings per share (48.0p) (43.6p)
(Loss)/earnings per share: excluding exceptional items * (13.8p) (11.7p)
Average number of shares in issue (thousands) 15,156 14,843
FINANCIAL POSITION AT END OF YEAR:
Cash and bank deposits 44,725 38,972
Total assets 100,204 111,828
Creditors: amounts falling due after more than one year 15 66
Total shareholders funds 61,124 70,187
FINANCIAL CONDITION:
Working capital 26,611 27,306
Current ratio 1.81 1.76
Return on revenue: excluding exceptional items * n/a n/a
Return on average equity: excluding exceptional items * n/a n/a
EMPLOYEE INFORMATION:
Average number of employees 646 735
Number of employees at year end 626 708
Revenue per employee 113 105
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
In thousands of G.B. pounds (except per Years ended January 31: 1995 1994 1993
share data, percentages and employees) Annual Report: 1994 1993 1992
<S> <C> <C> <C>
OPERATING RESULTS FOR THE YEAR:
Revenue 89,885 83,842 68,882
Exceptional items * (4,148) - -
(Loss)/profit before taxation 8,723 21,761 22,777
Retained (loss)/profit for the year 4,590 14,747 15,444
(Loss)/earnings per share 32.0p 104.3p 110.3p
(Loss)/earnings per share: excluding exceptional items * 61.0p 104.3p 110.3p
Average number of shares in issue (thousands) 14,336 14,138 13,998
FINANCIAL POSITION AT END OF YEAR:
Cash and bank deposits 55,823 57,544 53,541
Total assets 124,302 109,915 96,892
Creditors: amounts falling due after more than one year 193 404 2,712
Total shareholders funds 72,856 75,100 60,549
FINANCIAL CONDITION:
Working capital 36,554 48,686 42,073
Current ratio 1.80 2.38 2.16
Return on revenue: excluding exceptional items * 10% 18% 22%
Return on average equity: excluding exceptional items * 12% 28% 35%
EMPLOYEE INFORMATION:
Average number of employees 751 667 599
Number of employees at year end 788 698 636
Revenue per employee 120 126 115
- -----------------------------------------------------------------------------------------------
</TABLE>
* Details of the exceptional items are set out in note 7 to the financial
statements on page 49.
34
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (UK FORMAT)
This discussion has been prepared in accordance with U.S. reporting practice and
is added to the U.K. format section of this Annual Report so that readers of the
U.K. format financial statements have the same information as readers of the
U.S. format financial statements. It should be read in conjunction with the
financial statements of Micro Focus Group Plc and its subsidiary undertakings
("Micro Focus") in G.B. pounds, on pages 40 to 55.
RESULTS OF OPERATIONS
Micro Focus reported a loss for the year after taxation of GBP 7.3m (1995: GBP
6.5m.) These results include exceptional charges of GBP 5.2m in 1996 and GBP
6.7m in 1995 and an exceptional credit of GBP 0.7m in 1995.
The table below sets out operating results as a percentage of revenue for the
three years ended January 31 1997. To further aid comparison, exceptional items
are identified separately in the table, and percentages shown against other cost
categories are exclusive of exceptional items.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Percentage of revenue Percentage change
1995 1994
1996 1995 1994 to 1996 to 1995
<S> <C> <C> <C> <C> <C>
REVENUE
PRODUCT REVENUE 57 57 70 (4) (30)
Service revenue 43 43 30 (7) 23
--------------------------------------------------------------------------
Total revenue 100 100 100 (5) (12)
--------------------------------------------------------------------------
Costs and expenses
Cost of product revenue 9 11 12 (27) (18)
Cost of service revenue 16 16 12 (4) 12
Research and development 30 29 23 (1) 7
Sales and marketing 40 40 35 (7) (1)
General and administrative 8 7 6 14 3
Exceptional items 7 8 - (13) -
Purchased research and
development costs - - 5 - -
--------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 110 111 93 (6) 3
--------------------------------------------------------------------------
OPERATING (LOSS)/PROFIT (10) (11) 7 (13) n/a
Interest income 2 3 2 (21) (2)
Interest expense - - - (72) (3)
--------------------------------------------------------------------------
(LOSS)/PROFIT BEFORE TAXATION (8) (8) 9 (11) n/a
Taxation (2) - (4) n/a n/a
--------------------------------------------------------------------------
(LOSS) FOR THE YEAR (10) (8) (5) 1 115
--------------------------------------------------------------------------
</TABLE>
REVENUE
Micro Focus derives its revenue from the license of software products and
related support and maintenance ("direct revenue") and from the licensing of
distribution rights to software products to original equipment manufacturers
("OEM revenue"). Direct revenue represented 90% of total revenue in 1996 (1995:
89%; 1994: 86%).
Revenue is analysed between product revenue, which consists of licensing of
software product to end-users and OEMs, and service revenue, consisting of
maintenance and other support services, including training and consulting.
Total revenue decreased by GBP 4.2m or 5% to GBP 73.1m in 1996, and by GBP 12.6m
or 12% to GBP 77.3m in 1995.
Product revenue decreased by GBP 2.0m or 4% to GBP 42.0m in 1996, and by GBP
18.9m or 30% to GBP 44.0m in 1995.
Service revenue decreased by GBP 2.2m or 7% to GBP 31.1m in 1996, having
increased by GBP 6.3m or 23% to GBP 33.3m in 1995.
Revenue by customer location is analysed in note 2 to the financial statements
on page 48.
Revenue decreased by 10% in the United States. Other territories showed no
overall sales increase, with growth in the United Kingdom, France and Japan
being offset by decreased sales to certain distributors, notably those in Italy
and Brazil.
Factors contributing to the decline in revenue in the first half of 1996
included slow conversion to 32-bit products and continuing uncertainties arising
from the
35
<PAGE> 27
fundamental changes caused by the Internet. The improved performance in
the second half of the year was reflected by increased sales of products to
address the century date change or "Year 2000" problem.
In 1995 revenue decreases were reported in the United States, and in other
territories. Factors contributing to the fall in revenue included postponed
investment decisions caused by uncertainties arising from the impact of the
Internet and the launch of Windows 95, and from delayed delivery of 32-bit
products.
COST OF PRODUCT REVENUE
Cost of product revenue is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media, and printing of manuals), packaging and distribution costs,
and royalties to third party software developers for the licensing of certain
add-on software products.
Excluding exceptional items, such costs decreased by GBP 2.3m or 27% to GBP 6.3m
in 1996 and by GBP 1.9m or 18% to GBP 8.7m in 1995 and represented 15% of
product revenue in 1996 (1995: 20%; 1994: 17%).
The decrease in product costs during 1996 reflected savings in product materials
arising from the intro-duction of documentation being supplied on CD-ROM.
The decrease in 1995 reflected the fall in revenue.
COST OF SERVICE REVENUE
Cost of service revenue is comprised principally of compensation for technical
support personnel, plus the costs associated with training and consulting.
Excluding exceptional items, such costs decreased by GBP 0.5m or 4% to GBP 11.8m
in 1996, having increased by GBP 1.3m or 12% to GBP 12.3m in 1995, and
represented 38%, of service revenue in 1996 (1995: 37%; 1994: 41%). The decrease
in 1996 reflected reductions taken to better align expenses with revenue. The
increase in 1995 resulted from increases in product support for client/server
and rehosting programs.
RESEARCH AND DEVELOPMENT
Research and development costs consist principally of compensation for software
developers and related costs incurred, after adjusting for the proportion of
such costs capitalised and the amortisation of previously capitalised software
costs. Micro Focus' high level of research and development spending supports the
development and enhancement of new and existing products and is consistent with
the Company's strategy of investing heavily to improve and expand product lines.
Research and development spending in 1996 has been directed principally towards
further development of Revolve/2000(TM) products which address the Year 2000
problem; NetExpress(TM), a complete set of tools for developing business
applications targeted at graphical PC workstations, distributed computer
environments and the Internet; and tools to enhance the functionality and
capability of core legacy COBOL Workbench products for workstation development
of IBM mainframe applications.
