<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OR 15D-15 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of August 24, 1998
Micro Focus Public Limited Company
(Translation of Registrant's Name into English)
The Lawn, Old Bath Road, Newbury, England RG14 1QN
(Address of Principal Executive Offices)
(Indicate by check mark whether the Registrant files or will file annual
reports under the cover of Form 20-F or Form 40-F.)
Form 20-F X Form 40-F
----- -----
(Indicate by check mark whether the Registrant by furnishing the
information contained in this form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes X No
----- -----
(If "Yes" is marked, indicate below the file number assigned to the
Registrant in connection with Rule 12g3-2(b): 82-795.
<PAGE> 2
14.1(C)
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN
ANY DOUBT AS TO THE ACTION YOU SHOULD TAKE, YOU SHOULD CONSULT AN INDEPENDENT
FINANCIAL ADVISER AUTHORISED UNDER THE FINANCIAL SERVICES ACT 1986.
14.1(E)
If you no longer hold any ordinary shares of 2p each in Micro Focus Group Plc,
please hand this document together with the accompanying documents at once to
the purchaser or transferee or to the stockbroker, bank or other agent through
whom the sale or transfer was effected for transmission to the purchaser or
transferee. The distribution of this document in jurisdictions other than the
United Kingdom and the United States may be restricted by law and therefore
persons into whose possession this document comes should inform themselves about
and observe any such restrictions. Any failure to comply with these restrictions
may constitute a violation of the securities laws of any such jurisdiction.
6.B.3
A copy of this document, which comprises listing particulars relating to Micro
Focus Group Plc prepared in accordance with the listing rules made under section
142 of the Financial Services Act 1986, has been delivered to the Registrar of
Companies in England and Wales for registration in accordance with section 149
of that Act.
- --------------------------------------------------------------------------------
MICRO FOCUS GROUP PLC
6.C.6
6.B.6
6.B.1
(incorporated and registered in England under the Companies Acts 1948 to 1981
No. 1709998)
LISTING PARTICULARS RELATING TO THE ISSUE OF NEW MICRO FOCUS
ORDINARY SHARES OF 2P EACH IN CONNECTION WITH THE MERGER WITH
6.B.15(B)
INTERSOLV, INC.
6.B.16
- --------------------------------------------------------------------------------
14.1(H)
6.B.1
6.B.18
14.1(H)(I)
Application has been made to the London Stock Exchange for the new ordinary
shares of 2p each in Micro Focus Group Plc to be issued in connection with the
Merger to be admitted to the Official List of the London Stock Exchange. It is
expected that admission will become effective and dealings will commence at 2
p.m. on 24 September 1998.
In respect of the Merger of a subsidiary of Micro Focus Group Plc and INTERSOLV,
Inc. and the application for the new Micro Focus Ordinary Shares to be admitted
to the Official List of the London Stock Exchange, Donaldson, Lufkin & Jenrette
International and Warburg Dillon Read and their respective affiliates are acting
as advisers to Micro Focus Group Plc and no one else and will not be responsible
to anyone other than Micro Focus Group Plc for providing the protections
afforded to customers of Donaldson, Lufkin & Jenrette International and Warburg
Dillon Read or for providing advice in relation to the Merger. Donaldson, Lufkin
& Jenrette International and Warburg Dillon Read are regulated in the United
Kingdom by The Securities and Futures Authority Limited.
NOTICE OF AN EXTRAORDINARY GENERAL MEETING OF MICRO FOCUS GROUP PLC TO BE HELD
AT 4 P.M. ON 23 SEPTEMBER 1998 AT THE LAWN, 22-30 OLD BATH ROAD, NEWBURY,
BERKSHIRE RG14 1QN IS SET OUT AT THE END OF THIS DOCUMENT. MICRO FOCUS
SHAREHOLDERS WILL FIND ENCLOSED WITH THIS DOCUMENT A FORM OF PROXY FOR USE AT
THE EXTRAORDINARY GENERAL MEETING. TO BE VALID, FORMS OF PROXY SHOULD BE
COMPLETED, SIGNED AND RETURNED IN ACCORDANCE WITH THE INSTRUCTIONS PRINTED
THEREON TO LLOYDS BANK REGISTRARS, THE CAUSEWAY, WORTHING, WEST SUSSEX BN99 3UH
SO AS TO BE RECEIVED AS SOON AS POSSIBLE AND, IN ANY EVENT, NO LATER THAN 4 P.M.
ON 21 SEPTEMBER 1998.
<PAGE> 3
CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
Expected Timetable 3
Definitions 4
Part 1 Letter from the Chairman of Micro Focus 7
1. Introduction 7
2. Summary of the terms of the Merger 8
3. Information on the Intersolv Group 8
4. Information on the Micro Focus Group 8
5. Background to and reasons for the Merger 9
6. Merged Group board and headquarters 10
7. Current trading and prospects 10
8. Changes to the Micro Focus Share Option Schemes and
details of the new
Micro Focus Plan 11
9. Listing, settlement and dealings 11
10. Extraordinary General Meeting 11
11. Action to be taken 12
12. Additional information 12
13. Recommendation 13
Part 2 Financial information on the Micro Focus Group 14
1. UK GAAP audited consolidated accounts 14
2. US GAAP audited consolidated accounts 28
3. Latest interim results 39
Part 3 Financial information on the Intersolv Group 45
1. US GAAP audited consolidated accounts 45
2. Summary of differences between US GAAP and UK GAAP 56
3. Reconciliation of US GAAP to UK GAAP financial
information 56
4. Report on the restatements to UK GAAP 58
5. Latest quarterly results 59
Part 4 Pro forma statements of net assets including a report on the
pro forma 63
Part 5 Employee share option schemes 67
1. Micro Focus 67
2. Intersolv 71
3. Proposed rules of the new Micro Focus Plan 78
4. Proposed amendments to the Micro Focus 1996 Approved
Scheme 80
5. Summary of options granted and available for grant 80
Part 6 Details of the Merger 81
Part 7 Additional information 86
Appendix I Risk factors 103
Appendix II Notice of Extraordinary General Meeting 113
</TABLE>
2
<PAGE> 4
EXPECTED TIMETABLE
<TABLE>
<S> <C>
Latest time for the return of Micro Focus forms of proxy... 4 p.m. BST on 21 September 1998
Extraordinary General Meeting of Micro Focus............... 4 p.m. BST on 23 September 1998
Intersolv Special Meeting.................................. 10 a.m. EDT on 23 September 1998
Effective Date of the Merger............................... 24 September 1998
</TABLE>
6.B.18
<TABLE>
<S> <C>
Dealings commence in new Micro Focus Ordinary Shares on the
London Stock Exchange.................................... 2 p.m. BST on 24 September 1998
</TABLE>
14.1(H)(V)
14.1(H)(IV)
<TABLE>
<S> <C>
Date on which certificates for new Micro Focus Ordinary
Shares will be dispatched to the Depositary.............. 24 September 1998
</TABLE>
3
<PAGE> 5
DEFINITIONS
In this document, the following definitions apply unless the context requires
otherwise:
"ACT" the Companies Act 1985 as amended
"ADMISSION" admission of the new Micro Focus Ordinary Shares to
the Official List becoming effective in accordance
with the Listing Rules published by the London
Stock Exchange
"BST" British Summer Time
"DEPOSITARY" The Bank of New York, being the depositary which
will issue the new Micro Focus ADRs representing
new Micro Focus ADSs to the Intersolv Stockholders
pursuant to the terms of a deposit agreement dated
16 March 1998 between, inter alia, itself and Micro
Focus
"DIRECTORS" OR "BOARD" the directors of the Company, whose names are set
out in Paragraph 2 of Part 7 of this document
"DONALDSON, LUFKIN &
JENRETTE" Donaldson, Lufkin & Jenrette International of 99
Bishopsgate, London EC2M 3XD and its affiliates
"EDT" Eastern Daylight Time
"EFFECTIVE DATE" the date on which the Merger becomes effective
(which is expected to be 24 September 1998)
"EXTRAORDINARY GENERAL
MEETING" the extraordinary general meeting of Micro Focus to
be held on 23 September 1998 (and any adjournment
thereof)
"EXCHANGE RATIO" the 0.55 new Micro Focus ADSs to be issued per
share of Intersolv Stock pursuant to the Merger
Agreement
"INTERSOLV" INTERSOLV, Inc.
"INTERSOLV AFFILIATES" officers, directors and holders of more than 10 per
cent. of the issued share capital of Intersolv
"INTERSOLV EMPLOYEE STOCK
PURCHASE PLAN" the Intersolv 1992 employee stock purchase plan
"INTERSOLV GROUP" Intersolv and its subsidiaries
"INTERSOLV OPTIONS" options to purchase Intersolv Stock granted under
Intersolv's 1982 Stock Option Plan, 1992 Stock
Option Plan, 1997 Employee Stock Option Plan, Q+E
Stock Option Plan and TechGnosis Stock Option Plan
as described in Paragraph 2 of Part 5 of this
document
"INTERSOLV SPECIAL MEETING" the special meeting of Intersolv Stockholders to be
held on 23 September 1998 (and any adjournment
thereof)
"INTERSOLV STOCK" shares of common stock in Intersolv with a par
value of $0.01 per share
"INTERSOLV STOCKHOLDERS" holders of Intersolv Stock
"INTERSOLV WARRANTS" the outstanding warrants, exchangeable or
convertible securities or other rights or
agreements to purchase or otherwise acquire any
shares of Intersolv Stock (other than Intersolv
Options)
"LONDON STOCK EXCHANGE" London Stock Exchange Limited
"MERGER" the proposed US statutory merger of Tower Merger
Sub and Intersolv as described in this document
"MERGED GROUP" Micro Focus and its subsidiaries as constituted
with effect from the Effective Date
"MERGER AGREEMENT" the definitive agreement and plan of reorganisation
dated as of 17 June 1998 between Micro Focus, Tower
Merger Sub and Intersolv which establishes the
terms of and conditions to the Merger
4
<PAGE> 6
"MICRO FOCUS" OR "COMPANY" Micro Focus Group Plc
"MICRO FOCUS ADS HOLDERS" holders of Micro Focus ADSs
"MICRO FOCUS ADSS" American Depositary Shares each representing 5
Micro Focus Ordinary Shares
"MICRO FOCUS GROUP" Micro Focus and its subsidiaries as constituted
prior to the Effective Date
"MICRO FOCUS OPTIONS" options to purchase Micro Focus Ordinary Shares
granted under the Micro Focus Share Option Schemes
"MICRO FOCUS ORDINARY
SHARES" fully paid ordinary shares of 2p each in the
capital of Micro Focus
"MICRO FOCUS SHAREHOLDERS" holders of Micro Focus Ordinary Shares
"MICRO FOCUS SHARE OPTION
SCHEMES" the 1983-84 and 1991 share option plans, the Micro
Focus 1996 Plan, the Micro Focus 1996 Approved
Scheme and the Micro Focus 1994 EBT
"MICRO FOCUS 1994 EBT" the Micro Focus Group Employee Benefit Trust
established by a deed of trust made on 10 June 1994
between Micro Focus (1) and Micro Focus Trustees
Limited (2)
"MICRO FOCUS 1996 APPROVED
SCHEME" the Micro Focus Group Inland Revenue approved Share
Option Scheme originally adopted in December 1983
and amended by the Company in general meeting on 19
June 1996
"MICRO FOCUS 1996 PLAN" the Micro Focus Group Share Option Plan adopted by
the Company on 19 June 1996
"NASDAQ" The Nasdaq National Market
"NEW MICRO FOCUS ADRS" American Depositary Receipts evidencing new Micro
Focus ADSs
"NEW MICRO FOCUS ADSS" American Depositary Shares each representing 5 new
Micro Focus Ordinary Shares
"NEW MICRO FOCUS ORDINARY
SHARES" Micro Focus Ordinary Shares to be issued in
connection with the Merger
"NEW MICRO FOCUS PLAN" the Micro Focus Group Share Option Plan which it is
proposed will be adopted by Micro Focus at the
Extraordinary General Meeting
"OFFICIAL LIST" the Official List of the London Stock Exchange
"PROPOSED DIRECTORS" the proposed new directors of the Company, whose
names are set out in Paragraph 2 of Part 7 of this
document
"Q+E" Q+E Software Inc., a wholly owned subsidiary of
Intersolv
"RECORD DATE" the business day immediately preceding the
Effective Date
"SDRT" UK Stamp Duty Reserve Tax
"SEC" the US Securities and Exchange Commission
"SECURITIES ACT" the US Securities Act of 1933, as amended
"TOWER MERGER SUB" Tower Merger Sub Inc., a wholly owned subsidiary of
Micro Focus, incorporated on 11 June 1998 under the
laws of the State of Delaware, United States for
the purpose of effecting the Merger
"UK GAAP" generally accepted accounting principles in the
United Kingdom
"UNITED KINGDOM" OR "UK" the United Kingdom of Great Britain and Northern
Ireland
"US GAAP" generally accepted accounting principles in the
United States
"UNITED STATES" OR "US" the United States of America and its territories
and possessions and all other areas subject to its
jurisdiction
5
<PAGE> 7
"WARBURG DILLON READ" Warburg Dillon Read, a division of UBS AG, of 1
Finsbury Avenue, London EC2M 2PP
"XDB" XDB Systems, Inc., a wholly owned subsidiary of
Micro Focus
"XDB PLANS" the 1992 and 1996 share option plans of XDB adopted
by Micro Focus pursuant to its acquisition of XDB
"$" OR "US DOLLARS" United States dollars
"L" OR "GB POUNDS" Great Britain pounds
Throughout this document, financial information has been translated between GB
pounds and US dollars using closing exchange rates for all assets and
liabilities, and using average exchange rates for the relevant period for all
revenues, costs, expenses and cash flows.
Financial information extracted from the financial statements of Micro Focus
included in Parts 1, 5, 6 and 7 and in the Appendices to this document is, where
denominated in GB pounds, extracted from UK GAAP financial statements and, where
denominated in US dollars is extracted from the US GAAP financial statements.
For the purpose of the statement of indebtedness in Section 13 of Part 7 of this
document, amounts denominated in foreign currencies have been translated into or
from GB pounds at the closing exchange rates in effect at 31 July 1998. Where
other GB pounds amounts have been presented with US dollar equivalents in Parts
1, 5, 6 and 7 and in the Appendices to this document, these amounts have been
translated into or from GB Pounds at an exchange rate of L1 = $1.64.
6
<PAGE> 8
PART I -- LETTER FROM THE CHAIRMAN OF MICRO FOCUS
[Micro Focus Logo]
24 August 1998
Directors:
J. Michael Gullard -- Non Executive Chairman
Harold Hughes -- Non Executive Deputy Chairman
Martin Waters -- President and Chief Executive Officer
Paul Adams -- Senior Vice President, International Sales
J. Sidney Webb -- Non Executive Director
To Micro Focus Shareholders and, for information only, to participants in the
Micro Focus Share Option Schemes
Dear Shareholder,
14.1(A)
1. INTRODUCTION
10.31(A)
On 17 June 1998, your board of directors announced that Micro Focus had signed a
definitive agreement under which a subsidiary of Micro Focus will merge with
Intersolv, a leading provider of applications enablement technology and services
based in Maryland in the United States. The Merger will combine Micro Focus'
expertise in providing solutions for enterprise software applications with
Intersolv's capabilities in application enablement. The Merged Group will assist
major corporations in accelerating the development, delivery and integration of
applications in distributed computing environments.
6.C.22(A)
6.B.5
10.31(C)
Under the terms of the Merger Agreement, each share of Intersolv Stock will be
exchanged for 0.55 new Micro Focus ADSs. Each new Micro Focus ADS represents 5
new Micro Focus Ordinary Shares. The total consideration is an amount equal to
approximately L316 million based on the closing mid market price of 502.5 p per
Micro Focus Ordinary Share as derived from the London Stock Exchange Daily
Official List for 16 June 1998, the dealing day prior to announcement of the
Merger, or L285 million based on the closing mid market price of 452.5 p per
Micro Focus Ordinary Share as derived from the London Stock Exchange Daily
Official List for 21 August 1998, being the latest practicable date prior to the
printing of this document.
Approximately 12.6 million new Micro Focus ADSs (62.9 million new Micro Focus
Ordinary Shares) will be issued to Intersolv Stockholders conditionally upon
completion of the Merger, which will represent approximately 44 per cent. of the
enlarged issued share capital of Micro Focus. Completion of the Merger is
expected to occur on 24 September 1998.
Because of Intersolv's size relative to Micro Focus, the proposed Merger is
conditional upon the approval of Micro Focus Shareholders. This document, which
comprises listing particulars relating to Micro Focus, provides details of the
proposed Merger and contains notice of an Extraordinary General Meeting to be
held on 23 September 1998 to seek the Micro Focus Shareholders' approval for the
Merger, the increase in the authorised share capital of the Company, to
authorise the Directors to allot shares, to approve the new Micro Focus Plan and
changes to the Micro Focus 1996 Approved Scheme and to increase the limit on
directors' fees. The Merger is also conditional upon approval by the Intersolv
Stockholders.
For further details of the Merger, including terms of the Merger Agreement, your
attention is drawn to Paragraph 2 of Part 1 and to Part 6 of this document.
Notice of the Extraordinary General Meeting can be found in Appendix II, and
details of the resolutions to be proposed are set out in Paragraph 10 of Part 1
of this document.
MICRO FOCUS GROUP PLC REGISTERED IN ENGLAND NO: 1709998
REGISTERED OFFICE: THE LAWN, 22-30 OLD BATH ROAD, NEWBURY, BERKSHIRE RG14 1QN
6.C.1
7
<PAGE> 9
14.1(B)
2. SUMMARY OF THE TERMS OF THE MERGER
In order to complete the Merger, a wholly owned US subsidiary of Micro Focus
will merge with and into Intersolv, with Intersolv being the surviving
subsidiary of Micro Focus. It is intended that the Merger will be a tax-free
reorganisation under Section 368(a) of the US Internal Revenue Code of 1986, as
amended, and accounted for under the pooling of interests method of accounting
under US GAAP and under the acquisition accounting method under UK GAAP.
Immediately following completion of the Merger, the new Micro Focus ADSs, and
the new Micro Focus Ordinary Shares they represent, will be listed on Nasdaq and
the London Stock Exchange, respectively.
On completion of the Merger, Intersolv Stockholders will receive new Micro Focus
ADSs on the following basis:
<TABLE>
<S> <C>
FOR EACH SHARE OF INTERSOLV STOCK: 0.55 NEW MICRO FOCUS ADSS, REPRESENTING
2.75 NEW MICRO FOCUS ORDINARY SHARES
</TABLE>
14.1(H)(VI)
No fractional new Micro Focus ADSs will be issued in connection with the Merger.
Intersolv Stockholders who would otherwise have been entitled to receive a
fraction of a new Micro Focus ADS in the Merger will receive cash, in lieu of
such entitlement.
6B7
RIGHTS OF NEW MICRO FOCUS ORDINARY SHARES AND NEW MICRO FOCUS ADSS
14.1(H)(II)
14.1(H)(III)
The new Micro Focus ADSs, representing new Micro Focus Ordinary Shares, to be
issued as consideration, will be issued free of all taxes, including SDRT, to
Intersolv Stockholders and will rank pari passu in all respects from the time of
their issue with the Micro Focus Ordinary Shares in issue at the time.
The new Micro Focus ADSs issued in connection with the Merger will be subject to
US SEC Rule 145 and any applicable "continuity of interest" requirements for a
tax-free reorganisation. Directors, Proposed Directors and certain other
affiliates of Intersolv and Micro Focus have agreed not to sell or transfer or
otherwise reduce their risk or ownership relative to any Micro Focus or
Intersolv securities during the period commencing 30 days prior to the
completion of the Merger and ending upon the public release of financial
statements covering 30 days of combined operations of Micro Focus and Intersolv.
This summary has been extracted from Part 6 of the document, and should be read
in conjunction with the whole document. Shareholders should not rely on key or
summarised information.
3. INFORMATION ON THE INTERSOLV GROUP
10.31.B
10.31.G
Intersolv develops, markets and supports a broad line of software solutions that
facilitate the development, delivery and deployment of business information
systems. Intersolv's strategy is to offer customers a broad family of software
development tools and services that are independent of rapidly changing
hardware, operating systems and database management technology. Intersolv's
products and services are focused primarily in three solution areas: automated
software quality, data connectivity and enterprise application renewal.
Intersolv has more than 4.5 million customer licences at over 35,000 customer
sites around the world. In the year ended 30 April 1998, Intersolv generated
revenues of $196.5 million and profits before tax of $8.2 million. These figures
have been extracted from the financial statements in Part 3 of this document and
should be read in conjunction with the whole document. Shareholders should not
rely on key or summarised information.
10.31(E)
Intersolv was incorporated under the laws of the State of Delaware, United
States in 1985 and is the successor to the business begun in 1982.
4. INFORMATION ON THE MICRO FOCUS GROUP
6.D.1
Micro Focus designs, develops, markets and supports application development
tools and services for business application development. Micro Focus' products
focus primarily on markets using the COBOL computer language. These products
permit users to analyse, create, re-engineer and deploy software applications
for a wide range of computers, from personal computer workstations to mainframe
computers. In addition, Micro Focus' products and services enable enterprise
application development and re-engineering of applications, including the
analysis and remediation of programs to meet the requirements of Year 2000 and
Euro currency compliance. In the year ended 31 January 1998, Micro Focus
generated revenues of L97.0 million ($167.3 million) and profits before tax of
L15.2 million ($21.8 million). These figures have been extracted from the
financial statements in Part 2 of this document, and should be read in
conjunction with the whole document. Shareholders should not rely on key or
summarised information.
8
<PAGE> 10
Micro Focus Limited was established in England and Wales in August 1976 and
became a wholly owned subsidiary of Micro Focus in May 1983. Micro Focus was
incorporated in England and Wales in March 1983 as a public limited company. In
May 1983, Micro Focus obtained a quotation on the Unlisted Securities Market
and, in June 1984, Micro Focus acquired a full listing on the London Stock
Exchange. In May 1992, the Micro Focus ADSs became listed on Nasdaq.
5. BACKGROUND TO AND REASONS FOR THE MERGER
10.31(F)
The software application development and management tools and services industry
is competitive and rapidly changing. As a result, both Micro Focus and Intersolv
have frequently evaluated strategic relationships of various forms, such as
potential original equipment manufacturer or value added reseller arrangements,
joint marketing relationships and potential business combinations with other
companies in the same and closely related fields. The Directors and the Proposed
Directors believe that the proposed Merger will provide the following benefits:
PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES FOR ENTERPRISE SOFTWARE SOLUTIONS
The Directors and the Proposed Directors believe that the combination of Micro
Focus' mainframe development and maintenance tools and expertise with
Intersolv's client/server and internet software tools and expertise will provide
an opportunity for the Merged Group to offer a more complete suite of products.
In addition, the Directors and the Proposed Directors believe that combining
Micro Focus' development and transformation software tools with Intersolv's
middleware components and application management products will produce a more
comprehensive product portfolio. This will enable the Merged Group to offer
products from developing, testing and deployment of new applications to
maintenance and extension of existing applications. The Board and the Proposed
Directors expect that the Merged Group will be focused exclusively on
applications development across the enterprise, with the strategy of providing a
single source for enterprise software solutions. The ability to provide a more
complete and broader product offering may also attract new marketing partners.
ADD STRENGTH TO THE PROFESSIONAL SERVICES ORGANISATION
Intersolv's professional services organisation provides training, consulting and
support services and has a history of strong service relationships with leading
corporations. The Directors and the Proposed Directors believe that the market
presence, customer base and relationships of Intersolv's professional services
group should provide the critical mass for services capability that will enable
the Merged Group to provide an integrated approach to products, services and
support and also provide an opportunity for expansion for the Merged Group.
EXPAND SALES ORGANISATION
Micro Focus has an extensive world-wide sales organisation that employs a direct
selling approach in the United Kingdom, the United States, Canada, Japan,
Germany, France, Spain, Italy, Australia and India. Additional sales channels
include original equipment manufacturers, value added resellers ("VARs") and
independent software vendors ("ISVs"). Intersolv has an extensive sales
organisation in the United Kingdom, the United States, Australia, Belgium, the
Netherlands, France, Germany and Japan which employs direct selling, telesales,
VARs and ISVs. Each of Micro Focus and Intersolv also uses distributors in a
number of international markets where it does not have a direct sales presence.
A number of these distributor relationships are common to both Micro Focus and
Intersolv. The Board and the Proposed Directors believe that the Merger will
enable Micro Focus to significantly expand its world-wide distribution.
INCREASE PRODUCT OFFERINGS AND CUSTOMER BASE
The Board and the Proposed Directors believe that the Merged Group will be able
to offer more products to more customers than either company currently offers.
This will provide a wider range of solutions and is expected to reduce the
dependency on any particular product line. In addition, the Merged Group will be
positioned to focus on areas, such as software application development business,
which the Directors and the Proposed Directors believe have potential for future
growth.
MAINTAIN TECHNOLOGY LEADERSHIP
Micro Focus' business strategy includes maintaining technology leadership by
consistently updating its software products for the various operating systems
consistent with customer demand. The Directors and the Proposed Directors
believe that Micro Focus' legacy technology and expertise combined with the
client/server and internet technology and expertise of Intersolv will help to
address a broader range of enterprise software technology. In addition, the
Directors and the Proposed Directors believe that the Merged Group will be
positioned to provide
9
<PAGE> 11
tools for the development of enterprise applications that are component-based,
multi-platform and implemented in open languages such as Java and COBOL. The
Merger should also increase the research and development capacity of the Merged
Group to improve product offerings.
REDUCE COSTS THROUGH ECONOMIES OF SCALE
The Directors and the Proposed Directors believe that the Merger will result in
business synergies including through the elimination or sharing of certain
administrative and operational expenses. However, Micro Focus expects to incur
charges to operations, primarily in the quarter in which the Merger becomes
effective, to reflect direct transaction costs and integration related expenses.
The Directors and Proposed Directors believe that cost savings arising from the
business synergies immediately following the Merger will be less significant
than long-term economies of scale.
6. MERGED GROUP BOARD AND HEADQUARTERS
Following the Merger it is proposed that Gary Greenfield (Intersolv's President
and Chief Executive Officer), Kevin Burns (Intersolv's Chairman) and Michel
Berty (a director of Intersolv) will be invited to join the board of directors
of Micro Focus. It is also proposed that Paul Adams will step down from the main
board upon the Merger becoming effective.
Following the Merger, the Micro Focus board will therefore be as follows:
<TABLE>
<CAPTION>
DIRECTOR POSITION
- ------------------------------------------------------------------------------------------------------
<S> <C>
J. Michael Gullard Non Executive Chairman
Harold Hughes Non Executive Deputy Chairman
Martin Waters President and Chief Executive Officer
J. Sidney Webb Non Executive Director
Gary Greenfield Non Executive Director
Kevin Burns Non Executive Director
Michel Berty Non Executive Director
- ------------------------------------------------------------------------------------------------------
</TABLE>
The principal offices of the Micro Focus Group in the United Kingdom will
continue to be at The Lawn, 22-30 Old Bath Road, Newbury, RG14 1QN, England. The
United States operations of the Micro Focus Group will be based at 701 East
Middlefield Road, Mountain View, California 94043, United States.
7. CURRENT TRADING AND PROSPECTS
On 19 August 1998, Micro Focus announced its results for its first half year
ended 31 July 1998. Net revenue for the half year grew to L58.6 million ($97.0
million) from L41.3 million ($71.7 million) in the half year ended 31 July 1997.
Profits before tax for the half year ended 31 July 1998 were L10.1 million
($15.8 million), 94 per cent. (215 per cent.) (under UK GAAP and US GAAP
respectively) higher than L5.2 million ($7.4 million) profits before tax in the
same period last year.
6.D.2
In the second half of 1998, Micro Focus expects to launch products which will
perform testing of code that has already been remediated. Because Micro Focus
has a powerful brand name in the COBOL tools area, the Board believes it is
positioned to take advantage of an increase in the Year 2000 testing market
which is expected to occur as users near the end of their Year 2000 remediation
process. Micro Focus has launched products this year aimed at aiding the EMU
conversion solution. Because the vast bulk of banking and financial services
software is written in COBOL, Micro Focus' area of expertise, the Board believes
that the move to a unified currency in Europe will provide the Company with an
opportunity to seek leadership in this market.
On 18 August 1998, Intersolv announced its results for its first quarter ended
31 July 1998. Intersolv reported a threefold increase in earnings after tax,
from $605,000 in the first quarter to 31 July 1997 to $2,120,000 in the first
quarter to 31 July 1998. Revenues were $47.1 million, 14 per cent. higher than
$41.3 million in revenue for the first quarter last year. Profits before tax
were $3.3 million, three times higher than $0.9 million profits before tax in
the same quarter last year.
6.G.1(A)
6.G.1(B)
Your Board and the Proposed Directors are confident about the prospects of the
Merged Group and the benefits to be obtained from the Merger. The Directors and
the Proposed Directors look forward to continued growth in the Merged Group's
business.
10
<PAGE> 12
8. CHANGES TO THE MICRO FOCUS SHARE OPTION SCHEMES AND DETAILS OF THE NEW
MICRO FOCUS PLAN
Micro Focus has had a policy of encouraging share ownership by its employees,
and the Directors and the Proposed Directors continue to hold the view that an
attractive company share scheme plays a key role in attracting and retaining
high quality staff. Employee share ownership is an essential factor to
recruiting staff in the software industry in the US. Following the Merger, the
Merged Group will have 1,150 of its staff in the US and, based upon the latest
audited results for Micro Focus and Intersolv, the Merged Group would have
earned 65 per cent. of its pro forma revenues in the 1998 financial year in the
US.
The Directors therefore will be seeking approval at the Extraordinary General
Meeting for the adoption of the new Micro Focus Plan. Following approval of the
new Micro Focus Plan, no further options will be granted under the Micro Focus
1996 Plan, which would otherwise expire on 18 June 1999. The new Micro Focus
Plan will authorise the Directors and the Proposed Directors to grant options
over Micro Focus Ordinary Shares. The authority being sought at the
Extraordinary General Meeting is in line with levels of share options granted by
many US software product companies, but it does exceed the guidelines
recommended by the Investment Committee of the Association of British Insurers.
The Directors and the Proposed Directors of Micro Focus believe this is
necessary to attract and retain high quality staff, especially in the highly
competitive US market for technology employees.
Under the new Micro Focus Plan, options will be granted to subscribe for new
Micro Focus Ordinary Shares up to an amount which, when aggregated with options
to subscribe for shares which have already been granted by the Company and which
remain available for exercise at the Effective Date, will not exceed 15 per cent
of the issued share capital of the Company, as enlarged, immediately following
completion of the Merger.
In addition, the Micro Focus 1994 EBT holds a total of 3,815,055 Micro Focus
Ordinary Shares. Of these, 2,512,108 have been placed under option by the
Trustees of the Micro Focus 1994 EBT and 1,302,947 remain available to be
granted by the Trustees. These options will be available to be allocated to
existing and new eligible persons as determined by the Trustees in consultation
with the board of the Company from time to time.
It is the Company's policy that the number of options granted to a Micro Focus
employee (other than a new employee) will be determined in the light of the
employee's performance against objectives, which may be individual or group as
appropriate, for the previous period.
The Directors and the Proposed Directors strongly believe that this proposal is
essential to manage properly the Merged Group. A summary of the key terms of the
new Micro Focus Plan is set out in Paragraph 3 of Part 5 and a summary of
existing options of the Company and Intersolv is set out in Paragraphs 1 and 2
of Part 5 of this document. Approval of the Merger is conditional upon approval
of this proposal. The full terms of the Micro Focus Share Option Schemes, the
XDB Plans and the new Micro Focus Plan will be available for inspection (see
additional information, Paragraph 21 of Part 7 of this document). In addition,
some amendments are proposed to the Micro Focus 1996 Approved Scheme to bring
its terms into line with the proposed new Micro Focus Plan. A summary of the
amendments is set out in Paragraph 4 of Part 5 of this document.
