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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, 1998
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 RG14 1QN, 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 2p 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: 79,416,935 Ordinary Shares of 2p 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 ___
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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
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Page
General Introduction..............................................................................................1
PART I
Item 1. Description of Business.................................................................................3
Item 2. Description of Property................................................................................15
Item 3. Legal Proceedings......................................................................................15
Item 4. Control of Registrant..................................................................................15
Item 5. Nature of Trading Market...............................................................................16
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.....................................18
Item 7. Taxation...............................................................................................18
Item 8. Selected Financial Data................................................................................22
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations..................23
Item 9A. Quantitative and Qualitative Disclosures About Market Risk .............................................23
Item 10. Directors and Officers of Registrant...................................................................23
Item 11. Compensation of Directors and Officers.................................................................25
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.........................................25
Item 13. Interest of Management in Certain Transactions.........................................................26
PART II
Item 14. Description of Securities to be Registered.............................................................27
PART III
Item 15. Defaults Upon Senior Securities........................................................................37
Item 16. Changes in Securities and Changes in Security for Registered Securities and Use of Proceeds............37
PART IV
Item 17. Financial Statements...................................................................................37
Item 18. Financial Statements...................................................................................37
Item 19. Financial Statements and Exhibits......................................................................37
Signatures.......................................................................................................41
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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, COBOL Workbench and Revolve are registered trademarks of
the Group, and COBOL Developer Suite, Micro Focus COBOL, NetExpress,
Revolve/2000, SmartFind-Fix/2000 and SoftFactory/2000 are trademarks of the
Group. Certain other trademarks belonging to other companies appear in this
Annual Report and are the property of their respective owners.
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 the Company 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 22 and 50 in the Company's
Annual Report to Shareholders for the year ended January 31, 1998 contained in
the Report of Foreign Issuer on Form 6-K furnished to the Commission on May 28,
1998 (the "Micro Focus 1998 Annual Report to Shareholders"), which sections of
the Micro Focus 1998 Annual Report to Shareholders are incorporated herein by
reference. On April 30, 1998, the Noon Buying Rate was $1.67 per 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 generally
accepted accounting principles in the United States ("US GAAP") expressed in US
dollars and on the basis of accounting principles generally accepted in the
United Kingdom ("UK GAAP") expressed in GB pounds. There are differences between
US GAAP and UK 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
US GAAP and UK 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
an Amended and Restated Deposit Agreement dated as of March 16, 1998 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 record holders
of ADRs and mails to all record holders of ADRs notices of shareholders'
meetings received by the Depositary.
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As a foreign private issuer in the United States, the Company is not
required to file quarterly reports with the Securities and Exchange Commission
(the "Commission"). However, beginning in June 1997, the Company began
furnishing to the Commission on a voluntary basis quarterly reports on Form 6-K
which include the results for the applicable Company fiscal quarter in a format
similar to that of a Form 10-Q. In addition, foreign private issuers in the
United States are not currently required to file electronically with the
Commision but may choose to do so. As of March 1997, the Company began
voluntarily submitting its filings electronically to the Commission.
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, 1998, 1997 and 1996 have been delivered to the Registrar of
Companies for England and Wales. The auditor's reports on such accounts 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 1998, 1997 and 1996 are for the years ended
January 31, 1998, 1997 and 1996, respectively.
This Form 20-F contains, and incorporates by reference, certain
forward-looking statements (as such term is defined in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange 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 U.S.
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," "intends" and similar expressions, as they
relate to the Group, 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. Additionally, statements
concerning future matters such as the features, benefits and advantages of the
Company's products, the development of new products, enhancements or
technologies, business and sales strategies, developments in the Company's
target markets, matters relating to distribution channels, proprietary rights,
competition and facilities needs and other statements regarding matters that are
not historical are forward-looking statements. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's actual results, performance or achievements in fiscal 1999 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
"Part I, Item 1- 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.
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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 remediation 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 National Market.
Industry Background
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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 1950's and,
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since the early 1960's, 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
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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 Enterprise 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 1998 being denoted by "98." This 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/I and Assembler. Micro Focus' long-standing market position as a provider
of business application programming tools for this environment and its current
set of available products and services have resulted in a leadership position
for offering customers Year 2000 solutions.
Micro Focus currently offers two specialized products for Year 2000
analysis and remediation. SmartFind-Fix/2000 is a highly automated tool for
finding and fixing COBOL code that will be affected by the Year 2000 problem.
Revolve/2000 is a program understanding and analysis tool that provides an
effective means for customers to assess the potential for Year 2000 compliance
problems in their applications, as well as an effective toolset for finding and
replacing date deficient code. In the area of Year 2000 compliance testing,
Micro Focus' COBOL Workbench is used by some customers to correct date deficient
code.
Some industry analysts have estimated that worldwide expenditures to
correct and test the Year 2000 problem could exceed $300 billion. During fiscal
1998, Micro Focus intends to enhance its product offerings for the Year 2000
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problem and to offer a greater level of services to support customers facing
Year 2000 problems. Micro Focus believes that few companies have completed their
Year 2000 compliance projects, that customer spending for the Year 2000 problem
will significantly increase in fiscal 1998, and that its Year 2000 analysis and
testing products and services will continue to be well received in meeting the
needs of customers.
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 NetExpress, a
new set of COBOL development tools designed to simplify the creation of
enterprise quality programming for the Internet and intranet environments; the
COBOL Developer Suite, an integrated COBOL development environment for all major
UNIX platforms; and other tools for developing applications for the popular
Windows 95 and NT platforms. Micro Focus believes that it is well-positioned to
capitalize on the growing need for application development tools and services to
support distributed computing applications.
Enterprise Solutions
"Enterprise Solutions" are offered to customers with mainframe-based
business software applications that frequently 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 mainframe-based applications can be
among the most valuable intangible assets that a business may own.
Micro Focus offers its tools and services to meet the needs of
application developers who create, maintain and extend such "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 offer
these customers a highly-valued solution to maintain and extend their
mainframe-based business applications.
Micro Focus tools take advantage of the highly productive user
interface offered by the PC environment, but emulate the key aspects of the
mainframe environment. These features permit programmers to develop, maintain
and extend their key legacy assets efficiently and cost-effectively. In
addition, Micro Focus tools provide the ability to move these program assets to
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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 believes that its 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 provides Micro Focus technologies and products to computer
manufacturers worldwide for distribution with their computer equipment. Micro
Focus believes that OEM's distribute Micro Focus development tools in order to
attract customers to their hardware and operating system offerings as the
availability of good development tools is a key OEM selling strength.
OEM products that are licensed to US and European OEM's 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.
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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, 1998, 1997
and 1996, respectively, were GBP 17.6 million/$31.6 million, GBP 19.2
million/$34.1 million, and GBP 23.4 million/$40.3 million which represented
approximately 19%, 28% and 30%, respectively, of the Group's revenue. Of these
expenditures, GBP 5.7 million/$9.3 million, GBP 5.3 million/$8.3million and GBP
9.9 million/$15.6 million, respectively, were capitalized as software product
assets. For the same years, GBP 7.8 million/$12.7 million, GBP 8.1 million/$12.7
million and GBP 8.8 million/$13.9 million, respectively, were amortized and
included in research and development costs resulting in total research and
development charges of GBP 19.7 million/$35 million, GBP 24.3 million/$38.6
million and GBP 26.1 million/$38.6 million, respectively.
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 typically have a continuing
obligation to improve and maintain the products supplied to Micro Focus. For the
year ended January 31, 1998, 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.
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.
During the last fiscal year, sales by geographic region have been distributed as
follows: 51% in the United States, 12% in the United Kingdom, 19% in
rest of Europe (excluding the United Kingdom), 4% in Canada, 4% in Japan
and 10% 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
broad, with no individual customer accounting for more than 3% of total revenue
in the year ended January 31, 1998.
As of January 31, 1998, the Group's sales and sales support
organization consisted of 34 people in the United Kingdom, 112 people in the
United States and 105 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 January 31, 1998, approximately 320 universities,
colleges and other educational institutions had become participants in the
Program.
Employees
- - ---------
As of January 31, 1998, Micro Focus had 827 employees, of whom 282 were
located in the United Kingdom, 392 were located in the United States and 153
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.
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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 4 million/$6.5 million, which consisted of a payment of GBP 2 million/$3.25
million in cash and the issuance of 745,710 Ordinary Shares of the Company with
a value of approximately GBP 2 million/$3.25 million on the date the acquisition
was completed. Millennium provided consulting and project management services
and had specialized expertise in the estimating, planning and management of Year
2000 compliance projects for large scale systems, as well a development
expertise in Web-based applications. Effective January 31, 1998, Millennium's
consulting services were integrated with the professional service operations of
the Company.
On January 20, 1998, the Company acquired XDB Systems, Inc. ("XDB") for
total consideration of approximately GBP 11.54 million/$18.64 million on the
date of the acquisition, which consisted of the issuance of 2,084,825 Ordinary
Shares of the Company (including up to 192,850 Ordinary Shares to be issued to
holders of XDB options upon exercise of such options). XDB, a privately-held
corporation based in Columbia, Maryland, is a provider of DB2 database
development, maintenance and connectivity solutions.
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
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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 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.
Year 2000 Business and Compliance Issues
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
9
<PAGE> 12
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.
The Group is in the process of reviewing its major internal corporate
systems for any potential Year 2000 compliance issues and intends to take
appropriate corrective action based on the results of such review. The Group
does not currently anticipate that it will incur material operating expenses or
be required to invest heavily in internal system improvements as a result of
Year 2000 compliance issues. In addition, the Group believes that the current
versions of its software products are Year 2000 compliant. Notwithstanding the
foregoing, there can be no assurance that the Year 2000 problem will not have an
adverse effect on the Group's business, financial condition or results of
operations, which are not controlled by the Group, but on which the Group may
rely with respect to its business and 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
10
<PAGE> 13
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 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.
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.
11
<PAGE> 14
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 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
12
<PAGE> 15
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.
Risks Associated with Global Operations
For the fiscal years ended January 31, 1998, 1997 and 1996, sales to
customers outside of the United States represented approximately 49%, 46% and
43%, respectively, of 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. In addition, the laws of certain foreign counties in which the
Group's products may be marketed may not protect the Group's intellectual
property rights to the same extent as do the laws of the United States and
Europe. There can be no assurance that the factors described above will not have
an adverse effect on the 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. Furthermore, given that 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.
Enforcement of Civil Liabilities
The Company is a public limited company organized under the laws of
England and Wales. A significant portion of the assets of the Company is located
outside of the United States. As a result, it may not be possible for investors
to effect service of process within the United States upon the Company or to
enforce against the Company, in United States courts, judgments obtained in such
courts predicated upon the civil liability provision of the federal securities
laws of the United States. There is doubt as to the enforceability in England,
in original actions or in actions for enforcement of judgments of United States
court, of civil liabilities predicated solely upon such securities laws.
13
<PAGE> 16
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.
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.
Acquisitions
The Group completed two significant business combinations during fiscal
1998. See "Recent Acquisitions or Dispositions". The Group is in the process of
integrating the operations acquired in these transactions with its own. There
can be no assurance that the anticipated benefits of recently concluded business
combinations will be realized. In addition, these acquisitions could require
significant additional management attention. The Group expects to continue
growing its business through acquisitions. If the Group is unsuccessful in
integrating and managing the recently acquired businesses or other businesses it
may acquire in the future, the Group's business, results of operations and
financial condition could be adversely affected in future periods.
Forward-Looking Statements
- - --------------------------
This Form 20-F contains, and incorporates by reference, certain
forward-looking statements (as such term is defined in Section 27A of the
Securities Act and Section 21E of the Exchange 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 U.S. 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,"
14
<PAGE> 17
"expect," "intends" and similar expressions, as they relate to the Group, 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. Additionally, statements concerning future
matters such as the features, benefits and advantages of the Company's products,
the development of new products, enhancements or technologies, business and
sales strategies, developments in the Company's target markets, matters relating
to distribution channels, proprietary rights, competition and facilities needs
and other statements regarding matters that are not historical are
forward-looking statements. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, the Company's
actual results, performance or achievements in fiscal 1999 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 above 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 Mountain View, California,
where it leases office space of approximately 56,000 square feet located at 701
East Middlefield Road, Mountain View, California 94043, and this lease for its
U.S. headquarters expires in 2007. Micro Focus also leases a nearby production
facility in Santa Clara, California that covers approximately 9,000 square feet,
and this lease for the production facility expires in 2002.
Micro Focus also maintains facilities in the following areas:
Philadelphia, Pennsylvania; Chicago, Illinois; New York, New York; Cedarberg,
Wisconsin; Boston, Massachusetts; Raleigh, North Carolina; Columbia, Maryland;
Toronto and Montreal, Canada; Paris, France; Munich, Germany; Barcelona and
Madrid, Spain; Tokyo, Japan; and Bangalore, India.
Micro Focus believes 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.
15
<PAGE> 18
The following table sets forth certain information as of April 30,
1998, 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.
Identity of Person or Group Amount Owned Percent of Class
- - --------------------------- ------------ ----------------
Bank of New York (1) 11,101,620 13.92%
All directors and officers
as a group (13 persons) 734,730 0.92%
- - --------------------
(1) Held beneficially as the depositary of the Company's ADSs for which ADRs
have been issued. Each one ADS represents five Ordinary Shares of the
Company.
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 five Ordinary Shares, 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 Nasdaq National Market
where they trade under the symbol MIFGY. In connection with such listing, the
Company has sought and received a waiver of the Nasdaq National 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).
Effective as of the close of business on March 13, 1998, the Company
undertook a subdivision (or stock split) of its ordinary shares (the "Ordinary
Shares") on a 5-for-1 basis. The Company's ADSs have been adjusted such that
each ADS represents 5 Ordinary Shares. Unless provided otherwise herein, share
and per share references included in this Annual Report have been adjusted to
reflect the impact of the above-mentioned stock split of the Ordinary Shares.
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.
16
<PAGE> 19
Ordinary Shares
---------------
Fiscal Years Ended
January 31, High Low High Low
- - ---------------------- ------------- --------------
(in GB Pounds) (in US Dollars)
1997
First Quarter 2.67 1.12 4.06 1.70
Second Quarter 2.02 1.29 3.01 1.98
Third Quarter 2.08 1.40 3.33 2.17
Fourth Quarter 2.28 1.58 3.72 2.63
1998
First Quarter 2.75 2.04 4.46 3.29
Second Quarter 3.85 2.65 6.45 4.30
Third Quarter 4.66 3.27 7.55 5.35
Fourth Quarter 5.66 3.88 9.44 6.52
The table below shows the highest and lowest bid prices for the ADSs in
US Dollars as reported by the Nasdaq National Market for the periods indicated.
American Depositary Shares
--------------------------
Fiscal Years Ended
January 31, High Low
- - --------------------- ---------------------
(in US Dollars)
1997
First Quarter 21.25 8.38
Second Quarter 15.88 9.75
Third Quarter 16.50 10.50
Fourth Quarter 19.63 12.75
1998
First Quarter 22.50 16.38
Second Quarter 33.38 21.25
Third Quarter 39.13 26.25
Fourth Quarter 47.50 32.88
As of April 30, 1998, 2,122,569 Ordinary Shares and 2,220,324 ADSs
(each representing five Ordinary Shares) were held of record in the United
States. These Ordinary Shares and ADSs were held by 75 record holders and
approximately 1,600 record holders, respectively, and represented 2.66% and
13.92%, 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.
17
<PAGE> 20
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.
ITEM 7. TAXATION
The following summary does not address United States state or local
taxes nor does it address foreign law other than that of the United Kingdom as
it would affect US holders (persons resident in the United States and not
resident in the United Kingdom, under the current double taxation convention
between the United States and the United Kingdom). Non US holders may experience
significantly different tax consequences and should consult their own tax
advisors.
In addition, the following is a general summary that does not address
all material tax consequences of the ownership of Ordinary Shares or ADSs.
Holders of Ordinary Shares or ADS should consult their own tax advisors as to
the particular tax consequences to them of ownership of the Ordinary Shares or
ADSs. The following summary 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.
UK Income Taxation of Dividends
- - -------------------------------
No dividends have ever been paid by the Company. However, in the event
dividends were to be paid in cash and denominated in dollars, 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 1/4 of any dividend paid to shareholders, which is equivalent
to 20% 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.
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<PAGE> 21
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. In such a case, special provisions of
the convention on business profits and on independent personal services would
apply. 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 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. An ADR holder should consult
its own tax advisor to determine whether UK authorities have taken any actions
which would deny an ACT refund.
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.
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<PAGE> 22
Legislation has recently been enacted (the UK Finance Act (No.2 ) 1997)
which will reduce the rate of tax credits available to UK resident individual
shareholders on dividends paid by the Company to 10% of the gross dividend from
April 1999. Accordingly with effect from April 1999, an eligible US holder will
no longer be entitled to receive a treaty payment as the 15% UK withholding tax
will exceed the tax credit amount. The amount of the excess will not be deducted
from the cash dividend entitlement of the eligible US holder which will continue
to be paid free of UK withholding tax. US holders and other shareholders
resident outside the United Kingdom who are in any doubt about their position
should consult an appropriate professional adviser on the effect of these
changes for them.
In his U.K. "Green" Budget announcement made on November 25, 1997, the
UK Chancellor of the Exchequer announced the abolition of ACT from April 1999,
which was confirmed in his budget on March 17, 1998. Even if this proposal is
enacted, dividends will continue to be paid free of withholding tax.
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
US federal income tax liability. The dividend income will, for purposes of
computing the foreign tax credit limitation, 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. Special
rules, not discussed here, apply for purposes of determining the foreign tax
credit available to a US corporation that controls 10% or more of the voting
shares of the Company.
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 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.
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<PAGE> 23
US Estate Tax
- - -------------
US residents and US citizens will be subject to an estate tax on the
fair market value of the shares at the date of death. The estate tax is imposed
on the value of all assets, subject to a specific dollar credit and certain
deductions. If the assets are passed in a tax deductible way to a surviving
spouse, the estate tax is deferred. If the surviving spouse is not a US citizen,
the tax is only deferred if a specialized trust is established with a US
trustee.
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.
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. SDRT, which will be
payable by the Depositary, will be charged at a rate of 1 1/2% of the
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<PAGE> 24
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.
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.
Other US Issues
- - ---------------
As of May 22, 1998, the Company is not a controlled foreign corporation
("CFC"), a passive foreign investment company ("PFIC"), or a foreign personal
holding company ("FPHC"), and the Company does not anticipate becoming a CFC,
PFIC or FPHC. Neither the Company nor its advisers have a duty or will undertake
to inform US shareholders of changes in circumstances which would cause the
Company to become a CFC, PFIC or a FPHC. US shareholders should consult their
own tax advisers concerning the status of the Company as a CFC, PFIC or FPHC.
ITEM 8. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
- - ------------------------------------
The Selected Consolidated Financial Data in US Format set forth on page
16 and the Selected Consolidated Financial Data in UK Format set forth on page
44 of the Micro Focus 1998 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.
Fiscal Year Ended January 31, Average* High Low Period End
- - ---------------------------- -------- ---- ---- -----------
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
1998................................. 1.64 1.70 1.58 1.63
* The average of the exchange rates on the last day of each calendar month
during the period.
On April 30, 1998, the Noon Buying Rate was $1.67 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.
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<PAGE> 25
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 22 and
50 of the Micro Focus 1998 Annual Report to Shareholders, which sections on
exchange rate fluctuations are incorporated herein by reference.
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 FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Results of Financial Condition
and Results of Operations for the fiscal years ended January 31, 1998, 1997 and
1996, which is contained on pages 17 through 22 and pages 45 through 50 of the
Micro Focus 1998 Annual Report to Shareholders, is incorporated herein by
reference.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 six
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 May 22,
1998, are as follows:
Board of Directors
- - ------------------
Name Position Date Elected or Appointed
- - ---- --------- --------------------------
Paul A. Adams Director and Vice President, November 1986
International Sales
23
<PAGE> 26
J. Michael Gullard Director and Chairman May 1995
Harold Hughes Director December 1993
Martin Waters Director, President and July 1997
Chief Executive Officer
J. Sidney Webb Director December 1997
Executive Officers
- - ------------------
Name Position Date Appointed
- - ---- -------- ----------------
Stanley Blaustein Vice President and November 1996
Chief Information Officer
Richard Butts Vice President, Human Resources June 1996
Michael Mahoney Senior Vice President, May 1998
North American Sales Operations
Buff Jones Senior Vice President, March 1998
Business Development
Christopher Sanders Senior Vice President, September 1997
Product Operations
Richard Van Hoesen Senior Vice President, March 1998
Chief Financial Officer and
Secretary
Biographical information with respect to the directors and officers is
shown below.
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. 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. Waters joined the Company as a director and its President and Chief
Executive Officer in July 1997.
Mr. Hughes has been a non-executive director of the Company since December
1993. He is Chief Executive Officer of Pandesic LLC.
Mr. Webb has been a non-executive director of the Company since December
1997. He is Chairman of Titan Corporation.
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<PAGE> 27
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. Mahoney joined the Company in May 1998 as its Senior Vice President,
North American Sales Operations.
Ms. Jones joined the Company in March 1998 as its Senior Vice President,
Business Development.
Mr. Sanders joined the Company in September 1997 as its Senior Vice
President, Strategic Planning and became Senior Vice President, Product
Operations of the Company in January 1998.
Mr. Van Hoesen joined the Company in March 1998 as its Senior Vice
President, and Chief Financial Officer. In May 1998, Mr. Van Hoesen also became
the Secretary of the Company.
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, 1998, 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 1,964,000/$3,222,000. For
the same period, the compensation of the chairman of Micro Focus was GBP
50,000/$82,000. The aggregate amount set aside or accrued by Micro Focus for the
fiscal year ended January 31, 1998 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 47,000/$77,000.
The amounts paid to the directors and officers as a group may be
divided as follows: GBP 932,000/$1,514,000 was paid as salary, GBP
73,000/$120,000 was paid as director's fees, other benefits of GBP
211,000/$345,000, consulting fees of GBP 120,000/$200,00 paid to one former
director, compensation payments for loss of office of GBP 137,000/$225,000 to
one former 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 41 of the Micro
Focus 1998 Annual Report to Shareholders, which compensation information is
incorporated herein by reference.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company has four share option plans (the "Micro Focus 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
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<PAGE> 28
to Micro Focus employees and consultants. The Company currently has the
authority to grant stock options under the 1994 Plan and the 1996 Plan.
In connection with the Company's acquisition of XDB, the Company
assumed the XDB Systems, Inc. 1992 Stock Option Plan and the XDB Systems, Inc.
1996 Stock Option Plan (the "XDB Plans"), and the outstanding stock options
under the XDB Plans as of January 20, 1998, the effective date of the
acquisition, were converted into stock options to purchase Ordinary Shares of
the Company. No further stock options have been or will be granted under the XDB
Plans.
At April 30, 1998, there were outstanding stock options under the Micro
Focus Plans and XDB Plans to purchase an aggregate of 11,216,336 Ordinary Shares
with exercise prices ranging from GBP 1.08 to GBP 7.08 and expiration dates
ranging from 1998 to 2008. 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>
Paul A. Adams 8,000 GBP 1.084 August 8, 1998
286,500 GBP 1.37 April 9, 2003
50,000 GBP 2.118 March 5, 2007
Ronald H. Forbes 256,500 GBP 1.37 April 9, 2003
Harold Hughes 50,000 GBP 2.996 August 19, 2002
10,000 GBP 2.396 June 16, 2004
J. Michael Gullard 50,000 GBP 2.134 June 2, 2004
250,000 GBP 1.67 June 21, 2006
Martin Waters 1,187,500 GBP 4.202 September 16, 2004
1,812,500 GBP 4.202 September 16, 2007
Directors and Officers
as a group
(13 persons) 10,000 GBP 1.084 August 8, 1998
667,950 GBP 1.37 April 10, 2003
525,000 GBP 1.466 September 11, 2006
250,000 GBP 1.67 June 21, 2006
120,000 GBP 1.81 December 3, 2006
50,000 GBP 2.118 March 5, 2007
50,000 GBP 2.134 June 2, 2004
10,000 GBP 2.396 June 16, 2004
50,000 GBP 2.996 August 19, 2002
1,187,500 GBP 4.202 September 16, 2004
2,062,500 GBP 4.202 September 16, 2007
175,000 GBP 6.25 March 4, 2008
</TABLE>
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<PAGE> 29
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
The information required by this Item is incorporated herein by
reference from "Executive Remuneration Committee's Report-Directors'
Remuneration" on page 42 of the Micro Focus 1998 Annual Report to Shareholders.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
The Registrant has elected to respond to this Item.
Description of Ordinary Shares
- - ------------------------------
The following summarizes certain rights of holders of the Company's
Ordinary Shares based on the Company's Memorandum and Articles of Association
("Articles of Association") and English law in force as of the date of this
Annual Report. The summary does not purport to be complete and is qualified in
its entirety by reference to the Articles of Association, which are incorporated
by reference in this Annual Report.
The authorised share capital of the Company is GBP 2,250,000 divided
into 112,500,000 Ordinary Shares of 2p each, of which 79,416,935 Ordinary Shares
were outstanding on January 31, 1998. Each of the issued Ordinary Share 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. The Ordinary Shares are issued in registered
form. See Item 16 for a description of the five-for-one stock split of the
Ordinary Shares effective as of the close of business on March 13, 1998.
In the following description, a "shareholder" is the person registered
in the Company's register of members as the holder of the relevant share. The
Depositary for the Company's ADSs will be the shareholder in respect of those
Ordinary Shares represented by ADS against which ADRs are issued pursuant to the
Deposit Agreement.
Dividends
All dividends on the Ordinary Shares shall be declared and paid
according to the amount paid up on the 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. Final
dividends may be declared by resolution of the members on the recommendation of
the Board. There are no fixed dates on which entitlement to dividends arises 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.
Rights in a Winding Up
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
27
<PAGE> 30
the provisions of The Companies Act 1985 of Great Britain, as amended (the
"Companies Act"). The liquidator may, with the sanction of an extraordinary
resolution of the Company and subject to the Companies Act, divide among the
members in specie the whole or any part of the assets of the Company.
Voting
Voting at any general meeting of shareholders is by a show of hands
unless a poll is duly demanded. A poll may be demanded by (i) the chairman of
the meeting, (ii) at least two shareholders entitled to vote at the meeting,
(iii) any shareholder or shareholders representing in the aggregate not less
than one-tenth of the total voting rights of all shareholders entitled to vote
at the meeting, or (iv) any shareholder or shareholders holding shares
conferring a right to vote at the meeting on which there have been paid up sums
in the aggregate equal to not less than one-tenth of the total sum paid up on
all the shares conferring that right. On a show of hands, every holder of
Ordinary Shares who is present in person at a general meeting of the Company
will have one vote, and on a poll, every holder of Ordinary Shares who is
present in person or by proxy will have one vote per share. The necessary quorum
for a shareholder meeting shall be a minimum of two persons entitled to vote on
the business to be transacted, each being a member or a proxy for a member or a
duly authorised representative of a corporation. Unless otherwise required by
law or the Company's Articles of Association, voting in a general meeting is by
ordinary resolution (e.g., resolutions for the election of directors, the
approval of financial statements, the declaration of final dividends, the
appointment of auditors, the increase of authorized share capital or the grant
of authority to allot shares). An ordinary resolution requires the affirmative
vote of a majority of the votes cast at a meeting at which there is a quorum. A
special resolution (e.g., relating to certain matters concerning an alteration
of the Company's Articles of Association or a winding-up of the Company) or an
extraordinary resolution (e.g., modifying the rights of any class of shares at a
meeting of the holders of such class) requires the affirmative vote of not less
than three-fourths of the votes cast. Meetings are generally convened upon
advance notice of 21 or 14 clear days (not including the days of delivery or
receipt of the notice) depending on the nature of the business to be transacted.
Pre-Emptive Rights
Under Part III of the Companies Act, 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 favourable 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 4, 1997, the statutory pre-emption
right was disapplied in respect of the allotment of equity securities for cash
in connection with (i) 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 (ii) the allotment of equity securities up
to an aggregate nominal value of GBP 76,709. This disapplication will, unless
extended or renewed, expire on the date of the annual general meeting of the
Company in 1998, or, if earlier, on September 4, 1998.
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<PAGE> 31
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 Act, 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 Act, 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 Act, purchase its own shares.
Subject to the provisions of the Companies Act, 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. At any separate general meeting, the
necessary quorum is one or more persons holding or representing by proxy not
less than one-third in nominal amount of the issued shares of the class in
question (but at any adjourned meeting, any person holding shares of the class
or his proxy shall be a quorum).
Disclosure of Interests
The Companies Act gives the Company power to require persons who it
knows are, or has reasonable cause to believe to be, or to have been within the
previous three years, interested in its relevant share capital to disclose
prescribed particulars of those interests. For this purpose "relevant share
capital" means the Company's issued share capital carrying the right to vote in
all circumstances at a general meeting of the Company. Failure to provide in a
timely manner the information requested may result in the imposition of
sanctions against the holder of the relevant shares as provided in the Companies
Act. The Articles of Association of the Company impose the withdrawal of voting
rights of such shares and restrictions on the rights to receive dividends on and
to transfer such shares. In this context, the term "interest is broadly defined
and will generally include an interest of any kind in shares, including the
interest of a holder of an ADS. In addition, under the Companies Act, any person
who acquires (alone or, in certain circumstances, with others) a direct or
indirect interest in the relevant share capital of the Company in excess of the
"notifiable percentage" (currently 3%, or 10% for certain types of interest)
comes under an obligation to disclose prescribed information to the Company in
respect of those shares within a period of two business days. An obligation of
disclosure also arises where such person's notifiable interest subsequently
falls below the notifiable percentage or where, above that level, the percentage
of the Company's relevant capital in which such person is interested (expressed
in whole numbers) increases or decreases.
Miscellaneous
There are currently no United Kingdom foreign exchange controls on the
payment of dividends on the Ordinary Shares or the conduct of the Company's
operations. There are no restrictions under the Articles of Association or under
English law that limit the right of non-resident or foreign owners to hold or
vote the Company's Ordinary Shares.
Description of American Depositary Receipts
- - -------------------------------------------
The following is a summary of certain provisions of the Amended and
Restated Deposit Agreement (the "Deposit Agreement") dated as of March 16, 1998,
entered into by the Company, The Bank of New York, as depositary (the
"Depositary," such term to include any successor Depositary), and all Owners and
holders from time to time of ADRs, pursuant to which the ADRs are issued. The
Deposit Agreement will be governed by the laws of the State of New York.
29
<PAGE> 32
This summary does not purport to be complete and is subject to and
qualified in its entirety by reference to the Deposit Agreement, including the
form of ADRs. Terms used herein and not otherwise defined will have the meanings
set forth in the Deposit Agreement. Copies of the Deposit Agreement and the
Memorandum and Articles of Association of the Company are available for
inspection at the Corporate Trust Office of the Depositary, currently located at
101 Barclay Street, New York, New York 10286, and at the London office of the
Depositary (the "Custodian"), currently located at 46 Berkeley Street, London
W1X 6AA, England. The Depositary's principal executive office is located at 48
Wall Street, New York, New York 10286.
American Depositary Receipts
ADRs representing ADSs are issuable by the Depositary pursuant to the
Deposit Agreement. Each ADS represents five Ordinary Shares (together with any
additional Ordinary Shares at any time deposited or deemed deposited under the
Deposit Agreement and any and all other securities, property and cash received
by the Depositary or the Custodian in respect thereof and at such time held
under the Deposit Agreement, "Deposited Securities"). Only persons in whose
names ADRs are registered on the books of the Depositary will be treated by the
Depositary and the Company as owners (the "Owners").
Deposit, Transfer and Withdrawal
The Depositary has agreed, subject to the terms and conditions of the
Deposit Agreement, that upon delivery to the Custodian of Ordinary Shares (or
evidence of rights to receive Ordinary Shares), accompanied by any appropriate
instruments of transfer or endorsement in a form satisfactory to the Custodian,
and any other documents required by the Depositary or the Custodian in
accordance with the Deposit Agreement, the Depositary will, upon payment of the
fee of the Depositary and of all taxes and governmental charges and fees,
execute and deliver at its Corporate Trust Office to, or upon the order of, the
person or persons named in the notice of the Custodian delivered to the
Depositary or requested by the person depositing such Ordinary Shares with the
Depositary, an ADR or ADRs, registered in the name or names of such person or
persons, and representing any authorized number of ADSs requested by such person
or persons.
The Depositary has no obligation to accept Ordinary Shares for deposit
from any person or entity identified by the Company as holding Restricted
Securities (as defined below) except upon compliance with the provisions of the
Deposit Agreement. The term "Restricted Securities" means Ordinary Shares, or
ADRs representing such Ordinary Shares, which are acquired directly or
indirectly from the Company or its affiliates, as defined in Rule 144 to the
Securities Act of 1933, as amended (the "Securities Act"), in a transaction or
chain of transactions not involving any public offering or which are subject to
resale limitations under Regulation D under the Securities Act or both, or which
are held by an officer, director or other affiliate of the Company, or which are
subject to other restrictions on sale or deposit under the laws of the United
States or England, or under a shareholder agreement or the Memorandum and
Articles of Association of the Company.
Upon surrender at the Corporate Trust Office of the Depositary of an
ADR for the purpose of withdrawal of the Deposited Securities represented by
such ADR, and upon payment of the fee of the Depositary for the surrender of
ADRs and payment of all taxes and governmental charges and fees, and subject to
the terms and conditions of the Deposit Agreement, the Owner of such ADR will be
entitled to delivery, to him or upon his order, of the amount of Deposited
Securities at the time represented by such ADR. The forwarding of share
certificates and other proper documents of title for such delivery will be at
the risk and expense of the Owner.
30
<PAGE> 33
Subject to the terms and conditions of the Deposit Agreement and any
limitations established by the Depositary, the Depositary may deliver ADRs prior
to the receipt of Ordinary Shares (a "Pre-Release") and deliver Ordinary Shares
upon the receipt and cancellation of ADRs which have been Pre-Released, whether
or not such cancellation is prior to the termination of such Pre-Release or the
Depositary knows that such ADR has been Pre-Released. The Depositary may receive
ADRs in lieu of Ordinary Shares in satisfaction of a Pre-Release. Each
Pre-Release must be (i) preceded or accompanied by a written representation from
the person to whom the ADRs are to be delivered that such person, or its
customer, owns the Ordinary Shares or ADRs to be remitted, as the case may be,
(ii) at all times fully collateralized with cash or such other collateral as the
Depositary deems appropriate, (iii) terminable by the Depositary on not more
than five business days' notice and (iv) subject to such further indemnities and
credit regulations as the Depositary deems appropriate.
Dividends, Other Distributions and Rights
Subject to any restrictions imposed by English law, regulations or
applicable permits, the Depositary is required to convert or cause to be
converted into United States dollars, to the extent that in its judgment it can
do so on a reasonable basis and can transfer the resulting dollars to the United
States, all cash dividends and other cash distributions denominated in a
currency other than dollars, including pounds sterling ("Foreign Currency"),
that it receives in respect of the deposited Ordinary Shares, and to distribute
the resulting dollar amount (net of reasonable and customary expenses incurred
by the Depositary in converting such Foreign Currency) to the Owners entitled
thereto, in proportion to the number of ADSs representing such Deposited
Securities held by them, respectively. The amount distributed to the Owners of
ADRs will be reduced by any amount on account of taxes to be withheld by the
Company or the Depositary. See "Liability of Owner for Taxes." If such
conversion or distribution can be effected only with the approval or license of
any government or agency thereof, the Depositary will file such application for
approval or license, if any, as it deems desirable.
If the Depositary determines that in its judgment any Foreign Currency
received by the Depositary cannot be converted on a reasonable basis into
dollars transferable to the United States, any approval or license of any
government or agency thereof that is required for such conversion is denied or
in the opinion of the Depositary is not obtainable or if any such approval or
license is not obtained within a reasonable period as determined by the
Depositary, the Depositary may distribute the Foreign Currency received by the
Depositary to, or in its discretion may hold such Foreign Currency for the
respective accounts of, the Owners entitled to receive the same. If any such
conversion of Foreign Currency, in whole or in part, cannot be effected for
distribution to some of the Owners entitled thereto, the Depositary may in its
discretion make such conversion and distribution in dollars to the extent
permissible to the Owners entitled thereto, and may distribute the balance of
the Foreign Currency received by the Depositary to, or hold such balance for,
the respective accounts of the Owners entitled thereto.
If the Company declares a dividend in, or free distribution of,
Ordinary Shares, the Depositary may, and will if the Company so requests,
distribute to the Owners, in proportion to the number of ADSs representing such
Deposited Securities held by them, respectively, additional ADRs for an
aggregate number of ADSs representing the amount of Ordinary Shares received as
such dividend or free distribution, subject to the terms and conditions of the
Deposit Agreement with respect to the deposit of Ordinary Shares and the
issuance of ADRs, including the withholding of any tax or other governmental
charges or fees and the payment of the fees of the Depositary. In lieu of
delivering ADRs for fractional ADSs in the event of any such dividend or free
distribution, the Depositary will sell the amount of Ordinary Shares represented
by the aggregate of such fractions and distribute the net proceeds in accordance
with the Deposit Agreement. If additional ADRs are not so distributed, each ADS
31
<PAGE> 34
will thenceforth also represent the additional Ordinary Shares distributed upon
the Deposited Securities represented thereby.
If the Company offers or causes to be offered to the holders of any
Deposited Securities any rights to subscribe for additional Ordinary Shares or
any rights of any other nature, the Depositary will have discretion as to the
procedure to be followed in making such rights available to any Owners or in
disposing of such rights on behalf of any Owners and making the net proceeds
available in United States Dollars to such Owners or, if by the terms of such
rights offering or for any other reason, the Depositary may not either make such
rights available to any Owners or dispose of such rights and make the net
proceeds available to such Owners, then the Depositary shall allow the rights to
lapse. If at the time of the offering of any rights the Depositary reasonably
determines that it is lawful and feasible to make such rights available to all
Owners or to certain Owners but not to other Owners, the Depositary must
distribute to any Owner to whom it determines the distribution to be lawful and
feasible, in proportion to the number of ADSs held by such Owner, warrants or
other instruments therefor in such form as it deems appropriate. If the
Depositary reasonably determines that it is not lawful and feasible to make such
rights available to certain Owners or if the rights represented by such warrants
or other instruments are not exercised and appear about to lapse, it may sell
the rights, warrants or other instruments in proportion to the number of ADSs
held by the Owners to whom it has determined it may not lawfully or feasibly
make such rights available, and allocate the net proceeds of such sales for the
account of such Owners otherwise entitled to such rights, warrants or other
instruments, upon an averaged or other practical basis without regard to any
distinctions among such Owners because of exchange restrictions or the date of
delivery of any ADR or ADRs, or otherwise.
In circumstances in which rights would not otherwise be distributed, if
an Owner of ADRs requests the distribution of warrants or other instruments in
order to exercise the rights allocable to the ADSs of such Owner, the Depositary
will make such rights available to such Owner upon written notice from the
Company to the Depositary that (i) the Company has elected in its sole
discretion to permit such rights to be exercised and (ii) such Owner has
executed such documents as the Company has determined in its sole discretion are
reasonably required under applicable law. Upon instruction pursuant to such
warrants or other instruments to the Depositary from such Owner to exercise such
rights, upon payment by such Owner to the Depositary for the account of such
Owner of an amount equal to the purchase price of the Ordinary Shares to be
received upon exercise of the rights and upon payment of the fees of the
Depositary as set forth in such warrants or other instruments, the Depositary
will, on behalf of such Owner, exercise the rights and purchase the Ordinary
Shares, and the Company shall cause the Ordinary Shares so purchased to be
delivered to the Depositary on behalf of such Owner. As agent for such Owner,
the Depositary will cause the Ordinary Shares so purchased to be deposited, and
will execute and deliver restricted ADRs to such Owner pursuant to the Deposit
Agreement.
If registration under the Securities Act of the securities to which any
rights relate is required in order for the Company to offer such rights to
Owners and sell the securities represented by such rights, the Company or the
Depositary are not required to offer such rights to Owners of ADRs unless and
until such a registration statement is in effect, or unless the offering and
sale of such securities to the Owners of such ADRs are exempt from registration
under the provisions of the Securities Act. The Deposit Agreement does not
create any obligation on the part of the Company to file a registration
statement with respect to such rights or underlying securities or to endeavor to
have such a registration statement declared effective.
Whenever the Depositary receives any distribution other than cash or
Ordinary Shares upon any Deposited Securities, the Depositary will cause the
securities or property received by it to be distributed to the Owners entitled
thereto, after deduction or upon payment of any fees of the Depositary or any
taxes or other governmental charges or fees, in proportion to the number of ADSs
representing such Deposited Securities held by them respectively, in any manner
that the Depositary may deem equitable and practicable for accomplishing such
distribution; provided, however, that if in the opinion of the Depositary such
distribution cannot be made proportionately among the Owners entitled thereto,
32
<PAGE> 35
or if for any other reason (including any requirement that the Company or the
Depositary withhold an amount on account of taxes) the Depositary deems such
distribution not to be feasible, the Depositary may adopt such method as it may
deem equitable and practicable for the purpose of effecting such distribution,
including the public or private sale of the securities or property thus
received, or any part thereof, and the Depositary will distribute the net
proceeds of any such sale to the Owners entitled thereto.
If the Depositary determines that any distribution in property
(including Ordinary Shares and rights to subscribe therefor) is subject to any
tax which the Depositary is obligated to withhold, the Depositary may, by public
or private sale, dispose of all or a portion of such property in such amounts
and in such manner as the Depositary deems necessary and practicable to pay such
taxes and the Depositary will distribute the net proceeds of any such sale after
deduction of such taxes to the Owners entitled thereto in proportion to the
number of ADSs held by them, respectively.
Upon any change in nominal or par value, split-up, consolidation or any
other reclassification of Deposited Securities, or upon any recapitalization,
reorganization, merger or consolidation or sale of assets affecting the Company
or to which it is a party, any securities that are received by the Depositary or
Custodian in exchange for, in conversion of, or in respect of Deposited
Securities will be treated as new Deposited Securities under the Deposit
Agreement, and the ADSs will thenceforth represent the new Deposited Securities
so received in exchange or conversion unless additional ADRs are delivered
pursuant to the following sentence. In any such case, the Depositary may, upon
consultation with the Company, and must if the Company so requests, execute and
deliver additional ADRs as in the case of a dividend on Ordinary Shares, or call
for the surrender of outstanding ADRs to be exchanged for new ADRs specifically
describing such new Deposited Securities.
Record Dates
Whenever the Depositary receives notice of the fixing of a record date
by the Company for the determination of the holders of Deposited Securities
entitled to receive any cash dividend or other cash distribution, any
distribution other than cash, or any rights to be issued with respect to the
Deposited Securities, or whenever for any reason the Depositary causes a change
in the number of Ordinary Shares that are represented by each ADS, or whenever
the Depositary receives notice of the fixing of a record date by the Company for
the determination of the holders of Deposited Securities entitled to vote at any
meeting of holders of Ordinary Shares or other Deposited Securities, the
Depositary, in consultation with the Company, will fix a record date for the
determination of the Owners of ADRs who will be entitled to receive such
dividend, distribution or rights, or the net proceeds of the sale thereof or to
give instructions for the exercise of voting rights at any such meeting, or for
fixing the date on or after which each ADS will represent the changed number of
Ordinary Shares, all subject to the provisions of the Deposit Agreement.
Voting of Deposited Securities
Upon receipt of notice of any meeting or solicitation of consents or
proxies of holders of Ordinary Shares or other Deposited Securities, the
Depositary will, as soon as practicable thereafter, mail to all Owners a notice
containing (i) the information included in such notice of meeting received by
the Depositary, (ii) a statement that each Owner at the close of business on a
specified record date will be entitled, subject to applicable law and the
provisions of the Memorandum and the Articles of Association of the Company and
the provisions of or governing Deposited Securities, to instruct the Depositary
in writing as to the exercise of the voting rights, if any, pertaining to the
Deposited Securities represented by the ADSs evidenced by such Owner's ADRs and
(iii) a statement as to the manner in which such instructions may be given. Upon
the written request of an Owner on such record date, received on or before the
date established by the Depositary for such purpose, the Depositary will
33
<PAGE> 36
endeavor, insofar as practicable, to vote or cause to be voted the Deposited
Securities represented by the ADSs evidenced by such Owner's ADRs in accordance
with any nondiscretionary proxy. The Depositary will not exercise any voting
discretion over any Deposited Securities.
If after complying with the procedures set forth above, the Depositary
does not receive instructions from the Owner of an ADR on or before the date
established by the Depositary for such purpose, the Depositary will deliver a
discretionary proxy for the ADSs evidenced by such ADR in the form provided by
the Company; provided that the Depositary will not give such proxy with respect
to any matter as to which the Company informs the Depositary that the Company
does not wish such proxy given, substantial opposition exists or such matter
materially and adversely affects the rights of holders of Ordinary Shares.