Research and development spending in 1995 and 1994 was directed principally
towards enabling Micro Focus products to operate across multiple operating
systems and graphical user interfaces; development of new 32-bit products;
further development of client/server solutions; object oriented programming in
COBOL; Expenditure on internal software research and development, before
capitalisation, decreased by GBP 4.2m or 18% to GBP 19.2m in 1996, and by GBP
0.1m to GBP 23.4m in 1995. The decrease in 1996 reflected the impact of the
restructuring announced in the first quarter (see "Exceptional items" below).
In 1996 27% of these costs were capitalised as software product assets (1995:
42%; 1994: 41%). Provisions for amortisation excluding exceptional items,
amounted to GBP 8.1m (1995: GBP 8.8m; 1994: GBP 7.1m), resulting in a net charge
to income in 1996 of GBP 2.8m, compared to net credits of GBP 1.1m and GBP 2.6m
in 1995 and 1994 respectively.
Total research and development costs also include restructuring costs of GBP
2.3m and GBP 4.5m in 1996 and 1995 (see "Exceptional items", below, and note 7
to the financial statements on page 49).
SALES AND MARKETING
Sales and marketing costs include compensation, travel and facility costs for
sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows.
Excluding exceptional items, such costs decreased by GBP 2.1m or 7% to GBP 29.2m
in 1996, and by GBP 0.2m or 1% to GBP 31.3m in 1995. The decrease in 1996
reflects the impact of the worldwide cost reductions implemented in the first
quarter.
GENERAL AND ADMINISTRATIVE
General and administrative costs include the group management, finance, legal
and human resources operations of Micro Focus.
Excluding exceptional items, such costs increased by GBP 0.8m or 14% to GBP 6.0m
in 1996, having increased by GBP 0.1m to GBP 5.2m in 1995. In 1996 general and
administrative costs have increased following the strengthening of the Micro
Focus management team.
36
<PAGE> 28
EXCEPTIONAL ITEMS
In the first quarter of 1996 Micro Focus incurred a restructuring charge of GBP
5.2m. The charge consisted of costs associated with a reduction in the Company's
workforce of approximately 65 people, facility closures and consolidations, and
asset write-downs. The restructuring was essentially completed during the year,
but payments estimated at GBP 1.5m remain to be paid in 1997.
Exceptional items recorded in 1995 consisted of a charge of GBP 6.7m for
restructuring costs and a credit of GBP 0.7m in respect of an employer loan to
the Micro Focus Group Employee Benefit Trust 1994.
Restructuring costs of GBP 3.1m incurred in the first quarter of 1995
principally reflected employee terminations (including salary, benefit
continuation and outplacement costs for approximately 75 employees), closure of
surplus office facilities, and write-downs of related fixed assets. An
additional charge of GBP 3.6m, booked in the fourth quarter of 1995, was
primarily the result of a review into the carrying values of software product
assets.
In 1994 Micro Focus recorded exceptional charges of GBP 3.2m, representing the
write-off of intellectual property rights acquired from mbp and GBP 0.9m in
connection with the purchase of Burl Software Laboratories, Inc.("Burl").
INTEREST INCOME
Interest income represents interest earned on cash and short-term investments.
Interest income decreased by GBP 0.5m or 21% to GBP 1.7m in 1996, having
remained constant at GBP 2.2m in 1995 and 1994. The current decrease principally
reflects lower average cash balances, and, to a lesser degree, lower interest
rates.
INCOME TAXES
A tax provision of GBP 1.5m was recorded for 1996. The effective tax rate in
both 1996 and 1995 was affected by the distribution of taxable profits and
losses among the tax jurisdictions in which Micro Focus operates. The Company
has not recognised the tax effects of operating losses in U.S. subsidiaries.
An analysis of the charge for taxation, including an analysis of differences
between the effective rate and the U.K. statutory rate, is given in note 8 to
the financial statements on page 50.
ACQUISITIONS
In 1995 Micro Focus completed the agreed acquisition of Burl (see note 12 to the
financial statements on page 52). The transaction had been accounted for as a
purchase in 1994.
In 1994 Micro Focus acquired the intellectual property rights to certain
development tools from mbp, a German subsidiary of EDS, for U.S. $5.0m (GBP
3.2m) and the Expert Consulting Division of The Systems Group for U.S. $0.5m
(GBP 0.3m).
FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS
Micro Focus operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. This section highlights
some of these factors and the possible impact of these factors on future results
from operations.
This section has been included in both the U.S. and U.K. format of the
Management's Discussion and Analysis in this Annual Report in accordance with
the Private Securities Litigation Reform Act of 1995, which became effective in
the United States as of January 1 1996. For more information regarding such law
and forward-looking statements, see Further Information for Shareholders-Special
Note on Forward-Looking Statements above.
The factors set forth below contain certain forward-looking statements that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
Company's actual results, performance or achievements in 1997 and beyond could
differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in this
section below, as well as those in the Letter to Shareholders above and those
discussed elsewhere in this Annual Report. The Company undertakes no obligation
to release publicly any updates or revisions to any such forward-looking
statements that may reflect events or circumstances occurring after the date of
this Annual Report. For more information regarding forward-looking statements,
see Further Information for Shareholders - Special Note on Forward-Looking
Statements on page 6.
Micro Focus' future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders, product life cycles, the
ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis, the introduction and
acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of enhancements or new
products, changes in the mix of
37
<PAGE> 29
distribution channels through which the Company's products are offered,
purchasing patterns of distributors and retailers, quality control of products
sold, price and other competitive conditions in the industry, changes in the
Company's level of operating expenses, changes in the Company's sales incentive
plans, budgeting cycles of its customers, the cancellation of licenses during
the warranty period, nonrenewal of maintenance agreements, economic conditions
generally or in various geographic areas, and other factors discussed in this
section.
A high percentage of Micro Focus' operating expenses is fixed over the short
term and if anticipated revenue does not occur or is delayed, the operating
results for that quarter will be immediately and adversely affected. In
addition, a substantial portion of Micro Focus' revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter. Furthermore, while the Company's business has not
been subject to seasonal variations, the Company's customers tend to make
product purchase decisions in the fourth quarter of the Company's financial year
as a result of purchase cycles related to expiration of budgetary
authorizations. As a result, the Company experiences lower revenue for the first
quarter of its financial year than in the fourth quarter of the prior year. The
Company's revenue is also affected by seasonal fluctuations resulting from lower
sales that typically occur during the summer months in Europe and other parts of
the world. Due to all of the foregoing factors, it is possible that in some
future quarters Micro Focus' operating results will be below the expectations of
stock market analysts and investors and that the share price would be materially
adversely affected.
Micro Focus is in a market that is subject to rapid technological change. Micro
Focus must continually adapt to that change by improving its products and
introducing new products and technologies. The growth and financial performance
of Micro Focus will depend upon its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market new products depends upon its ability to attract and retain qualified
employees. In the past, Micro Focus has experienced delays and increased
expenses in developing new products. Any failure by the Company to anticipate or
respond adequately to changes in technology and market conditions, to complete
product development and introduce new products on a timely basis or to attract
and retain qualified employees, could materially adversely affect the Company's
business, results of operations and financial condition.
Substantially all of Micro Focus' revenue is currently, and is expected to
continue to be, derived from products and services related to applications
development in the COBOL language. As a result, Micro Focus' future operating
results depend upon continued market acceptance of the COBOL language. Any
decline in the demand for of the COBOL language or mainframe computers where
COBOL is a dominant language as a result of competition, technological change or
other factors would have a material adverse effect on Micro Focus' business,
financial condition and results of operations.
The markets in which the Company competes are characterized by rapid
technological change and aggressive competition and the quality of service
offerings. The Company believes that the principal competitive factors in the
Company's markets are product performance and reliability, functionality,
product quality, application portability, product enhancement, price, training,
support and services. The Company expects competition to increase in the future
from existing competitors and from other companies that may enter the Company's
existing or future markets with similar, or substitute solutions including
vendors of other programming languages and database vendors with tools that may
be less costly or provide better performance or functionality. Some of the
Company's current and prospective competitors in the products and service
markets have greater financial, marketing or technical resources than Micro
Focus and may be able to adapt more quickly to new or emerging technologies, or
devote greater resources to the promotion and sale of their products than can
Micro Focus. There can be no assurance that other companies will not develop
competitive products in the future. In addition, the software industry is
characterized generally by low barriers to entry, as a result of which new
competitors possessing technological, marketing or other competitive advantages
may emerge and rapidly acquire market share. Furthermore, there can be no
assurance that the Company will be able to compete effectively in the future in
the professional services market and particularly the Year 2000 professional
services market.