9. LISTING, SETTLEMENT AND DEALINGS
6.B.1
6.B.18
6.B.15(G)
Application has been made to the London Stock Exchange for the new Micro Focus
Ordinary Shares to be admitted to the Official List of the London Stock
Exchange. The new Micro Focus ADSs have been approved for quotation on Nasdaq.
Dealings in new Micro Focus Ordinary Shares are expected to commence at 2 p.m.
on the Effective Date. Certificates of new Micro Focus Ordinary Shares will be
dispatched to the Depositary on the Effective Date.
10. EXTRAORDINARY GENERAL MEETING
You will find at the end of this document a notice convening an Extraordinary
General Meeting to be held at The Lawn, 22-30 Old Bath Road, Newbury, Berkshire
RG14 1QN at 4 p.m. on 23 September 1998 at which the following resolutions will
be proposed:
6.C.10(A)
14.9(A)
14.7(A)
(1) subject to the passing of resolution 2:
(a) to approve the Merger Agreement, increase the authorised share capital
of the Company from L2,250,000 to L4,240,000 by the creation of an
additional 99,500,000 Micro Focus Ordinary Shares, representing an
increase of approximately 88 per cent. in the authorised share capital
of Micro Focus, to authorise the directors for the purposes of Section
80 of the Act to allot relevant securities in
11
<PAGE> 13
connection with the Merger up to an aggregate nominal amount of
L1,508,174 and to disapply section 89(1) of the Act (statutory
pre-emption rights) in order to comply with obligations to be assumed by
the Company pursuant to the Merger Agreement;
14.8(A)
14.7(C)
(b) to authorise the directors generally and unconditionally to allot
relevant securities (within the meaning of Section 80 of the Act) up to
an aggregate nominal amount of L1,110,128, such authority to expire no
later than 22 September 2003, and to empower the directors, pursuant to
such authority, for the purposes of Section 95 of the Act, to allot
equity securities limited to the allotment of equity securities in
connection with a rights issue or other issue of shares in favour of
Micro Focus Shareholders and to the allotment otherwise of equity
securities up to an aggregate nominal amount of L143,427. This power
will expire on the earlier of the date of the annual general meeting of
the Company to be held in 1999 or 15 months from the date of passing of
this resolution, being 22 December 1999;
14.8(B)(II)
(2) to approve the new Micro Focus Plan and authorise the directors to
implement it;
(3) to approve amendments to the Micro Focus 1996 Approved Scheme; and
(4) to increase the aggregate directors' fees limit under the articles of
association of the Company from L50,000 to L250,000 per annum.
Resolution 1 proposes, inter alia, to disapply statutory pre-emption rights in
order to implement the Merger and for the Company to assume the Intersolv
Options and Intersolv Warrants on the terms set out in this document. In
accordance with Section 95(5) of the Act, the Directors recommend Micro Focus
Shareholders to vote in favour of resolution 1 since, for the reasons set out in
this document, they believe that the Merger (which is conditional upon the
passing of resolutions 1 and 2) is in the best interests of the Company and
Micro Focus Ordinary Shareholders as a whole.
New Micro Focus Ordinary Shares which fall to be issued for cash pursuant to the
assumption of the Intersolv Options and Intersolv Warrants and their exercise
will, at current exchange rates, be issued at prices of between L5.87 and L18.94
per new Micro Focus Ordinary Share. Your Board considers that these terms are
reasonable having regard to the interests of the Company.
Following the increase in authorised share capital and completion of the Merger
and after taking account of:
a) the assumption of the Intersolv Options and Intersolv Warrants;
b) Micro Focus Ordinary Shares reserved for issue under the Micro Focus
Share Option Schemes and XDB Plans and the new Micro Focus Plan;
6.C.10(A)
14.9(B)
14.7(B)
47,809,075 Micro Focus Ordinary Shares, representing approximately 33 per cent.
of the enlarged authorised share capital of Micro Focus, will remain authorised
for allotment by the directors but unissued and unreserved. Save for any issue
of Micro Focus Ordinary Shares in connection with the Merger, and to satisfy
options under the Micro Focus Share Option Schemes and XDB Plans and the new
Micro Focus Plan for which approval is being sought at the Extraordinary General
Meeting, the Directors do not have any present intention of exercising the
authority to be granted pursuant to resolution 1, but consider it prudent to
maintain a degree of flexibility for the future.
11. ACTION TO BE TAKEN
Micro Focus Shareholders will find enclosed a form of proxy for use at the
Extraordinary General Meeting. WHETHER OR NOT THEY INTEND TO BE PRESENT AT THE
MEETING, MICRO FOCUS SHAREHOLDERS ARE REQUESTED TO COMPLETE AND RETURN THE FORM
OF PROXY IN ACCORDANCE WITH THE INSTRUCTIONS THEREON SO AS TO ARRIVE AS SOON AS
POSSIBLE AT LLOYDS BANK REGISTRARS, THE CAUSEWAY, WORTHING, WEST SUSSEX BN99
3UH, BUT IN ANY EVENT SO THAT IT IS RECEIVED NO LATER THAN 4 P.M. ON 21
SEPTEMBER 1998. The completion and return of a form of proxy will not preclude
Micro Focus Shareholders from attending and voting in person at the meeting,
should they wish to do so.
12. ADDITIONAL INFORMATION
Your attention is drawn to the further information on Micro Focus, on Intersolv,
and on the terms of the Merger contained in Parts 2, 3, 4, 5, 6, and 7 of this
document, and also to the Risk Factors, extracted from the US proxy
statement/prospectus, contained in Appendix I to this document.
12
<PAGE> 14
13. RECOMMENDATION
14.1(D)
YOUR DIRECTORS, WHO HAVE BEEN SO ADVISED BY DONALDSON, LUFKIN & JENRETTE AND
WARBURG DILLON READ, CONSIDER THE MERGER TO BE IN THE BEST INTERESTS OF MICRO
FOCUS AND MICRO FOCUS SHAREHOLDERS TAKEN AS A WHOLE. IN PROVIDING ADVICE TO THE
DIRECTORS, DONALDSON, LUFKIN & JENRETTE AND WARBURG DILLON READ HAVE PLACED
RELIANCE ON THE DIRECTORS' COMMERCIAL ASSESSMENT OF THE MERGER.
ACCORDINGLY, YOUR DIRECTORS RECOMMEND THAT MICRO FOCUS SHAREHOLDERS VOTE IN
FAVOUR OF THE RESOLUTIONS TO BE PROPOSED AT THE EXTRAORDINARY GENERAL MEETING,
AS YOUR DIRECTORS INTEND TO DO IN RESPECT OF THEIR OWN BENEFICIAL HOLDINGS
WHICH, IN AGGREGATE, AMOUNT TO 645,000 MICRO FOCUS ORDINARY SHARES AND 1,300
MICRO FOCUS ADSS REPRESENTING APPROXIMATELY 1 PER CENT. OF THE ISSUED SHARE
CAPITAL OF THE COMPANY.
Yours faithfully,
J. Michael Gullard
Chairman
13
<PAGE> 15
PART 2 -- FINANCIAL INFORMATION ON THE MICRO FOCUS GROUP
12.19(A)
6.E.1
6.E.3(A)
6.E.1
6.E.3(A)
6.A.4
6.A.5
The financial information on Micro Focus has been extracted without material
adjustment from the published audited consolidated accounts of Micro Focus for
each of the three years ended 31 January 1998. The financial information does
not constitute statutory accounts within the meaning of Section 240 of the Act.
Ernst & Young, Registered Auditors, have made reports under Section 235 of the
Act on the statutory accounts of Micro Focus for each of the three years ended
31 January 1998. Each such report was unqualified and did not contain a
statement under Section 237(2) or Section 237(3) of the Act. A copy of the
accounts for each of the three years ended 31 January 1998 has been delivered to
the Registrar of Companies in England and Wales in accordance with Section 242
of the Act.
1. UK GAAP AUDITED CONSOLIDATED ACCOUNTS
MICRO FOCUS CONSOLIDATED PROFIT AND LOSS ACCOUNTS (UK FORMAT)
6.E.4(B)
6.E.5
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOTES 31 JANUARY 1998 31 JANUARY 1997 31 JANUARY 1996
L'000 L'000 L'000
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Product revenue 60,480 42,020 43,991
Service revenue 36,535 31,069 33,267
---------------------------------------------------
Total revenue 2 97,015 73,089 77,258
---------------------------------------------------
COST OF REVENUE
Cost of product revenue 6,990 6,406 8,855
Cost of service revenue 15,845 11,892 12,343
---------------------------------------------------
Total cost of revenue 22,835 18,298 21,198
---------------------------------------------------
GROSS PROFIT 74,180 54,791 56,060
---------------------------------------------------
OPERATING EXPENSES
Research and development 4 19,679 24,299 26,851
Sales and marketing 35,289 30,146 32,857
General and administrative 6,476 7,854 4,986
---------------------------------------------------
Total operating expenses 61,444 62,299 64,694
---------------------------------------------------
OPERATING PROFIT/(LOSS) 5 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)
After five-for-one stock split:
EARNINGS/(LOSS) PER SHARE -- basic 13.6p (9.6p) (8.7p)
EARNINGS/(LOSS) PER SHARE -- diluted 13.0p (9.6p) (8.7p)
- ---------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
12.19(B)
6.E.1
6.E.3(A)
MICRO FOCUS CONSOLIDATED BALANCE SHEETS (UK FORMAT)
<TABLE>
<CAPTION>
AS AT AS AT
NOTES 31 JANUARY 1998 31 JANUARY 1997
L'000 L'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
Provision 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>
Note: an analysis of movements in shareholders' funds is set out on page 18
15
<PAGE> 17
MICRO FOCUS CONSOLIDATED CASH FLOW STATEMENT (UK FORMAT)
12.19(C)
6.E.1
6.E.3(A)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOTES 31 JANUARY 1998 31 JANUARY 1997 31 JANUARY 1996
L'000 L'000 L'000
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET CASH INFLOW FROM OPERATING
ACTIVITIES (i) 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
UK 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
undertakings 3 (2,000) -- (3,892)
Net cash acquired with
subsidiary undertakings 3 961 -- --
---------------------------------------------------
Net cash outflow from
acquisitions and disposals (1,039) -- (3,892)
---------------------------------------------------
Cash inflow/(outflow) before
financing 5,560 6,687 (18,538)
---------------------------------------------------
Financing
Issuance 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 7 (17)
---------------------------------------------------
INCREASE/(DECREASE) IN CASH (iii) 8,019 6,694 (18,555)
---------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
MICRO FOCUS CONSOLIDATED CASH FLOW STATEMENT (UK FORMAT)
6.E.10
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
31 JANUARY 1998 31 JANUARY 1997 31 JANUARY 1996
L'000 L'000 L'000
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(i) RECONCILIATION OF OPERATING PROFIT TO "NET
CASH INFLOW FROM OPERATING ACTIVITIES"
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 cash, beginning of year 44,642 38,758 55,314
---------------------------------------------------
NET CASH, END OF YEAR 50,493 44,642 38,758
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT TERM FINANCE LEASE
CASH LOANS OBLIGATIONS TOTAL
L'000 L'000 L'000 L'000
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(iii) ANALYSIS OF NET FUNDS
Balances at 31 January 1996 38,972 -- (214) 38,758
Cash flow 6,694 -- 131 6,825
Exchange differences (941) -- -- (941)
-----------------------------------------------
Balances at 31 January 1997 44,725 -- (83) 44,642
Cash flow 8,019 (1,007) 65 7,077
Exchange differences (1,226) -- -- (1,226)
-----------------------------------------------
Balances at 31 January 1998 51,518 (1,007) (18) 50,493
- ---------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
31 JANUARY 1998 31 JANUARY 1997 31 JANUARY 1996
L'000 L'000 L'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 L'000 L'000 L'000 L'000 L'000
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, 31 January 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, 31 January 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, 31 January 1998 22,500 15,883 1,588 30,196 -- 39,108 70,892
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Note: The issued ordinary shares are allotted, called up and fully paid (see
also note 22).
The Company 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 23
December 1989 and 31 January 1998 was L11,732,000 (31 January 1997: Lnil).
18
<PAGE> 20
NOTES TO THE FINANCIAL STATEMENTS (UK FORMAT)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
To enable the reader to see immediately any information provided in addition to
the common accounting policy statements, the text of this note and the
corresponding note 1 to the financial statements in U.S. format 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 UK Accounting Standards which, as applied by
the Micro Focus Group, 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 31
January 1997 and 31 January 1996.
BASIS OF CONSOLIDATION
The consolidated financial statements are those of Micro Focus Group Plc ("the
Company") and all of its subsidiary undertakings (together "the Group"). 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 Group 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 the Group's ordinary activities, stated net of applicable
sales taxes.
Revenue from licensing 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 ("OEMs") under
non-cancellable licence agreements generally provide for development fees and
initial licence fees, which are recognised at the later of: (a) the date product
is delivered to the OEM; (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 licensed 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.
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.
12.19(D)
12.19(E)
TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at cost less accumulated depreciation and
amortisation. Depreciation and amortisation is computed using the straight line
method over estimated economic lives from the time the asset is put into use.
Present estimated economic lives are as follows:
<TABLE>
<S> <C>
Freehold office buildings 40 years
Leasehold improvements over the lease term
Computer equipment 3-5 years
Office equipment 7 years
Transportation equipment 3-4 years
</TABLE>
LEASING
Leases which transfer substantially all the benefits and risks of ownership of
an asset to the Group 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 charge (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.
19
<PAGE> 21
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 UK Statement
of Standard Accounting Practice No. 20 "Foreign Currency Translation".
Assets and liabilities denominated in currencies other than GB pounds are
translated at exchange rates in effect at the balance sheet date. Closing GB
pound to US dollar rates at 31 January 1998 and 1997 were L1 = $1.64 and
L1 = $1.60 respectively. Revenue, costs and expenses are translated using
average rates. Monthly average GB pound to US dollar rates used during 1998
range between L1 = $1.60 and L1 = $1.67, and average L1 = $1.64, L1 = $1.58 and
L1 = $1.58 in 1998, 1997 and 1996 respectively. Translation adjustments
resulting from the process of translating financial statements denominated in
currencies other than GB 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.
PENSIONS
The Group 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
The Group 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:
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- ----------------------------------------------------------
<S> <C> <C> <C>
United Kingdom 11,864 6,811 7,178
United States 49,037 38,640 42,824
Europe (excluding UK) 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
- ----------------------------------------------------------
</TABLE>
The following table analyses worldwide operations by geographical area, based on
the location of Micro Focus facilities.
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- ----------------------------------------------------------
<S> <C> <C> <C>
Revenue:
United Kingdom 43,249 33,974 33,988
United States 56,846 42,856 49,503
Europe (excluding UK) 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 UK) (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 UK) 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 UK) (4,112) 2,988 9,176
Other 2,521 (16) (558)
--------------------------
15,513 10,848 25,795
- ----------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- ----------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------
</TABLE>
20
<PAGE> 22
NOTE 3 ACQUISITIONS
In the year ended 31 January 1998 the Group completed two acquisitions for a
total consideration of L12,679,000 in cash and shares.
6.D.11
On 30 April 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 L4,000,000 paid in a combination of
L2,000,000 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 the Group for the nine-month period subsequent to 30 April 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.
<TABLE>
<CAPTION>
FAIR VALUES
NET ASSETS FAIR VALUE ON
ACQUIRED ADJUSTMENTS ACQUISITION
L'000 L'000 L'000
- -------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------
</TABLE>
Goodwill arising on the acquisition has been charged to reserves.
Millennium reported a loss after taxation of L229,000 in its financial year
ended 31 December 1996. In the subsequent four month period to 30 April 1997
Millennium recorded a profit after taxation of L19,000. In the period since
acquisition, Millennium contributed L48,000 to the Group's net operating cash
flows and utilised L44,000 for capital expenditure.
Subsequent to the acquisition, costs amounting to L200,000 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 20 January 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 L8,679,000 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 the Group for the period
subsequent to 20 January 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.
<TABLE>
<CAPTION>
FAIR VALUE
ADJUSTMENTS
--------------------- FAIR VALUES
NET ASSETS ACCOUNTING ON
ACQUIRED POLICY CHANGE OTHER ACQUISITIONS
L'000 L'000 L'000 L'000
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------
</TABLE>
The fair value adjustments relate to:
- the deferral of previously recognised revenue totalling L707,000 to
reflect compliance with the Micro Focus Group's existing revenue
recognition policy
- reductions of L78,000 to accruals established by XDB to provide for costs
incurred during 1998
- the elimination of a deferred tax asset amounting to L754,000 which had
been established in accordance with US 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 ending 31 January 1999.
In addition to the above adjustments, provisions amounting to L122,000 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 31 January 1997 was
L2,642,000. In the subsequent pre-acquisition period from 1 February 1997 to 20
January 1998 XDB recorded a loss after taxation of L671,000. XDB's cash flows
for the period of ownership were not material.
In May 1995 the Group completed the acquisition of Burl Software Laboratories,
Inc. for a total of US$13.5 million (L8.5 million), which was satisfied by the
issue of 664,979 ordinary shares of the Company (equivalent to 3,324,895 Micro
Focus Ordinary Shares following the Stock Split) and the payment of US$6.3
million (L3.9 million) in cash. The transaction was accounted for as an
acquisition.
21
<PAGE> 23
6.D.7
6.D.12
NOTE 4 RESEARCH AND DEVELOPMENT COSTS
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- ----------------------------------------------------------
<S> <C> <C> <C>
Research and development costs
before capitalisation 17,602 19,235 23,423
Costs capitalised as software
product assets (5,688) (5,258) (9,882)
Amortisation of capitalised
costs 7,765 8,067 8,805
------------------------
19,679 22,044 22,346
Exceptional items (note 8)
Restructuring costs:
- -- accelerated amortisation -- -- 3,834
- -- other costs -- 2,255 671
------------------------
19,679 24,299 26,851
- ----------------------------------------------------------
</TABLE>
NOTE 5 OPERATING PROFIT/(LOSS)
Operating profit/(loss) is stated after charging:
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- ----------------------------------------------------------
<S> <C> <C> <C>
Auditor's remuneration:
audit services: UK 117 105 96
audit services: overseas 110 93 100
non-audit services: UK 230 181 141
non-audit services: overseas 289 218 179
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
- ----------------------------------------------------------
</TABLE>
The profit attributable to Micro Focus Shareholders, dealt with in the financial
statements of Micro Focus, is L805,000 (1997: L716,000; 1996: L1,449,000). There
were no other movements on reserves other than the movement on share premium.
FIG. 1
An analysis of the directors' remuneration, pension entitlements and share
options is set out below:
6.F.3
<TABLE>
<CAPTION>
PERFORMANCE PENSION COMPENSATION FOR
SALARY FEES RELATED PAY CONTRIBUTIONS LOSS OF OFFICE OTHER TOTAL
YEAR ENDED 31 JANUARY L'000 L'000 L'000 L'000 L'000 L'000 L'000
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
J. Michael Gullard -- 50 -- -- -- -- 50
Harold Hughes -- 18 -- -- -- -- 18
J. Sidney Webb -- 5 -- -- -- -- 5
(appointed December 2 1997)
Martin Waters 105 -- 201 -- -- 183 489
(appointed June 21 1997)
Paul Adams 85 -- 125 -- -- -- 210
Ron Forbes 82 -- 76 6 -- -- 164
Marcelo Gumucio 53 -- 31 -- 545 -- 629
(resigned June 21 1997)
-------------------------------------------------------------------------------
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 -- -- -- -- -- 29 29
(resigned March 24 1996)
Paul O'Grady 24 -- -- -- 30 -- 54
(resigned April 1 1996)
-------------------------------------------------------------------------------
283 84 195 6 30 29 627
-------------------------------------------------------------------------------
1996:
J. Michael Gullard -- 62 -- -- -- -- 62
(appointed May 2 1995)
Harold Hughes -- 34 -- -- -- -- 34
Marcelo Gumucio -- 1 -- -- -- -- 1
(appointed January 27 1996)
Paul Adams 143 -- -- -- -- -- 143
Ron Forbes 76 -- 3 6 -- -- 85
Brian Reynolds -- -- -- -- -- 117 117
Paul O'Grady 120 -- 11 -- -- -- 131
-------------------------------------------------------------------------------
339 97 14 6 -- 117 573
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 24
NOTE 6 DIRECTORS AND EMPLOYEES
See Fig. 1
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 (L136,000) 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 (L120,000) and vesting for 138,440 option shares held by Mr Gumucio was
accelerated and the exercise period extended. The benefit attributable to Mr.
Gumucio as a result of the accelerated vesting of share options amounted to
L409,000. 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 Act.
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- ----------------------------------------------------------
<S> <C> <C> <C>
All directors:
Aggregate emoluments 1,559 621 567
Pension contributions 6 6 6
Gain on exercise of share options 889 -- --
----------------------
2,454 627 573
----------------------
Highest paid director:
Aggregate emoluments 629 231 143
Gain on exercise of share options 889 -- --
----------------------
1,518 231 143
- ----------------------------------------------------------
</TABLE>
Gains on exercise of share options are calculated as at the date of exercise
although the shares may have been retained.
DIRECTORS' SHAREHOLDINGS
The interests of the directors in the share capital of the Company are as
follows:
6.F.4
(number of shares)
<TABLE>
<CAPTION>
31 JANUARY
1998 1997
- -------------------------------------------------------
<S> <C> <C>
J Michael Gullard, 1,000 1,000
Chairman
Harold Hughes, 20,000 20,000
Deputy Chairman
J Sidney Webb 100 100*
Martin Waters, -- --*
Chief Executive Officer
Paul Adams 106,600 106,600
Ron Forbes 17,676 23,676
- -------------------------------------------------------
</TABLE>
* At date of appointment in the cases of Mr Webb and Mr Waters
On 6 March 1998 Mr Webb increased his holding by 1,000 shares. There have been
no other changes in these holdings since the year end.
The shareholdings quoted above have not been restated to give effect to the
sub-division of Micro Focus Ordinary Shares which took effect from the close of
business on 13 March 1998 (see note 22).
DIRECTORS' SHARE OPTIONS
See Fig. 2
FIG. 2
The following table sets out the numbers of options held by each director,
including the changes in holdings during the year ended 31 January 1998.
6.C.19
6.C.10
6.C.10(C)
<TABLE>
<CAPTION>
DATE OF OPTION OPTION 31 JANUARY 31 JANUARY LATEST
GRANT PRICE 1997 GRANTED EXERCISED LAPSED 1998 EXERCISE DATE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Michael Gullard 2 June 1994 L10.67 10,000 10,000 2 June 2004
21 June 1996 L8.35 50,000 50,000 21 June 2006
Harold Hughes 19 August 1992 L14.98 10,000 10,000 19 August 2002
16 June 1994 L11.98 2,000 2,000 16 June 2004
Martin Waters 16 September 1997 L21.01 237,500 237,500 16 September 2004
16 September 1997 L21.01 362,500 362,500 16 September 2007
Marcelo Gumucio 30 January 1996 L6.05 10,000 (2,000) (8,000) -- n/a
(resigned 21 June
1997) 1 April 1996 L6.53 362,500 (72,500) (262,313) 27,687* n/a
21 June 1996 L8.35 362,500 (353,438) 9,062* n/a
Paul Adams 8 May 1990 L5.42 1,600 1,600 8 August 1998
10 April 1996 L6.85 57,300 57,300 10 April 2003
5 March 1997 L10.59 10,000 10,000 5 March 2007
Ron Forbes 10 April 1996 L6.85 51,300 51,300 10 April 2000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Number of option shares held at date of resignation in the case of Mr Gumucio.
At the date of exercise, the Company's share price was L18.45 per share.
Consequently, the exercise of options by Mr Gumucio gave rise to a gain of
L889,000. As set out above, no other director exercised options during the year.
No consideration was payable on the grant of the share options set out above.
The market price of the Micro Focus Ordinary Shares at 31 January 1998 was
L27.37 and the range during the year was L10.35 to L28.30.
The option prices and holdings quoted above have not been restated to give
effect to the sub-division of the Micro Focus Ordinary Shares which took effect
from the close of business on 13 March 1998 (see note 22).
23
<PAGE> 25
The average weekly number of staff employed by the Group during the year was:
<TABLE>
<CAPTION>
1998 1997 1996
NO. NO. NO.
- -----------------------------------------------------
<S> <C> <C> <C>
UK 252 255 302
US 355 310 355
Other 112 81 78
------------------
719 646 735
- -----------------------------------------------------
</TABLE>
6.D.10
Staff costs, which include salaries, bonus and commissions,
amounted to:
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- --------------------------------------------------------
<S> <C> <C> <C>
UK 10,324 9,173 10,167
US 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
- --------------------------------------------------------
</TABLE>
Other pension costs principally represent amounts paid by the Group to personal
pension schemes operated by its employees. In the United Kingdom, the Group
matches contributions made by participating employees up to certain
predetermined thresholds. Arrangements for employees in other countries have
been established on similar bases, subject to local regulations and practices in
the countries concerned.
NOTE 7 INTEREST EXPENSE
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- --------------------------------------------------------
<S> <C> <C> <C>
Finance charges payable under
finance leases 5 18 74
On bank loans and overdrafts 65 3 --
----------------------
70 21 74
- --------------------------------------------------------
</TABLE>
NOTE 8 EXCEPTIONAL ITEMS
Exceptional items recorded in the year ended 31 January 1997 represented a
charge of L5,195,000 for restructuring. The charge consists of the costs
associated with a reduction in the Group'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 31 January 1998.
Exceptional items recorded in the year ended 31 January 1996 consisted of a
charge of L6,667,000 for restructuring and a credit of L666,000 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 L3,125,000 announced in May 1995 related to employee
terminations, closure of surplus office facilities, and fixed asset write-downs.
Additional asset write-downs of L3,542,000 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:
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- --------------------------------------------------------
<S> <C> <C> <C>
UK corporation tax 3,244 237 133
Deferred taxation (71) 870 (458)
Double taxation relief (162) (174) (105)
Overseas taxation:
US federal 542 4 5
US 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:
US federal -- -- 193
US state -- -- (2)
Other -- -- 78
-----------------------
4,791 1,472 (72)
- --------------------------------------------------------
</TABLE>
The effective tax rate in 1998 is 31.5%, which compares to the applicable UK
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.
6.D.10
The corporation tax returns of certain US subsidiary undertakings
are under examination by the US 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.
6.E.5
NOTE 10 EARNINGS/(LOSS) PER SHARE
Earnings/(loss) per share is computed on the bases set out in note 1.
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- --------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------
</TABLE>
Earnings per share data has also been presented on the profit and loss account
on a basis which reflects the five-for-one sub-division of Micro Focus Ordinary
Shares on 13 March 1998 (see note 22). This data has been calculated as if the
sub-division had occurred
24
<PAGE> 26
at 1 February 1995, on the basis of the weighted average number of ordinary
shares set out below:
<TABLE>
<CAPTION>
1998 1997 1996
L'000 L'000 L'000
- --------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Ordinary shares (weighted
average) 76,865 75,780 74,215
Diluted earnings per share:
Ordinary shares (weighted
average) 85,995 75,780 74,215
- --------------------------------------------------------
</TABLE>
NOTE 11 INTANGIBLE FIXED ASSETS
Intangible fixed assets consist of software product assets, as follows:
<TABLE>
<CAPTION>
NET BOOK
COST AMORTISATION VALUE
L'000 L'000 L'000
- --------------------------------------------------------
<S> <C> <C> <C>
At 31 January 1996 70,816 52,959 17,857
Currency fluctuations (1,858) (1,400) (458)
Additions 5,258 -- 5,258
Amortisation for the
year -- 8,067 (8,067)
-------------------------------
At 31 January 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 31 January 1998 79,149 66,755 12,394
- --------------------------------------------------------
</TABLE>
NOTE 12 TANGIBLE FIXED ASSETS
See Fig. 3
Freehold land and buildings includes capitalised interest of L385,000.
Transportation equipment includes assets held under finance leases as follows:
<TABLE>
<CAPTION>
NET BOOK
COST DEPRECIATION VALUE
L'000 L'000 L'000
- --------------------------------------------------------
<S> <C> <C> <C>
At 31 January 1996 374 165 209
Provision for the year -- 39 (39)
Disposals (249) (138) (111)
-----------------------------
At 31 January 1997 125 66 59
Provision for the year -- -- --
Disposals -- -- --
-----------------------------
At 31 January 1998 125 66 59
- --------------------------------------------------------
</TABLE>
NOTE 13 INVESTMENTS
Investment in own shares represents the Company's ordinary shares acquired by
Micro Focus Trustees Limited on behalf of the Micro Focus 1994 EBT ("the
Trust"), at cost:
<TABLE>
<CAPTION>
1998 1997
L'000 L'000
- -------------------------------------------------------
<S> <C> <C>
Beginning of year 5,634 5,634
Sold on exercise of options (748) --
--------------
End of year 4,886 5,634
- -------------------------------------------------------
</TABLE>
FIG. 3
<TABLE>
<CAPTION>
COMPUTER AND
FREEHOLD COMMUNICATIONS
LAND AND LEASEHOLD OFFICE EQUIPMENT AND TRANSPORTATION
BUILDINGS IMPROVEMENTS EQUIPMENT SOFTWARE EQUIPMENT TOTAL
L'000 L'000 L'000 L'000 L'000 L'000
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost:
At 31 January 1996 13,142 1,983 4,852 25,014 594 45,585
Currency fluctuations -- (75) (211) (1,076) (3) (1,365)
Additions 414 101 77 1,891 17 2,500
Disposals -- (1,169) (28) (1,875) (316) (3,388)
--------------------------------------------------------------------------------
At 31 January 1997 13,556 840 4,690 23,954 292 43,332
Currency fluctuations -- (60) (101) (457) (2) (620)
Additions 272 1,795 1,308 5,157 27 8,559
Disposals -- -- (1,246) (834) (191) (2,271)
--------------------------------------------------------------------------------
At 31 January 1998 13,828 2,575 4,651 27,820 126 49,000
--------------------------------------------------------------------------------
Depreciation:
At 31 January 1996 205 1,847 2,779 15,581 263 20,675
Currency fluctuations -- (55) (125) (737) (3) (920)
Provision for the year 231 135 678 4,531 80 5,655
Disposals -- (1,167) (20) (1,257) (177) (2,621)
--------------------------------------------------------------------------------
At 31 January 1997 436 760 3,312 18,118 163 22,789
Currency fluctuations -- (28) (54) (347) (2) (431)
Provision for the year 223 85 403 3,810 9 4,530
Disposals -- -- (965) (659) (100) (1,724)
--------------------------------------------------------------------------------
At 31 January 1998 659 817 2,696 20,922 70 25,164
--------------------------------------------------------------------------------
Net book values:
At 31 January 1996 12,937 136 2,073 9,433 331 24,910
At 31 January 1997 13,120 80 1,378 5,836 129 20,543
At 31 January 1998 13,169 1,758 1,955 6,898 56 23,836
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 27
As at 31 January 1998 the Trust owned 757,369 shares with a nominal value of
L75,737, and options have been granted to employees to purchase up to 634,245 of
such shares (see note 21). The market value of these shares was L20,729,000 (31
January 1997: L9,656,000); if they had been sold at this value a liability to
corporation tax of approximately L4,500,000 (31 January 1997: L1,100,000) 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 the consolidated financial statements.
The principal subsidiary undertakings of the Company, all of which are
wholly-owned, are:
<TABLE>
<CAPTION>
COUNTRY OF
INCORPORATION
- ---------------------------------------------------------
<S> <C>
Micro Focus Limited UK (1)
Micro Focus International Limited UK (2)
Micro Focus Holdings Limited UK (1)
Micro Focus Incorporated USA. (2)
XDB Systems, Inc. USA. (1)
Micro Focus Japan Japan (2)
Micro Focus GmbH Germany (2)
Micro Focus SARL France (2)
Micro Focus SA Spain (2)
Micro Focus Investments Limited Jersey (3)
System Focus BV Netherlands (2)
Micro Focus Technology NV Antilles (2)
- ---------------------------------------------------------
</TABLE>
(1) Held directly by the Company
(2) Held by a subsidiary undertaking
(3) Held directly by the Company, operating as a financing company.