There can be no assurance that Owners generally or any Owner in
particular will receive notice sufficiently in advance of the date established
by the Depositary for the receipt of instructions to ensure that the Depositary
will vote the Ordinary Shares or Deposited Securities.
Reports and Other Communications
The Depositary will make available for inspection by Owners at its
Corporate Trust Office any reports and communications, including any proxy
soliciting material, received from the Company, which are both (i) received by
the Depositary as the holder of the Deposited Securities and (ii) made generally
available to the holders of such Deposited Securities by the Company. The
Depositary will also send to the Owners copies of such reports when furnished by
the Company pursuant to the Deposit Agreement.
Amendment and Termination of the Deposit Agreement
The form of ADRs and any provisions of the Deposit Agreement may at any
time and from time to time be amended by written agreement between the Company
and the Depositary in any respect which they may deem necessary or desirable.
Any amendment that imposes or increases any fees or charges (other than taxes
and other governmental charges, registration fees, cable, telex or facsimile
transmission costs, delivery costs or other such expenses), or that otherwise
prejudices any substantial existing right of Owners of ADRs, will, however, not
take effect as to outstanding ADRs until the expiration of three months after
notice of such amendment has been given to the Owners of outstanding ADRs. Every
Owner, at the time any amendment becomes effective, will be deemed, by
continuing to hold such ADR, to consent and agree to such amendment and to be
bound by the Deposit Agreement as amended thereby. In no event will any
amendment impair the right of the Owner of any ADR to surrender such ADR and
receive therefor the Deposited Securities represented thereby. In the event the
Depositary resigns or is removed and a successor depositary is appointed in
accordance with the provisions of the Deposit Agreement, Owners of outstanding
ADRs will be notified of such appointment by the successor depositary.
Upon the resignation or removal of the Depositary pursuant to the
Deposit Agreement, or at any time at the direction of the Company, the
Depositary will terminate the Deposit Agreement by mailing notice of such
termination to the Owners of the ADRs then outstanding at least 30 days prior to
the date fixed in such notice for such termination. On and after the date of
termination, the Owner of an ADR will, upon (i) surrender of such ADR at the
Corporate Trust Office, (ii) payment of the fee of the Depositary for the
surrender of ADRs as provided in the Deposit Agreement and (iii) payment of any
applicable taxes or governmental charges, be entitled to delivery to such Owner
or upon such Owner's order, of the amount of Deposited Securities represented by
such ADR. If any ADRs remain outstanding after the date of termination of the
Deposit Agreement, the Depositary thereafter will discontinue the registration
of transfers of ADRs, will suspend the distribution of dividends to the Owners
thereof and will not give any further notices or perform any further acts under
the Deposit Agreement, except the collection of dividends and other
34
<PAGE> 37
distributions pertaining to the Deposited Securities, the sale of rights and the
delivery of Deposited Securities, together with any dividends or other
distributions received with respect thereto and the net proceeds of the sale of
any rights or other property, in exchange for surrendered ADRs (after deducting,
in each case, the fee of the Depositary for the surrender of ADRs, any expenses
set forth in the Deposit Agreement and any applicable taxes or governmental
charges). At any time after the expiration of one year from the date of
termination, the Depositary may sell the Deposited Securities then held under
the Deposit Agreement and hold uninvested the net proceeds of such sale,
together with any other cash, unsegregated and without liability for interest,
for the pro rata benefit of the Owners that have not surrendered their ADRs,
such Owners thereupon becoming general creditors of the Depositary with respect
to such net proceeds. After making such sale, the Depositary will be discharged
from all obligations under the Deposit Agreement, except to account for net
proceeds and other cash (after deducting, in each case, the fee of the
Depositary for the surrender of ADRs, any expenses set forth in the Deposit
Agreement and any applicable taxes or governmental charges).
Charges of Depositary
The Company will pay the fees and reasonable expenses of the Depositary
and those of any Registrar. The Company will not pay or be liable for (i) the
fees of the Depositary for the execution and delivery of ADRs, transfers, the
surrender of ADRs and the making of any distribution, all pursuant to the
Deposit Agreement; (ii) taxes and other governmental charges; (iii) such
registration fees as may from time to time be in effect for the registration of
transfers of Ordinary Shares generally on the share register of the Company or
its appointed agent and applicable to transfers of Ordinary Shares to the name
of the Depositary or its nominee or the Custodian or its nominee on the making
of deposits or withdrawals under the Deposit Agreement; (iv) such cable, telex
and facsimile transmission expenses as are expressly provided in the Deposit
Agreement to be at the expense of persons depositing Ordinary Shares or Owners;
and (v) such expenses as are incurred by the Depositary in the conversion of
Foreign Currency pursuant to the Deposit Agreement. The Depositary will charge
to any party to whom ADRs are issued (including, without limitation, issuance
pursuant to a stock dividend or stock split declared by the Company or an
exchange of stock regarding the ADRs or Deposited Securities or a distribution
of ADRs pursuant to the Deposit Agreement) or who surrenders ADRs a fee of $5.00
or less per 100 ADSs (or portion thereof) for the issuance or surrender,
respectively, of ADRs pursuant to the Deposit Agreement. In addition, the
Depositary will charge the Owners and holders of ADRs a fee for, and deduct such
fee from, the distribution of proceeds pursuant to the Deposit Agreement, such
fee being in an amount equal to the fee for the issuance of ADSs referred to
above that would have been charged as a result of the deposit by Owners of
Ordinary Shares received in exercise of rights distributed to them pursuant to
the Deposit Agreement, but which rights are instead sold by the Depositary, and
the net proceeds distributed.
The Depositary may own and deal in any class of securities of the
Company and its affiliates and in ADRs.
Liability of Owner for Taxes
If any tax or other governmental charge becomes payable with respect to
any ADR or any Deposited Securities represented by any ADR, such tax or other
governmental charge will be payable by the Owner of such ADR to the Depositary.
The Depositary may refuse to effect any transfer of such ADR or any withdrawal
of Deposited Securities represented thereby until such payment is made, and may
withhold any dividends or other distributions, or may sell for the account of
the Owner thereof any part or all of the Deposited Securities represented by
such ADR and may apply such dividends or other distributions or the proceeds of
any such sale to pay any such tax or other governmental charge and the Owner of
such ADR will remain liable for any deficiency.
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<PAGE> 38
General
Neither the Depositary nor the Company will be liable to any Owner of
any ADR, if by reason of any provision of any present or future law of the
United States or any other country, or of any other governmental authority, or
by reason of any provision, present or future, of the Memorandum and Articles of
Association of the Company, or by reason of any act of God or war or other
circumstances beyond its control, the Depositary or the Company shall be
prevented or forbidden from, or be subjected to any civil or criminal penalty on
account of, doing or performing any act or thing which by the terms of the
Deposit Agreement is provided will be done or performed; nor will the Depositary
or the Company incur any liability to any Owner of any ADR by reason of any
nonperformance or delay, caused as aforesaid, in the performance of any act or
thing which by the terms of the Deposit Agreement is provided will or may be
done or performed, or by reason of any exercise of, or failure to exercise, any
discretion provided for in the Deposit Agreement. Where, by the terms of a
distribution pursuant to the Deposit Agreement, or an offering or distribution
pursuant to the Deposit Agreement, or for any other reason, such distribution or
offering may not be made available to Owners, and the Depositary may not dispose
of such distribution or offering on behalf of such Owners and make the net
proceeds available to such Owners, then the Depositary will not make such
distribution or offering, and will allow any rights, if applicable, to lapse.
The Company and the Depositary assume no obligation nor will they be
subject to any liability under the Deposit Agreement to Owners or holders of
ADRs, except that they agree to perform their respective obligations set forth
in the Deposit Agreement without negligence or bad faith.
The ADRs are transferable on the books of the Depositary, provided that
the Depositary may close the transfer books at any time or from time to time
when deemed expedient by it in connection with the performance of its duties. As
a condition precedent to the execution and delivery, registration of transfer,
split-up, combination or surrender of any ADR or withdrawal of any Deposited
Securities, the Depositary or the Custodian may require payment from the
depositor of the Ordinary Shares or the presentor of the ADR of a sum sufficient
to reimburse it for any tax or other governmental charge and any stock transfer
or registration fee with respect thereto (including any such tax or charge and
fee with respect to Ordinary Shares being deposited or withdrawn) and payment of
any applicable fees as provided in the Deposit Agreement. The Depositary may,
and if requested by the Company must, refuse to deliver ADRs, to register the
transfer of any ADR, to make any distribution on, or related to, Ordinary Shares
or to deliver any Deposited Securities until it has received such proof of
citizenship or residence, exchange control approval or other information,
certificates, representations and warranties as it may reasonably deem necessary
or proper. The delivery, transfer or registration of transfer of outstanding
ADRs generally may be suspended during any period when the transfer books of the
Depositary are closed or if any such action is deemed necessary or advisable by
the Depositary or the Company, at any time or from time to time. The surrender
of outstanding ADRs and the withdrawal of Deposited Securities may not be
suspended, subject only to (i) temporary delays caused by closing the transfer
books of the Depositary or the Company or the deposit of Ordinary Shares in
connection with voting at a shareholders' meeting or the payment of dividends,
(ii) the payment of fees, taxes and similar charges and (iii) compliance with
any United States or other laws or governmental regulations relating to the ADRs
or to the withdrawal of the Deposited Securities.
The Depositary will keep books, at its Corporate Trust Office, for the
registration and transfer of ADRs, which at all reasonable times will be open
for inspection by the Owners, provided that such inspection will not be for the
purpose of communicating with Owners 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.
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<PAGE> 39
The Depositary may appoint one or more co-transfer agents for the
purpose of effecting transfers, combinations and split-ups of ADRs at designated
transfer offices on behalf of the Depositary. In carrying out its functions, a
co-transfer agent may require evidence of authority and compliance with
applicable laws and other requirements by holders or Owners or persons entitled
to ADRs and will be entitled to protection and indemnity to the same extent as
the Depositary.
Listing
The ADRs are quoted on the Nasdaq National Market under the trading
symbol MIFGY.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
Effective as of the close of business on March 13, 1998, the Company
undertook a subdivision (or stock split) of its Ordinary Shares on a 5-for-1
basis. The Company's ADSs have been adjusted such that each ADS represents 5
Ordinary Shares. All share and per share references included in this Annual
Report have been adjusted to reflect the impact of the above-mentioned stock
split of the Ordinary Shares.
PART IV
ITEM 17. FINANCIAL STATEMENTS
See Item 18.
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 1998 Annual Report to Shareholders:
US Format
---------
Audited Financial Statements
Consolidated Statements of Income for the years ended
January 31, 1998, 1997 and 1996
37
<PAGE> 40
Consolidated Balance Sheets at January 31, 1998 and 1997
Consolidated Statements of Cash Flow for the years ended
January 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders'Equity for the
years ended January 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of the Independent Auditors
UK Format
---------
Audited Financial Statements
Consolidated Profit and Loss Account for the years
ended January 31, 1998, 1997 and 1996
Consolidated Balance Sheet at January 31, 1998 and 1997
Consolidated Cash Flow Statement for the years ended
January 31, 1998, 1997 and 1996
Notes to Consolidated Cash Flow Statement for the years
ended January 31, 1998, 1997 and 1996
Company Balance Sheet at January 31, 1998 and 1997
Statement of Total Recognized Gains and Losses for the
years ended January 31, 1998, 1997 and 1996
Movement in Shareholders' Funds for the years ended
January 31, 1998, 1997 and 1996
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, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying Accounts
UK Format
---------
Report of the Independent Auditors
Schedule for the years ended January 31, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required
information is not significant or is not applicable.
38
<PAGE> 41
(b) Exhibits.
--------
Exhibit 2.01(1) Memorandum of Association of the Company dated as
of March 28, 1983, as amended and restated
to date.
Exhibit 2.02(1) Articles of Association of the Company adopted as
of June 19, 1996,as amended and restated to date.
Exhibit 2.03* Form of Specimen Certificate for the Company's
Ordinary Shares at GBP 0.02 each.
Exhibit 2.04* Amended and Restated Deposit Agreement dated
as of March 16, 1998 among the Company, the Bank
of New York and all owners and holders from time
to time of American Depositary Receipts.
Exhibit 2.05(2)+ The Company's 1983-1984 Share Option Plan, as
amended, and related documents.
Exhibit 2.06(2)+ The Company's 1991 Share Option Plan, as amended,
and related documents.
Exhibit 2.07(2)+ The Company's 1994 Employee Benefit Trust and
related documents.
Exhibit 2.08(2)+ The Company's 1996 Share Option Plan and related
documents.
Exhibit 2.09(1) Form of Indemnification Agreement entered into by
the Company with each of its directors and
certain executive officers.
Exhibit 2.10(1) 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(3) Master Lease Agreement dated as of March 24, 1992
between Micro Focus Incorporated and Mayfair
Investments, Inc.
Exhibit 2.12(1) Lease Agreement dated as of January 8, 1997
between Micro Focus Incorporated and
Passantino-Vidovich Limited Partnership.
Exhibit 2.13* Agreement and Plan of Reorganization dated as of
December 23, 1997 between the Company and XDB
Systems, Inc. and its shareholders
Exhibit 2.14* Amendment No. 1 to the Agreement and Plan of
Reorganization dated as of January 20, 1998
between the Company, XDB Systems, Inc. and its
shareholders.
Exhibit 2.15(4)+ XDB Systems, Inc. 1992 Stock Option Plan and
related documents.
Exhibit 2.16(4)+ XDB Systems, Inc. 1996 Stock Option Plan and
related documents.
Exhibit 13.01* The portions of the Micro Focus 1998 Annual
Report to Shareholders incorporated herein by
reference.
39
<PAGE> 42
Exhibit 23.01* Consent of Ernst & Young, Independent Auditors,
dated May 27, 1998.
Exhibit 23.02* Consent of Ernst & Young, Independent Auditors,
dated May 27, 1998
- - --------------------
(1) Filed on May 2, 1997 as an exhibit to the Company's Annual Report on Form
20-F, as amended, and incorporated herein by reference.
(2) 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.
(3) Filed on March 15, 1993 as an exhibit to the Company's Annual Report on
Form 20-F, and incorporated herein by reference.
(4) Filed on February 5, 1998 as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-45701), and incorporated herein by
reference.
+ Indicates a management contract or compensatory plan or arrangement
* Filed herewith
40
<PAGE> 43
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 29, 1998 MICRO FOCUS GROUP PLC
By: /s/ Richard Van Hoesen
-----------------------
Richard Van Hoesen
Senior Vice President, Chief
Financial Officer and Secretary
41
<PAGE> 44
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 1998 and 1997 and for each of the three years
in the period ended January 31 1998 set forth on pages 23 to 36 of the Annual
Report to Shareholders for 1998. 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
May 1, 1998
<PAGE> 45
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS US FORMAT
- - --------------------------------------------------------------------------------
MICRO FOCUS GROUP PLC
<TABLE>
<CAPTION>
In thousands of US dollars
- - -------------------------- ---------------- ------------------- ------------------------ ----------------- -----------
Balance at Charged Charged Deductions Balance
beginning of to costs and to/credited from at end of
Description period expenses otheraccounts (*) period
- - -------------------------- ---------------- ------------------- ------------------------ ----------------- -----------
<S> <C> <C> <C> <C> <C>
Provision for bad and doubtful debts
Years ended January 31:
1996 1,401 457 (3) (423) 1,423
1997 1,423 724 (21) (395) 1,731
1998 1,731 585 806 (623) 2,499
- - -------------------------- ---------------- ------------------- ------------------- --------------- ----------------
(*) Includes exchange rate adjustments
</TABLE>
<PAGE> 46
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 1997
and 1998 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 1998 set forth on pages 51 to 67 of the
Annual Report to Shareholders for 1998. 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 1998 and 1997 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended January 31 1998
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
May 1 1998
<PAGE> 47
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS UK FORMAT
- - --------------------------------------------------------------------------------
MICRO FOCUS GROUP PLC
<TABLE>
<CAPTION>
- - -------------------------- ---------------- ------------------ ------------------------ ---------------- ---------------
Balance at Charged Charged Deductions Balance
beginning of to costs and to/credited from other GBP '000 at end of
Description period expenses accounts (*) period
GBP '000 GBP '000 GBP '000 GBP '000
- - -------------------------- ---------------- ------------------ ------------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Provision for bad and doubtful debts
Years ended January 31:
1996 879 288 20 (272) 942
1997 942 458 (41) (251) 1,081
1998 1,081 358 475 (381) 1,524
- - -------------------------- ---------------- ------------------ ------------------ ---------------- ---------------------
(*) Includes exchange rate adjustments
</TABLE>
<PAGE> 48
EXHIBIT INDEX
Exhibit No. Document
----------- --------
Exhibit 2.01(1) Memorandum of Association of the Company dated as
of March 28, 1983, as amended and restated
to date.
Exhibit 2.02(1) Articles of Association of the Company adopted
as of June 19, 1996, as amended and restated
to date.
Exhibit 2.03* Form of Specimen Certificate for the Company's
Ordinary Shares at GBP 0.02 each.
Exhibit 2.04* Amended and Restated Deposit Agreement dated
as of March 16, 1998 among the Company, the Bank
of New York and all owners and holders from time
to time of American Depositary Receipts.
Exhibit 2.05(2)+ The Company's 1983-1984 Share Option Plan, as
amended, and related documents.
Exhibit 2.06(2)+ The Company's 1991 Share Option Plan, as amended,
and related documents.
Exhibit 2.07(2)+ The Company's 1994 Employee Benefit Trust and
related documents.
Exhibit 2.08(2)+ The Company's 1996 Share Option Plan and related
documents.
Exhibit 2.09(1) Form of Indemnification Agreement entered into by
the Company with each of its directors and
certain executive officers.
Exhibit 2.10(1) 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(3) Master Lease Agreement dated as of March 24, 1992
between Micro Focus Incorporated and Mayfair
Investments, Inc.
<PAGE> 49
Exhibit 2.12(1) Lease Agreement dated as of January 8, 1997
between Micro Focus Incorporated and
Passantino-Vidovich Limited Partnership.
Exhibit 2.13* Agreement and Plan of Reorganization dated as of
December 23, 1997 between the Company and XDB
Systems, Inc. and its shareholders
Exhibit 2.14* Amendment No. 1 to the Agreement and Plan of
Reorganization dated as of January 20, 1998
between the Company, XDB Systems, Inc. and its
shareholders.
Exhibit 2.15(4)+ XDB Systems, Inc. 1992 Stock Option Plan and
related documents.
Exhibit 2.16(4)+ XDB Systems, Inc. 1996 Stock Option Plan and
related documents.
Exhibit 13.01* The portions of the Micro Focus 1998 Annual
Report to Shareholders incorporated herein by
reference.
Exhibit 23.01* Consent of Ernst & Young, Independent Auditors,
dated May 27, 1998.
Exhibit 23.02* Consent of Ernst & Young, Independent Auditors,
dated May 27, 1998
- - --------------------
(1) Filed on May 2, 1997 as an exhibit to the Company's Annual Report on Form
20-F, as amended, and incorporated herein by reference.
(2) 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.
(3) Filed on March 15, 1993 as an exhibit to the Company's Annual Report on
Form 20-F, and incorporated herein by reference.
(4) Filed on February 5, 1998 as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-45701), and incorporated herein by
reference.
+ Indicates a management contract or compensatory plan or arrangement
* Filed herewith
<PAGE> 1
EXHIBIT 2.03
<TABLE>
<CAPTION>
Ordinary Shares
<S> <C> <C> <C> <C>
CERTIFICATE NO. ACCOUNT NO. TRANSFER NO. DATE NUMBER OF SHARES
- - -------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------
OF 2p EACH
[MICRO FOCUS LOGO]
MICRO FOCUS(R)
____________________________________________ GROUP PLC _________________________________________________
(INCORPORATED IN ENGLAND UNDER THE COMPANIES ACTS 1948 TO 1981 NO. 1709998)
This is to certify that the
undermentioned is/are the registered holder(s)
of Ordinary shares Of 2 p each fully paid in
the Capital of this Company as shown herein, subject to
the Memorandum and Articles of Association.
NAME(S) OF HOLDER(S) NUMBER OF ORDINARY SHARES OF 2p EACH
- - -------------------------------------------------- ------------------------------------------------------
GIVEN UNDER THE
OFFICIAL SEAL OF
COMPANY
This certificate should be kept in a safe place. It will be needed when you sell
or transfer the shares.
[SEAL]
The registrar's address is: Lloyds Bank Registrars, The Causeway, Worthing, West
Sussex BN99 6DA and the relevant reference for correspondence in No. 260.
[NUMBER]
</TABLE>
<PAGE> 1
EXHIBIT 2.04
====================================================
MICRO FOCUS GROUP PUBLIC LIMITED COMPANY
AND
THE BANK OF NEW YORK
As Depositary
AND
OWNERS AND HOLDERS OF AMERICAN DEPOSITARY RECEIPTS
Deposit Agreement
Dated as of March 1, 1990
As Amended and Restated as of March 16, 1998
====================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ARTICLE 1. ..................................................................................................... 2
SECTION 1.01. American Depositary Shares. .................................................................. 2
SECTION 1.02. Commission. .................................................................................. 2
SECTION 1.03. Custodian. ................................................................................... 2
SECTION 1.04. Deposit Agreement. ........................................................................... 2
SECTION 1.05. Depositary; Corporate Trust Office ........................................................... 3
SECTION 1.06. Deposited Securities. ........................................................................ 3
SECTION 1.07. Dollars; Pence; Foreign Currency ............................................................. 3
SECTION 1.08. Foreign Registrar. ........................................................................... 3
SECTION 1.09. Issuer. ...................................................................................... 3
SECTION 1.10. Owner. ....................................................................................... 3
SECTION 1.11. Receipts. .................................................................................... 4
SECTION 1.12. Registrar. ................................................................................... 4
ARTICLE 2. ..................................................................................................... 5
SECTION 2.01. Form and Transferability of Receipts. ........................................................ 5
SECTION 2.02. Deposit of Shares. ........................................................................... 6
SECTION 2.03. Execution and Delivery of Receipts. .......................................................... 7
SECTION 2.04. Transfer of Receipts; Combination and Split-up of Receipts. .................................. 8
SECTION 2.05. Surrender of Receipts and Withdrawal of Shares................................................ 8
SECTION 2.06. Limitations on Execution and Delivery, Transfer and Surrender of Receipts..................... 9
SECTION 2.07. Lost Receipts, etc. ......................................................................... 10
SECTION 2.08. Cancellation and Destruction of Surrendered Receipts. ....................................... 10
SECTION 2.09. Pre-Release of Receipts. .................................................................... 11
ARTICLE 3. .................................................................................................... 11
SECTION 3.01. Filing Proofs, Certificates and Other Information............................................ 11
SECTION 3.02. Liability of Owner for Taxes. ............................................................... 12
SECTION 3.03. Warranties on Deposit of Shares. ............................................................ 12
ARTICLE 4. .................................................................................................... 12
SECTION 4.01. Cash Distributions. ......................................................................... 12
SECTION 4.02. Distributions Other Than Cash or Shares. ................................................... 13
<PAGE> 3
SECTION 4.03. Distributions in Shares. .................................................................... 14
SECTION 4.04. Rights. ..................................................................................... 14
SECTION 4.05. Conversion of Foreign Currency. ............................................................. 15
SECTION 4.06. Fixing of Record Date. ...................................................................... 16
ARTICLE 5. .................................................................................................... 20
SECTION 5.01. Maintenance of Office and Transfer Books by the Depositary. ................................. 20
SECTION 5.02. Prevention or Delay in Performance by the Depositary or the Issuer. ......................... 20
SECTION 5.03. Obligations of the Depositary, the Custodian and the Issuer. ................................ 21
SECTION 5.04. Resignation and Removal of the Depositary.................................................... 22
SECTION 5.05. The Custodians. ............................................................................. 22
SECTION 5.06. Notices and Reports. ........................................................................ 23
SECTION 5.07. Issuance of Additional Shares, etc. ......................................................... 23
SECTION 5.08. Indemnification. ............................................................................ 24
SECTION 5.09. Charges of Depositary. ...................................................................... 24
SECTION 5.10. Retention of Depositary Documents. .......................................................... 25
SECTION 5.11. Exclusivity. ................................................................................ 25
SECTION 5.12. List of Restricted Securities Owners. ....................................................... 26
ARTICLE 6. .................................................................................................... 26
SECTION 6.01. Amendment. .................................................................................. 26
SECTION 6.02. Termination. ................................................................................ 27
ARTICLE 7. .................................................................................................... 28
SECTION 7.01. Counterparts. ............................................................................... 28
SECTION 7.02. No Third Party Beneficiaries. ............................................................... 28
SECTION 7.03. Severability. ............................................................................... 28
SECTION 7.04. Holders and Owners as Parties; Binding Effect. .............................................. 28
SECTION 7.05. Notices. .................................................................................... 28
SECTION 7.06. Governing Law. .............................................................................. 29
SECTION 7.07. Assignment. ................................................................................. 29
</TABLE>
<PAGE> 4
DEPOSIT AGREEMENT
AMENDED AND RESTATED DEPOSIT AGREEMENT dated as of March 16, 1998 among
MICRO FOCUS GROUP PUBLIC LIMITED COMPANY, incorporated in England with reg. no.
1709998 (herein called the Issuer), THE BANK OF NEW YORK, a New York banking
corporation (herein called the Depositary), and all Owners and holders from time
to time of American Depositary Receipts issued hereunder.
W I T N E S S E T H :
-------------------
WHEREAS, the Issuer desires to create a vehicle, as hereinafter set
forth in this Deposit Agreement, for the deposit of Shares (as defined in
Section 1.16 hereof), of the Issuer from time to time with the Depositary or
with the principal London, England office of the Depositary (herein called the
Custodian), as agent of the Depositary for the purposes set forth in this
Deposit Agreement, for the creation of American Depositary Shares representing
the Shares so deposited and for the execution and delivery of American
Depositary Receipts in respect of the American Depositary Shares; and
WHEREAS, the American Depositary Receipts are to be substantially in
the form of Exhibit A annexed hereto, with appropriate insertions, modifications
and omissions, as hereinafter provided in this Deposit Agreement;
NOW, THEREFORE, in consideration of the premises, it is agreed by and
between the parties hereto as follows:
<PAGE> 5
ARTICLE 1.
DEFINITIONS.
The following definitions shall for all purposes, unless otherwise
clearly indicated, apply to the respective terms used in this Deposit Agreement:
SECTION 1.01. American Depositary Shares.
--------------------------
The term "American Depositary Shares" shall mean the rights
represented by the Receipts issued hereunder and the interests in the Deposited
Securities represented thereby. Each American Depositary Share shall represent
five (5) Shares, until there shall occur a distribution upon Deposited
Securities covered by Section 4.03 or a change in Deposited Securities covered
by Section 4.08 with respect to which additional Receipts are not executed and
delivered, and thereafter American Depositary Shares shall evidence the amount
of Shares or Deposited Securities specified in such Sections.
SECTION 1.02. Commission.
----------
The term "Commission" shall mean the Securities and Exchange
Commission of the United States or any successor governmental agency in the
United States.
SECTION 1.03. Custodian.
---------
The term "Custodian" shall mean the principal London, England
office of The Depositary, as agent of the Depositary for the purposes of this
Deposit Agreement, and any other firm or corporation which may hereafter be
appointed by the Depositary pursuant to the terms of Section 5.05, as substitute
or additional custodian or custodians hereunder, as the context shall require
and the term "Custodians" shall mean all of them, collectively.
SECTION 1.04. Deposit Agreement.
-----------------
The term "Deposit Agreement" shall mean this Agreement, as the
same may be amended from time to time in accordance with the provisions hereof.
2
<PAGE> 6
SECTION 1.05. Depositary; Corporate Trust Office.
----------------------------------
The term "Depositary" shall mean The Bank of New York, a New
York banking corporation. The term "Corporate Trust Office", when used with
respect to the Depositary, shall mean the office of the Depositary which at the
date of this Agreement is 101 Barclay Street, New York, New York, 10286.
SECTION 1.06. Deposited Securities.
--------------------
The term "Deposited Securities" as of any time shall mean
Shares at such time deposited or deemed to be deposited under this Deposit
Agreement and any and all other securities, property and cash received by the
Depositary or the Custodian in respect thereof and at such time held hereunder,
subject as to cash to the provisions of Section 4.05.
SECTION 1.07. Dollars; Pence; Foreign Currency.
--------------------------------
The term "Dollars" shall mean United States dollars. The term
"pence" or "p" shall mean United Kingdom pence. The term "Foreign Currency"
shall mean any currency other than Dollars.
SECTION 1.08. Foreign Registrar.
-----------------
The term "Foreign Registrar" shall mean Lloyds Bank PLC, The
Causeway, Goring-by Sea, Wathing, West Sussex BN126DA, England, a company
organized under the laws of England, which carries out the duties of registrar
for the Ordinary Shares of the Issuer or any successor as registrar for the
Ordinary Shares of the Issuer.
SECTION 1.09. Issuer.
------
The term "Issuer" shall mean Micro Focus Group Public
Limited Company (incorporated in England with reg. no. 1709998, and its
successors and permitted assigns.
SECTION 1.10. Owner.
-----
The term "Owner" shall mean the person in whose name a Receipt
is registered on the books of the Depositary maintained for such purpose.
3
<PAGE> 7
SECTION 1.11. Receipts.
--------
The term "Receipts" shall mean the American Depositary
Receipts issued hereunder representing American Depositary Shares in
substantially the form of Exhibit A hereto.
SECTION 1.12. Registrar.
---------
The term "Registrar" shall mean any bank or trust company
having an office in the Borough of Manhattan, The City of New York, which shall
be appointed to register Receipts and transfers of Receipts as herein provided.
SECTION 1.13. Restricted Receipts.
-------------------
The term "Restricted Receipts" shall mean any Receipts issued
pursuant to Section 4.04 hereunder in connection with the issuance of rights by
the Issuer as set forth in such Section. Any such Restricted Receipts shall be
held by such Owner and legended in accordance with applicable U.S. laws, and
shall be subject to the appropriate restrictions on sale, deposit, cancellation,
and transfer under such laws.
SECTION 1.14. Restricted Securities.
---------------------
The term "Restricted Securities" shall mean Shares as defined
below, or Receipts representing such Shares, which are acquired directly or
indirectly from the Issuer or its affiliates (as defined in Rule 144 to the
Securities Act of 1933) in a transaction or chain of transactions not involving
any public offering or which are subject to resale limitations under Regulation
D under that Act or both, or which are held by an officer, director (or persons
performing similar functions) or other affiliate of the Issuer, or which are
subject to other restrictions on sale or deposit under the laws of the United
States, England, or under a shareholder agreement or the Memorandum and Articles
of Association of the Issuer.
SECTION 1.15. Securities Act of 1933.
----------------------
The term "Securities Act of 1933" shall mean the United States
Securities Act of 1933, as from time to time amended.
4
<PAGE> 8
SECTION 1.16. Shares.
------
The term "Shares" shall mean fully-paid Ordinary shares of 2p
in the capital of the Issuer, heretofore validly issued and outstanding and
fully paid, non-assessable and free of any pre-emption rights of the holders of
outstanding Shares or hereafter validly issued and outstanding and fully paid,
non-assessable and free of any pre-emption rights of the holders of outstanding
Shares or interim certificates representing such Shares.
ARTICLE 2.
FORM OF RECEIPTS, DEPOSIT OF SHARES, EXECUTION
AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS.
SECTION 2.01. Form and Transferability of Receipts.
------------------------------------
Definitive Receipts shall be substantially in the form set
forth in Exhibit A annexed to this Deposit Agreement, with appropriate
insertions, modifications and omissions, as hereinafter provided. No Receipt
shall be entitled to any benefits under this Deposit Agreement or be valid or
obligatory for any purpose, unless such Receipt shall have been executed by the
Depositary by the manual or facsimile signature of a duly authorized signatory
of the Depositary and, if a Registrar for the Receipts shall have been
appointed, countersigned by the manual or facsimile signature of a duly
authorized officer of the Registrar. The Depositary shall maintain books on
which each Receipt so executed and delivered as hereinafter provided and the
transfer of each such Receipt shall be registered. Receipts bearing the
signature (manual or facsimile) of a duly authorized signatory of the Depositary
who was at any time a proper signatory of the Depositary shall bind the
Depositary, notwithstanding that such signatory has ceased to hold such office
prior to the execution of such Receipts by the Registrar and their delivery or
did not hold such office at the date of such Receipts.
The Receipts may be endorsed with or have incorporated in the
text thereof such legends or recitals or changes not inconsistent with the
provisions of this Deposit Agreement as may be required by the Depositary or
required to comply with any applicable law or regulations thereunder or with the
rules and regulations of any securities exchange upon which Receipts may be
5
<PAGE> 9
listed or to conform with any usage with respect thereto, or to indicate any
special limitations or restrictions to which any particular Receipts are subject
by reason of the date of issuance of the underlying Deposited Securities or
otherwise.
Title to a Receipt (and to the American Depositary Shares
evidenced thereby), when properly endorsed or accompanied by proper instruments
of transfer, shall be transferable by delivery with the same effect as in the
case of a negotiable instrument; provided, however, that the Depositary,
notwithstanding any notice to the contrary, may treat the Owner thereof as the
absolute owner thereof for the purpose of determining the person entitled to
distribution of dividends or other distributions or to any notice provided for
in this Deposit Agreement and for all other purposes.
SECTION 2.02. Deposit of Shares.
-----------------
Subject to the terms and conditions of this Deposit Agreement,
Shares or evidence of rights to receive Shares may be deposited by delivery
thereof to any Custodian hereunder, accompanied by any appropriate instrument or
instruments of transfer, or endorsement, in form satisfactory to the Custodians,
together with all such certifications as may be required by the Depositary or
the Custodians in accordance with the provisions of this Deposit Agreement, and
if the Depositary requires together with a written order directing the
Depositary to execute and deliver to, or upon the written order of, the person
or persons stated in such order a Receipt or Receipts for the number of American
Depositary Shares representing such deposit. If required by the Depositary,
Shares presented for deposit at any time, whether or not the transfer books of
the Issuer (or the appointed agent of the Issuer for transfer and registration
of Shares, which may but need not be the Foreign Registrar) are closed, shall
also be accompanied by an agreement or assignment, or other instrument
satisfactory to the Depositary, which will provide for the prompt transfer to
the Custodian of any dividend, or right to subscribe for additional Shares or to
receive other property which any person in whose name the Shares are or have
been recorded may thereafter receive upon or in respect of such deposited
Shares, or in lieu thereof, such agreement of indemnity or other agreement as
shall be satisfactory to the Depositary.
6
<PAGE> 10
At the request and risk and expense of any Owner, and for the
account of such Owner, the Depositary may receive certificates for Shares to be
deposited, together with the other instruments herein specified, for the purpose
of forwarding such Share certificates to the Custodian for deposit hereunder.
Upon each delivery to a Custodian of a certificate or
certificates for Shares to be deposited hereunder, together with the other
documents above specified, such Custodian shall, as soon as transfer and
recordation can be accomplished, present such certificate or certificates to the
Issuer (or the appointed agent of the Issuer for transfer and registration of
Shares, which may but need not be the Foreign Registrar), for transfer and
recordation of the Shares being deposited in the name of the Depositary or its
nominee or such Custodian or its nominee.
Deposited Securities shall be held by the Depositary or by a
Custodian for the account and to the order of the Depositary or at such other
place or places as the Depositary shall determine.
SECTION 2.03. Execution and Delivery of Receipts.
----------------------------------
Upon receipt by any Custodian of any deposit pursuant to
Section 2.02 hereunder (and in addition, if the transfer books of the Issuer [or
the appointed agent of the Issuer for the transfer and registration of Shares,
which may but need not be the Foreign Registrar] are open, the Depositary may
require a proper acknowledgment or other evidence from the Issuer satisfactory
to the Depositary that any Deposited Securities have been recorded upon the
books of the Issuer [or the appointed agent of the Issuer for the transfer and
registration of Shares, which may but need not be the Foreign Registrar] in the
name of the Depositary or its nominee or such Custodian or its nominee),
together with the other documents required as above specified, such Custodian
shall notify the Depositary of such deposit and the person or persons to whom or
upon whose written order a Receipt or Receipts are deliverable in respect
thereof and the number of American Depositary Shares to be represented thereby.
Such notification shall be made by letter sent first class airmail postage
prepaid or, at the request and risk and expense of the person making the
deposit, by cable, telex or facsimile transmission. Upon receiving such notice
from such Custodian, or upon the receipt of Shares by the Depositary, the
Depositary, subject to the terms and conditions of this Deposit Agreement, shall
7
<PAGE> 11
execute and deliver at its Corporate Trust Office, to or upon the order of the
person or persons entitled thereto, a Receipt or Receipts, registered in the
name or names and representing any authorized number of American Depositary
Shares requested by such person or persons, but only upon payment to the
Depositary of the fee of the Depositary for the execution and delivery of such
Receipt or Receipts, and of all taxes and governmental charges and fees payable
in connection with such deposit and the transfer of the Deposited Securities.
SECTION 2.04. Transfer of Receipts; Combination and Split-up of Receipts.
--------------------------------------------------------
The Depositary, subject to the terms and conditions of this
Deposit Agreement, shall register transfers on its transfer books from time to
time of Receipts, upon any surrender of a Receipt, by the Owner in person or by
duly authorized attorney, properly endorsed or accompanied by proper instruments
of transfer, and duly stamped as may be required by the laws of the State of New
York and of the United States of America. Thereupon the Depositary shall execute
a new Receipt or Receipts and deliver the same to or upon the order of the
person entitled thereto.
The Depositary, subject to the terms and conditions of this
Deposit Agreement, shall upon surrender of a Receipt or Receipts for the purpose
of effecting a split-up or combination of such Receipt or Receipts, execute and
deliver a new Receipt or Receipts for any authorized number of American
Depositary Shares requested, representing the same aggregate number of American
Depositary Shares as the Receipt or Receipts surrendered.
The Depositary may, with the Issuer's approval, appoint one or
more co-transfer agents for the purpose of effecting transfers, combinations and
split-ups of Receipts at designated transfer offices on behalf of the
Depositary. In carrying out its functions, a co-transfer agent may require
evidence of authority and compliance with applicable laws and other requirements
by holders or Owners or persons entitled thereto and will be entitled to
protection and indemnity to the same extent as the Depositary.
8
<PAGE> 12
SECTION 2.05. Surrender of Receipts and Withdrawal of Shares.
----------------------------------------------
Upon surrender at the Corporate Trust Office of the Depositary
of a Receipt for the purpose of withdrawal of the Deposited Securities
represented thereby, and upon payment of the fee of the Depositary for the
surrender of Receipts, and subject to the terms and conditions of this Deposit
Agreement, the Owner of such Receipt shall be entitled to delivery, to him or
upon his order, of the amount of Deposited Securities at the time represented by
such Receipt. Delivery of such Deposited Securities may be made by the delivery
of certificates to such Owner or as ordered by him. Such delivery shall be made,
as hereinafter provided, without unreasonable delay.
A Receipt surrendered for such purposes may be required by the
Depositary to be properly endorsed in blank or accompanied by proper instruments
of transfer in blank, and if the Depositary requires, the Owner thereof shall
execute and deliver to the Depositary a written order directing the Depositary
to cause the Deposited Securities being withdrawn to be delivered to or upon the
written order of a person or persons designated in such order. Thereupon the
Depositary shall direct one (or more) of the Custodians to deliver at the
principal London, England office of such Custodian, subject to Sections 2.06,
3.01 and 3.02, and to the other terms and conditions of this Deposit Agreement,
to or upon the written order of the person or persons designated in the order
delivered to the Depositary if so required by the Depositary and as above
provided, the amount of Deposited Securities represented by such Receipt, except
that the Depositary may make delivery to such person or persons at the Corporate
Trust Office of the Depositary of any dividends or distributions with respect to
the Deposited Securities represented by such Receipt, or of any proceeds of sale
of any dividends, distributions or rights, which may at the time be held by the
Depositary.
At the request, risk and expense of any Owner so surrendering
a Receipt, and for the account of such Owner, the Depositary shall direct the
Custodian to forward a certificate or certificates and other proper documents of
title for the Deposited Securities represented by such Receipt to the Depositary
for delivery at the Corporate Trust Office of the Depositary. Such direction
shall be given by letter sent first class airmail postage prepaid or, at the
request, risk and expense of such Owner, by cable, telex or facsimile
transmission.
9
<PAGE> 13
SECTION 2.06. Limitations on Execution and Delivery, Transfer and Surrender
of Receipts.
-------------------------------------------------------------
As a condition precedent to the execution and delivery,
registration of transfer, split-up, combination or surrender of any Receipt or
withdrawal of any Deposited Securities, the Depositary or the Custodian may
require payment from the depositor of Shares or the presentor of the Receipt of
a sum sufficient to reimburse it for any tax or other governmental charge and
any stock transfer or registration fee with respect thereto (including any such
tax or charge and fee with respect to Shares being deposited or withdrawn) and
payment of any applicable fees as herein provided, may require the production of
proof satisfactory to it as to the identity and genuineness of any signature and
may also require compliance with such regulations, if any, as the Depositary may
establish consistent with the provisions of this Deposit Agreement.
The delivery of Receipts against deposits of Shares generally or against
deposits of particular Shares may be suspended, or the transfer of Receipts in
particular instances may be refused, or the registration of transfer of
outstanding Receipts generally may be suspended, during any period when the
transfer books of the Depositary are closed, or if any such action is deemed
necessary or advisable by the Depositary or the Issuer at any time or from time
to time because of any requirement of law or of any government or governmental
body or commission, or under any provision of this Deposit Agreement, or for any
other reason. The surrender of outstanding Receipts and withdrawal of Deposited
Securities may not be suspended subject only to (i) temporary delays caused by
closing the transfer books of the Depositary or the Issuer or the deposit of
Shares in connection with voting at a shareholders' meeting, or the payment of
dividends, (ii) the payment of fees, taxes and similar charges, and (iii)
compliance with any U.S. or foreign laws or governmental regulations relating to
the Receipts or to the withdrawal of the Deposited Securities. The Depositary
may retain for its own account any compensation for the issuance of Receipts
against evidence of rights to receive Shares, including without limitation out
of earnings on the collateral securing such rights. Without limitation of the
foregoing, neither the Depositary nor the Custodian shall knowingly accept for
deposit under this Deposit Agreement any Shares required to be registered under
10
<PAGE> 14
the provisions of the Securities Act of 1933, unless a registration statement is
in effect as to such Shares.
SECTION 2.07. Lost Receipts, etc.
-------------------
In case any Receipt shall be mutilated, destroyed, lost or
stolen, the Depositary shall execute and deliver a new Receipt of like tenor, in
exchange and substitution for such mutilated Receipt upon cancellation thereof,
or in lieu of and in substitution for such destroyed or lost or stolen Receipt,
upon the Owner thereof filing with the Depositary (a) a request for such
execution and delivery before the Depositary has notice that the Receipt has
been acquired by a bona fide purchaser and (b) a sufficient indemnity bond and
satisfying any other reasonable requirements imposed by the Depositary.
SECTION 2.08. Cancellation and Destruction of Surrendered Receipts.
-----------------------------------------------------
All Receipts surrendered to the Depositary shall be cancelled
by the Depositary. The Depositary is authorized to destroy Receipts so
cancelled.
SECTION 2.09. Pre-Release of Receipts.
-----------------------
Notwithstanding Section 2.03 hereof, the Depositary may
execute and deliver Receipts prior to the receipt of Shares pursuant to Section
2.02 ("Pre-Release"). The Depositary may, pursuant to Section 2.05, deliver
Shares upon the receipt and cancellation of Receipts which have been
Pre-Released, whether or not such cancellation is prior to the termination of
such Pre-Release or the Depositary knows that such Receipt has been
Pre-Released. The Depositary may receive Receipts in lieu of Shares in
satisfaction of a Pre-Release. Each Pre-Release will be (a) preceded or
accompanied by a written representation from the person to whom Receipts are to
be delivered that such person, or its customer, owns the Shares or Receipts 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 number of American Depositary Shares which are outstanding at
any time as a result of Pre-Releases will not normally exceed thirty percent
(30%) of the Shares deposited hereunder; provided, however, that the Depositary
11
<PAGE> 15
reserves the right to change or disregard such limit from time to time as it
deems appropriate.
The Depositary may retain for its own account any compensation
received by it in connection with the foregoing.
ARTICLE 3.
CERTAIN OBLIGATIONS OF OWNERS OF RECEIPTS.
SECTION 3.01 Filing Proofs, Certificates and Other Information.