The market price of the Company's securities has experienced significant price
volatility and such volatility may occur in the future. Factors such as actual
or anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software industry
and
38
<PAGE> 30
other factors may have a significant impact on the market price of the Company's
securities. Further, the stockmarket has experienced extreme volatility that has
particularly affected the market prices of equity securities of many high
technology companies. These market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Company's securities.
Micro Focus is subject to the general economic climate in the various areas of
the world in which it does business. The risks inherent in conducting
international business generally include exposure to exchange rate fluctuations
(see "Exchange rate fluctuations" directly below), longer payment cycles,
greater difficulties in debtor collection and enforcing agreements, tariffs and
other restrictions on foreign trade, export requirements, economic and political
instability, withholding and other tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that the factors described above will
not have an adverse effect on the Company's future international revenues.
The Company markets certain of its products and services to customers for
managing the development and maintenance of mission-critical computer software
systems. In addition, an increasing portion of the Company's business is devoted
to addressing the Year 2000 problem, which affects the performance and
reliability of many mission-critical systems. The Company's agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product and service liability claims. It is possible, however, that
the limitation of liability provisions contained in the Company's customer
agreements may not be effective as a result of existing or future domestic or
foreign laws or ordinances or unfavorable judicial decisions. Although the
Company has not experienced any product or service liability claims to date, the
sale and support of its products and services may entail the risk of such
claims, particularly in the Year 2000 market. A successful product or service
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition.
Furthermore, the Company anticipates that demand in the Year 2000 market will
decline, perhaps rapidly, following the year 2000 and the demand for the
Company's Year 2000 solutions, products and services may also decline as a
result of new technologies, competition or other factors. If this decline in
demand were to occur, the Company's license revenues and professional services
fees could be materially and adversely affected.
EXCHANGE RATE FLUCTUATIONS
Micro Focus prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates.
Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of Micro Focus' revenue arises in U.S. dollars (approximately
two-thirds in 1996) whereas its costs and expenses are incurred approximately
equally in U.S. dollars and other currencies, predominately G.B. pounds.
Consequently fluctuations in exchange rates, particularly between the U.S.
dollar and the G.B. pound, may have a significant impact on Micro Focus'
operating results, notably when expressed in G.B. pounds. In 1996 and 1995
fluctuations between the U.S. dollar and the G.B. pound have not been
significant, and net exchange rate gains or losses on operational transactions
have been immaterial.
LIQUIDITY AND CAPITAL RESOURCES
Micro Focus continues to fund its activities through cash from operations. In
1996 cash provided by operating activities was GBP 12.1m (1995: GBP 9.7m). In
1996 Micro Focus invested GBP 2.4m (1995: GBP 8.6m) in property, plant and
equipment and GBP 5.3m (1995: GBP 9.9m) in software product assets. Investment
in 1995 included GBP 4.4m in the redevelopment of the Company's U.K.
headquarters office in Newbury, England. In 1995 the Company also paid GBP 3.9m
in connection with the acquisition of Burl and spent GBP 5.0m on the purchase of
shares in the Company for the benefit of the Micro Focus Group Employee Benefit
Trust 1994.
Net of these expenditures, cash and bank increased by GBP 5.7m to GBP 44.7m
(1995: decreased by GBP 16.9m to GBP 39.0m). Micro Focus may invest a further
GBP 5.8m on capital during 1997 in connection with occupying a new U.S.
facility, and on communications software and other information systems
improvements. The Company has in place a line of credit under the terms of which
unsecured financing of up to GBP 5.0m is available until December 1997. There
have been no borrowings under this line of credit to date.
Micro Focus believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid money
market investments. The Company's investment policy is designed to minimize
risk while maximizing return on cash given such levels of risk, and to keep
uninvested cash at a minimum. Cash management is centralized, although some cash
is held at various subsidiaries around the world to meet local operating
requirements. All cash is freely remittable. Micro Focus believes that existing
39
<PAGE> 31
CONSOLIDATED PROFIT AND LOSS ACCOUNT (UK FORMAT)
<TABLE>
<CAPTION>
Year ended January 31
Continuing operations
Before
In thousands of G.B. pounds exceptional Exceptional
(except per share data) Notes items items (note 7)
<S> <C> <C> <C>
Revenue
Product revenue 42,020 --
Service revenue 31,069 --
---------------------------------------------------------------
Total revenue 2 73,089 --
===============================================================
Costs and expenses
Cost of product revenue 6,352 54
Cost of service revenue 11,848 44
Research and development 3 22,044 2,255
Sales and marketing 29,158 988
General and administrative 6,000 1,854
---------------------------------------------------------------
Total costs and expenses 75,402 5,195
===============================================================
Operating (loss)/profit 4 (2,313) (5,195)
Interest income
Interest expense 6
Other acquisition charges
---------------------------------------------------------------
(Loss)/profit before taxation
Taxation 8
---------------------------------------------------------------
(Loss)/profit for the year
===============================================================
(Loss)/earnings per share 9
===============================================================
(Loss)/earnings per share: 9
before exceptional items
===============================================================
</TABLE>
<TABLE>
<CAPTION>
In thousands of G.B.pounds Year ended Year ended Year ended
(except per share data) January 31 January 31 January 31
1997 1996 1995
<S> <C> <C> <C>
Revenue
Product revenue 42,020 43,991 62,878
Service revenue 31,069 33,267 27,007
--------------------------------------------------------------------
Total revenue 73,089 77,258 89,885
====================================================================
Costs and expenses
Cost of product revenue 6,406 8,855 10,586
Cost of service revenue 11,892 12,343 11,055
Research and development 24,299 26,851 24,149
Sales and marketing 30,146 32,857 31,464
General and administrative 7,854 4,986 5,099
--------------------------------------------------------------------
Total costs and expenses 80,597 85,892 82,353
====================================================================
Operating (loss)/profit (7,508) (8,634) 7,532
Interest income 1,720 2,166 2,210
Interest expense (21) (74) (76)
Other acquisition charges -- -- (943)
--------------------------------------------------------------------
(Loss)/profit before taxation (5,809) (6,542) 8,723
Taxation (1,472) 72 (4,133)
--------------------------------------------------------------------
(Loss)/profit for the year (7,281) (6,470) 4,590
====================================================================
(Loss)/earnings per share (48.0p) (43.6p) 32.0p
====================================================================
(Loss)/earnings per share: (13.8p) (11.7p) 61.0p
before exceptional items
====================================================================
</TABLE>
The notes on pages 46 to 55 form part of these financial statements.
40
<PAGE> 32
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET (UK FORMAT)
In thousands of G.B. pounds January 31 January 31
Notes 1997 1996
<S> <C> <C> <C>
Fixed assets
Intangible fixed assets 10 14,590 17,857
Tangible fixed assets 11 20,543 24,910
Investments 12 5,634 5,634
-----------------------------------------------------------------------------
Total fixed assets 40,767 48,401
=============================================================================
Current assets
Stocks 13 484 1,704
Debtors 14 14,228 22,751
Cash and bank deposits 44,725 38,972
-----------------------------------------------------------------------------
Total current assets 59,437 63,427
=============================================================================
Creditors: amounts falling due within
one year 15 16,180 16,461
Deferred revenue 16,646 19,660
-----------------------------------------------------------------------------
Net current assets 26,611 27,306
=============================================================================
Total assets less current liabilities 67,378 75,707
Creditors: amounts falling due after more
than one year 16 15 66
Provisions for liabilities and charges:
Deferred taxation 18 6,239 5,454
-----------------------------------------------------------------------------
Net assets 61,124 70,187
=============================================================================
Capital and reserves
Called up share capital 1,517 1,514
Share premium account 18,071 17,936
Profit and loss account 41,536 50,737
-----------------------------------------------------------------------------
Total shareholders' funds 61,124 70,187
=============================================================================
The financial statements on pages 40 to 55 were approved by the Board of
directors on March 4 1997.