NOTE 14 STOCKS
The replacement value of stocks is not considered to be materially different
from their balance sheet values.
NOTE 15 DEBTORS
<TABLE>
<CAPTION>
1998 1997
L'000 L'000
- -------------------------------------------------------
<S> <C> <C>
Trade debtors 29,145 12,672
Other debtors and prepaid expenses 1,728 1,556
----------------
30,873 14,228
- -------------------------------------------------------
</TABLE>
Trade debtors include Lnil (1997: L1,693,000) which is due more than twelve
months from the balance sheet date. Other debtors and prepaid expenses include
loans to an officer of the Company totalling Lnil (1997: L57,000), and amounts
due more than twelve months from the balance sheet date totalling L74,000 (1997:
L164,000).
NOTE 16 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1998 1997
L'000 L'000
- --------------------------------------------------------
<S> <C> <C>
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 5,105
---------------
26,483 16,180
- --------------------------------------------------------
</TABLE>
The Bank loan represents borrowings against an unsecured revolving
multi-currency loan facility, under the terms of which financing of up to
L5,000,000, or its equivalent in such other currency as the Company may
determine, is available until January 2001. Borrowings under this facility bear
interest at 0.75% above the London Interbank Offered Rate ("LIBOR"). The amount
outstanding against this credit line at 31 January 1998 was drawn in French
Francs, and was incurring interest at 3.6% per annum.
Accrued expenses includes L116,000 (1997: L123,000) in respect of an unfunded
defined benefit scheme operated by a foreign subsidiary undertaking, and other
outstanding contributions payable by the Group 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).
6.E.11
NOTE 18 LEASE COMMITMENTS
Financial commitments for future periods under lease agreements existing at 31
January 1998 are as follows:
Finance leases:
<TABLE>
<CAPTION>
1998 1997
L'000 L'000
- ------------------------------------------------------
<S> <C> <C>
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 year (note 16) 6 68
Amounts due after more than one year 12 15
--------------
18 83
- ------------------------------------------------------
</TABLE>
Operating leases:
<TABLE>
<CAPTION>
LAND AND
BUILDINGS OTHER
------------- -------------
1998 1997 1998 1997
L'000 L'000 L'000 L'000
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------
</TABLE>
NOTE 19 CAPITAL COMMITMENTS
At 31 January 1998 and 31 January 1997 the Group had no material capital
expenditure commitments.
NOTE 20 DEFERRED TAXATION
Deferred taxation has been fully provided as follows:
<TABLE>
<CAPTION>
1998 1997
L'000 L'000
- -------------------------------------------------------
<S> <C> <C>
Capital allowances in advance of
depreciation and amortisation 89 169
Other timing differences 6,318 6,070
-------------
6,407 6,239
- -------------------------------------------------------
</TABLE>
26
<PAGE> 28
The movement of deferred taxation during the year is as follows:
<TABLE>
<CAPTION>
1998 1997
L'000 L'000
- -------------------------------------------------------
<S> <C> <C>
Balances, beginning of year 6,239 5,454
Movement on capital allowances in
advance of depreciation and
amortisation (80) (140)
Movement in other timing differences 248 925
-------------
Balances, end of year 6,407 6,239
- -------------------------------------------------------
</TABLE>
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 the Group
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 instalments commencing one year after the date of grant.
Unexercised options lapse when the optionholder ceases to be employed by the
Group or at a predetermined expiry date (of up to ten years from the date of
grant), whichever occurs first.
The Micro Focus 1996 Plan was approved by Micro Focus 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 18 June 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 in
1996 and 1991 respectively. At 31 January 1998, 1,687,580 options were issued
and outstanding under the plans, and a further 319,253 which had been approved
for grant by Micro Focus Shareholders under the Micro Focus 1996 Plan were
currently unissued.
In 1994 the Micro Focus 1994 EBT was established to further the Company's policy
of encouraging share ownership by its employees. Under the terms of the Micro
Focus 1994 EBT, Micro Focus Trustees Limited ("MFTL") is permitted to acquire
Micro Focus Ordinary Shares and to issue options for those shares to directors
and employees. At 31 January 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 Micro Focus 1994 EBT are included in
Investments (see note 13).
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 Micro Focus Ordinary Shares. At 20 January 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 US dollars. At 31 January 1998, 30,056 of
these option shares remained outstanding.
Share option activity under the plans was as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
- --------------------------------------------------------
<S> <C> <C>
Outstanding, 31 January 1995 1,728,874 L2.20-L28.83
Options granted 603,795 L5.42-L 8.20
Options exercised (114,865) L2.20-L 5.42
Options cancelled (159,035) L2.20-L28.83
-------------------------
Outstanding, 31 January 1996 2,058,769 L5.42-L28.83
Options granted 2,300,830 L5.83-L 9.70
Options exercised (24,156) L5.42-L 9.66
Options cancelled (1,840,411) L5.42-L28.83
-------------------------
Outstanding, 31 January 1997 2,495,032 L5.42-L21.61
Options granted 1,324,545 L4.85-L22.60
Options exercised (310,741) L5.42-L18.52
Options cancelled (1,134,955) L4.85-L22.60
-------------------------
Outstanding, 31 January 1998 2,373,881 L4.85-L22.60
- --------------------------------------------------------
</TABLE>
The total of 2,373,881 options outstanding at 31 January 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 31 January 1998 would be L21,579,000 (31 January 1997: L19,790,000).
6.F.8
At 31 January 1998 options for 254,000 shares (31 January 1997: 168,000 shares)
were currently exercisable at prices per share of between L5.42 and L22.60; the
proceeds on exercise of such options at 31 January 1998 would be L2,586,000 (31
January 1997: L2,095,000).
NOTE 22 POST-BALANCE SHEET EVENT
On 12 March 1998 shareholders approved a five-for-one sub-division of Micro
Focus Ordinary Shares ("the Stock Split"). The sub-division became effective as
of the close of business on Friday, 13 March 1998. The Micro Focus ADSs, which
are traded on the Nasdaq Stock Market in the United States, did not split,
although the conversion rights of such Micro Focus ADSs have been such that each
Micro Focus ADS now represents five Micro Focus Ordinary Shares.
27
<PAGE> 29
6.E.1
6.E.3(A)
6.A.4
6.A.5
12.17
12.19(A)
12.19
6.E.5
6.E.4(B)
2. US GAAP AUDITED CONSOLIDATED ACCOUNTS
MICRO FOCUS CONSOLIDATED STATEMENTS OF INCOME (US FORMAT)
($ in thousands except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOTES 31 JANUARY 1998 31 JANUARY 1997 31 JANUARY 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET REVENUE
Product revenue $104,041 $ 71,115 $ 77,725
Service revenue 63,268 52,112 57,059
---------------------------------------------------
Total net revenue 10 167,309 123,227 134,784
---------------------------------------------------
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 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 5 -- 8,670 9,469
---------------------------------------------------
Total operating expenses 112,813 112,559 116,638
---------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 10 17,594 (16,993) (14,912)
Interest income 4,370 3,094 3,784
Interest expense (123) (73) (117)
---------------------------------------------------
INCOME (LOSS) BEFORE TAXES 21,841 (13,972) (11,245)
Income taxes 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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
12.19(E)
Note: Shares and per share data for all periods presented have been restated to
reflect the five-for-one stock split of the Micro Focus Ordinary Shares,
which was effective as of the close of business on 13 March 1998 (see note
12 to the consolidated financial statements). The Micro Focus ADSs did not
split, although the conversion rights of such Micro Focus ADSs have been
adjusted such that each Micro Focus ADS represents five Micro Focus
Ordinary Shares. Per share earnings are also shown in the US format on a
Micro Focus ADS equivalent basis, consistent with pre-split reporting.
28
<PAGE> 30
MICRO FOCUS CONSOLIDATED BALANCE SHEETS (US FORMAT)
($ in thousands except share and per share data)
12.19(B)
<TABLE>
<CAPTION>
AS AT AS AT
NOTES 31 JANUARY 1998 31 JANUARY 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
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 6 39,083 33,796
Goodwill, net of accumulated amortisation of $1,391
($nil in 1997) 5,346 --
Software product assets, net of accumulated
amortisation of $108,871 ($95,402 in 1997) 20,328 23,344
---------------------------------
TOTAL ASSETS 10 $200,397 $161,870
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loan 7 $ 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 9 9,159 8,746
---------------------------------
TOTAL LIABILITIES 85,563 69,126
---------------------------------
SHAREHOLDERS' EQUITY
Ordinary shares: 2 pence par value 112,500,000
shares, authorised, 79,417,000 shares issued and
outstanding (77,730,000 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 $161,870
- -------------------------------------------------------------------------------------------------
</TABLE>
Note: Share data for all periods have been restated to reflect the five-for-one
stock split of the Micro Focus Ordinary Shares, which was effective as of
the close of business on 13 March 1998 (see note 12 to the consolidated
financial statements). The Micro Focus ADSs did not split, although the
conversion rights of such Micro Focus ADSs have been adjusted such that
each Micro Focus ADS represents five Micro Focus Ordinary Shares.
29
<PAGE> 31
12.19(C)
6.E.10
MICRO FOCUS CONSOLIDATED STATEMENTS OF CASH FLOW (US FORMAT)
($ in thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
31 JANUARY 1998 31 JANUARY 1997 31 JANUARY 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
Amortisation of software product assets 12,716 12,690 19,862
Amortisation of goodwill 1,391 -- --
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
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
obligations incurred (13,782) (4,235) (14,065)
Software product assets (9,321) (8,261) (15,989)
Own shares 1,190 -- (7,954)
Acquisition of subsidiary, net of cash
balances acquired (3,437) -- --
Settlement of deferred purchase
consideration -- -- (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 --
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
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 32
MICRO FOCUS CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (US FORMAT)
($ in thousands)
<TABLE>
<CAPTION>
UNREALISED
ORDINARY ADDITIONAL GAIN ON DEFERRED CURRENCY
NUMBER OF SHARES PAID-IN MARKETABLE TREASURY PURCHASE RETAINED TRANSLATION
SHARES AMOUNT CAPITAL INVESTMENTS STOCK CONSIDERATION EARNINGS ADJUSTMENT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, 31 January 1996 77,610 2,449 27,257 2 (8,959) -- 89,076 (3,782)
Share options exercised 120 3 211 -- -- -- -- --
Unrealised gain on
marketable securities,
net of taxes -- -- -- (92) -- -- -- --
Net loss -- -- -- -- -- -- (14,690) --
Currency translation
adjustment -- -- -- -- -- -- -- 1,269
--------------------------------------------------------------------------------------------------
Balance, 31 January 1997 77,730 2,452 27,468 (90) (8,959) -- 74,386 (2,513)
Share options exercised 941 31 2,408 -- 1,190 -- -- --
Issued for acquisitions 746 25 3,486 -- -- -- -- --
Unrealised gain on
marketable securities,
net of taxes -- -- -- 134 -- -- -- --
Net income -- -- -- -- -- -- 14,633 --
Currency translation
adjustment -- -- -- -- -- -- -- 183
--------------------------------------------------------------------------------------------------
Balance, 31 January 1998 79,417 $2,508 $33,362 $ 44 $(7,769) $ -- $ 89,019 $(2,330)
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL
<S> <C>
Balance, 31 January 1996 106,043
Share options exercised 214
Unrealised gain on
marketable securities,
net of taxes (92)
Net loss (14,690)
Currency translation
adjustment 1,269
Balance, 31 January 1997 92,744
Share options exercised 3,629
Issued for acquisitions 3,511
Unrealised gain on
marketable securities,
net of taxes 134
Net income 14,633
Currency translation
adjustment 183
Balance, 31 January 1998 $114,834
- ---------------------------------------------
</TABLE>
Note: Share data for all periods have been restated to reflect the five-for-one
stock split of the Micro Focus Ordinary Shares, which was effective as of
the close of business on 13 March, 1998 (see note 12 to the consolidated
financial statements). The Micro Focus ADSs did not split, although the
conversion rights of such Micro Focus ADSs have been adjusted such that
each Micro Focus ADS represents five Micro Focus Ordinary Shares.
31
<PAGE> 33
12.19(D)
12.19(E)
NOTES TO THE MICRO FOCUS CONSOLIDATED FINANCIAL STATEMENTS (US FORMAT)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
To enable the reader to see immediately any information provided in addition to
the common accounting policy statements, the text of this note and the
corresponding note 1 to the U.K. format financial statements 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 licences 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 licences 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 US generally accepted accounting principles ("GAAP"), which,
as applied by Micro Focus, do not differ in any significant respect from UK
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 20 January 1998, the Company acquired 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 US 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
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 ("OEMs") under
non-cancellable licence agreements generally provide for development fees and
initial licence fees, which are recognised at the later of: (a) the date product
is delivered to the OEM; (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 (CAPITALISED 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 capitalised as software product
assets, in compliance with Statement of Financial Accounting Standards No. 86
("SFAS 86") "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed".
Software licensed for inclusion in the Micro Focus product set, including
software acquired through acquisitions which meets the provisions for
capitalisation under SFAS 86, is also included in software product assets.
During the years ended 31 January 1998, 1997 and 1996 purchased software
totalling $nil, $nil, and $350,000, respectively, was added to 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.
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 capitalised as an intangible fixed asset and amortised
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 business acquired, amortisation is
accelerated.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation
and amortisation. Depreciation and amortisation is computed using the straight
line method over estimated economic lives from the time the asset is put into
use. Present estimated economic lives are as follows:
<TABLE>
<S> <C>
Office buildings 40 years
Leasehold improvements over the lease term
Computer equipment 3-5 years
Office equipment 7 years
Transportation equipment 3-4 years
</TABLE>
LEASING
Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are capitalised as fixed assets. The amount capitalised
is that sum for which the leased asset could be purchased at the start of the
lease, this sum also being treated as a liability.
32
<PAGE> 34
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.
INCOME TAXES
The provision for income taxes includes US, UK 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 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 inventories and expensed when the related revenue is recognised.
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.
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 policy translation complies with SFAS 52 "Foreign
Currency Translation".
Assets and liabilities denominated in currencies other than US dollars are
translated at exchange rates in effect at the balance sheet date. Closing US
dollar to GB pound rates at 31 January 1998 and 1997 were $1 = L0.610 and $1 =
L0.625 respectively. Revenue, costs and expenses are translated using average
rates. Monthly average US dollar to GB pound rates used during fiscal 1998 range
between $1 = L0.599 and $1 = L0.625, and average $1 = L0.611, $1 = L0.633 and $1
= L0.634 in the fiscal years 1998, 1997 and 1996 respectively. Translation
adjustments resulting from the process of translating financial statements
denominated in currencies other than US 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 15 December 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 anti-dilutive and
therefore excluded from the computation.
Shares and per share data for all periods presented have been restated to
reflect the five-for-one Stock Split (see note 12). The Company's American
Depository Shares ("Micro Focus ADS") 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 US 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. Concentration of
credit risk with respect to trade receivables is 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 amortises capitalised 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 capitalised 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,
recognises 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
33
<PAGE> 35
promotional expenses, amounted to $2,086,000, $5,897,000 and $7,097,000 in
fiscal 1998, 1997 and 1996, respectively.
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 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 30 April 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). 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 30 April 1997 and
for the nine-month period subsequent to 30 April 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)
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------
<S> <C> <C>
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)
- --------------------------------------------------------
</TABLE>
On 20 January 1998, the Company acquired all of the outstanding stock of 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 $1.6
million in connection with activities to complete this acquisition. The
combination has been accounted for using the pooling of interests method and
accordingly all financial data presented herein has been restated to include the
results of XDB. The following table sets forth the composition of combined net
revenue and net income (loss) for the periods indicated. Information for 1998
with respect to XDB reflects the period from 1 February 1997 to 20 January 1998,
the date XDB was acquired.
($ in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
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)
- ----------------------------------------------------------
</TABLE>
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 $6,251,000 in cash and the issuance of 664,979 ordinary shares of the Company
(equivalent to 3,324,895 ordinary shares following the Stock Split). The
acquisition was accounted for as a purchase.
NOTE 3 FINANCIAL INSTRUMENTS
The Company invests its excess cash in accordance with an investment policy
approved by the Board of Directors and implemented as of the beginning of the
current fiscal year. This policy authorises investment in US government
securities, municipal bonds, certificates of deposit with highly rated financial
institutions and other specified money market instruments of similar liquidity
and credit quality.
The Company has determined that all of its investment securities are to be
classified as available-for-sale. Such securities are stated at amounts which
approximate fair value, based on quoted market prices, with the unrealised gains
and losses reported as a separate component of shareholders' equity.
Available-for-sale securities with original maturities of less than three months
are classified as cash equivalents.
Estimated fair values of financial instruments are based on quoted market
prices. The carrying amounts and fair value of the Company's financial
instruments are as follows:
($ in thousands)
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Cash $24,773 $73,119
Available-for-sale securities 59,717 2,577
Forward foreign currency contracts -- --
- --------------------------------------------------------
</TABLE>
34
<PAGE> 36
Available-for-sale securities are analysed as follows:
($ in thousands)
<TABLE>
<CAPTION>
GROSS
UNREALISED ESTIMATED
COST GAIN (LOSSES) FAIR VALUE
- -----------------------------------------------------------
<S> <C> <C> <C>
At 31 January 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 31 January 1997
Mutual funds $ 1,912 $(152) 1,760
Bonds 683 3 686
Other 131 -- 131
----------------------------------
$ 2,726 $(149) $ 2,577
- -----------------------------------------------------------
</TABLE>
The cost and estimated fair values of available-for-sale securities by
contractual maturity are as follows:
($ in thousands)
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
- --------------------------------------------------------
<S> <C> <C>
At 31 January 1998
Less than three months $23,498 $23,501
Between 3-12 months 25,551 25,558
Over 12 months 10,601 10,658
------------------
$59,650 $59,717
- --------------------------------------------------------
</TABLE>
The notional amounts of foreign currency contracts were $4,800,000 and $nil at
31 January 1998 and 31 January 1997, respectively, and were predominantly to
exchange US dollars for GB pounds sterling. Substantially all forward foreign
currency contracts entered into by the Company have maturities of 60 days or
less.
NOTE 4 RESEARCH AND DEVELOPMENT COSTS
($ in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Research and development
costs, before
capitalisation $31,645 $34,138 $40,295
Costs capitalised as software
product assets (9,321) (8,272) (15,639)
Amortisation of capitalised
costs 12,716 12,690 13,917
---------------------------
$35,040 $38,556 $38,573
- ----------------------------------------------------------
</TABLE>
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 31 January 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 1994 EBT. 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
$5,471,000 booked in the fourth quarter of 1996 were primarily the result of a
review into the carrying value of software product assets.
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
($ in thousands)
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Land and buildings $ 22,679 $ 21,690
Leasehold improvements 4,228 1,390
Computer and communications
equipment and 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
amortisation (43,705) (38,593)
-------------------
Property, plant and equipment --
net $ 39,083 $ 33,796
- --------------------------------------------------------
</TABLE>
The above figures include assets under capital leases as follows:
($ in thousands)
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------
<S> <C> <C>
Cost $ 47 $ 200
Less: accumulated depreciation and
amortisation (33) (105)
------------
$ 14 $ 95
- -------------------------------------------------------
</TABLE>
During the years ended 31 January 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 L5,000,000 ($8,200,000 at 31 January 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 31 January 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 30 June 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 31
January 1997 was $1,500,000; the amount was repaid in full on 1 February 1997.
35
<PAGE> 37
NOTE 8 COMMITMENTS
The Company leases certain of its facilities and equipment under operating
leases expiring at various dates through 2007. In most cases, it is anticipated
that these leases will be renewed or replaced by other leases in the normal
course of business. The Company also leases transportation equipment under
capital leases. Minimum lease commitments as of 31 January 1998 are as follows:
($ in thousands)
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
- -------------------------------------------------------
<S> <C> <C>
Years ending 31 January
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 --
- -------------------------------------------------------
</TABLE>
During the years ended 31 January 1998, 1997 and 1996, rent expense totalled
$4,650,000, $4,594,000 and $5,309,000, respectively.
NOTE 9 INCOME TAXES
($ in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Current:
UK $5,048 $ 380 $ 237
US federal 273 (1,635) 484
US state 209 (242) 58
Other 1,568 369 (230)
------------------------
7,098 (1,128) 549
Deferred:
UK 110 1,489 (235)
US federal -- 280 (344)
US state -- 77 (59)
------------------------
110 1,846 (638)
Total: $7,208 $ 718 $ (89)
- ----------------------------------------------------------
</TABLE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Software development costs and
other $ 249 $2,043 ($884)
Depreciation and amortisation (139) (197) 246
----------------------
$ 110 $1,846 (638)
- ----------------------------------------------------------
</TABLE>
The following table analyses the difference between the UK statutory tax rate
and the effective tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
UK statutory tax rate 31.3 % 33.0 % 33.0 %
Tax effect of earnings of
foreign subsidiaries (1.8)% (22.4)% 6.7 %
Permanent differences and
other 3.5 % (15.7)% (38.9)%
--------------------------
Effective tax rate 33.0 % (5.1)% 0.8 %
- --------------------------------------------------------
</TABLE>
Deferred income taxes, all of which are non-current, are as follows:
($ in thousands)
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Software development costs and other $9,017 $8,475
Depreciation and amortisation 142 271
---------------
$9,159 $8,746
- --------------------------------------------------------
</TABLE>
Deferred tax relative to the different tax jurisdictions is as follows:
($ in thousands)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
UK $10,111 $ 9,983
US (952) (1,237)
-----------------
$ 9,159 $ 8,746
- ---------------------------------------------------------
</TABLE>
The corporate income tax returns of certain US subsidiaries are under
examination by the Internal Revenue Services, 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
6.D.3
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)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Revenue:
United States $100,699 $ 75,203 $ 89,839
United Kingdom 72,562 55,701 56,158
Europe (excluding UK) 39,612 33,849 32,734
Other 12,869 3,205 2,251
------------------------------
$225,742 $167,958 $180,982
- ----------------------------------------------------------
</TABLE>
($ in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Inter-segment revenue:
United States $ (8,612) $ (8,288) $ (9,647)
United Kingdom (34,567) (25,265) (26,372)
Europe (excluding UK) (14,904) (10,331) (8,715)
Other (350) (847) (1,464)
------------------------------
Total net revenue $167,309 $123,227 $134,784
- ----------------------------------------------------------
</TABLE>
36
<PAGE> 38
($ in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from
operations:
United States $ (671) $(12,374) $ (7,229)
United Kingdom 7,957 (4,704) 1,606
Europe (excluding UK) 1,577 (580) (8,568)
Other 8,731 665 (721)
-----------------------------
$17,594 $(16,993) $(14,912)
- -----------------------------------------------------------
</TABLE>
($ in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Total assets:
United States $ 48,855 $ 26,622 $ 45,674
United Kingdom 69,574 71,578 61,694
Europe (excluding UK) 70,331 62,969 63,915
Other 11,637 701 798
------------------------------
$200,397 $161,870 $172,801
- ----------------------------------------------------------
</TABLE>
Inter-segment revenue principally represents licence fees and sub-contracted
development charges between locations.
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 instalments 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 Micro Focus 1996 Plan was approved by Micro Focus 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 18 June 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 31 January 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 Micro Focus 1996 Plan were currently unissued.
In 1994, the Micro Focus 1994 EBT was established to further the Company's
policy of encouraging share ownership by its employees. Under the terms of the
Micro Focus 1994 EBT, Micro Focus Trustees Limited ("MFTL") is permitted to
acquire Micro Focus Ordinary Shares in the Company and to issue options for
those Micro Focus Ordinary Shares to directors and employees. At 31 January
1998, MFTL owned 3,968,565 Micro Focus Ordinary Shares, and options granted by
MFTL to purchase up to 3,171,225 of these Micro Focus Ordinary 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
Micro Focus 1994 EBT are shown in the balance sheet as treasury stock within
shareholders' equity.
Pursuant to the agreement to acquire 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 Micro Focus
Ordinary Shares. At 20 January 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 US dollars. At 31 January 1998, 150,280 of these option shares
remained outstanding.
Share option activity under the plans was as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF PER SHARE IN
SHARES GB POUNDS
- --------------------------------------------------------
<S> <C> <C>
Outstanding, 31 January 1995 8,644,370 L0.44-L5.77
Options granted 3,018,975 L1.08-L1.64
Options exercised (574,325) L0.44-L1.08
Options cancelled (795,175) L0.44-L5.77
--------------------------
Outstanding, 31 January 1996 10,293,845 L1.08-L5.77
Options granted 11,504,150 L1.17-L1.94
Options exercised (120,780) L1.08-L1.93
Options cancelled (9,202,055) L1.08-L5.77
--------------------------
Outstanding, 31 January 1997 12,475,160 L1.08-L4.32
Options granted 6,622,725 L0.97-L4.52
Options exercised (1,553,705) L1.08-L3.70
Options cancelled (5,674,775) L0.97-L4.52
--------------------------
Outstanding, 31 January 1998 11,869,405 L0.97-L4.52
- --------------------------------------------------------
</TABLE>
The total of 11,869,405 option shares outstanding at 31 January 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 table summarises information about share options outstanding at 31
January 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE
31 JANUARY CONTRACTUAL LIFE EXERCISE PRICE
1998 (MONTHS) (GB POUNDS)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Range of exercise
prices
L0.97-L1.50 4,069,680 97 L1.37
L1.51-L2.00 696,800 102 L1.73
L2.00-L4.52 7,102,925 108 L3.43
----------------------------------------------
11,869,405 104 L2.62
- -------------------------------------------------------------------------
</TABLE>
6.F.8
The following table summarises information about share options exercisable at 31
January 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CONTRACTUAL LIFE EXERCISE PRICE
(MONTHS) (GB POUNDS)
- ----------------------------------------------------------
<S> <C> <C>
Range of exercise
prices
L0.97-L1.50 968,915 L1.33
L1.51-L2.00 158,770 L1.72
L2.00-L4.52 555,380 L3.17
-----------------------------
1,683,065 L1.97
- ----------------------------------------------------------
</TABLE>
As stated in note 1, the Company has elected to follow APB 25 and related
Interpretations in accounting for its employee share options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires 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 recognised.
37
<PAGE> 39
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 31 January 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 amortised 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 31 January 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 31 January 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 12 March 1998, Micro Focus Shareholders approved a five-for-one sub-division
of the Micro Focus Ordinary Shares. The sub-division became effective as of the
close of business on Friday, 13 March 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 ("Micro Focus ADSs"),
which are traded on the Nasdaq Stock Market in the United States, did not split,
although the conversion rights of such Micro Focus ADSs have been adjusted such
that each Micro Focus ADS represents five ordinary shares.
38
<PAGE> 40
3. LATEST INTERIM RESULTS
The following information is the full text of Micro Focus' announcement of
results for the half year and second quarter ended 31 July 1998, which was
released on 19 August 1998:
"MICRO FOCUS FIRST HALF EARNINGS INCREASE 112% ON 35% REVENUE GROWTH
LONDON, ENGLAND AND MOUNTAIN VIEW, CALIFORNIA, August 19, 1998 -- Micro Focus
Group Plc (London Stock Exchange: MICF; NASDAQ: MIFGY) today announced a 35%
revenue increase to $97.0 million for the first half of its fiscal year compared
with $71.7 million for the comparable prior year period. Net income increased
112% to $10.4 million and diluted earnings of $0.12 per ordinary share were
double earnings per ordinary share of $0.06 reported in the first half of fiscal
1998. Earnings of $0.62 per American Depositary Share ("ADS") were also double
the $0.30 reported in the first half of fiscal 1998.
For the second quarter of fiscal 1999, revenue increased 23% to $48.4 million,
compared with $39.2 million in the second quarter of fiscal 1998. Net income for
the quarter grew more than 100% to $5.1 million compared with $2.5 million for
the second quarter of fiscal 1998 and diluted earnings per share were $0.06 per
share compared with $0.03 for the second quarter of fiscal 1998. Diluted
earnings per ADS were $0.31 compared with $0.15 for the second quarter of fiscal
1998. This represents the fifth consecutive quarter of greater than 100% year
over year earnings growth.
"We are pleased with our continuing strong operating performance while we made
significant progress on our key strategic objectives," said Martin Waters,
President and CEO. "During the second quarter of this year, we undertook a major
restructuring of our North American field organisation, launched more products
than in any other comparable period in the Company's history, completed the
acquisition of our distributor in Italy, and announced our intent to acquire
INTERSOLV, Inc. In addition, we delivered a particularly strong performance in
our international markets. The doubling of profits over last year's first half
again confirms Micro Focus' ability to grow our base business profitably while
continuing to pursue additional growth through strategic acquisitions."
Rick Van Hoesen, Senior Vice President and CFO, said, "This performance reflects
a balance of contributions from our consulting business, our distributed
computing segment and our application transformation business. We also had a
strong cash quarter. We finished the quarter with $95.8 million in cash, a $3
million increase in a quarter in which we acquired our Italian distributor for
$4 million."
In conclusion, Mr. Waters said, "Your Board are confident about the prospects of
the merged group and the benefits to be obtained from the merger with INTERSOLV
and look forward to continued growth in the merged group's business. We expect
to post the Listing Particulars within a week and to have the Extraordinary
General Meeting of shareholders to approve the merger approximately 30 days
later."
In UK Sterling terms, net revenue for the first half of 1999 increased 42% to
GBP 58.6 million, from GBP 41.3 million for the first half of fiscal 1998. Net
income grew 96% to GBP 6.8 million versus GBP 3.5 million for the first half of
fiscal 1998. Diluted earnings per share were 8.3 pence per share in 1999
compared with 4.5 pence per share for the first half of 1998.
Net revenue for the second quarter of fiscal 1999 increased 29% to GBP 29.3
million, from GBP 22.8 million for the second quarter of 1998. Net income grew
61% to GBP 3.4 million versus GBP 2.1 million for the fiscal 1998 second
quarter. Diluted earnings per share were 4.1 pence per share in the second
quarter of fiscal 1999 compared with 2.7 pence per share for the second quarter
of 1998.
39
<PAGE> 41
Summary financial results are as follows:
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
-------------------- --------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Dollars, US GAAP
Net revenue $48.4m $39.2m $97.0m $71.7m
Net income (loss) $5.1m $2.5m $10.4m $4.9m
EPS: Basic $0.06 $0.03 $0.13 $0.06
Diluted $0.06 $0.03 $0.12 $0.06
Diluted ADS equivalent $0.31 $0.15 $0.62 $0.30
- -----------------------------------------------------------------------------------------
UK Sterling, UK GAAP
Net revenue GBP 29.3m GBP 22.8m GBP 58.6m GBP41.3m
Net income (loss) 3.4m 2.1m 6.8m 3.5m
EPS - Basic 4.2p 2.7p 8.5p 4.5p
Diluted 4.1p 2.7p 8.3p 4.5p
- -----------------------------------------------------------------------------------------
</TABLE>
Micro Focus (NASDAQ:MIFGY) provides solutions for developing and managing
enterprise applications that run on IBM (NYSE:IBM) mainframes. The company's
solutions allow enterprises to carry forward the value of the legacy application
base by transforming them for use with newer computing technologies such as
distributed computing and the Internet. The company's products and services
deliver outstanding value and shorten time-to-solution through an analysis and
understanding of legacy applications. Micro Focus solutions include mainframe
application development and maintenance solutions, Year 2000 compliance
solutions and distributed computing solutions for UNIX, Microsoft (NASDAQ:MSFT)
Windows NT(R) and the World Wide Web. Micro Focus solutions integrate with
technology offered by Unisys (NYSE:UIS), PeopleSoft (NASDAQ:PSFT), Mercury
Interactive (NASDAQ:MERQ) and others. The Micro Focus customer and partner base
includes many global 500 companies, including Hewlett Packard Company
(NASDAQ:HWP), Microsoft Corporation (NASDAQ:MSFT), Oracle Corporation
(NASDAQ:ORCL), Sun Microsystems Incorporated (NASDAQ:SUNW), The Boeing Company
(NASDAQ:BA), Computer Sciences Corporation (NASDAQ:CSC) and Bank of America
Corporation (NASDAQ:BAC), EDS and Andersen Consulting.