-------------------------------------------------
Any person presenting Shares for deposit or any Owner of a
Receipt may be required from time to time to file such proof of citizenship or
residence, exchange control approval, evidence of the number of Receipts and
Deposited Securities legally or beneficially owned or such information relating
to the registration on the books of the Issuer (or the appointed agent of the
Issuer for transfer and registration of Shares, which may but need not be the
Foreign Registrar) of the Shares presented for deposit or other information, to
execute such certificates and to make such representations and warranties, as
the Depositary may reasonably deem necessary or proper. The Depositary may, and
if requested by the Issuer shall, withhold, the delivery or registration of
transfer of any Receipt or the distribution or sale of any dividend or other
distribution or rights or of the proceeds thereof or the delivery of any
Deposited Securities until such proof or other information is filed or such
certificates are executed.
SECTION 3.02 Liability of Owner for Taxes.
----------------------------
If any tax or other governmental charge shall become payable
with respect to any Receipt or any Deposited Securities represented by any
Receipt, such tax or other governmental charge shall be payable by the Owner of
such Receipt to the Depositary. The Depositary may refuse to effect any transfer
of such Receipt or any withdrawal of Deposited Securities represented thereby
until such payment is made, and may withhold any dividends or other
distributions, or may sell for the account of the Owner thereof any part or all
of the Deposited Securities represented by such Receipt, and may apply such
dividends or other distributions or the proceeds of any such sale in payment of
12
<PAGE> 16
such tax or other governmental charge, the Owner of such Receipt remaining
liable for any deficiency.
SECTION 3.03. Warranties on Deposit of Shares.
-------------------------------
Every person depositing Shares under this Deposit Agreement
shall be deemed thereby to represent and warrant that such Shares and each
certificate therefor are validly issued, fully paid, non-assessable and free of
any pre-emption rights of the holders of outstanding Shares and that the person
making such deposit is duly authorized so to do. Every such person shall also be
deemed to represent that the deposit of Shares or sale of Receipts by that
person is not restricted under the Securities Act of 1933. Such representations
and warranties shall survive the deposit of Shares and issuance of Receipts. Any
shares delivered to the Custodian for deposit bearing a legend shall not be
accepted for deposit without first obtaining Issuer's consent.
ARTICLE 4.
THE DEPOSITED SECURITIES.
SECTION 4.01. Cash Distributions.
------------------
Whenever the Depositary shall receive any cash dividend or
other cash distribution by the Issuer on any Deposited Securities, the
Depositary shall, subject to the provisions of Section 4.05, convert such
dividend or distribution into Dollars and shall distribute the amount thus
received to the Owners as of the record date fixed pursuant to Section 4.06, in
proportion to the number of American Depositary Shares representing such
Deposited Securities held by them respectively; provided, however, that in the
event that the Issuer or the Depositary shall be required to withhold and does
withhold from any cash dividend or other cash distribution in respect of any
Deposited Securities an amount on account of taxes, the amount distributed to
the Owner of Receipts for American Depositary Shares representing such Deposited
Securities shall be reduced accordingly. The Depositary shall distribute only
such amount, however, as can be distributed without attributing to any Owner of
a Receipt a fraction of one cent. Any such fractional amounts shall be rounded
to the nearest whole cent and so distributed to Owners entitled thereto. The
13
<PAGE> 17
Issuer or its agent will remit to the appropriate governmental agency in the
England all amounts withheld and owing to such agency. The Depositary will
forward to the Issuer or its agent such information from its records as the
Issuer may reasonably request to enable the Issuer or its agent to file
necessary reports with governmental agencies, and either the Depositary or the
Issuer or its agent may file any such reports necessary to obtain benefits under
the applicable tax treaties for the Owners.
SECTION 4.02. Distributions Other Than Cash or Shares.
---------------------------------------
Whenever the Depositary shall receive any distribution other
than cash or Shares upon any Deposited Securities, the Depositary shall cause
the securities or property received by it to be distributed to the Owners as of
the record date fixed pursuant to Section 4.06, in proportion to the number of
American Depositary Shares representing such Deposited Securities held by them
respectively, in any manner that the Depositary may deem equitable and
practicable for accomplishing such distribution; provided, however, that if in
the opinion of the Depositary such distribution cannot be made proportionately
among such Owners as of the record date fixed pursuant to Section 4.06, or if
for any other reason (including any requirement that the Issuer or the
Depositary withhold an amount on account of taxes) the Depositary deems such
distribution not to be feasible, the Depositary may adopt such method as it may
deem equitable and practicable for the purpose of effecting such distribution,
including the sale (at public or private sale) of the securities or property
thus received, or any part thereof, and the net proceeds of any such sale shall
be distributed by the Depositary to such Owners.
SECTION 4.03. Distributions in Shares.
-----------------------
If any distribution upon any Deposited Securities consists of
a dividend in, or free distribution of, Shares, the Depositary may, and shall if
the Issuer shall so request, distribute to the Owners, as of the record date
fixed pursuant to Section 4.06, in proportion to the number of American
Depositary Shares representing such Deposited Securities held by them
respectively, additional Receipts for an aggregate number of American Depositary
Shares representing the amount of Shares received as such dividend or free
distribution. In lieu of delivering Receipts for fractional American Depositary
Shares in any such case, the Depositary shall sell the amount of Shares
represented by the aggregate of such fractions and distribute the net proceeds,
14
<PAGE> 18
all in the manner and subject to the conditions described in Section 4.02. If
additional Receipts are not so distributed, each American Depositary Share shall
thenceforth also represent the additional Shares distributed upon the Deposited
Securities represented thereby.
SECTION 4.04. Rights.
------
In the event that the Issuer shall offer or cause to be
offered to the holders of any Deposited Securities any rights to subscribe for
additional Shares or any rights of any other nature, the Depositary shall have
discretion as to the procedure to be followed in making such rights available to
any Owners or in disposing of such rights on behalf of any Owners and making the
net proceeds available in Dollars to such Owners or, if by the terms of such
rights offering or, for any other reason, the Depositary may not either make
such rights available to any Owners or dispose of such rights and make the net
proceeds available to such Owners, then the Depositary shall allow the rights to
lapse; provided, however, if at the time of the offering of any rights the
Depositary reasonably determines that it is lawful and feasible to make such
rights available to all Owners or to certain Owners but not to other Owners, the
Depositary shall distribute, to any Owner to whom it determines the distribution
to be lawful and feasible, in proportion to the number of American Depositary
Shares held by such Owner, warrants or other instruments therefor in such form
as it deems appropriate to facilitate the exercise, sale or transfer of such
rights by such Owner. If the Depositary reasonably determines that it is not
lawful and feasible to make such rights available to certain Owners or if the
rights represented by such warrants or other instruments are not exercised and
appear about to lapse, it may sell the rights or warrants or other instruments
in proportion to the number of American Depositary Shares held by the Owners to
whom it has determined it may not lawfully or feasibly to make such rights
available, and allocate the net proceeds of such sales for the account of such
Owners otherwise entitled to such rights, warrants or other instruments, upon an
averaged or other practical basis without regard to any distinctions among such
Owners because of exchange restrictions or the date of delivery of any Receipt
or Receipts, or otherwise.
If an Owner of Receipts requests the distribution of warrants
or other instruments in order to exercise the rights allocable to the American
Depositary Shares of such Owner hereunder, the Depositary will make such rights
15
<PAGE> 19
available to such Owner upon written notice from the Issuer to the Depositary
that (a) the Issuer has elected in its sole discretion to permit such rights to
be exercised and (b) such Owner has executed such documents as the Issuer has
determined in its sole discretion are reasonably required under applicable law.
Upon instruction pursuant to such warrants or other instruments to the
Depositary from such Owner to exercise such rights, upon payment by such Owner
to the Depositary for the account of such Owner of an amount equal to the
purchase price of the Shares to be received in exercise of the rights, and upon
payment of the fees of the Depositary as set forth in such warrants or other
instruments, the Depositary shall, on behalf of such Owner, exercise the rights
and purchase the Shares, and the Issuer shall cause the Shares so purchased to
be delivered to the Depositary on behalf of such Owner. As agent for such Owner,
the Depositary will cause the Shares so purchased to be deposited pursuant to
Section 2.02 of this Deposit Agreement, and shall, pursuant to Section 2.03 of
this Deposit Agreement, execute and deliver to such Owner Restricted Receipts.
If registration under the Securities Act of 1933 of the
securities to which any rights relate is required in order for the Issuer to
offer such rights to Owners and sell the securities represented by such rights,
the Issuer or the Depositary shall not be required to offer such rights to
Owners of Receipts under any circumstances unless and until such a registration
statement is in effect, or unless the offering and sale of such securities to
the Owners of such Receipts are exempt from registration under the provisions of
such Act.
SECTION 4.05. Conversion of Foreign Currency.
------------------------------
Whenever the Depositary shall receive Foreign Currency, by way
of dividends or other distributions or the net proceeds from the sale of
securities, property or rights, and if at the time of the receipt thereof the
Foreign Currency so received can in the judgment of the Depositary be converted
on a reasonable basis into Dollars and the resulting Dollars transferred to the
United States, the Depositary shall convert or cause to be converted, by sale or
in any other manner that it may determine, such Foreign Currency into Dollars,
and such Dollars shall be distributed to the Owners entitled thereto or, if the
Depositary shall have distributed any warrants or other instruments which
entitle the holders thereof to such Dollars, then to the holders of such
warrants and/or instruments upon surrender thereof for cancellation. Such
16
<PAGE> 20
distribution may be made upon an averaged or other practicable basis without
regard to any distinctions among Owners on account of exchange restrictions or
otherwise.
If such conversion or distribution can be effected only with
the approval or license of any government or agency thereof, the Depositary
shall file such application for approval or license, if any, as it may deem
desirable.
If at any time the Depositary shall determine that in its
judgment any Foreign Currency received by the Depositary is not convertible on a
reasonable basis into Dollars transferable to the United States, or if any
approval or license of any government or agency thereof which is required for
such conversion is denied or in the opinion of the Depositary is not obtainable,
or if any such approval or license is not obtained within a reasonable period as
determined by the Depositary, the Depositary may distribute the Foreign Currency
(or an appropriate document evidencing the right to receive such Foreign
Currency) received by the Depositary to, or in its discretion may hold such
Foreign Currency for the respective accounts of, the Owners entitled to receive
the same.
If any such conversion of Foreign Currency, in whole or in
part, cannot be effected for distribution to some of the Owners entitled
thereto, the Depositary may in its discretion make such conversion and
distribution in Dollars to the extent permissible to the Owners of Receipts
entitled thereto and may distribute the balance of the Foreign Currency received
by the Depositary to, or hold such balance for the respective accounts of, the
Owners entitled thereto.
SECTION 4.06 Fixing of Record Date.
---------------------
Whenever the Depositary shall receive notice of the fixing of
a record date by the Issuer for the determination of the holders of Deposited
Securities entitled to receive any cash dividend or other cash distribution, any
distribution other than cash, or any rights to be issued with respect to the
Deposited Securities, or whenever for any reason the Depositary causes a change
in the number of Shares that are represented by each American Depositary Share,
or whenever the Depositary shall receive notice of the fixing of a record date
17
<PAGE> 21
by the Issuer for the determination of the holders of Deposited Securities
entitled to vote at any meeting of holders of Shares or other Deposited
Securities, the Depositary, in consultation with the Issuer, shall fix a record
date for the determination of the Owners of Receipts who shall be entitled to
receive such dividend, distribution or rights, or the net proceeds of the sale
thereof, or to give instructions for the exercise of voting rights at any such
meeting, or for fixing the date on or after which each American Depositary Share
will represent the changed number of Shares. Subject to the provisions of
Sections 4.01 through 4.05 and to the other terms and conditions of this Deposit
Agreement, the Owners on such record date shall be entitled to receive the
amount distributable by the Depositary with respect to such dividend or other
distribution or such rights or the net proceeds of sale thereof in proportion to
the number of American Depositary Shares held by them respectively.
SECTION 4.07. Voting of Deposited Securities.
------------------------------
(i) As soon as practicable after receipt of notice of any
meeting or solicitation of consents or proxies of holders of Shares or other
Deposited Securities, the Depositary shall mail to the Owners a notice
containing (a) such information as is contained in the notice received by the
Depositary, (b) a statement that each Owner at the close of business on a
specified record date will be entitled, subject to applicable law and the
provisions of the Memorandum and the Articles of Association of the Issuer and
the provisions of or governing Deposited Securities, to instruct the Depositary
in writing as to the exercise of voting rights, if any, pertaining to the
Deposited Securities represented by the American Depositary Shares evidenced by
such Owner's Receipts and (c) a statement as to the manner in which such
instructions may be given, including, when applicable, deemed given in
accordance with paragraph (ii) of this Section if no instruction is received.
Upon the written request of an Owner on such record date, received on or before
the date established by the Depositary for such purpose (the "Instruction
Date"), the Depositary shall endeavor insofar as practicable and permitted under
applicable law and the provisions of the Memorandum and the Articles of
Association of the Issuer and the provisions of or governing Deposited
Securities to vote or cause to be voted the Deposited Securities represented by
the American Depositary Shares evidenced by such Owner's Receipts in accordance
with any nondiscretionary proxy to a person designated by the Issuer. The
Depositary shall not itself exercise any voting discretion over any Deposited
Securities.
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<PAGE> 22
(ii) If after complying with the procedures set forth in this
Section the Depositary does not receive instructions from the Owner of a Receipt
on or before the Instruction Date, the Depositary shall deliver a discretionary
proxy for the Shares evidenced by such Receipt in such form as provided by the
Issuer to a person designated by the Issuer; provided, that no such proxy shall
be given with respect to any matter as to which the Issuer informs the
Depositary (and the Issuer agrees to provide such information as promptly as
practicable in writing) that (x) the Issuer does not wish such proxy given, (y)
substantial opposition exists or (z) such matter materially and adversely
affects the rights of holders of Shares.
There can be no assurance that Owners generally or any Owner
in particular will receive the notice described in paragraph (i) of this Section
sufficiently prior to the Instruction Date to ensure that the Depositary will
vote the Shares or Deposited Securities in accordance with the provisions set
forth in such paragraph.
SECTION 4.08. Changes Affecting Deposited Securities.
--------------------------------------
Upon any change in nominal value, par value, split-up,
consolidation or any other reclassification of Deposited Securities, or upon any
recapitalization, reorganization, merger or consolidation or sale of assets
affecting the Issuer or to which it is a party, any securities which shall be
received by the Depositary or a Custodian in exchange for or in conversion of or
in respect of Deposited Securities shall be treated as new Deposited Securities
under this Deposit Agreement, and American Depositary Shares shall thenceforth
represent the new Deposited Securities so received in exchange or conversion,
unless additional Receipts are delivered pursuant to the following sentence. In
any such case the Depositary may, upon consultation with the Issuer, and shall
if the Issuer shall so request, execute and deliver additional Receipts as in
the case of a dividend on the Shares, or call for the surrender of outstanding
Receipts to be exchanged for new Receipts specifically describing such new
Deposited Securities.
19
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SECTION 4.09. Reports.
-------
The Depositary shall make available for inspection by Owners
at its Corporate Trust Office any reports and communications, including any
proxy soliciting material, received from the Issuer which are both (a) received
by the Depositary as the holder of the Deposited Securities and (b) made
generally available to the holders of such Deposited Securities by the Issuer.
The Depositary shall also send to the Owners copies of such reports when
furnished by the Issuer pursuant to Section 5.06.
In addition, upon notice that the Issuer has not furnished the
Commission with any public reports, documents or other information as required
by foreign law or otherwise under Rule 12g3-2(b) under the Securities Exchange
Act of 1934, as from time to time amended, the Depositary shall furnish promptly
to the Commission copies of all annual or other periodic reports and other
notices or communications which the Depositary receives as holder of the
Deposited Securities from the Issuer and which are not so furnished to or filed
with the Commission pursuant to any other requirement of the Commission and the
Depositary is hereby authorized by the Issuer so to do on its behalf.
SECTION 4.10. Lists of Receipt Owners.
-----------------------
Promptly upon request by the Issuer, the Depositary shall, at
the expense of the Issuer, furnish to it a list, as of a recent date, of the
names, addresses and holdings of American Depositary Shares by all persons in
whose names Receipts are registered on the books of the Depositary.
SECTION 4.11. Withholding.
-----------
In the event that the Depositary determines that any
distribution in property (including Shares and rights to subscribe therefor) is
subject to any tax which the Depositary is obligated to withhold, the Depositary
may dispose of all or a portion of such property (including Shares and rights to
subscribe therefor) in such amounts and in such manner as the Depositary deems
necessary and practicable to pay any such taxes, by public or private sale, and
the Depositary shall distribute the net proceeds of any such sale after
20
<PAGE> 24
deduction of such taxes to the Owners entitled thereto in proportion to the
number of American Depositary Shares held by them respectively.
ARTICLE 5.
THE DEPOSITARY, THE CUSTODIANS AND THE ISSUER.
SECTION 5.01. Maintenance of Office and Transfer Books by the Depositary.
--------------------------------------------------------
Until termination of this Deposit Agreement in accordance with
its terms, the Depositary shall maintain in the Borough of Manhattan, The City
of New York, facilities for the execution and delivery, registration,
registration of transfers and surrender of Receipts in accordance with the
provisions of this Deposit Agreement. The Depositary or its agent agrees to
register as a foreign nominee for the purposes of this Agreement pursuant to
English Law.
The Depositary shall keep books for the registration of
Receipts and transfers of Receipts which at all reasonable times shall be open
for inspection by the Owners, provided that such inspection shall not be for the
purpose of communicating with Owners in the interest of a business or object
other than the business of the Issuer or a matter related to this Deposit
Agreement or the Receipts.
The Depositary may close the transfer books, at any time or
from time to time, when deemed expedient by it in connection with the
performance of its duties hereunder.
If any Receipts or the American Depositary Shares represented
thereby are listed on one or more stock exchanges in the United States, the
Depositary shall act as Registrar or appoint a Registrar or one or more
co-registrars for registry of such Receipts in accordance with any requirements
of such exchange or exchanges.
SECTION 5.02. Prevention or Delay in Performance by the Depositary or
-------------------------------------------------------
the Issuer.
- - ----------
Neither the Depositary nor the Issuer shall incur any liability to
any Owner of any Receipt, if by reason of any provision of any present or future
21
<PAGE> 25
law of the United States or any other country, or of any other governmental
authority, or by reason of any provision, present or future, of the Memorandum
and Articles of Association of the Issuer, or by reason of any act of God or war
or other circumstances beyond its control, the Depositary or the Issuer shall be
prevented or forbidden from, or be subjected to any civil or criminal penalty on
account of, doing or performing any act or thing which by the terms of this
Deposit Agreement it is provided shall be done or performed; nor shall the
Depositary or the Issuer incur any liability to any Owner of a Receipt by reason
of any non-performance or delay, caused as aforesaid, in the performance of any
act or thing which by the terms of this Deposit Agreement it is provided shall
or may be done or performed, or by reason of any exercise of, or failure to
exercise, any discretion provided for in this Deposit Agreement. Where, by the
terms of a distribution pursuant to Sections 4.01, 4.02, or 4.03 of this Deposit
Agreement, or an offering or distribution pursuant to Section 4.04 of this
Deposit Agreement, or for any other reason, such distribution or offering may
not be made available to Owners, and the Depositary may not dispose of such
distribution or offering on behalf of such Owners and make the net proceeds
available to such Owners, then the Depositary shall not make such distribution
or offering, and shall allow any rights, if applicable, to lapse.
SECTION 5.03. Obligations of the Depositary, the Custodian and the Issuer.
-----------------------------------------------------------
The Issuer assumes no obligation nor shall it be subject to
any liability under this Deposit Agreement to Owners or holders of Receipts,
except that it agrees to perform its obligations set forth in this Deposit
Agreement without negligence or bad faith.
The Depositary assumes no obligation nor shall it be subject
to any liability under this Deposit Agreement to any Owners (including, without
limitation, liability with respect to the validity or worth of the Deposited
Securities), except that it agrees to perform its obligations specifically set
forth in this Deposit Agreement without negligence or bad faith.
Neither the Depositary nor the Issuer shall be under any
obligation to appear in, prosecute or defend any action, suit or other
proceeding in respect of any Deposited Securities or in respect of the Receipts,
which in its opinion may involve it in expense or liability, unless indemnity
satisfactory to it against all expense and liability be furnished as often as
22
<PAGE> 26
may be required, and the Custodian shall not be under any obligation whatsoever
with respect to such proceedings, the responsibility of the Custodian being
solely to the Depositary.
Neither the Depositary nor the Issuer shall be liable for any
action or nonaction by it in reliance upon the advice of or information from
legal counsel, accountants, any person presenting Shares for deposit, any Owner,
or any other person believed by it in good faith to be competent to give such
advice or information.
The Depositary shall not be responsible for any failure to
carry out any instructions to vote any of the Deposited Securities, or for the
manner in which any such vote is cast or effect of any such vote, provided that
any such action or nonaction is in good faith and not as a result of
Depositary's negligence.
The Depositary may own and deal in any class of securities of
the Issuer and its affiliates and in Receipts.
No disclaimer of liability under the Securities Act of 1933 is
intended by any provision of this Deposit Agreement.
SECTION 5.04. Resignation and Removal of the Depositary.
-----------------------------------------
The Depositary may at any time resign as Depositary hereunder
by written notice of its election so to do delivered to the Issuer. The
Depositary may at any time be removed by the Issuer by written notice of such
removal. In case at any time the Depositary acting hereunder shall resign or be
removed, it shall continue to act as Depositary for the purpose of terminating
this Deposit Agreement pursuant to Section 6.02.
Any corporation into or with which the Depositary may be
merged or consolidated shall be the successor of the Depositary without the
execution or filing of any document or any further act.
23
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SECTION 5.05 The Custodians.
--------------
The Depositary has appointed the principal London, England
office of the Depositary as custodian and agent of the Depositary for the
purposes of this Deposit Agreement. The Custodian or its successors in acting
hereunder shall be subject at all times and in all respects to the directions of
the Depositary and shall be responsible solely to it. Any Custodian may resign
and be discharged from its duties hereunder by notice of such resignation
delivered to the Depositary at least 30 days prior to the date on which such
resignation is to become effective. If upon such resignation there shall be no
Custodian acting hereunder, the Depositary shall, promptly after receiving such
notice, appoint a substitute custodian or custodians, each of which shall
thereafter be a Custodian hereunder. Whenever the Depositary in its discretion
determines that it is in the best interest of the Owners to do so, it may
appoint a substitute or additional custodian or custodians, which shall
thereafter be one of the Custodians hereunder. Upon demand of the Depositary any
Custodian shall deliver such of the Deposited Securities held by it as are
requested of it to any other Custodian or such substitute or additional
custodian or custodians. Each such substitute or additional custodian shall
deliver to the Depositary, forthwith upon its appointment, an acceptance of such
appointment satisfactory in form and substance to the Depositary.
SECTION 5.06. Notices and Reports.
-------------------
On or before the first date on which the Issuer gives notice,
by publication or otherwise, of any meeting of holders of Shares or other
Deposited Securities, or of any adjourned meeting of such holders, or of the
taking of any action in respect of any cash or other distributions or the
offering of any rights, the Issuer agrees to transmit to the Depositary and the
Custodians a copy of the notice thereof in the form given or to be given to
holders of Shares or other Deposited Securities.
The Issuer will arrange for the prompt transmittal by the
Issuer to the Depositary and the Custodian of such notices and any other reports
and communications which are made generally available by the Issuer to holders
of its Shares. If requested in writing by the Issuer, the Depositary will
arrange for the mailing, at the Issuer's expense, of copies of such notices,
24
<PAGE> 28
reports and communications to all Owners. The Issuer will timely provide the
Depositary with the quantity of such notices, reports, and communications, as
requested by the Depositary from time to time, in order for the Depositary to
effect such mailings.
SECTION 5.07. Issuance of Additional Shares, etc.
----------------------------------
The Issuer agrees that in the event of any issuance of (1)
additional Shares, (2) rights to subscribe for Shares, (3) securities
convertible into Shares, or (4) rights to subscribe for such securities, the
Issuer will promptly furnish to the Depositary a written opinion from counsel
for the Issuer in the United States, which counsel shall be satisfactory to the
Depositary, stating whether or not the circumstances of such issue are such as
to make it necessary for a Registration Statement under the Securities Act of
1933 to be in effect prior to the delivery of the Receipts to be issued in
connection with such securities or the issuance of such rights. If in the
opinion of such counsel a Registration Statement is required, such counsel shall
furnish to the Depositary a written opinion as to whether or not there is a
Registration Statement in effect which will cover such issuance of securities or
rights.
The Issuer agrees with the Depositary that neither the Issuer
nor any company controlled by the Issuer will at any time deposit any Shares,
either upon original issuance or upon a sale of Shares previously issued and
reacquired by the Issuer or by any company under its control, unless a
Registration Statement is in effect or an exemption is available as to such
Shares under the Securities Act of 1933.
SECTION 5.08. Indemnification.
---------------
The Issuer agrees to indemnify the Depositary and any
Custodian against, and hold each of them harmless from, any liability or expense
(including but not limited to the fees and expenses of counsel) which may arise
out of acts performed or omitted, in accordance with the provisions of this
Deposit Agreement and of the Receipts, as the same may be amended, modified or
supplemented from time to time, (i) by either the Depositary or a Custodian,
except for any liability or expense arising out of the negligence or bad faith
of either of them, or (ii) by the Issuer or any of its agents.
25
<PAGE> 29
The Depositary agrees to indemnify the Issuer and hold it
harmless from any liability or expense (including but not limited to the fees
and expenses of counsel), which may arise out of acts performed or omitted by
the Depositary or its Custodian due to their negligence or bad faith.
SECTION 5.09. Charges of Depositary.
---------------------
The Issuer agrees to pay the fees and reasonable expenses of
the Depositary and those of any Registrar, but the Issuer shall not pay or be
liable for (1) the fees of the Depositary for the execution and delivery of
Receipts pursuant to Section 2.03, transfers pursuant to Section 2.04, the
surrender of Receipts pursuant to Section 2.05, and the making of any
distribution pursuant to this Deposit Agreement, including but not limited to,
Sections 4.01 through 4.04 hereof, (2) taxes and other governmental charges, (3)
such registration fees as may from time to time be in effect for the
registration of transfers of Shares generally on the share register of the
Issuer (or the appointed agent of the Issuer for transfer and registration of
Shares which may but need not be the Foreign Registrar) and accordingly
applicable to transfers of Shares to the name of the Depositary or its nominee
or Custodian or its nominee on the making of deposits or withdrawals hereunder,
(4) such cable, telex and facsimile transmission expenses as are expressly
provided in this Deposit Agreement to be at the expense of persons depositing
Shares or Owners, and (5) such expenses as are incurred by the Depositary in the
conversion of Foreign Currency pursuant to Section 4.05. Any other charges of
the Depositary hereunder will be paid by the Issuer after consultation and
agreement between the Depositary and the Issuer as to the amount and nature of
such charges. Such charges may at any time and from time to time be changed by
agreement between the Issuer and the Depositary. The Depositary shall present
its statement for such charges and expenses to the Issuer once every three
months. The charges and expenses of the Custodian are for the sole account of
the Depositary. The Depositary shall charge any party to whom Receipts are
issued (including, without limitation, issuance pursuant to a stock dividend or
stock split declared by the Issuer or an exchange of stock regarding the
Receipts or Deposited Securities or a distribution of Receipts pursuant to
Section 4.03 hereof) or who surrenders Receipts a fee of $5.00 or less per 100
American Depositary Shares (or portion thereof) for the issuance or surrender,
respectively, of a Receipt. In addition, the Depositary shall charge the Owners
and holders of Receipts a fee for, and deduct such fee from, the distribution of
26
<PAGE> 30
proceeds pursuant to Section 4.04, such fee being in an amount equal to the fee
for the issuance of American Depositary Shares referred to above which would
have been charged as a result of the deposit by Owners of Shares received in
exercise of rights distributed to them pursuant to Section 4.04, but which
rights are instead sold by the Depositary, and the net proceeds distributed.
SECTION 5.10. Retention of Depositary Documents.
---------------------------------
The Depositary is authorized to destroy those documents,
records, bills and other data compiled during the term of this Deposit Agreement
at the times permitted by the governing statutes unless the Issuer requests that
such papers be retained for a longer period or turned over to the Issuer or to a
successor depositary.
SECTION 5.11. Exclusivity.
-----------
The Issuer agrees not to appoint any other depositary for
issuance of American Depositary Receipts so long as The Bank of New York is
acting as Depositary hereunder; provided, however, that the Depositary agrees to
use its best efforts to assist and cooperate with the Issuer in making the
transition from Depositary to another depositary in the event this Agreement is
terminated by either party and the Issuer decides to continue to make American
Depositary Receipts available to holders of Ordinary shares.
SECTION 5.12. List of Restricted Securities Owners.
------------------------------------
From time to time, the Issuer shall provide the Depositary a
list setting forth, to the actual knowledge of the Issuer, those persons or
entities who beneficially own Restricted Securities and the Issuer shall update
that list on a regular basis. The Issuer agrees to advise in writing each of the
persons or entities so listed that such Restricted Securities are ineligible for
deposit hereunder. The Depositary may rely on such a list or update but shall
not be liable for any action or omission made in reliance thereon.
27
<PAGE> 31
ARTICLE 6.
AMENDMENT AND TERMINATION.
SECTION 6.01. Amendment.
---------
The form of the Receipts and any provisions of this Deposit
Agreement may at any time and from time to time be amended by written agreement
between the Issuer and the Depositary in any respect which they may deem
necessary or desirable. Any amendment which shall impose or increase any fees or
charges (other than taxes and other governmental charges, registration fees,
cable, telex or facsimile transmission costs, delivery costs or other such
expenses), or which shall otherwise prejudice any substantial existing right of
Owners of Receipts, shall, however, not become effective as to outstanding
Receipts until the expiration of three months after notice of such amendment
shall have been given to the Owners of outstanding Receipts. Every Owner at the
time any amendment so becomes effective shall be deemed, by continuing to hold
such Receipt, to consent and agree to such amendment and to be bound by the
Deposit Agreement as amended thereby. In no event shall any amendment impair the
right of the Owner of any Receipt to surrender such Receipt and receive therefor
the Deposited Securities represented thereby.
SECTION 6.02. Termination.
-----------
Upon the resignation or removal of the Depositary pursuant to
Section 5.04, or at any time at the direction of the Issuer, the Depositary
shall terminate this Deposit Agreement by mailing notice of such termination to
the Owners of all Receipts then outstanding at least 30 days prior to the date
fixed in such notice for such termination. On and after the date of termination,
the Owner of a Receipt will, upon surrender of such Receipt at the Corporate
Trust Office of the Depositary, upon the payment of the fee of the Depositary
for the surrender of Receipts referred to in Section 2.05, and upon payment of
any applicable taxes or governmental charges, be entitled to delivery, to him or
upon his order, of the amount of Deposited Securities represented by such
Receipt. If any Receipts shall remain outstanding after the date of termination,
the Depositary thereafter shall discontinue the registration of transfers of
Receipts, shall suspend the distribution of dividends to the Owners thereof, and
shall not give any further notices or perform any further acts under this
28
<PAGE> 32
Deposit Agreement, except that the Depositary shall continue to collect
dividends and other distributions pertaining to Deposited Securities, shall sell
rights as provided in this Deposit Agreement, and shall continue to deliver
Deposited Securities, together with any dividends or other distributions
received with respect thereto and the net proceeds of the sale of any rights or
other property, in exchange for Receipts surrendered to the Depositary (after
deducting, in each case, the fee of the Depositary for the surrender of a
Receipt, any expenses for the account of the Owner of such Receipt in accordance
with the terms and conditions of this Deposit Agreement, and any applicable
taxes or governmental charges). At any time after the expiration of one year
from the date of termination, the Depositary may sell the Deposited Securities
then held hereunder and may thereafter hold uninvested the net proceeds of any
such sale, together with any other cash then held by it hereunder, unsegregated
and without liability for interest, for the pro rata benefit of the Owners which
have not theretofore been surrendered, such Owners thereupon becoming general
creditors of the Depositary with respect to such net proceeds. After making such
sale, the Depositary shall be discharged from all obligations under this Deposit
Agreement, except to account for such net proceeds and other cash (after
deducting, in each case, the fee of the Depositary for the surrender of a
Receipt, any expenses for the account of the Owner of such Receipt in accordance
with the terms and conditions of this Deposit Agreement, and any applicable
taxes or governmental charges). Upon the termination of this Deposit Agreement,
the Issuer shall be discharged from all obligations under this Deposit Agreement
except for its obligations to the Depositary under Sections 5.08 and 5.09
hereof.
ARTICLE 7.
MISCELLANEOUS.
SECTION 7.01. Counterparts.
------------
This Deposit Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of such
counterparts shall constitute one and the same instrument. Copies of this
Deposit Agreement shall be filed with the Depositary and the Custodians and
shall be open to inspection by any holder or Owner of a Receipt during business
hours.
29
<PAGE> 33
SECTION 7.02. No Third Party Beneficiaries.
----------------------------
This Deposit Agreement is for the exclusive benefit of the
parties hereto and shall not be deemed to give any legal or equitable right,
remedy or claim whatsoever to any other person.
SECTION 7.03. Severability.
------------
In case any one or more of the provisions contained in this
Deposit Agreement or in the Receipts should be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall in no way be affected,
prejudiced or disturbed thereby.
SECTION 7.04. Holders and Owners as Parties; Binding Effect.
----------------------------------------------
The holders and Owners of Receipts from time to time shall be
parties to this Deposit Agreement and shall be bound by all of the terms and
conditions hereof and of the Receipts by acceptance thereof.
SECTION 7.05. Notices.
-------
Any and all notices to be given to the Issuer shall be deemed
to have been duly given if personally delivered or sent by first class airmail
postage prepaid, cable, telex or facsimile transmission confirmed by letter,
addressed to Micro Focus Limited, Attention: Legal Department, 26 West Street,
Newbury Berkshire, RG 131 1JT, England or any other place to which the Issuer
may have transferred its principal office.
Any and all notices to be given to the Depositary shall be
deemed to have been duly given if personally delivered or sent by first class
airmail postage prepaid or cable, telex or facsimile transmission confirmed by
letter, addressed to The Bank of New York, Attention: ADR Administration, 101
Barclay Street, New York, New York 10286, or any other place to which the
Depositary may have transferred its Corporate Trust Office.
Any and all notices to be given to any Owner of a Receipt
shall be deemed to have been duly given if personally delivered or sent by first
class airmail postage prepaid or cable, telex or facsimile transmission
30
<PAGE> 34
confirmed by letter, addressed to such Owner at the address of such Owner as it
appears on the transfer books for Receipts of the Depositary, or, if such Owner
shall have filed with the Depositary a written request that notices intended for
such Owner be mailed to some other address, at the address designated in such
request.
Delivery of a notice sent by mail or cable, telex or facsimile
transmission shall be deemed to be effected at the time when a duly addressed
letter containing the same (or a confirmation thereof in the case of a cable,
telex or facsimile transmission) is deposited, postage prepaid, in a post-office
letter box. The Depositary or the Issuer may, however, act upon any cable, telex
or facsimile transmission received by it from the other or from any Owner of a
Receipt, notwithstanding that such cable, telex or facsimile transmission shall
not subsequently be confirmed by letter as aforesaid.
SECTION 7.06. Governing Law.
-------------
This Deposit Agreement and the Receipts shall be interpreted
and all rights hereunder and thereunder and provisions hereof and thereof shall
be governed by the laws of the State of New York.
SECTION 7.07. Assignment.
----------
This Deposit Agreement may not be assigned by either the
Issuer or the Depositary, except that the Issuer may assign this Deposit
Agreement to the surviving entity in a merger or consolidation in which it
participates or to a purchaser of all or substantially all of its assets.
SECTION 7.08. Compliance With U.S. Securities Laws.
------------------------------------
Notwithstanding anything in this Deposit Agreement to the
contrary, the Issuer and the Depositary each agrees that it will not exercise
any rights it has under the Deposit Agreement in a manner which would violate
the United States securities laws to prevent the withdrawal or delivery of
Deposited Securities, including, but not limited to, Section IA(1) of the
General Instructions to the Form F-6 Registration Statement under the Securities
Act of 1933, as amended from time to time.
31
<PAGE> 35
IN WITNESS WHEREOF, MICRO FOCUS GROUP PUBLIC LIMITED COMPANY and THE
BANK OF NEW YORK have duly executed this agreement as of the day and year first
set forth above and all Owners shall become parties hereto upon acceptance by
them of Receipts issued in accordance with the terms hereof.
MICRO FOCUS GROUP PUBLIC LIMITED COMPANY
By: /s/ Loren E. Hillberg
-----------------------------------
LOREN E. HILLBERG
DIRECTOR
THE BANK OF NEW YORK
By: /s/ Joanne F. DiGiovanni
-----------------------------------
JOANNE F. DIGIOVANNI
VICE PRESIDENT
32
<PAGE> 1
EXHIBIT 2.13
10795/683876/6
- - --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
MICRO FOCUS GROUP PLC,
XDB SYSTEMS, INC.
AND
THE SHAREHOLDERS OF XDB SYSTEMS, INC.
DECEMBER 23, 1997
- - --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. PLAN OF REORGANIZATION................................................................. 2
1.1 The Merger ................................................................... 3
1.2 Fractional Shares................................................................. 3
1.3 Escrow Agreement.................................................................. 3
1.4 Stock Options ................................................................... 4
1.5 Effects of the Merger............................................................. 5
1.6 Further Assurances................................................................ 5
1.7 Securities Law Issues............................................................. 5
1.8 Tax-Free Reorganization........................................................... 5
1.9 Pooling of Interests.............................................................. 6
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE SHAREHOLDERS..................................................................... 6
2.1 Organization and Good Standing; Title............................................. 6
2.2 Power, Authorization and Validity................................................. 7
2.3 Capitalization ................................................................... 7
2.4 Subsidiaries ................................................................... 8
2.5 No Conflicts ................................................................... 8
2.6 Litigation ................................................................... 9
2.7 Company Financial Statements...................................................... 9
2.8 Taxes .......................................................................... 10
2.9 Title to Properties............................................................... 10
2.10 Absence of Certain Changes........................................................ 11
2.11 Agreements and Commitments........................................................ 12
2.12 Intellectual Property............................................................. 14
2.13 Compliance with Laws.............................................................. 15
2.14 Certain Transactions and Agreements............................................... 16
2.15 Employees......................................................................... 16
2.16 Corporate Documents............................................................... 18
2.17 No Brokers........................................................................ 18
2.18 Disclosure........................................................................ 18
2.19 Books and Records; Bank Accounts.................................................. 18
2.20 Insurance......................................................................... 19
2.21 Environmental Matters............................................................. 19
2.22 Customers......................................................................... 20
2.23 Accounts Receivable; Accounts Payable............................................. 20
3. REPRESENTATIONS AND WARRANTIES OF PARENT............................................... 20
3.1 Organization and Good Standing .................................................. 20
3.2 Power, Authorization and Validity................................................. 21
3.3 No Violation of Charter Documents or Laws......................................... 21
3.4 Disclosure ................................................................... 21
3.5 No Brokers ................................................................... 21
3.6 Reporting ................................................................... 22
3.7 Trading Markets................................................................... 22
i
<PAGE> 3
4. COVENANTS OF THE COMPANY ............................................................ 22
4.1 Advice of Changes .......................................................... 22
4.2 Maintenance of Business .......................................................... 22
4.3 Conduct of Business .......................................................... 24
4.4 Regulatory Approvals .......................................................... 24
4.5 Necessary Consents .......................................................... 24
4.6 Litigation ................................................................... 24
4.7 No Other Negotiations .......................................................... 24
4.8 Access to Information .......................................................... 24
4.9 Satisfaction of Conditions Precedent.............................................. 25
4.10 Securities Laws ................................................................ 25
4.11 Notification of Employee Problems................................................. 25
4.12 Pooling Accounting................................................................ 25
4.13 Audits ................................................................ 25
5.COVENANTS OF PARENT ............................................................ 25
5.1 Satisfaction of Conditions Precedent.............................................. 26
5.2 Regulatory Approvals .......................................................... 26
5.3 Employee Matters .......................................................... 26
5.4 Access to Information .......................................................... 26
5.5 Company Tax Refund .......................................................... 26
5.6 Parent Stock Listing .......................................................... 26
5.7 Parent Options Registration....................................................... 26
5.8 Parent Reporting .......................................................... 26
6. CLOSING MATTERS ............................................................ 27
6.1 The Closing ................................................................... 27
6.2 Exchange of Certificates.......................................................... 27
7. CONDITIONS TO OBLIGATIONS OF THE COMPANY............................................... 28
7.1 Accuracy of Representations and Warranties........................................ 28
7.2 Covenants ................................................................... 28
7.3 Compliance with Law............................................................... 28
7.4 Government Consents............................................................... 28
7.5 Documents ................................................................... 28
7.6 No Litigation ................................................................... 28
7.7 Opinion of Parent's Counsel....................................................... 28
7.8 Escrow Agreement .......................................................... 28
7.9 License Agreement .......................................................... 28
7.10 Parent Stock ................................................................ 28
8. CONDITIONS TO OBLIGATIONS OF PARENT.................................................... 29
8.1 Accuracy of Representations and Warranties........................................ 29
8.2 Covenants; No Material Adverse Change............................................. 29
8.3 Compliance with Law .......................................................... 29
8.4 Government Consents .......................................................... 29
8.5 Opinion of the Company's Counsel.................................................. 29
ii
<PAGE> 4
8.6 Requisite Approvals .......................................................... 29
8.7 No Litigation ................................................................... 29
8.8 Documents ................................................................... 30
8.9 Investment and Affiliate Letters.................................................. 30
8.10 Escrow Agreement.................................................................. 30
8.11 Non-Competition Agreements........................................................ 30
8.12 License Agreement ................................................................ 30
8.13 Employment Agreements............................................................. 30
8.14 Due Diligence ................................................................ 30
8.15 Pooling Opinion ................................................................ 30
8.16 Closing Balance Sheet............................................................. 30
8.17 Company Common Stock.............................................................. 30
8.18 Releases ................................................................ 30
8.19 Audit Opinion ................................................................ 30
9. TERMINATION............................................................................ 31
9.1 Termination ................................................................... 31
9.2 Effect of Termination .......................................................... 31
10. INDEMNIFICATION....................................................................... 32
10.1 Survival .................................................................... 32
10.2 Indemnification ................................................................ 32
10.3 Procedures........................................................................ 33
11. MISCELLANEOUS ..................................................................... 34
11.1 Governing Law .................................................................... 34
11.2 Assignment; Successors and Assigns................................................ 34
11.3 Severability .................................................................... 34
11.4 Counterparts .................................................................... 34
11.5 Other Remedies.................................................................... 34
11.6 Amendment and Waivers............................................................. 34
11.7 No Waiver .................................................................... 35
11.8 Expenses .................................................................... 35
11.9 Notices .................................................................... 35
11.10 Construction of Agreement........................................................ 36
11.11 No Joint Venture ............................................................... 36
11.12 Further Assurances............................................................... 36
11.13 Absence of Third Party Beneficiary Rights........................................ 37
11.14 Public Announcement.............................................................. 37
11.15 Confidentiality ............................................................... 37
11.16 Time is of the Essence........................................................... 38
11.17 Entire Agreement ............................................................... 38
11.18 Dispute Resolution............................................................... 38
iii
</TABLE>
<PAGE> 5
EXHIBITS
Exhibit A Intentionally Omitted
Exhibit B Form of Escrow Agreement
Exhibit C Form of Non-Competition Agreement
Exhibit 1.8 Form of Officer Certificates
Exhibit 5.3 Form of Parent Affiliates Agreement
Exhibit 7.7 Form of Opinion of Counsel to Parent
Exhibit 7.9 Form of License Agreement
Exhibit 8.5 Form of Opinion of Counsel to the Company
Exhibit 8.9 Form of Investment and Affiliate Letter
Exhibit 8.9-A Form of Company Affiliates Agreement
Exhibit 8.13 Persons Signing Employment Agreements
Exhibits 8.18 Persons Signing Releases and Form of Release
Exhibit 10.2.1(C) Severance Agreements
iv
<PAGE> 6
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into as of December 23, 1997, by and among Micro Focus Group PLC, a public
limited company organized under the laws of England and Wales ("Parent"), XDB
Systems, Inc., a Maryland corporation (the "Company"), and Dr. S. Bing Yao and
Lien Yao (collectively, the "Shareholders").
RECITALS
A. The parties intend that, subject to the terms and conditions
hereinafter set forth, a new Delaware corporation that will be organized as a
wholly-owned subsidiary of Parent ("Newco") will merge with and into the Company
in a reverse triangular merger (the "Merger"), with the Company to be the
surviving corporation of the Merger, all pursuant to the terms and conditions of
this Agreement, and an Articles of Merger and a Certificate of Merger, each in
forms to be agreed by the parties (such Articles of Merger and Certificate of
Merger, collectively, the "Agreement of Merger"), and the provisions of
applicable law. Upon the effectiveness of the Merger, all the outstanding common
stock of the Company, par value $0.01 per share ("Company Common Stock"), will
be converted into ordinary shares of Parent, 10p nominal value per share
("Parent Stock"), in the manner and on the basis determined herein and as
provided in the Agreement of Merger.