/s/ M.A. Gumucio /s/ Ron Forbes
- --------------------- ---------------------
Marcelo Gumucio Ron Forbes
Director Director
The notes on pages 46 to 55 form part of these financial statements.
41
</TABLE>
<PAGE> 33
CONSOLIDATED BALANCE SHEET (UK FORMAT)
<TABLE>
<CAPTION>
In thousands of G.B. pounds Year ended Year ended Year ended
January 31 January 31 January 31
1997 1996 1995
<S> <C> <C> <C>
Net cash inflow from operating activities (note i) 12,135 9,725 26,436
Returns on investments and servicing of finance
Interest received 1,803 2,082 3,505
Interest paid (21) (74) (76)
- -----------------------------------------------------------------------------------------------
Net cash inflow from returns on investments and
servicing of finance 1,782 2,008 3,429
===============================================================================================
Taxation
U.K. corporation tax (paid) (88) (1,562) (4,721)
Overseas tax refunded (paid) 70 (1,362) (2,207)
- -----------------------------------------------------------------------------------------------
Tax paid (18) (2,924) (6,928)
===============================================================================================
Investing activities
Purchase of tangible fixed assets (2,500) (8,643) (12,208)
Purchase of software product assets -- (226) (333)
Capitalised software product assets (5,258) (9,882) (9,719)
Investment in own shares -- (5,002) --
Investment in subsidiary undertakings -- (3,892) --
Investment in bank deposits -- -- 33,187
Disposal of tangible fixed assets 546 298 149
- -----------------------------------------------------------------------------------------------
Net cash (outflow)/inflow from investing activities (7,212) (27,347) 11,076
===============================================================================================
Net cash (outflow)/inflow before financing 6,687 (18,538) 34,013
===============================================================================================
Financing (note ii)
Issue of ordinary shares, net of expenses 138 278 224
Capital element of finance lease obligations (131) (295) (315)
- -----------------------------------------------------------------------------------------------
Net cash inflow/(outflow) from financing 7 (17) (91)
===============================================================================================
Increase/(decrease) in cash 6,694 (18,555) 33,922
===============================================================================================
Increase/(decrease) in cash, as above (note iii) 6,694 (18,555) 33,922
(Repayment of) bank deposits (note iv) -- -- (33,187)
Effect of foreign exchange translation differences (941) 1,704 (2,456)
- -----------------------------------------------------------------------------------------------
Increase/(decrease) in cash and bank deposits 5,753 (16,851) (1,721)
===============================================================================================
</TABLE>
The notes on pages 46 to 55 form part of these financial statements.
42
<PAGE> 34
NOTES TO CONSOLIDATED CASH FLOW STATEMENT (UK FORMAT)
<TABLE>
<CAPTION>
In thousands of G.B. pounds Year ended Year ended Year ended
January 31 January 31 January 31
1997 1996 1995
<S> <C> <C> <C>
(i) Reconciliation of operating (loss)/profit to
"Net cash inflow from operating activities"
Operating (loss)/profit (7,508) (8,634) 7,532
Depreciation charges 5,655 6,186 4,351
Amortisation charges 8,012 12,639 7,093
Loss on sale of tangible fixed assets 221 70 11
Decrease/(increase) in stocks 1,171 117 (325)
Decrease in debtors 8,012 2,174 2,213
(Decrease)/increase in creditors (790) (690) 2,475
(Decrease)/increase in deferred revenue (2,693) (2,137) 3,086
- ----------------------------------------------------------------------------------------------
Net cash inflow from operating activities 12,135 9,725 26,436
==============================================================================================
(ii) Analysis of changes in financing:
- ----------------------------------------------------------------------------------------------
Share capital (including premium):
- ----------------------------------------------------------------------------------------------
Balance, beginning of year 19,450 14,584 14,360
Shares issued to complete acquisition of Burl -- 4,558 --
Share options exercised 138 308 224
- ----------------------------------------------------------------------------------------------
Balance, end of year 19,588 19,450 14,584
- ----------------------------------------------------------------------------------------------
Loans and finance lease obligations:
- ----------------------------------------------------------------------------------------------
Balance, beginning of year 214 509 700
Finance lease obligations (131) (295) (191)
- ----------------------------------------------------------------------------------------------
Balance, end of year 83 214 509
==============================================================================================
(iii) Analysis of changes in cash during the year
- ----------------------------------------------------------------------------------------------
Balance, beginning of year 38,972 55,823 23,433
Increase/(decrease) in cash 7,526 (18,555) 33,922
Effect of foreign exchange rate changes on cash (1,773) 1,704 (1,532)
- ----------------------------------------------------------------------------------------------
Balance, end of year 44,725 38,972 55,823
==============================================================================================
(iv) Analysis of changes in bank deposits
during the year
- ----------------------------------------------------------------------------------------------
Balance, beginning of year -- -- 34,111
(Decrease) in bank deposits -- -- (33,187)
Effect of foreign exchange rate changes on
bank deposits -- -- (924)
- ----------------------------------------------------------------------------------------------
Balance, end of year -- -- --
==============================================================================================
</TABLE>
The notes on pages 46 to 55 form part of these financial statements.
43
<PAGE> 35
<TABLE>
<CAPTION>
COMPANY BALANCE SHEET (UK FORMAT)
January 31 January 31
In thousands of G.B. pounds Notes 1997 1996
<S> <C> <C> <C>
Fixed assets
Tangible fixed assets 11 2,992 3,077
Investments 12 32,809 33,319
-------------------------------------------------------------------------------
Total fixed assets 35,801 36,396
===============================================================================
Current assets
Amounts owed by subsidiary undertakings 11,214 8,436
Other debtors 2 --
Cash and bank deposits 18 76
-------------------------------------------------------------------------------
Total current assets 11,234 8,512
===============================================================================
Creditors: amounts falling due within
one year: -- --
Amounts owed to subsidiary undertakings 11,469 10,145
Trade creditors 9 2
Corporation tax 178 174
Accrued expenses 47 109
-------------------------------------------------------------------------------
Net current (liabilities) (469) (1,918)
===============================================================================
Total assets less current liabilities 35,332 34,478
Provisions for liabilities and charges:
Deferred taxation 18 19 19
-------------------------------------------------------------------------------
Net assets 35,313 34,459
===============================================================================
Capital and reserves
Called up share capital 1,517 1,514
Share premium account 18,071 17,936
Profit and loss account 15,725 15,009
-------------------------------------------------------------------------------
Total shareholders' funds 35,313 34,459
===============================================================================
The financial statements on pages 40 to 55 were approved by the Board of
directors on March 4 1997.
/s/ M.A. Gumucio /s/ Ron Forbes
------------------------------ ----------------------------
Marcelo Gumucio Ron Forbes
Director Director
This is the balance sheet of Micro Focus Group Plc, the holding company of the
Micro Focus group of companies, which is presented in accordance with section
226 of the Companies Act 1985 of Great Britain. No profit or loss account is
presented for Micro Focus Group Plc as provided by section 230 of the same Act.
The notes on pages 46 to 55 form part of these financial statements.