Micro Focus is located in the US at 701 East Middlefield Road, Mountain View,
California 94043 -- telephone 650-938-3700 and in the UK at The Lawn, 22-30 Old
Bath Road, Newbury, Berkshire, RG14 1QN -- telephone 01635 32646. For additional
information on Micro Focus and its products, visit the Micro Focus Web site at
http://www.microfocus.com.
The financial information contained in this report does not constitute statutory
accounts as defined in section 240 of the UK Companies Act 1985. The figures for
the year ended January 31, 1998 are based on the audited financial statements
which have been filed with the UK Registrar of Companies; the auditors' reports
on both the UK and US financial statements for the year ended January 31, 1998
were unqualified. The Company intends to publish its First Half Report in
August, 1998, and distribute copies to all shareholders of record as of July 31,
1998.
As a foreign private issuer in the United States, Micro Focus is not required to
file quarterly reports with the U.S. Securities and Exchange Commission ("SEC").
However, beginning in 1997, the Company commenced furnishing to the SEC on a
voluntary basis quarterly reports on Form 6-K which include the Company's
results for the applicable quarter in a format similar to that of a Form 10-Q.
Copies of the Annual Report for the year ended January 31, 1998 are available
upon request to the Company Secretary of Micro Focus at the Registered Office,
The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, England, RG14 1QN. Following
established Micro Focus practice, the directors do not intend to recommend the
payment of a dividend.
The following statement is made in accordance with the U.S. Private Securities
Litigation Reform Act of 1995: This announcement contains forward-looking
statements that involve a number of risks and uncertainties. There are certain
important factors that could cause results to differ materially from those
anticipated by the statements made herein. Factors that could cause actual
results to differ materially include, among others, the ability of Micro Focus
to develop and release to the market products and services that meet the needs
of the Company's customers in the highly dynamic market for application
development tools, the potential need for development tools to shift based on
changes in underlying technology standards coming into use, the potential for a
decrease in net revenue which may be caused by delays in the timing of the
delivery of products or services, the effect of competitors' efforts to enter
the Company's markets, the ability of the Company to effectively manage its
costs against uncertain revenue expectations and the ability to manage and
integrate recently acquired businesses or other businesses that it may acquire
in the future. Further information on potential factors which could affect the
Company's financial results is included in the Company's Form 20-F for the
fiscal year ended January 31, 1998 and the Company's quarterly report on Form
6-K for the quarter ended April 30, 1998, each as filed with the SEC, as they
may be updated or amended with future filings.
# # #
Micro Focus is a registered trademark of Micro Focus. All other companies and
products as they appear in this release are trademarks or registered trademarks
of their respective owners.
40
<PAGE> 42
MICRO FOCUS GROUP PLC -- SECOND QUARTER ENDED JULY 31, 1998
CONSOLIDATED STATEMENTS OF INCOME -- IN U.S. FORMAT
(in thousands of U.S. dollars, except share, per share and ADS data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JULY 31, 1998 JULY 31, 1997 JULY 31, 1998 JULY 31, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET REVENUE
Product revenue $29,850 $23,898 $59,392 $41,790
Maintenance revenue 12,958 11,700 25,973 24,383
Service revenue 5,559 3,580 11,652 5,538
-----------------------------------------------------------
Total net revenue 48,367 39,178 97,017 71,711
-----------------------------------------------------------
COST OF REVENUE
Cost of product revenue 1,879 2,222 3,995 4,399
Cost of maintenance revenue 3,972 3,000 7,410 5,823
Cost of service revenue 4,759 3,392 9,002 5,702
-----------------------------------------------------------
Total cost of revenue 10,610 8,614 20,407 15,924
-----------------------------------------------------------
GROSS PROFIT 37,757 30,564 76,610 55,787
-----------------------------------------------------------
OPERATING EXPENSES
Research and development 8,499 8,481 16,877 17,008
Sales and marketing 18,237 15,392 37,454 27,379
General and administrative 4,456 3,884 8,723 6,062
-----------------------------------------------------------
Total operating expenses 31,192 27,757 63,054 50,449
-----------------------------------------------------------
INCOME FROM OPERATIONS 6,565 2,807 13,556 5,338
Interest income, net 1,174 1,042 2,270 2,025
-----------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,739 3,849 15,826 7,363
Income taxes (2,630) (1,301) (5,380) (2,440)
-----------------------------------------------------------
Net income $ 5,109 $ 2,548 $10,446 $ 4,923
-----------------------------------------------------------
NET INCOME PER SHARE: basic $ 0.06 $ 0.03 $ 0.13 $ 0.06
NET INCOME PER ADS: basic $ 0.32 $ 0.16 $ 0.65 $ 0.31
-----------------------------------------------------------
Weighted average number of shares
outstanding:
basic (thousands) 80,133 78,750 79,808 78,259
Shares converted to ADS equivalent
(thousands) 16,027 15,750 15,962 15,652
-----------------------------------------------------------
NET INCOME PER SHARE: diluted $ 0.06 $ 0.03 $ 0.12 $ 0.06
NET INCOME PER ADS: diluted $ 0.31 $ 0.15 $ 0.62 $ 0.30
-----------------------------------------------------------
Weighted average number of shares
outstanding:
diluted (thousands) 83,449 83,290 83,820 82,023
Shares converted to ADS equivalent
(thousands) 16,690 16,658 16,764 16,405
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Note:
Shares and per-share data for all periods presented above 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. The Company's American Depositary 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 on an ADS equivalent basis.
41
<PAGE> 43
MICRO FOCUS GROUP PLC -- SECOND QUARTER ENDED JULY 31, 1998
CONSOLIDATED BALANCE SHEETS -- IN US FORMAT
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52,569 $ 48,174
Short-term investments 43,274 36,316
Accounts receivable, net 39,492 47,798
Inventories 448 519
Prepaid expenses and other assets 6,171 2,833
-----------------------------
Total current assets 141,954 135,640
-----------------------------
FIXED ASSETS:
Property, plant and equipment, net 40,368 39,083
Goodwill, net 8,646 5,346
Software product assets, net 18,866 20,328
-----------------------------
TOTAL ASSETS $209,834 $200,397
-----------------------------
LIABILITY AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loans $ 1,679 $ 1,652
Accounts payable 6,506 6,957
Accrued employee compensation 8,010 12,383
Income taxes payable 15,174 10,459
Deferred revenue 27,134 32,848
Other current liabilities 13,894 12,085
-----------------------------
Total Current Liabilities 72,397 76,384
-----------------------------
Long-term debt and other liabilities -- 20
Deferred income taxes 9,272 9,159
-----------------------------
TOTAL LIABILITIES $ 81,669 $ 85,563
-----------------------------
SHAREHOLDERS' EQUITY:
Ordinary shares 2,669 2,546
Additional paid-in capital 36,586 33,362
Unrealised (loss) gain on available-for-sale securities,
net of tax 39 44
Treasury stock (7,434) (7,769)
Retained earnings 99,465 89,019
Currency translation adjustment (3,160) (2,368)
-----------------------------
Total Stockholder's Equity 128,165 114,834
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $209,834 $200,397
- ---------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 44
MICRO FOCUS GROUP PLC -- SECOND QUARTER ENDED JULY 31, 1998
CONSOLIDATED PROFIT & LOSS ACCOUNT -- IN U.K. FORMAT
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JULY 31, 1998 JULY 31, 1997 JULY 31, 1998 JULY 31, 1997
L'000 L'000 L'000 L'000
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Product revenue 18,072 14,007 35,886 24,106
Maintenance revenue 7,841 6,552 15,711 13,845
Service revenue 3,360 2,215 7,045 3,398
---------------------------------------------------------
Total revenue 29,273 22,774 58,642 41,349
---------------------------------------------------------
COST OF REVENUE
Cost of product revenue 1,136 1,433 2,414 2,917
Cost of maintenance revenue 2,403 2,047 4,480 3,336
Cost of service revenue 2,877 1,728 5,440 3,488
---------------------------------------------------------
Total cost of revenue 6,416 5,208 12,334 9,741
---------------------------------------------------------
GROSS PROFIT 22,857 17,566 46,308 31,608
---------------------------------------------------------
OPERATING EXPENSES
Research and development 5,142 4,711 10,207 9,448
Sales and marketing 11,028 8,648 22,632 15,254
General and administrative 2,425 1,777 4,725 2,919
---------------------------------------------------------
Total operating expenses 18,595 15,136 37,564 27,621
---------------------------------------------------------
OPERATING PROFIT 4,262 2,430 8,744 3,987
Interest income, net 712 686 1,313 1,184
---------------------------------------------------------
PROFIT BEFORE TAXATION 4,974 3,116 10,057 5,171
Taxation (1,617) (1,028) (3,269) (1,706)
---------------------------------------------------------
PROFIT FOR THE PERIOD AFTER TAXATION 3,357 2,088 6,788 3,465
---------------------------------------------------------
EARNINGS PER SHARE: basic 4.2p 2.7p 8.5p 4.5p
EARNINGS PER SHARE: diluted 4.1p 2.7p 8.3p 4.5p
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Note:
Earnings per share data for all periods presented above reflects the 5-for-1
sub-division of the Company's ordinary shares, which took effect as at the close
of business on March 13, 1998.
43
<PAGE> 45
MICRO FOCUS GROUP PLC -- SECOND QUARTER ENDED JULY 31, 1998
CONSOLIDATED BALANCE SHEET -- IN U.K. FORMAT
<TABLE>
<CAPTION>
JULY 31, 1998
(UNAUDITED) JANUARY 31, 1998
L'000 L'000
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
FIXED ASSETS:
Intangible fixed assets 14,076 12,394
Tangible fixed assets 24,615 23,836
Investment 4,682 4,886
------------------------------
TOTAL FIXED ASSETS 43,373 41,116
------------------------------
CURRENT ASSETS:
Stock 273 317
Trade debtors 24,080 29,145
Other debtors and prepaid expenses 3,704 1,728
Cash and bank deposits 58,441 51,518
------------------------------
TOTAL CURRENT ASSETS 86,498 82,708
------------------------------
Creditors: amounts falling due within one year
Bank loans and overdrafts 1,024 1,007
Trade creditors 3,967 4,241
Accrued employee compensation 4,884 7,481
Current corporation tax 9,252 6,428
Accrued expenses and other current liabilities 8,472 7,326
Deferred revenue 16,545 20,030
------------------------------
Total current liabilities 44,144 46,513
------------------------------
NET CURRENT ASSETS 42,354 36,195
------------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 85,727 77,311
Creditors: amounts falling due after more than one year -- 12
Provision for liabilities and charges: deferred taxation 6,408 6,407
------------------------------
NET ASSETS 79,319 70,892
------------------------------
CAPITAL AND RESERVES
Called up share capital 1,685 1,588
Share premium account and other reserves 32,137 30,196
Profit and loss account 45,497 39,108
------------------------------
TOTAL SHAREHOLDERS' EQUITY 79,319 70,892
- -----------------------------------------------------------------------------------------------"
</TABLE>
44
<PAGE> 46
12.19(A)
12.9
12.11(A)
6.A.4
6.A.5
PART 3 -- FINANCIAL INFORMATION ON THE INTERSOLV GROUP
The financial information for the three years ended 30 April 1998, 1997 and 1996
relating to Intersolv has been extracted without material adjustment from the
audited annual reports filed on Form 10-K with the SEC for each of the three
years ended 30 April 1998. PricewaterhouseCoopers LLP have issued independent
auditor's reports in connection with Intersolv's consolidated financial
statements for the three years ended 30 April 1998 that are required to be
included in the annual report on Form 10-K pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. Each such report was unqualified. Copies of
the annual report on Form 10-K for each of the three years ended 30 April 1998
have been filed with the SEC.
1. US GAAP AUDITED CONSOLIDATED ACCOUNTS.
INTERSOLV CONSOLIDATED STATEMENTS OF INCOME
($ in thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOTES 30 APRIL 1998 30 APRIL 1997 30 APRIL 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
License Fees $ 94,122 $ 91,324 $ 89,147
Service Fees 102,358 69,089 56,166
-------------------------------------------
Total Revenues 4 196,480 160,413 145,313
-------------------------------------------
COST AND EXPENSES
Cost of products 5,193 12,429 15,649
Cost of services 56,409 35,077 26,091
Sales and marketing 72,457 73,123 64,026
Research and development 24,231 17,555 14,626
General and administrative 12,178 11,626 12,744
Non-recurring charges 17,468 28,933 13,600
-------------------------------------------
TOTAL COSTS AND EXPENSES 187,936 178,743 146,736
-------------------------------------------
OPERATING INCOME (LOSS) 4 8,544 (18,330) (1,423)
Other income (expense), net 11 (312) (75) 1,040
-------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 8,232 (18,405) (383)
Provision for income taxes 10 2,717 2,761 3,328
-------------------------------------------
NET INCOME (LOSS) $ 5,515 $(21,166) $ (3,711)
-------------------------------------------
Shares used in computing basic net income (loss) per
share 1 21,315 20,119 19,348
-------------------------------------------
NET INCOME (LOSS) PER SHARE -- basic $ 0.26 $ (1.05) $ (0.19)
-------------------------------------------
Shares used in computing net income (loss) per share
-- diluted 1 22,433 20,119 19,348
-------------------------------------------
NET INCOME (LOSS) PER SHARE -- diluted $ 0.25 $ (1.05) $ (0.19)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
12.19(B)
12.9
12.11(A)
10.38C
INTERSOLV CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
AS AT AS AT
NOTES 30 APRIL 1998 30 APRIL 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,082 $ 20,180
Accounts receivable, net of allowance for doubtful
accounts of
$2,901 and $4,129 62,962 50,338
Prepaid expenses and other assets 7,663 6,156
----------------------------
TOTAL CURRENT ASSETS 104,707 76,674
----------------------------
Software, at cost 8,340 6,235
Accumulated amortisation (4,156) (1,957)
----------------------------
Total software, net 4,184 4,278
----------------------------
Property and equipment
Furniture and equipment 22,894 18,405
Leasehold improvements 5,069 5,507
Accumulated depreciation and amortisation (15,975) (12,346)
----------------------------
Total property and equipment 11,988 11,566
----------------------------
Notes receivable and other assets 11,987 3,499
----------------------------
TOTAL ASSETS 4 $132,866 $ 96,017
----------------------------
LIABILITY AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable and current portion of long-term
debt 5 $ 3,707 $ 6,621
Accounts payable 8,824 9,576
Accrued acquisition costs 4,376 706
Accrued compensation and employee benefits 18,292 13,831
Other accrued expenses 5,608 6,452
Deferred revenue 26,269 20,471
Income taxes payable 2,657 970
----------------------------
Total current liabilities 69,733 58,627
----------------------------
Long term liabilities
Deferred taxes 10 5,264 5,264
Long term debt, less current portion 5 592 1,290
Minority interests -- --
----------------------------
Total long term liabilities 5,856 6,554
----------------------------
TOTAL LIABILITIES 75,589 65,181
----------------------------
Subordinated convertible notes 38 87
Shareholders' equity:
Common stock, $0.01 par value; 50,000,000 shares
authorised;
22,665,000 and 20,578,000 issued and outstanding 226 208
Paid-in capital 120,346 99,179
Treasury stock, at cost -- (1,523)
Accumulated deficit (56,969) (62,484)
Cumulative currency translation adjustment (6,364) (4,631)
----------------------------
STOCKHOLDERS' EQUITY 57,239 30,749
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $132,866 $ 96,017
- ----------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 48
12.19(C)
12.9
12.11(A)
INTERSOLV CONSOLIDATED STATEMENTS OF CASH FLOW
($ in thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
30 APRIL 1998 30 APRIL 1997 30 APRIL 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash inflows (outflows)
Operating activities:
Net income (loss) $ 5,515 $(21,166) $ (3,711)
Non-cash items:
Depreciation and amortisation 6,770 13,446 14,923
Deferred income taxes -- 158 2,735
Write-down of software and intangible assets -- 22,535 2,386
Gain on sale of discontinued product lines 423 -- --
Write-down of purchased research and
development 15,739 -- --
Payment of restructuring/acquisition charges (496) (3,247) (8,278)
Changes in assets and liabilities, net of effect
of acquisition and divestitures:
Accounts receivable (15,781) (12,813) 924
Refundable income taxes -- -- 580
Prepaid expenses and other current assets (4,144) 1,081 (2,380)
Accounts payable and accrued expenses 1,385 2,103 7,795
Deferred revenue 3,524 1,672 3,253
-----------------------------------------------
Net cash provided by operating activities 12,935 3,769 18,227
-----------------------------------------------
Investing activities:
Additions to software (964) (9,478) (12,951)
Additions to property and equipment (4,487) (7,697) (5,721)
Sale/leaseback of equipment -- -- 776
Proceeds from sale of discontinued product lines 1,200 -- --
Payments for SQL, net of $2,433 cash acquired 1,589 -- --
Other -- (209) 161
-----------------------------------------------
Net cash used in investing activities (2,662) (17,384) (17,735)
-----------------------------------------------
Financing activities:
Purchase of common stock for treasury -- (3,445) (264)
Purchase of common stock from TechGnosis
shareholders -- -- (4,800)
Proceeds from sale of common stock, including tax
benefits 7,440 4,555 8,678
Payment of Q+E instalment liabilities -- -- (1,107)
Net proceeds (repayment) of debt obligations (3,661) 4,922 (1,062)
-----------------------------------------------
Net cash provided by financing activities 3,779 6,032 1,445
-----------------------------------------------
Effect of exchange rate changes on cash (150) (452) (383)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents 13,902 (8,035) 1,554
Cash and cash equivalents, beginning of year 20,180 28,215 26,661
-----------------------------------------------
Cash and cash equivalents, end of year $ 34,082 $ 20,180 $ 28,215
- -----------------------------------------------------------------------------------------------------
Supplemental Data
Cash paid for interest $ 889 $ 717 $ 615
Cash paid for income taxes $ 647 $ 269 $ 802
- -----------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
INTERSOLV CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
<TABLE>
<CAPTION>
CUMULATIVE
PAID-IN ACCUMULATED TRANSLATION
COMMON STOCK CAPITAL TREASURY DEFICIT ADJUSTMENT TOTAL
--------------- -------- ---------------- ----------- ----------- -------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, 30 April 1996 19,733 $198 $ 92,967 -- $ -- $(41,318) $(2,013) $49,834
Sale of common stock under stock
option and stock purchase
plans, including tax benefit 278 1 2,632 (203) 1,922 -- -- 4,555
Repurchase of common stock (381) -- -- 381 (3,445) -- -- (3,445)
Translation adjustment -- -- -- -- -- -- (2,618) (2,618)
Conversion of subordinated
convertible notes 948 9 3,580 -- -- -- -- 3,589
Net loss -- -- -- -- -- (21,166) -- (21,166)
-----------------------------------------------------------------------------------
Balance, 30 April 1997 20,578 208 99,179 178 (1,523) (62,484) (4,631) 30,749
Sale of common stock under stock
option and stock purchase
plans, including tax benefit 823 6 5,864 (178) 1,523 -- -- 7,393
Issuance for SQL Acquisition 1,251 12 15,255 -- -- -- -- 15,267
Translation adjustment -- -- -- -- -- -- (1,733) (1,733)
Conversion of subordinated
convertible notes 13 -- 48 -- -- -- -- 48
Net Income -- -- -- -- -- 5,515 -- 5,515
-----------------------------------------------------------------------------------
Balance, 30 April 1998 22,665 $226 $120,346 -- $ -- $(56,969) $(6,364) $57,239
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6.E.13
The accompanying notes are an integral part of the consolidated financial
statements
NOTE 1 SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
INTERSOLV, Inc. ("Intersolv"), is engaged in the development, marketing and
support of computer software products and services in three major solution
areas: automated software quality, data connectivity and enterprise application
renewal. Intersolv's objective is to build products that deliver high
productivity on simple projects and are powerful enough to handle scalability
requirements of production-grade information systems without retooling.
CONSOLIDATION
The consolidated financial statements include the accounts of Intersolv and its
wholly-owned subsidiaries. Intercompany accounts, transactions and profits have
been eliminated in the consolidated financial statements.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Intersolv's revenues consist primarily of license and service fees, which
include fee-paid consulting and training services and maintenance services.
Software license fees are recognised upon initial shipment of the product and
acceptance by the customer, assuming collection of the receivable is probable.
Training and consulting fees are recognised upon delivery of the services.
Maintenance fees for support are recorded as deferred revenue and recognised
rateably over the period of the maintenance contract, typically twelve months.
Transactions which include extended payment terms are discounted using
Intersolv's line of credit interest rate.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of time and demand deposits and highly liquid
investments purchased with a maturity of three months or less. Intersolv
maintains its time and demand deposits in bank deposit accounts which, at times,
may exceed federally insured limits. Intersolv has not experienced any losses in
such accounts.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose Intersolv to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No. 105,
consist primarily of trade accounts receivable. Intersolv's customer base is
primarily Fortune 1000 companies or branches thereof, which minimises potential
concentrations of credit risk. Intersolv does not require collateral upon
delivery of its products. In fiscal 1998, one customer represented 11% of
Intersolv's revenues. No single customer represented more than 10% of
Intersolv's revenues in fiscal 1997 or 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Information" requires disclosure of the fair value of
certain financial instruments where it is practicable to estimate that value.
The carrying amount of cash and cash equivalents approximated fair value as of
30 April 1998 and 1997 because of the relatively short maturity of these
instruments. The carrying amount of notes receivable, short-term debt and
long-term debt approximates fair value as Intersolv believes these instruments
carry terms which are comparable to similar instruments.
SALE OF RECEIVABLES
Intersolv has implemented Statement of Financial Accounting Standards No. 125 --
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("FAS 125") in fiscal 1997. There was no adjustment in the
accompanying financial statements due to the implementation of FAS 125. In
fiscal 1998 and 1997, Intersolv entered into agreements to sell approximately
$2.5 million and $5.1 million, respectively, in accounts receivable at a net
discount of approximately 7.25%, which has been charged to operating expenses in
the accompanying consolidated statement of operations. Approximately $2.5
million and $2.6 million, respectively, of these accounts receivable were sold
on a recourse basis, for which Intersolv remains liable in the event of default.
INCOME TAXES
12.19(D)
12.19(E)
Deferred tax assets and liabilities are recognised for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. They are determined annually based on the differences between
financial statement and tax bases using enacted tax laws and rates in effect for
the year in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realised. The provision for income taxes is
the tax payable for the year plus the change in the deferred tax assets and
liabilities during the year.
CURRENCY TRANSLATION
Assets and liabilities of Intersolv's foreign operations are translated into US
dollars at the exchange rate in effect at the balance sheet date and revenues
and expenses are translated at average rates in effect during the period. The
unrealised currency translation adjustment is reflected as a separate component
of stockholders' equity on the balance sheet.
NET INCOME (LOSS) PER SHARE
Intersolv has adopted SFAS No. 128, "Earnings per Share". Basic earnings per
common share have been computed by dividing net income by the weighted-average
number of common shares outstanding during the period. Diluted earnings per
common share have been computed by dividing net income by the weighted-average
number of common shares outstanding plus an assumed increase in common shares
outstanding for dilutive securities. Since a net loss was reported in fiscal
years 1997 and 1996, the basic share counts are used in calculating diluted
earnings per share. Earnings per share for all periods presented herein have
been restated to conform to SFAS No. 128.
49
<PAGE> 51
The following table reconciles the weighted-average number of common shares
outstanding during each period for basic earnings per share with the comparable
amount for diluted earnings per share.
(Amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED 30 APRIL
------------------------
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares
outstanding - basic 21,315 20,119 19,348
Stock Option equivalent shares 1,098 N/A N/A
Subordinated Convertible Note
equivalent shares 20 N/A N/A
------------------------
Weighted average shares
outstanding - diluted 22,433 20,119 19,348
- ----------------------------------------------------------
</TABLE>
STATEMENT OF CASH FLOWS
The consolidated statements of cash flows are intended to reflect only cash
receipt and cash payment activity and does not reflect non-cash investing and
financing activity. In fiscal 1998 and 1997, Intersolv recognised a tax benefit
of approximately $0.9 million and $2.8 million, respectively, related to the
exercise of stock options, which is reflected in the accompanying consolidated
statements of cash flows. Non-cash activity for each of the three one-year
periods ended 30 April 1998, 1997, and 1996 was not significant except for the
acquisition of SQL Software, Ltd. in March, 1998, as more fully discussed in
Note 2, and the conversion of subordinated convertible notes into common stock,
as shown in the accompanying consolidated statement of changes in stockholders'
equity.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under SFAS No. 123, "Accounting for Stock-based Compensation", companies can
either elect to recognise compensation expense based upon the estimated fair
value of employee stock options and other equity instruments issued to employees
at the date the instruments are granted or they can elect to continue to follow
the guidance under APB Opinion 25 -- Accounting for Stock Issued to Employees
("APB 25"), and disclose in the footnotes the pro forma net income and earnings
per share as if FAS 123 had been applied. Intersolv will continue to follow the
guidance of APB 25. (See Note 8)
PROPERTY AND EQUIPMENT AND OTHER LONG-LIVED ASSETS
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives. Furniture and equipment are generally
depreciated over terms of three to five years, leasehold improvements are
amortised over the shorter of the assets' useful lives or the term of the
related lease period. Computer software purchased for internal use is amortised
over terms not exceeding five years. Repairs and maintenance are charged to
operations as incurred. Major improvements and betterments are capitalised.
Goodwill and acquired intangible assets are amortised over their useful lives
which are estimated to be five years.
In accordance with Statement of Accounting Standards No. 121 -- "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("FAS 121"), all non current assets that are to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset in question may not be recoverable. Intersolv
estimates the future cash flows expected from using the asset(s) in question and
their eventual disposition. When this amount is less than the carrying amount,
an impairment loss is recorded. Assets to be disposed of, with certain
exceptions, are reported at the lower of cost or fair value less the cost to
sell the asset. In fiscal 1997, Intersolv recorded a charge for impairment of
certain long-lived assets, as more fully described in Note 3.
RESEARCH AND DEVELOPMENT
Research and development expense, before the capitalisation of certain internal
software development costs, amounted to $26.3 million, $27.0 million and $25.9
million for the fiscal years ended 30 April 1998, 1997 and 1996, respectively.
CAPITALISED SOFTWARE
Certain internal software development costs are capitalised subsequent to the
establishment of technological feasibility for the product as evidenced by a
working model. Capitalised internal software development costs amounted to $2.1
million, $9.5 million, and $11.3 million for the fiscal years ended 30 April
1998, 1997 and 1996, respectively. Capitalisation ceases when the product is
available for general release to customers, at which time amortisation of the
capitalised costs begins. Intersolv also purchases selected technologies from
time to time to supplement or expand its product lines. Intersolv amortises
capitalised software development costs for new products based upon the greater
of the amount computed using (i) the ratio of current gross revenues to current
and future anticipated gross revenues or (ii) the straight line method, over a
three year life or the products' economic life, if shorter. Purchased software
is amortised over useful lives of three to five years on a straight-line basis.
Amortisation of capitalised and purchased software costs was $2.2 million, $8.7
million, and $10.6 million during fiscal 1998, 1997, and 1996, respectively, and
is included in cost of products.
Intersolv continually compares the unamortised costs of capitalised software
development costs and purchased software costs to the expected future revenues
for those products. If the unamortised costs exceed the expected future net
realisable value, the excess amount is written off (See Note 3).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". Both SFAS No. 130 and SFAS
No. 131 are required to be adopted for fiscal years beginning after 15 December
1997. Upon the effective date of each of the new statements, Intersolv will make
the necessary changes to comply with the provisions of each statement and
restate all prior periods presented. Intersolv does not expect the adoption of
these statements to have a material impact on its financial condition or results
of operations.
The American Institute of Certified Public Accountants has issued Statement of
Position ("SOP") 97-2, Software Revenue Recognition. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after 15 December 1997, and
provides guidance on applying generally accepted accounting principles in
recognising revenue on software transactions. Intersolv does not expect the
application of the SOP to have a material impact on its financial condition or
results of operations.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform with
current year presentation.
6.D.11
NOTE 2 ACQUISITIONS
SQL SOFTWARE, LTD.
In the fourth quarter of fiscal 1998, Intersolv acquired SQL Software, Ltd.
("SQL"), by exchanging 1,251,450 shares of
50
<PAGE> 52
Intersolv Stock for all the outstanding shares of SQL. The acquisition was
accounted for under the purchase method. The purchase price, including
transaction costs of $1.5 million and assumed liabilities of $2.4 million, was
determined to be $19.2 million. Of that amount, $15.7 million was allocated to
purchased research and development and was written off in fiscal 1998 since no
technological feasibility or alternative future use could be demonstrated.
Additionally, $1.1 million was allocated to capitalised software and $2.4
million was allocated to goodwill and other intangibles. The amounts allocated
to goodwill and other intangibles will be amortised over their useful lives
which are estimated to be five years.
The unaudited combined historical results as if SQL had been acquired at the
beginning of fiscal 1998 and fiscal 1997 are estimated to be (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Revenue $206,083 $166,816
Net Income $ 6,601 $(20,846)
Diluted earnings per share $ 0.28 $ (0.97)
- --------------------------------------------------------
</TABLE>
TECHGNOSIS INTERNATIONAL, INC.
In October 1995, Intersolv acquired all of the outstanding common and preferred
stock of TechGnosis International, Inc. ("TechGnosis") for 2.5 million shares of
Intersolv Stock and $4.8 million in cash. In addition, Intersolv also assumed
TechGnosis' obligations under its $3.9 million of 8.4% Subordinated Convertible
Notes ("Notes") due in 1999. The notes are convertible into 1,020,756 shares of
Intersolv Stock. Total value of the transaction was approximately $80 million.
TechGnosis, which is headquartered in Belgium, provides cross-platform data
access technology for client/server environments. The transaction was accounted
for using the "pooling-of-interests" method.
PC STRATEGIES & SOLUTIONS, INC.
In May 1995, Intersolv acquired all of the outstanding common stock of PC
Strategies & Solutions, Inc. ("PCS") for 675,000 shares of Intersolv Stock
(valued at $9.3 million). The transaction was accounted for using the
"pooling-of-interest" method; accordingly the fiscal 1995 historical financial
statements of Intersolv have been restated to include the financial position and
results of operations of PCS. PCS provides consulting and training services
focusing on the implementation of object-oriented client/server technology.
C++/VIEWS PRODUCT LINE
In May 1995, Intersolv acquired the rights to the C++/Views product line owned
by Liant Inc. for $1.2 million. Intersolv did not acquire any of the common
stock of Liant Inc. As discussed in Note 3, $0.7 million was allocated to
in-process software development efforts which had not reached technological
feasibility. This amount was charged to operations in fiscal 1996.
NOTE 3 NON-RECURRING CHARGES
WRITE-OFF OF SQL PURCHASED R&D
In fiscal 1998, purchased research and development arising from the SQL
acquisition in the amount of $15.7 million was written off. Intersolv also
recognised $1.7 million in non-recurring expenses which were primarily
associated with discontinued businesses. During fiscal 1998, Intersolv exited
the Allegris product line at a total cost of $2.4 million. Offsetting this
amount were gains on the sale of the Excelerator product ($250 thousand) and
non-strategic consulting services ($170 thousand) and a net reduction in
restructuring accruals established in fiscal 1997 ($247 thousand). As of 30
April 1998, the remaining liabilities of $3.3 million and $.9 million relate to
the SQL acquisition and to Allegris, respectively.
WRITEDOWN OF SOFTWARE AND INTANGIBLE ASSETS
In the fourth quarter of fiscal 1997, Intersolv completed a comprehensive
business strategy review of its primary market opportunities, which led
Intersolv to record a charge of $28.9 million to writedown capitalised and
purchased software along with certain related intangible assets, to their net
realisable values. Intersolv determined the nature and amount of this charge
after identifying which product lines will be primary solution areas for future
fiscal years. Based upon future expected net revenues for the primary solution
areas, Intersolv determined that certain capitalised and purchased software
assets should be written down to their expected net realisable values. This
consisted of $19.1 million to write down various capitalised and purchased
software balances, $3.4 million to writedown intangible assets that were related
to obsolete or discontinued products, $3.3 million to cover the costs of
disposing or discontinuing certain products, $1.6 million of inventory related
to products that were discontinued or disposed of and $1.5 million for losses on
settlement of certain customer receivables related to discontinued products.