B. The Merger is intended to be treated as a tax-free reorganization
pursuant to the provisions of Section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended (the "Code"), by virtue of the provisions of Section
368(a)(2)(E) of the Code. The Merger is intended to be treated as a "pooling of
interests" for accounting purposes.
C. Prior to the execution and delivery of this Agreement, (i) the Board
of Directors of the Company approved and recommended to the Shareholders that
they vote in favor of, the Merger, this Agreement, the Agreement of Merger and
the transactions provided for herein and therein, and (ii) each of the
Shareholders, who, collectively, own all of the issued and outstanding capital
stock of the Company, executed and delivered to the Company's Secretary their
written consent to the Merger, this Agreement, the Agreement of Merger and the
transactions provided for herein and therein.
D. At the closing of the Merger and the transactions contemplated
herein (the "Closing" and, the date of the Closing, the "Closing Date"),
1. Parent and the Shareholders will enter into an Escrow Agreement
in substantially the form of Exhibit B hereto (the "Escrow Agreement"); and
2. Parent and the Shareholders will enter into Non-Competition
Agreements in substantially the form of Exhibit C hereto (the "Non-Competition
Agreement").
In consideration of the foregoing and the representations,
warranties, covenants and agreements set forth in this Agreement, the parties
hereto agree as follows:
<PAGE> 7
1. PLAN OF REORGANIZATION
1.1 The Merger. The Agreement of Merger will be filed with the
Secretary of State of the State of Delaware and the State of Maryland Department
of Assessments and Taxation as soon as practicable after the Closing. The
effective time of the Merger as specified in the Agreement of Merger (the
"Effective Time") will occur on or before December 31, 1997, or on such other
date as the parties hereto may mutually agree upon. Subject to the terms and
conditions of this Agreement and the Agreement of Merger, at the Effective Time,
Newco will be merged with and into the Company in a statutory merger pursuant to
the Agreement of Merger and in accordance with applicable provisions of Delaware
and Maryland law as follows:
1.1.1 Conversion of Company Shares. Each share of
Company Common Stock that is issued and outstanding immediately prior to the
Effective Time will, by virtue of the Merger and at the Effective Time, and
without further action on the part of any holder thereof, be converted into that
number of fully paid and nonassessable shares of Parent Stock obtained by
multiplying each such share of Company Common Stock by the Exchange Ratio.
1.1.2 Definitions. The "Exchange Ratio" equals the
quotient obtained by dividing (A) the quotient of (x) the Total Acquisition
Price divided by (y) the Closing Price by (B) the sum of the aggregate number of
shares of Company Common Stock issued and outstanding at the Effective Time and
the aggregate number of shares of Company Common Stock issuable upon the
exercise of Company Options (as defined in Section 1.4) which are issued,
outstanding, vested and fully exercisable at the Effective Time.
The "Total Acquisition Price" equals $13,355,000, subject to the following
adjustments based upon the balance sheet of the Company as of December 31, 1997,
as adjusted by the items set forth on the schedule of closing adjustments to be
delivered by the Company to Parent not less than three business days prior to
the Closing Date (such schedule, the "Schedule of Closing Adjustments" and, the
December 31, 1997 balance sheet, as adjusted by the Schedule of Closing
Adjustments, the "Closing Balance Sheet"):
(i) plus $2,842,950 (the sum of "cash and cash equivalents" and
"investments" as shown on the unaudited balance sheet of the Company as of July
31, 1997 (the "Baseline Balance Sheet"), a copy of which is attached as Item
1.1.2(i) of the Company Disclosure Letter;
(ii) plus (if such amount is positive) or minus (if such amount is
negative) the lesser of (A) the sum of "cash and cash equivalents" and
"investments" on the Closing Balance Sheet minus the sum of "cash and cash
equivalents" and "investments" on the Baseline Balance Sheet, or (B) the sum of
working capital (total current assets less total current liabilities, exclusive
of deferred taxes and the amount of the Company Tax Refund) and "investments"
shown on the Closing Balance Sheet minus the sum of working capital and
"investments" shown on the Baseline Balance Sheet. Notwithstanding the
foregoing, the amount determined pursuant to clause (A) of this subsection shall
be increased by any amounts payable by Parent or any of its affiliates to the
Company which are contractually owing and overdue as of the Closing Date.
(iii) plus the amount of the net U.S. Internal Revenue Service federal,
Maryland, New Jersey, Virginia, California and New Hampshire state tax refunds
due to the Company as shown on the Closing Balance Sheet (collectively, the
"Company Tax Refund") less any costs and expenses incurred by the Company
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between July 31, 1997 and the Closing Date in obtaining payment of the Company
Tax Refund;
(iv) minus the amount of any employee bonus obligations accrued but
unpaid by the Company as of the Closing Date or which shall vest in connection
with the Closing, as shown on the Closing Balance Sheet.
The "Closing Price" equals the average middle market price per share of Parent
Stock as derived from the Stock Exchange Daily Official List (converted into
United States dollars at the "Noon Buying Rate" as determined by the Federal
Reserve Bank of New York on each trading day) for the 30 consecutive trading
days ending with and including the fourth trading day immediately preceding the
Closing Date.
1.1.3 Adjustments for Capital Changes. If prior to the
Merger, Parent recapitalizes either through a split-up of its outstanding shares
of Parent Stock into a greater number, or through a combination of its
outstanding shares into a lesser number, or reorganizes, reclassifies or
otherwise changes its outstanding shares into the same or a different number of
shares of other classes (other than through a split-up or combination of shares
provided for in the previous clause), or declares a dividend on its outstanding
shares payable in shares or securities convertible into shares, the calculation
of the Exchange Ratio shall be adjusted appropriately.
1.1.4 Conversion of Newco Shares. Each share of Newco Common
Stock, par value $0.01 per share ("Newco Common Stock"), that is issued and
outstanding immediately prior to the Effective Time will, by virtue of the
Merger and without further action on the part of the sole stockholder of Newco,
be converted into and become one share of Company Common Stock that is issued
and outstanding immediately after the Effective Time, and the shares of Company
Common Stock into which the shares of Newco Common Stock are so converted shall
be the only shares of Company Common Stock that are issued and outstanding
immediately after the Effective Time.
1.2 Fractional Shares. No fractional shares of Parent Stock
will be issued in connection with the Merger, but in lieu thereof, the holder of
any shares of Company Common Stock who would otherwise be entitled to receive a
fraction of a share of Parent Stock will receive from Parent, promptly after the
Effective Time, an amount of cash equal to the Closing Price multiplied by the
fraction of a share of Parent Stock to which such holder would otherwise be
entitled.
1.3 Escrow Agreement. Pursuant to the Escrow Agreement, on the
Closing Date, Parent will (i) withhold, pro rata, from the shares of Parent
Stock that would otherwise be delivered to the Shareholders a number of shares
equal to (A) 10% of the total number of shares of Parent Stock issued to them in
the Merger plus (B) a number of shares of Parent Stock equal to the aggregate
amount of the potential Company tax liabilities set forth on Exhibit 1.3 (such
amount, the "Company Tax Exposure") divided by the Closing Price, and (ii)
deposit or cause to be deposited in escrow certificates representing the shares
thus withheld. The shares of Parent Stock withheld pursuant to this Section 1.3
(the "Escrow Shares") will be held, with respect to (A) above, solely as
collateral for the indemnification obligations of the Shareholders under Section
10.2.1 and, with respect to (B) above, solely as collateral for the
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indemnification obligations of the Shareholders with respect to the Company Tax
Exposure, in each case pursuant to the Escrow Agreement.
1.4 Stock Options. (a) At the Effective Time, each of the then
outstanding Company Options shall by virtue of the Merger, and without any
further action on the part of any holder thereof, be assumed by Parent and
converted into an option to subscribe for that number of shares of Parent Stock
(a "Parent Option") obtained by multiplying the number of shares of Company
Common Stock underlying each such Company Option by the Exchange Ratio. If the
foregoing calculation results in a Parent Option being exercisable for a
fraction of a share of Parent Stock, then the number of shares of Parent Stock
subject to such option shall be rounded down to the nearest whole number of
shares. The exercise price of each Parent Option shall be equal to the exercise
price of the Company Option from which such Parent Option was converted divided
by the Exchange Ratio, rounded to the nearest whole cent. Except as otherwise
set forth in this Section 1.4, the term and vesting schedule, status as an
"incentive stock option" under Section 422 of the Code, if applicable, and all
other terms and conditions of Company Options will, to the extent permitted by
law and otherwise reasonably practicable, be unchanged. An optionholder's
continuous employment with the Company shall be credited as employment with
Parent for purposes of vesting of the Parent Options. Other than Company Options
which shall become vested and exercisable pursuant to acceleration provisions
not entered into in contemplation of the Merger, no Company Options shall become
vested or exercisable solely as a result of the Merger. The Company will take,
or cause to be taken, all actions which are necessary, proper or advisable under
the Stock Plans to make effective the transactions contemplated by this Section
1.4. Item 1.4(a) of the Company Disclosure Letter (as hereinafter defined) sets
forth the name of each holder of Company Options, the exercise price of such
holder's Company Options, and the number of shares of Company Common Stock
underlying such holder's Company Options which are (i) currently vested, (ii)
will vest upon the Closing, and (iii) will be unvested immediately following the
Closing, and for the Company Options described in clause (iii), the remaining
vesting periods and percentages for such options. The assumption by Parent of
the Company Options and their conversion into Parent Options by virtue of the
Merger is an obligation of Parent pursuant to the Merger and the transactions
contemplated by this Agreement.
"Company Options" means any option granted, and not exercised or expired, to a
current or former employee, director or independent contractor of the Company or
any of its subsidiaries or any predecessor thereof to purchase Company Common
Stock pursuant to any stock option, stock bonus, stock award or stock purchase
plan, program or arrangement of the Company or any of its subsidiaries or any
predecessor thereof (collectively, the "Stock Plans") or any other contract or
agreement entered into by the Company or any of its subsidiaries.
(b) Parent shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Parent Stock for delivery
pursuant to the terms set forth in this Section 1.4. Parent shall promptly cause
the shares of Parent Stock issuable upon exercise of the assumed Company Options
to be registered, or to be issued pursuant to a then effective registration
statement on Form S-8 promulgated by the U.S. Securities and Exchange Commission
("SEC") and shall use all commercially reasonable efforts to maintain the
effectiveness of such registration statement or registration statements for so
long as such Parent Options remain outstanding.
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1.5 Effects of the Merger. At the Effective Time: (a) the
separate existence of Newco will cease and Newco will be merged with and into
the Company and the Company will be the surviving corporation pursuant to the
terms of the Agreement of Merger; (b) the Articles of Incorporation and Bylaws
of the Company will continue unchanged as the Articles of Incorporation and
Bylaws of the surviving corporation; (c) each share of Company Common Stock
outstanding immediately prior to the Effective Time will be converted as
provided in this Section 1; (d) each share of Newco Common Stock outstanding
immediately prior to the Effective Time will be converted as provided in this
Section 1; (e) the Board of Directors and executive officers of Parent will
remain unchanged, the directors of Newco immediately prior to the Effective Time
will become the directors of the Company and the officers of Newco immediately
prior to the Effective Time will become the officers of the Company; and (f) the
Merger will, at and after the Effective Time, have all of the effects provided
by applicable law.
1.6 Further Assurances. The Company agrees that if, at any
time after the Effective Time, Parent considers or is advised that any further
deeds, assignments or assurances are reasonably necessary or desirable to vest,
perfect or confirm in Parent title to any property or rights of the Company as
provided herein, Parent and any of its officers are hereby authorized by the
Company to execute and deliver all such proper deeds, assignments and assurances
and do all other things necessary or desirable to vest, perfect or confirm title
to such property or rights in Parent and otherwise to carry out the purposes of
this Agreement, in the name of the Company or otherwise.
1.7 Securities Law Issues. Based in part on the
representations and covenants of the Shareholders set forth in the Investment
and Affiliate Letters delivered by the Shareholders to Parent pursuant to
Section 8.9, the Parent Stock to be issued in the Merger will be issued pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act") and/or Regulation D promulgated under
the Securities Act and applicable state securities laws.
1.8 Tax-Free Reorganization. The parties intend to adopt this
Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(1)(A) of the Code, by virtue of
the provisions of Section 368(a)(2)(E) of the Code. The shares of Parent Stock
issued in the Merger will be issued solely in exchange for the issued and
outstanding shares of Company Common Stock pursuant to this Agreement, and no
other transaction other than the Merger represents, provides for or is intended
to be an adjustment to the consideration paid for Company Common Stock. Except
for cash paid in lieu of fractional shares, no consideration that could
constitute "other property" within the meaning of Section 356 of the Code will
be paid by Parent for shares of Company Common Stock in the Merger. In addition,
Parent represents that it presently intends, and that at the Effective Time it
will intend, to continue the Company's historic business or use a significant
portion of the Company's business assets in a business. At the Closing, officers
of Parent and officers of the Company will execute and deliver officers'
certificates in the forms of Exhibits 1.8, and the representations and other
statements set forth therein are incorporated in this Agreement by this
reference to the same extent as if Parent or the Company, respectively, had made
such statements herein.
1.9 Pooling of Interests. The parties intend that the Merger
be treated as a "pooling of interests" for accounting purposes.
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2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS
The Company and the Shareholders hereby represent and warrant
to Parent that, as of the date hereof and the Closing Date, except as set forth
in the Company disclosure letter delivered by the Company to Parent prior to the
execution of this Agreement (the "Company Disclosure Letter"), including items
in the Company Disclosure Letter referred to as "Items" below:
2.1 Organization and Good Standing; Title.
2.1.1 The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland,
has the requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted and is duly qualified
or licensed as a foreign corporation (or will be so qualified or licensed as of
the Closing Date) in each jurisdiction listed on Item 2.1, which is each
jurisdiction in which the nature of its business makes such qualification or
licensing necessary. Each subsidiary of the Company is a corporation or similar
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction in which it was organized, has the requisite power and
authority to own, operate and lease its properties and to carry on its business
as now conducted and is duly qualified or licensed in each jurisdiction listed
on Item 2.1, which is each jurisdiction in which the nature of its business
makes such qualification or licensing necessary, except where the failure to be
so qualified or licensed would not have a material adverse effect on the
Company. The Company has heretofore delivered to Parent true and complete copies
of its certificate of incorporation and bylaws and the equivalent charter
documents of each of its subsidiaries as currently in effect.
2.1.2 Each Shareholder owns and holds good and
valid title to the Company Common Stock to be converted in the Merger, free and
clear of any pledges, claims, liens, charges, encumbrances, security interests
of any kind or nature whatsoever and free of any other limitation or restriction
(including any restriction on the right to vote, sell or otherwise dispose of
such Company Common Stock). Each Shareholder has no interest or right in the
equity or assets of the Company other than the Company Common Stock owned by
such Shareholder to be converted in the Merger. The Shareholders together own
all of the issued and outstanding capital stock of the Company, except for 10
shares of Company Common Stock owned by Jamie MacDonald, which is owned free and
clear of any pledges, claims, liens, charges, encumbrances, security interests
of any kind or nature whatsoever and free of any other limitation or restriction
(including any restriction on the right to vote, sell or otherwise dispose of
such Company Common Stock).
2.2 Power, Authorization and Validity.
2.2.1 The Company has the corporate right, power
and authority to enter into and perform its obligations under this Agreement and
all agreements to which the Company is or will be a party that are required to
be executed pursuant to this Agreement (the "Company Ancillary Agreements") and
the transactions contemplated hereby and thereby. This Agreement and the Company
Ancillary Agreements have been duly and validly authorized by all necessary
corporate action on the part of the Company, including, without limitation, the
requisite approval of the Company's stockholders in connection with the
consummation of the Merger. Each Shareholder has the legal power and capacity to
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<PAGE> 12
enter into and perform his or her obligations under this Agreement and all
agreements to which such Shareholder is or will be a party that are required to
be executed pursuant to this Agreement (the "Shareholder Ancillary Agreements")
and the transactions contemplated hereby and thereby.
2.2.2 No filing, authorization or approval,
governmental or otherwise, is necessary to enable the Company or the
Shareholders to enter into, and to perform their respective obligations under,
this Agreement, the Company Ancillary Agreements and the Shareholder Ancillary
Agreements, except for (a) the filing of the Agreement of Merger with the
Secretary of State of the State of Delaware and the State of Maryland Department
of Assessments and Taxation, the filing of such officers' certificates and other
documents as are required to effectuate the Merger under Delaware and Maryland
law and the filing of appropriate documents with the relevant authorities of the
states in which the Company is qualified to do business, (b) such filings as may
be required to comply with federal and state securities laws, (c) filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "HSR Act") and (d)
consents required under agreements set forth in Item 2.5 as exceptions to the
representation made in the last sentence of Section 2.5.
2.2.3 This Agreement and the Company Ancillary
Agreements are, or when executed and delivered by the Company and the other
parties thereto will be, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
except as to the effect, if any, of (a) applicable bankruptcy and other similar
laws affecting the rights of creditors generally and (b) rules of law governing
specific performance, injunctive relief and other equitable remedies; provided,
however, that the Company Ancillary Agreements will not be effective until the
Effective Time. This Agreement and the Shareholder Ancillary Agreements are, or
when executed and delivered by the respective Shareholders and the other parties
thereto will be, valid and binding obligations of such Shareholders enforceable
against such Shareholders in accordance with their respective terms, except as
to the effect, if any, of (a) applicable bankruptcy and other similar laws
affecting the rights of creditors generally and (b) rules of law governing
specific performance, injunctive relief and other equitable remedies; provided,
however, that the Shareholder Ancillary Agreements will not be effective until
the Effective Time.
2.3 Capitalization.
2.3.1 Authorized/Outstanding Capital Stock. The
authorized capital stock of the Company consists of 10,000,000 shares of Company
Common Stock. 5,100,010 shares of Company Common Stock are issued and
outstanding as of this date and as of the Closing Date. The Company has no
preferred stock authorized, issued or outstanding. All issued and outstanding
shares of Company Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable, are not subject to any right of rescission, and
have been offered, issued, sold and delivered by the Company in compliance with
all registration or qualification requirements (or applicable exemptions
therefrom) of applicable federal and state securities laws.
2.3.2 Options/Rights. Company Options in respect
of 624,350 shares of Company Common Stock are issued and outstanding as of this
date and as of the Closing Date, of which 565,278 shall be vested and fully
exercisable at the Effective Time. There are no other stock appreciation rights,
options, warrants, conversion privileges or preemptive or other rights or
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agreements outstanding to purchase or otherwise acquire any of the Company's
authorized but unissued capital stock; there are no options, warrants,
conversion privileges or preemptive or other rights or agreements to which the
Company is a party involving the purchase or other acquisition of any shares of
the Company capital stock; there is no liability for dividends accrued but
unpaid; and there are no voting agreements, registration rights, rights of first
refusal or other restrictions (other than normal restrictions on transfer under
applicable federal and state securities laws) applicable to any of the Company's
outstanding securities. Other than the Company Options which shall become vested
and exercisable pursuant to acceleration provisions not entered into in
contemplation of the Merger and which are set forth in Item 2.3, no Company
Options shall become vested or exercisable solely as a result of the Merger.
There are no bonds, debentures, notes or other indebtedness of the Company
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters which shareholders of the Company may
vote.
2.4 Subsidiaries. Set forth in Item 2.4 is a true, correct and
complete list of each subsidiary of the Company and its respective jurisdiction
of organization. All of the issued and outstanding shares of capital stock of
each such subsidiary have been duly authorized and validly issued and are fully
paid and nonassessable and are owned by the Company free and clear of all
pledges, claims, liens, charges, encumbrances and security interests of any kind
or nature whatsoever and free of any other limitation or restriction (including
any restriction on the right to vote, sell or otherwise dispose of such capital
stock). Except for the capital stock of its subsidiaries, the Company does not
own, directly or indirectly, any equity interest in any corporation,
partnership, joint venture or other business entity. XDB Systems Bejing, Ltd.
has no liabilities or obligations; it is currently in the process of being
liquidated by the Company, and such liquidation will not cause the Company or
Parent any present or future liability.
2.5 No Conflicts. Neither the execution and delivery of this
Agreement, any Company Ancillary Agreement or any Shareholder Ancillary
Agreement, nor the consummation of the transactions provided for herein or
therein, will conflict with, or (with or without notice or lapse of time, or
both) result in a termination, breach, impairment or violation of, (a) any
provision of the Articles of Incorporation, Bylaws or similar charter documents
of the Company or any of its subsidiaries as currently in effect, (b) any note,
bond, lease, mortgage, indenture, license, franchise, permit, agreement or other
instrument or obligation to which the Company, any of its subsidiaries or a
Shareholder is a party or by which the Company, any of its subsidiaries or a
Shareholder is bound or affected (which conflict, termination, breach impairment
or violation would have a material adverse effect on the Company and its
subsidiaries as a whole), (c) to the Company's or a Shareholder's knowledge, any
federal, state, local or foreign judgment, writ, decree, order, statute, rule or
regulation applicable to the Company or any of its subsidiaries or any of their
respective assets or properties. The consummation of the Merger will not require
the consent of any third party and will not adversely affect any of the material
rights, licenses, franchises, leases or agreements of the Company or any of its
subsidiaries pursuant to their terms other than as set forth in Item 2.5.
2.6 Litigation. Except as set forth in Item 2.6, there is no
action, proceeding or investigation pending or, to the Company's or any
Shareholder's knowledge, threatened against the Company, any of its subsidiaries
or any Shareholder before any court or administrative agency that, if determined
adversely to the Company, such subsidiary or such Shareholder, would adversely
affect the present or future operations or financial condition of the Company or
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such subsidiary or in which the adverse party or parties seek to recover in
excess of $10,000. Except as set forth on Item 2.6, there is no basis for any
person, firm, corporation or entity to assert a claim against the Company or any
of its subsidiaries or Parent as successor in interest to the Company based
upon: (a) ownership or rights to ownership of any shares of the Company Common
Stock or the capital stock of any of its subsidiaries, (b) any rights as a
securities holder of the Company or any of its subsidiaries, including, without
limitation, any option or other right to acquire any securities of the Company
or any of its subsidiaries, any preemptive rights or any rights to notice or to
vote regarding such securities, or (c) any rights under any agreement between
the Company or any of its subsidiaries and any securities holder or former
securities holder of the Company or any of its subsidiaries in such holder's
capacity as such.
2.7 Company Financial Statements. The Company has delivered to
Parent as Item 2.7 the Company's (i) Baseline Balance Sheet as of July 31, 1997
(the "Balance Sheet Date") and (ii) unaudited balance sheets as of October 31,
1997, and income statement for the nine-month period then ended (such financial
statements, together with the Closing Balance Sheet, the "Company Financial
Statements"). Except as set forth in Item 2.7, the Company Financial Statements
have been prepared according to U.S. generally accepted accounting principles
consistent with prior periods. The balance sheets of the Company as at the dates
set forth present fairly the financial position of the Company and its
subsidiaries as at such dates, and the related statements of the Company for
each of the respective specified periods then ended present fairly the results
of operations of the Company and its subsidiaries for each of the respective
periods then ended. For the purposes of this Agreement, all financial statements
referred to in this paragraph shall include any notes or schedules to such
financial statements. Except as set forth in Item 2.7, neither the Company nor
any of its subsidiaries has any material debt, liability or obligation of any
nature, whether accrued, absolute, contingent or otherwise, and whether due or
to become due, that is not reflected, reserved against or disclosed in the
Company Financial Statements. The Schedule of Closing Adjustments will be, upon
delivery by the Company to Parent, a true, correct and complete list of (i) all
bonus or incentive payments, or any other compensation in any form due, payable
or transferable to an officer, director, employee or shareholder of the Company
or any other person or entity, the entitlement to which or the payment of which,
is triggered by, or arises out of, the Merger, this Agreement or the
transactions contemplated hereby, and (ii) all fees, costs, commissions or
expenses incurred by the Company or the Shareholders (including, without
limitation, those of counsel, accountants, investment bankers, and brokers)
incurred by the Company or the Shareholders in connection with or arising out of
the Merger, this Agreement or the transactions contemplated hereby ("Company
Fees").
2.8 Taxes. Except as set forth in Item 2.8, the Company and
each of its subsidiaries has filed all federal, state, local and foreign tax and
information returns and reports required to be filed prior to the date hereof,
has paid all taxes required to be paid in respect of all periods prior to the
date hereof for which returns have been filed, has made all necessary estimated
tax payments, and has no liability for taxes in excess of the amount so paid,
except to the extent adequate reserves have been established in the Company
Financial Statements. Except as set forth in Item 2.8, all such returns and
reports are and will be true, correct and complete in all material respects.
True, correct and complete copies of all such tax and information returns have
been provided or made available by the Company to Parent. Except as set forth in
Item 2.8, neither the Company nor any of its subsidiaries is delinquent in the
payment of any tax or in the filing of any tax returns, and no deficiencies for
any tax have been threatened, claimed, proposed or assessed which have not been
settled or paid. Except as set forth in Item 2.8, no tax return of the Company
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or any of its subsidiaries has ever been audited by the Internal Revenue Service
or any state or other national taxing agency or authority. For the purposes of
this Section 2.8, the terms "tax" and "taxes" include all federal, state, local
and foreign income, gains, franchise, excise, property, sales, use, employment,
license, payroll, occupation, recording, value added or transfer taxes,
governmental charges, fees, levies or assessments (whether payable directly or
by withholding), and, with respect to such taxes, any estimated tax, interest
and penalties or additions to tax and interest on such penalties and additions
to tax. Neither the Company nor any of its subsidiaries has any current or
deferred federal income tax liabilities and will not as a result of the Merger
become liable for any income tax not adequately reserved against on the Company
Financial Statements. Neither the Company nor any of its subsidiaries has filed
a consent pursuant to Section 341(f) of the Code. To the best of the Company's
and the Shareholders' knowledge and belief, the Company is entitled to collect
the full amount of the Company Tax Refund.
2.9 Title to Properties. The Company has good and marketable
title to, or a valid leasehold interest in, as applicable, all of the assets
reflected on the Company Financial Statements, free and clear of all liens,
mortgages, pledges, charges or encumbrances of any kind other than as set forth
on Item 2.9 or which are subject to capitalized leases. Item 2.9 sets forth a
list and brief description of all material personal property owned or leased by
the Company and its subsidiaries. Except as set forth in Item 2.9, there are no
UCC or other financing statements on record with the State of Maryland or any
other authority naming the Company or any of its subsidiaries as debtor. Such
assets (A) are in all material respects in good operating condition and repair,
normal wear and tear excepted, and (B) constitute all of the properties,
interests, assets and rights held for use or used in connection with the
business of the Company and constitute all those reasonably necessary to
continue to operate the business of the Company consistent with current
practice. All leases of real or personal property to which the Company or any of
its subsidiaries is a party are, to the Company's and each Shareholder's
knowledge, fully effective and afford the Company or such subsidiary peaceful
and undisturbed possession of the subject matter of the lease. Neither the
Company nor any of its subsidiaries owns any real property. To the Company's and
the Shareholders' knowledge, neither the Company nor any of its subsidiaries is
in violation of any material zoning, building, safety or environmental
ordinance, regulation or requirement or other law or regulation applicable to
the operation of owned or leased properties, and neither the Company nor any of
its subsidiaries has received any notice of such violation with which it has not
complied or had waived.
2.10 Absence of Certain Changes. Since the Balance Sheet Date,
the Company has carried on its business in the ordinary course substantially in
accordance with the procedures and practices in effect on the Balance Sheet
Date, and except as set forth in Item 2.10, since the Balance Sheet Date there
has not been with respect to the Company or any of its subsidiaries:
(a) any material adverse change in the financial
condition, properties, assets, liabilities, customer contracts or other customer
arrangements, business or results of operations;
(b any contingent liability incurred as guarantor or
surety with respect to the obligations of others;
(c) any mortgage, encumbrance or lien placed on any
of its properties;
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(d) any material obligation or liability (whether
absolute, accrued, contingent or otherwise, and whether due or to become due)
incurred other than in the ordinary course of business (including obligations
under customer contracts and current obligations);
(e) any purchase or sale or other disposition, or
any agreement or other arrangement for the purchase, sale or other disposition,
of any of its properties or assets other than in the ordinary course of business
or in nonmaterial amounts;
(f) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting its properties, assets
or business;
(g) any declaration, setting aside or payment of any
dividend on, or the making of any other distribution in respect of, the capital
stock of the Company or any of its subsidiaries, any split, stock dividend,
combination or recapitalization of the capital stock of the Company or any of
its subsidiaries or any direct or indirect redemption, purchase or other
acquisition by the Company or any of its subsidiaries of the capital stock of
the Company or any of its subsidiaries;
(h) any labor dispute or claim of material unfair
labor practices, any change in the compensation payable or to become payable to
any of the Company's or any of its subsidiaries' officers, employees or agents,
or any bonus payment or arrangement made to or with any of such officers,
employees or agents (except as previously disclosed in writing to and approved
in writing by Parent) other than normal annual raises in accordance with past
practice or any bonus payment or arrangement made to or with any of such
officers, employees or agents other than normal bonuses or compensation
increases noted on Item 2.10(h) hereof or other arrangements made in accordance
with past practices;
(i) any change with respect to its management,
supervisory, development or other key personnel (the management, supervisory,
development and other key personnel of the Company and each of its subsidiaries
are listed on Item 2.10(i) hereof);
(j) any payment or discharge of a material lien or
liability, which lien or liability was not either (i) shown on the balance sheet
as of the Balance Sheet Date included in the Company Financial Statements or
(ii) incurred in the ordinary course of business after the Balance Sheet Date;
(k) any obligation or liability incurred by the
Company or any of its subsidiaries to any of its officers, directors or
shareholders, or any loans or advances made to any of its officers, directors,
shareholders or affiliates, except normal compensation and expense allowances
payable to officers;
(l) any cancellation of any debts or claims or any
amendment, termination or waiver of any rights of value to the Company or any of
its subsidiaries in excess of $10,000 in the aggregate;
(m) any payment, discharge or satisfaction of any
claim or obligation, except in the ordinary course of business;
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(n) any dividend, distribution or other action
transferring from the Company's funds, or any reduction of the Company's
interest in, any of the compensation received by the Company in respect of the
licensing of Company Intellectual Property to Sand Technology;
(o) any agreement or action not otherwise referred
to in items (a) through (n) above entered into or taken that is material to the
Company and its subsidiaries, taken as a whole; or
(p) any agreement, whether in writing or otherwise,
to take any of the actions specified in the foregoing items (a) through (o).
2.11 Agreements and Commitments. Except as set forth in Item
2.11, neither the Company nor any of its subsidiaries is a party or subject to
any oral or written agreement, obligation or commitment, including but not
limited to the following:
(a) Any agreement, commitment, letter agreement,
quotation or purchase order entered into on or after February 1, 1990, providing
for payments by or to the Company or its subsidiaries in an aggregate amount of
$20,000 or more with respect to any one party (other than agreements of the
types described in Section 2.11(b));
(b)(i) Any license agreement entered into on or after
November 30, 1994 under which the Company or any of its subsidiaries is a
licensor, including, without limitation, any licenses of the Company
Intellectual Property (as defined in Section 2.12), pursuant to the Company's
standard forms of license agreement;
(ii) Any license agreement (other than those disclosed
pursuant to Section 2.11(b)(i)) under which the Company or any of its
subsidiaries is a licensor, including, without limitation, any licenses of the
Company Intellectual Property (as defined in Section 2.12), providing for
payments by or to the Company or its subsidiaries in an aggregate amount of
$50,000 or more with respect to any one party;
(iii) Any license agreement under which the Company
or any of its subsidiaries is a licensee (except for standard "shrink wrap"
licenses for off-the-shelf software products), including, without limitation,
any licenses of the Company Intellectual Property (as defined in Section 2.12);
(c) Any agreement by the Company or any of its
subsidiaries to encumber, transfer or sell rights in or with respect to any the
Company Intellectual Property, other than licenses which have been disclosed
under Section 2.11(b);
(d) Any agreement entered into on or after February 1,
1990 for the sale or lease of real or personal property involving more than
$10,000 per year;
(e) Any dealer, distributor, sales representative,
original equipment manufacturer, value added remarketer or other agreement for
the distribution of the Company's products entered into on or after February 1,
1990;
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(f) Any franchise agreement or financing statement;
(g) Any stock redemption or purchase agreement;
(h)(i) Any joint venture agreement or arrangement or any
other agreement that involves a sharing of profits with other persons or the
payment of royalties to any other person, which agreement or arrangement is
currently of any force or effect;
(ii) Any joint venture agreement or arrangement
or any other agreement entered into or commenced on or after February 1, 1990
that involves a sharing of profits with other persons or the payment of
royalties to any other person, whether or not such agreement or arrangement is
currently of any force or effect (other than agreements or arrangements
disclosed pursuant to Section 2.11(h)(i));
(i)(i) Any instrument evidencing indebtedness for
borrowed money by way of direct loan, sale of debt securities, purchase money
obligation, conditional sale, guarantee or otherwise, which is currently of any
force or effect, except for trade indebtedness or any advance to any employee of
the Company or any of its subsidiaries incurred or made in the ordinary course
of business, and except as disclosed in the Company Financial Statements;
(ii) Any instrument evidencing indebtedness for
borrowed money by way of direct loan, sale of debt securities, purchase money
obligation, conditional sale, guarantee or otherwise, entered into on or after
February 1, 1990, except for trade indebtedness or any advance to any employee
of the Company or any of its subsidiaries incurred or made in the ordinary
course of business, and except as disclosed in the Company Financial Statements,
whether or not such instrument is currently of any force or effect (other than
instruments disclosed pursuant to Section 2.11(i)(i));
(j) Any agreement containing covenants purporting to limit
the Company's or any of its subsidiaries' freedom to compete in any line of
business in any geographic area;
(k) Any agreement which is currently of any force or effect
relating to the employment or compensation of any director, officer, employee,
consultant or other agent of the Company or any of its subsidiaries;
(l) Any agreement between the Company or any of its
subsidiaries and any Shareholder; or
(m) Any agreement that it is otherwise material to the
Company and its subsidiaries, taken as a whole, or entered into other than
in the ordinary course of business.
The Company has provided Parent with true and
correct copies of each of the written agreements set forth in Item 2.11 and
true, correct and complete summaries of any oral agreements set forth in Item
2.11 (collectively, the "Company Agreements"), and each of the Company's
standard forms of license agreements. All Company Agreements are valid, binding
and enforceable against the parties thereto and in full force and effect. Except
as set forth in Item
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2.11, neither the Company nor, to the knowledge of the Company or the
Shareholders, any other party is in breach of or default under any material term
of any such Company Agreement.
2.12 Intellectual Property.
2.12.1. Except as set forth in Item 2.12.1, the Company owns
all right, title and interest in, or has the right to use, all patent
applications, patents, trademark applications, trademarks, service marks, trade
names, copyright applications, copyrights, trade secrets, know-how, technology
and other intellectual property and proprietary rights used in or, to the
Company's or any Shareholder's knowledge, necessary to the conduct of its
business as presently conducted and the business of the development, production,
marketing, licensing and sale of commercial products using such intellectual
property and proprietary rights (the "Company Intellectual Property"). All of
the Company Intellectual Property is owned or held by the Company and not by the
Company's subsidiaries (including, without limitation, XDB Systems Beijing,
Ltd.).
2.12.2. Except as set forth in Item 2.12.2, the Company has
taken all reasonable measures to protect all the Company Intellectual Property.
2.12.3 Except as set forth in Item 2.12.3, to the Company's or
any Shareholder's knowledge, no other person is infringing or violating any of
the Company Intellectual Property.
2.12.4. Set forth in Item 2.12.4 is a true and complete list
of all copyright, mask work and trademark registrations and applications and all
patents and patent applications for the Company Intellectual Property owned by
the Company. The Company is not aware of any material loss, cancellation,
termination or expiration of any such registration or patent.
2.12.5. The business of the Company as conducted as of the
date hereof does not, and, to the Company's or any Shareholder's knowledge, the
business of the development, production, marketing, licensing and sale of
commercial products using the Company Intellectual Property after the Effective
Time will not, cause the Company or any of its subsidiaries to, infringe or
violate any of the patents, trademarks, service marks, trade names, mask works,
copyrights, trade secrets, proprietary rights or other intellectual property of
any other person. Except as set forth in Item 2.12.5, none of the Company, its
subsidiaries nor any Shareholder has received any written or oral claim or
notice of infringement or potential infringement of the intellectual property of
any other person.
2.12.6. Except as set forth in Item 2.12.6, the Company has
the unrestricted, worldwide right to reproduce, manufacture, sell, license and
distribute all of its products, including, without limitation, ExpressLane,
JetConnect, JetAssist, JetStore, JetReport and Quantum Leap (all such products
being set forth in Item 2.12) (the "Products") and the right to use all of its
registered user lists, and is not using any confidential information or trade
secrets of any former employer of any past or present employees.
2.12.7. Except as set forth in Item 2.12.7, the Company
possesses copies of the source code for each of the Products and none of such
source code has been provided to any third party other than to an escrow agent
pursuant to source code escrow agreements, copies of which have been provided to
Parent. None of the Products contains any significant defect (including, without
limitation, in connection with processing dates in the year 2000 and any
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preceding or following years) or a material difference between such Product and
its current end-user documentation which results in severe inconvenience to the
end-users of such Product and which cannot be easily avoided or detoured by such
end-user.
2.13 Compliance with Laws. The Company and each of its
subsidiaries has complied in all material respects and is in compliance in all
material respects with all applicable laws, ordinances, regulations and rules,
and all orders, writs, injunctions, awards, judgments and decrees, applicable to
the Company or such subsidiary or to their assets, properties and business,
including, without limitation: (a) all applicable federal and state securities
laws and regulations, (b) all applicable federal, state and local laws,
ordinances and regulations, and all orders, writs, injunctions, awards,
judgments and decrees, pertaining to (i) the sale, licensing, leasing, ownership
or management of the Company's owned, leased or licensed real or personal
property, Company Intellectual Property, products or technical data, (ii)
employment or employment practices, terms and conditions of employment, or wages
and hours or (iii) safety, health, fire prevention, environmental protection
(including toxic waste disposal and related matters described in Section 2.21
hereof), building standards, zoning or other similar matters, (c) the Export
Administration Act and regulations promulgated thereunder or other laws,
regulations, rules, orders, writs, injunctions, judgments or decrees applicable
to the export or re-export of controlled commodities or technical data or (d)
the Immigration Reform and Control Act. The Company and each of its subsidiaries
has received all licenses, permits and approvals from, and has made all filings
with, third parties, including government agencies and authorities, necessary to
conduct its business as presently conducted, which licenses, permits and
approvals are set forth in Item 2.13.
2.14 Certain Transactions and Agreements. Except as provided
in the License Agreement (as hereinafter defined) no person who is an officer,
director or shareholder of the Company or any of its subsidiaries, or a member
of any such person's immediate family, has any direct or indirect ownership
interest in, or any employment or consulting agreement with, any firm or
corporation that competes with the Company or Parent (except with respect to any
interest in less than 1% of the outstanding voting shares of any corporation
whose stock is publicly traded). Except as set forth in Item 2.14, no person who
is an officer, director, employee or shareholder of the Company or any of its
subsidiaries, or any member of any such person's immediate family, is directly
or indirectly interested in any agreement or informal arrangement with the
Company or any of its subsidiaries, including, without limitation, any loan
arrangements, except for compensation for services as an officer, director or
employee of the Company and except for the normal rights of a shareholder or
optionholder. Except as set forth in Item 2.14, none of such officers,
directors, employees or shareholders or family members has any interest in any
property, real or personal, tangible or intangible, including, without
limitation, inventions, patents, copyrights, trademarks, trade names or trade
secrets, used in the business of the Company, except for the normal rights of a
shareholder and except as provided in the License Agreement and the
Noncompetition Agreement.
2.15 Employees.
2.15.1 Except as set forth in Item 2.15.1, (i)
neither the Company nor any of its subsidiaries has any employment contract or
consulting agreement currently in effect that is not terminable at will without
penalty or payment of compensation by the Company or such subsidiary and (ii)
each officer, employee, agent or consultant of the Company and each of its
subsidiaries has executed the Company's standard forms of noncompetition,
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nondisclosure of proprietary information and assignment of copyright and other
intellectual property rights to the Company, forms of which have been provided
to Parent.
2.15.2 Neither the Company nor any of its subsidiaries
(a) has ever been and is not now subject to a union organizing effort, (b) is
not subject to any collective bargaining agreement with respect to any of its
employees, (c) is not subject to any other contract, written or oral, with any
trade or labor union, employees' association or similar organization, and (d)
has no current labor dispute. To the Company's and the Shareholders' knowledge,
the Company and each of its subsidiaries has good labor relations, and neither
the Company nor the Shareholders has knowledge of any facts indicating that the
consummation of the transactions provided for herein will have a material
adverse effect on its labor relations, or that any of its key employees (each of
whom is listed on Item 2.15.2) has notified the Company of his or her intent to
leave its employ.
2.15.3 Item 2.15.3 delivered by the Company to Parent
herewith contains a list of all employment and consulting agreements, pension,
retirement, disability, medical, dental or other health plans, life insurance or
other death benefit plans, profit sharing, deferred compensation agreements,
stock, option, bonus or other incentive plans, vacation, sick, holiday or other
paid leave plans, severance plans or other similar employee benefit plans
maintained by the Company and each of its subsidiaries (the "Employee Plans"),
including, without limitation, all "employee benefit plans" as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). The Company has delivered true and complete copies or descriptions of
all the Employee Plans to Parent and Parent's counsel. Except as set forth in
Item 2.15.3, each of the Employee Plans, and its operation and administration,
is, in all material respects, in compliance with all applicable, federal, state,
local and other governmental laws and ordinances, orders, rules and regulations,
including the requirements of ERISA and the Code. Except as set forth in Item
2.15.3, all such Employee Plans that are "employee pension benefit plans" (as
defined in Section 3(2) of ERISA) which are intended to qualify under Section
401(a)(8) of the Code have received favorable determination letters that such
plans satisfy the qualification requirements of the Tax Equity and Fiscal
Responsibility Act of 1982, the Deficit Reduction Act of 1984 and the Retirement
Equity Act of 1984. In addition, neither the Company nor any of its subsidiaries
has ever been a participant in any "prohibited transaction" within the meaning
of Section 406 of ERISA with respect to any employee pension benefit plan (as
defined in Section 3(2) of ERISA) which the Company or such subsidiary sponsors
as employer or in which the Company or such subsidiary participates as an
employer, which was not otherwise exempt pursuant to Section 408 of ERISA
(including any individual exemption granted under Section 408(a) of ERISA), or
which could result in an excise tax under the Code. The group health plans, as
defined in Section 4980B(g) of the Code, that benefit employees of the Company
and its subsidiaries are in material compliance with the continuation coverage
requirements of subsection 4980B of the Code. There are no outstanding
violations of Section 4980B of the Code with respect to any Employee Plan,
covered employees or qualified beneficiaries.
2.15.4 To the Company's or any Shareholders'
knowledge, no employee of the Company or any of its subsidiaries is in material
violation of any term of any employment contract, patent disclosure agreement or
noncompetition agreement or any other contract or agreement, or any restrictive
covenant, relating to the right of any such employee to be employed by the
Company or such subsidiary or to use trade secrets or proprietary information of
others, and, to the Company's or any Shareholders' knowledge, the employment of
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any employee of the Company or any of its subsidiaries does not subject the
Company or such subsidiary to any liability to any third party.
2.15.5 Except as set forth in Item 2.15.5, neither
the Company nor any of its subsidiaries is a party to any (a) agreement with any
executive officer or other key employee (i) the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving the Company in the nature of any of the transactions
contemplated by this Agreement or the Agreement of Merger, (ii) providing any
term of employment or compensation guarantee or (iii) providing severance
benefits or other benefits after the termination of employment of such employee
regardless of the reason for such termination of employment, or (b) agreement or
plan, including, without limitation, any stock option plan, stock appreciation
rights plan or stock purchase plan, any of the benefits of which will be
materially increased, or the vesting of benefits of which will be materially
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the Agreement of Merger or the value of any of the benefits of
which will be calculated on the basis of any of the transactions contemplated by
this Agreement or the Agreement of Merger. The Company is not obligated to make
any excess parachute payment, as defined in Section 280G(b)(1) of the Code, nor
will any excess parachute payment be deemed to have occurred as a result of or
arising out of the Merger to the extent Section 280G of the Code is applicable
to the Company.
2.15.6 A list of all employees, officers and
development consultants of the Company and its subsidiaries and their current
compensation and benefits as of the date of this Agreement is set forth on Item
2.15.6, which the Company has delivered to Parent.
2.15.7 All contributions due from the Company and
its subsidiaries with respect to any of the Employee Plans have been made or
accrued on the Company Financial Statements, and no further contributions will
be due or will have accrued thereunder as of the Closing Date.