44
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (UK FORMAT)
Year ended Year ended Year ended
In thousands of G.B. pounds January 31 January 31 January 31
1997 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Loss)/profit for the year (7,281) (6,470) 4,590
Currency translation adjustment (1,920) 2,275 (2,978)
------------------------------------------------------------------------------------------
Total recognised gains and losses for the year (9,201) (4,195) 1,612
==========================================================================================
MOVEMENT IN SHAREHOLDERS' FUNDS (UK FORMAT)
--------------------------------------------------------------------------------------
In thousands of G.B. pounds
(except per share data)
Ordinary shares of 10p each :
Authorised Issued Amount Premium
'000 '000
<S> <C> <C> <C> <C>
Balance, January 31 1994 16,500 14,217 1,422 12,938
Share options exercised -- 147 15 209
Transfer between reserves -- -- -- --
Agreed acquisition of Burl -- -- -- --
Goodwill arising on acquisitions -- -- -- --
Profit for the year -- -- -- --
Currency translation adjustment -- -- -- --
-----------------------------------------------------------------------------------
Balance, January 31 1995 16,500 14,364 1,437 13,147
Share options exercised -- 115 11 297
Shares issued to complete Burl
acquisition -- 665 66 4,492
(Loss) for the year -- -- -- --
Currency translation adjustment -- -- -- --
-----------------------------------------------------------------------------------
Balance, January 31 1996 16,500 15,144 1,514 17,936
Increase in authorised share capital 6,000 -- -- --
Share options exercised -- 24 3 135
(Loss) for the year -- -- -- --
Currency translation adjustment -- -- -- --
-----------------------------------------------------------------------------------
Share Deferred Other Retained
purchase reserves earnings Total
consideration
<S> <C> <C> <C> <C>
Balance, January 31 1994 -- 1 60,739 75,100
Share options exercised -- -- -- 224
Transfer between reserves -- (1) 1 --
Agreed acquisition of Burl 3,340 -- -- 3,340
Goodwill arising on acquisitions -- -- (7,420) (7,420)
Profit for the year -- -- 4,590 4,590
Currency translation adjustment -- -- (2,978) (2,978)
----------------------------------------------------------------------------------
Balance, January 31 1995 3,340 -- 54,932 72,856
Share options exercised -- -- -- 308
Shares issued to complete Burl
acquisition (3,340) -- -- 1,218
(Loss) for the year -- -- (6,470) (6,470)
Currency translation adjustment -- -- 2,275 2,275
----------------------------------------------------------------------------------
Balance, January 31 1996 -- -- 50,737 70,187
Increase in authorised share capital -- -- -- --
Share options exercised -- -- -- 138
(Loss) for the year -- -- (7,281) (7,281)
Currency translation adjustment -- -- (1,920) (1,920)
----------------------------------------------------------------------------------
The issued ordinary shares are allotted, called up and fully paid.
Micro Focus Group Plc has been authorised by its members to make market
purchases of its own shares (within the meaning of section 163(3) of the
Companies Act 1985).
The notes on pages 46 to 55 form part of these financial statements.
45
</TABLE>
<PAGE> 37
NOTES TO THE FINANCIAL STATEMENTS (UK FORMAT)
The statutory financial statements of Micro Focus, within the meaning of section
240 of the Companies Act 1985 of Great Britain, for the year ended January 31
1997 are contained on pages 40 to 55.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
To enable the reader to see immediately any information provided in addition to
the common policy statements, the text of this note and the corresponding note 1
to the financial statements in U.S. format on page 19 is italicised where the
text is identical.
BASIS OF PREPARATION
The financial statements have been prepared under the historical cost convention
and in accordance with applicable U.K. Accounting Standards, which, as applied
by Micro Focus, do not differ in any significant respect from U.S. generally
accepted accounting principles ("GAAP") except with regard to the treatment of
acquisitions and goodwill and the presentation of certain items in the financial
statements.
BASIS OF CONSOLIDATION
The consolidated financial statements are those of Micro Focus Group Plc ("the
Company") and all of its subsidiary undertakings ("Micro Focus"). All
significant inter-company balances and transactions have been eliminated on
consolidation.
Certain changes have been made to the presentation of data in the financial
statements this year in line with current best practice. The profit and loss
account has been amended to disclose an analysis of revenue between that derived
from products and that derived from services. Cost of revenue has been similarly
analysed. Also, the Company has revised the presentation of debtors and deferred
revenue in the balance sheet. These reclassifications have not impacted the
results of operations or financial position of the Company. Certain amounts
previously reported in 1995 and 1994 have been reclassified to conform with the
1996 presentation.
REVENUE RECOGNITION
Revenue represents the amounts derived from the provision of goods and services
which fall within Micro Focus' ordinary activities, stated net of applicable
sales taxes.
Revenue from licensing software packaged products to end users and resellers is
recognised on delivery.
Revenue from sales to original equipment manufacturers ("OEMs") under
non-cancellable licence agreements generally provide for development fees and
initial licence fees, which are recognised at the later of (a) the date product
is delivered to the OEM and (b) the date payment becomes due within twelve
months and (c) the date of receipt of monies if collection cannot be assessed
with reasonable assurance. When sales by the OEM exceed the initial licence fee
commitment, revenue is recognised as unit shipments are reported by the OEM.
Revenue from maintenance agreements is recognised pro-rata over the life of the
agreement corresponding to notional delivery of the service.
SOFTWARE PRODUCT ASSETS - DEVELOPMENT COSTS
Costs related to the initial development and design of new software products
prior to the establishment of technological feasibility are written off as
research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalised as software product
assets.
Software purchased for inclusion in the Micro Focus product set, including
software acquired on acquisitions, is also included in software product assets.
Software product assets are amortised using the straight line method over the
estimated economic life of the products, which in most cases is assumed to be
four years. Where market expectations dictate, amortisation is accelerated.
Amortisation of software product assets is included in research and development
costs.
GOODWILL
Goodwill represents the excess of the amount paid on the acquisition of a
business over the aggregate fair value of the net assets acquired. Such amounts
are set off against reserves as incurred.
46
<PAGE> 38
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:
<TABLE>
<S> <C>
Freehold office buildings 40 years
Leasehold improvements over the lease term
Computer equipment 3 - 5 years
Office equipment 7 years
Transportation equipment 3 - 4 years
</TABLE>
LEASING
Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are capitalised as fixed assets. The amount capitalised
is that sum for which the leased asset could be purchased at the start of the
lease, this sum also being treated as a liability.
Depreciation on such leased assets is provided at rates calculated to write off
the capitalised cost over the shorter of the lease term and the asset's economic
life. Lease payments are apportioned between finance charges (computed on the
basis of implicit interest rates) and a reduction in the original liability.
Rentals paid under operating leases are charged to income on a straight-line
basis over the lease term.
DEFERRED TAXATION
Deferred taxation is provided on the liability method on all timing differences
to the extent that they are expected to reverse in the future without being
replaced, calculated at the rate at which it is anticipated the timing
differences will reverse.
STOCKS
Stocks, consisting principally of diskettes and technical manuals, are stated
at the lower of cost and net realisable value, using the first-in, first-out
method. Contracts in progress, representing engineering costs associated with
non-cancellable licence agreements prior to delivery,are included in stocks
and charged to income when the related revenue is recognised.
CASH AND BANK DEPOSITS
Cash and bank deposits includes cash placed on deposit where the maturity
date is between three and twelve months from the initial date of deposit.
INVESTMENTS
Investments are recorded at cost less any provision for permanent diminution in
value.
TRANSLATION OF FOREIGN CURRENCIES
Micro Focus' policy on foreign currency translation complies with U.K. Statement
of Standard Accounting Practice No. 20 "Foreign Currency Translation".
Assets and liabilities denominated in currencies other than G.B. pounds are
translated at exchange rates in effect at the balance sheet date. Closing G.B.
pound to U.S. dollar rates at January 31 1997, 1996 and 1995 were GBP 1 =
$1.60, GBP 1 = $1.51 and GBP 1 = $1.59 respectively. Revenues, costs and
expenses are translated using average rates. Monthly average G.B. pound to U.S.
dollar rates used during 1996 range between GBP 1 = $1.50 and GBP 1 = $1.71,
and average GBP 1 = $1.58 (1995: GBP 1 = $1.58; 1994: GBP 1 = $1.54.)
Translation adjustments resulting from the process of translating financial
statements denominated in currencies other than G.B. pounds are dealt with
through reserves.
(LOSS)/EARNINGS PER SHARE
(Loss)/earnings per share is based on the (loss)/profit for the year after
taxation, and on the weighted average number of ordinary shares outstanding
during the year.
Fully diluted earnings per share is based on the profit for the year after
taxation, and on the weighted average number of ordinary shares outstanding
during the period as adjusted for shares issuable upon exercise of share
options. The computation assumes the proceeds from the exercise of share options
are invested in 2.5% Consolidated Stock. Fully diluted earnings per share is
disclosed where dilution from earnings per share is greater than 3%.
47
<PAGE> 39
PENSIONS
Micro Focus has entered into arrangements under which it makes defined
contributions to personal pension schemes operated by its employees.
Contributions, which are independently administered by insurance companies and
other financial institutions, are charged to income in the year in which they
become payable.
NEW ACCOUNTING STANDARDS
Compliance with Financial Reporting Standard 8 - Related Party Disclosures ("FRS
8"), which was issued by the Accounting Standards Board in 1995, became
mandatory in 1996. The financial statements of Micro Focus have not been
affected by the increased disclosures required by FRS 8.