TECHGNOSIS ACQUISITION CHARGES
In October 1995, Intersolv incurred $11.6 million of non-recurring charges
related to the acquisition of TechGnosis. This includes $3.3 million to
restructure distributor agreements, $2.5 million for consolidation of offices
and equipment, $2.2 million for severance and related costs, $2 million to
write-off overlapping technologies and $1.6 million of direct transaction and
other transition expenses. As of 30 April 1998 and 1997, the remaining
liabilities of $.2 million and $.7 million relate to amounts to be disbursed for
continuing office lease obligations respectively.
PCS AND C++/VIEWS ACQUISITION CHARGES
In May 1995, Intersolv incurred $2 million of non-recurring charges related to
the acquisition of PCS and the C++/Views Product line. Acquisition charges
included a $0.7 million charge for purchased research and development related to
the C++/Views transaction. The remaining $1.3 million charge was for direct
transaction expenses, severance and costs to consolidate operations, which were
all disbursed by 30 April 1996.
NOTE 4 BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
Intersolv operates in one industry segment, the development and marketing of
computer software programs and related services. Intersolv markets its products
worldwide and operations can be grouped into three main geographic areas.
Pertinent financial data by major geographic area is summarised below.
51
<PAGE> 53
(Amounts in thousands)
<TABLE>
<CAPTION>
NORTH EUROPE & ASIA
AMERICA OTHER PACIFIC CONSOLIDATED
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1998:
Revenues:
Customers $144,334 $41,230 $10,916 $196,480
Intercompany 2,788 (626) (2,162) --
---------------------------------------------
TOTAL $147,122 $40,604 $ 8,754 $196,480
---------------------------------------------
Income (loss) from
operations $ 4,387 $ 4,446 $ (289) $ 8,544
---------------------------------------------
Identifiable assets $107,799 $22,163 $ 2,904 $132,866
---------------------------------------------
FISCAL 1997:
Revenues:
Customers $111,541 $31,509 $17,363 $160,413
Intercompany (330) 3,920 (3,590) --
---------------------------------------------
TOTAL $111,211 $35,429 $13,773 $160,413
---------------------------------------------
Income (loss) from
operations $(21,878) $ (505) $ 4,053 $(18,330)
---------------------------------------------
Identifiable assets $ 72,167 $15,163 $ 8,687 $ 96,017
---------------------------------------------
FISCAL 1996:
Revenues:
Customers $ 96,883 $32,420 $16,010 $145,313
Intercompany 5,311 (4,711) (600) --
---------------------------------------------
TOTAL $102,194 $27,709 $15,410 $145,313
---------------------------------------------
Income (loss) from
operations $ (1,798) $(4,215) $ 4,590 $ (1,423)
---------------------------------------------
Identifiable assets $ 83,361 $19,096 $ 8,460 $110,917
- -----------------------------------------------------------------------
</TABLE>
Intercompany revenues between geographic areas are accounted for as transfer
fees representative of transactions with unaffiliated third parties. These fees
are intended to cover primarily software development expense and cost of goods.
Identifiable assets are those assets that are identifiable with operations in
each geographic area. General corporate assets in North America include cash and
cash equivalents and capitalised software costs. One customer accounted for 11%
of revenues in fiscal 1998. No customer accounted for 10% or more of total
revenue during the fiscal years ended 30 April 1997 and 1996. Included in Europe
and Other revenues is $5.3 million, $4.8 million and $7.3 million of export
revenues to countries where Intersolv has no foreign owned operations.
Approximately 95% of the North American revenues is to customers based in the
United States and the remainder is to customers in Canada and Mexico.
NOTE 5 DEBT
LINES OF CREDIT AND SHORT-TERM NOTES PAYABLE
Intersolv has an unsecured credit arrangement with two banks (the "Credit
Agreement"). The Credit Agreement provides for borrowings not to exceed $15
million. The Credit Agreement was renewed in October 1996 and is due to expire
in September 1998. Interest on borrowings would be at the LIBOR rate plus 1.5%
or prime, at Intersolv's option. The commitment fee is 3/8% per annum on the
unused portion of the credit line. The weighted average rate during fiscal 1998
and the rate as of 30 April 1998 was 8.50%. The Credit Agreement has various
covenants which limit Intersolv's ability to dispose of assets, purchase its own
stock, pay dividends and purchase other significant businesses or technologies.
Intersolv is also required to maintain certain financial ratios. Intersolv was
in violation of the debt service coverage covenants for fiscal 1998. This
violation was waived by the two banks. As of 30 April 1998 and 1997, there was
$3 million and $6 million outstanding, respectively. No amounts were outstanding
during the year ended 30 April 1996.
TechGnosis had $1,083,000 of short-term debt outstanding under foreign lines of
credit and other borrowing arrangements during fiscal 1996. Interest on the
short-term debt ranged from 3.5% to 10% with varying maturity dates through
December 1995. Foreign lines of credit and other borrowing arrangements were
generally restricted for working capital purposes. The borrowings are primarily
collateralised by certain assets of Intersolv's foreign operations. All amounts
were repaid by 30 April 1996.
LONG-TERM DEBT
6.D.3.
Long-term debt consists of the following at 30 April:
(In thousands)
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Notes payable to two companies with interest
at 5.47%; payable in monthly principal and
interest instalments through
February 1999 $ 190 $ 406
Non-interest bearing accrued liabilities
payable to four individuals, payable in
monthly instalments 1,375 2,009
---------------
Total debt 1,565 2,415
Less current portion (973) (1,170)
---------------
Long-term debt excluding current portion $ 592 $1,245
- --------------------------------------------------------------
</TABLE>
The maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 973
2000 592
------
$1,565
------
</TABLE>
NOTE 6 COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Intersolv is subject to legal proceedings and claims that arise in the ordinary
course of its business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the financial
position or results of operations of Intersolv.
OPERATING LEASE OBLIGATIONS
Intersolv leases office space and equipment under non-cancellable operating
leases expiring through 2017. In addition, Intersolv leases office equipment on
a month-to-month basis, which can be terminated at any time at Intersolv's
option. None of the agreements contain unusual renewal or purchase options.
Total rent expense in fiscal 1998, 1997 and 1996 was $11.6 million, $10.5
million, and $7 million, respectively.
Future minimum lease payments under the non-cancellable operating lease
agreements as of 30 April 1998, are as follows:
YEARS ENDING 30 APRIL
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$7,280 $4,703 $3,680 $3,127 $3,002 $11,976 $33,768
- ------------------------------------------------------------------
</TABLE>
SALES AND INCOME TAXES
Intersolv sells its products in various states through different distribution
channels, including telesales and direct sales. On certain sales, Intersolv must
collect and remit sales tax to the respective states. These sales taxes are
subject to adjustment upon audit by the respective states. Liabilities may
result from this
52
<PAGE> 54
process; however, management believes the reserves provided for these
liabilities are sufficient.
Intersolv's income tax returns are subject to audit by Federal, state and
foreign tax authorities. Adjustments to increase or decrease taxable income or
losses may result from the audits. Management believes the impact of these
adjustments, if any, would not have a material impact on Intersolv's financial
statements taken as a whole.
NOTE 7 SUBORDINATED CONVERTIBLE NOTES
As a result of the acquisition of TechGnosis in October 1995, Intersolv incurred
an obligation for $3,865,000 of 8.4% subordinated convertible notes which are
due in September 1999. Interest is payable quarterly. As of 30 April 1998, there
was $38,330 of principal amount outstanding, which can be converted into
Intersolv Stock at the option of the holder at any time prior to maturity. The
conversion price per share is $3.7864, which would be adjusted for certain
dilutive events. Intersolv may prepay the notes at any time prior to maturity.
Upon prepayment, the note holder will receive a warrant to purchase the number
of shares of Intersolv Stock determined by dividing the prepayment amount by the
conversion price. The warrants shall be exercisable until 1999. Intersolv has
not prepaid any of the notes or issued any warrants.
NOTE 8 CAPITAL STOCK
STOCK OPTION PLANS
6.F.8
Intersolv has two active stock option plans, the 1992 Stock Option Plan (the
"1992 Plan"), which provides for the granting of incentive and nonqualified
stock options to purchase up to 4,000,000 shares of Intersolv Stock and the 1997
Employee Stock Option Plan (the "1997 Plan") which provides for the granting of
nonqualified stock options to purchase up to 700,000 shares of Intersolv Stock.
The option price must be equal to or greater than fair market value at the date
of grant. Options are granted for terms of up to ten years and most are
exercisable in cumulative annual increments of 25% each year, commencing one
year after the date of grant. These plans expire in 2002 and 2007, respectively.
Intersolv applies APB Opinion 25 and related interpretations in accounting for
this plan. Accordingly, no compensation expense has been recorded in the
accompanying financial statements for this plan.
Intersolv has 272,658 options outstanding under the 1982 Stock Option Plan (the
"1982 Plan"), which has expired. In addition, Intersolv has 3,511 shares and
31,018 shares outstanding under option plans that were assumed from Q+E and
TechGnosis, respectively, as a result of the acquisition of those companies. The
average price of the outstanding options is $10.30, $10.38, and $1.66 under the
1982, Q+E and TechGnosis plans, respectively. No further options will be granted
under those plans.
See Fig. 1
FIG. 1
Information regarding Intersolv's 1992 Plan is summarised below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE OPTIONS FAIR VALUE OF
SHARES EXERCISE PRICE EXERCISABLE OPTIONS GRANTED
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
30 April 1995 options outstanding 1,122,065 $ 9.19 152,207
Granted 1,274,998 13.22 $ 10,554,706
Exercised (196,591) 8.13
Cancelled (379,762) 14.77
---------
30 April 1996 options outstanding 1,820,710 10.78 293,871
Granted 883,574 8.19 $ 4,881,907
Exercised (2,500) 7.25
Cancelled (249,814) 11.16
---------
30 April 1997 options outstanding 2,451,970 9.82 748,683
Granted 1,068,400 11.08 $ 3,096,526
Exercised (379,630) 9.85
Cancelled (201,643) 10.41
---------
30 April 1998 options outstanding 2,939,097 $10.23 977,061
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
As of 30 April 1998, there were 2,939,097 options outstanding and 977,061
options exercisable under the 1992 Plan. Exercise prices of options outstanding
and options exercisable as of 30 April 1998 are as follows:
<TABLE>
<CAPTION>
OPTIONS OPTIONS WEIGHTED AVERAGE LIFE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISABLE (YEARS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 6.50-$14.00 2,771,606 917,396 7.7
$14.00-$21.00 167,491 59,665 9.0
- --------------------------------------------------------------------------------------------------------------------
2,939,097 977,061 7.8
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Information regarding the Company's 1997 Plan is summarised below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE OPTIONS FAIR VALUE OF
SHARES EXERCISE PRICE EXERCISABLE OPTIONS GRANTED
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
30 April 1997, options outstanding
Granted 427,770 $15.78 -- $ 1,239,798
Exercised -- --
Cancelled 13,030 16.00
-----------------------------------------------------------------
30 April 1998, options outstanding 414,740 $14.77 --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
As of 30 April 1998, the 414,740 options outstanding under the 1997 Plan have
exercise prices between $13.00 and $16.00 and a weighted-average remaining
contractual life of 9.7 years.
53
<PAGE> 55
If Intersolv had recorded compensation for the 1992 Plan and the 1997 Plan based
upon the fair value at the grant dates of options issued in fiscal 1997 and 1998
and for the Employee Stock Purchase Plan at the dates of purchase, consistent
with the method of FASB Statement 123, Intersolv's net income and earnings per
share would have been adjusted to the amounts shown below:
<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1998
- ------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss) As reported $(21,166) $5,515
Pro forma $(24,065) $1,487
Basic EPS As reported $(1.05) $0.26
Pro forma $(1.20) $0.07
Diluted EPS As reported $(1.05) $0.25
Pro forma $(1.20) $0.07
- ------------------------------------------------------------
</TABLE>
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of six years, expected volatility of 69%, a
dividend yield of 0% and a risk-free interest rate of 6.25% in fiscal 1997 and
5.5% in fiscal 1998.
EMPLOYEE STOCK PURCHASE PLAN
Intersolv has an Employee Stock Purchase Plan, which is authorised to grant
rights to purchase an aggregate maximum of 1,200,000 shares of Intersolv Stock.
Employees of Intersolv with three months of continuous service are eligible to
participate.
Rights are granted twice yearly and are exercisable effective the succeeding 30
June or 31 December. Eligible employees may purchase shares of Intersolv Stock
through payroll deductions at a purchase price which is 85% of fair market value
at the beginning or the end of each six-month offering period, whichever is
lower. During fiscal 1998, 1997, and 1996, respectively, 286,356, 203,076, and
102,958 shares of Intersolv Stock were purchased under this plan.
SHAREHOLDER RIGHTS PLAN
Intersolv has a Shareholder Rights Plan (the "Rights Plan"), which is designed
to deter coercive takeover tactics and to prevent an acquirer from gaining
control of Intersolv without offering a fair price to all of Intersolv
Stockholders. Under the Rights Plan, each Intersolv Stockholder receives one
right (a "Right") for each share of Intersolv Stock which entitles its holder to
buy one one-hundredth of a share of Series A Junior Participating Preferred
Stock ("Series A") at a purchase price of $40.00. The Rights will not be
exercisable or separable from the Intersolv Stock until a specified period after
a person or group has acquired or has the right to acquire 20% of Intersolv
Stock or has commenced a tender offer resulting in the ownership of 30% or more
of Intersolv Stock.
If Intersolv is acquired in a merger or other business combination transaction,
each Right will entitle the holder to receive, upon exercise, common stock of
either Intersolv or the acquiring company having a market value equal to twice
the exercise price of the Right. Each Right is nonvoting and expires on 31
August 1999. Intersolv may generally redeem the Rights at Intersolv's option
prior to such Right becoming exercisable at a redemption price of $.01 per
Right.
In connection with the Micro Focus Merger Agreement, Intersolv amended the
Rights Plan to exclude transactions in connection with the Merger.
WARRANTS
In fiscal 1997, Intersolv issued warrants to purchase 140,000 shares of
Intersolv Stock at an exercise price of $10.375. As of 30 April 1998, 108,734
shares were exercisable, with the balance becoming exercisable in increments of
31,267 shares on an annual basis through February 1999. The warrants expire in
2006.
NOTE 9 EMPLOYEE BENEFIT PLAN
401(K) PLAN
Intersolv has a savings and investment plan (the "Plan") which covers employees
of Intersolv and that qualifies under section 401(k) of the Internal Revenue
Code. All full-time employees who are at least 21 years old and have worked a
minimum of three months at Intersolv are eligible to participate. Contributions
up to 10% of eligible employees' salaries, as defined, may be made by employees
and Intersolv can make matching contributions. Intersolv contributed $447,000,
$346,000 and $303,000 in fiscal 1998, 1997 and 1996, respectively.
NOTE 10 INCOME TAXES
The US and foreign components of income (loss) before provision for income taxes
were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED 30 APRIL
--------------------------
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
United States $4,075 $(21,672) $2,951
Foreign 4,167 3,267 (3,334)
- ----------------------------------------------------------
$8,242 $(18,405) $ (383)
- ----------------------------------------------------------
</TABLE>
The provision for income taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED 30 APRIL
--------------------------
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Current provision:
US federal $1,637 $ 1,547 $ --
Foreign 620 904 --
State 460 151 593
- ----------------------------------------------------------
2,717 2,602 593
- ----------------------------------------------------------
Deferred provision (benefit)
US federal -- 159 2,735
Foreign -- -- --
State -- -- --
- ----------------------------------------------------------
-- 159 2,735
- ----------------------------------------------------------
$2,717 $ 2,761 $3,328
- ----------------------------------------------------------
</TABLE>
The provision for income taxes result in effective tax rates which differ from
the US Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Statutory US Federal income tax
rate 35.0% (35.0%) (35.0%)
State income taxes, net of
federal benefit 3.7 1.0 77.7
Foreign taxes impact (5.3) (4.7) (143.2)
Changes in valuation allowance
and liability for tax exposures (71.1) 52.5 909.1
Non-deductible permanent expenses 66.8 1.2 60.3
Other 3.9 -- --
- -----------------------------------------------------------
33.0% 15.0% 868.9%
- -----------------------------------------------------------
</TABLE>
54
<PAGE> 56
The tax effects of the components of the deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
30 APRIL 30 APRIL
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 2,786 $ 7,849
Research and experimental tax
credits 800 1,809
Property and equipment 669 301
Allowance for doubtful accounts 984 971
Other accruals 1,535 2,934
Valuation allowance (6,774) (13,864)
- ---------------------------------------------------------
Total deferred tax assets -- --
- ---------------------------------------------------------
Deferred tax liabilities:
Liability for tax exposures (3,633) (4,027)
Capitalised software, net (1,631) (1,237)
- ---------------------------------------------------------
Total deferred tax liabilities (5,264) (5,264)
- ---------------------------------------------------------
Net deferred tax liabilities $(5,264) $ (5,264)
- ---------------------------------------------------------
</TABLE>
Intersolv provided a full valuation allowance on the total amount of its
deferred tax assets at 30 April 1998 since management does not believe that it
is more likely than not that these assets will be realised. Net operating loss
carryforwards for US and foreign tax purposes are $5.5 million and $1.2 million,
respectively, which expire through 2012.
NOTE 11 OTHER INCOME (EXPENSE)
Other income (expense) includes interest income of $559,000, $501,000, and
$1,083,000 in fiscal 1998, 1997, and 1996, respectively, and interest expense of
$871,000, $578,000, and $615,000 in fiscal 1998, 1997, and 1996, respectively.
NOTE 12 QUARTERLY FINANCIAL DATA (UNAUDITED)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTERS FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Revenues $41,330 $47,767 $49,014 $58,369
Costs and Expenses 40,725 44,429 43,594 62,217
Net Income (loss) 605 3,338 5,420 (3,848)
Basic net income
(loss) per share $ 0.03 $ 0.16 $ 0.26 $ (0.17)
Diluted net income
(loss) per share $ 0.03 $ 0.15 $ 0.24 $ (0.17)
Stock Price:
High $ 14.63 $ 18.50 $ 21.25 $ 20.50
Low $ 7.13 $ 11.25 $ 12.00 $ 13.88
1997:
Revenues $32,747 $37,665 $42,083 $47,918
Costs and Expenses 32,830 35,615 37,062 73,236
Net income (loss) 36 1,396 3,369 (25,967)
Basic net income
(loss) per share 0.00 $ 0.07 $ 0.17 $ (1.26)
Diluted net income
(loss) per share 0.00 $ 0.07 $ 0.16 $ (1.26)
Stock Price:
High $ 12.00 $ 9.87 $ 11.12 $ 10.12
Low $ 8.37 $ 7.50 $ 7.50 $ 6.25
- ------------------------------------------------------------
</TABLE>
The fourth quarter of fiscal 1998 includes a non-recurring charge of $15.7
million which represents the write off of research and development costs
purchased as part of the SQL acquisition. A charge of $1.7 million was also
recorded in connection with the disposition of non-strategic products. The
fourth quarter of fiscal 1997 includes a non-recurring charge of $28.9 million
related to the writedown of certain software and intangible asset balances.
These charges are more fully discussed in Note 3.
NOTE 13 SUBSEQUENT EVENT
On 17 June 1998, Intersolv signed a definitive agreement to merge with Micro
Focus Group Plc. Micro Focus is a UK company with principal offices in Newbury,
England and Mountain View, California. Under the terms of the Merger Agreement,
each share of Intersolv Stock will be exchanged for .55 shares of Micro Focus
American Depositary Shares and each Intersolv Option will be exchanged for an
equivalent Micro Focus Option. Micro Focus shares are listed both on the London
Stock Exchange and on the Nasdaq National Market System. The transaction is
subject to regulatory approval in the US and the UK as well as to the approval
of each company's shareholders.
55
<PAGE> 57
2. SUMMARY OF DIFFERENCES BETWEEN US GAAP AND UK GAAP
6.E.13(A)
The main differences between the accounting policies adopted by Intersolv under
US GAAP and those adopted by Micro Focus under UK GAAP relate to the accounting
for business combinations, goodwill and sale and leaseback transactions.
(1) GOODWILL
Under US GAAP, goodwill arising from the purchase of subsidiary
undertakings is held as an intangible asset in the balance sheet and
amortised over its useful life. Under UK GAAP, Micro Focus writes off such
goodwill on acquisition against retained earnings.
(2) BUSINESS COMBINATIONS
(a) "Pooling-of-interest" method of accounting -- Under US GAAP, Intersolv
has accounted for certain business combinations using the
pooling-of-interest method. Accordingly, at the date of a business
combination accounted for using the pooling-of-interest method, the US
GAAP financial statements of Intersolv are restated to reflect the results
of such business combinations for all periods presented. Under UK GAAP,
Micro Focus cannot account for such business combinations using the
pooling-of-interest method. The combinations are accounted for using the
acquisition method of accounting. Accordingly, the results of Micro Focus
include the results of the acquired company for the period of ownership
only.
(b) Restructuring costs -- Under US GAAP, when accounting for business
combinations using the acquisition method of accounting, costs estimated
to be incurred due to the integration of the two entities can be included
as fair value adjustments when calculating the value of the net assets
acquired. Under UK GAAP, Micro Focus does not include such post
acquisition costs when calculating the fair value of net assets acquired.
(c) Transaction costs -- Under US GAAP, when accounting for business
combinations using the pooling-of-interest method of accounting, fees and
similar incremental costs incurred directly in making an acquisition are
expensed as incurred. Under UK GAAP, Micro Focus includes such expenses as
a component of the fair value of the purchase consideration.
(3) SALE AND LEASEBACK TRANSACTIONS
Under US GAAP, profits arising from the sale of assets which are leased
back on operating leases are recognised over the period of the lease.
Under UK GAAP, Micro Focus recognises such profits in the year that the
sale and leaseback transaction occurs.
3. RECONCILIATION OF US GAAP TO UK GAAP FINANCIAL INFORMATION
6.E.13(A)
The following unaudited statements summarise the material adjustments, net of
their tax effect, which reconcile Intersolv's net income, shareholders' equity
and net assets from that reported under US GAAP to those which would have been
reported had UK GAAP been applied.
(1) RECONCILIATION OF NET INCOME (LOSS)
($ in thousands except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
30 APRIL 1998 30 APRIL 1997 30 APRIL 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) under US GAAP 5,515 (21,166) (3,711)
- ---------------------------------------------------------------------------------------------------------
Adjustments for:
Elimination of amortisation of goodwill 15,604 100 100
Elimination of subsidiaries pre-acquisition results -- -- 3,698
Restatement of acquired fair values (2,077) -- --
Inclusion of transaction costs in purchase
consideration -- -- 1,233
Elimination of deferred sale and leaseback profits (41) (83) 24
------------------------------------------
Total adjustments 13,486 17 5,055
------------------------------------------
Net income (loss) as adjusted for UK GAAP 19,001 (21,149) 1,344
- ---------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
30 APRIL 1998 30 APRIL 1997 30 APRIL 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (loss) per share
Adjusted net income (loss) under UK GAAP 19,001 (21,149) 1,344
Weighted average shares outstanding (in thousands) 21,315 20,119 19,348
------------------------------------------
Earnings (loss) per share as adjusted for UK GAAP $0.89 $(1.05) $0.07
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(2) RECONCILIATION OF SHAREHOLDERS' EQUITY
($ in thousands)
<TABLE>
<CAPTION>
AS AT AS AT
30 APRIL 1998 30 APRIL 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Shareholders' equity under US GAAP 57,239 30,749
- ----------------------------------------------------------------------------------------------
Adjustments for:
Goodwill, net of accumulated amortisation (2,862) (675)
Sale and leaseback 9 50
--------------------------
Total adjustments (2,853) (625)
--------------------------
Shareholders' equity as adjusted for UK GAAP 54,386 30,124
- ----------------------------------------------------------------------------------------------
</TABLE>
(3) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
The net increase (decrease) in cash and cash equivalents, as recorded in
the Intersolv financial statements for each of the three years ended 30
April 1998, is stated on a basis consistent in all material respects with
the accounting policies adopted by Micro Focus in its UK GAAP financial
statements.
(4) RECONCILIATION OF NET ASSETS AT 30 APRIL 1998
($ in thousands)
<TABLE>
<CAPTION>
AUDITED ADJUSTMENTS RESTATED
NET ASSETS US GAAP NET ASSETS
(US GAAP) TO UK GAAP (UK GAAP)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED ASSETS
Intangible........................................... 7,047 (2,862) 4,185
Tangible............................................. 11,988 -- 11,988
---------------------------------------
TOTAL FIXED ASSETS................................... 19,035 (2,862) 16,173
---------------------------------------
CURRENT ASSETS
Stocks............................................... 699 -- 699
Debtors.............................................. 79,050 -- 79,050
Cash at bank......................................... 34,082 -- 34,082
---------------------------------------
TOTAL CURRENT ASSETS................................. 113,831 -- 113,831
---------------------------------------
Creditors: amount falling due within one year........ (43,464) 9 (43,455)
Deferred revenue..................................... (26,269) -- (26,269)
---------------------------------------
(69,733) 9 (69,724)
---------------------------------------
NET CURRENT ASSETS................................... 44,098 9 44,107
---------------------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES................ 63,133 (2,853) 60,280
---------------------------------------
Creditors: amounts falling due after more than one
year............................................... (630) -- (630)
Provisions for liabilities and charges............... (5,264) -- (5,264)
---------------------------------------
NET ASSETS........................................... 57,239 (2,853) 54,386
- ----------------------------------------------------------------------------------------------
</TABLE>
Material adjustments necessary to restate the net assets of Intersolv under UK
GAAP have been made in respect of the following items:
<TABLE>
<S> <C>
1 Write off of goodwill, net of amortisation................ (2,862)
2 Reversal of deferred revenue relating to sale and
leaseback................................................. 9
------
(2,853)
======
</TABLE>
57
<PAGE> 59
4. REPORT ON THE RESTATEMENTS TO UK GAAP
The following is a copy of a letter received from Ernst & Young:
LOGO
Apex Plaza
Reading
RG1 1YE
12.11
The Directors and the Proposed Directors 24 August 1998
Micro Focus Group Plc
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN
The Directors
Donaldson, Lufkin & Jenrette International
99 Bishopsgate
London EC2M 3XB
Warburg Dillon Read
1 Finsbury Avenue
London EC2M 2PP
Dear Sirs
We report on the unaudited restatements under UK GAAP ("the UK GAAP
restatements") of the consolidated net income for each of the three years ended
30 April 1998, the consolidated shareholders' equity as at 30 April 1997 and
1998 and the consolidated net assets statement as at 30 April 1998 of INTERSOLV,
Inc. ("Intersolv"), set out in Section 3 of Part 3 of the Listing Particulars
dated 24 August 1998.
RESPONSIBILITY
It is the responsibility solely of the Directors of Micro Focus Group Plc to
prepare the UK GAAP restatements in accordance with paragraph 12.11 of the
Listing Rules. It is our responsibility to form an opinion, as required by the
Listing Rules of the London Stock Exchange, on the UK GAAP restatements and to
report our opinion to you.
The UK GAAP restatements incorporate significant adjustments from the
consolidated financial statements of Intersolv, which are prepared in accordance
with US GAAP. The financial statements of Intersolv for the three years ended 30
April 1998 were audited by PricewaterhouseCoopers LLP, who gave unqualified
reports thereon. We do not accept any responsibility for this financial
information used in the preparation of the UK GAAP restatements.
BASIS OF OPINION
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards issued by the Auditing Practices Board. Our work, which
involved no independent examination of any underlying financial information,
consisted primarily of making enquiries of the management of Intersolv and
considering the evidence recorded by the auditors who audited the financial
statements to the extent that we considered it necessary to establish the
principal accounting policies which were applied in the preparation of the
financial information.
We have considered the evidence supporting the UK GAAP restatements and
discussed the UK GAAP restatements with the Directors of Micro Focus Group Plc.
OPINION
In our opinion the adjustments made are those appropriate for the purpose of
presenting net income for each of the three years ended 30 April 1998, the
consolidated shareholders' equity as at 30 April 1997 and 1998, the net cash
flow for each of the three years ended 30 April 1998 and the consolidated net
assets statement at 30 April 1998 (as adjusted) on a basis consistent in all
material respects with UK GAAP and the restatements have been properly compiled
on the basis stated.
Yours faithfully
Ernst & Young
58
<PAGE> 60
5. LATEST QUARTERLY RESULTS
The following information is the full text of Intersolv's announcement of
results for the first quarter ended 31 July 1998 which was released on 18 August
1998:
"EARNINGS PER SHARE UP THREEFOLD TO $0.09 ON REVENUES OF $47 MILLION
ROCKVILLE, MD., Aug. 18 -- INTERSOLV, Inc. (Nasdaq:ISLI), a leader in
application enablement solutions, today announced financial results for the
first fiscal quarter ended July 31, 1998. Revenues were $47.1 million, 14
percent higher than $41.3 million in revenue for the first fiscal quarter of
last year. License fee revenue increased 15% to $21 million for the most recent
quarter. Operating earnings for the first quarter were $3 million, up from $1
million a year ago. First quarter net earnings were $0.09 per share, up
threefold from $0.03 per share in last year's first quarter.
The company's three strategic businesses -- Automated Software Quality, Data
Connectivity and Enterprise Application Renewal -- grew 23 percent when compared
to the first quarter last year. Demand in Automated Software Quality (PVCS
series) remained strong, with 26 percent revenue growth reported for this past
quarter. Growth accelerated in our Data Connectivity business (DataDirect
series) with revenue increasing 24 percent over the first quarter last year.
Growth in Enterprise Application Renewal was modest as the company broadened its
customer base, thus reducing its dependence on one major customer.
"Our focus on strategic business units continued to produce strong revenue
growth along with expanded operating margins," said Gary G. Greenfield,
INTERSOLV President and Chief Executive Officer. "During a quarter which is
seasonally weak, it's very pleasing to report a threefold increase in earnings
which exceeded consensus earnings estimates."
The proposed merger with Micro Focus (London Stock Exchange:MICF; Nasdaq:MIFGY),
announced on June 17, 1998, is progressing as anticipated. The proposed merger
remains subject to the satisfaction of certain conditions, including the
approval of the stockholders of both companies. INTERSOLV expects to mail to its
shareholders the proxy materials regarding the merger shortly and has scheduled
a Special Meeting of Shareholders on September 23, 1998.
SUMMARY FINANCIAL RESULT
(in 000s, except per share amounts)
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
JULY 31, JULY 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $47,086 $41,330
Operating income $3,026 $1,035
Pretax income $3,262 $930
Net income $2,120 $605
Net income per share $0.09 $0.03
- --------------------------------------------------------------------------------
</TABLE>
59
<PAGE> 61
HIGHLIGHTS OF INTERSOLV'S FIRST FISCAL QUARTER INCLUDE
- - Tektronix Taps PVCS for Oracle Financials Conversion -- Tektronix, a
portfolio of measurement, color printing and video and networking businesses,
selected INTERSOLV PVCS Professional to manage its business Source Code
Management process. The first application project is the upgrade of their
Oracle Financials to Version 10.7. PVCS Professional provides Tektronix with
a complete, full-scale software configuration management (SCM) solution for
team development across the enterprise, with the added value of an integrated
source code and issue management platform to streamline the migration
process.
- - PVCS Introduces PVCS Version Manager for Front Page -- PVCS Version Manager
for Front Page is an innovative new product that provides version control to
developers who are building Web sites. Now, the two million FrontPage and
Visual InterDev developers can easily organize, manage and protect Web
content. PVCS Version Manager for FrontPage enables companies with Web
applications to increase productivity by effectively managing changes to
their Web content, reduce Web management costs and improve Web site quality
-- all from the FrontPage development environment.
- - PVCS Extends Web Support -- PVCS Version Manager will support the upcoming
versions of Allaire Corporation's Cold Fusion application server. With PVCS
Version Manager, the more than 45,000 users of Cold Fusion are able to
implement a team development Infrastructure to improve communication and
reduce development risk, resulting in higher-quality Web applications.