2.15.8 Neither the Company nor any of its subsidiaries
has any employee bonus obligations or any other payments (other than regular
salary payments for the then-current pay period) due to its employees accrued
but unpaid by the Company as of the Closing Date or which shall vest in
connection with the Closing, in each case, which are not shown on the Closing
Balance Sheet.
2.16 Corporate Documents. The Company has made available to
Parent for examination all documents and information listed in Items 2.1 through
2.22 or other exhibits called for by this Agreement which have been requested by
Parent's legal counsel, including, without limitation, the following: (a) copies
of the Company's and each of its subsidiaries' Articles of Incorporation and
Bylaws or similar charter documents as currently in effect; (b) the Company's
and each of its subsidiaries' minute book containing all records of all
proceedings, consents, actions and meetings of its directors and shareholders;
(c) the Company's and each of its subsidiaries' stock ledger, journal and other
records reflecting all stock issuances and transfers; and (d) all permits,
orders and consents issued by any regulatory agency with respect to the Company
and each of its subsidiaries, or any securities of the Company and each of its
subsidiaries, and all applications for such permits, orders and consents.
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2.17 No Brokers. Other than Broadview Associates, whose fees
and expenses will be paid by the Company immediately prior to the Closing (and a
corresponding deduction for which shall be reflected on the Closing Balance
Sheet), the Company is not obligated for the payment of fees or expenses of any
investment banker, broker or finder in connection with the origin, negotiation
or execution of this Agreement or the Agreement of Merger or in connection with
any transaction provided for herein or therein.
2.18 Disclosure. This Agreement, its exhibits and schedules,
and any of the certificates or documents to be delivered by the Company to
Parent under this Agreement, taken together, do not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements contained herein and therein, in light of the circumstances under
which such statements were made, not misleading.
2.19 Books and Records; Bank Accounts.
2.19.1 The books, records and accounts of the Company (a) are
in all material respects true and complete, (b) have been maintained in
accordance with reasonable business practices on a basis consistent with prior
years, (c) are stated in reasonable detail and accurately and fairly reflect the
transactions and dispositions of the assets of the Company and (d) accurately
and fairly reflect the basis for the Company Financial Statements.
2.19.2 Item 2.19.2 sets forth a true, correct and complete
list of (i) all bank accounts and safe deposit boxes of the Company and all
persons who are signatories thereunder or who have access thereto and (ii) the
names of all persons holding general or special powers-of-attorney from the
Company and a summary of the terms thereof.
2.20 Insurance. Item 2.20 is a true, correct and complete list
of all fire and casualty, automobile, workers compensation, errors and
omissions, general liability and other insurance maintained by the Company.
2.21 Environmental Matters.
2.21.1 During the period that the Company and its
subsidiaries have leased the premises currently occupied by them and those
premises occupied by them since the date of their respective organizations,
there have been no disposals, releases or threatened releases of Hazardous
Materials (as defined below) on any such premises that would have a material
adverse effect upon the business or financial statements of the Company. Neither
the Company nor any Shareholder has any knowledge of any presence, disposals,
releases or threatened releases of Hazardous Materials on or from any of such
premises, which may have occurred prior to the Company or any of its
subsidiaries having taken possession of any of such premises that would have a
material adverse effect upon the business or financial statements of the
Company. For purposes of this Agreement, the terms "disposal," "release," and
"threatened release" have the definitions assigned thereto by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. ss.
9601 et seq., as amended ("CERCLA"). For the purposes of this Section 2.21,
"Hazardous Materials" mean any hazardous or toxic substance, material or waste
which is or becomes prior to the Closing Date regulated under, or defined as a
"hazardous substance," "pollutant," "contaminant," "toxic chemical," "hazardous
material," "toxic substance" or "hazardous chemical" under (i) CERCLA; (ii) the
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001 et
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seq.; (iii) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801,
et seq.; (iv) the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.;
(v) the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et
seq.; (vi) regulations promulgated under any of the above statutes; or (vii) any
applicable state or local statute, ordinance, rule or regulation that has a
scope or purpose similar to those identified above.
2.21.2 During the time that the Company or its
subsidiaries have leased such premises, none of the premises currently leased by
the Company or its subsidiaries or any premises previously occupied by the
Company or its subsidiaries is in violation of any federal, state or local law,
ordinance, regulation or order relating to industrial hygiene or to the
environmental conditions in such premises.
2.21.3 During the time that the Company and its
subsidiaries have leased the premises currently occupied by it or any premises
previously occupied by the Company or such subsidiary, neither the Company, its
subsidiaries nor, to the Company's knowledge, any third party, has used,
generated, manufactured or stored in such premises or transported to or from
such premises any Hazardous Materials that would have a material adverse effect
upon the business or financial statements of the Company.
2.21.4 During the time that the Company and its
subsidiaries have leased the premises currently occupied by it or any premises
previously occupied by the Company or such subsidiary, there has been no
litigation, proceeding or administrative action brought or threatened in writing
against the Company, or any settlement reached by the Company with, any party or
parties alleging the presence, disposal, release or threatened release of any
Hazardous Materials on, from or under any of such premises.
2.21.5 During the time that the Company and its
subsidiaries have leased the premises currently occupied by it or any premises
previously occupied by the Company or such subsidiary, no Hazardous Materials
have been transported from such premises to any site or facility now listed or
proposed for listing on the National Priorities List, at 40 C.F.R. Part 300, or
any list with a similar scope or purpose published by any state authority.
2.22 Customers. Item 2.22 sets forth the names with the dollar
value of sales to each of the customers of the Company and its subsidiaries
having aggregate annual sales of $50,000 or more during any of the three years
prior to the date hereof. The Company has no outstanding disputes with any such
customer and to the knowledge of the Company and each Shareholder, no such
customer has expressed dissatisfaction with any of the Company's products or
services provided to such customer.
2.23 Accounts Receivable; Accounts Payable.
2.23.1 Item 2.23.1 sets forth a true and complete aged list of
unpaid accounts and notes receivable owing to the Company and its subsidiaries,
all of which are, and all receivables generated from the date of this Agreement
through the Closing Date will be, collectible in the ordinary course of
business, except as set forth in Item 2.23.1. No such account has been assigned
or pledged to any other person, firm or corporation and no defense or setoff to
any such account has been asserted in writing by the account obligor.
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2.23.2 Item 2.23.2 sets forth a true and complete list of all
accounts payable of the Company and its subsidiaries as of the date hereof.
3. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants, that, as of the date
hereof and the Closing Date, except as set forth on the Parent disclosure letter
delivered to the Company herewith:
3.1 Organization and Good Standing. Parent is a public limited
company duly organized, validly existing and in good standing under the laws of
England and Wales and has the corporate power and authority to own, operate and
lease its properties and to carry on its business as now conducted and as
proposed to be conducted.
3.2 Power, Authorization and Validity.
3.2.1 Parent has the corporate right, power, legal
capacity and authority to enter into and perform its obligations under this
Agreement, and all agreements to which Parent is or will be a party that are
required to be executed pursuant to this Agreement (the "Parent Ancillary
Agreements"). The execution, delivery and performance of this Agreement and the
Parent Ancillary Agreements have been duly and validly approved and authorized
by all necessary corporate action on the part of Parent. The Parent Stock to be
issued to the Shareholders in the Merger will be , upon such issuance, duly
authorized, validly issued, fully paid and non-assessable, and, except as
provided in this Agreement and the Escrow Agreement, free and clear of all
pledges, claims, liens, charges, encumbrances and security interests of any kind
or nature whatsoever.
3.2.2 No filing, authorization or approval,
governmental or otherwise, is necessary to enable Parent to enter into, and to
perform its obligations under, this Agreement and the Parent Ancillary
Agreements, except for (a) the filing of the Agreement of Merger with the
Secretary of State of the State of Delaware, (b) such filings as may be required
to comply with federal and state securities laws, (c) the filing of a share
listing with the London Stock Exchange in respect of the Parent Stock to be
issued in the Merger, and (d) filings required under the HSR Act.
3.2.3 This Agreement and the Parent Ancillary
Agreements are, or when executed by Parent will be, valid and binding
obligations of Parent, enforceable against Parent in accordance with their
respective terms, except as to the effect, if any, of (a) applicable bankruptcy
and other similar laws affecting the rights of creditors generally, and (b)
rules of law governing specific performance, injunctive relief and other
equitable remedies; provided, however, that the Agreement of Merger and the
Parent Ancillary Agreements will not be effective until the earlier of the
Effective Time or the date provided for therein.
3.3 No Violation of Charter Documents or Laws. Neither the
execution nor delivery of this Agreement or any Parent Ancillary Agreement, nor
the consummation of the transactions contemplated hereby or thereby, will
conflict with, or (with or without notice or lapse of time, or both) result in a
termination, breach, impairment or violation of (a) any provision of the
Memorandum of Association or Articles of Association of Parent, as currently in
effect, or (b) any contract that is material to Parent's business or (c) any
federal, state, local or foreign judgment, writ, decree, order, statute or
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regulation applicable to and that would have a material adverse effect on Parent
or its assets or properties.
3.4 Disclosure. Parent has furnished the Company and each of
the Company Shareholders with Parent's 1996 Annual Report to Shareholders,
Annual Report on Form 20-F for the fiscal year ended January 31, 1997, Second
Quarterly Report on Form 6-K for the quarter ended July 31, 1997, Half Yearly
Report on Form 6-K for the First Half Year ended July 31, 1997, Registration
Statement on Form S-8, filed April 9, 1997, First Quarterly Report on Form 6-K
for the quarter ended April 30, 1997 and Proxy Statement on Form 6-K, dated May
9, 1997 (collectively, the "Parent Disclosure Package"). The Parent Disclosure
Package, this Agreement, the exhibits and schedules hereto, and any certificates
or documents to be delivered to the Company pursuant to this Agreement, when
taken together, do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements contained
herein and therein, in light of the circumstances under which such statements
were made, not misleading.
3.5 No Brokers. Parent is not obligated for the payment of
fees or expenses of any investment banker, broker or finder in connection with
the origin, negotiation or execution of this Agreement or the Agreement of
Merger or in connection with any transaction provided for herein or therein.
3.6 Reporting. During the 12 months preceding the date hereof,
Parent has filed all reports required to be filed by (i) Section 13 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
regulations thereunder, as applicable to Parent, (ii) the securities laws of
England and Wales, and (iii) the Listing Rules of the London Stock Exchange.
3.7 Trading Markets. The majority of all trading in Parent
Stock currently takes place in, on or through the facilities of securities
exchanges and inter-dealer quotation systems not in the United States.
4. COVENANTS OF THE COMPANY
During the period from the date of this Agreement until the
Effective Time, the Company and Shareholders covenant to and agree with Parent
as follows; provided, however, that the covenants set forth in Section 4.12 and
4.13 shall continue in effect after the Effective Time:
4.1 Advice of Changes. The Company and each Shareholder will
promptly advise Parent in writing, to the full extent of such person's
knowledge, (a) of any event occurring subsequent to the date of this Agreement
that would render any representation or warranty of the Company or the
Shareholders contained in this Agreement, if made on or as of the date of such
event or the Closing Date, untrue or inaccurate in any material respect and (b)
of any material adverse change in the Company's financial condition, properties,
assets, liabilities, business or results of operations.
4.2 Maintenance of Business. The parties hereto understand and
acknowledge that it is their intent to work closely together during the period
from the date hereof until the Closing Date. If the Company or any Shareholder
becomes aware of a material deterioration in the Company's relationship with any
customer, supplier or key employee, it will promptly bring such information to
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the attention of Parent in writing and, if requested by Parent, will exert all
reasonable efforts to restore the relationship.
4.3 Conduct of Business. Except as otherwise provided herein
or as approved or recommended by Parent, the Company will not, and will not
permit any of its subsidiaries to, without the prior written consent of Parent:
(a) borrow any money;
(b) other than the conversion of investments
into cash or cash equivalents, enter into any transaction not in the ordinary
course of business or enter into any transaction or make any commitment
involving an expense or capital expenditure in excess of $50,000;
(c) except for the Merger, merge, consolidate or
reorganize with, or acquireany entity;
(d) dispose of any of its material assets except
in the ordinary course of business consistent with past practice;
(e) enter into any material lease or contract
for the purchase or sale ofany property, real or personal, tangible or
intangible, except in the ordinary course of business consistent with past
practice or enter into any agreement of the types described in Section 2.11;
(f) fail to maintain its equipment and other
assets in good working condition in a manner consistent with past practices and
repair according to the standards it has maintained to the date of this
Agreement, subject only to ordinary wear and tear;
(g) pay any bonus, royalty, increased salary or
special remuneration to any officer, employee or consultant (except pursuant to
existing arrangements heretofore disclosed in writing to Parent) or enter into
any new employment or consulting agreement with any such person, or enter into
any new agreement or plan of the type described in Section 2.15.3;
(h) change accounting methods;
(i) declare, set aside or pay any cash or
stock dividend or other distribution in respect of capital stock, or redeem or
otherwise acquire any of its capital stock;
(j) amend or terminate any contract, agreement
or license to which it is a party except those amended or terminated in the
ordinary course of business, consistent with past practice, and which are not
material in amount or effect;
(k) lend any amount to any person or entity,
other than advances for travel and expenses which are incurred in the ordinary
course of business consistent with past practice, not material in amount, which
travel and expenses shall be documented by receipts for the claimed amounts;
(l) guarantee or act as a surety for any
obligation except for the endorsement of checks and other negotiable instruments
in the ordinary course of business, consistent with past practice;
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(m) waive or release any material right or
claim except in the ordinarycourse of business, consistent with past practice;
(n) issue or sell any shares of its capital
stock of any class or any other of its securities, or issue or create any
warrants, obligations, subscriptions, options, convertible securities, stock
appreciation rights or other commitments to issue shares of capital stock, or
accelerate the vesting of any outstanding option or other security;
(o) split or combine the outstanding shares
of its capital stock of any class or enter into any recapitalization affecting
the number of outstanding shares of its capital stock of any class or affecting
any other of its securities;
(p) amend its Articles of Incorporation or Bylaws
or other charter documents;
(q) agree to any audit assessment by any tax
authority or file any federal or state income or franchise tax return unless
copies of such returns have been delivered to Parent for its review prior to
filing;
(r) except as contemplated by the License
Agreement, license any of the Company's technology or any of the Company
Intellectual Property, except in the ordinary course of business consistent with
past practice, or take any action which could have the effect of placing any of
the Company Intellectual Property in the public domain;
(s) change any insurance coverage or issue any
certificates of insurance;
(t) terminate the employment of any key employee
listed in Item 2.10(i); or
(u) agree to do any of the things described in
the preceding clauses 4.3(a) through 4.3(t).
4.4 Regulatory Approvals. The Company will promptly execute
and file, or join in the execution and filing, of any application or other
document that may be necessary in order to obtain the authorization, approval or
consent of any governmental body, federal, state, local or foreign, which may be
reasonably required, or which Parent may reasonably request, in connection with
the consummation of the transactions contemplated by this Agreement. The Company
will use all reasonable efforts to obtain or assist Parent in obtaining all such
authorizations, approvals and consents.
4.5 Necessary Consents. The Company will use its best efforts
to obtain such written consents and take such other actions as may be necessary
or appropriate to facilitate and allow the consummation of the transactions
contemplated by this Agreement and to facilitate and allow Parent to carry on
the Company's business after the Closing Date.
4.6 Litigation. The Company will notify Parent in writing
promptly after learning of any action, suit, proceeding or investigation by or
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before any court, board or governmental agency, initiated by or against the
Company or any of its subsidiaries or threatened against it.
4.7 No Other Negotiations. From the date hereof until the
termination of this Agreement (provided that such termination is not effected by
the Company or the Shareholders in breach of this Agreement) or the consummation
of the Merger, the Company will not, and will not authorize any officer,
director, employee or affiliate of the Company, or any other person, on its
behalf, directly or indirectly, to (a) solicit, facilitate, discuss, encourage
or accept any offer, inquiry or proposal received from any party other than
Parent, concerning the possible disposition of all or any substantial portion of
the Company's business, assets or capital stock by merger, sale or any other
means or any other transaction that would involve a change in control of the
Company or to otherwise solicit, facilitate, discuss or encourage any such
disposition (other than the Merger), or (b) provide any confidential information
to or negotiate with any third party other than Parent in connection with any
offer, inquiry or proposal concerning any such disposition. The Company will
immediately notify Parent of any such offer, inquiry or proposal.
4.8 Access to Information. Until the Closing Date, the Company
will provide Parent and its agents with full access to the files, books, records
and offices of the Company, including, without limitation, any and all
information relating to the Company's taxes, commitments, contracts, leases,
licenses, real, personal and intangible property, and financial condition, and
specifically including, without limitation, access to the Company source code
reasonably necessary for Parent to complete its diligence review of the
Company's products and technology. The Company will cause its accountants to
cooperate with Parent and its agents in making available all financial
information reasonably requested, including, without limitation, the right to
examine all working papers pertaining to all financial statements prepared or
audited by such accountants.
4.9 Satisfaction of Conditions Precedent. The Company will use
its reasonable best efforts to satisfy or cause to be satisfied all the
conditions precedent which are set forth in Section 8, and the Company will use
its reasonable best efforts to cause the transactions provided for in this
Agreement to be consummated, and, without limiting the generality of the
foregoing, to obtain all consents and authorizations of third parties and to
make all filings with, and give all notices to, third parties that may be
necessary or reasonably required on its part in order to effect the transactions
provided for herein.
4.10 Securities Laws. The Company and the Shareholders shall
use their reasonable best efforts to assist Parent to the extent necessary to
comply with the securities and blue sky laws of all jurisdictions applicable in
connection with the Merger.
4.11 Notification of Employee Problems. The Company will
promptly notify Parent if any of the Company's officers becomes aware that any
of the key employees listed in Item 2.15.2 notifies the Company of his or her
intent to leave its employ.
4.12 Pooling Accounting. The Company and the Shareholders
shall use their reasonable best efforts to cause the Merger to be accounted for
as a "pooling of interests", including, without limitation, causing each person
who is an "affiliate" (for purposes of compliance with pooling requirements) of
the Company not to take any action that would adversely affect the Merger to be
accounted for as a "pooling of interests". The Company has no "affiliates" that
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own any of its capital stock, or possess rights to acquire any of its capital
stock, other than the Shareholders.
4.13 Audits. If the Company or any of its subsidiaries were to
become subject to an audit by the Internal Revenue Service or any state or other
national taxing agency or authority for tax years or periods prior to the
Effective Time (including, but not limited to, any short tax year resulting from
the Merger), the Shareholders will be responsible for such audits and the
liabilities arising therefrom and shall use all reasonable efforts to resolve
all such audits in a manner consistent with the intentions of the Company and
Parent as expressed in this Agreement.
5. COVENANTS OF PARENT
During the period from the date of this Agreement until the
Effective Time, Parent covenants to and agrees with the Company and the
Shareholders as follows; provided, however, that the covenants set forth in
Sections 5.3 and 5.5 through 5.8 shall continue in effect after the Effective
Time, in accordance with their respective terms:
5.1 Satisfaction of Conditions Precedent. Parent will use its
reasonable best efforts to satisfy or cause to be satisfied all the conditions
precedent which are set forth in Section 7, and Parent will use its reasonable
best efforts to cause the transactions provided for in this Agreement to be
consummated, and, without limiting the generality of the foregoing, to obtain
all consents and authorizations of third parties and to make all filings with,
and give all notices to, third parties that may be necessary or reasonably
required on its part in order to effect the transactions provided for herein.
5.2 Regulatory Approvals. Parent will execute and file, or
join in the execution and filing, of any application or other document that may
be necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign, which may be reasonably
required, or which the Company may reasonably request, in connection with the
consummation of the transactions provided for in this Agreement. Parent will use
all reasonable efforts to obtain all such authorizations, approvals and
consents.
5.3 Pooling Accounting. Parent shall use its reasonable best
efforts to cause the Merger to be accounted for as a "pooling of interests."
Parent shall use its reasonable best efforts to have each person who is an
"affiliate" (for purposes of compliance with pooling requirements) of Parent to
execute and deliver to Parent a Parent Affiliate Agreement, in substantially the
form of Exhibit 5.3.
5.4 Access to Information. Until the Closing Date, Parent will
provide the Company, the Shareholders and their respective agents a reasonable
opportunity to perform due diligence on Parent.
5.5 Company Tax Refund. Parent shall use its reasonable
efforts to assist the Shareholders in obtaining full payment of the Company Tax
Refund but neither such obligation nor Parent's exercise thereof shall in any
manner limit Parent's right to reacquire Escrow Shares in partial or complete
payment of the value of the Company Tax Refund pursuant to the Escrow Agreement.
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5.6 Parent Stock Listing. Parent shall use its reasonable best
efforts to have the Parent Stock to be issued in the Merger (including Parent
Stock to be issued upon the exercise of Parent Options converted from Company
Options) approved for listing on the London Stock Exchange promptly, and in any
event, within ten business days, following the Closing.
5.7 Parent Options Registration. Parent shall use its
reasonable best efforts to cause the Parent Stock issuable upon the exercise of
Parent Options converted from Company Options to be registered, or to be issued
pursuant to a then effective registration statement, on Form S-8 promulgated by
the SEC promptly, and in any event, within fourteen business days, following the
Closing.
5.8 Parent Reporting. Parent shall use its reasonable best
efforts to file all reports required to be filed by (i) Section 13 of the
Exchange Act, and the regulations thereunder, as applicable to Parent, (ii) the
securities laws of England and Wales, and (iii) the Listing Rules of the London
Stock Exchange.
6. CLOSING MATTERS
6.1 The Closing. Subject to termination of this Agreement as
provided in Section 9 below, the Closing will take place at the offices of
Fenwick & West, Two Palo Alto Square, Palo Alto, California 94306 at 10:00 a.m.,
Pacific Time, on or before January 15, 1998, or, if all conditions to Closing
have not been satisfied or waived by such date, such other place, time and date
as the Company and Parent may mutually select (the "Closing Date"). Prior to or
concurrently with the Closing, the Agreement of Merger and such officers'
certificates or other documents as may be required to effectuate the Merger will
be filed in the office of the Secretary of State of the State of Delaware and
the State of Maryland Department of Assessments and Taxation. Accordingly, the
Merger will become effective at the Effective Time.
6.2 Exchange of Certificates.
6.2.1 As of the Effective Time, all shares of
Company Common Stock that are outstanding immediately prior thereto will, by
virtue of the Merger and without further action, cease to exist, and all such
shares will be converted into the right to receive from Parent the number of
shares of Parent Common Stock determined as set forth in Section 1.1, subject to
Sections 1.2 and 1.3.
6.2.2 At and after the Effective Time, each
certificate representing outstanding shares of Company Common Stock will
represent the number of shares of Parent Stock into which such shares of the
Company Common Stock have been converted, and such shares of Parent Stock will
be deemed registered in the name of the holder of such certificate. As soon as
practicable after the Effective Time, each holder of shares of the Company
Common Stock will surrender the certificates for such shares (the "Company
Certificates") to Parent for cancellation. At the Effective Time and upon
receipt of the Company Certificates, Parent will cause its transfer agent to
issue to such surrendering holder or to such holder's designee certificates for
the number of shares of Parent Stock to which such holder is entitled pursuant
to Section 1.1, subject to Sections 1.2 and 1.3, and Parent shall distribute any
cash payable under Section 1.2.
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6.2.3 After the Effective Time, there will be
no further registration of transfers of the shares of Company Common Stock on
the stock transfer books of the Company. If, after the Effective Time, Company
Certificates are presented for transfer or for any other reason, they will be
canceled and exchanged and certificates therefor will be delivered or placed in
escrow as provided in this Section 6.2. Notwithstanding anything herein to the
contrary, except to the extent waived by Parent, any Company Certificate that is
not properly submitted to Parent for exchange and cancellation within two years
after the Effective Time shall no longer evidence ownership of or any right to
receive shares of Parent Stock and all rights of the holder of such Company
Certificate, with respect to the shares previously evidenced by such Company
Certificate, shall cease.
6.2.4 Until Company Certificates representing
Company Common Stock outstanding prior to the Merger are surrendered pursuant to
Section 6.2.2 above, such certificates shall be deemed, for all purposes, to
evidence ownership of (a) the number of shares of Parent Stock into which the
shares of Company Common Stock shall have been converted, subject to the
provisions of Sections 1.2 and 1.3, and (b) if applicable, cash in lieu of
fractional shares.
7. CONDITIONS TO OBLIGATIONS OF THE COMPANY
The Company's obligations under this Agreement are subject to the
fulfillment or satisfaction, on and as of the Closing, of each of the following
conditions (any one or more of which may be waived by the Company, but only in a
writing signed on behalf of the Company by its President):
7.1 Accuracy of Representations and Warranties. The
representations and warranties of Parent set forth in Section 3 shall be true
and accurate in all material respects on and as of the date hereof and the
Closing Date as if made on and as of the Closing Date, and the Company shall
have received a certificate to such effect executed on behalf of Parent by its
Chief Financial Officer.
7.2 Covenants. Parent shall have performed and complied in all
material respects with all of its covenants contained in Section 5 on or before
the Closing Date, and the Company shall have received a certificate to such
effect executed on behalf of Parent by its Chief Financial Officer.
7.3 Compliance with Law. There shall be no order, decree, or
ruling by any court or governmental agency or threat thereof, or any other fact
or circumstance, which would prohibit or render illegal the transactions
contemplated by this Agreement.
7.4 Government Consents. There shall have been obtained at or
prior to the Closing Date such permits or authorizations, and there shall have
been taken such other actions, as may be required to consummate the Merger by
any regulatory authority having jurisdiction over the parties and the actions
herein proposed to be taken, including but not limited to satisfaction of all
requirements under applicable federal and state securities laws and the
expiration or termination of the waiting period under the HSR Act.
7.5 Documents. The Company shall have received all written
consents, assignments, waivers, authorizations or other certificates reasonably
deemed necessary by the Company's legal counsel to consummate the transactions
provided for herein.
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7.6 No Litigation. No litigation or proceeding shall be
pending which will have the probable effect of enjoining or preventing the
consummation of any of the transactions provided for in this Agreement.
7.7 Opinion of Parent's Counsel. The Company shall have
received from Memery Crystal and Fenwick & West LLP, counsel to Parent, opinions
substantially in the form of Exhibit 7.7.
7.8 Escrow Agreement. Parent shall have duly executed
and delivered to the Shareholders the Escrow Agreement.
7.9 License Agreement. Parent shall have executed and
delivered to Dr. S. Bing Yao the License Agreement, substantially in the form of
Exhibit 7.9 (the "License Agreement").
7.10 Parent Stock. Parent shall have delivered to the
Shareholders' designee certificates representing the shares of Parent Stock to
be issued to the Shareholders pursuant to Section 1.1, subject to Sections 1.2
and 1.3.
8. CONDITIONS TO OBLIGATIONS OF PARENT
The obligations of Parent under this Agreement are subject to
the fulfillment or satisfaction on, and as of the Closing, of each of the
following conditions (any one or more of which may be waived by Parent, but only
in a writing signed on behalf of Parent by its President or Chief Financial
Officer):
8.1 Accuracy of Representations and Warranties. The
representations and warranties of the Company set forth in Section 2 shall be
true and complete in all material respects on and as of the date hereof and the
Closing Date as if made on and as of the Closing Date, and Parent shall have
received a certificate to such effect executed on behalf of the Company by its
Chief Executive Officer.
8.2 Covenants; No Material Adverse Change. The Company shall
have performed and complied in all material respects with all of its covenants
contained in Section 4 on or before the Closing and Parent shall have received a
certificate to such effect signed on behalf of the Company by its Chief
Executive Officer. There shall not have occurred any material adverse change in
the assets, business or employee base of the Company since July 31, 1997, and
Parent shall have received a certificate to such effect executed on behalf of
Parent by its Chief Executive Officer.
8.3 Compliance with Law. There shall be no order, decree, or
ruling by any court or governmental agency or threat thereof, or any other fact
or circumstance, which would prohibit or render illegal the transactions
provided for in this Agreement.
8.4 Government Consents. There shall have been obtained at or
prior to the Closing Date such permits or authorizations and there shall have
been taken such other action, as may be required to consummate the Merger by any
regulatory authority having jurisdiction over the parties and the actions herein
proposed to be taken, including but not limited to satisfaction of all
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requirements under applicable federal and state securities laws and the
expiration or termination of the waiting period under the HSR Act.
8.5 Opinion of the Company's Counsel. Parent shall have
received from Venable, Baetjer and Howard, LLP, counsel to the Company, an
opinion substantially in the form of Exhibit 8.5.
8.6 Requisite Approvals. The terms of this Agreement and the
Agreement of Merger shall have been approved and adopted by the written consent
or vote of Shareholders holding not less than 98% of the outstanding shares of
the Company Common Stock.
8.7 No Litigation. No litigation or proceeding shall be
pending which will have the probable effect of enjoining or preventing the
consummation of any of the transactions provided for in this Agreement. No
litigation or proceeding shall be pending which could reasonably be expected to
have a material adverse effect on the financial condition or results of
operations of the Company that has not been previously disclosed to Parent
herein.
8.8 Documents. Parent shall have received all written
consents, assignments, waivers, authorizations or other certificates reasonably
deemed necessary by Parent's legal counsel to provide for the continuation in
full force and effect of any and all material contracts and leases of the
Company, except as disclosed in the Company Disclosure Letter, and for Parent to
consummate the transactions contemplated hereby.
8.9 Investment and Affiliate Letters; Affiliate Agreements.
Each Shareholder shall have duly executed and delivered to Parent an Investment
and Affiliate Letter, substantially in the form of Exhibit 8.9. Each "affiliate"
of the Company who is not also a Shareholder shall have duly executed and
delivered to Parent an Affiliate Agreement, substantially in the form of Exhibit
8.9-A.
8.10 Escrow Agreement. Each of the Shareholders shall
have duly executed and delivered to Parent the Escrow Agreement.
8.11 Non-Competition Agreements. Dr. S.Bing Yao and Lien
Yao shall have executed and delivered to Parent a Non-Competition Agreement.
8.12 License Agreement. Dr.S.Bing Yao shall have executed
and delivered to Parent the License Agreement.
8.13 Employment Agreements. Each employee of the Company set
forth in Exhibit 8.13 shall have executed and delivered to Parent an employment
agreement on terms to be mutually agreed upon between Parent and such employee.
8.14 Due Diligence. Parent and its representatives shall have
completed a due diligence review of the condition (financial and otherwise),
operations, customer arrangements, intellectual property, business and prospects
of, and any other matters relating to, the Company, and the results of such due
diligence shall be satisfactory to Parent in its sole discretion.
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8.15 Pooling Opinion. Parent shall have received the opinion
of Ernst & Young, Parent's independent auditors, to the effect that the Merger
will qualify as a "pooling of interests" transaction under the relevant
accounting rules and principles.
8.16 Closing Balance Sheet. Parent shall have received the
Closing Balance Sheet (including the Schedule of Closing Adjustments) prepared
by the Company, certified as true, complete and correct by the Chief Financial
Officer of the Company.
8.17. Company Stock. The Shareholders shall have delivered to
Parent certificates representing all of the shares of Company Common Stock to be
converted into Parent Stock pursuant to Section 1.1.
8.18 Releases. Parent shall have received from each of the
persons set forth in Exhibit-8.18-A a release substantially in the form of
Exhibit 8.18-B.
8.19 Audit Opinion. Parent shall have received a true copy of
the unqualified audit opinion of Deloitte & Touche LLP with respect to the
Company's January 31, 1997 financial statements, which financial statements
shall be the same financial statements delivered by the Company to Parent,
without any changes thereto.
9. TERMINATION
9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the Merger by
the shareholders of the Company:
(a) by the mutual written agreement of Parent and
the Company;
(b) at any time after January 31, 1998, by either
Parent or the Company if the Closing shall not have occurred on or before such
date and such failure to consummate is not caused by a breach of this Agreement
by the terminating party;
(c) by the Company, if there has been a
breach by Parent of any representation, warranty, covenant or agreement set
forth in this Agreement on the part of Parent, or if any representation of
Parent will have become untrue, in either case which has or can reasonably be
expected to have a material adverse effect on Parent and which Parent fails to
cure within a reasonable time, not to exceed 30 days, after written notice
thereof (except that no cure period will be provided for a breach by Parent
which by its nature cannot be cured);
(d) by Parent, if there has been a breach by the
Company or a Shareholder of any representation, warranty, covenant or agreement
set forth in this Agreement on the part of the Company or a Shareholder, or if
any representation of the Company or a Shareholder will have become untrue, in
either case which has or can reasonably be expected to have a material adverse
effect on the Company and which the Company or such Shareholder fails to cure
within a reasonable time, not to exceed 30 days, after written notice thereof
(except that no cure period will be provided for a breach by the Company or a
Shareholder which by its nature cannot be cured); or
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(e) by either party, if a permanent injunction or
other order by any Federal or state court which would make illegal or otherwise
restrain or prohibit the consummation of the Merger will have been issued and
will have become final and nonappealable.
Any termination of this Agreement under this Section 9.1 will
be effective by the delivery of written notice of the terminating party to the
other party hereto.
9.2 Effect of Termination. If this Agreement is validly
terminated pursuant to Section 9.1, such termination shall be without liability
or obligation of either party (or any shareholder, director, officer, employee,
agent, consultant or representative of such party) to the other party to this
Agreement; provided that if such termination shall result from the willful
failure of either party to fulfill a condition to the performance of the
obligations of the other party or to perform a covenant of this Agreement or
from a willful breach by either party to this Agreement, such party shall be
fully liable for any and all Damages incurred or suffered by the other party as
a result of such failure or breach; provided, further, that the failure of the
Company and Shareholders to satisfy the condition set forth in Section 8.5 shall
not constitute a willful failure for the purposes of this Section 9.2. The
provisions of Article 11 shall survive any termination hereof pursuant to
Section 9.1.
10. INDEMNIFICATION
10.1 Survival. The representations, warranties, covenants and
agreements of the parties hereto contained in this Agreement or in any
certificate, document or instrument delivered pursuant hereto or in connection
herewith shall survive the Closing until the one year anniversary of the Closing
Date (the "Expiration Date"); provided, that the Shareholders' indemnification
of the Parent Indemnified Persons for the Company Tax Exposure shall survive the
Closing until the three year anniversary of the Closing Date (the "Third
Anniversary") and that indemnification of claims made by tax authorities with
respect to the Company Tax Exposure prior to the Third Anniversary which are
unresolved on the Third Anniversary shall survive until such claims are finally
resolved.
10.2 Indemnification.
10.2.1 Subject to the limitations set forth in
this Section 10.2.1, the Shareholders hereby severally indemnify and hold
harmless Parent and its respective officers, directors, agents and employees,
and each person, if any, who controls or may control Parent within the meaning
of the Securities Act (collectively "Parent Indemnified Persons") from and
against any and all claims, demands, actions, causes of action, judgments,
fines, penalties, obligations, losses, costs, damages, liabilities and expenses
including, without limitation, the reasonable fees and disbursements of legal
counsel, investigators, consultants, accountants and other professionals
(collectively, "Damages") incurred or suffered by any such person arising from,
by reason of or in connection with any misrepresentation or breach of or default
in connection with any of the representations, warranties, covenants or
agreements given or made by the Company or the Shareholders in this Agreement or
any certificate, document or instrument delivered by or on behalf of the Company
or by a Shareholder pursuant hereto or in connection herewith (collectively,
"Company Breaches"); provided, however, that (i) the Parent Indemnified Persons
shall not have any right to be indemnified under this Section 10.2.1 unless the
aggregate amount of all Damages to the Parent Indemnified Persons exceeds
$75,000, in which case the Parent Indemnified Persons will be entitled to
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indemnification to the extent to which such Damages exceed $75,000, and (ii) the
maximum aggregate indemnification obligation of the Shareholders under this
Section 10.2.1 shall not exceed the Total Acquisition Price; provided, further,
that claims for Damages based upon or arising out of (A) the inability of Parent
to timely receive payment on accounts receivable owing to the Company on the
Closing Date, (B) the claims asserted by the Business Software Alliance against
the Company disclosed in the Company Disclosure Letter or (C) any severance or
similar termination or settlement payments due to the employees of the Company
set forth on Exhibit 10.2.1(C), in each case of (A), (B) or (C), whether or not
such Damages or payments arise in connection with a Company Breach, shall be
indemnified hereunder and shall not be subject to the deductible set forth in
clause (i) of this sentence. The Shareholders shall settle any claims for
indemnification by first returning to Parent, pro rata, escrowed shares of
Parent Stock (valued at the Closing Price) and if the aggregate amount of
Damages exceeds the value of such escrowed shares, the Shareholders shall
severally fulfill such indemnification obligations in cash or in shares of
Parent Stock (valued at the Closing Price). None of the provisions of this
Section 10.2.1 or of the Escrow Agreement shall in any manner limit liability
with respect to (i) claims of intentional misrepresentation or fraud, (ii) any
criminal matters, (iii) any claim concerning the breach of the representations
and warranties set forth in Section 2.3 or (iv) any claim concerning title to
the shares of the Company's capital stock. For the purposes of this Section
10.2.1, except for Damages arising out of, by reason of or in connection with
Company Breaches with respect to Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.11 or 2.12,
Damages indemnifiable by the Shareholders pursuant to this Section 10.2.1 shall
not include lost profits or consequential damages; provided, that the exception
contained in this sentence with respect to Section 2.5(b) and Section 2.11
(excluding Section 2.11(j)) shall apply only to lost profits and consequential
damages arising out of claims for equitable relief and not for claims for money
damages. For the avoidance of doubt, Damages indemnifiable hereunder shall
include lost profits and consequential damages arising out of Company Breaches
of Sections 2.1, 2.2, 2.3, 2.4, 2.5(a), 2.5(c), 2.11(j) and 2.12 in all
instances and Section 2.5(b) and Section 2.11 (excluding Section 2.11(j)) in
connection with claims for equitable relief.
10.2.2 Subject to the limitations set forth in
this Section 10.2.2, Parent hereby severally indemnify and hold harmless the
Shareholders from and against any and all Damages incurred or suffered by any
such person arising from, by reason of or in connection with any
misrepresentation or breach of or default in connection with any of the
representations, warranties, covenants or agreements given or made by Parent in
this Agreement or any certificate, document or instrument delivered by or on
behalf of Parent pursuant hereto or in connection herewith provided, however,
that (i) the Shareholders shall not have any right to be indemnified under this
Section 10.2.2 unless the aggregate amount of all Damages to the Shareholders
exceeds $75,000, in which case the Shareholders will be entitled to
indemnification to the extent to which such Damages exceed $75,000, and (ii) the
maximum aggregate indemnification obligation of Parent under this Section 10.2.2
shall not exceed the Total Acquisition Price. None of the provisions of this
Section 10.2.2 shall in any manner limit liability with respect to (i) claims of
intentional misrepresentation or fraud or (ii) any criminal matters.
10.2.3 The calculation of the amount required
to hold an indemnified party harmless shall be on (i) an after-tax basis, taking
into account any reduction in tax liability as a result of the facts giving rise
to the claim for indemnification and (ii) an after-insurance basis, taking into
account any insurance proceeds received under then-existing policies with
insurance companies covering the liability (it being understood that any amounts
which the indemnified party self-insures shall not be so taken into account).
32
<PAGE> 38
10.3 Procedures. Dr. S. Bing Yao shall act as Representative
of the Shareholders for all purposes of the Escrow Agreement and the
indemnification provisions of this Section 10, is duly authorized to be such
Representative and may bind the Shareholders with respect thereto. Promptly
after the receipt by a Parent Indemnified Person or a Shareholder (as the case
may be, the "Indemnified Person") of notice or discovery of any claim, damage or
legal action or proceeding giving rise to indemnification rights under this
Agreement, such Indemnified Person will give the indemnifying party (in the case
of a Parent Indemnified Person, notice shall be given to the Representative and
the Escrow Agent) written notice of such claim, damage, legal action or
proceeding (a "Claim") (in the case of a Parent Indemnified Person, such notice
shall be given in accordance with Section 3 of the Escrow Agreement). An
Indemnified Person may assert a claim in writing at any time prior to the
Expiration Date. Within ten days of delivery of such written notice, the
indemnifying party may, at the expense of such indemnifying party, elect to take
all necessary steps properly to contest any Claim involving third parties or to
prosecute such Claim to conclusion or settlement satisfactory to such
indemnifying party. If such indemnifying party makes the foregoing election, an
Indemnified Person will have the right to participate at its own expense in all
proceedings. If such indemnifying party does not make such election, an
Indemnified Person shall be free to handle the prosecution or defense of any
such Claim, will take all necessary steps to contest the Claim involving third
parties or to prosecute such Claim to conclusion or settlement satisfactory to
such Indemnified Person, and will notify the indemnifying party of the progress
of any such Claim, will permit the indemnifying party, at the sole cost of the
indemnifying party, to participate in such prosecution or defense and will
provide the indemnifying party with reasonable access to all relevant
information and documentation relating to the Claim and the prosecution or
defense thereof. In any case, the party not in control of the Claim will
cooperate with the other party in the conduct of the prosecution or defense of
such Claim. Neither party will compromise or settle any such Claim without the
written consent of either Parent (if the Representative defends the Claim) or
the Representative (if Parent defends the Claim), such consent not to be
unreasonably withheld; provided, that an Indemnified Person shall have the right
to settle any such Claim if the terms of such settlement are not materially
prejudicial to the indemnifying party, and that in such event the Indemnified
Person shall be deemed to have waived any right of indemnity for such claim
hereunder.
11. MISCELLANEOUS
11.1 Governing Law. The internal laws of the State of
California (irrespective of its choice of law principles) will govern the
validity of this Agreement, the construction of its terms, and the
interpretation and enforcement of the rights and duties of the parties hereto.
11.2 Assignment; Successors and Assigns. Neither party hereto
may assign any of its rights or obligations hereunder without the prior written
consent of the other party hereto. Any purported assignment not permitted by
this Section shall be void. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
11.3 Severability. If any provision of this Agreement, or the
application thereof, is for any reason held to any extent to be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such
unenforceable provision of this Agreement with a valid and enforceable provision
33
<PAGE> 39
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
11.4 Counterparts. This Agreement may be executed in
counterparts, each of which will be an original as regards any party whose name
appears thereon and all of which together will constitute one and the same
instrument. This Agreement will become binding when one or more counterparts
hereof, individually or taken together, bear the signatures of both parties
reflected hereon as signatories.
11.5 Other Remedies. Except as otherwise provided herein, any
and all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby or by law
on such party, and the exercise of any one remedy will not preclude the exercise
of any other.
11.6 Amendment and Waivers. Any term or provision of this
Agreement may be amended only by a writing signed by Parent, the Company and
Shareholders holding at least 50% of Company Common Stock. This Agreement may be
amended by the parties hereto at any time before or after approval of the
Shareholders. The observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default.
11.7 No Waiver. The failure of any party to enforce any of the
provisions hereof will not be construed to be a waiver of the right of such
party thereafter to enforce such provisions. The waiver by any party of the
right to enforce any of the provisions hereof on any occasion will not be
construed to be a waiver of the right of such party to enforce such provision on
any other occasion.
11.8 Expenses. Each party will bear its respective expenses
and fees of its own accountants, attorneys, investment bankers and other
professionals incurred with respect to this Agreement and the transactions
contemplated hereby. If the Merger is consummated, the Company will pay at the
Closing all Company Fees, which paid Company Fees shall be reflected by
corresponding deductions of like amounts on the Closing Balance Sheet. If
payment of all Company Fees is not timely made, Parent may pay such Company Fees
or a portion thereof, in which event Parent will be entitled to be reimbursed by
the Shareholders for such payment and, if not so reimbursed, Parent will be
entitled to treat the amount of payment as Damages recoverable under the Escrow
Agreement.
11.9 Notices. Any notice or other communication required or
permitted to be given under this Agreement will be in writing, will be delivered
personally, by mail or express delivery, postage prepaid, or telecopy (confirmed
in writing) and will be deemed given upon actual delivery or, if mailed by
registered or certified mail, on the third business day following deposit in the
mails, addressed as follows:
34
<PAGE> 40
(i) If to Parent:
Micro Focus
701 Middlefield Road
Mountain View, California 94043
Attention: General Counsel
Fax: 650-404-7394
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attention: Gordon K. Davidson
Fax: 650-494-1417
(ii) If to the Shareholders:
Dr. S. Bing Yao
9904 Bent Cross Drive
Potomac, Maryland 20854
Fax: 301-983-5860
with a copy to:
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank and Trust Building
Two Hopkins Plaza
Attention: Newton B. Fowler, III
Fax: 410-244-7742
and a copy to:
Joseph, Greenwald & Laake, P.A.
6404 Ivy Lane, Suite 400
Greenbelt, Maryland 20770
Attention: John S. Parker
or to such other address as the party in question may have furnished to the
other party by written notice given in accordance with this Section 11.9.