NOTE 2 REVENUE (TURNOVER)
The following table analyses revenue by customer location:
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995 1994
Revenue:
<S> <C> <C> <C>
United States 38,640 42,824 53,215
Japan 3,519 2,720 4,185
United Kingdom 6,811 7,178 8,136
Europe (excluding U.K.) 19,297 19,400 19,269
Other 4,822 5,136 5,080
- -----------------------------------------------------------------
73,089 77,258 89,885
=================================================================
</TABLE>
An analysis of revenue based on the location of Micro Focus facilities is
included in note 20 on page 54.
NOTE 3 RESEARCH AND DEVELOPMENT COSTS
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995 1994
<S> <C> <C> <C>
Research and development costs,
before capitalisation 19,235 23,423 23,505
Costs capitalised as software
product assets (5,258) (9,882) (9,719)
Amortisation of capitalised costs 8,067 8,805 7,093
Previously deferred costs expensed
on contract completion -- -- 65
- -----------------------------------------------------------------
22,044 22,346 20,944
Exceptional items (note 7):
Restructuring costs:
- accelerated amortisation -- 3,834 --
- other costs 2,255 671 --
Purchased research and development
costs written off -- -- 3,205
- -----------------------------------------------------------------
24,299 26,851 24,149
=================================================================
</TABLE>
NOTE 4 OPERATING (LOSS)/PROFIT
Operating (loss)/profit is stated after charging:
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995 1994
<S> <C> <C> <C>
Auditors' remuneration:
audit services: U.K 105 96 130
audit services: overseas 93 100 104
non-audit services: U.K 181 141 125
non-audit services: overseas 218 179 156
Operating lease rentals:
equipment 743 903 883
land and buildings 1,811 2,137 2,187
Depreciation on leased assets 39 118 190
Other depreciation and
amortisation 5,616 6,068 4,161
</TABLE>
The profit attributable to the ordinary shareholders of Micro Focus Group Plc,
dealt with in the financial statements of Micro Focus, is GBP 716,000 (1995:
profit GBP 1,449,000; 1994: loss GBP 7,790,000).
48
<PAGE> 40
NOTE 5 DIRECTORS AND EMPLOYEES
An analysis of the directors' remuneration, including details of the
remuneration of the chairmen and highest-paid U.K. director, is set out in the
Executive Remuneration Committee's Report on page 31.
The average monthly number of staff employed by Micro Focus during the year was:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1996 1995 1994
No. No. No.
<S> <C> <C> <C>
U.S. and Japan 316 362 378
Europe 330 373 373
- --------------------------------------------------------------------
646 735 751
====================================================================
</TABLE>
Staff costs, which include salaries, bonus and commissions, amounted to:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(In thousands of G.B. pounds) 1996 1995 1994
<S> <C> <C> <C>
U.S. and Japan 17,270 18,272 20,333
Europe 12,215 13,552 13,450
- ----------------------------------------------------------------------
29,485 31,824 33,783
Social security costs 2,797 2,884 2,808
Other pension costs 437 596 710
- ----------------------------------------------------------------------
32,719 35,304 37,301
======================================================================
</TABLE>
Other pension costs principally represent amounts paid by Micro Focus to
personal pension schemes operated by its employees. In the United Kingdom, Micro
Focus matches contributions made by participating employees up to certain
predetermined thresholds. Arrangements for employees in other countries have
been established on similar bases, subject to local regulations and practices in
the countries concerned.
NOTE 6 INTEREST EXPENSE
Interest expense principally represents finance charges payable in respect of
finance leases.
NOTE 7 EXCEPTIONAL ITEMS
Exceptional items recorded in 1996 represent a charge of GBP 5,195,000 for
restructuring costs. The charge consists of the costs associated with a
reduction in the Company's workforce of approximately 65 people, with facility
closures and consolidations, and with asset write-downs. The restructuring was
essentially completed during the year, but payments estimated at GBP 1,500,000
remain to be paid in 1997.
Exceptional items recorded in 1995 consist of a charge of GBP 6,667,000 for
restructuring costs and a credit of GBP 666,000 resulting from the adoption of
Abstract 13 "Accounting for ESOP Trusts" which was issued by the Urgent Issues
Task Force of the Accounting Standards Board in June 1995.
Restructuring costs of GBP 3,125,000 announced in May 1995 principally related
to employee terminations, closure of surplus office facilities, and fixed asset
write-downs. Additional asset write-downs of GBP 3,542,000 booked in the fourth
quarter of 1995 were primarily the result of a review into the carrying value of
software product assets.
In 1994 non-recurring exceptional items charged against income consisted of GBP
3,205,000 of intellectual property rights acquired from mbp and GBP 943,000 of
costs related to the acquisition of Burl Software Laboratories, Inc.
49
<PAGE> 41
In 1996 and 1995 the effective tax rate was distorted principally as a result of
losses incurred in the United States which can only be offset against profits
arising in future periods. The effective tax rate for 1994 was distorted by the
impact of exceptional items.
The corporation tax returns of a U.S. subsidiary undertaking for the years ended
January 31 1991 and 1992 are under examination by the U.S. Internal Revenue
Service, which has proposed certain adjustments. The Company believes that the
outcome of the examination will not give rise to any material adjustment to the
financial statements.
<PAGE> 42
NOTE 8 TAXATION
The taxation charge for the year consists of the following:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995 1994
<S> <C> <C> <C>
U.K. corporation tax at 33% 237 133 2,383
Deferred taxation 870 (458) 760
Double taxation relief (174) (105) (356)
Overseas taxation:
U.S. federal 4 5 (163)
U.S. state 1 -- 3
Other 276 (118) 1,966
- ------------------------------------------------------------
1,214 (543) 4,593
Taxation underprovided/(over-
provided) in previous years:
Corporation tax 258 -- (403)
Deferred taxation -- 202 (361)
Overseas taxation:
U.S. federal -- 193 281
U.S. state -- (2) 73
Other -- 78 (50)
- ------------------------------------------------------------
1,472 (72) 4,133
===========================================================
</TABLE>
In 1996 and 1995 the effective tax rate was distorted principally as a result
of losses incurred in the United States which can only be offset against
profits arising in future periods. The effective tax rate for 1994 was
distorted by the impact of exceptional items.
The corporation tax returns of a U.S. subsidiary undertaking for the years
ended January 31 1991 and 1992 are under examination by the U.S. Internal
Revenue Service, which has proposed certain adjustments. The Company believes
that the outcome of the examination will not give rise to any material
adjustment to the financial statements.
NOTE 9 (LOSS)/EARNINGS PER SHARE
The calculation of (loss)/earnings per share is based on the loss after taxation
of GBP 7,281,000 (1995: loss GBP 6,470,000; 1994: profit GBP 4,590,000) and on
15,156,000 ordinary shares (1995: 14,843,000; 1994: 14,336,000), being the
weighted average number of shares in issue.
Adjusted (loss)/earnings per share, excluding exceptional items, has been
calculated in addition to the (loss)/earnings per share required by FRS 3 since
in the opinion of the directors this will provide shareholders with a better
indication of the underlying (loss)/earnings per share.