- - IBM Selects DataDirect -- INTERSOLV will extend its market-leading DataDirect
ODBC and JDBC technology for client applications on IBM's OS/390 UNIX System
Services. INTERSOLV DataDirect SequeLink solutions deliver fast,
high-performance connectivity, empowering IBM OS/390 customers to fully
leverage business data for developing innovative applications for the
enterprise A over client/server, Internet and intranet environments.
- - Silicon Graphics and Compaq Connect with DataDirect -- INTERSOLV will port
both DataDirect Connect ODBC drivers and DataDirect SequeLink ODBC Edition to
Silicon Graphics' IRIX operating system for compatibility with the company's
Origin server lines. Compaq Computer Corporation will integrate INTERSOLV
DataDirect database connectivity products in each copy of Compaq's Digital
UNIX operating system.
- - DataDirect Advances Development and Deployment of OLE DB -- INTERSOLV
DataDirect is further building on its alliance with Microsoft to accelerate
the understanding and implementation of OLE DB technology. At Microsoft's
Tech Ed developer conference, DataDirect has introduced an innovative
training course and previewed new OLE DB technology, further establishing
itself as a premier educational and developmental resource for OLE DB.
INTERSOLV CORPORATE PROFILE
INTERSOLV, Inc. delivers innovative solutions for the entire application
enablement process -- empowering organizations to accelerate the delivery of
information systems across client/server, Internet or intranet environments.
Customers worldwide recognize the value of INTERSOLV's automated software
quality, data connectivity and enterprise application renewal solutions to gain
a true competitive advantage. Partnering with INTERSOLV, organizations achieve
the agility and flexibility to respond quickly to rapid business and
technological change. With annual revenues exceeding $200 million, INTERSOLV has
more than 4.5 million customer licenses at over 35,000 customer sites around the
world. Additional information about INTERSOLV is available via the World Wide
Web at http://www.intersolv.com or by calling 800-547-4000.
All trademarks are the property of their respective owners.
RISK FACTORS
This press release may contain forward-looking information within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and is subject to the safe harbor created by those
sections. INTERSOLV assumes no obligation to update the information contained in
this press release.
INTERSOLV's operating results can be impacted by a number of factors, including
the following, any of which could cause actual results to vary materially from
current results or INTERSOLV's anticipated future results. 1) Competition for
INTERSOLV's products is extremely intense, and there can be no assurance that
INTERSOLV's current products will remain competitive, or that INTERSOLV's
development efforts will produce products with the cost and performance
characteristics necessary to remain competitive. 2) The market for INTERSOLV's
products and services is characterized by rapidly changing technology and
frequent new product introductions. INTERSOLV's success will depend on its
ability to enhance its existing products and to introduce new products on a
timely and cost effective basis. 3) INTERSOLV's operating results can vary
substantially from period to period due to the timing of large orders. This and
other factors make the estimation of operating results prior to the end of a
quarter extremely uncertain. 4) Additional risk factors listed from time to time
in INTERSOLV's SEC reports, including but not limited to the report on Form 10-K
for the year ended April 30, 1998 (Item 7 -- Factors That May Affect Future
Results).
60
<PAGE> 62
OPERATING RESULTS QUARTER TO QUARTER COMPARISON THREE MONTHS ENDED JULY 31
(amounts in thousands, except per share amount)
<TABLE>
<CAPTION>
INCREASE
7/31/98 (DECREASE) 7/31/97
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
License fees $ 20,973 15% $ 18,273
Service fees 26,113 13% 23,057
--------------------------------
Total revenues 47,086 14% 41,330
--------------------------------
COSTS AND EXPENSES:
Cost of products 1,461 13% 1,297
Cost of services 14,869 19% 12,461
Sales and marketing 17,839 4% 17,112
Research and development 6,500 (2)% 6,631
General and administrative 3,391 21% 2,794
--------------------------------
TOTAL COSTS AND EXPENSES 44,060 9% 40,295
--------------------------------
OPERATING INCOME 3,026 2.9X 1,035
Other income (expense), net 236 (105)
--------------------------------
PRE-TAX PROFITS 3,262 3.5X 930
Taxes 1,142 3.5X 325
--------------------------------
NET INCOME $ 2,120 3.5X $ 605
--------------------------------
Shares used in computing EPS 24,014 14% 21,065
--------------------------------
DILUTED EPS $ 0.09 3.0X $ 0.03
- ----------------------------------------------------------------------------------------------
KEY OPERATING RATIOS:
Operating Margin 6% 3%
Pre-tax Margin 7% 2%
Net Margins 5% 1%
Tax Rate 35% 35%
- ----------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 63
BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
7/31/98 4/30/98
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,576 $ 34,082
Accounts receivable, net 58,555 62,962
Prepaid expenses and other assets 5,785 7,663
-------------------
TOTAL CURRENT ASSETS 97,916 104,707
-------------------
Software, net 3,646 4,184
Property and equipment, net 11,362 11,988
Notes receivable and other assets 13,499 11,987
-------------------
TOTAL ASSETS $126,423 $132,866
-------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 33,065 $ 43,464
Deferred revenue 25,815 26,269
-------------------
TOTAL CURRENT LIABILITIES 58,880 69,733
-------------------
Long-term liabilities 6,928 5,856
-------------------
TOTAL LIABILITIES 65,808 75,589
-------------------
Subordinated convertible notes 38 38
-------------------
Stockholders' equity 60,577 57,239
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $126,423 $132,866
- ----------------------------------------------------------------------------------
KEY RATIOS:
Days sales in receivables 108 Days 97 Days
Quick ratio 2.8X 2.2X"
- ----------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 64
PART 4 -- PRO FORMA STATEMENTS OF NET ASSETS
10.38(F)
12.28
12.29
12.31
12.31(B)
12.33(A)(B)
12.32(B)
12.30
1. The following unaudited pro forma combined statement of net assets has
been prepared for illustrative purposes only to show the effect of the
Merger as if it had occurred as at 31 January 1998 and, because of its
nature, may not give a true picture of the financial position of the
Merged Group. It has been prepared and reported upon in accordance with
the Listing Rules of the London Stock Exchange. The statement is prepared
on the basis of the net assets of Micro Focus as at 31 January 1998, as
extracted from the financial information in Part 2 of this document, and
the unaudited restated consolidated net asset statement of Intersolv under
UK GAAP as at 30 April 1998 as set out in Section 3 of Part 3.
10.31(D)
<TABLE>
<CAPTION>
ADJUSTMENTS
-----------------------
MERGER
MICRO FOCUS INTERSOLV INTERSOLV EXPENSES COMBINED
----------- --------- --------- ---------- --------
L'000 $'000 L'000 L'000 L'000
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Intangible 12,394 4,185 2,503 -- 14,897
Tangible 23,836 11,988 7,170 -- 31,006
Investments 4,886 -- -- -- 4,886
---------------------------------------------------------------
TOTAL FIXED ASSETS 41,116 16,173 9,673 -- 50,789
---------------------------------------------------------------
CURRENT ASSETS
Stocks 317 699 418 -- 735
Debtors 30,873 79,050 47,279 -- 78,152
Cash at bank 51,518 34,082 20,384 -- 71,902
---------------------------------------------------------------
TOTAL CURRENT ASSETS 82,708 113,831 68,081 -- 150,789
---------------------------------------------------------------
Creditors: amounts falling due
within one year (26,483) (43,455) (25,990) (18,902) (71,375)
Deferred revenue (20,030) (26,269) (15,711) -- (35,741)
---------------------------------------------------------------
(46,513) (69,724) (41,701) (18,902) (107,116)
---------------------------------------------------------------
NET CURRENT ASSETS 36,195 44,107 26,380 (18,902) 43,673
---------------------------------------------------------------
TOTAL ASSETS LESS CURRENT
LIABILITIES 77,311 60,280 36,053 (18,902) 94,462
---------------------------------------------------------------
---------------------------------------------------------------
Creditors: amounts falling due
after more than one year (12) (630) (377) -- (389)
Provisions for liabilities and
charges (6,407) (5,264) (3,148) -- (9,555)
---------------------------------------------------------------
NET ASSETS 70,892 54,386 32,528 (18,902) 84,518
---------------------------------------------------------------
---------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
12.34(A)
12.34(B)
Notes:
1 For the purposes of this pro forma statement, the balance sheet of Intersolv
has been translated at an exchange rate of $1.672 to L1, being the closing
exchange rate at 30 April 1998.
2 Micro Focus and Intersolv expect to incur direct transaction costs estimated
at $31 million in connection with the Merger. These costs include $16
million (L9.8 million) (exclusive of any value added tax) relating to Micro
Focus transaction costs, which comprise accounting fees and legal fees, the
costs of printing, $8 million (L4.9 million) relating to Stamp Duty charges
and $6.1 million (L3.7 million) in respect of advice from Donaldson, Lufkin
& Jenrette and from Warburg Dillon Read. The total transaction costs also
include the costs and expenses of $15 million (L9.2 million) expected to be
payable by Intersolv, which include $8 million (L4.9 million) in respect of
advice from Hambrecht & Quist. The adjustment does not include any amounts
in respect of additional costs associated with the integration of Micro
Focus and Intersolv. For the purposes of the pro forma net asset statement,
a cost of $31 million is included within creditors falling due within one
year. These amounts have been translated at an exchange rate of $1.640 to
L1, being the closing exchange rate at 31 January 1998.
3 No adjustment has been made to reflect the trading subsequent to the balance
sheet dates shown above or other transactions entered into since the
respective balance sheet dates of Micro Focus or Intersolv.
4 The pro forma statement of net assets does not take account of any
differences between the book values and the fair values which will be
ascribed to the assets and liabilities of Intersolv upon the acquisition by
Micro Focus.
5 Certain reclassifications have been made to the Intersolv historical data to
conform with Micro Focus presentation.
63
<PAGE> 65
12.28
12.29
12.31
12.33(A)
12.33(B)
12.32(B)
12.30
2. The following unaudited pro forma combined statement of net assets has
been prepared for illustrative and information purposes only to show the
effect of the Merger, in accordance with US GAAP, as if it had occurred as
at 31 January 1998 and, because of its nature, may not give a true picture
of the financial position of the Merged Group. The statement is presented
in US dollars and is prepared on the basis of the net assets of Micro
Focus as at 31 January 1998 as extracted from the US GAAP financial
information set out in Part 2, and the audited consolidated balance sheet
of Intersolv as at 30 April 1998 as extracted from the US GAAP financial
information set out in Part 3.
This unaudited pro forma combined statement of net assets has been
prepared and reported upon in accordance with the Listing Rules of the
London Stock Exchange. It has not been prepared in accordance with US
practice and standards and does not constitute pro forma financial
information as defined by the SEC.
<TABLE>
<CAPTION>
ADJUSTMENTS
-----------------------
MERGER
(IN $ THOUSANDS) MICRO FOCUS INTERSOLV EXPENSES COMBINED
- ---------------- ------------- --------- ---------- ----------
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 48,174 34,082 -- 82,256
Short term investments 36,316 -- -- 36,316
Accounts receivable, net of allowances for
doubtful accounts 47,798 62,962 -- 110,760
Inventories 519 -- -- 519
Prepaid expenses and other assets 2,833 7,663 -- 10,496
------------------------------------------------------
Total current assets 135,640 104,707 -- 240,347
------------------------------------------------------
FIXED ASSETS
Property, plant and equipment, net 39,083 11,988 -- 51,071
Goodwill, net of accumulated amortisation 5,346 -- -- 5,346
Software product assets, net of accumulated
amortisation 20,328 4,184 -- 24,512
Notes receivable and other assets -- 11,987 -- 11,987
------------------------------------------------------
TOTAL ASSETS 200,397 132,866 -- 333,263
------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loan and short term notes payable (1,652) (3,707) -- (5,359)
Accounts payable (6,957) (8,824) -- (15,781)
Product and royalties payable (1,386) -- -- (1,386)
Accrued employee compensation and commissions (12,383) (18,292) -- (30,675)
Accrued payroll taxes (1,142) -- -- (1,142)
Income taxes payable (10,459) (2,657) -- (13,116)
Deferred revenue (32,848) (26,269) -- (59,117)
Other current liabilities (9,557) (9,984) (31,000) (50,541)
------------------------------------------------------
Total current liabilities (76,384) (69,733) (31,000) (177,117)
------------------------------------------------------
Long term debt and other liabilities (20) (592) -- (612)
Deferred income taxes (9,159) (5,264) -- (14,423)
Subordinated convertible note -- (38) -- (38)
------------------------------------------------------
TOTAL LIABILITIES (85,563) (75,627) (31,000) (192,190)
------------------------------------------------------
NET ASSETS 114,834 57,239 (31,000) 141,073
- -----------------------------------------------------------------------------------------------------
</TABLE>
Notes:
12.34(A)
12.34(B)
1 No adjustment has been made to reflect the trading subsequent to the balance
sheet dates shown above or other transactions entered into since the
respective balance sheet dates of Micro Focus or Intersolv.
2 Micro Focus and Intersolv expect to incur direct transaction costs estimated
at $31 million in connection with the Merger. These costs include $16
million (L9.8 million) (exclusive of any value added tax) relating to Micro
Focus transaction costs, which comprise accounting fees and legal fees, the
costs of printing, $8 million (L4.9 million) relating to Stamp Duty charges
and $6.1 million (L3.7 million) in respect of advice from Donaldson, Lufkin
& Jenrette and from Warburg Dillon Read. The total transaction costs also
include the costs and expenses of $15 million (L9.2 million) expected to be
payable by Intersolv, which include $8 million (L4.9 million) in respect of
advice from Hambrecht & Quist. The adjustment does not include any amounts
in respect of additional costs associated with the integration of Micro
Focus and Intersolv. For the purposes of the pro forma net asset statement,
a cost of $31 million is included within other current liabilities.
3 The pro forma statement of net assets does not take account of any
differences between the book values and the fair values which will be
ascribed to the assets and liabilities of Intersolv upon the acquisition by
Micro Focus.
4 Certain reclassifications have been made to the Intersolv historical data to
conform with Micro Focus presentation.
64
<PAGE> 66
3. REPORT ON THE PRO FORMA NET ASSETS STATEMENTS
The following is a copy of a letter received from Ernst & Young:
LOGO
Apex Plaza
Reading
RG1 1YE
The Directors and the Proposed Directors 24 August 1998
Micro Focus Group Plc
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN
The Directors
Donaldson, Lufkin & Jenrette International
99 Bishopsgate
London EC2M 3XB
Warburg Dillon Read
1 Finsbury Avenue
London EC2M 2PP
Dear Sirs
We report on the pro forma financial information (being the UK GAAP pro forma
net assets statement on page 63 and, for information purposes, the US GAAP pro
forma net assets statement on page 64) in Part 4 of the Listing Particulars
dated 24 August 1998, which have been prepared, for illustrative purposes only,
to provide information about how the proposed merger with INTERSOLV, Inc. might
have affected the balance sheet of Micro Focus Group Plc had it occurred on 31
January 1998.
RESPONSIBILITY
It is the responsibility solely of the Directors of Micro Focus Group Plc to
prepare the pro forma financial information in accordance with paragraph 12.29
of the Listing Rules.
It is our responsibility to form an opinion, as required by the Listing Rules of
the London Stock Exchange, on the pro forma financial information and to report
our opinion to you. We do not accept any responsibility for any audit reports
previously given by us on the financial information relating to Micro Focus
Group Plc used in the compilation of the pro forma financial information beyond
that owed to those to whom those reports were addressed by us at the dates of
their issue.
BASIS OF OPINION
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards issued by the Auditing Practices Board. Our work, which
involved no independent examination of any underlying financial information,
consisted primarily of comparing the consolidated net assets statement of Micro
Focus Group Plc as at 31 January 1998 with the audited financial statements of
Micro Focus Group Plc at that date, considering the evidence supporting the
adjustments and discussing the pro forma financial information with the
Directors of Micro Focus Group Plc.
65
<PAGE> 67
OPINION
In our opinion:
(a) the pro forma net assets statements have been properly compiled on the
bases stated;
(b) (i) in respect of the UK GAAP pro forma net assets statement set out on
page 63, such basis is consistent with the accounting policies adopted by
Micro Focus Group Plc; and
(ii) in respect of the US GAAP pro forma net assets statement set out on
page 64, such basis is consistent with the accounting policies adopted by
Micro Focus Group Plc for the purpose of presenting financial information
in accordance with US generally accepted accounting practice; and
(c) the adjustments are appropriate for the purposes of the pro forma
financial information as disclosed pursuant to paragraph 12.29 of the
Listing Rules of the London Stock Exchange.
Yours faithfully
Ernst & Young
66
<PAGE> 68
6.C.19 PART 5 -- EMPLOYEE SHARE OPTION SCHEMES
6.F.8
1. MICRO FOCUS
The Company has in existence the Micro Focus 1996 Plan, the Micro Focus 1996
Approved Scheme and the Micro Focus 1994 EBT and in addition, pursuant to the
agreement to acquire XDB, the Company assumed the XDB Plans, effective from 20
January 1998. Details of these are summarised below.
(1) THE MICRO FOCUS 1996 PLAN, MICRO FOCUS 1996 APPROVED SCHEME AND THE
1983-4 AND 1991 SHARE OPTION PLANS
The Micro Focus 1996 Plan was adopted by the Company on 19 June 1996, and
replaced the 1991 and 1983-84 share option plans. It is not approved by
the Inland Revenue. The Micro Focus 1996 Approved Scheme was adopted by
the Company in December 1983 and amendments were approved on 19 June 1996
by shareholders in general meeting. It is approved by the Inland Revenue.
Save as set out below, the provisions of the Micro Focus 1996 Plan and
Micro Focus 1996 Approved Scheme are in all material respects identical.
(a) Grant of options
6.C.12(B)
(i) Under the Micro Focus 1996 Approved Scheme options may only be
granted to persons who are employees or full time directors of the
Micro Focus Group. Under the Micro Focus 1996 Plan, options may be
granted to persons who devote substantially the whole of their working
time to the business of Micro Focus and such eligible persons as the
board may from time to time in its absolute discretion determine.
Following the adoption of the new Micro Focus Plan and the Merger
becoming effective it is not intended to grant further options under
the Micro Focus 1996 Plan. The consideration for grant of an option
shall not exceed L1.
(ii) The subscription price under an option shall be the higher of the
nominal value and the average of the middle market quotations of a
Micro Focus Ordinary Share as derived from the London Stock Exchange
Daily Official List on the 3 business days immediately preceding the
day on which the option is granted. In the case of an option granted
to a 10 per cent. shareholder the subscription price shall be not less
than 110 per cent. of the fair market value of the share at the time
the option is granted.
(iii) Options shall be personal to the person to whom they are granted
and shall lapse forthwith if they are transferred (otherwise than to
personal representatives upon death), assigned, mortgaged, charged or
otherwise alienated or if the option holder is adjudicated bankrupt or
where the option holder is deprived of legal or beneficial ownership
of the options.
(b) Limits
(i) Under the Micro Focus 1996 Plan, the total number of shares in
respect of which options may be granted in the period of 3 years after
19 June 1996 may not exceed 757,369 shares (or 3,786,845 shares
pursuant to the sub-division of shares on 12 March 1998, referred to
in Paragraph 4 of Part 7 below) (representing 5 per cent. of the
issued share capital of the Company on 3 May 1996). For the 1983-84
share option plan this was limited to 4 per cent. of the issued share
capital on 23 November 1983, and for the 1991 share option plan this
limit was 10 per cent. of the issued share capital of the Company as
at 23 May 1991. In the Micro Focus 1996 Plan, the limits are exclusive
of options which have lapsed or ceased to be exercisable under the
Micro Focus 1996 Plan, any former plan or any other share option plan
established by the Company of which not more than 3 per cent.,
exclusive as aforesaid, may be put under option in any period of 12
months starting in June 1996. Options which lapse or cease to be
exercisable under the Micro Focus 1996 Plan or any other share option
plan established by the Company may be re-granted.
(ii) Under the Micro Focus 1996 Plan, subject to Paragraph (i) above,
the maximum number of shares in respect of which options may be
granted to any person in accordance with it shall be 75,736 shares (or
378,680 shares pursuant to the sub-division). For the 1983-4 share
option plan and 1991 share option plans different limits applied.
These limits are subject to the provision that any person who
commences employment for the first time (whether before or after
adoption of the Micro Focus 1996 Plan) with the Company or a
subsidiary shall be eligible to be granted options in respect of up to
362,500 shares (or 1,812,500 shares pursuant to the sub-division) in
the period of 12 months after the commencement of his employment.
67
<PAGE> 69
(iii) Under the Micro Focus 1996 Plan, the aggregate fair market value
(determined as at the time of grant) of shares in respect of which
incentive stock options are exercisable for the first time by an
employee during any calendar year pursuant to the Micro Focus 1996
Plan (and any other plan permitting the granting of incentive stock
options which might hereafter be established by any company in the
Micro Focus Group) may not exceed $100,000. Any excess exercisable for
the first time in such calendar year shall not qualify as incentive
stock options.
(iv) Under the Micro Focus 1996 Plan and the Micro Focus 1996 Approved
Scheme, the numbers of shares and/or the nominal amount in respect of
which options may be granted shall be adjusted to take into account
any capitalisation or rights issue, any sub-division, consolidation or
reduction effected without receipt of consideration.
(v) Under the Micro Focus 1996 Plan, options may only be granted (i)
within 30 days after the date of approval of the Micro Focus 1996 Plan
by members in general meeting; (ii) within 42 days immediately
following the date on which the Company or a subsidiary announces its
interim or preliminary trading results for any period to the press and
the London Stock Exchange (provided that in respect of directors of
the Company such date does not fall during the period of two months
prior to the announcement of interim or preliminary trading results
or, if shorter, the period from the end of the relevant financial
period up to and including the time of the announcement) or (iii) to
any person who commences employment with the Company for the first
time, within the period of 45 days immediately thereafter (provided
that in respect of directors of the Company such date does not fall
during the period of two months prior to the announcement of interim
or preliminary trading results or, if shorter, the period from the end
of the relevant financial period up to and including the time of the
announcement) or (iv) at other times considered by the directors to be
sufficiently exceptional to justify the grant of options.
(vi) Under the Micro Focus 1996 Approved Scheme, no option shall be
granted or be capable of being exercised by a person who has within
the preceding 12 months had a material interest in a close company
being either Micro Focus or a company which is controlled by Micro
Focus or is a member of a consortium of such a company.
(vii) Under the Micro Focus 1996 Approved Scheme, no option shall be
granted if it causes the aggregate market value of shares which an
option holder may acquire under the Micro Focus 1996 Approved Scheme
or any other approved share option scheme established by any
associated company of the Company to exceed L30,000.
(viii) The executive remuneration committee of the board may set
appropriate performance targets whenever options are granted. For the
Micro Focus 1996 Approved Scheme, the prior approval of the Inland
Revenue is required to the terms of such performance targets.
(c) Exercise of options
6.C.12(B)
(i) No option shall be capable of being exercised later than 10 years
after the date on which it is granted or, in the case of options held
by a person owning shares representing more than 10 per cent. of the
voting power of any member company of the Micro Focus Group, five
years after the date on which it is granted. Previously, for the
1983-4 share option plans, this period was 8 years and 6 months, and
for the 1991 share option plan this period was increased to 10 years.
Under the Micro Focus 1996 Plan, in the case of a 10 per cent.
shareholder of an incentive stock option, no option shall be capable
of being exercised later than 5 years after the date of grant.
(ii) If the option holder's employment is terminated, or the option
holder ceases to provide services to the Micro Focus Group, for any
reason other than his death or disability, then the option holder may
exercise such unexercised options which would have been exercisable
upon the date of such termination, up to 3 months after termination or
such shorter or (for the Micro Focus 1996 Approved Scheme) longer
period as may be specified in the option. In the event that the option
holder's employment is terminated because of disability or death, or
the option holder ceases to provide services to the Micro Focus Group,
such unexercised options may be exercised by the option holder (or, in
the case of death, by the option holder's personal representatives) up
to 12 months after termination, or such shorter or (for the Micro
Focus 1996 Approved Scheme) longer period as may be specified in the
option.
(iii) The Company will apply to the London Stock Exchange for shares
allotted pursuant to exercise of any option to be admitted to the
Official List.
68
<PAGE> 70
(d) Winding up of the Company
In the event of notice being given to shareholders of a resolution for the
winding-up of the Company, options under the Micro Focus 1996 Approved
Scheme shall be capable of exercise within the period commencing on the
date of the notice of winding up and ending six months later or the
commencement of winding up, if earlier, and thereafter the options shall
lapse. Existing options under the Micro Focus 1996 Plan may be exercised
within six months from the passing of the resolution for winding up and
will thereafter lapse.
(e) Change of control of the Company
Under the Micro Focus 1996 Plan (and 1991 share option plan) and the Micro
Focus 1996 Approved Scheme, in the event of a change of control of the
Company option holders may be offered substantially equivalent options in
the offeror. If such offer is not made by the offeror then any and all
outstanding options shall accelerate and become exercisable in full but
shall lapse if not so exercised. Under the 1983-4 share option plan there
were no provisions for change of control.
(f) Variation of capital
If the issued share capital of the Company is varied by a capitalisation
or rights issue or any sub-division, consolidation or reduction effected
without receipt of consideration, the board will make the appropriate
adjustment to the number of shares which are subject to any option and/or
the subscription price payable for each share under any option. Except in
the case of a capitalisation issue, no such adjustment shall be made
without the prior written confirmation of the auditors of the Company for
the time being that it is in their opinion fair and reasonable. Written
notice of an adjustment shall be given to any holder of options affected
thereby. Under the Micro Focus 1996 Approved Scheme, the terms of any such
variation or adjustment shall first be approved by the Inland Revenue.
(g) Amendments
Under the Micro Focus 1996 Plan and Micro Focus 1996 Approved Scheme, the
board may at any time alter or add to all or any of their provisions in
any respect subject to the approval of the shareholders in general meeting
except in the case of the Micro Focus 1996 Approved Scheme for minor
amendments to benefit the administration of the Micro Focus 1996 Plan or
the Micro Focus 1996 Approved Scheme, to take account of a change in
legislation or to obtain or maintain favourable tax or regulatory
treatment. The board may alter or add to the Micro Focus 1996 Plan or
Micro Focus 1996 Approved Scheme at any time in order to obtain or
maintain approval of the Micro Focus 1996 Plan or Micro Focus 1996
Approved Scheme from any government or regulatory body in the United
Kingdom, USA or elsewhere.
Under the Micro Focus 1996 Approved Scheme, no alteration or addition
shall have effect unless approved by the Inland Revenue. Under the Micro
Focus 1996 Plan shareholder approval is required for amendments to the
advantage of participants relating to various matters affecting persons to
whom options may be granted including, inter alia, transferability, number
of shares, payment, option periods and variation of share capital.
(h) Financial statements
The Company shall provide financial statements to each option holder
annually.
(i) Expiry
The present authority to grant options under the Micro Focus 1996 Plan
will expire on 18 June 1999 or, if earlier, upon the Merger becoming
effective.
(2) THE MICRO FOCUS 1994 EBT
Under the terms of the Micro Focus 1994 EBT, Micro Focus Trustees Limited
("MFTL") is permitted to acquire Micro Focus Ordinary Shares and to grant
options over Micro Focus Ordinary Shares to present and former employees
of the Micro Focus Group and their immediate families. As at 20 August
1998, being the latest practicable date prior to the printing of this
document, MFTL owned 3,815,055 shares and options granted by MFTL to
purchase 2,512,108 of those shares were outstanding. Options which had
been granted for an additional 11,000 existing shares prior to their
acquisition by MFTL also remained outstanding. The 1,302,947 remaining
option shares held by MTFL are available for future grant.
69
<PAGE> 71
The Micro Focus 1994 EBT is an employee benefit trust established by deed
on 10 June 1994. MFTL is a wholly owned subsidiary of the Company and is
incorporated in Jersey.
(3) XDB PLANS
The XDB Plans were assumed by the Company pursuant to the agreement and
plan of reorganisation dated 23 December 1997 between the Company and XDB,
effective from 20 January 1998. No further options have since 20 January
1998 been, or will be, granted under the XDB Plans.
The 1992 and 1996 XDB Plans have identical terms.
(a) Eligibility
Options may be granted to employees (including officers who are
employees), consultants or advisers to officers or directors of XDB.
However, incentive stock options may only be granted to employees.
Further, incentive stock options shall not be granted to persons who own
more than 10 per cent. of all classes of voting stock, as interpreted
under Section 424(d) of the Internal Revenue Code of 1986 ("the Code").
(b) Grant of options
In respect of a grant of options to directors or officers, the timing,
exercise price and number of shares of such option shall be determined
either by the board of directors or a committee of two or more directors,
who shall be "disinterested persons".
(c) Limitations
The aggregate number of Micro Focus Ordinary Shares which may be issued
and sold under the XDB Plans is 38,571 shares (or 192,855 shares pursuant
to the sub-division).
(d) Option price
The option price shall be determined by the board of directors, provided
however that the exercise price shall not be less than 100 per cent. of
the fair market value of such stock as determined by the board at the time
of the grant of such option, subject to the incentive stock options having
an exercise price of not less than 110 per cent. of such fair market
value.
(e) Exercise of options
6.C.12(B)
Incentive stock options shall expire 10 years from their grant (five years
where the board in its sole discretion has accelerated the date at which
it may be exercised), and in the case of non-statutory options at 10 years
plus 30 days after their grant. Each option may be exercised either in
full or in part at any times during the exercise period, subject to the
foregoing limitations.
(f) Rights and restrictions
No option may be assigned or transferred, except by will or intestacy, but
where the option holder dies either during or within 3 months of being
employed by XDB or the Company an option may be exercised within one year
of the date of death by the option holder's personal representatives.
However, the option will lapse on the expiry of 3 months from the date on
which the option holder ceases to be employed by XDB or the Company and in
the case of disability, an option may be exercised up to one year after
such cessation of employment due to disability, subject to the incentive
stock options only being exercised up to their expiration date.
Incentive stock options can only be exercised up to a limit of $100,000,
being the aggregate fair market value of the stock, during any one
calendar year. Where an option holder of incentive stock options holds
more than 10 per cent. of the total combined voting rights of all classes
of stock of XDB (or its parent or subsidiary), then such option may be
exercised at 110 per cent. of the fair market value of the common stock at
the time of grant, and shall only be valid for five years following its
grant.
The board of directors have sole discretion as to accelerating the dates
upon which an option may be exercised, or may extend the date of the
exercise provided that such extension does not cause the plan to fail to
comply with Section 422 of the Code or Rule 16(b)-3 of the SEC.
70
<PAGE> 72
(g) Recapitalisation and reorganisation
In the event of a recapitalisation, reclassification, stock split, stock
dividend, combination or sub-division, the appropriate adjustment shall be
made to the number and kind of shares available under the XDB Plan, so
that such adjustment does not constitute a modification, extension or
renewal of any such options.
In the event of a reorganisation, the board of directors may decide to
issue equivalent options, or they may give written notice to the option
holders providing that all unexercised options will terminate immediately
unless exercised within a specified number of days following such notice,
or holders of Micro Focus Ordinary Shares will receive cash payment for
shares surrendered in the reorganisation. Alternatively, the board of
directors may provide that all outstanding options shall become
exercisable in full immediately prior to such event.
(h) Amendment
The board of directors may at any time modify or amend the XDB Plans, but
must seek the approval of the shareholders if they wish to materially
increase the benefits to participants of the XDB Plans, increase the
number of shares which may be issued pursuant to it or materially modify
the requirements for eligibility for participation in the XDB Plans.
(4) SUMMARY OF OPTIONS GRANTED
6.C.12(A)
The following summarises outstanding share options granted under the Micro
Focus 1996 Plan, the Micro Focus 1996 Approved Scheme and earlier plans
and the XDB Plans as at 20 August 1998 (being the latest practicable date
prior to the printing of this document):
<TABLE>
<S> <C>
Options remaining outstanding under the Micro Focus 1996
Plan or earlier plans which are exercisable at prices
between L1.08 and L7.15 per Micro Focus Ordinary Share 7,643,604
Options remaining outstanding under the XDB Plans which are
exercisable at prices between L5.39 and L7.41 per Micro
Focus Ordinary Share 53,709
---------
TOTAL: 7,697,313
---------
</TABLE>
In addition, the Trustees of the Micro Focus 1994 EBT have granted options
over a total of 2,512,108 Micro Focus Ordinary Shares which remain
outstanding and are exercisable at prices of between L1.35 and L4.85 per
share. The Micro Focus 1994 EBT also owns 1,302,947 Micro Focus Ordinary
Shares which are not under option.