11.10 Construction of Agreement. The language hereof will not
be construed for or against either party. A reference to an article, section or
exhibit will mean an article or section in, or an exhibit to, this Agreement,
unless otherwise explicitly set forth. The titles and headings in this Agreement
are for reference purposes only and will not in any manner limit the
construction of this Agreement. For the purposes of such construction, this
Agreement will be considered as a whole. When this Agreement makes reference to
a person's "knowledge", such reference shall mean such person's (or a corporate
person's directors, officers or senior employees) actual knowledge, after due
investigation.
35
<PAGE> 41
11.11 No Joint Venture. Nothing contained in this Agreement
will be deemed or construed as creating a joint venture or partnership between
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will have
the power to control the activities and operations of any other, and the
parties' status is, and at all times, will continue to be, that of independent
contractors with respect to each other. No party will have any power or
authority to bind or commit any other. No party will hold itself out as having
any authority or relationship in contravention of this Section.
11.12 Further Assurances. Each party agrees to cooperate fully
with the other party and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by the other party to evidence and reflect the transactions provided
for herein and to carry into effect the intent of this Agreement.
11.13 Absence of Third Party Beneficiary Rights. No provisions
of this Agreement are intended, nor will be interpreted, to provide or create
any third party beneficiary rights or any other rights of any kind in any
client, customer, affiliate, partner or employee of any party hereto or any
other person or entity, unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement.
11.14 Public Announcement. Parent and the Company will issue a
press release approved by both parties announcing the Merger as soon as
practicable following the execution of this Agreement. Parent may issue such
press releases, and make such other disclosures regarding the Merger, as it
determines to be required or appropriate under applicable securities laws or
NASD rules after reasonable consultation, where possible, with the Company. The
Company will not make any other public announcement or disclosure of the
transactions contemplated by this Agreement. The Company will take all
reasonable precautions to prevent any trading in the securities of Parent by
officers, directors, employees and agents of the Company having knowledge of any
material information regarding Parent provided hereunder until the information
in question has been publicly disclosed.
11.15 Confidentiality. Except as expressly authorized by
Parent in writing, the Company will not directly or indirectly divulge to any
person or entity or use any Parent Confidential Information, except as required
for the performance of its duties under this Agreement. Except as expressly
authorized by the Company in writing, Parent will not directly or indirectly
divulge to any person or entity or use any the Company Confidential Information,
except as required for the performance of its duties under this Agreement. As
used herein, "Parent Confidential Information" consists of (a) any information
designated by Parent as confidential whether developed by Parent or disclosed to
Parent by a third party, (b) the source code to any Parent software and any
trade secrets relating to any of the foregoing, (c) any information relating to
Parent's product plans, product designs, product costs, product prices, product
names, finances, marketing plans, business opportunities, personnel, research
development or know-how, (d) any information contained in Parent's HSR Act
filing in connection herewith and (e) items and matters set forth in any
disclosure letter by Parent in connection herewith. As used herein, "Company
Confidential Information" consists of (v) any information contained in the
Company's HSR Act filing in connection herewith, (w) items and matters set forth
in the Company Disclosure Letter, (x) any information designated by the Company
as confidential whether developed by the Company or disclosed to the Company by
36
<PAGE> 42
a third party, (y) the source code to any the Company software, and any trade
secrets related to any of the foregoing, and (z) any information relating to the
Company product plans, product designs, product costs, product prices, product
names, finances, marketing plan, business opportunities, personnel, research,
development or know-how. "Parent Confidential Information" and "Company
Confidential Information" also include the terms and conditions of this
Agreement, except as disclosed in accordance with Section 11.14 above. The
foregoing restriction will apply to information about a party whether or not it
was obtained from such party's employees, acquired or developed by the other
party during such other party's performance under this Agreement, or otherwise
learned. The foregoing restrictions will not apply to information that (i) has
become publicly known through no wrongful act of the receiving party, (ii) has
been rightfully received from a third party authorized by the party which is the
owner, creator or compiler to make such disclosure without restriction, (iii)
has been approved or released by written authorization of the party which is the
owner, creator or compiler, or (iv) is being or has therefore been disclosed
pursuant to a valid court order or valid action of a governmental authority
after a reasonable attempt has been made to notify the party which is the owner,
creator or compiler.
11.16 Time is of the Essence. The parties hereto acknowledge
and agree that time is of the essence in connection with the execution, delivery
and performance of this Agreement, and that they will each utilize their best
efforts to satisfy all the conditions to Closing on or before January 15, 1998.
11.17 Entire Agreement. This Agreement and the exhibits hereto
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect to the subject matter hereof.
The express terms hereof control and supersede any course of performance or
usage of trade inconsistent with any of the terms hereof.
11.18. Dispute Resolution.
11.18.1 Arbitration. Any dispute arising under or in
connection with this Agreement and the transactions contemplated hereby
(including under each agreement or instrument attached hereto as an exhibit) (a
"Dispute") shall be settled by arbitration in San Francisco, California, and,
except as herein specifically stated, in accordance with the commercial
arbitration rules of the American Arbitration Association ("AAA Rules") then in
effect; provided, that discovery in such arbitration shall be permitted under
the Federal Rules of Civil Procedure then in effect. However, in all events,
these arbitration provisions shall govern over any conflicting rules which may
now or hereafter be contained in the AAA Rules. Any judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction over
the subject matter thereof. Arbitration pursuant to the terms of this Section
11.18 shall be the exclusive means of resolving Disputes; provided, that any
party under this Agreement or the other agreements contemplated hereby may seek
provisional, injunctive or other equitable relief in any court pending
resolution of a Dispute hereunder.
11.18.2 Compensation of Arbitrator. Any such arbitration will
be conducted before a single arbitrator who will be compensated for his or her
services at a rate to be determined by the parties, but based upon reasonable
37
<PAGE> 43
hourly or daily consulting rates determined by the American Arbitration
Association for the arbitrator in the event the parties are not able to agree
upon his or her rate of compensation.
11.18.3 Selection of Arbitrator. The American Arbitration
Association will have the authority to select an arbitrator from a list of
arbitrators who are lawyers familiar with California contract law; provided,
however, that such lawyers do not work for a firm then providing services for
either party, that each party will have the opportunity to make such reasonable
objection to any of the arbitrators listed as such party may wish and that the
American Arbitration Association will select the arbitrator from the list of
arbitrators as to whom neither party makes any such objection. In the event that
the foregoing procedure is not followed, each party will choose one person from
the list of arbitrators provided by the American Arbitration Association
(provided that such person does not have a conflict of interest), and the two
persons so selected will select from the list provided by the American
Arbitration Association the person who will act as the arbitrator.
11.18.4 Payment of Costs. Parent and the Shareholders will
each pay 50% of the initial compensation to be paid to the arbitrator in any
such arbitration and 50% of the costs of transcripts and other normal and
regular expenses of the arbitration proceedings; provided, however, that the
prevailing party in any arbitration will be entitled to an award of attorneys'
fees and costs, and all costs of arbitration, including those provided for
above, will be paid by the losing party, and the arbitrator will be authorized
to make such determinations. For Disputes arising under the Escrow Agreement,
the Shareholders' liability for such fees and expenses of arbitration initially
will be paid by Parent and, if so determined, will be recovered pursuant to the
Escrow Agreement.
11.18.5 Burden of Proof. For any Dispute submitted to
arbitration, the burden of proof will be as it would be if the claim were
litigated in a judicial proceeding.
11.18.6 Award. Upon the conclusion of any arbitration
proceedings hereunder, the arbitrator will render findings of fact and
conclusions of law and a written opinion setting forth the basis and reasons for
any decision reached and will deliver such documents to each party to this
Agreement along with a signed copy of the award.
11.18.7 Terms of Arbitration. The arbitrator chosen in
accordance with these provisions will not have the power to alter, amend or
otherwise affect the terms of these arbitration provisions or the provisions of
this Agreement.
38
<PAGE> 44
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MICRO FOCUS GROUP PLC
By:/s/ Martin Waters
------------------------------------
Name: Martin Waters
Title: President and Chief Executive Officer
`
XDB SYSTEMS, INC.
By:/s/ S. Bing Yao
-------------------------------------
Name: S. Bing Yao
Title: Chairman and CEO
SHAREHOLDERS:
/s/ S. Bing Yao
----------------------------------
Dr. S. Bing Yao
/s/ Lien Yao
-----------------------------------
Lien Yao
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
39
<PAGE> 1
EXHIBIT 2.14
AMENDMENT NO. 1
AMENDMENT NO. 1, dated as of January 20, 1998, to the Agreement and
Plan of Reorganization, dated as of December 23, 1997 (the "Plan"), by and
amoung Micro Focus Group PLC, XDB Systems, Inc., Dr. S. Bing Yao and Lien Yao.
The parties to the Plan hereby agree as follows:
1. Amendments. The Plan is hereby amended as follows:
1.1. Section 1.1.2 of the Plan is amended by replacing, in the
first line of the second paragraph thereof, the amount $13,355,000 with the
amount $13,055,000.
1.2. Section 1.3 of the Plan is amended to read in its entirely
as follows:
"1.3. Escrow Agreement. Pursuant to the Escrow Agreement, on the
Closing Date, Parent will (i) withhold, pro rata, from the shares of Parent
Stock that would otherwise be delivered to the Shareholders a number of shares
equal to 10% of the total number of shares of Parent Stock issued to them in the
Merger and (ii) deposit or cause to be deposited in escrow certificates
representing the shares thus withheld. The shares of Parent Stock withheld
pursuant to this Section 1.3 ("Escrow Shares") will be held solely as collateral
for the indemnification obligations of the Shareholders under Section 10.2.1,
pursuant to the Escrow Agreement."
1.3. Section 10.1 of the Plan is amended to replace the words
"Company Tax Exposure" in the fifth line thereof with the following: "the
potential Company tax liabilities described in Exhibit 1.3 (the "Company Tax
Exposure").
2. Reaffirmation. The Plan, as amended hereby, is and shall continue to
be in full force and effect and is hereby in all respects reaffirmed, remade and
ratified.
IN WITNESS WHEREOF, the parties have executed this Amendment
No. 1 as of the date first above written.
MICRO FOCUS GROUP PLC SHAREHOLDERS
By: /s/ Martin Waters /s/ S. Bing Yao
---------------------- --------------------
Name: Martin Waters Dr. S. Bing Yao
Title: President and CEO
XDB SYSTEMS, INC.
By: /s/ S. Bing Yao /s/ Lien Yao
----------------------- --------------------
Name: S. Bing Yao Lien Yao
Title: Chairman of the Board
<PAGE> 1
EXHIBIT 13.01
[PAGES 16-36]
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 23 to 36 of this report.
<TABLE>
<CAPTION>
.......................................................................................................................
(In thousands of U.S. dollars -
except per share and ADS data, percentages and employees)
Years ended January 31, 1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Net revenue 167,309 123,227 134,784 151,012 137,164
Non-recurring items (note 2 below) - (8,670) (9,469) (18,265) -
Income (loss) before income taxes 21,841 (13,972) (11,245) 3,757 35,801
Net income (loss) 14,633 (14,690) (11,156) (3,507) 24,015
Net income (loss) per share:
Basic $0.19 ($0.19) ($0.14) ($0.05) $0.33
Diluted $0.18 ($0.19) ($0.14) ($0.05) $0.32
Basic - per ADS (note 3 below) $0.93 ($0.95) ($0.72) ($0.23) $1.65
Diluted - per ADS: (note 3 below) $0.89 ($0.94) ($0.72) ($0.23) $1.61
Weighted average number of shares outstanding, in thousands
Basic 78,735 77,675 77,395 75,420 72,830
Diluted 82,635 78,060 77,395 75,420 74,565
Basic - ADS equivalent 15,747 15,535 15,479 15,084 14,566
Diluted - ADS equivalent 16,527 15,612 15,479 15,084 14,913
Financial Position at January 31:
Cash and short-term investments 84,490 75,696 63,857 94,511 92,732
Total assets 200,397 161,870 161,606 197,713 176,335
Long-term obligations 20 24 100 307 605
Shareholders' equity 114,834 92,744 107,275 124,831 120,602
Financial Condition:
Working capital 59,256 44,374 45,761 61,034 75,591
Current ratio 1.78 1.74 1.77 1.96 2.61
Return on net revenue: excluding non-recurring items 8.7% n/a n/a n/a 17.5%
Return on average equity: excluding non-recurring items 14.1% n/a n/a n/a 19.9%
Employee Information:
Average number of employees 805 786 858 871 764
Number of employees at year-end 827 712 831 908 795
Net revenue per employee 208 157 157 173 180
.........................................................................................................................
Notes:
1. Data for all periods presented has been restated to reflect the pooling of
interest accounting in connection with the Company's acquisition of XDB Systems,
Inc. on January 20, 1998 (see note 2 to the consolidated financial statements on
page 30).
2. Details of the non-recurring items are set out in note 5 to the consolidated
financial statements on page 31.
3. Share and per-share data for all periods presented has been restated to
reflect the 5-for-1 stock split which occurred effective as of the close of
business on March 13, 1998 (see note 12 to the consolidated financial statements
on page 35). The Company's American Depository Shares ("ADSs") did not split,
although the conversion rights of such ADSs have been adjusted such that each
ADS represents five ordinary shares. Per share earnings are also shown in the
U.S.format on an ADS equivalent basis, consistent with pre-split reporting.
</TABLE>
16
<PAGE> 2
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" or "the
Company") in U.S. dollars, on pages 23 to 36.
The Company has previously referred to its current fiscal yearending January 31,
1998 as "fiscal year 1997." In the future, the Company will designate each
fiscal year by reference to the calendar year in which the last month of the
fiscal year occurs. Accordingly, the Company's current fiscal year ending
January 31, 1998 is referred to as "fiscal year 1998", "fiscal 1998" and "1998"
in this report, and prior fiscal years are referenced accordingly.
Results of Operations
On January 20, 1998, the Company acquired XDB Systems, Inc.("XDB"). The
transaction was accounted for using the pooling of interests method and
accordingly the Company's financialstatements for all periods have been restated
to include the results of XDB. For further information on the XDB acquisition,
see the sections entitled "Business combinations" on pages 20 and 30.
Micro Focus reported net income for fiscal 1998 of $14.6 million or $0.18 per
share diluted as compared to a net loss of $14.7 million or $0.19 per share in
1997 and a net loss of $11.2 million or $0.14 per share in 1996. Results for the
prior years include non-recurring charges of $8.7 million and $9.5 million in
1997 and 1996, respectively.
The table below sets forth results of operations as a percentage of net revenue
for the three fiscal years ended January 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
........................................................................................................................
Year to year
Percentage of net revenue percentage change
Years ended January 31 1997 1996
1998 1997 1996 to 1998 to 1997
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue
Product revenue 62 58 58 46 (9)
Service revenue 38 42 42 21 (9)
- - -------------------------------------------------------------------------------------------------------------------------
Total net revenue 100 100 100 36 (9)
- - -------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of product revenue 6 7 9 28 (35)
Cost of service revenue 16 16 15 36 (5)
- - -------------------------------------------------------------------------------------------------------------------------
Total cost of revenue 22 23 24 33 (16)
- - -------------------------------------------------------------------------------------------------------------------------
Gross profit 78 77 76 36 (6)
- - -------------------------------------------------------------------------------------------------------------------------
Operating expenses
Research and development 21 31 29 (9) -
Sales and marketing 38 43 43 16 (7)
General and administrative 9 10 8 32 6
Non-recurring items 0 7 7 n/a (8)
- - -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 68 91 87 - (3)
- - -------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 10 (14) (11) n/a 14
Interest income 3 3 3 41 (18)
Interest expense - - - 70 (38)
.........................................................................................................................
Income (loss) before income taxes 13 (11) (8) n/a (24)
Income taxes (4) (1) - n/a n/a
- - -------------------------------------------------------------------------------------------------------------------------
Net income (loss) 9 (12) (8) n/a (32)
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net revenue
Micro Focus derives its net revenue from the license of software products and
related support, maintenance and consulting services ("direct revenue") and from
the licensing of distribution rights to software products to original equipment
manufacturers ("OEM revenue"). Direct revenue represents approximately 90% of
total net revenue.
Net revenue is analyzed between product revenue, which consists of the licensing
of software product to end-users and OEMs, and service revenue, consisting of
maintenance and other support services, including training and consulting.
17
<PAGE> 3
Total net revenue increased by $44.1 million or 36% to $167.3 million in fiscal
1998, having previously decreased by $11.6 million or 9% to $123.2 million in
fiscal 1997. The increase in 1998 reflected initial worldwide sales of the
Company's SoftFactory/2000 and NetExpress products, increased UNIX product sales
and revenue from consulting services. The decrease in revenue in fiscal 1997
arose during the first two quarters with relatively flat sales in comparison to
the third and fourth quarters. Factors contributing to the decline in the first
two quarters of 1997 included slow conversion of theMicro Focus installed base
to 32-bit products and continuing uncertainties arising from the fundamental
changes caused by the Internet. The improved performance in the second half of
1997 reflected increased sales of products to address the "Year 2000" problem.
Product revenue increased by $32.9 million or 46% to $104.0 million in fiscal
1998, having previously decreased by $6.6 million or 9% to $71.1 million in
fiscal 1997. The increase in product licensing revenue in 1998 reflected higher
sales of Year 2000 products, UNIX products, NetExpress and other product lines.
Service revenue increased by $11.2 million or 21% to $63.3 million in fiscal
1998, having previously decreased by $4.9 million or 9% to $52.1 million in
fiscal 1997. The increase in service revenue in 1998 resulted from increased
software maintenance revenue and from consulting revenue.
Net revenue by customer location was contributed as follows:
- - --------------------------------------------------------------------------------
Fiscal years: 1998 1997 1996
- - --------------------------------------------------------------------------------
United States 51% 54% 57%
United Kingdom 12% 10% 10%
Other 37% 36% 33%
- - --------------------------------------------------------------------------------
100% 100% 100%
- - --------------------------------------------------------------------------------
In fiscal 1998, U.S. revenue increased by 38% over 1997. Revenue from non-U.S.
territories increased by 34% over 1997.
In fiscal 1997, U.S. revenue decreased by 7%, while non-U.S. territories showed
a 3% increase, with growth in the United Kingdom, France and Japan being
partially offset by decreased sales to certain distributors, notably in Italy
and
Brazil.
There can be no assurance that the market for the Company's products will grow
in future periods at its historical rate of growth, that certain segments will
not decline, or that the Company will be able to increase or maintain its market
share in the future or achieve its historical revenue growth rates.
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.
Such costs increased by $2.2 million or 28% to $10.3 million in fiscal 1998,
having previously decreased by $4.3 million in fiscal 1997 and represented 10%,
11% and 16% of product revenue in 1998, 1997 and 1996, respectively. Decreases
in product costs as a percentage of product revenue principally reflected
savings in product materials arising from the documentation being supplied on
CD-ROM.
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.
Such costs increased by $7.0 million or 36% to $26.6 million in fiscal 1998,
having previously decreased by $1.1 million in fiscal 1997 and represented 42%,
38% and 36% of service revenue in 1998, 1997 and 1996, respectively. The
increase in such costs in 1998 arose mainly from the expansion of the consulting
organization, including the acquisition of Millennium UK Limited ("Millennium").
For further information on the Millennium acquisition, see the sections entitled
"Business combinations" on pages 20 and 30.
The decrease in 1997 reflected reductions taken to better align expenses with
revenue.
Gross profit
Gross profit represented 78%, 77% and 76% of net revenue in 1998, 1997 and 1996,
respectively. The improvement primarily reflected proportionately higher product
sales which carry higher margins and savings attributable to the
replacement of printed software documentation with electronic versions.
The Company's gross margin can be affected by a number of factors, including
changes in product or distribution channel mix, the mix of product and service
revenue, and competitive pressures on pricing. Gross margin is also dependent on
discounts selectively provided to customers in competitive sales situations. In
addition, gross margin may be adversely affected by expansion of the Company's
consulting organization and the to deploy its capacity to revenue generating
projects. As a result of the above factors, gross margin fluctuations are
difficult to predict, and gross margins may decline from current levels in
future periods.
18
<PAGE> 4
Research and development
Research and development costs consist principally of compensation for software
developers and related costs incurred, after adjusting for the proportion of
such costs capitalized (in accordance with Statement of Financial Accounting
Standard No. 86) and the amortization of previously capitalized software costs.
Research and development spending supports the development and enhancement of
new and existing products and is consistent with the Company's strategy of
investing heavily to improve and expand its product lines.
Research and development spending in fiscal 1998 was directed principally
towards further development of SoftFactory/2000 products which address the Year
2000 problem; NetExpress, 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 COBOL Workbench product line for workstation development of
IBM mainframe applications.
Research and development spending in 1997 and 1996 was directed towards
SoftFactory/2000 and NetExpress, 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 $2.5 million or 7% to $31.6 million in fiscal 1998,
and by $6.2 million or 15% to $34.1 million in 1997 and represented 19%, 28% and
30% of net revenue in fiscal 1998, 1997 and 1996, respectively. The decrease in
research and development costs reflects a lower relative cost structure
following last year's restructuring of operations.
In fiscal 1998, 1997 and 1996, $9.3 million, $8.3 million and $15.6 million,
representing 29%, 24% and 39%, respectively, of these costs, were capitalized as
software product assets. Provisions for amortization in those years, excluding
non-recurring items, amounted to $12.7 million, $12.7 million and $13.9 million,
resulting in a net charge to income in 1998 of $3.4 million, compared to $4.4
million in fiscal 1997 and a net credit of $1.7 million in 1996.
The Company believes that ongoing development of new products and features is
required to maintain and enhance its competitive position. Accordingly, while
the Company will continue to control expenses where possible, the Company
anticipates that aggregate research and development expenses will increase over
time, and may not be directly related to the level of revenue realized in future
quarters.
Sales and marketing
Sales and marketing costs include compensation, travel and facility costs for
sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows.
Such costs increased by $8.7 million or 16% to $62.2 million in fiscal 1998,
having previously decreased by $4.0 million or 7% to $53.5 million in fiscal
1997, and represented 38%, 43% and 43% of revenue in 1998, 1997 and 1996,
respectively. The increase in sales and marketing costs reflected sales force
expansion, higher commissions and higher advertising and marketing expenses,
including those associated with new product launches. The decrease in fiscal
1997 reflected the worldwide cost reduction initiatives implemented in the first
quarter of that year.
The Company believes that continued investments in sales, marketing, customer
support and promotional activities are essential to maintaining its competitive
position. The Company is expanding its sales and support staffs and,
accordingly, anticipates that aggregate sales and marketing expenses will be
higher in future periods, but as a function of revenue will remain about the
same.
General and administrative
General and administrative costs include the corporate management, finance,
legal and human resources operations of Micro Focus.
Such costs increased by $3.7 million or 32% to $15.6 million in fiscal 1998, and
by $0.7 million or 6% to $11.8 million in fiscal 1997 and represented 9%, 10%
and 8% of revenue in 1998, 1997 and 1996, respectively. The increase in fiscal
1998 reflected higher bonus accruals, staff additions and related recruitment
expenses, goodwill amortization arising from the acquisition of Millennium UK
Limited and costs incurred in connection with the acquisition of XDB Systems,
Inc. The increase in 1997 resulted principally from the strengthening of the
Micro Focus management team.
The Company is investing to strengthen its infrastructure and anticipates that
aggregate general and administrative expenses will increase in future quarters,
but decrease as a percentage of revenue.
Non-recurring items
No non-recurring items were separately reported in fiscal 1998.
In fiscal 1997, Micro Focus incurred restructuring charges of $8.7 million.
These charges consisted of the costs associated with a reduction in the
Company's workforce of approximately 95 people, facility closures and
consolidations, and asset write-downs.
Non-recurring items recorded in 1996 consisted of a charge of $10.5 million for
restructuring and a credit of $1.0 million in respect of an employer loan to the
Micro Focus Group Employee Benefit Trust 1994. Restructuring costs of $5.0
million incurred in the first quarter of 1996 principally related to 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 $5.5 million,
booked in the fourth quarter of 1996, reflected a reduction in the carrying
values of software product assets in line with future revenue expectations from
certain products.
19
<PAGE> 5
Interest income
Interest earned on cash and short-term investments increased by $1.3 million or
41% to $4.4 million in fiscal 1998, having previously decreased by $0.7 million
or 18% to $3.1 million in fiscal 1997 and represented 3% of net revenue in each
of the last three years. The increase in fiscal 1998 reflected higher average
cash balances and higher investment yields resulting from the investment of
funds in money market instruments instead of bank certificates of deposit. The
decrease in 1997 reflected lower average cash balances and, to a lesser degree,
lower interest rates.
Income taxes
The Company's tax rate in fiscal 1998 was 33%, which compares to the statutory
U.K. rate applicable to the Company of 31.3%. The excess principally reflects
the impact of permanent differences between accounting profits and taxable
profits, primarily the amortization of goodwill.
The tax rate in both 1997 and 1996 was significantly affected by the
distribution of taxable profits and losses among the tax jurisdictions in which
the Company operates and by restructuring charges, certain of which were not
deductible for tax purposes.
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 9 to
the consolidated financial statements pages 32 and 33.
Business combinations
During fiscal 1998, Micro Focus completed two acquisitions.
On April 30, 1997, the Company acquired all of the outstanding stock of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, in
exchange for 745,710 ordinary shares in the Company and a cash payment of $3.2
million. Millennium provided consulting and project management services and had
specialized expertise in the estimating, planning and management of Year 2000
compliance projects for large scale systems, as well as development expertise in
Web-based applications. Effective January 31, 1998, Millennium's consulting
services were integrated with the professional services operations of the
Company.
The transaction has been accounted for as a purchase. Accordingly, the excess of
the purchase price over the estimated fair value of the net tangible assets has
been allocated to goodwill, and the net assets and results of operations of
Millennium have been combined with those of Micro Focus as of April 30, 1997 and
for the nine-month period subsequent to April 30, 1997, respectively. Where
appropriate the accounting policies of Millennium have been amended to conform
with those of Micro Focus. The effects of the resulting changes to the financial
statements were not material. The goodwill, which amounted to $6.7 million, is
being amortized primarily over three years. On January 20, 1998, the Company
acquired XDB Systems, Inc ("XDB") in exchange for 1,891,975 ordinary shares in
the Company. XDB, a privately-held corporation based in Maryland, USA, is a
provider of DB2 database development, maintenance and connectivity solutions.
The combination has been accounted for using the pooling of interests method and
accordingly all financial data presented herein has been restated to include the
results of XDB. Where appropriate, the accounting policies of XDB have been
amended to conform with those of Micro Focus. The effects of the resulting
changes to the financial
statements were not material.
In 1996, Micro Focus completed the acquisition of Burl Software Laboratories,
Inc. The transaction was accounted for as a purchase.
Further information on these transactions is given in note 2 to the consolidated
financial statements on page 30.
Risk 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 of the
discussion highlights some of these risks and the possible impact of
these factors on future results from operations.
The factors set forth below as well as statements made elsewhere in this Report
contain certain forward-looking statements that are based on the beliefs of the
Company's management, as well as assumptions made by, and information currently
available to, the Company's management. The Company's actual results,
performance or achievements in fiscal 1999 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, as well as those in the
Letter to Shareholders 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 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 13.
The Company's future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders, 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
20
<PAGE> 6
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 the Company's revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter. Furthermore, the Company'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 of budgetary authorizations.
As a result, the Company has historically experienced lower revenue for the
first quarter of a fiscal year than in the fourth quarter of the prior fiscal
year.
The Company'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 Company's operating results will be below the
expectations of stock market analysts 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. The
Company 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 Companys business, results of operations
and financial condition.
Substantially all of the Company's revenue is currently, and is expected to
continue in the future to be, derived from products and services related to
applications development in the COBOL language. As a result, the Company's
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 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. 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. 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, general market conditions and other factors may have a significant
impact on the market price of the Company's securities. Furthermore, the stock
market has experienced extreme volatility that has particularly affected the
market prices of equity securities of many high technology companies. These
market fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the Company's securities.
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.
21
<PAGE> 7
There can be no assurance that the factors described above will not have an
adverse effect on the Company's future international revenue and expenses.
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 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.
Micro Focus is in the process of reviewing all of its major internal corporate
systems for any potential Year 2000 compliance issues and will take appropriate
corrective action based on the results of such review. In doing so, Micro Focus
does not anticipate that it will incur material operating expenses or be
required to invest heavily in internal system improvements as a result of Year
2000 compliance issues. In addition, Micro Focus believes that the current
versions of its software products are Year 2000 compliant. Notwithstanding the
foregoing, there can be no assurance that the Year 2000 problem will not have an
adverse effect on the Company's business, financial condition or results of
operations, due to external factors relating to the Year 2000 problem which are
not controlled by Micro Focus, but on which Micro Focus may rely with respect to
its business and operations.
Micro Focus completed two significant business combinations during fiscal 1998,
as previously noted. The Company is in the process of integrating the operations
acquired in these transactions with its own. There can be no assurance that the
anticipated benefits of recently concluded business combinations will be
realized. In addition, these acquisitions could require significant additional
management attention. The Company expects to continue growing its business
through acquisitions. If Micro Focus is unsuccessful in integrating and managing
the recently acquired businesses or other businesses it may acquire in the
future, the Company's business, results of operations and financial condition
could be adversely affected in future periods.
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 the Company's net revenue arises in U.S. dollars (approximately
two-thirds in 1998), whereas its costs are incurred approximately equally in
U.S. dollars and other currencies, predominately G.B. pounds. Consequently,
fluctuations in exchange rates, particularly between the U.S. dollar and the
G.B. pound, may have a significant impact on the Company's operating results,
notably when expressed in G.B. pounds.
In 1998 and 1997, fluctuations between the U.S. dollar and the G.B. pound have
not been significant, and net exchange rate gains or losses on operational
transactions have been immaterial.
Liquidity and capital resources
Micro Focus continues to fund its activities through cash from operations. In
1998, cash provided by operating activities was $31.1 million (1997: $22.8
million).
In 1998, Micro Focus invested $13.8 million (1997: $4.2 million) in property,
plant and equipment and $9.3 million (1997: $8.3 million) in software product
assets. Investment in 1998 included $4.3 million in connection with the
relocation of the Company to new U.S. facilities in Mountain View, California
and Wayne, Pennsylvania, and $5.1 million for communications and enterprise
systems. In 1998, the Company also paid $3.2 million in cash in connection with
the acquisition of Millennium.
Net of these expenditures, cash and short-term investments increased by $8.8
million to $84.5 million (1997: increased by $10.4 million to $75.7 million).
The Company has in place a line of credit under the terms of which unsecured
financing of up to $8.0 million is available until January 2001. At January 31,
1998, borrowings totalling $1.7 million had been made against this line of
credit (1997: $0).
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.
The Company believes that existing cash balances, in combination with internally
generated funds and its available bank lines of credit, will be more than
sufficient to meet cash requirements in fiscal 1999.
22
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME (US FORMAT)
<TABLE>
<CAPTION>
.................................................................................................................
(In thousands of U.S. dollars -
except share and per share data)
Years ended January 31, 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue
Product revenue $104,041 $71,115 $77,725
Service revenue 63,268 52,112 57,059
- - ------------------------------------------------------------------------------------------------------------------
Total net revenue 167,309 123,227 134,784
- - ------------------------------------------------------------------------------------------------------------------
Cost of revenue
Cost of product revenue 10,309 8,075 12,416
Cost of service revenue 26,593 19,586 20,642
- - -------------------------------------------------------------------------------------------------------------------
Total cost of revenue 36,902 27,661 33,058
- - -------------------------------------------------------------------------------------------------------------------
Gross profit 130,407 95,566 101,726
- - -------------------------------------------------------------------------------------------------------------------
Operating expenses
Research and development (note 4) 35,040 38,556 38,573
Sales and marketing 62,214 53,519 57,494
General and administrative 15,559 11,814 11,102
Non recurring items (note 5) - 8,670 9,469
- - -------------------------------------------------------------------------------------------------------------------
Total operating expenses 112,813 112,559 116,638
- - -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 17,594 (16,993) (14,912)
Interest income 4,370 3,094 3,784
Interest expense (123) (73) (117)
- - -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 21,841 (13,972) (11,245)
Income taxes (note 9) (7,208) (718) 89
- - -------------------------------------------------------------------------------------------------------------------
Net income (loss) $14,633 ($14,690) ($11,156)
- - -------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic (note below) $0.19 ($0.19) ($0.14)
Net income (loss) per ADS - basic $0.93 ($0.95) ($0.72)
..................................................................................................................
Weighted average number of shares outstanding -
basic (thousands) 78,735 77,675 77,395
Shares converted to ADS equivalent 15,747 15,535 15,479
- - -------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - diluted (note below) $0.18 ($0.19) ($0.14)
Net income (loss) per ADS - diluted $0.89 ($0.94) ($0.72)
...................................................................................................................
Weighted average number of shares outstanding -
diluted (thousands) 82,635 78,060 77,395
Shares converted to ADS equivalent 16,473 15,612 15,479
- - -------------------------------------------------------------------------------------------------------------------
Note:
Shares and per share data for all periods presented has been restated to reflect
the 5-for-1 stock split of the Company's ordinary shares, which was effective as
of the close of business on March 13, 1998 (see note 12 to the consolidated
financial statements on page 35). The Company's American Depository Shares
("ADSs") did not split, although the conversion rights of such ADSs have been
adjusted such that each ADS represents five ordinary shares. Per share earnings
are also shown sin the U.S.format on an ADS equivalent basis, consistent with
pre-split reporting.
See accompanying notes to consolidated financial statements on pages 27 to 36.
</TABLE>
23
<PAGE> 9
CONSOLIDATED BALANCE SHEETS (US FORMAT)
<TABLE>
<CAPTION>
..................................................................................................................
(In thousands of U.S. dollars -
except per share data January 31, January 31,
1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $48,174 $73,119
Short-term investments 36,316 2,577
Accounts receivable, net of allowances for doubtful accounts
of $2,499 ($1,731 in 1997) 47,798 22,390
Inventories 519 774
Prepaid expenses and other assets 2,833 5,870
- - -------------------------------------------------------------------------------------------------------------------
Total current assets 135,640 104,730
- - -------------------------------------------------------------------------------------------------------------------
Fixed assets:
Property, plant and equipment, net (note 6) 39,083 33,796
Goodwill, net of accumulated amortization of $1,391 ($nil in 1997) 5,346 0
Software product assets, net of accumulated amortization of $108,871 ($95,402 in 1997) 20,328 23,344
- - -------------------------------------------------------------------------------------------------------------------
Total assets $200,397 $161,870
- - -------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Bank loan $1,652 $1,500
Accounts payable 6,957 5,732
Product and royalties payable 1,386 963
Accrued employee compensation and commissions 12,383 5,811
Accrued payroll taxes 1,142 838
Income taxes payable 10,459 4,142
Deferred revenue 32,848 31,155
Other current liabilities 9,557 10,215
- - -------------------------------------------------------------------------------------------------------------------
Total current liabilities 76,384 60,356
- - -------------------------------------------------------------------------------------------------------------------
Long term debt and other liabilities 20 24
Deferred income taxes (note 9) 9,159 8,746
- - -------------------------------------------------------------------------------------------------------------------
Total liabilities 85,563 69,126
- - -------------------------------------------------------------------------------------------------------------------
Commitments (note 8)
Shareholders' equity:
Ordinary shares: 2 pence (G.B.) par value 112,500,000 shares authorized,
79,417,000 shares issued and outstanding (75,840,000 in 1997) $2,508 $2,452
Additional paid-in capital 33,362 27,468
Unrealised gain (loss) on available-for-sale securities, net of tax 44 (90)
Treasury stock (7,769) (8,959)
Retained earnings 89,019 74,386
Currency translation adjustment (2,330) (2,513)
- - -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 114,834 92,744
- - -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $200,397 $161,870
- - -------------------------------------------------------------------------------------------------------------------
Note: Share data for all periods presented has been restated to reflect the
5-for-1 stock split of the Company's ordinary shares, which was effective as of
the close of business on March 13, 1998 (see note 12 to the consolidated
financial statements on page 35). The Company's American Depository Shares
(""ADSs"") did not split, although the conversion rights of such ADSs have been
adjusted such that each ADS represents five ordinary shares.
See accompanying notes to consolidated financial statements on pages 27 to 36.
</TABLE>
24
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOW (US FORMAT)
<TABLE>
<CAPTION>
.......................................................................................................................
(In thousands of U.S. dollars) Years ended January 31, 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $14,633 ($14,690) ($11,156)
Adjustments to reconcile net income (loss) to cash provided by operations
Depreciation of fixed assets 7,706 9,410 10,290
Amortization of software product assets 12,716 12,690 19,862
Amortization of goodwill 1,391 0 0
Loss on sale of fixed assets 207 504 237
Deferred income taxes 1,846 (1,622)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (26,506) 13,691 4,339
Decrease in inventories 247 1,895 185
(Increase) decrease in prepaid expenses and other assets 2,955 1,011 149
Increase (decrease) in accounts payable 1,607 (2,560) 1,002
Increase (decrease) in product royalties payable 1,034 (18) 312
Increase (decrease) in accrued employee compensation 6,581 (890) (908)
Increase (decrease) in accrued payroll taxes 381 158 (105)
Increase (decrease) in income taxes payable 6,219 (2,204) (4,786)
Increase (decrease) in deferred revenue 2,000 (1,481) (3,709)
(Decrease)increase in other current liabilities (49) 3,413 (1,117)
- - -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,122 22,775 12,973
- - -------------------------------------------------------------------------------------------------------------------------
Investing activities
Purchases of property, plant and equipment, net of capital lease (13,782) (4,235) (14,065)
obligations incurred
Software product assets (9,321) (8,261) (15,989)
Own shares 1,190 0 (7,954)
Acquisition of subsidiary, net of cash balances acquired (3,437) 0 0
Settlement of deferred purchase consideration 0 0 (6,252)
Disposals of property, plant and equipment 570 916 478
Short-term investments (33,639) 1,654 1,056
- - -------------------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (58,419) (9,926) (42,726)
- - -------------------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of ordinary shares, net of expenses 2,439 215 446
Borrowings 152 1,500 0
Repayment of capital leases (73) (233) (467)
- - -------------------------------------------------------------------------------------------------------------------------
Net cash (used) by financing activities 2,518 1,482 (21)
- - -------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (166) (687) (117)
(Decrease) increase in cash (24,945) 13,644 (29,891)
Cash at beginning of year 73,119 59,475 89,366
- - -------------------------------------------------------------------------------------------------------------------------
Cash at end of year $48,174 $73,119 $59,475
- - -------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Income taxes paid during the year $817 $1,022 $6,460
Interest paid during the year 87 72 172
See accompanying notes to consolidated financial statements on pages 27 to 36.
</TABLE>
25
<PAGE> 11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (US FORMAT)
<TABLE>
<CAPTION>
....................................................................................................................................
Unrealized
Ordinary Additional gain on Deferred Currency
(In thousands) Number shares pain-in marketable Treasury purchase Retained translation
of shares amount capital securities stock consideration earnings adjustment Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1995 73,710 $2,323 $19,549 ($311) - $5,311 $100,232 ($2,412) $124,692
Share options exercised 575 19 474 - - - - - 493
Agreed acquisition of Burl 3,325 107 7,234 - - (5,311) - - 2,030
Unrealized gain on marketable
securities, net of taxes - - - 313 - - 313 - -
Treasury stock - - - - (8,959) - - - (8,959)
Net loss - - - - - - (11,156) - (11,156)
Currency translation adjustment - - - - - - - (1,370) (1,370)
....................................................................................................................................
BALANCE, JANUARY 31, 1996 77,610 2,449 27,257 2 8,959) - 89,076 (3,782) 106,043
Share options exercised 120 3 211 - - - - - 214
Unrealized loss on marketable
securities, net of taxes - - - - (92) - - - (92)
Net loss - - - - - - (14,690) - (14,690)
Currency translation adjustment - - - - - - - 1,269 1,269
....................................................................................................................................
BALANCE, JANUARY 31, 1997 77,730 2,452 27,468 (90) (8,959) - 74,386 (2,513) 92,744
Share options exercised 941 31 2,408 - 1,190 - - - 3,629
Issued for acquisitions 746 25 3,486 - - - - - 3,511
Unrealized gain on marketable
securities, net of taxes - - - 134 - - - - 134
Net income - - - - - 14,633 - 14,633
Currency translation adjustment - - - - - - - 183 183
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1998 79,417 $2,508 $33,362 $44 ($7,769) $- $89,019 ($2,330) $114,834
- - ------------------------------------------------------------------------------------------------------------------------------------
Note: Share data for all periods presented has been restated to reflect the
5-for-1 stock split of the Company's ordinary shares, which was effective as of
the close of business on March 13,1998 (see note 12 to the consolidated
financial statements on page 35). The Company's American Depository Shares
("ADSs") did not split, although the conversion rights of such ADSs have been
adjusted such that each ADS represents five ordinary shares.
See accompanying notes to consolidated financial statements on pages 27 to 36.
</TABLE>
26
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US FORMAT)
The statutory financial statements of Micro Focus Group Plc, within the meaning
of section 240 of the Companies Act 1985 of Great Britain, for the year ended
January 31, 1998 are contained on pages 51 to 67.
The Company has previously referred to its current fiscal year ending January
31, 1998 as "fiscal year 1997." In the future, the Company will designate each
fiscal year by reference to the calendar year in which the last month of the
fiscal year occurs. Accordingly, the Company's current fiscal year ending
January 31, 1998 is referred to as "fiscal year 1998", "fiscal 1998" and "1998"
in this report, and prior fiscal years are also referenced accordingly.
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 57 is italicised 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 50% of revenue.
Approximately 30% of revenue is derived from customers in Europe and
approximately 20% is earned in the rest of the world.
Principles of consolidation
The consolidated financial statements are those of the Company and all of its
subsidiaries. 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.
As more fully described in Note 2, on January 20, 1998, the Company acquired XDB
Systems, Inc. ("XDB"). The transaction was accounted for using the pooling of
interests method and accordingly all financial data presented herein includes
the results of XDB. All significant inter-company balances and transactions have
been eliminated on consolidation.
The Company has revised the presentation of its income statement to show gross
profit by segregating direct costs of revenue from operating costs. This
revision does not affect the results of operations of the Company.
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Revenue recognition
Net revenue represents the amounts derived from the provision of goods and
services which fall within the Company's ordinary activities, stated net of
applicable sales taxes.
Revenue from licensing software packaged products to end users and resellers is
recognized on delivery, provided that no significant vendor obligations exist
and collection of the resulting receivable is deemed probable.
Revenue from sales to original equipment manufacturers ("OEM's") 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; (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".
27
<PAGE> 13
Software licensed for inclusion in the Micro Focus product set, including
software acquired through acquisitions which meets the provisions for
capitalization under SFAS 86, is also included in software product assets.
During the years ended January 31, 1998, 1997 and 1996 purchased software
totaling $0, $0 and $350,000, respectively, was added to software product
assets.
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 a shortfall in future revenue from a product is anticipated,
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 a potential impairment of goodwill,
based on cash flow projections of the businesses acquired, amortization is
accelerated.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization is computed using the
straight-line method over estimated economic lives from the time the asset is
put into use. Present estimated economic lives are as follows:
Office buildings 40 years
Leasehold improvements over the lease term
Computer equipment 3 - 5 years
Office equipment 7 years
Transportation equipment 3 - 4 years
Leasing
Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are 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 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 temporary 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 and cash equivalents include cash placed on short-term deposit and
short-term money market instruments where the
maturity date is less than three months from the initial date of deposit.
In accordance with SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities," the appropriate classification of debt securities is
determined at the time of purchase and re-evaluated at each balance sheet date.
Debt securities that the Company has the intent and the ability to hold until
maturity are classified as held-to-maturity, and all other debt securities are
classified as available-for-sale.
28
<PAGE> 14
Short-term investments represents cash placed on deposit where the maturity date
exceeds three months from the initial date of deposit.
Other financial instruments
The Company enters into forward foreign currency contracts to hedge the value of
assets and liabilities recorded in
foreign currencies against fluctuations in exchange rates.
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, 1998, 1997 and 1996 were $1 = GBP
0.610, $1 = GBP 0.625 and $1 = GBP 0.662, respectively. Revenue, costs and
expenses are translated using average rates. Monthly average U.S. dollar to G.B.
pound rates used during fiscal 1998 range between $1 = GBP 0.599 and $1 = GBP
0.625, and average $1 = GBP 0.611, $1 = GBP 0.633 and $1 = GBP 0.634 in fiscal
1998, 1997 and 1996, respectively. Translation adjustments resulting from the
process of translating financial statements denominated in currencies other than
U.S. dollars are dealt with separately in shareholders' equity.
Net income (loss)/per share
Net income (loss) per share is computed in accordance with SFAS 128 "Earnings
per Share" which is required to be adopted in financial statements for periods
ending on or after December 15, 1997. Accordingly, net income (loss) per share
is disclosed in accordance with SFAS 128 for all periods presented.