NOTE 10 INTANGIBLE FIXED ASSETS
Intangible fixed assets consist of software product assets, as follows:
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Amort- Net book
(In thousands of G.B. pounds) Cost isation value
<S> <C> <C> <C>
At January 31 1996 70,816 52,959 17,857
Currency fluctuations (1,858 (1,400) (458)
Additions 5,258 -- 5,258
Amortisation for the year -- 8,067 (8,067)
- --------------------------------------------------------------
At January 31 1997 74,216 59,626 14,590
==============================================================
</TABLE>
50
<PAGE> 43
NOTE 11 TANGIBLE FIXED ASSETS
(a) Micro Focus:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of Freehold Leasehold
G.B. pounds) land and improve- Office
buildings ments equipment
<S> <C> <C> <C>
Cost:
At January 31 1996 13,142 1,983 4,852
Currency fluctuations -- (75) (211)
Additions 414 101 77
Disposals -- (1,169) (28)
- ---------------------------------------------------------------------
At January 31 1997 13,556 840 4,690
=====================================================================
Depreciation:
At January 31 1996 205 1,847 2,779
Currency fluctuations -- (55) (125)
Provision for the year 231 135 678
Disposals -- (1,167) (20)
- ---------------------------------------------------------------------
At January 31 1997 436 760 3,312
=====================================================================
Net book values:
At January 31 1996 12,937 136 2,073
At January 31 1997 13,120 80 1,378
=====================================================================
<CAPTION>
Computer &
(In thousands of communications Trans-
G.B. pounds) equipment portation
& software equipment Total
<S> <C> <C> <C>
Cost:
At January 31 1996 25,014 594 45,585
Currency fluctuations (1,076) (3) (1,365)
Additions 1,891 17 2,500
Disposals (1,875) (316) (3,388)
- ---------------------------------------------------------------------
At January 31 1997 23,954 292 43,332
=====================================================================
Depreciation:
At January 31 1996 15,581 263 20,675
Currency fluctuations (737) (3) (920)
Provision for the year 4,531 80 5,655
Disposals (1,257) (177) (2,621)
- ---------------------------------------------------------------------
At January 31 1997 18,118 163 22,789
=====================================================================
Net book values:
At January 31 1996 9,433 331 24,910
At January 31 1997 5,836 129 20,543
=====================================================================
</TABLE>
The above figures include transportation equipment held under finance leases as
follows:
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Amort- Net book
(In thousands of G.B. pounds) Cost isation value
<S> <C> <C> <C>
At January 31 1996 374 165 209
Provision for the year - 39 (39)
Disposals (249) (138) (111)
- ----------------------------------------------------------
At January 31 1997 125 66 59
==========================================================
</TABLE>
(b) Company:
The Company's tangible fixed assets consist of freehold land and buildings,
valued at cost which includes capitalized interest amounting to GBP 385,000.
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Net book
(In thousands of G.B. pounds) Cost Depreciation value
<S> <C> <C> <C>
At January 31 1996 3,088 11 3,077
Provision for the year -- 85 (85)
- --------------------------------------------------------
At January 31 1997 3,088 96 2,992
========================================================
</TABLE>
NOTE 12 INVESTMENTS
(a) Micro Focus:
Investments represents an investment in the Company's own shares.
In 1995 the Company funded the acquisition of 915,216 shares by Micro Focus
Trustees Limited on behalf of the Micro Focus Group Employee Benefit Trust 1994
("the Trust"). The cost to Micro Focus amounted to GBP 5,634,000. Options have
been granted to employees over 693,690 of these shares (see note 21 to the
financial statements on page 54). As at January 31 1997 the market value of the
shares was GBP 9,656,000 (January 31 1996: GBP 5,674,000); if they had been sold
at this value a liability to corporation tax of approximately GBP 1,100,000
(January 31 1996: GBP nil) would have arisen. The Trust has not waived its right
to dividends in respect of this shareholding.
In accordance with FRS 5 "Reporting the Substance of Transactions" and as
recommended in UITF Abstract 13 "Accounting for ESOP Trusts", the assets and
liabilities of the Trust, as well as its operating costs, are included in Micro
Focus' consolidated financial statements.
51
<PAGE> 44
(b) Company
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995
<S> <C> <C>
Investments in subsidiary undertakings
Beginning of year 27,685 27,289
Effect of exchange rate changes (510) 396
- --------------------------------------------------------------------
End of year 27,175 27,685
Investment in own shares (see (a) above)
Beginning and end of year 5,634 5,634
- --------------------------------------------------------------------
32,809 33,319
====================================================================
</TABLE>
The principal subsidiary undertakings, all of which are wholly-owned, are:
<TABLE>
<CAPTION>
Country of incorporation
and operation
<S> <C>
Micro Focus Limited UK (1)
Micro Focus International Limited UK (2)
Micro Focus Holdings Limited UK (1)
Micro Focus Incorporated USA (2)
Stingray Software Company Incorporated USA (2)
Burl Software Laboratories, Inc USA (1)
Micro Focus Japan Japan (2)
Micro Focus Gmbh Germany (2)
Micro Focus SARL France (2)
Micro Focus SA Spain (2)
Micro Focus Investments Limited Jersey (3)
Micro Focus Securities Limited Jersey (3)
Micro Focus Finance Limited Jersey (3)
System Focus BV Netherlands (2)
Micro Focus Technology NV Netherlands Antilles (2)
</TABLE>
(1) Held directly by the Company
(2) Held by a subsidiary undertaking
(3) Held directly by the Company, operating as financing companies. The
activities of the other subsidiary undertakings are described in the
Directors' Report.
In May 1995 Micro Focus completed the acquisition of Burl Software
Laboratories, Inc. for a total of US$13.5m (GBP 8.5m), which was satisfied by
the issue of 664,979 ordinary shares and the payment of US$6.3m (GBP 3.9m) in
cash. The transaction was accounted for as an acquisition.
NOTE 13 STOCKS
The replacement value of stocks is not considered to be materially different
from their balance sheet values.
NOTE 14 DEBTORS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995
<S> <C> <C>
Trade debtors 12,672 20,513
Other debtors and prepaid expenses 1,556 2,238
- ------------------------------------------------------------
14,228 22,751
============================================================
</TABLE>
Trade debtors includes GBP 1,693,000 (1995: GBP 1,825,000) which is due more
than twelve months from the balance sheet date.
Other debtors and prepaid expenses includes:
- loans to an officer of Micro Focus totalling GBP 57,000 (1995: two officers
- GBP 117,000).
- amounts due more than twelve months from the balance sheet date totalling
GBP 164,000 (1995: GBP 270,000).
NOTE 15 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995
<S> <C> <C>
Obligations under finance leases (note 17) 68 148
Trade creditors 3,054 5,323
Current corporation tax 2,590 2,001
Other taxes and social security costs 1,129 850
Product royalties and purchases 602 647
Accrued employee compensation and commissions 3,632 4,459
Accrued expenses 5,105 3,033
- -----------------------------------------------------------------------
16,180 16,461
=======================================================================
</TABLE>
Accrued expenses includes GBP 123,000 (1995: GBP 147,000) in respect of an
unfunded defined benefit scheme operated by a foreign subsidiary undertaking,
and other outstanding contributions payable by Micro Focus in connection with
employees' pension arrangements.
52
<PAGE> 45
NOTE 16 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Creditors due after more than one year represent obligations under lease
commitments (see note 17).
Micro Focus has in place a line of credit under the terms of which financing is
available until December 1997, either in G.B. pounds or such other currency as
Micro Focus may determine, of up to the equivalent of GBP 5.0m. Any borrowings
under this line of credit will bear interest at 1% above the London Interbank
Offered Rate (LIBOR) and would be unsecured. There have been no borrowings under
this line of credit to date.
NOTE 17 LEASE COMMITMENTS
Financial commitments for future periods under lease agreements existing at
January 31 1997 were as follows:
Finance leases:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995
<S> <C> <C>
Amounts payable within one year 71 152
Amounts payable from one to two years 15 67
- -------------------------------------------------------------
86 219
Less financial charges allocated after
the balance sheet date (3) (5)
- -------------------------------------------------------------
83 214
=============================================================
Finance leases are shown as:
Amounts due within one year (note 15) 68 148
Amounts due after more than one year 15 66
- -------------------------------------------------------------
83 214
=============================================================
</TABLE>
Operating leases:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Land and buildings
(In thousands of G.B. pounds) 1996 1995
<S> <C> <C>
Commitment for 1997 under leases which expire:
within one year 1,117 808
in the second to fifth
years inclusive 3,131 556
thereafter 4,302 138
- -----------------------------------------------------------------------
8,550 1,502
=======================================================================
<CAPTION>
Other
(In thousands of G.B. pounds) 1996 1995
<S> <C> <C>
Commitment for 1997 under leases which expire:
within one year 114 101
in the second to fifth
years inclusive 459 351
thereafter -- --
- ----------------------------------------------------------------------
573 452
======================================================================
</TABLE>
NOTE 18 DEFERRED TAXATION
Deferred taxation has been fully provided as follows:
(a) Micro Focus:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995
<S> <C> <C>
Capital allowances in advance of depreciation
and amortisation 169 309
Other timing differences in recognising revenue
and expense items in different periods
for taxation purposes 6,070 5,145
- -----------------------------------------------------------------------
6,239 5,454
=======================================================================
(b) Company:
(In thousands of G.B. pounds) 1996 1995
Capital allowances in advance of depreciation
and amortisation 19 18
Other timing differences in recognising revenue
and expense items in different periods
for taxation purposes -- 1
- -----------------------------------------------------------------------
19 19
=======================================================================
</TABLE>
NOTE 19 CAPITAL COMMITMENTS
At January 31 1997 and January 31 1996 Micro Focus had no material capital
expenditure commitments.