Basic net income (loss) per share is based on net income (loss) and on the
weighted average number of ordinary shares outstanding during the period.
Diluted net income per share is based on net income 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 1996 and 1997, common stock equivalents were antidilutive and
therefore excluded from the computation.
Shares and per share data for all periods presented has been restated to reflect
the 5-for-1 Stock Split (see note 12 on page 35). The Company's American
Depository Shares ("ADSs") did not split, although the conversion rights of such
ADSs have been adjusted such that each ADS represents five ordinary shares. Per
share earnings are also shown in the U.S.format on an ADS equivalent basis,
consistent with pre-split reporting.
Pro-forma net income (loss) per share calculated on the fair-value-based method
is disclosed in accordance with SFAS 123 "Accounting for Stock Based
Compensation" (see "Stock based compensation" below).
Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of short-term investments, foreign exchange
contracts 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. The
counterparties to the agreements relating to the Company's foreign exchange
contracts are financial institutions of high credit standing. Concentrations of
credit risk with respect to trade receivables are limited due to the large,
widespread customer base which encompasses many different industries and
countries. No single customer represented more than 5% of Micro Focus' revenue
in 1998, 1997 and 1996.
Other risks and uncertainties
The Company amortizes 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 the capitalized software costs may be
reduced.
Stock based compensation
The Company adopted SFAS 123 "Accounting for Stock-Based Compensation" in fiscal
1997. As permitted by SFAS 123, the Company continues to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25 "Accounting for Stock Options
Issued to Employees", and accordingly, since all options are granted with an
exercise price equal to the fair value of the shares at the date of grant,
recognizes no compensation expense for share option grants.
Pro-forma disclosures of net income (loss) and net income (loss) per share
computed as if the fair-value-based method prescribed by SFAS 123 had been
applied are provided in Note 11.
Advertising costs
Advertising costs are charged to operations when incurred. Advertising expense,
which includes media, agency and promotional expenses, amounted to $2,086,000,
$5,897,000 and $7,097,000 in fiscal 1998, 1997 and 1996, respectively.
29
<PAGE> 15
Other recent pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS 130
"Reporting Comprehensive Income" and SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information". In October 1997, the American Institute of
Certified Public Accountants issued Statement of Position 97-2 "Software Revenue
Recognition". All of these statements are effective for fiscal years beginning
after December 15, 1997. The Company will comply with the requirements of these
statements in fiscal 1999. The future adoption of these statements is not
expected to have a material effect on the Company's results from operations or
financial position.
Note 2 Business combinations
During fiscal 1998, Micro Focus completed two acquisitions.
On April 30, 1997, the Company acquired all of the outstanding stock of
Millennium UK Limited ("Millennium"), a privately-held consulting firm, for a
total consideration of $6,400,000, satisfied by a cash payment of $3,200,000 and
the issuance of 149,142 ordinary shares of the Company (equivalent to 745,710
ordinary shares following the Stock Split - see note 12 on page 35). Millennium
provided specialised consulting and project management services.
The transaction has been accounted for as a purchase. Accordingly, the excess of
the purchase price over the estimated fair value of the net tangible assets has
been allocated to goodwill, and the net assets and results of operations of
Millennium have been combined with those of Micro Focus as of April 30, 1997 and
for the nine-month period subsequent to April 30, 1997, respectively. Where
appropriate, the accounting policies of Millennium have been amended to conform
with those of Micro Focus. The effects of the resulting changes to the financial
statements were not material. The goodwill, which amounted to $6,737,000, is
being amortised primarily over three years.
The following table presents pro forma information on the results of operations
as though the acquisition had occurred at the beginning of the periods shown:
- - --------------------------------------------------------------------------------
(in thousands) 1998 1997
- - --------------------------------------------------------------------------------
Net revenue $168,462 $124,885
Income (loss) before income taxes 21,795 (14,334)
Net income (loss) 14,602 (15,052)
Net income per share (diluted) $0.19 ($0.19)
Net income per share (basic) $0.18 ($0.19)
- - --------------------------------------------------------------------------------
On January 20, 1998, the Company acquired all of the outstanding stock of XDB
Systems, Inc. ("XDB") in exchange for 378,395 ordinary shares of the Company
(equivalent to 1,891,975 ordinary shares following the Stock Split) which
represented a value of $14,243,000 on the date the merger was completed. XDB, a
privately-held corporation based in Maryland, USA, is a provider of DB2 database
development, maintenance and connectivity solutions.
The Company incurred charges in the fourth quarter of 1998 of approximately $1.6
million in connection with activities to complete this acquisition. The
combination has been accounted for using the pooling of interests method and
accordingly all financial data presented herein has been restated to include the
results of XDB. The following table sets forth the composition of combined net
revenue and net income (loss) for the periods indicated. Information for 1998
with respect to XDB reflects the period from February 1, 1997 to January 20,
1998, the date XDB was acquired.
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Net revenue:
Micro Focus $159,033 $115,409 $121,956
XDB 9,477 10,042 14,241
Elimination (1,201) (2,224) (1,413)
- - --------------------------------------------------------------------------------
As restated $167,309 $123,227 $134,784
- - --------------------------------------------------------------------------------
Net income (loss):
Micro Focus $15,731 ($10,508) ($10,436)
XDB (1,098) (4,182) (720)
- - --------------------------------------------------------------------------------
As restated $14,633 ($14,690) ($11,156)
- - --------------------------------------------------------------------------------
Where appropriate, the accounting policies of XDB have been amended to conform
with those of Micro Focus. The effects of the resulting changes to the financial
statements were not material.
In fiscal 1996, Micro Focus completed the acquisition of Burl Software
Laboratories, Inc. for a total of $13,500,000 which was satisfied by the payment
of $6,251,000 in cash and the issuance of 664,979 ordinary shares of the Company
(equivalent to 3,324,895 ordinary shares following the Stock Split). The
acquisition was accounted for as a purchase.
30
<PAGE> 16
Note 3 Financial instruments
The Company invests its excess cash in accordance with an investment policy
approved by the Board of Directors and implemented as of the beginning of the
current fiscal year. This policy authorizes investment in U.S. government
securities, municipal bonds, certificates of deposit with highly-rated financial
institutions and other specified money market instruments of similar liquidity
and credit quality.
The Company has determined that all of its investment securities are to be
classified as available-for-sale. Such securities are stated at amounts which
approximate fair value, based on quoted market prices, with the unrealized gains
and losses reported as a separate component of shareholders' equity.
Available-for-sale securities with original maturities of less than three months
are classified as cash equivalents.
Estimated fair values of financial instruments are based on quoted market
prices. The carrying amounts and fair value of the Company's financial
instruments are as follows:
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997
- - --------------------------------------------------------------------------------
Cash $24,773 $73,119
Available for sale securities 59,717 2,577
Forward foreign currency contracts - -
- - --------------------------------------------------------------------------------
Available-for-sale securities are analysed as follows:
................................................................................
Gross
unrealized Estimated
(In thousands) Cost gains(losses) fair value
- - --------------------------------------------------------------------------------
At January 31, 1998:
Money market funds $815 $ - $815
Commercial paper 20,722 10 20,732
Certificates of deposit 7,971 10 7,981
Agency 3,870 5 3,875
Auction rate securities 3,319 - 3,319
Corporates 22,953 42 22,995
- - --------------------------------------------------------------------------------
$59,650 $67 $59,717
- - --------------------------------------------------------------------------------
At January 31, 1997:
Mutual funds $1,912 ($152) 1,760
Bonds 683 3 686
Other 131 - 131
- - --------------------------------------------------------------------------------
$2,726 ($149) $2,577
- - --------------------------------------------------------------------------------
The cost and estimated fair values of available-for-sale securities by
contractual maturity are as follows:
................................................................................
Estimated
(In thousands) Cost fair value
- - --------------------------------------------------------------------------------
At January 31, 1998:
Less than three months $24,498 $23,501
Between 3 - 12 months 25,551 25,558
Over 12 months 10,601 10,658
- - --------------------------------------------------------------------------------
$59,650 $59,717
- - --------------------------------------------------------------------------------
The notional amounts of foreign currency contracts were $4,800,000 and $nil at
January 31, 1998 and January 31, 1997, respectively, and were predominantly to
exchange U.S. dollars for G.B. pounds sterling. Substantially all forward
foreign currency contracts entered into by the Company have maturities of 60
days or less.
Note 4 Research and development costs
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Research and
development costs,
before capitalization $31,645 $34,138 $40,295
Costs capitalized as software
product assets (9,321) (8,272) (15,639)
Amortization of
capitalized costs 12,716 12,690 13,917
- - --------------------------------------------------------------------------------
$35,040 $38,556 $38,573
- - --------------------------------------------------------------------------------
Note 5 Non-recurring items
The Company has reported no non-recurring items in 1998.
Non-recurring items recorded in fiscal 1997 represented charges for
restructuring. The charges consisted of the costs associated with a reduction in
the Company's workforce of approximately 95 people, facility closures and
consolidations, and asset write-downs. All outstanding amounts due under the
restructuring were settled prior to January 31, 1998.
Non-recurring items recorded in fiscal 1996 consisted of a charge of $10,502,000
for restructuring 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 1996 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 1996
were primarily the result of a review into the carrying value of software
product assets.
31
<PAGE> 17
Note 6 Property, plant and equipment
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997
- - --------------------------------------------------------------------------------
Land and buildings $22,679 $21,690
Leasehold improvements 4,228 1,390
Computer and communications
equipment & software 47,239 40,236
Office equipment 8,374 8,346
Transportation equipment 268 727
- - --------------------------------------------------------------------------------
Property, plant and equipment - at cost 82,788 72,389
Less: accumulated depreciation
and amortization (43,705) (38,593)
- - --------------------------------------------------------------------------------
Property, plant and equipment - net $39,083 $33,796
- - --------------------------------------------------------------------------------
The above figures include assets under capital leases as follows:
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997
- - --------------------------------------------------------------------------------
Cost $47 $200
Less: accumulated depreciation
and amortization (33) (105)
- - --------------------------------------------------------------------------------
$14 $95
- - --------------------------------------------------------------------------------
During the years ended January 31, 1998, 1997 and 1996, depreciation expense,
including depreciation on leased assets, totalled $7,706,000, $9,410,000 and
$10,290,000, respectively.
Note 7 Lines of credit
Micro Focus has an unsecured revolving multi-currency loan facility, under the
terms of which financing of up to GBP 5,000,000 ($8,200,000 at January 31, 1998)
or its equivalent in such other currency as the Company may determine, is
available until January 2001. Borrowings under this facility bear interest at
0.75% above the London Interbank Offered Rate ("LIBOR"). Amounts outstanding
against this credit line at January 31, 1998 were the equivalent of $1,652,000
(1997: $nil), drawn in French Francs, and incurring interest at 3.6% per annum.
A second line of credit, negotiated by XDB, expired on June 30, 1997. Under the
terms of the credit line, up to $1,500,000 was available, secured by XDB's
short-term investments. The amount outstanding against this credit line at
January 31, 1997 was $1,500,000; the amount was repaid in full on February 1,
1997.
Note 8 Commitments
The Company leases certain of its facilities and equipment under operating
leases expiring at various dates through 2007. In most cases, it is anticipated
that these leases will be renewed or replaced by other leases in the normal
course of business. The Company also leases transportation equipment under
capital leases. Minimum lease commitments as of January 31, 1998 are as follows:
................................................................................
(In thousands) Capital Operating
Years ended January 31 Leases Leases
- - --------------------------------------------------------------------------------
1999 $60 $6,245
2000 11 3,249
2001 23 2,271
2002 - 2,049
2003 - 2,037
Thereafter - 769
- - --------------------------------------------------------------------------------
Total minimum lease payments 94 16,620
Less: amount representing interest (3) -
Present value of net minimum lease payments $91 -
- - --------------------------------------------------------------------------------
During the years ended January 31, 1998, 1997 and 1996, rent expense totalled
$4,650,000, $4,594,000 and $5,309,000, respectively.
Note 9 Income taxes
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Current: U.K. $5,048 $380 $237
U.S. federal 273 (1,635) 484
U.S. state 209 (242) 58
Other 1,568 369 (230)
- - --------------------------------------------------------------------------------
7,098 (1,128) 549
- - --------------------------------------------------------------------------------
Deferred: U.K. 110 1,489 (235)
U.S. federal - 280 (344)
U.S. state - 77 (59)
110 1,846 (638)
Total: $7,208 $718 ($89)
- - --------------------------------------------------------------------------------
32
<PAGE> 18
Deferred taxes result from timing differences in the recognition of revenue and
expenses for tax and financial statement purposes. The sources of these
differences and the tax effect of each were as follows:
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Software development costs
and other $249 $2,043 ($884)
Depreciation and amortization (139) (197) 246
- - --------------------------------------------------------------------------------
$110 $1,846 (638)
- - --------------------------------------------------------------------------------
The following table analyses the differences between the U.K. statutory tax
rate and the effective tax rate:
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
U.K. statutory tax rate 31.3% 33.0% 33.0%
Tax effect of earnings of
foreign subsidiaries (1.8)% (22.4)% 6.7%
Permanent differences
and other 3.5% (15.7)% (38.9)%
- - --------------------------------------------------------------------------------
Effective tax rate 33.0% (5.1)% 0.8%
- - --------------------------------------------------------------------------------
Deferred income taxes, all of which are non-current, are as follows:
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997
- - --------------------------------------------------------------------------------
Software development costs
and other $9,017 $8,475
Depreciation and amortization 142 271
- - --------------------------------------------------------------------------------
$9,159 $8,746
- - --------------------------------------------------------------------------------
Deferred tax relative to the different tax jurisdictions is as follows:
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997
- - --------------------------------------------------------------------------------
U.K. $10,111 $9,983
U.S. (952) (1,237)
- - --------------------------------------------------------------------------------
$9,159 $8,746
- - --------------------------------------------------------------------------------
The corporate income tax returns of certain U.S. subsidiaries are under
examination by the Internal Revenue Service, which has proposed certain
adjustments. The Company believes that the outcome of the examination will not
give rise to any material adjustment to the financial statements.
Note 10 Business segment information
Micro Focus operates in one business segment - the development and marketing of
computer software products and related services. The following table analyses
worldwide operations by geographical segment, based on the location of Micro
Focus facilities.
- - --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Revenue:
United States $100,699 $75,203 $89,839
United Kingdom 72,562 55,701 56,158
Europe (excluding U.K.) 39,612 33,849 32,734
Other 12,869 3,205 2,251
- - --------------------------------------------------------------------------------
225,742 $167,958 180,982
- - --------------------------------------------------------------------------------
Inter-segment revenue:
United States (8,612) (8,288) (9,647)
United Kingdom (34,567) (25,265) (26,372)
Europe (excluding U.K.) (14,904) (10,331) (8,715)
Other (350) (847) (1,464)
- - --------------------------------------------------------------------------------
Total net revenue 167,309 123,227 134,784
- - --------------------------------------------------------------------------------
Income (loss) from operations:
United States (671) (12,374) (7,229)
United Kingdom 7,957 (4,704) 1,606
Europe (excluding U.K.) 1,577 (580) (8,568)
Other 8,731 665 (721)
- - --------------------------------------------------------------------------------
17,594 (16,993) (14,912)
- - --------------------------------------------------------------------------------
Total assets:
United States 48,855 26,622 45,674
United Kingdom 69,574 71,578 61,694
Europe (excluding U.K.) 70,331 62,969 63,915
Other 11,637 701 798
- - --------------------------------------------------------------------------------
$200,397 $161,870 $172,081
- - --------------------------------------------------------------------------------
Inter-segment revenue principally represents license fees and sub-contracted
development charges between locations.
33
<PAGE> 19
Note 11 Employee share and retirement plans
Share option plans
All references to shares and options within this note have been adjusted for the
Stock Split - see note 12 below.
The Company's share option plans provide for the grant of options to acquire
shares to persons who devote substantially all their working time to Micro Focus
and such other eligible persons as the Board may determine. The exercise price
of options issued under these plans is 100% of the fair market value at the time
such options are granted. Options are generally exercisable in five equal
cumulative annual installments commencing one year after the date of grant.
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 1996 Share Option Plan was approved by shareholders in June 1996 and
authorised the Company to grant options up to a maximum of 3,786,845 shares
(representing 5% of the issued share capital of the Company at that time); such
authority will expire on June 18, 1999. Prior to 1996, authority to grant
options under similar terms had been granted pursuant to the 1991 Share Option
Plan and the 1983-1984 Share Option Plan. Such authorities expired in 1996 and
1991, respectively. At January 31, 1998, 8,437,900 option shares were issued and
outstanding under the plans, and a further 1,596,265 which had been approved for
grant by shareholders under the 1996 Share Option Plan were currently unissued.
In 1994, the Micro Focus Group Employee Benefit Trust 1994 ("the Trust") was
established 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 for those shares to directors and employees. At January 31, 1998, MFTL
owned 3,968,565 shares, and options granted by MFTL to purchase up to 3,171,225
of these shares were outstanding. Options which had been granted for an
additional 110,000 shares prior to their acquisition by MFTL also remained
outstanding. The remaining 526,100 option shares were available for future
grant. The shares held by the Trust are shown in the balance sheet as treasury
stock within shareholders' equity.
Pursuant to the agreement to acquire XDB Systems, Inc. ("XDB"), the Company
assumed XDB's 1992 Share Option Plan and 1996 Share Option Plan. Under the
agreement, holders of XDB options are entitled to exercise their options in
return for ordinary shares in the Company. At January 20, 1998, the date of the
merger, XDB option holders held 200,210 option shares in the Company at prices
between $1.59 and $7.41 and denominated in U.S. dollars. At January 31, 1998,
150,280 of these option shares remained outstanding.
Share option activity under the plans was as follows:
- - --------------------------------------------------------------------------------
Number Option price per
of shares share in G.B.POUNDS
- - --------------------------------------------------------------------------------
Outstanding, January 31, 1995 8,644,370 GBP 0.44-GBP 5.77
Options granted 3,018,975 GBP 1.08-GBP 1.64
Options exercised (574,325) GBP 0.44-GBP 1.08
Options cancelled (795,175) GBP 0.44-GBP 5.77
- - --------------------------------------------------------------------------------
Outstanding, January 31, 1996 10,293,845 GBP 1.08-GBP 5.77
Options granted 11,504,150 GBP 1.17-GBP 1.94
Options exercised (120,780) GBP 1.08-GBP 1.93
Options cancelled (9,202,055) GBP 1.08-GBP 5.77
- - --------------------------------------------------------------------------------
Outstanding, January 31, 1997 12,475,160 GBP 1.08-GBP 4.32
Options granted 6,622,725 GBP 0.97-GBP 4.52
Options exercised (1,553,705) GBP 1.08-GBP 3.70
Options cancelled (5,674,775) GBP 0.97-GBP 4.52
- - --------------------------------------------------------------------------------
Outstanding, January 31, 1998 11,869,405 GBP 0.97-GBP 4.52
- - --------------------------------------------------------------------------------
The total of 11,869,405 option shares outstanding at January 31, 1998 is
represented by 8,588,180 unissued shares (8,437,900 granted under the Micro
Focus plans and 150,280 pursuant to the XDB plans) and 3,281,225 issued shares
held by MFTL.
The following tables summarize information about share options outstanding at
January 31, 1998:
Options outstanding:
- - --------------------------------------------------------------------------------
Weighted Weighted
Number average average
outstanding at contractual exercise price
Ranges of exercise prices January 31, 1998 life (months) (G.B.POUNDS)
- - --------------------------------------------------------------------------------
GBP 0.97-GBP 1.50 4,069,680 97 GBP 1.37
GBP 1.51-GBP 2.00 696,800 102 GBP 1.73
GBP 2.00-GBP 4.52 7,102,925 108 GBP 3.43
- - --------------------------------------------------------------------------------
11,869,405 104 GBP 2.62
- - --------------------------------------------------------------------------------
34
<PAGE> 20
Options exercisable:
- - --------------------------------------------------------------------------------
Weighted
Number average
exercisable at exercise price
Ranges of exercise prices January 31, 1998 (G.B.POUNDS)
- - --------------------------------------------------------------------------------
GBP 0.97-GBP 1.50 968,915 GBP 1.33
GBP 1.51-GBP 2.00 158,770 GBP 1.72
GBP 2.00-GBP 4.52 555,380 GBP 3.17
- - --------------------------------------------------------------------------------
1,683,065 GBP 1.97
- - --------------------------------------------------------------------------------
As stated in note 1, the Company has elected to follow APB 25 and related
Interpretations in accounting for its employee share options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires the use of option valuation models that were not developed for use
in valuing employee share options. Under APB 25, because the exercise price of
the Company's options equals the market price of the underlying shares on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123, and has been determined as if the Company had
accounted for employee share options granted since January 31, 1995 under the
fair value method of that statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1998 and 1997: risk-free interest
rate based on Treasury Strip, No Principal from the Wall Street Journal for
maturity of six years, based on the date of grant; dividend yields of 0%;
volatility factors of the expected market price of 0.378; 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 fully
transferable. In addition, the option valuation models require the input of
highly subjective assumptions including the expected share price volatility.
Because the Company's options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net income and diluted net income per share in 1998 was $12,525,000 and
$0.19, respectively, pro forma net loss and net loss per share in 1997 was
$15,961,000 and $0.20, respectively, and pro forma net loss and net loss per
share in 1996 was $11,359,000 and $0.14, respectively. The effects on pro forma
disclosures of applying SFAS 123 are not likely to be representative of such
effects in future years since SFAS 123 is applicable only to options granted
since January 31, 1995. The effect will not be fully reflected in the pro forma
disclosures until 2001.
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, 1998, 1997 and 1996, contributions totalling
$755,000, $779,000 and $1,020,000, respectively, have been expensed.
Note 12 Subsequent event - stock split
On March 12, 1998, shareholders approved a 5-for-1 sub-division of the Company's
ordinary shares. The sub-division became effective as of the close of business
on Friday, March 13, 1998, and unless otherwise stated, all data presented in
these financial statements has been restated to reflect the sub-division. The
Company's American Depository Shares ("ADSs"), which are traded on the Nasdaq
Stock Market in the United States, did not split, although the conversion rights
of such ADSs have been adjusted such that each ADS now represents 5 ordinary
shares.
35
<PAGE> 21
Note 13 Quarterly financial information (unaudited)
Quarterly financial information for the two years ended January 31, 1998 is as
follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------
(In thousands - except per share and ADS data)
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 31, 1998:
Net revenue 32,533 39,178 43,612 51,986 167,309
Operating income 2,531 2,807 5,303 6,953 17,594
Net income 2,375 2,548 4,371 5,339 14,633
Net income per share: diluted $0.03 $0.03 $0.05 $0.06 $0.18
Net income per share: basic $0.03 $0.03 $0.06 $0.07 $0.19
Net income per ADS: basic $0.15 $0.16 $0.28 $0.34 $0.93
Net income per ADS: diluted $0.15 $0.15 $0.26 $0.32 $0.89
- - ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1997:
Net revenue 25,820 29,755 30,158 37,494 123,227
Non-recurring items (8,670) - - - (8,670)
Operating income (loss) (15,576) (3,661) 83 2,161 (16,993)
Net income (loss) (14,432) (2,437) 405 1,774 (14,690)
Net income (loss) per share: basic ($0.19) ($0.03) $0.01 $0.02 ($0.19)
Net income (loss) per share: diluted ($0.19) ($0.03) $0.01 $0.02 ($0.19)
Net income (loss) per ADS: basic ($0.93) ($0.16) $0.03 $0.11 ($0.94)
Net income (loss) per ADS: diluted ($0.93) ($0.16) $0.03 $0.11 ($0.95)
- - ------------------------------------------------------------------------------------------------------------------------
Notes:
Data for all periods presented has been restated to reflect the pooling of
interest accounting in connection with the Company's acquisition of XDB Systems,
Inc. on January 20, 1998 (see note 2 to the consolidated financial statements on
page 28).
Share and per-share data for all periods presented has been restated to reflect
the 5-for-1 stock split which occurred effective as of the close of business on
March 13, 1998 (see note 12 to the consolidated financial statements on page
35). The Company's American Depository Shares ("ADSs") did not split, although
the conversion rights of such ADSs have been adjusted such that each ADS
represents five ordinary shares. Per share earnings are also shown in the
U.S.format on an ADS equivalent basis, consistent with pre-split reporting.
</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 as of
January 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 1998 on pages 23 to 35. 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
which do not differ in any significant respect from those generally accepted in
the United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Micro Focus Group
Plc at January 31, 1998 and 1997 and the consolidated results of its operations
and its consolidated cash flows for each of the three years in the period ended
January 31, 1998 in conformity with United States generally accepted accounting
principles.
Ernst & Young
Chartered Accountants
Registered Auditor
Reading, England
May 1, 1998
36
<PAGE> 22
[PAGE 41]
EXECUTIVE REMUNERATION COMMITTEE'S REPORT (UK FORMAT)
The Micro Focus Executive Remuneration Committee was established in December
1993. At present the Committee members are J. Michael Gullard, Harold Hughes and
J. Sidney Webb.
The remuneration of the executive directors is determined by the Committee. The
Committee ensures that remuneration is appropriate to each executive director's
responsibilities, taking into consideration the overall financial and business
position of the Company, the highly competitive industry of which 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.
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 the current year such bonuses were based on targets measuring achievement
against performance, measured in terms of audited earnings per share.
Compensation for loss of office: The Company provides nominal amounts of
compensation to its non-executive officers for loss of office. Compensation for
loss of office for executive officers may exceed such nominal amounts as a
result of the Company needing to provide such executive directors with
competitive packages in accordance with the criteria described elsewhere in this
"Directors' Remuneration Policy" section.
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: Other emoluments relate to an amount received by Mr. Waters in respect of
acceptance of office, and benefits principally related to the use of corporate
communications facilities by, and personal travel provided to, a former
director.
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 66. The grant of share options to directors is
designed to ensure that an element of their remuneration is directly related to
long-term growth in shareholder value.
Long-term incentives: None of the directors is eligible for any long-term
incentive payments.
Service agreements: Except as noted below, 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.
In the event of a change of control of the Company, Mr. Waters would be entitled
to predetermined compensation on termination of his employment of an amount
which exceeds one year's salary and benefits, provided that the termination
occurs within one year from the effective date of the change of control.
41
<PAGE> 23
[PAGE 42]
Directors' Remuneration
The following table analyses the remuneration earned by each director in each of
the last two years.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Performance Pension Compensation
Salary Fees related pay contributions for loss of office Other TOTAL
Years ended January 31 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998: J. Michael Gullard - 50 - - - - 50
Harold Hughes - 18 - - - - 18
J. Sidney Webb
(appointed December 2 1997) - 5 - - - - 5
Martin Waters
(appointed June 21 1997) 105 - 201 - - 183 489
Paul Adams 85 - 125 - - - 210
Ron Forbes 82 - 76 6 - - 164
Marcelo Gumucio
(resigned June 21 1997) 53 - 31 - 545 - 629
- - ------------------------------------------------------------------------------------------------------------------------------------
325 73 433 6 545 183 1,565
- - ------------------------------------------------------------------------------------------------------------------------------------
1997: J. Michael Gullard - 63 - - - - 63
Harold Hughes - 20 - - - - 20
Marcelo Gumucio 101 1 129 - - - 231
Paul Adams 79 - 50 - - - 129
Ron Forbes 79 - 16 6 - - 101
Brian Reynolds
(resigned March 24 1996) - - - - - 29 29
Paul O'Grady
(resigned April 1 1996) 24 - - - 30 - 54
- - ------------------------------------------------------------------------------------------------------------------------------------
283 84 195 6 30 29 627
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Upon the resignation of Marcelo Gumucio, the Company entered into a settlement
agreement and release with Mr. Gumucio, pursuant to which Mr.Gumucio was paid an
amount of $225,000 (GBP 136,000) for loss of office, Mr. Gumucio agreed to
provide six months of consulting services to the Company in exchange for a
payment of $200,000 (GBP 120,00) and vesting for 138,440 option shares held by
Mr. Gumucio was accelerated and the exercise period extended. As expected, the
services that were intended to be performed under the agreement were performed
during fiscal 1998.
The following additional information is provided in accordance with the
requirements of the Companies Act.
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
All directors:
Aggregate emoluments 1,559 621
Pension contributions 6 6
Gain on exercise of share options 889 -
- - --------------------------------------------------------------------------------
2,454 627
- - --------------------------------------------------------------------------------
Highest paid director:
Aggregate emoluments 629 231
Gain on exercise of share options 889 -
- - --------------------------------------------------------------------------------
1,518 231
- - --------------------------------------------------------------------------------
Gains on exercise of share options are calculated as at the date of exercise
although the shares may have been retained.
42
<PAGE> 24
[PAGES 44-67]
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 51 to 67 of this report.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
(In thousands of G.B. POUNDS - except per share data,
percentages and employee information)
Years ended January 31 1998 1997 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating results for the year:
Revenue 97,015 73,089 77,258 89,885 83,842
Profit/(loss) before taxation and exceptional items* 15,217 (614) (541) 12,871 21,761
Exceptional items* - (5,195) (6,001) (4,148) -
Profit/(loss) before taxation 15,217 (5,809) (6,542) 8,723 21,761
Retained profit/(loss) for the year 10,426 (7,281) (6,470) 4,590 14,747
Earnings/(loss) per share: basic 67.8p (48.0p) (43.6p) 32.0p 104.3p
Earnings/(loss) per share: diluted 65.0p (48.0p) (43.6p) 32.0p 101.2p
Average number of shares in issue (thousands) 15,373 15,156 14,843 14,336 14,138
Financial position at end of year:
Cash and bank deposits 51,518 44,725 38,972 55,823 57,544
Total assets 123,824 100,204 111,828 124,302 109,915
Creditors: amounts falling due after more than one year 12 15 66 193 404
Total shareholders funds 70,892 61,124 70,187 72,856 75,100
Financial condition:
Working capital 36,195 26,611 27,306 36,554 48,686
Current ratio 1.78 1.81 1.76 1.80 2.38
Return on revenue: excluding exceptional items* 11% n/a n/a 10% 18%
Return on average equity: excluding exceptional items* 16% n/a n/a 12% 28%
Employee information:
Average number of employees 719 646 735 751 667
Year end number of employees 847 626 708 788 698
Revenue per employee 135 113 105 120 126
Profit/(loss) after taxation per employee:
excluding exceptional items * 14 (3) (2) 12 22
- - ---------------------------------------------------------------------------------------------------------------------------
* Details of the exceptional items are set out in note 8 to the financial
statements on page 62.
</TABLE>
44
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (UK FORMAT)
This discussion has been prepared in accordance with U.S. reporting practice and
is presented here so that readers of the U.K. format financial statements have
the same information as readers of the U.S. format financial statements. It
should be read in conjunction with the financial statements of Micro Focus Group
Plc and its subsidiary undertakings ("Micro Focus") in G.B. pounds, on pages 51
to 67.
The Company has previously referred to its current financial year ending January
31 1998 as "financial year 1997." In the future, the Company will designate each
financial year by reference to the calendar year in which the last month of the
financial year occurs. Accordingly, the Company's current year ending January 31
1998 is referred to as "financial year 1998" or "1998" in this report, and prior
financial years are also referenced accordingly.
Results of Operations
Micro Focus has reported a profit for the year of GBP 10.4m compared to a loss
of GBP 7.3m in 1997. Results for the prior year included non-recurring charges
of GBP 5.2m.
The table below sets forth operating results as a percentage of revenue for each
of last three years and the percentage changes relative to the previous year for
each of the last two years.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
Year to year
Percentage of net revenue percentage change
Years ended January 31 1997 1996
1998 1997 1996 to 1998 to 1997
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
Product revenue 62 57 57 44 (4)
Service revenue 38 43 43 18 (7)
- - --------------------------------------------------------------------------------------------------------------------------------
Total revenue 100 100 100 33 (5)
- - --------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of product revenue 7 9 11 9 (28)
Cost of service revenue 17 16 16 33 (4)
- - --------------------------------------------------------------------------------------------------------------------------------
Total cost of revenue 24 25 27 25 (14)
- - --------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Research and development 20 33 35 (19) (10)
Sales and marketing 36 41 43 17 (8)
General and administrative 7 11 6 (18) 58
- - --------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 63 85 84 (2) (4)
- - --------------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) 13 (10) (11) n/a 13
Interest income 3 2 3 48 (21)
Interest expense - - - 238 (72)
................................................................................................................................
Profit/(loss) before taxation 16 (8) (8) n/a (11)
Taxation (5) (2) - 227 n/a
- - --------------------------------------------------------------------------------------------------------------------------------
Retained profit/(loss) for the year 11 (10) (8) n/a 13
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenue
Micro Focus derives its revenue from the licence of software products and
related support, maintenance and consulting ("direct revenue") and from the
licencing of distribution rights to software products to original equipment
manufacturers ("OEM revenue"). Direct revenue represents approximately 90% of
total revenue.
Net revenue is analysed between product revenue, which consists of the licensing
of software product to end-users and OEMs, and service revenue, consisting of
maintenance and other support services, including training and consulting.
Revenue increased by GBP 23.9m or 33% to GBP 97.0m in 1998 having decreased by
GBP 4.2m or 5% to GBP 73.1m in 1997. The increase in 1998 reflected initial
worldwide sales of the Company's SoftFactory/2000 and NetExpress products,
increased UNIX product sales and revenue from consulting services. The decrease
in revenue in 1997 arose during the first two quarters with relatively flat
sales in comparison to the third and fourth quarters. Factors contributing to
the decline in the first two quarters of 1997 included slow conversion to 32-bit
products of Micro Focus installed base and continuing uncertainties arising from
the fundamental changes caused by the Internet. The improved performance in the
second half of 1997 reflected increased sales of products to address the "Year
2000" problem.
45
<PAGE> 26
Product revenue increased by GBP 18.5m or 44% to GBP 60.5m in 1998, having
previously decreased by GBP 2.0m or 4% to GBP 42.0m in 1997. The increase in
product licencing revenue in 1998 reflected higher sales of Year 2000 products,
UNIX products, NetExpress and other product lines.
Service revenue increased by GBP 5.5m or 18% to GBP 36.5m in 1998, having
previously decreased by GBP 2.2m or 7% to GBP 31.1m in 1997. The increase in
service revenue resulted from increased software maintenance revenue and from
consulting revenue.
Revenue by customer location is analysed in note 2 to the financial statements
on page 59. In 1998 United Kingdom revenue grew by 74%, United States revenue by
27% and revenue from other countries by 31%.
In 1997 U.S. revenue decreased by 10%, while non-U.S. territories showed a 1%
increase, with growth in the United Kingdom, France and Japan being offset by
decreased sales to certain distributors, notably in Italy and Brazil.
There can be no assurance that the market for the Company's products will grow
in future periods at its historical rate of growth, that certain segments will
not decline, or that the Company will be able to increase or maintain its market
share in the future or achieve its historical revenue growth rates.
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.
Such costs increased by GBP 0.6m or 9% to GBP 7.0m in 1998, having previously
decreased by $2.4m in 1997 and represented 12% of product revenue in 1998 (15%
in 1997). Decreases in product costs as a percentage of product revenue
principally reflected savings in product materials arising from the
documentation being supplied on CD-ROM.
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.
Such costs increased by GBP 4.0m or 33% to GBP 15.8m in 1998, having previously
decreased by $0.5m in 1997 and represented 43% of service revenue in 1998 (38%
in 1997). The increase in such costs in 1998 arose mainly from the expansion of
the consulting organization, including the acquisition of Millennium UK Limited.
The decrease in 1997 reflected cost reductions taken to align expenses with
anticipated revenue.
Gross profit
Gross profit represented 76% of net revenue (1997: 75%). The improvement
primarily reflected proportionately higher product sales which carry higher
margins and savings attributable to the replacement of printed software
documentation with
electronic versions.
The Company's gross margin can be affected by a number of factors, including
changes in product or distribution channel mix, the mix of product and service
revenue, and competitive pressures on pricing. Gross margin is also dependent on
discounts selectively provided to customers in competitive sales situations. In
addition, gross margin may be adversely affected by expansion of the Company's
consulting organization and the ability to deploy its capacity to revenue
generating projects. As a result of the above factors, gross margin fluctuations
are difficult to predict, and gross margins may decline from current levels in
future periods.
Research and development
Research and development costs consist principally of compensation for software
developers and related costs expended, less the development costs capitalised,
plus amortisation of previously capitalised costs. Research and development
spending supports the development and enhancement of new and existing products
and is consistent with the Company's strategy of
investing heavily to improve and expand its product lines.
Research and development spending in 1998 was directed principally towards
further development of SoftFactory/2000 products which address the Year 2000
problem; NetExpress, 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 COBOL Workbench product line for workstation development of
IBM mainframe applications.
Research and development spending in 1997 and 1996 was directed towards
SoftFactory/2000 and NetExpress, 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 capitalisation,
decreased by GBP 1.6m to GBP 17.6m in 1998 and by GBP 4.2m to GBP 19.2m in 1997
and represented 18% of net revenue in 1998 (1997: 26%; 1996: 30%). The decrease
in research and development costs reflects a lower relative cost structure
following last year's restructuring of operations.
46
<PAGE> 27
In 1998 GBP 5.7m, representing 32% of these costs were capitalised as
software product assets (1997: 27%, 1996: 42%). Provisions for amortisation
amounted to GBP 7.8m (1997: GBP 8.1m; 1996: GBP 8.8m) resulting in a net charge
to profit and loss in 1998 of GBP 2.1m (1997: charge of GBP 2.7m; 1996: credit
of GBP 1.1m).
The Company believes that ongoing development of new products and features is
required to maintain and enhance its competitive position. Accordingly, while
the Company will continue to control expenses where possible, the Company
anticipates that aggregate research and development expenses will increase over
time, and may not be directly related to the level of revenue realized in future
quarters.
Sales and marketing
Sales and marketing costs include compensation, travel and facility costs for
sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows.
Such costs increased by GBP 5.1m or 17% to GBP 35.3m in 1998, having decreased
by GBP 2.7m or 8% to GBP 30.1m in 1997 and represented 36% of net revenue in
1998 (1997: 41%; 1996: 43%). The increase in sales and marketing costs reflected
sales force expansion, higher commissions and higher advertising and marketing
expenses, including those associated with new product launches. The decrease in
fiscal 1997 reflected the worldwide cost reduction initiatives implemented in
the first quarter of that year.
The Company believes that continued investments in sales, marketing, customer
support and promotional activities are essential to maintaining its competitive
position. The Company is expanding its sales and support staffs and,
accordingly, anticipates that aggregate sales and marketing expenses will be
higher in future periods, but as a function of revenue will remain about the
same.
General and administrative
General and administrative costs include the corporate management, finance,
legal and human resources operations of Micro Focus.
Such costs decreased by GBP 1.4m or 18% to GBP 6.5m in 1998, having increased by
GBP 2.9m or 58% to GBP 7.9m in 1997 and represented 7% of net revenue in 1998
(1997: 11%; 1996: 6%). The total for 1997 included GBP 1.9m of restructuring
costs (see "Non-recurring items" below). The underlying increase in 1998
reflected higher bonus accruals and staff additions and related recruitment
expenses. The increase in 1997 resulted principally from the strengthening of
the Micro Focus management team.
The Company is investing to strengthen its infrastructure and anticipates that
aggregate general and administrative expenses will increase in future quarters,
but decrease as a percentage of revenue.
Non-recurring items
No non-recurring items were separately reported in 1998.
In 1997 Micro Focus incurred a restructuring charge of GBP 5.2m. The charge
consisted of the costs associated with a reduction in the Company's workforce of
approximately 65 people, facility closures and consolidations, and asset
write-downs.
Non-recurring items recorded in 1996 consisted of a charge of GBP 6.7m for
restructuring 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 1996 principally related to 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 1996, reflected a reduction in the carrying values of
software product assets in line with future revenue expectations from certain
products.
Interest income
Interest earned on cash and short-term investments increased by GBP0.8m or 48%
to GBP 2.6m in 1998, having decreased by GBP 0.4m or 21% to GBP 1.7m in 1997,
and represented 3% of revenue in 1998 (1997: 2%; 1996: 3%). The increase in 1998
reflected higher average cash balances and higher investment yields resulting
from the investment of funds in money market instruments instead of bank
certificates of deposit. The decrease in 1997 reflected lower average cash
balances and, to a lesser degree, lower interest rates.
Taxation
The Company's tax rate in 1998 was 31.5%, which compares to the statutory U.K.
rate applicable to the Company of 31.3%.
The tax rate in both 1997 and 1996 was significantly affected by the
distribution of taxable profits and losses among the tax jurisdictions in which
the Company operates and by restructuring charges, certain of which were not
deductible for tax
purposes.
An analysis of the charge for income taxes is given in note 9 to the
consolidated financial statements on page 63.
47
<PAGE> 28
Acquisitions
During the current year Micro Focus completed two acquisitions.
On April 30 1997 the Company acquired all of the share capital of Millennium UK
Limited ("Millennium"), a privately-held consulting firm, for a consideration of
GBP4.0m paid in a combination of GBP2.0m in cash and the issue of 149,142
ordinary shares in the Company. Millennium provided consulting and
projectmanagement services and had specialized expertise in the estimating,
planning and management of Year 2000 compliance projects for large scale
systems, as well as development expertise in Web-based applications. With effect
from January 31 1998 Millennium's consulting services were integrated with the
professional services operations of the Company.
On January 20 1998 the Company acquired all of the share capital of XDB Systems,
Inc ("XDB") in exchange for 378,395 ordinary shares in the Company, which
represented a value of GBP8.7m on the date of the acquisition. XDB, a
privately-held corporation based in Maryland, USA, is a provider of DB2 database
development, maintenance and connectivity solutions.
Both transactions have been accounted for as acquisitions. Accordingly, the
excess of the purchase price over the estimated fair value of the net tangible
assets has been allocated to goodwill, and the results of the acquired companies
have been combined with those of Micro Focus with effect from the acquisition
dates. Goodwill has been written off directly to reserves. Where appropriate the
accounting policies of Millennium and XDB have been amended to conform with
those of Micro Focus. The effects of the resulting changes are summarised in
note 3 to the financial statements on page 60.
Risk 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 of the
discussion highlights some of these risks and the possible impact of these
factors on future results from operations.
The following comments are included in both the U.S. and U.K. format of the
Management's Discussion and Analysis in this Annual Report in accordance with
the Private Securities Litigation Reform Act 1995, which became effective in the
U.S. on January 1 1996. For more information on U.S. Securities Law Matters see
page 13.
The factors set forth below as well as statements made elsewhere in this Report
contain certain forward-looking statements that are based on the beliefs of the
Company's management, as well as assumptions made by, and information currently
available to, the Company's management. The Company's actual results,
performance or achievements in financial year 1999 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 as well as
those in the Letter to Shareholders 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 13.
The Company's future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders, product life cycles, the
ability of the Company to develop, introduce and market new and enhanced
versions of the Companys 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 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 the Company's revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter. Furthermore, the Company's customers tend to make
product purchase decisions in the fourth quarter of the Company's year as a
result of purchase cycles related to expiration of budgetary authorizations. As
a result, the Company has historically experienced lower revenue for the first
quarter of a 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 the Company's operating results will be below the
expectations of stock market analysts and investors and that the share price
could be materially adversely affected.
Micro Focus is in a market that is subject to rapid technological change. The
Company must continually adapt to that change by improving its products and
introducing new products and technologies. The growth and financial performance
48
<PAGE> 29
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 Companys business, results of operations
and financial condition.
Substantially all of the Company's revenue is currently, and is expected to
continue in the future to be, derived from products and services related to
applications development in the COBOL language. As a result, the Company's
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 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. 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. 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, general market conditions and other factors may have a significant
impact on the market price of the Company's securities. Furthermore, the stock
market has experienced extreme volatility that has particularly affected the
market prices of equity securities of many high technology companies. These
market fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the Company's securities.
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, 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 revenue and
expenses.
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 domestic or
foreign laws or ordinances or unfavourable 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.
49
<PAGE> 30
Micro Focus is in the process of reviewing its major internal corporate systems
for potential Year 2000 compliance issues and intends to take appropriate
corrective action based on the results of such review. Micro Focus does not
currently anticipate that it will incur material operating expenses or be
required to invest heavily in internal system improvements as a result of Year
2000 compliance issues. In addition, Micro Focus believes that the current
versions of its software products are Year 2000 compliant. Notwithstanding the
foregoing, there can be no assurance that the Year 2000 problem will not have an
adverse effect on the Company's business, financial condition or results of
operations, due to external factors relating to the Year 2000 problem which are
not controlled by Micro Focus, but on which Micro Focus may rely with respect to
its business and operations.
Micro Focus completed two significant corporate acquisitions in the current
year, as noted above. The Company is in the process of integrating the
operations acquired in these transactions with its own. There can be no
assurance that the anticipated benefits of recently concluded business
combinations will be realised. In addition, these acquisitions could require
significant additional management attention. The Company expects to continue
growing its business through acquisitions. If Micro Focus is unsuccessful in
integrating and managing the recently acquired businesses or other businesses it
may acquire in the future, the Company's business, results of operations and
financial condition could be adversely affected in future periods.