53
<PAGE> 46
NOTE 20 SEGMENTAL INFORMATION
Micro Focus operates in one business segment - the development and marketing of
computer software products. The following table analyses worldwide operations by
geographical area, based on the location of Micro Focus facilities.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995 1994
<S> <C> <C> <C>
Revenue:
United Kingdom 33,974 33,988 35,863
United States 42,856 49,503 58,544
Europe (excluding U.K.) 20,588 20,196 25,135
Other 1,910 1,300 1,369
- ----------------------------------------------------------------------------------
99,328 104,987 120,911
Inter-segment revenue:
United Kingdom (15,900) (16,728) (15,583)
United States (3,501) (4,790) (2,770)
Europe (excluding U.K.) (6,381) (5,362) (11,720)
Other (457) (849) (953)
- ----------------------------------------------------------------------------------
Total revenue: 73,089 77,258 89,885
==================================================================================
Operating (loss)/profit:
United Kingdom (2,384) 1,350 5,848
United States (4,699) (4,429) (1,671)
Europe (excluding U.K.) (796) (5,097) 4,222
Other 371 (458) (867)
- ----------------------------------------------------------------------------------
(7,508) (8,634) 7,532
==================================================================================
Net operating assets/(liabilities):
United Kingdom 16,075 20,264 9,209
United States (8,199) (3,087) (162)
Europe (excluding U.K.) 2,988 9,176 8,609
Other (16) (558) (113)
- ----------------------------------------------------------------------------------
10,848 25,795 17,543
==================================================================================
</TABLE>
Inter-segment revenue principally represents licence fees and charges for
research and development between locations. Operating (loss)/profit excludes
interest income and expense and, correspondingly, net operating
assets/(liabilities) exclude interest-bearing assets and liabilities. A
reconciliation of the net operating assets/(liabilities) as shown above to net
assets as shown in the balance sheet is as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds) 1996 1995 1994
<S> <C> <C> <C>
Net operating assets 10,848 25,795 17,543
Cash and bank deposits 44,725 38,972 55,823
Investment in own shares 5,634 5,634 --
Finance lease obligations (83) (214) (510)
- --------------------------------------------------------------------------
Net assets 61,124 70,187 72,856
==========================================================================
</TABLE>
An analysis of revenue by customer location is included in note 2 to the
financial statements on page 48.
NOTE 21 SHARE OPTION PLANS
Micro Focus operates two plans both of which provide for the grant of options to
acquire shares to all persons who devote substantially all their working time to
Micro Focus and such other eligible persons as the Board may determine. The
terms and exercise prices of options issued under these plans are determined at
the time the options are granted. Unexercised options lapse when the
optionholder ceases to be employed by Micro Focus or at a predetermined expiry
date (of up to ten years from the date of grant), whichever occurs first.
The Micro Focus Share Option Plan ("the Plan") was established in 1984. It meets
the terms and conditions required by the U.S. Internal Revenue Code in order
that the options will qualify as Incentive Stock Options, and as required by the
U.K. Inland Revenue in order to qualify as an approved Company Share Option
Plan. Options issued under the Plan are generally exercisable in five equal
cumulative annual instalments commencing one year after the date of grant.
At January 31 1997 1,769,342 options were issued and outstanding under the Plan
and a further 427,911 had been approved for grant by shareholders of the Company
but were currently unissued.
In 1994 Micro Focus established a discretionary employee benefit trust, the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust"), the purpose of
which is to further the Company's policy of encouraging share ownership by its
employees. Under the terms of the Trust, Micro Focus Trustees Limited ("MFTL")
is permitted to acquire ordinary shares in the Company and to issue options over
those shares to directors and employees.
In 1995 MFTL purchased 915,216 shares in the Company and granted options on
530,700 of these shares at a price of GBP 6.97 per share. Under the terms of the
grant, these options vest, and therefore become exercisable, in five equal
annual instalments only on the achievement by Micro Focus of certain
predetermined annual earnings per share targets in respect of each of the
financial years ended January 31 1996 to January 31 2000. In March 1996
one-fifth of the outstanding options lapsed when the announcement of financial
results for the year ended January 31 1996 indicated that the target in respect
of that year had not been achieved. In April 1996 the Company offered all
employees the opportunity to cancel all outstanding options above the then fair
market value and receive instead a new option, with a new vesting schedule, for
three new shares for each four shares then under option. As a result 376,840 of
the remaining options
54
<PAGE> 47
were exchanged for 282,630 new options, issued at a price of GBP 6.85 per share.
These new options are exercisable in five equal cumulative annual instalments
commencing one year after the date of grant.
At January 31 1997 693,690 of the options issued by MFTL in 1995 and 1996 were
outstanding. A further 32,000 shares over which options had been granted prior
to their acquisition by MFTL remained outstanding at January 31 1997 at prices
between GBP 6.05 and GBP 14.98. The remaining 189,526 shares were available for
the grant of further options. Options issued by the Trust under this plan do not
qualify as Incentive Stock Options (for U.S. taxation purposes), nor does the
plan qualify as an approved Company Share Option Plan (for U.K. taxation
purposes).
The shares held by the Trust are included in Investments (see note 12 to the
financial statements on page 51).
Share option activity under the plans was as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In G.B. pounds, except share data) Number Option price
of shares per share
<S> <C> <C>
January 31 1994 1,310,176 0.92-28.83
Options granted 608,416 8.16-16.38
Options exercised (148,206) 0.92-7.63
Options cancelled (41,512) 2.20-28.83
- ---------------------------------------------------------------------
January 31 1995 1,728,874 2.20-28.83
Options granted 603,795 5.65-8.20
Options exercised (114,865) 2.20-5.42
Options cancelled (159,035) 2.20-28.83
- ---------------------------------------------------------------------
January 31 1996 2,058,769 2.20-28.83
Options granted 2,300,830 5.83-9.70
Options exercised (24,156) 5.42-9.66
Options cancelled (1,840,411) 5.42-28.83
- ---------------------------------------------------------------------
January 31 1997 2,495,032 5.42-21.61
=====================================================================
</TABLE>
The total of 2,495,032 options outstanding at January 31 1997 is represented by
1,769,342 unissued shares and 725,690 shares held by MFTL.
The outstanding options are exercisable between 1997 and 2006; the proceeds on
exercise at January 31 1997 would be GBP 19,790,000 (January 31 1996: GBP
25,233,000).
At January 31 1997 options for 168,000 shares (January 31 1996: 728,000 shares)
were currently exercisable at prices per share of between GBP 5.42 and GBP
21.61; the proceeds on exercise of such options at January 31 1997 would be GBP
2,095,000 (January 31 1996: 10,729,000).
55
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Annual Report (Form 20-F) of
Micro Focus Group Plc of our reports dated March 6, 1997 with respect to the
consolidated financial statements of Micro Focus Group Public Company for the
year ended January 31, 1997 in US format included in its 1996 Annual Report to
Shareholders and furnished to the Securities and Exchange Commission pursuant
to a Report of Foreign Issuer (Form 6-K) on March 28, 1997.
/s/ Ernst & Young
ERNST & YOUNG
Chartered Accountants
Reading England
March 6, 1997
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8, No. 333-24867) pertaining to the employee share plans of
Micro Focus Group Plc named on the facing sheet thereof of our reports dated
March 6, 1997 with respect to the consolidated financial statements and
schedule of Micro Focus Group Plc for the year ended January 31, 1997 included
or incorporated by reference in its Annual Report (Form 20-F) for the year
ended January 31, 1997.
/s/ Ernst & Young
ERNST & YOUNG
Chartered Accountants
Reading, England
May 2, 1997