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 the Company's revenue arises in U.S. dollars (approximately
two-thirds in 1998), whereas its costs are incurred approximately equally in
U.S. dollars and other currencies, predominately G.B. pounds. Consequently,
fluctuations in exchange rates, particularly between the U.S. dollar and the
G.B. pound, may have a significant impact on the Company's operating results,
notably when expressed in G.B. pounds. In 1998 and 1997, fluctuations between
the U.S. dollar and the G.B. pounds 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 operating
activities. In 1998 cash provided by operating activities was GBP 17.8m (1997:
GBP 12.1m).
In 1998 Micro Focus invested GBP 8.3m (1997: GBP 2.5m) in property, plant and
equipment and GBP 5.7m (1997: GBP 5.3m) in software product assets. Investment
in 1998 included $2.7m in connection with the relocation of the Company to new
U.S. facilities in Mountain View, California and Wayne, Pennsylvania, and $3.2m
for communications and enterprise systems. In 1998 the Company also paid GBP
2.0m in cash in connection with the acquisition of Millennium.
Net of these expenditures, cash and short-term investments increased by GBP 6.8m
to GBP 51.5m (1997: increased by GBP 5.8m toGBP 44.7m).
The Company has in place a line of credit under the terms of which unsecured
financing of up to GBP 5.0m is available until January 2001. At January 31 1998
borrowings totalling GBP1.0m had been made against this line of credit (1997:
GBPnil).
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.
The Company believes that existing cash balances in combination with internally
generated funds and its available bank lines of credit will be more than
sufficient to meet cash requirements in its 1999 financial year.
50
<PAGE> 31
CONSOLIDATED PROFIT AND LOSS ACCOUNT (UK FORMAT)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
Continuing Acquisitions Year ended Year ended Year ended
operations (note 3) January 31 January 31 January 31
1998 1997 1996
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
Product revenue 60,323 157 60,480 42,020 43,991
Service revenue 34,274 2,261 36,535 31,069 33,267
- - ---------------------------------------------------------------------------------------------------------------------------
Total revenue 2 94,597 2,418 97,015 73,089 77,258
- - ---------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of product revenue 6,987 3 6,990 6,406 8,855
Cost of service revenue 13,742 2,103 15,845 11,892 12,343
- - ---------------------------------------------------------------------------------------------------------------------------
Total cost of revenue 20,729 2,106 22,835 18,298 21,198
- - ---------------------------------------------------------------------------------------------------------------------------
Gross profit 73,868 312 74,180 54,791 56,060
- - ---------------------------------------------------------------------------------------------------------------------------
Operating expenses
Research and development 4 19,625 54 19,679 24,299 26,851
Sales and marketing 35,222 67 35,289 30,146 32,857
General and adminisive 6,091 385 6,476 7,854 4,986
- - --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 60,938 506 61,444 62,299 64,694
- - --------------------------------------------------------------------------------------------------------------------------
Operating profit/(loss) 5 12,930 (194) 12,736 (7,508) (8,634)
- - ---------------------------------------------------------------------------------------------------------------------------
Interest income 2,551 1,720 2,166
Interest expense (70) (21) (74)
...........................................................................................................................
Profit/(loss) before taxation 15,217 (5,809) (6,542)
Taxation 9 (4,791) (1,472) 72
- - ---------------------------------------------------------------------------------------------------------------------------
Retained profit/(loss) for the year 10,426 (7,281) (6,470)
- - ---------------------------------------------------------------------------------------------------------------------------
Earnings/(loss) per share: basic 10 67.8p (48.0p) (43.6p)
- - ---------------------------------------------------------------------------------------------------------------------------
Earnings/(loss) per share: diluted 10 65.0p (48.0p) (43.6p)
- - ---------------------------------------------------------------------------------------------------------------------------
Earnings per share after 5-for-1 stock split (see note 22 to the financial
statements on page 67):
- - ---------------------------------------------------------------------------------------------------------------------------
Earnings/(loss) per share: basic 13.6p (9.6p) (8.7p)
- - ---------------------------------------------------------------------------------------------------------------------------
Earnings/(loss) per share: diluted 13.0p (9.6p) (8.7p)
- - ---------------------------------------------------------------------------------------------------------------------------
The notes on pages 57 to 67 form part of these financial statements.
</TABLE>
51
<PAGE> 32
CONSOLIDATED BALANCE SHEET (UK FORMAT)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
January 31 January 31
1998 1997
Notes GBP'000 GBP'000
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed assets
Intangible fixed assets 11 12,394 14,590
Tangible fixed assets 12 23,836 20,543
Investments 13 4,886 5,634
- - ---------------------------------------------------------------------------------------------------------------------------
Total fixed assets 41,116 40,767
- - ---------------------------------------------------------------------------------------------------------------------------
Current assets
Stocks 14 317 484
Debtors 15 30,873 14,228
Cash and bank deposits 51,518 44,725
- - ---------------------------------------------------------------------------------------------------------------------------
Total current assets 82,708 59,437
- - ---------------------------------------------------------------------------------------------------------------------------
Creditors: amounts falling due within one year 16 26,483 16,180
Deferred revenue 20,030 16,646
Net current assets 36,195 26,611
Total assets less current liabilities 77,311 67,378
Creditors: amounts falling due after more than one year 17 12 15
Provisions for liabilities and charges:
Deferred taxation 20 6,407 6,239
- - ---------------------------------------------------------------------------------------------------------------------------
Net assets 70,892 61,124
- - ---------------------------------------------------------------------------------------------------------------------------
Capital and reserves
Called up share capital 1,588 1,517
Share premium account 30,196 18,071
Profit and loss account 39,108 41,536
- - ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' funds 70,892 61,124
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial statements on pages 51 to 67 were approved by the Board of
Directors on May 1 1998
/s/ Martin Waters /s/ Ron Forbes
Martin Waters Ron Forbes
Director Director
The notes on pages 51 to 67 form part of these financial statements.
52
<PAGE> 33
CONSOLIDATED CASH FLOW STATEMENT (UK FORMAT)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
January 31 January 31 January 31
1998 1997 1996
GBP'000 GBP'000 GBP'000
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash inflow from operating activities 17,767 12,135 9,725
- - ---------------------------------------------------------------------------------------------------------------------------
Returns on investments and servicing of finance
Interest received 2,519 1,803 2,082
Interest paid (70) (21) (74)
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash inflow from returns on investments and servicing of finance 2,449 1,782 2,008
- - ---------------------------------------------------------------------------------------------------------------------------
Taxation
U.K. corporation tax (paid) (599) (88) (1,562)
Overseas tax refunded/(paid) (262) 70 (1,362)
- - ---------------------------------------------------------------------------------------------------------------------------
Tax paid (861) (18) (2,924)
- - ---------------------------------------------------------------------------------------------------------------------------
Capital expenditure and financial investment
Purchase of tangible fixed assets (8,263) (2,500) (8,643)
Purchase of software product assets - - (226)
Capitalised software product assets (5,688) (5,258) (9,882)
Purchase of own shares - - (5,002)
Disposal of own shares 748 - -
Disposal of tangible fixed assets 447 546 298
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash outflow from capital expenditure and financial investment (12,756) (7,212) (23,455)
- - ---------------------------------------------------------------------------------------------------------------------------
Acquisitions and disposals
Purchase of subsidiary undertaking (2,000) - (3,892)
Net cash acquired with subsidiary undertakings 961 - -
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash outflow from acquisitions and disposals (1,039) - (3,892)
- - ---------------------------------------------------------------------------------------------------------------------------
Cash inflow/(outflow) before financing (6,546) 6,687 (18,538)
- - ---------------------------------------------------------------------------------------------------------------------------
Financing
Issue of ordinary shares, net of expenses 1,517 138 278
Capital element of finance lease obligations (65) (131) (295)
Bank loan 1,007 - -
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash inflow/(outflow) from financing 2,459 - (17)
- - ---------------------------------------------------------------------------------------------------------------------------
Increase/(decrease) in cash 8,019 6,694 (18,555)
- - ---------------------------------------------------------------------------------------------------------------------------
The notes on pages 57 to 67 form part of these financial statements.
</TABLE>
53
<PAGE> 34
NOTES TO CONSOLIDATED CASH FLOW STATEMENT (UK FORMAT)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
January 31 January 31 January 31
1998 1997 1996
GBP'000 GBP'000 GBP'000
- - ---------------------------------------------------------------------------------------------------------------------------
(i) Reconciliation of operating profit to "Net cash inflow from operating activities"
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating profit/(loss) 12,736 (7,508) (8,634)
Depreciation charges 4,534 5,655 6,186
Amortisation charges 7,765 8,067 12,639
Loss on sale of tangible fixed assets 72 221 70
Decrease in stocks 154 1,171 117
(Increase)/decrease in debtors (14,460) 8,012 2,174
Increase/(decrease) in creditors 3,942 (790) (690)
Increase/(decrease) in deferred revenue 3,024 (2,693) (2,137)
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities 17,767 12,135 9,725
- - ---------------------------------------------------------------------------------------------------------------------------
(ii) Reconciliation of net cash flow to movement in net funds
- - ---------------------------------------------------------------------------------------------------------------------------
Increase/(decrease) in cash 8,019 6,694 (18,555)
Net cash inflow/(outflow) from financing (942) 131 295
7,077 6,825 (18,260)
Translation difference (1,226) (941) 1,704
- - ---------------------------------------------------------------------------------------------------------------------------
5,851 5,884 (16,556)
Net debt, beginning of year 44,642 38,758 55,314
- - ---------------------------------------------------------------------------------------------------------------------------
Net debt, end of year 50,493 44,642 38,758
- - ---------------------------------------------------------------------------------------------------------------------------
(iii) Analysis of net funds
- - ---------------------------------------------------------------------------------------------------------------------------
Balances at Balances at
January 31 Exchange January 31
1997 Cash flow differences 1998
GBP'000 GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------------------------------------------------
Cash 44,725 8,019 (1,226) 51,518
Short term loans - (1,007) - (1,007)
Finance lease obligations (83) 65 - (18)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year 44,642 7,077 (1,226) 50,493
- - ---------------------------------------------------------------------------------------------------------------------------
The notes on pages 57 to 67 form part of these financial statements.
</TABLE>
54
<PAGE> 35
COMPANY BALANCE SHEET (UK FORMAT)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
January 31 January 31
1998 1997
Notes GBP'000 GBP'000
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed assets
Tangible fixed assets 12 2,971 2,992
Investments 13 45,086 32,809
- - ---------------------------------------------------------------------------------------------------------------------------
Total fixed assets 48,057 35,801
- - ---------------------------------------------------------------------------------------------------------------------------
Current assets
Amounts owed by subsidiary undertakings 8,989 11,214
Other debtors 40 2
Cash and bank deposits 738 18
- - ---------------------------------------------------------------------------------------------------------------------------
Total current assets 9,767 11,234
- - ---------------------------------------------------------------------------------------------------------------------------
Creditors: amounts falling due within one year
Amounts owed to subsidiary undertakings 9,153 11,469
Trade creditors 69 9
Corporation tax 63 178
Accrued expenses 206 47
- - ---------------------------------------------------------------------------------------------------------------------------
Net current assets/(liabilities) 276 (469)
- - ---------------------------------------------------------------------------------------------------------------------------
Total assets less current liabilities 48,333 35,332
Provisions for liabilities and charges:
Deferred taxation 20 19 19
- - ---------------------------------------------------------------------------------------------------------------------------
Net assets 48,314 35,313
- - ---------------------------------------------------------------------------------------------------------------------------
Capital and reserves
Called up share capital 1,588 1,517
Share premium account 30,196 18,071
Profit and loss account 16,530 15,725
- - ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' funds 48,314 35,313
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial statements on pages 51 to 67 were approved by the Board of
Directors on May 1 1998.
/s/Martin Waters /s/Ronald Forbes
Martin Waters 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 51 to 67 form part of these financial statements.
55
<PAGE> 36
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES/MOVEMENT IN SHAREHOLDERS' FUNDS
(UK FORMAT)
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
January 31 January 31 January 31
1998 1997 1996
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit/(loss) for the year 10,426 (7,281) (6,470)
Currency translation adjustment (1,122) (1,920) 2,275
- - ---------------------------------------------------------------------------------------------------------------------------
Total recognised gains and losses for the year 9,304 (9,201) (4,195)
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
MOVEMENT IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
....................................................................................................................................
Ordinary shares of 10p each:
Share Deferred Retained
Authorised Issued Amount premium consideration earnings Total
'000 '000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31 1995 16,500 14,364 1,437 13,147 3,340 54,932 72,856
Share options exercised - 115 11 297 - - 308
Shares issued to complete Burl acquisition - 665 66 4,492 (3,340) - 1,218
(Loss) for the year - - - - - 6,470) (6,470)
Currency translation adjustment - - - - - 2,275 2,275
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31 1996 16,500 15,144 1,514 17,936 - 50,737 70,187
Increase in authorised share capital 6,000 - - - - - -
Share options exercised - 24 3 135 - - 138
(Loss) for the year - - - - - (7,281) (7,281)
Currency translation adjustment - - - - - (1,920) (1,920)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31 1997 22,500 15,168 1,517 18,071 - 41,536 61,124
Issued on acquisitions - 527 52 10,627 - - 10,679
Goodwill arising on acquisitions - - - - - (11,732) (11,732)
Share options exercised - 188 19 1,498 - - 1,517
Profit for the year - - - - - 10,426 10,426
Currency translation adjustment - - - - - (1,122) (1,122)
BALANCE, JANUARY 31 1998 22,500 15,883 1,588 30,196 - 39,108 70,892
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The issued ordinary shares are allotted, called up and fully paid (see also note
22 on page 67).
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 cumulative value of goodwill written off on
acquisitions between December 23 1989 and January 31 1998 was GBP 11,732,000
(January 31 1997: GBPnil).
The notes on pages 57 to 67 form part of these financial statements.
56
<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
1998 are contained on pages 43 to 59.
The Company has previously referred to its current financial year ending January
31 1998 as "1997." In the future, the Company will designate each financial year
as the calendar year in which the last month of the financial year occurs.
Accordingly, the Company's current year ending January 31 1998 is referred to as
"financial year 1998" and "1998" in this report, and prior financial years are
referenced accordingly.
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 US generally accepted
accounting principles ("GAAP") except with regard to acquisitions and goodwill
and the presentation of certain items in the financial statements. In order to
comply with the provisions of FRS 1 (Revised) the Consolidated Cash Flow
Statement has been restated for the years ended January 31 1997 and January 31
1996.
Basis of consolidation
The consolidated financial statements are those of Micro Focus Group Plc ("the
Company") and all of its subsidiary undertakings ("Micro Focus") for the year
ended January 31 1998. All significant inter-company balances and transactions
have been eliminated on consolidation.
The presentation of data presented in the profit and loss account has been
revised in order to segregate costs of revenue from operating costs. The
presentation of prior year numbers has been similarly revised to conform with
the current presentation. The results of operations of the Company are not
affected by this changed presentation.
Acquisitions are accounted for using the acquisition method of accounting.
Accordingly the Consolidated Profit and Loss Account and Consolidated Cash Flow
Statement include the results and cash flows for the period of ownership. The
cost of acquisition represents the cash value of the consideration and/or the
market value of the shares issued on the date the offer became unconditional,
plus expenses. The purchase consideration is allocated to assets and liabilities
on the basis of fair value at the date of acquisition.
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 licencing software packaged products to end users and resellers is
recognised on delivery, provided that no significant vendor obligations exist
and collection of the resulting debt is deemed probable.
Revenue from sales to original equipment manufacturers ("OEM's") 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; (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 licenced for inclusion in the Micro Focus product set, including
software acquired through 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 a shortfall in future revenue from a product is anticipated,
amortisation is accelerated.
Amortisation of software product assets is included in research and development
costs.
57
<PAGE> 38
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.
Tangible fixed assets
Tangible fixed assets are stated at cost less accumulated depreciation and
amortisation. Depreciation and amortisation is computed using the straight-line
method over estimated economic lives from the time the asset is put into use.
Present estimated economic lives are as follows:
Freehold office buildings 40 years
Leasehold improvements over the lease term
Computer equipment 3 - 5 years
Office equipment 7 years
Transportation equipment 3 - 4 years
Leasing
Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are capitalised as fixed assets. The amount capitalised
is that sum for which the leased asset could be purchased at the start of the
lease, this sum also being treated as a liability.
Depreciation on such leased assets is provided at rates calculated to write off
the capitalised cost over the shorter of the lease term and the asset's economic
life. Lease payments are apportioned between finance charges (computed on the
basis of implicit interest rates) and a reduction in the original liability.
Rentals paid under operating leases are charged to income on a straight-line
basis over the lease term.
Deferred taxation
Deferred taxation is provided on the liability method on all timing differences
to the extent that they are expected to reverse in the future without being
replaced, calculated at the rate at which it is anticipated the timing
differences will reverse.
Stocks
Stocks, consisting principally of diskettes and technical manuals, are stated at
the lower of cost and net realisable value, using the first-in, first-out
method. Contracts in progress, representing engineering costs associated with
non-cancellable licence agreements prior to delivery, are included in stocks and
charged to income when the related revenue is recognised.
Cash and bank deposits
Cash and bank deposits includes cash placed on deposit where the maturity date
is between three and twelve months from the initial date of deposit. All such
cash balances are repayable on demand and can be withdrawn at any time without
notice or penalty.
Investments
Investments are recorded at cost less any provision for 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.
pounds to U.S. dollar rates at January 31 1998, 1997 and 1996 were GBP 1 =
$1.64, GBP 1 = $1.60 and GBP 1 = $1.51 respectively. Revenue, costs and expenses
are translated using average rates. Monthly average G.B. pounds to U.S. dollar
rates used during 1998 range between GBP 1 = $1.60 and GBP 1 = $1.67, and
average GBP 1 = $1.64, GBP 1 = $1.58 and GBP 1 = $1.58 in 1998, 1997 and 1996
respectively. Translation adjustments resulting from the process of translating
financial statements denominated in currencies other than G.B. pounds are dealt
with through reserves. All other differences are charged through the profit and
loss account.
Earnings/(loss) per share
Earnings/(loss) per share are based on the profit/(loss) for the year after
taxation, and on the weighted average number of ordinary shares outstanding
during the period.
Fully diluted earnings per share are 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.
58
<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.
Related party transactions
The Company is exempt under the provisions of FRS 8 from disclosing related
party transactions which are eliminated on consolidation.
New accounting standards
Financial Reporting Standards No. 9 - Associates and Joint Ventures and No. 10
- - - Goodwill and Intangible Assets, were issued by the Accounting Standards Board
in 1997, and will apply to the Company in 1999.
Note 2 Segmental information
Micro Focus operates in one business segment - the development and marketing of
computer software products and related services. The following table analyses
revenue by geographical area, based on customer location:
1998 1997 1996
- - --------------------------------------------------------------------------------
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
United Kingdom 11,864 6,811 7,178
United States 49,037 38,640 42,824
Europe (excluding U.K.) 18,498 19,297 19,400
Japan 3,964 3,519 2,720
Other 13,652 4,822 5,136
- - --------------------------------------------------------------------------------
97,015 73,089 77,258
- - --------------------------------------------------------------------------------
The following table analyses worldwide operations by geographical area, based on
the location of Micro Focus facilities.
1998 1997 1996
- - --------------------------------------------------------------------------------
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Revenue:
United Kingdom 43,249 33,974 33,988
United States 56,846 42,856 49,503
Europe (excluding U.K.) 23,554 20,588 20,196
Other 7,859 1,910 1,300
- - --------------------------------------------------------------------------------
131,507 99,328 104,987
- - --------------------------------------------------------------------------------
Inter-segment revenue:
United Kingdom (21,003) (15,900) (16,728)
United States (4,199) (3,501) (4,790)
Europe (excluding U.K.) (9,077) (6,381) (5,362)
Other (213) (457) (849)
- - --------------------------------------------------------------------------------
97,015 73,089 77,258
- - --------------------------------------------------------------------------------
Operating profit/(loss):
United Kingdom 5,498 (2,960) 1,350
United States 1,041 (4,699) (4,429)
Europe (excluding U.K.) 896 (220) (5,097)
Other 5,301 371 (458)
- - --------------------------------------------------------------------------------
12,736 (7,508) (8,634)
- - --------------------------------------------------------------------------------
Net operating assets/(liabilities):
United States 14,174 16,075 20,264
United Kingdom 2,930 (8,199) (3,087)
Europe (excluding U.K.) (4,122) 2,988 9,176
Other 2,521 (16) (558)
- - --------------------------------------------------------------------------------
15,513 10,848 25,795
- - --------------------------------------------------------------------------------
Inter-segment revenue principally represents licence fees and charges for
research and development between locations. Operating profit/(loss) excludes
interest income and expense and, correspondingly, net 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:
1998 1997 1996
- - --------------------------------------------------------------------------------
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Net operating assets 15,513 10,848 25,795
Cash and bank loans 50,511 44,725 38,972
Investment in own shares 4,886 5,634 5,634
Finance lease obligations (18) (83) (214)
- - --------------------------------------------------------------------------------
Net assets 70,892 61,124 70,187
- - --------------------------------------------------------------------------------
59
<PAGE> 40
Note 3 Acquisitions
In the current year Micro Focus completed two acquisitions for a total
consideration of GBP 12,679,000 in cash and shares.
On April 30 1997 the Company acquired all of the share capital of Millennium UK
Limited ("Millennium"), a provider of consulting and project management
services, for a consideration of GBP 4,000,000 paid in a combination of GBP
2,000,000 in cash and the issuance of 149,142 ordinary shares in the Company.
The transaction has been accounted for as an acquisition and, accordingly, the
results of operations and cash flows of Millennium have been combined with those
of Micro Focus for the nine-month period subsequent to April 30 1997.
The acquisition cost has been allocated between the identifiable tangible assets
and liabilities of Millennium based on their respective fair values, and the
excess has been allocated to goodwill, as shown in the following table.
- - --------------------------------------------------------------------------------
Net assets Fair value Fair values on
acquired adjustments acquisition
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Cash (31) - (31)
Accounts receivable 379 - 379
Other current assets 45 - 45
Tangible fixed assets 20 - 20
Current liabilities (570) - (570)
- - --------------------------------------------------------------------------------
Total net assets (157) - (157)
- - --------------------------------------------------------------------------------
Goodwill arising 4,157
- - --------------------------------------------------------------------------------
4,000
- - --------------------------------------------------------------------------------
Purchase consideration payable to vendors 4,000
- - --------------------------------------------------------------------------------
Goodwill arising on the acquisition has been charged to reserves.
Millennium reported a loss after taxation of GBP 229,000 in its financial year
ended December 31 1996. In the subsequent four month period to April 30 1997
Millennium recorded a profit after taxation of GBP 19,000. In the period since
acquisition, Millennium contributed GBP 48,000 to the group's net operating cash
flows and utilised GBP 44,000 for capital expenditure.
Subsequent to the acquisition, costs amounting to GBP 200,000 have been incurred
in connection with a reorganisation of the business of Millennium. These costs
are included in general and administrative costs in the current year.
On January 20 1998 the Company completed the acquisition of XDB Systems, Inc
("XDB"). XDB was acquired in exchange for 378,395 ordinary shares in the Company
and the exchange of XDB stock options for Micro Focus options, which represented
a total value of GBP 8,679,000 on the date the acquisition was completed. XDB, a
privately-held corporation based in Maryland, USA, is a provider of DB2 database
development, maintenance and connectivity solutions. The transaction has been
accounted for as an acquisition. Accordingly, the results of operations and cash
flows of XDB have been combined with those of Micro Focus for the period
subsequent to January 20 1998.
The acquisition cost has been allocated between the identifiable tangible assets
and liabilities of XDB based on their respective fair values, and the excess has
been allocated to goodwill, as shown in the following table.
- - --------------------------------------------------------------------------------
Fair value adjustments
- - --------------------------------------------------------------------------------
Accounting
Net assets policy Fair values on
acquired changes acquisition
GBP'000 GBP'000 Other GBP'000
- - --------------------------------------------------------------------------------
Cash 992 - - 992
Accounts receivable 2,442 (707) - 1,735
Other current assets 116 - - 116
Tangible fixed assets 276 - - 276
Current liabilities (2,093) - 78 (2,015)
Deferred taxation 754 - (754) -
- - --------------------------------------------------------------------------------
Total net assets 2,487 (707) (676) 1,104
- - --------------------------------------------------------------------------------
Goodwill arising 7,575
- - --------------------------------------------------------------------------------
8,679
- - --------------------------------------------------------------------------------
Purchase consideration payable to vendors 8,679
- - --------------------------------------------------------------------------------
The fair value adjustments relate to: - the deferral of previously recognised
revenue totalling GBP 707,000 to reflect compliance with the Company's existing
revenue recognition policy - reductions of GBP 78,000 to accruals established by
XDB to provide for costs incurred during 1998 - the elimination of a deferred
tax asset amounting to GBP 754,000 which had been established in accordance with
U.S. accounting principles.
The acquisition of XDB was completed shortly before the end of the current
financial year and consequently fair values on acquisition have been estimated
based on information currently available. Any additional adjustments to fair
values arising on final review will be disclosed in the Company's financial
statements for the year ended January 31 1999.
60
<PAGE> 41
In addition to the above adjustments, provisions amounting to GBP 122,000 have
been recorded for the estimated costs of rationalisation and reorganisation of
the acquired business, and charged to general and administrative costs in the
profit and loss account.
Goodwill arising on the acquisition has been charged to reserves.
XDB's loss after taxation in its financial year ended January 31 1997 was GBP
2,642,000. In the subsequent pre-acquisition period from February 1 1997 to
January 20 1998 XDB recorded a loss after taxation of GBP 671,000. XDB's cash
flows for the period of ownership were not material.
Note 4 Research and development costs
- - --------------------------------------------------------------------------------
1998 1997 1996
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Research and
development costs,
before capitalization 17,602 19,235 23,423
Costs capitalized as
software product assets (5,688) (5,258) (9,882)
Amortisation of
capitalized costs 7,765 8,067 8,805
................................................................................
19,679 22,044 22,346
Exceptional items (note 8): 17,602 19,235 23,423
Restructuring costs:
- accelerated amortisation - - 3,834
- other costs - 2,255 671
- - --------------------------------------------------------------------------------
19,679 24,299 26,851
- - --------------------------------------------------------------------------------
Note 5 Operating profit/(loss)
Operating profit/(loss) is stated after charging:
- - --------------------------------------------------------------------------------
1998 1997 1996
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Auditors' remuneration:
audit services: U.K. 117 105 96
audit services: overseas 110 93 100
non-audit services: U.K. 230 181 141
non-audit services: overseas289 218 179
Operating lease rentals
equipment 756 743 903
land and buildings 1,780 1,811 2,137
Depreciation to leased assets 39 39 118
Other depreciation and
amortisation 4,534 5,616 6,068
- - --------------------------------------------------------------------------------
The profit attributable to the ordinary shareholders of Micro Focus Group Plc,
dealt with in the financial statements of Micro Focus, is GBP 805,000 (1997: GBP
716,000; 1996: GBP 1,449,000). There were no other movements on reserves other
than the movement on share premium shown on page 56.
Note 6 Directors and employees
An analysis of the directors' remuneration pension entitlements and share
options is set out in the Executive Remuneration Committee's Report on pages 42
and 43.
The average weekly number of staff employed by Micro Focus during the year was:
- - --------------------------------------------------------------------------------
1998 1997 1996
number number number
- - --------------------------------------------------------------------------------
U.K. 252 255 302
U.S. 355 310 355
Other 112 81 78
- - --------------------------------------------------------------------------------
719 646 735
- - --------------------------------------------------------------------------------
Staff costs, which include salaries, bonus and commissions, amounted to:
- - --------------------------------------------------------------------------------
1998 1997 1996
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
U.K. 10,324 9,173 10,167
U.S. 22,803 16,758 17,801
Other 5,184 3,554 3,856
- - --------------------------------------------------------------------------------
38,311 29,485 31,824
Social security costs 2,979 2,797 2,884
Other pension costs 432 437 596
- - --------------------------------------------------------------------------------
41,722 32,719 35,304
- - --------------------------------------------------------------------------------
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
certainpredetermined thresholds. Arrangements for employees in other countries
have been established on similar bases, subject to local regulations and
practices in the countries concerned.
Note 7 Interest expense
- - --------------------------------------------------------------------------------
1998 1997 1996
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Finance charges payable under
finance leases 5 18 74
On bank loans and overdrafts 65 3 -
- - --------------------------------------------------------------------------------
70 21 74
- - --------------------------------------------------------------------------------
61
<PAGE> 42
Note 8 Exceptional items
Exceptional items recorded in the year ended January 31 1997 represented a
charge of GBP 5,195,000 for restructuring. The charge consists of the costs
associated with a reduction in the Company's workforce of approximately 65
people, facility closures and consolidations, and asset write-downs. All
outstanding amounts due under the restructuring were settled prior to January 31
1998.
Exceptional items recorded in the year ended January 31 1996 consisted of a
charge of GBP 6,667,000 for restructuring 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 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 January 1996 were
primarily the result of a review into the carrying value of software product
assets.
Note 9 Taxation
The taxation charge for the year consists of the following:
- - --------------------------------------------------------------------------------
1998 1997 1996
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
U.K. corporation tax 3,244 237 133
Deferred taxation (71) 870 (458)
Double taxation relief (162) (174) 105
Overseas taxation:
U.S. federal 542 4 5
U.S. state 128 1 -
Other 958 276 (118)
................................................................................
4,639 1,214 (543)
Taxation underprovided/
(overprovided)
in previous years
Corporation tax - 258 -
Deferred taxation 152 - 202
Overseas taxation:
U.S. federal - - 193
U.S. state - - (2)
Other - - 78
- - --------------------------------------------------------------------------------
4,791 1,472 (72)
- - --------------------------------------------------------------------------------
The effective tax rate in 1998 is 31.5%, which compares to the applicable U.K.
corporate tax rate of 31.3%.
In prior years the effective tax rate was significantly distorted, principally
as a result of losses incurred in the United States which can only be offset
against profits arising in future periods, and the impact of disallowable
exceptional items. The corporation tax returns of certain U.S. subsidiary
undertakings are under examination by the U.S. Internal Revenue Service, which
has proposed certain adjustments. The Company believes that the outcome of the
examination will not give rise to any material adjustment to the financial
statements.
Note 10 Earnings/(loss) per share
Earnings/(loss) per share is computed on the bases set out in note 1.
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Basic earnings per share:
Profit/(loss) after taxation 10,426 (7,281) (6,470)
Ordinary shares
(weighted average) 15,373 15,156 14,843
Diluted earnings per share:
Adjusted profit/(loss)
after taxation 11,180 (7,281) (6,470)
Ordinary shares
(weighted average) 17,199 15,156 14,843
Pro-forma earnings per share data, based on ordinary shares in issue following
the 5-for-1 sub-division of the Company's ordinary shares on March 13 1998 (see
note 22 to the financial statements on page 67) are also shown on the profit and
loss account.
Note 11 Intangible fixed assets
Intangible fixed assets consist of software product assets, as follows:
- - -------------------------------------------------------------------------------
Net book
Cost Amortisation value
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
At January 31 1997 74,216 59,626 14,590
Currency fluctuations (755) (636) (119)
Additions 5,688 - 5,688
Amortisation for the year - 7,765 (7,765)
- - --------------------------------------------------------------------------------
At January 31 1998 79,149 66,755 12,394
- - --------------------------------------------------------------------------------
62
<PAGE> 43
Note 12 Tangible fixed assets
<TABLE>
<CAPTION>
(a) Micro Focus:
- - -------------------------------------------------------------------------------------------------------------------------------
Computer and
Freehold communications
land and Leasehold Office equipment Transportation
buildings Improvements equipment and software equipment Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost:
At January 31 1997 13,556 840 4,690 23,954 292 43,332
Currency fluctuations - (60) (101) (457) (2) (600)
Additions 272 1,795 1,308 5,157 27 8,560
Disposals - - (1,246) (834) (191) (2,271)
- - ---------------------------------------------------------------------------------------------------------------------------
At January 31 1998 13,828 2,575 4,651 27,820 126 49,021
- - ---------------------------------------------------------------------------------------------------------------------------
Depreciation:
At January 31 1997 436 760 3,312 18,118 163 22,789
Currency fluctuations - (28) (52) (347) (2) (415)
Provision for the year 223 85 403 3,810 9 4,534
Disposals - - (965) (659) (100) (1,724)
At January 31 1998 659 817 2,698 20,922 70 25,184
Net book values:
At January 31 1997 13,120 80 1,378 5,836 129 20,543
At January 31 1998 13,169 1,758 1,955 6,898 56 23,837
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Freehold land and buildings includes capitalised interest of GBP 385,000.
Transportation equipment includes assets held under finance leases as follows:
- - --------------------------------------------------------------------------------
Cost Netbook
depreciation value
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
At January 31 1997 125 66 59
Provision for the year - - -
Disposals - - -
- - --------------------------------------------------------------------------------
At January 31 1998 125 66 59
- - --------------------------------------------------------------------------------
(b) Company:
The Company's tangible fixed assets consist of freehold land and buildings,
valued at cost which includes capitalised interest of GBP 385,000.
- - --------------------------------------------------------------------------------
Cost Netbook
depreciation value
GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
At January 31 1997 3,088 96 2,992
Provision for the year - 21 (21)
- - --------------------------------------------------------------------------------
At January 31 1998 3,088 117 2,971
- - --------------------------------------------------------------------------------
63
<PAGE> 44
Note 13 Investments
(a) Micro Focus:
Investment in own shares represents the Company's ordinary shares acquired by
Micro Focus Trustees Limited on behalf of the Micro Focus Group Employee Benefit
Trust 1994 ("the Trust"), at cost:
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Beginning of year 5,634 5,634
Sold on exercise of options (748) -
- - --------------------------------------------------------------------------------
End of year 4,886 5,634
- - --------------------------------------------------------------------------------
As at January 31 1998 the Trust owned 757,369 shares with a nominal value of GBP
75,737, and options have been granted to employees to purchase up to 634,245 of
such shares (see note 21 to the financial statements on page 66). The market
value of these shares was GBP 20,729,000 (January 31 1997: GBP 9,656,000); if
they had been sold at this value a liability to corporation tax of approximately
GBP 4,500,000 (January 31 1997: GBP 1,100,000) would have arisen. The Trust has
not waived its right to dividends in respect of this shareholding.The assets and
liabilities of the Trust, as well as its operating costs, are included in Micro
Focus' consolidated financial statements.
(b) Company:
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Investments in subsidiary undertakings:
Beginning of year 27,175 27, 685
Acquisitions (note 3): 12,679 -
Additions 309 -
Effect of exchange rate changes 37 (510)
- - --------------------------------------------------------------------------------
End of year 40,200 27,175
Investment in own shares (see (a) above):
End of year 4,886 5,634
- - --------------------------------------------------------------------------------
45,086 32, 809
- - --------------------------------------------------------------------------------
The principal subsidiary undertakings, all of which are wholly-owned, are:
- - --------------------------------------------------------------------------------
Country of incorporation
- - --------------------------------------------------------------------------------
Micro Focus Limited U.K. (1)
Micro Focus International Limited U.K. (2)
Micro Focus Holdings Limited U.K. (1)
Micro Focus Incorporated U.S.A. (2)
XDB Systems, Inc. U.S.A. (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)
System Focus BV Netherlands (2)
Micro Focus Technology NV Netherlands Antilles (2)
- - --------------------------------------------------------------------------------
(1) Held directly by the Company
(2) Held by a subsidiary undertaking
(3) Held directly by the Company, operating as a financing company. The
activities of the other subsidiary undertakings are described in the
Directors' Report.
Note 14 Stocks
The replacement value of stocks is not considered to be materially different
from their balance sheet values.
Note 15 Debtors
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Trade debtors 29,145 12,672
Other debtors and prepaid expenses 1,728 1,556
- - --------------------------------------------------------------------------------
30,873 14,228
- - --------------------------------------------------------------------------------
Trade debtors include GBPnil (1997: GBP 1,693,000) which is due more than twelve
months from the balance sheet date. Other debtors and prepaid expenses include
loans to an officer of Micro Focus totalling GBP nil (1997: GBP 57,000), and
amounts due more than twelve months from the balance sheet date totalling GBP
74,000 (1997: GBP 164,000).
64
<PAGE> 45
Note 16 Creditors: amounts falling due within one year
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Bank loans 1,007 -
Obligations under finance leases (note 18) 6 68
Trade creditors 4,241 3,054
Current corporation tax 6,428 2,590
Other taxes and social security costs 1,725 1,129
Product royalties and purchases 845 602
Accrued employees compensation
and commissions 7,481 3,632
Accrued expenses 4,750 1,556
- - --------------------------------------------------------------------------------
26,483 16,180
- - --------------------------------------------------------------------------------
The bank loan represents borrowings against an unsecured revolving
multi-currency loan facility, under the terms of which financing of up to
GBP 5,000,000, or its equivalent in such other currency as the Company may
determine, is available until January 2001. Borrowings under this facility bear
interest at 0.75% above the London Interbank Offered Rate ("LIBOR"). The amount
outstanding against this credit line at January 31 1998 was drawn in French
Francs, and was incurring interest at 3.6% per annum.
Accrued expenses includes GBP 116,000 (1997: GBP 123,000) 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.
Note 17 Creditors: amounts falling due after more than one year
Creditors due after more than one year represent obligations under lease
commitments (see note 18).
Note 18 Lease commitments
Financial commitments for future periods under lease agreements existing at
January 31 1998 are as follows:
Finance leases:
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Amounts payable within one year 6 71
Amounts payable from one to two years 15 15
- - --------------------------------------------------------------------------------
21 86
Less finance charges allocated to
future periods - (3)
- - --------------------------------------------------------------------------------
21 83
- - --------------------------------------------------------------------------------
Finance leases are shown as:
Amounts due within one years (note 16) 6 68
Amounts due after more than one year 12 15
- - --------------------------------------------------------------------------------
18 83
- - --------------------------------------------------------------------------------
Operating leases:
- - --------------------------------------------------------------------------------
Land and buildings Other
1998 1997 1998 1997
GBP'000 GBP'000 GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Annual commitment
under leases which expire:
within one year 263 1,117 4 114
in the second to fifth
years inclusive 1,576 648 541 462
thereafter 469 168 - -
- - --------------------------------------------------------------------------------
2,308 1,933 545 576
- - --------------------------------------------------------------------------------
Note 19 Capital commitments
At January 31 1998 and January 31 1997 Micro Focus had no material capital
expenditure commitments.
65
<PAGE> 46
Note 20 Deferred taxation
Deferred taxation has been fully provided as follows:
(a) Micro Focus:
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Capital allowances in advance
of depreciation and amortisation 89 169
Other timing differences 6,318 6,070
- - --------------------------------------------------------------------------------
6,407 6,239
- - --------------------------------------------------------------------------------
The movement of deferred taxation during the year is as follows:
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Balances, beginning of year 6,239 5,454
Movement on captital allowances
in advance of depreciation
and amortisation (80) (140)
Movement in other timing differences 248 925
- - --------------------------------------------------------------------------------
Balances, end of year 6,407 6,239
- - --------------------------------------------------------------------------------
(b) Company:
- - --------------------------------------------------------------------------------
1998 1997
GBP'000 GBP'000
- - --------------------------------------------------------------------------------
Capital allowances in advance
of depreciation and amortisation 19 19
- - --------------------------------------------------------------------------------
19 19
- - --------------------------------------------------------------------------------
Note 21 Share option plans
The Company's share option plans provide for the grant of options to acquire
shares to persons who devote substantially all their working time to Micro Focus
and such other eligible persons as the Board may determine. The exercise price
of options issued under these plans is 100% of the fair market value at the time
such options are granted. Options are generally exercisable in five equal
cumulative annual installments commencing one year after the date of grant.
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 1996 Share Option Plan was approved by shareholders in June 1996 and
authorised the Company to grant options for up to a maximum of 757,369 shares
(representing 5% of the issued share capital of the Company at that time); such
authority will expire on June 18 1999. Prior to 1996, authority to issue options
under similar terms had been granted pursuant to the 1991 Share Option Plan and
the 1983-1984 Share Option Plan. Such authorities expired in1996 and 1991
respectively. At January 31 1998 1,687,580 options were issued and outstanding
under the plans, and a further 319,253 which had been approved for grant by
shareholders under the 1996 Share Option Plan were currently unissued.
In 1994 the Micro Focus Group Employee Benefit Trust 1994 ("the Trust") was
established 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 for those shares to directors and employees. At January 31 1998 MFTL
owned 793,713 shares, and options granted by MFTL to purchase 634,245 of these
shares were outstanding. Options which had been granted for an additional 22,000
shares prior to their acquisition by MFTL also remained outstanding. The
remaining 105,220 option shares were available for future grant. The shares held
by the Trust are included in Investments (see note 13 to the financial
statements on page 64).
Pursuant to the agreement to acquire XDB Systems, Inc. ("XDB"), the Company
assumed XDB's 1992 Share Option Plan and 1996 Share Option Plan. Under the
agreement, holders of XDB options are entitled to exercise their option shares
in return for ordinary shares in the Company. At January 20 1998, the date of
the merger, XDB option holders held 40,042 options in the Company at prices
between $7.95 and $37.06 and denominated in U.S. dollars. At January 31 1998
30,056 of these option shares remained outstanding.
66
<PAGE> 47
Share option activity under the plans was as follows:
- - --------------------------------------------------------------------------------
Number Option price
of shares per share
- - --------------------------------------------------------------------------------
Outstanding, January 31, 1995 1,728,874 GBP 2.20-GBP 28.83
Options granted 603,795 GBP 5.42-GBP 8.20
Options exercised (114,865) GBP 2.20-GBP 5.42
Options cancelled (159,035) GBP 2.20-GBP 28.83
- - --------------------------------------------------------------------------------
Outstanding, January 31, 1996 2,058,769 GBP 5.42-GBP 28.83
Options granted 2,300,830 GBP 5.83-GBP 9.70
Options exercised (24,156) GBP 5.42-GBP 9.66
Options cancelled (1,840,411) GBP 5.42-GBP 28.83
- - --------------------------------------------------------------------------------
Outstanding, January 31, 1997 2,495,032 GBP 5.42-GBP 21.61
Options granted 1,324,545 GBP 4.85-GBP 22.60
Options exercised (310,741) GBP 5.42-GBP 18.52
Options cancelled (1,134,955) GBP 4.85-GBP 22.60
- - --------------------------------------------------------------------------------
Outstanding, January 31, 1998 2,373,881 GBP 4.85-GBP 22.60
- - --------------------------------------------------------------------------------
The total of 2,373,881 options outstanding at January 31 1998 is represented by
1,717,636 unissued shares (1,687,580 issued under the Micro Focus plans and
30,056 pursuant to the XDB plans) and 656,245 issued shares held by MFTL.
The outstanding options are exercisable between 1998 and 2007; the proceeds on
exercise at January 31 1998 would be GBP 21,579,000 (January 31 1997:GBP
19,790,000).
At January 31 1998 options for 254,000 shares (January 311997: 168,000 shares)
were currently exercisable at prices per share of between GBP 5.42 and GBP
22.60; the proceeds on exercise of such options at January 31 1998 would be GBP
2,586,000 (January 31 1997: GBP 2,095,000).
Note 22 Post-balance sheet event
On March 12 1998 shareholders approved a 5-for-1 sub-division of the Company's
ordinary shares ("the Stock Split".) The sub-division became effective as of the
close of business on Friday, March 13 1998. The Company's American Depository
Shares ("ADSs"), which are traded on the Nasdaq Stock Market in the United
States, did not split, although the conversion rights of such ADSs have been
adjusted such that each ADS now represents 5 ordinary shares.
67
<PAGE> 1
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG, 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 May 1, 1998 with respect to the
consolidated financial statements of Micro Focus Group Plc for the year ended
January 31, 1998 included in its 1998 Annual Report to Shareholders and
furnished to the Securities and Exchange Commission pursuant to a Report of
Foreign Issuer (Form 6-K).
Our audits also included the financial statement schedules of Micro Focus Group
Plc listed in Item 19(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, based on our audits, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ Ernst & Young
Ernst & Young
May 27, 1998
Reading, England
<PAGE> 1
EXHIBIT 23.02
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Company's Registration
Statements of Form S-8 (Nos. 333-24867 and 333-45701) pertaining to the employee
share plans named on the facing sheets thereof of our reports dated May 1, 1998
with respect to the consolidated financial statements of Micro Focus Group Plc
for the year ended January 31, 1998 included in its 1998 Annual Report to
Shareholders and furnished to the Securities and Exchange Commission pursuant to
a Report of Foreign Issuer (Form 6-K).
/s/ Ernst & Young
Ernst & Young
May 27, 1998
Reading, England