2. INTERSOLV
Under the Merger Agreement, each issued and outstanding Intersolv Option and
Intersolv Warrant will be assumed by Micro Focus and respectively be converted
into a right to acquire that number of new Micro Focus ADSs equal to the number
of shares of Intersolv Stock issuable pursuant to such Intersolv Option or
Intersolv Warrant multiplied by 0.55, rounded down to the nearest whole new
Micro Focus ADS. The exercise price of each such assumed and converted option or
warrant shall be divided by 0.55, being the ratio at which each share of
Intersolv Stock will be exchanged for new Micro Focus ADSs in connection with
the Merger. Upon the Merger becoming effective, some of the Intersolv Options
accelerate, vesting as provided in the applicable plan documents and stock
option agreements. The term and other terms and conditions of Intersolv Options
and Intersolv Warrants shall otherwise remain unchanged.
Intersolv has a number of employee share option schemes in existence as follows:
(1) 1982 Stock Option Plan;
(2) 1992 Stock Option Plan;
(3) 1997 Employee Stock Option Plan;
(4) Q + E Stock Option Plan; and
(5) TechGnosis Stock Option Plan.
71
<PAGE> 73
Details of these are set out below.
(1) 1982 STOCK OPTION PLAN
This plan was adopted on 1 September 1982 for the purpose of granting
options to employees, officers, directors and consultants of Sage
Software, Inc. (re-named INTERSOLV, Inc. on 25 September 1991) and
subsequently amended on 25 September 1989.
The Intersolv board's authority to grant new options under this plan
expired in 1992.
(a) Eligibility
Any employee (including officers and directors) and any other officer,
director or consultant who is not an employee of Intersolv and its parent
and subsidiary companies is eligible to participate in the plan. Options
may either be incentive stock options, meeting the requirements of Section
422 of the Code or non-statutory options which are not intended to meet
the requirements of Section 422. Incentive stock options may only be
granted to employees of Intersolv (or any parent or subsidiary) or such
officers and directors but not consultants of Intersolv who are also
employees of Intersolv (or its parent or subsidiary). Further, incentive
stock options shall not be granted to persons who own more than 10 per
cent. of all voting classes of Intersolv Stock.
(b) Grant of options
Options may be granted at the discretion of the board of directors. In
respect of a grant of options to directors, the number of option shares to
be allocated shall be either determined by the board of directors acting
as "disinterested persons" within the meaning of paragraph (d)(3) of Rule
16b-3 of the SEC, or upon the recommendation of a committee of three or
more persons, all members of which shall be disinterested persons. In
respect of non-employee directors, they shall be granted non-statutory
stock options to purchase 10,000 shares of Intersolv Stock (less the
number of shares previously awarded or options granted with the right to
acquire shares) at each first meeting of directors following the election
or appointment of a director. The exercise price for such options shall be
the fair market value and such options shall vest in equal annual
instalments over four years.
(c) Limitations
The aggregate number of shares of Intersolv Stock which remain outstanding
as of 20 August 1998 under the plan is 272,658 shares.
(d) Option price
The option price shall be determined by the board of directors, provided
however that the exercise price shall not be less than 100 per cent. of
the fair market value for incentive stock options as determined by the
board at the time of the grant of such option, subject to the incentive
stock options where owned by holders of more than 10 per cent. of voting
stock having an exercise price of not less than 110 per cent. and
non-statutory options having an exercise price of not less than 90 per
cent. of such fair market value.
(e) Exercise of options
6.C.12(A)
Each option may be exercised either in full or in part at such times
during the exercise period as the board of Intersolv shall determine
subject to the limitations described below.
Incentive stock options shall expire 10 years from their grant (5 years
where the board in its sole discretion has accelerated the date at which
it may be exercised) and, in the case of non-statutory options, at 10
years plus 30 days after their grant.
(f) Rights and restrictions
No option may be assigned or transferred, except by will or intestacy, but
where the option holder dies either during or within 3 months of being
employed by Intersolv it may be exercised within one year of the date of
death by the option holder's personal representatives. However, the option
will lapse on the expiry of three months from the date on which the option
holder ceased to be employed by Intersolv (or its parent or subsidiary)
and in the case of disability, an option may be exercised up to one year
after such cessation of employment due to disability, subject to it only
being exercised up to its expiration date.
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<PAGE> 74
Incentive stock options granted prior to the effective date of the plan
shall not exceed $100,000 plus unused "carry over" from the preceding
three years.
Incentive stock options can only be exercised up to a limit of $100,000,
being the aggregate fair market value of the stock, during any one
calendar year. Where an option holder of incentive stock options holds
more than 10 per cent. of the total combined voting rights of all classes
of Intersolv Stock (or its parent or subsidiary), then such option may
only be exercised at 110 per cent. of the fair market value of the common
stock at the time of grant, and shall only be valid for five years
following its grant.
(g) Capitalisation and reorganisation
In the event of a recapitalisation, reclassification, stock split, stock
dividend, combination or sub-division, the appropriate adjustment shall be
made in the number and class of shares available under the plan, so that
such adjustment does not constitute a modification, extension or renewal
of any such option.
Where Intersolv is the surviving corporation in any merger or
consolidation (as is the case under the Merger), the board shall make
appropriate provision for the protection of outstanding options and such
options will be substituted with new options substantially equivalent in
value and benefit. The board has resolved (on 29 June 1998) to treat the
outstanding options in accordance with this provision as provided for in
Section 1.3 of the Merger Agreement and that, beginning 21 days prior to
the Merger, options under the plans shall become exercisable without
regard to any instalment provisions contained in the option agreement
applicable to such options.
(h) Amendment
The board of directors may at any time modify or amend the plan, but must
seek the approval of shareholders if they wish to materially increase the
benefit to participants of the plan, increase the number of shares which
may be issued pursuant to it, or materially modify the requirements of
eligibility for participation in the plan.
(2) 1992 STOCK OPTION PLAN
This plan was adopted by Intersolv on 22 September 1992 and subsequently
amended on 30 May 1996 for the purpose of granting options to employees,
officers, directors and consultants of Intersolv. Options have been
granted under both the plan prior to the amendments in 1996 ("the Prior
Plan") and the current plan. Both plans are identical save where specific
differences in respect of the Prior Plan are stated. The Company will not
grant further options under the 1992 Share Option Plan upon the Merger
becoming effective.
(a) Eligibility
The same persons are eligible to participate in the plan as under the 1982
Stock Option Plan, together with the same provisions in respect of
incentive stock options applying.
(b) Grant of options
Again, as under the 1982 Stock Option Plan, the provisions relating to the
grant of options are the same for this plan. However, in respect of
non-employee directors, they shall be granted non-statutory stock options
to purchase 5,000 shares of Intersolv Stock at the same time as opposed to
the number of non-statutory stock option shares as stated for the 1982
Stock Option Plan. The non-statutory stock options shall be granted at the
first meeting of directors following their appointment and at each
subsequent first meeting of directors following each annual general
meeting. Such options shall vest immediately upon grant for a term of 10
years plus 30 days, as opposed to equal annual instalments over four years
in the 1982 Stock Option Plan.
(c) Limitations
The aggregate number of shares of Intersolv Stock which are outstanding as
of 20 August 1998 under the 1992 Stock Option Plan is 3,180,365 shares.
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<PAGE> 75
(d) Option price
The option price shall be the same as stated for the 1982 Stock Option
Plan, save that non-statutory options shall have an exercise price of not
less than 100 per cent. of the fair market value as determined by the
board at the time of the grant of the option (as opposed to 90 per cent.
for the 1982 Stock Option Plan).
(e) Exercise of options
6.C.12(B)
The same provisions relating to the options period and exercise of options
as in the 1982 Stock Option Plan apply to the 1992 Stock Option Plan.
(f) Rights and restrictions
The same provisions as in the 1982 Stock Option Plan apply in respect of
rights and restrictions on options under this plan, save that for
incentive stock options there is no provision for "carry over" in respect
of the $100,000 limit upon exercise during any one calendar year and there
is no distinction in relation to incentive stock options granted prior to
or after the effective date of the plan. Hence, incentive stock options
granted to employees can only be exercised up to $100,000 being the
aggregate fair market value of the stock, during any one calendar year.
(g) Capitalisation and reorganisation
Identical provisions as in the 1982 Stock Option Plan apply to this plan
to adjustment being made in the event of a recapitalisation,
reclassification, stock split, stock dividend, combination or
sub-division.
In the event of a reorganisation such as envisaged under the Merger, each
outstanding option shall not terminate, but each option holder shall have
an accelerated right upon completion of the Merger to exercise his option
in whole or in part notwithstanding any provisions regarding exercise by
instalments. The plan provides that in the event of a reorganisation the
plan shall continue and the successor company shall assume all outstanding
options or, substitute them with options substantially equivalent in value
and benefits. The board has resolved (on 29 June 1998) to treat the
outstanding options in accordance with this provision as provided for in
Section 1.3 of the Merger Agreement. In a specific option agreement, the
board may provide that such unvested option may only be accelerated
partially or not at all (if so granted by the board of directors). Unless
an option agreement specifically states to the contrary, all outstanding
and unexercised options shall become vested and exercisable upon a
reorganisation.
The same provisions for a successor company to assume all outstanding
options, or substitute them with options substantially equivalent in value
and benefits, apply to the Prior Plan and the board's resolution of 29
June 1998 resolves that this would be dealt with under Section 1.3 of the
Merger Agreement.
(h) Amendment
The same provisions relating to modifications and amendments to the plan
apply, as summarised for the 1982 Stock Option Plan.
(3) 1997 EMPLOYEE OPTION PLAN
The 1997 Employee Option Plan was adopted on 22 September 1997 for the
purpose of granting options to employees and consultants of Intersolv (and
its parent and subsidiaries). The Company will not grant further options
under this plan upon completion of the Merger.
(a) Eligibility
Options may be granted to persons who are employees of Intersolv (or its
parent or subsidiaries) who are not officers and members of the board, or
they may be granted to consultants who are not employees of Intersolv (or
its parent or subsidiaries).
(b) Grant of options
The options which may be granted pursuant to this plan may only be
non-statutory options which are not intended to meet the requirements of
Section 422 of the Code.
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<PAGE> 76
(c) Limitations
The maximum number of new shares of Intersolv Stock which may be issued
and exercised under the 1997 Employee Option Plan is 625,810 shares,
subject to reorganisation of Intersolv, such as in the Merger. In
addition, Intersolv anticipates seeking an authorisation to grant options
over an additional 225,810 shares of Intersolv Stock. Such shares will be
used for the September 1998 option grant to employees of Intersolv. These
shares will not be subject to accelerated vesting on change of control.
(d) Option price
The option price per share of stock upon exercise shall be determined by
the board of directors, provided that it shall not be less than 100 per
cent. of the fair market value as determined by the board at the time of
the grant of such options.
(e) Exercise of option
Each option may be exercised up to 10 years and 30 days from the time it
was granted, in full or in part, subject to any contrary restrictions in
each option holder's agreement.
(f) Rights and restrictions
No options may be assigned or transferred, except by will or intestacy. In
the event of the option holder's death during employment/consultancy or up
to 3 months after ceasing such engagement, an option may be exercised by
his personal representatives up to one year after the date of death.
An option may only be exercised where the option holder has since the date
of the grant of the option been continuously employed by or rendered
services as a consultant to Intersolv (or its parent or subsidiaries). An
option will lapse on the expiry of 3 months from the date on which the
option holder ceases to be employed or be a consultant. In the event that
the option holder becomes disabled whilst employed or rendering services,
the option shall be exercisable up to one year following cessation of such
engagement.
The board of directors may, in its sole discretion, accelerate the date on
which any option may be exercised.
(g) Recapitalisation and reorganisation
In the event of any recapitalisation, reclassification, stock split, stock
dividend, combination or sub-division, appropriate adjustments shall be
made to the number and kind of shares available under the plan, save that
such adjustments shall not constitute a modification, extension or renewal
of any such options.
In the event of Intersolv being merged with another company or where all
or substantially all of its assets or more than 50 per cent. of its voting
stock is acquired by any other corporation (or in the case of dissolution
or liquidation), outstanding options shall not terminate, and each option
holder shall have a right upon closing of such reorganisation (as in the
Merger) to exercise his option in whole or in part. Following such
reorganisation, the plan shall continue and the successor company shall
assume all outstanding options, with their substitution duly adjusted so
that the substituted options are substantially equivalent in value and
benefit to the outstanding options. The board of Intersolv resolved on 29
June 1998 to treat the outstanding options in accordance with this
provision and as provided for in Section 1.3 of the Merger Agreement.
The board of directors (or committee) shall be authorised to provide that
any unvested option may only be accelerated partially, or not at all, upon
a reorganisation. Unless an option agreement states specifically to the
contrary, all outstanding and unexercised options shall become vested and
exercisable upon a reorganisation.
(h) Amendment
The board may at any time modify or amend the plan in any respect.
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<PAGE> 77
(4) Q + E STOCK OPTION PLAN
This plan was adopted by Intersolv in April 1994 when it acquired Q+E
Software Inc. The Company will not grant further options under this plan
upon the Merger becoming unconditional.
(a) Eligibility
Full time employees of Q+E are eligible to participate in this plan.
Options shall be incentive stock options, meeting the requirements of
Section 422 of the Code. No options shall be granted to persons who own
more than 10 per cent. of all classes of voting stock.
(b) Grant of options
Options may be granted at the discretion of the committee of the board of
directors.
(c) Limitations
The aggregate number of shares of Intersolv Stock which remain outstanding
under the plan is 3,511 shares.
(d) Option price
The option price shall be determined by the board of directors, provided
however, that the exercise price shall not be less than 100 per cent. of
the fair market value of such stock as determined by the board of
directors at the time of the grant of such option.
(e) Exercise of option
6.C.12(B)
Options may be exercised in full or in part and shall expire 10 years from
the date of a grant (or such shorter period if so granted by the board of
directors).
(f) Rights and restrictions
No option may be assigned or transferred, except by will or intestacy.
Options may only be exercised by the option holder when he is in full-time
employment with Q+E and, upon the termination of employment for any reason
whatsoever (including death or disability), options shall lapse
immediately and shall not be exercisable. The board of directors of
Intersolv shall have a discretion as to the option holder exercising his
option up to three months after cessation of employment.
Where an option holder holds more than 10 per cent. of the total combined
voting rights of all classes of stock of Q+E (or its parent or
subsidiary), then such option may only be exercised at 110 per cent. of
the fair market value of the stock at the time of grant and shall only be
valid between six months and five years following its grant.
(g) Capitalisation and reorganisation
Provisions similar to those in the 1992 Stock Option Plan apply to this
plan with regard to adjustments occurring upon the capitalisation or
merger of Q+E.
However, in the event of a sale of assets, liquidation or merger, the
board of directors shall have sole discretion to accelerate the
exercisability of all or any part of the option held which has not been
exercised prior to the date of effectiveness of such event. Further, in
the event of such merger or consolidation, and notwithstanding whether the
exercisability of any option has been accelerated, the board of directors
(in their sole discretion) may upon 10 days written notice give to the
option holder notice that any unexercised part of the option shall
terminate.
(h) Amendment
Similar provisions as to the amendment of the plan apply as for the 1992
Stock Option Plan, described above.
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<PAGE> 78
(5) TECHGNOSIS STOCK OPTION PLAN
The TechGnosis Stock Option Plan was adopted by TechGnosis International
Inc. ("TechGnosis") on 18 November 1993 and adopted by Intersolv when it
acquired TechGnosis in October 1995. The Company will not grant further
options under this plan upon the Merger becoming effective.
(a) Eligibility
Any director, officer, managerial employee and executive-level consultant
(known as a key employee) is eligible to participate in the plan if, in
the opinion of the committee of directors which administers the plan, they
have demonstrated a capacity for contributing to the success of
TechGnosis.
(b) Grant of options
The committee has an absolute discretion as to which key employees may be
granted options. These may be incentive stock options within the meaning
of Section 422 (a) of the Code, as well as non-incentive stock options.
(c) Limitations
The aggregate number of shares of Intersolv Stock which remain outstanding
under the plan is 22,778 shares.
(d) Option price
The option price shall be established by the committee at the time of the
grant of such option, but for incentive stock options shall be no less
than 85 per cent. of the fair market value of such shares.
(e) Exercise of options
6.C.12(B)
Each option may be exercised in full or in part on such terms during the
exercise period as determined by the committee, subject to the incentive
stock options expiring 10 years from their grant.
(f) Rights and restrictions
Of the incentive stock options, no more than $100,000 in value may be
exercised for the first time by the option holder during any calendar
year. Incentive stock options may only be granted to individuals who are
key employees of TechGnosis (or its subsidiaries), and who own 10 per
cent. or less of stock representing the total combined voting rights of
all classes of stock in TechGnosis (or its subsidiary) but this shall not
apply where upon the grant of option the option price is 110 per cent. of
the fair market value and the option expires after 5 years.
The option holder must have been in continuous employment from the date of
grant to the time of exercise. Options lapse at the expiry of 3 months
after the date of termination of employment, and in the event of
termination of employment due to disability, options will lapse at the
expiry of 12 months after the termination of employment. Options can be
transferred or assigned by way of will or intestacy to personal
representatives, whereby they shall be entitled to exercise such option
within 12 months of the date of death.
The committee also has power to grant stock appreciation rights to certain
persons in their absolute discretion.
(g) Capitalisation and reorganisation
The provisions applicable to options granted under this plan are broadly
similar to those applicable under the 1992 Stock Option Plan described
above.
(h) Amendment
The provisions applicable to this plan are similar to those described
under the 1982 Stock Option Plan.
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<PAGE> 79
(6) SUMMARY
6.C.10(B)
6.C.19
The following summarises outstanding options of Intersolv as at 20 August
1998, being the latest practicable date prior to the printing of this
document, and the number of new Micro Focus Ordinary Shares which will
become issuable upon their exercise.
6.C.12(A)
<TABLE>
<CAPTION>
NEW MICRO
INTERSOLV FOCUS
OPTIONS STOCK ORDINARY SHARES
-----------------------------------------------------------------------------------------
<S> <C> <C>
1. 1982 Stock Option Plan 272,658 749,810
2. 1992 Stock Option Plan 3,180,365 8,746,004
3. 1997 Stock Option Plan 625,810 1,720,978
4. Q+E Stock Option Plan 3,511 9,655
5. TechGnosis Stock Option Plan 22,778 62,640
--------- ---------------
Total 4,105,122 11,289,087
-----------------------------------------------------------------------------------------
</TABLE>
Accordingly, as at 20 August 1998 there were outstanding options over
4,105,122 shares of Intersolv Stock. Additionally, warrants were held by
four individuals for 35,000 shares in Intersolv Stock each. These warrants
are exercisable up to 31 January 2006 at a price of $10.375 per share,
subject to a cash bonus of $6.86 that effectively reduces the exercise
price by that amount, and these will be assumed by Micro Focus pursuant to
the Merger. They total 140,000 shares of Intersolv Stock or 385,000 new
Micro Focus Ordinary Shares following the completion of the Merger. No
further Intersolv Warrants will be granted following the Merger.
[13.13]
13.14(A)
[13.13(A)]
[13.14(B)]
[13.14(C)]
[13.14(D)
3. PROPOSED RULES OF THE NEW MICRO FOCUS PLAN
Set out below is a summary of the rules of the new Micro Focus Plan for which
shareholder approval will be sought pursuant to resolution 2 to be proposed at
the Extraordinary General Meeting. The terms of the new Micro Focus Plan are
substantially the same as the terms of the Micro Focus 1996 Plan.
(a) Grant of options
Options may only be granted to directors, employees or former employees of
Micro Focus Group and to such eligible persons as the board from time to
time in its absolute discretion may determine. The consideration for grant
of an option shall not exceed L1.
The acquisition price under an option shall be the higher of the nominal
value and the average of the middle market quotations of a share as
derived from the London Stock Exchange Daily Official List on the 3
business days immediately preceding the day on which the option is
granted. In the case of an option granted to a 10 per cent shareholder the
subscription price shall be not less than 110 per cent of the fair market
value of the share at the time the option is granted.
Options shall be personal to the person to whom they are granted and shall
lapse forthwith if they are transferred (otherwise than to personal
representatives upon death), mortgaged, charged or otherwise alienated or
if the option holder is adjudicated bankrupt. Benefits under the new Micro
Focus Plan will not be pensionable
(b) Limits
The total number of shares in respect of which options may be granted in
accordance with the new Micro Focus Plan when aggregated with options to
subscribe for shares already granted by Micro Focus and remaining capable
of exercise at the Effective Date may not exceed 15 per cent of the issued
share capital of the Company at the Effective Date. Options which
subsequently lapse or cease to be exercisable under this plan or any other
share option plan established by the Company may be re-granted.
The maximum number of shares in respect of which options may be granted to
any person shall be 375,000 Micro Focus Ordinary Shares save that any
person who commences employment for the first time (whether before or
after adoption of this plan) with the Company or a subsidiary shall be
eligible to be granted options in respect of up to 1,500,000 Micro Focus
Ordinary Shares in the period of 12 months after the commencement of his
employment.
The aggregate fair market value (determined as at the time of grant) of
shares in respect of which incentive stock options are exercisable for the
first time by an employee during any calendar year
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<PAGE> 80
pursuant to this plan (and any other plan permitting the granting of
incentive stock options which might hereafter be established by any
company in the incentive stock options group) may not exceed $100,000. Any
excess exercisable for the first time in such calendar year shall not
qualify as incentive stock options (under Section 422 of the US Internal
Revenue Code).
The numbers of shares and/or the nominal amount in respect of which
options may be granted under the new Micro Focus Plan shall be adjusted to
take into account any capitalisation or rights issue, any sub-division,
consolidation or reduction effected without receipt of consideration.
Options may only be granted (i) within 30 days after the date of approval
of the plan by members in general meeting; (ii) within 42 days immediately
following the date on which the Company announces its interim or
preliminary trading results for any period to the press and The London
Stock Exchange (provided that in respect of directors of the Company such
date does not fall during the period of two months prior to the
announcement of interim or preliminary trading results or, if shorter, the
period from the end of the financial period up to and including the time
of the announcement); (iii) to any person who commences employment with
any member of the Merged Group for the first time, within the period of 45
days immediately thereafter (provided that in respect of directors of the
Company such date does not fall during the period of two months prior to
the announcement of interim or preliminary trading results or, if shorter,
the period from the end of the relevant financial period up to and
including the time of the announcement); or (iv) at other times considered
by the directors to be sufficiently exceptional to justify the grant of
options.
The executive remuneration committee of the board may set appropriate
performance targets whenever options are granted.
(c) Exercise of options
No option shall be capable of being exercised later than 10 years after
the date on which it is granted or in the case of a 10 per cent
shareholder 5 years after the date on which it is granted.
The Company will apply to the London Stock Exchange for shares allotted
pursuant to exercise of any option to be admitted to the Official List.
(d) Winding up of the Company
In the event of notice being given to the shareholders of a resolution for
the winding-up of the Company options shall be capable of exercise within
the period commencing on the date of the notice of the winding-up and
ending six months later or on the commencement of winding-up if earlier
and thereafter shall lapse.
(e) Change of control of the Company
In the event of a change of control of the Company option holders may be
offered substantially equivalent options in the offeror. If such offer is
not made by the offeror then any and all outstanding options shall
accelerate and become exercisable in full. Any options not so exercised or
replaced by substantially equivalent options shall lapse and cease to be
exercisable.
(f) Variation of capital
If the issued share capital of the Company is varied by a capitalisation
or rights issue or any sub-division, consolidation, or reduction effected
without receipt of consideration, the board will make the appropriate
adjustment to the number of shares which are subject to any option and/or
the subscription price payable for each share under any option. Except in
the case of a capitalisation issue, no such adjustment shall be made
without the prior written confirmation of the auditors of the Company for
the time being that it is in their opinion fair and reasonable. Written
notice of an adjustment shall be given to any holder of options affected
thereby.
(g) Amendments
The board may at any time alter or add to all or any of the provisions of
the new Micro Focus Plan in any respect subject to approval of the Company
in general meeting except for minor amendments to benefit the
administration of the new Micro Focus Plan, to take account of a change in
legislation or to maintain or obtain favourable tax or regulatory
treatment. The board may alter or add to the new Micro Focus Plan
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<PAGE> 81
to obtain or maintain approval of the new Micro Focus Plan from any
government or regulatory body in the United Kingdom, USA or elsewhere.
(h) Financial statements
The Company shall provide financial statements to each option holder
annually.
(i) Expiry
The authority to grant options under the plan will expire 10 years from
its approval.
4. PROPOSED AMENDMENTS TO THE RULES OF THE MICRO FOCUS 1996 APPROVED SCHEME
13.17
Set out below is a summary of the amendments to the rules of the Micro Focus
1996 Approved Scheme for which shareholder approval will be sought pursuant to
resolution 3 to be proposed at the Extraordinary General Meeting:
(a) The period during which an option may be exercised by an option holder,
following termination of employment with, or ceasing to provide services
to, the Company or a subsidiary, may be extended or shortened by the board
if need be and specified in the option (prior to its grant) and if not
exercised shall lapse.
(b) Upon a winding-up of the Company, options may be exercised up to 6 months
after the notice of meeting or until, if earlier, the expiry of the option
or the commencement of winding-up.
13.17
(c) Amendments to the Micro Focus 1996 Approved Scheme require the approval
of the shareholders in general meeting except for minor amendments to
benefit the administration of the scheme, to take account of a change in
legislation or to obtain or maintain favourable tax, exchange control or
regulatory treatment for participants in the Micro Focus 1996 Approved
Scheme or any member of the Micro Focus Group.
5. SUMMARY OF OPTIONS GRANTED AND AVAILABLE FOR GRANT
The following summarises the share options which have been granted and which
would be available for grant immediately following the passing of resolution 2
to be proposed at the Extraordinary General Meeting and completion of the
Merger:
Based upon the enlarged issued share capital of the Company immediately
following completion of the Merger, options over 21,514,084 Micro Focus Ordinary
Shares would be authorised for grant of which options have been granted over
7,697,313 Micro Focus Ordinary Shares, leaving 13,816,771 options available for
grant.
In addition, the Micro Focus 1994 EBT holds a total of 3,815,055 Micro Focus
Ordinary Shares. Of these, 2,512,108 have been placed under option by the
Trustees and 1,302,947 remain available to be granted.
There are currently options outstanding over 4,105,122 shares of Intersolv Stock
which upon completion of the Merger would convert into options over
approximately 2,257,817 Micro Focus ADSs (equivalent to 11,289,086 Micro Focus
Ordinary Shares). No further Intersolv Options will be granted following
completion of the Merger.
80
<PAGE> 82
PART 6 -- DETAILS OF THE MERGER
The following discussion summarises the terms of the Merger Agreement and the
transactions contemplated thereby. The following is not, however, a complete
statement of all provisions of the Merger Agreement and related agreements. The
following description of the Merger, the Merger Agreement and related
transactions is qualified in all respects by reference to the complete text of
the Merger Agreement.
1. MERGER CONSIDERATION
CONVERSION OF INTERSOLV STOCK
10.31(A)
10.31(C)
At the Effective Date, each issued and outstanding share of Intersolv Stock
together with the associated right, but excluding shares held in the treasury of
Intersolv or owned by Micro Focus or any wholly owned subsidiary of Micro Focus,
will be converted into the right to receive fully paid and nonassessable new
Micro Focus ADSs on the following basis:
<TABLE>
<S> <C>
FOR EACH SHARE OF INTERSOLV STOCK: 0.55 NEW MICRO FOCUS ADSS, REPRESENTING
2.75 NEW MICRO FOCUS ORDINARY SHARES
</TABLE>
Each share of Intersolv Stock that is owned by Intersolv as treasury stock and
each share of Intersolv Stock that is owned by Micro Focus or any wholly owned
subsidiary of Micro Focus, together, in each case, with the associated Rights,
will automatically be cancelled and extinguished.
ASSUMPTION OF OPTIONS, WARRANTS AND NOTES
Pursuant to the Merger Agreement, at the Effective Date, each then outstanding
Intersolv Option will be converted into an option to purchase that number of new
Micro Focus ADSs (a "Micro Focus Option") obtained by multiplying the number of
shares of Intersolv Stock subject to each such Intersolv Option by the Exchange
Ratio. If that calculation results in a Micro Focus Option being exercisable for
a fraction of a new Micro Focus ADS, then the number of new Micro Focus ADSs
subject to such option will be rounded down to the nearest whole number of new
Micro Focus ADS. The exercise price of each Micro Focus Option will be equal to
the exercise price of the Intersolv Option from which such Micro Focus Option
was converted divided by the Exchange Ratio, rounded to the nearest whole cent.
To the extent permitted by law and the pooling rules, the term, vesting
schedule, status as an "incentive stock option" under Section 422 of the US
Internal Revenue Code, as amended, if applicable, and the other terms and
conditions of the Intersolv Options will remain unchanged. Pursuant to the
Merger Agreement, continuous employment with Intersolv by option holders will be
credited as employment by Micro Focus for the purpose of vesting the Micro Focus
Options issued in the Merger. Micro Focus has agreed to file a registration
statement on Form S-8 with the SEC promptly after the Effective Date to register
the new Micro Focus ADSs issuable upon exercise of the assumed Intersolv
Options.
At the Effective Date, each of the outstanding warrants, exchangeable or
convertible securities or other rights or agreements to purchase or otherwise
acquire any shares of Intersolv Stock ("Intersolv Warrants") will, by virtue of
the Merger, be assumed by Micro Focus and be converted into warrants or like
securities or agreements ("Micro Focus Warrants") to purchase that number of new
Micro Focus ADSs obtained by multiplying the number of shares of Intersolv Stock
underlying each such Intersolv Warrant by the Exchange Ratio. If that
calculation results in a Micro Focus Warrant being exercisable for a fraction of
a new Micro Focus ADS, then the number of new Micro Focus ADSs subject to such
Micro Focus Warrant will be rounded down to the nearest whole number of new
Micro Focus ADSs. The exercise price of each Micro Focus Warrant will be equal
to the exercise price of the Intersolv Warrant from which such Micro Focus
Warrant was converted divided by the Exchange Ratio, rounded to the nearest
whole cent. Under the Merger Agreement, Micro Focus has agreed to assume all of
the obligations of Intersolv under all such Intersolv Warrants and the exercise
period and other terms and conditions of the Intersolv Warrants will remain
unchanged after the Merger.
NO FRACTIONAL SHARES
14.1(H)(VI)
No fractional new Micro Focus ADSs will be issued in connection with the Merger,
but in lieu thereof, each holder of shares of Intersolv Stock who otherwise
would be entitled to a fraction of a new Micro Focus ADS (after aggregating all
fractional shares to be received by such holder) will receive from Micro Focus
an amount of cash (without interest) equal to the product of (i) such fraction,
multiplied by (ii) the average closing price of a Micro Focus ADS for the twenty
trading days ending with and including the third trading day immediately prior
to the Effective Date, as reported on Nasdaq.
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<PAGE> 83
2. SHARE OWNERSHIP FOLLOWING THE MERGER
Based upon the issued share capital of Intersolv as of the close of business on
20 August 1998, an aggregate of approximately 12,576,350 new Micro Focus ADSs
will be issued to Intersolv Stockholders in the Merger and Micro Focus will
assume Intersolv Options and Warrants to purchase up to approximately 2,340,384
additional Micro Focus ADSs. Based upon the issued share capital and the fully
diluted share capital of Intersolv and Micro Focus as of the close of business
on 20 August 1998, immediately following the Merger, the former security holders
of Intersolv will hold approximately 44 per cent. of the issued share capital of
Micro Focus and approximately 46 per cent. of the share capital of Micro Focus
calculated on a fully diluted basis. The foregoing number of shares and
percentages are subject to change in the event of a change in the number of
shares of Intersolv Stock or the number of Intersolv Options or Intersolv
Warrants outstanding or a change in the issued share capital of Micro Focus
subsequent to 20 August 1998 and prior to the Effective Date of the Merger.
3. REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations by the parties to each other and
covenants by Micro Focus and Intersolv as to, inter alia, their conduct prior to
the Effective Date.
4. FOLLOWING THE MERGER
In the Merger Agreement, Micro Focus and Intersolv have agreed that promptly
after the Effective Date Micro Focus will take all action necessary to set the
number of directors of Micro Focus at seven. In addition, Micro Focus has agreed
to take such action necessary to (i) appoint two directors of Micro Focus
nominated by Intersolv after consulting in good faith with Micro Focus, (ii)
either appoint or retain two directors of Micro Focus who are neither members of
the management of Micro Focus nor of Intersolv, after seeking the recommendation
of Intersolv with respect to one such director and after consulting in good
faith with Intersolv with respect to both such directors, and (iii) appoint or
retain three directors of Micro Focus selected in the sole discretion of Micro
Focus. Micro Focus has also agreed to take such action as is necessary to
appoint Kevin J. Burns as a director of Intersolv. The directors of Micro Focus
after the Effective Date will be Martin Waters, J. Michael Gullard, Harold
Hughes and J. Sidney Webb, all of whom are directors of Micro Focus, and Michel
Berty, Gary G. Greenfield and Kevin J. Burns, all of whom are directors of
Intersolv.
Micro Focus has agreed, in the Merger Agreement, to provide employees of
Intersolv who become employees of Micro Focus with employee benefits in the
aggregate no less favourable than those benefits provided to similarly situated
employees of Micro Focus. To the extent permitted by the terms of the Intersolv
Employee Stock Purchase Plan and the pooling rules, Intersolv has agreed to use
its reasonable best efforts to terminate such plan before or as of the Effective
Date.
5. CONDITIONS TO THE MERGER
The obligations of Intersolv, Micro Focus and Tower Merger Sub to effect the
Merger are subject to the satisfaction or waiver on or as of the closing date of
the Merger of certain conditions including: (i) the Merger Agreement having been
approved and adopted, and the Merger and all transactions contemplated by the
Merger Agreement having been duly approved, by the Intersolv Stockholders and
the Micro Focus Shareholders; (ii) the Registration Statement on Form F-4 filed
by Micro Focus and the Registration Statement on Form F-6 filed by the
Depositary with respect to the new Micro Focus Ordinary Shares and the new Micro
Focus ADSs, having become effective under the Securities Act and not being the
subject of any pending or threatened stop order or other SEC proceedings; (iii)
all material consents, orders, permits or authorisations of, declarations or
filings with, or expiration of waiting periods (including under the US
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) of any
governmental entity necessary for the consummation of the Merger and the other
transactions contemplated by the Merger Agreement having been filed, expired or
obtained; (iv) Micro Focus and Intersolv being reasonably satisfied that neither
the Merger nor any matter arising therefrom being referred to the UK Monopolies
and Mergers Commission; (v) no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other governmental
entity of competent jurisdiction being in effect that has the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger or
limiting or restricting Micro Focus' conduct or operation of the business of
Intersolv and its subsidiaries; (vi) Micro Focus and Intersolv having received
substantially identical opinions of their respective counsel to the effect that
the Merger will constitute a reorganisation within the meaning of Section 368(a)
of the Code; (vii) Intersolv having received a letter from its independent
accountants regarding concurrence with Intersolv management's conclusions that
no conditions exist that would preclude Intersolv from being a party to a merger
accounted for as a pooling of interests and Micro Focus having received a letter
from its independent auditors regarding concurrence with Micro Focus
management's conclusions as to the appropriateness of pooling of interests
accounting treatment for the Merger under US Accounting Principles Board ("APB")
Opinion No. 16, if
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<PAGE> 84
consummated in accordance with the Merger Agreement; (viii) the London Stock
Exchange having agreed to admit to the Official List (subject to allotment) the
new Micro Focus Ordinary Shares to be issued in connection with the Merger and
such agreement not having been withdrawn; (ix) the new Micro Focus ADSs to be
issued in the Merger having been authorised for listing on Nasdaq; and (x) H.M.
Treasury having consented pursuant to Section 765(1)(C) of the Income and
Corporation Taxes Act 1988, or H.M. Treasury having confirmed that no such
consent is required in connection with the transactions contemplated by the
Merger Agreement.
6. TERMINATION; EFFECTS OF TERMINATION
The Merger Agreement may be terminated at any time before the Effective Date,
whether before or after approval of the matters presented in connection with the
Merger by the Intersolv Stockholders and by the Micro Focus Shareholders, as
follows: (i) by the mutual written agreement of Intersolv and Micro Focus
authorised by their respective boards of directors; (ii) by either Intersolv or
Micro Focus if the Effective Date has not occurred on or before 31 January 1999
and such failure is not caused by a breach of the Merger Agreement by the party
seeking to terminate the Merger Agreement; (iii) by either Micro Focus or
Intersolv if there is a final and non-appealable permanent injunction or other
order by any federal, state or foreign court of competent jurisdiction that
makes the Merger illegal or otherwise restrains or prohibits the Merger; (iv) by
either Micro Focus or Intersolv if there has been a breach by the other party of
any representation, warranty, covenant or agreement in the Merger Agreement, or
if any representation by the other party becomes untrue, in either case that has
or can reasonably be expected to have a Material Adverse Effect on such other
party, which such other party fails to cure within a reasonable time (not to
exceed 20 days) after written notice thereof, (v) by Micro Focus or Intersolv if
the required approval of the Intersolv Stockholders or the Micro Focus
Shareholders is not obtained; (vi) by Micro Focus or Intersolv if the board of
directors of the other party has withheld, withdrawn or modified its
recommendation of the Merger Agreement or the Merger in a manner adverse to the
terminating party, or has resolved to do so, other than in connection with a
Trigger Event or an Intersolv Acquisition Proposal or a Micro Focus Acquisition
Proposal, respectively; or (vii) by either Micro Focus or Intersolv, if a
Trigger Event or an Intersolv Acquisition Proposal has occurred and the
Intersolv board in connection therewith, after receiving the written advice of
its legal counsel and financial advisors, withholds, withdraws or modifies its
approval and recommendation of the Merger Agreement and the Merger, determining
in good faith that to cause Intersolv to proceed with the transactions
contemplated by the Merger Agreement would not be consistent with the fiduciary
duty of the Intersolv board to the Intersolv Stockholders. As defined in the
Merger Agreement, "Material Adverse Effect" means, with respect to an entity,
any event, change or effect that is materially adverse to the condition
(financial or otherwise), properties, agreements, assets (including intangible
assets), liabilities, business, employee base, operations or results of
operations of such entity and its subsidiaries, taken as a whole; provided, that
"Material Adverse Effect" does not include (i) any adverse effect following the
date of the Merger Agreement that is directly caused by adverse reaction by
customers of such entity to the announcement of the execution of the Merger
Agreement and the transactions contemplated by the Merger Agreement, (ii) any
adverse effect that is caused by a general economic downturn in the industries
in which such entity operates or a national economic downturn, or (iii) a
decline in the market value of any publicly traded securities of such entity. A
"Trigger Event" will occur if any person acquires securities representing 20 per
cent. or more of the issued voting share capital of Intersolv or commences a
tender or exchange offer which if successful would result in the offeror and its
affiliates beneficially owning securities representing 20 per cent. or more of
the issued voting share capital of Intersolv. The term "Intersolv Acquisition
Proposal" means any offer, inquiry or proposal received from any party (other
than Micro Focus) concerning the possible disposition of all or any significant
portion of the business, assets or capital stock of Intersolv or any of its
subsidiaries, by merger, sale or any other means or any other transaction that
would involve a change in control of Intersolv or any of its subsidiaries or to
otherwise solicit, facilitate, discuss or encourage any such disposition (other
than the Merger). The term "Micro Focus Acquisition Proposal" means any offer,
inquiry or proposal received from any party other than Intersolv concerning the
possible disposition of all or substantially all of the business, assets or
capital stock of Micro Focus, by merger, sale or any other means or any other
transaction that would involve a change in control of Micro Focus.
7. EXPENSES AND TERMINATION FEES
Except as described below, each party to the Merger Agreement will bear its own
costs and expenses. Under certain circumstances, if the Merger Agreement is
terminated without effectuation of the Merger, then either Intersolv or Micro
Focus may be required to pay certain fees to the other.
If Micro Focus or Intersolv terminates the Merger Agreement because of a breach
by the other of a representation, warranty, covenant or agreement in the Merger
Agreement or because any representation of the other has become untrue, and such
breach has or can reasonably be expected to have a Material Adverse Effect
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<PAGE> 85
on the non-breaching party and the breaching party has failed to cure such
breach within a reasonable time after notice thereof (not to exceed 20 days),
the Merger Agreement provides that the breaching party will pay $1.0 million to
the other party. This amount is intended to reimburse the non-breaching party
for expenses and is not liquidated damages. Payment of the termination fee does
not limit either party's remedies for wilful breach of the Merger Agreement. In
no event, however, will the liability of Micro Focus or Intersolv for breach of
the Merger Agreement exceed a total of $20 million.
If the Merger Agreement is terminated because (i) the required approval of the
Intersolv Stockholders is not obtained or (ii) the board of directors of
Intersolv withholds, withdraws or modifies its recommendation of the Merger
Agreement or the Merger in a manner adverse to the other party, or resolves to
do so, after receiving advice from its legal counsel and financial advisors and
concluding in good faith that its fiduciary duties require such action, but
other than in connection with a Trigger Event or an Intersolv Acquisition
Proposal, then the Merger Agreement provides that Intersolv will pay $1.0
million to Micro Focus. If the Merger Agreement is terminated because (i) the
required approval of the Micro Focus Shareholders is not obtained or (ii) the
board of directors of Micro Focus withholds, withdraws or modifies its
recommendation of the Merger Agreement or the Merger in a manner adverse to the
other party, or resolves to do so, after receiving advice from its legal counsel
and financial advisors and concluding in good faith that its fiduciary duties
require such action, then the Merger Agreement provides that Micro Focus will
pay $1.0 million to Intersolv. These amounts are intended as reimbursements for
expenses and are the exclusive remedy for the matters giving rise to such
termination.
In addition, Intersolv has agreed to pay $15.0 million to Micro Focus if the
Merger Agreement is terminated by Intersolv or Micro Focus because a Trigger
Event or an Intersolv Acquisition Proposal has occurred and the Intersolv board
in connection therewith, after receiving the written advice of its legal counsel
and financial advisors, determines in good faith that to cause Intersolv to
proceed with the transactions contemplated by the Merger Agreement would not be
consistent with the fiduciary duty of the Intersolv board to the Intersolv
Stockholders and withholds, withdraws or modifies its approval and
recommendation of the Merger Agreement and the Merger.
Further, Intersolv has agreed in the Merger Agreement to pay an additional
amount (as described below) to Micro Focus in certain circumstances involving
termination of the Merger Agreement as follows: (i) by Micro Focus upon a breach
by Intersolv of any representation, warranty, covenant or agreement in the
Merger Agreement, or if any representation by Intersolv becomes untrue, in
either case that has or can reasonably be expected to have a Material Adverse
Effect on Micro Focus, which Intersolv fails to cure within a reasonable time
(not to exceed 20 days) after written notice thereof; (ii) by Micro Focus or
Intersolv if the required approval of the Intersolv Stockholders is not
obtained; (iii) by Micro Focus if the Intersolv board has withheld, withdrawn or
modified its recommendation of the Merger Agreement or the Merger in a manner
adverse to Micro Focus, or has resolved to do so after receiving advice from its
legal counsel and financial advisors and concluding in good faith that its
fiduciary duties require such action, other than in connection with a Trigger
Event or an Intersolv Acquisition Proposal; (iv) by Micro Focus or Intersolv if
a Trigger Event or Intersolv Acquisition Proposal has occurred and the Intersolv
board in connection therewith, after receiving the written advice of its legal
counsel and financial advisors, withholds, withdraws or modifies its approval
and recommendation of the Merger Agreement and the Merger, determining in good
faith that to cause Intersolv to proceed with the transactions contemplated by
the Merger Agreement would not be consistent with the fiduciary duty of the
Intersolv board to the Intersolv Stockholders. If, during the 12 month period
after termination of the Merger Agreement as specified above, Intersolv enters
into a binding agreement with respect to an Intersolv Acquisition Proposal with
any third party with whom Intersolv had any discussions concerning an Intersolv
Acquisition Proposal within six months of the date of termination of the Merger
Agreement, then upon consummation of the transaction contemplated by such
Intersolv Acquisition Proposal (whether or not consummated within such 12 month
period), Intersolv has agreed to pay $20.0 million to Micro Focus, less the
total of all other amounts that Intersolv has paid to Micro Focus as a result of
termination of the Merger Agreement. However, the amount that Intersolv has
agreed to pay to Micro Focus is reduced to $5.0 million, less the total of all
other amounts that Intersolv has paid to Micro Focus as a result of termination
of the Merger Agreement, if Intersolv disposes of a portion of its business that
represented less than 25 per cent. of its total revenues for the financial year
ending 1998. If the Merger Agreement is terminated because (i) the required
approval of the Intersolv Stockholders is not obtained; or (ii) the Intersolv
board has withheld, withdrawn or modified its recommendation of the Merger
Agreement or the Merger in a manner adverse to Micro Focus, or has resolved to
do so after receiving advice from its legal counsel and financial advisors and
concluding in good faith that its fiduciary duties require such action, other
than in connection with a Trigger Event or an Intersolv Acquisition Proposal,
then no additional fee is payable with respect to any spin-off of assets or
securities by dividend or other distribution to the Intersolv Stockholders and
that is not followed by a transaction contemplated by an Intersolv Acquisition
Proposal with respect to such
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<PAGE> 86
assets or securities for which a binding agreement is entered into during the 12
month period after termination of the Merger Agreement.
8. AFFILIATE AGREEMENTS
Each person determined by Intersolv to be an affiliate of Intersolv and each
person determined by Micro Focus to be an affiliate of Micro Focus has executed
an agreement that prohibits the sale, transfer, pledge or other disposition of,
or any other similar transaction intended to reduce its risk relative to, any
share of Intersolv Stock, Micro Focus Ordinary Shares or Micro Focus ADSs owned
by the affiliate, including all rights, options and warrants to acquire such
securities, and all such securities as to which the affiliate has sole or shared
voting or investment power for the period of time beginning 30 days before the
closing of the Merger through the date on which Micro Focus publicly releases
financial results covering at least 30 days of post-Merger combined operations.
The Intersolv affiliates have also agreed that they will not offer, sell,
pledge, exchange, transfer or otherwise dispose of any new Micro Focus ADSs
received by them in connection with the Merger unless such transaction is
permitted pursuant to Rule 145(d) under the Securities Act.
9. OTHER
In order to effect the issue and the listing in the United States of the new
Micro Focus Ordinary Shares, a registration statement on Form F-4, which
includes a proxy statement of Intersolv and a prospectus of Micro Focus, has
been filed with the SEC. Following the registration statement having been
declared effective by the SEC, the proxy statement/prospectus will be dispatched
to Intersolv Stockholders. The proxy statement/prospectus contains a notice
convening a special meeting of Intersolv Stockholders, to be held on 23
September 1998, at which the Intersolv Stockholders will be asked to approve and
adopt the Merger Agreement. In addition, the Depositary will file with the SEC a
registration statement on Form F-6 with respect to the new Micro Focus ADSs to
be issued pursuant to the Merger Agreement.
14.1(H)(III)
The new Micro Focus Ordinary Shares, represented by new Micro Focus ADSs, to be
issued as consideration, will be issued free of all taxes and SDRT to Intersolv
Stockholders and will rank pari passu in all respects from the time of their
issue with the Micro Focus Ordinary Shares in issue at that time.
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PART 7 -- ADDITIONAL INFORMATION
1. INCORPORATION
6.C.2
6.C.1
6.C.3
6.C.4
6.C.6
The Company was incorporated in England and Wales on 28 March 1983 under the
Companies Act 1948 to 1981 as a public company limited by shares with the
registered number 1709998 and with the name Micro Focus Group Plc. Its
registered office and principal place of business in the United Kingdom is The
Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14 1QN, England.
6.A.1.
6.F.1(A)
2. DIRECTORS AND PROPOSED DIRECTORS
Details of the Directors are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
James Michael Gullard................ Non Executive Chairman
Harold Edward Hughes................. Non Executive Deputy Chairman
Martin Charles Waters................ President and Chief Executive Officer
Paul Aldous Adams.................... Senior Vice President, International Sales
James Sidney Webb.................... Non Executive Director
</TABLE>
The business address of all the above Directors is care of Micro Focus
Incorporated, 701 East Middlefield Road, Mountain View, California 94043, USA.
Details of the Proposed Directors are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Gary Gordon Greenfield............... Non Executive Director
Kevin James Burns.................... Non Executive Director
Michel Berty......................... Non Executive Director
</TABLE>
The business address of all the above Proposed Directors is care of INTERSOLV,
Inc, 9420 Key West Avenue, Rockville, Maryland, 20850, United States
3. RESPONSIBILITY STATEMENT
6.A.3
10.38(E)
The Directors and Proposed Directors, whose names are set out in Paragraph 2
above, accept responsibility for the information contained in this document. To
the best of the knowledge and belief of the Directors and Proposed Directors
(who have taken all reasonable care to ensure that such is the case), the
information contained in this document is in accordance with the facts and does
not omit anything likely to affect the import of such information.
4. SHARE CAPITAL
(1) The Company was incorporated with an authorised share capital of L50,000
divided into 50,000 ordinary shares of L1 each of which two were issued at
par to the subscribers to the memorandum of association.
(2) The following table shows the authorised and issued share capital of the
Company as at the close of business on 20 August 1998 (being the latest
practicable date prior to the printing of this document) and as it is
expected to be immediately following the Merger becoming effective
(assuming no further issues of shares by Micro Focus or Intersolv after 20
August 1998 and prior to the Merger becoming effective, other than the
issue of the new Micro Focus Ordinary Shares pursuant to the Merger) as
follows:
6.C.9
6.C.10(A)
<TABLE>
<CAPTION>
AUTHORISED ISSUED AND FULLY PAID
------------------------ ------------------------
NO. AMOUNT NO. AMOUNT
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Before the Merger
ordinary shares of 2p each 112,500,000 L2,250,000 80,545,471 L1,610,909
After the Merger
ordinary shares of 2p each 212,000,000 L4,240,000 143,427,224 L2,868,545
- ------------------------------------------------------------------------------------------------
</TABLE>
(3) 62,881,753 new Micro Focus Ordinary Shares would be required to be
allotted to complete the Merger pursuant to the Merger Agreement,
12,526,924 new Micro Focus Ordinary Shares will be authorised and
available for issue pursuant to the Merger Agreement to satisfy options
granted pursuant to the Intersolv Options and Intersolv Warrants and
7,697,313 Micro Focus Ordinary Shares will be authorised and available for
issue to satisfy outstanding options under the Micro Focus Share Option
Schemes.
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<PAGE> 88
6.C.10(B)
(4) Save as disclosed in sub-paragraphs 4(3) and 4(5) of this Part 7, no
share or loan capital of the Company is under option nor has it been
agreed, conditionally or unconditionally, to put any share or loan capital
of the Company under option.
6.C.19
(5) As at 20 August 1998 (the latest practicable date prior to the printing
of this document) the number of outstanding options granted to directors
and employees pursuant to the Micro Focus share option schemes was
7,697,313 made up as follows:
6.C.19
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
PLAN OF SHARES PER SHARE EXERCISE DATES
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Micro Focus Share Option Schemes 7,643,604 L1.08-L7.15 4 June 2001 - 22 July 2008
XDB Plans 53,709 $ 5.39-$7.41 11 June 2002 - 23 July 2007
-------------------------------------------------------------------------------------------
</TABLE>
A total of 3,815,055 Micro Focus Ordinary Shares are held by the Micro
Focus 1994 EBT, of which 2,512,108 have been placed under option.
(6) The following alterations in the issued share capital of Micro Focus have
occurred in the three years since 20 August 1995:
<TABLE>
<CAPTION>
MICRO FOCUS ORDINARY
SHARES OF 10P ISSUED
--------------------------------
NUMBER NOMINAL VALUE
------------------------------------------------------------------------------------------
<S> <C> <C>
20 August 1995 to 31 January 1996 15,143,234 1,514,323
1 February 1996 to 31 January 1997 15,144,099 1,514,410
1 February 1997 to 31 January 1998 15,883,525 1,588,353
1 February 1998 to 11 March 1998 15,915,416 1,591,542
------------------------------------------------------------------------------------------
</TABLE>
On 12 March 1998, each issued and unissued ordinary share of 10p was
sub-divided into 5 ordinary shares of 2p each.
<TABLE>
<CAPTION>
MICRO FOCUS ORDINARY
SHARES OF 2P ISSUED
------------------------------------------------------------------------------------------
<S> <C> <C>
12 March 1998 79,577,080 1,591,542
12 March 1998 to 21 August 1998 80,545,471 1,610,909
------------------------------------------------------------------------------------------
</TABLE>
6.C.14
(7) During the three years immediately preceding the date of this document
the following changes in the authorised and issued share capital of Micro
Focus have taken place:
(a) on 19 June 1996:
(i) the authorised share capital of Micro Focus was increased by
ordinary resolution from L1,650,000 to L2,250,000 by the creation of
6,000,000 ordinary shares of 10p each;
(ii) the directors were generally and unconditionally authorised by
ordinary resolution in accordance with Section 80 of the Act for a
period expiring on 18 June 2001 and in substitution of other
authorities granted, to allot relevant securities (within the meaning
of Section 80 of the Act) up to an aggregate nominal amount of
L735,261; and
(iii) the directors were empowered by special resolution pursuant to
Section 95 of the Act to allot equity securities wholly for cash
pursuant to and within the terms of the authority conferred by the
resolution described in paragraph (ii) above in certain circumstances
as if Section 89(1) of the Act did not apply to such allotment in
order, inter alia, to permit allotments in connection with a rights
issue in favour of ordinary shareholders and otherwise up to an
aggregate nominal amount of L75,736. This power expired on 4 June
1997;
(b) on 30 April 1997, 149,142 ordinary shares of 10p each were allotted by
the Company and issued credited as fully paid as part consideration for
the acquisition of the whole of the share capital of Millennium (UK)
Limited;
(c) by special resolution passed on 4 June 1997, the directors were empowered
pursuant to Section 95 of the Act to allot equity securities as if Section
89(1) of the Act did not apply to such allotment, such power being limited
to the allotment of equity securities in connection with a rights issue in
favour of ordinary shareholders and otherwise to the allotment of equity
securities up to an aggregate nominal value of L76,709. This power expired
on 20 August 1998;
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(d) on 20 January 1998, 378,395 ordinary shares of 10p each were allotted by
the Company and issued credited as fully paid as consideration for the
acquisition of the whole of the share capital of XDB;
(e) by ordinary resolution passed on 12 March 1998 each issued and unissued
ordinary share of 10p was sub-divided into 5 ordinary shares of 2p each;
and
6.B.15(A)
(8) by a special resolution passed on 20 August 1998, the Directors were
empowered pursuant to Section 95 of the Act to allot equity securities as
if Section 89(1) of the Act did not apply to such allotment, such power
being limited to the allotment of equity securities in connection with a
rights issue in favour of ordinary shareholders and otherwise to the
allotment of equity securities up to an aggregate nominal amount of
L80,279. This power expires on 19 November 1999, or, if earlier, at the
conclusion of the annual general meeting of Micro Focus in 1999, and will
expire upon the Merger becoming effective.
6.B.15(A)
(9) The provisions of Section 89(1) of the Act, which confer on shareholders
rights of pre-emption in respect of the allotment of equity securities
which are, or are to be, paid up wholly in cash (other than in respect of
an allotment to employees under an employee's share scheme within the
meaning of Section 743 of the Act), apply to the unissued Micro Focus
Ordinary Shares to the extent that such rights are not disapplied by the
special resolution referred to in Paragraph (8) above.
(10) Save as disclosed in this document:
(a) no share or loan capital of the Company or any of its subsidiaries has
within the three year period immediately prior to the date of this
document been issued or agreed to be issued, fully or partly paid, either
for cash or for consideration other than cash;
(b) no issue of unissued shares will be made which would effectively alter
the control of the Company without the prior approval of shareholders in
general meeting;
(c) no commissions, discounts, brokerages or other special terms have within
the three year period referred to in Paragraph 4 above been granted by the
Company or any of its subsidiaries in connection with the sale of any
share or loan capital of the Company or any of its subsidiaries.
(11) It is expected that admission to the Official List of the new Micro Focus
Ordinary Shares will become effective and dealings are expected to
commence at or around 2 p.m. on the Effective Date. As soon as reasonably
practicable after the Effective Date, the exchange agent appointed under
the Merger Agreement will send to each holder on record of certificates
that represented outstanding Intersolv Stock and certain rights associated
therewith (the "Certificates") that were converted into the right to
receive the new Micro Focus ADSs pursuant to the Merger Agreement, (i) a
letter of transmittal and (ii) instructions for effecting the surrender of
such Certificates in exchange for the new Micro Focus ADRs. Upon surrender
of Certificates for cancellation to such exchange agent together with a
duly executed and completed letter of transmittal, and any other documents
required by such exchange agent, the holder of such Certificates will be
entitled to receive in exchange for such Certificates, inter alia, one or
more new Micro Focus ADRs representing in aggregate the whole number of
new Micro Focus ADSs that such holder has the right to receive under the
Merger Agreement and a cheque in an amount equal to the cash that such
holder has the right to receive, if any, in lieu of any fractional new
Micro Focus ADSs after aggregation of all Certificates held by a holder.
The Certificates so surrendered will be cancelled.
6.B.13
(12) Application has been made for the new Micro Focus ADSs and the new Micro
Focus Ordinary Shares they represent to be authorised for listing on
Nasdaq and to be listed on the London Stock Exchange, respectively, on the
Effective Date.
6.B.2
(13) Save as pursuant to the Merger, none of the new Micro Focus ADSs or new
Micro Focus Ordinary Shares have been or will be made available to the
public in whole or in part in conjunction with the application for listing
of those securities.
6.B.19
(14) The Micro Focus Ordinary Shares are listed on the London Stock Exchange
and, in the form of ADSs, on Nasdaq.
6.B.24
14.1(H)(VII)
14.1(H)(III)
(15) The Micro Focus Ordinary Shares are, and the new Micro Focus Ordinary
Shares and new Micro Focus ADSs will be, in the case of the latter, in
registered form held on record by the Depositary. However, both will be
capable of being held in uncertificated form. The new Micro Focus Ordinary
Shares represented by the new Micro Focus ADSs will be credited as fully
paid and will rank pari passu in all respects from the time of their issue
with the Micro Focus Ordinary Shares in issue at the time.
88
<PAGE> 90
5. PRINCIPAL SUBSIDIARY UNDERTAKINGS
(1) Micro Focus
6.C.17
Micro Focus is the principal operating company of the Micro Focus Group and a
holding company. Details of the Company's principal subsidiary undertakings (all
of which are wholly owned) are as follows:
6.E.11(A)(I)
6.E.11(A)(II)
6.E.11(A)(III)
<TABLE>
<CAPTION>
SHARE CAPITAL
(ISSUED AND FULLY
COUNTRY OF REGISTERED OR PAID UNLESS GENERAL NATURE
NAME OF COMPANY INCORPORATION PRINCIPAL OFFICE OTHERWISE STATED) OF BUSINESS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Micro Focus Limited England & The Lawn, 22-30 Old Bath Road L17,100 Developing and/or
Wales Newbury licencing computer
Berkshire RG14 1QN software
England
Micro Focus International England & The Lawn, 22-30 Old Bath Road L100 Marketing computer
Limited Wales Newbury software
Berkshire RG14 1QN
England
Micro Focus Holdings Limited England & The Lawn, 22-30 Old Bath Road L2,000 Holding company
Wales Newbury
Berkshire RG14 1QN
England
Micro Focus Italia SrL Italy Viale Erminio Lira 180,000,000 Developing and/or
Spalla n.41 licencing computer
Roma software
Italy
Micro Focus Japan Limited Japan Nishi Azabu Yen 48,000,000 Developing and/or
Matsui Building 4F licencing computer
17-30 Nishi Azabu, 4-Chome software
Minato-Ku
Tokyo 106
Japan
Micro Focus GmbH Germany Am Moosfeld 11 Deutschmarks Developing and/or
81829 Munchen 50,000 licencing computer
Germany software
Micro Focus SARL France Tour Franklin Francs 50,000 Developing and/or
Defense 8 licencing computer
92042 Paris, La Defense Cedex software
France
Micro Focus SA Spain Corsega 541 Pesetas 2,525,000 Developing and/or
4a Planta licencing computer
08025 Barcelona software
Spain
Micro Focus Investments Limited Jersey Le Gallais Chambers L30,001,930 Investment company
54 Bath Street
St. Hellier
Jersey
Channel Islands
- ----------------------------------------------------------------------------------------------------------------------------
System Focus BV Netherlands Drentestraat 20 Dutch Guilders Developing and/or
1083 HK 173,074 licencing computer
Amsterdam software
Netherlands
Micro Focus Technology NV Netherlands Frankrijkstraat 1 Dutch Guilders Developing and/or
Antilles Oranjestad, Aruba 6,000 licencing computer
Netherlands Antilles software
XDB Systems, Inc. USA 9861 Brokenland $1 Developing and/or
Parkway, Columbia licencing computer
Maryland 21046 software
United States
Advanced Software Engineering Australia 9 Park Avenue Australian Developing and/or
Pty. Ltd Chatswood Dollars licencing computer
New South Wales 2067 120,000 software
Australia
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE> 91
6.E.11(B)
There are no other companies in which Micro Focus has any interest where the
book value of the interest represents 10 per cent. of the consolidated net
assets, or accounts for at least 10 per cent. of the consolidated net profit or
loss of Micro Focus.
(2) Intersolv
Details of Intersolv's principal subsidiary undertakings (all of which are
wholly owned) are as follows:
<TABLE>
<CAPTION>
SHARE CAPITAL
(ISSUED AND FULLY
COUNTRY OF REGISTERED OR PAID UNLESS GENERAL NATURE OF
NAME OF COMPANY INCORPORATION PRINCIPAL OFFICE OTHERWISE STATED) BUSINESS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Intersolv Plc England & Abbey View, Everard Close L60,100 Software distribution
Wales St. Albans, AL1 2PS,
England
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. PRINCIPAL OPERATING ESTABLISHMENTS
(1) Micro Focus
6.D.4.
Details relating to the principal operating establishments of the Micro Focus
Group are set out below:
<TABLE>
<CAPTION>
OCCUPIER PROPERTY AREA (SQ FEET) TENURE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Micro Focus Limited The Lawn 80,000 Freehold
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN
England
Micro Focus Incorporated 701 East Middlefield Road 56,000 Leasehold
Mountain View (15 October 1997
California 94043 --
United States 15 October 2007)
- --------------------------------------------------------------------------------------------------
</TABLE>
(2) Intersolv
Details relating to the principal operating establishments of Intersolv are set
out below:
<TABLE>
<CAPTION>
AREA (SQ.
OCCUPIER PROPERTY FEET) TENURE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intersolv, Inc. 9420 Key West Avenue, 78,000 Leasehold
Rockville, MD 20850, (23 May 1995 -- 22
United States May 2005)
Intersolv, Inc. 735 SW, 158th Avenue, 48,000 Leasehold
Beaverton, OR 97006, (1 October 1996 --
United States 30 September 2003)
Intersolv, Inc. 1500 Perimeter Park Drive, 30,000 Leasehold
Suite 100, (15 March 1996 --
Morrisville, NC 27560, 31 March 2003)
United States
Intersolv, Plc Abbey View, Everard Close, 20,000 Leasehold
St. Albans, AL1 2PS, (5 April 1991 --
England 4 April 2016)
- --------------------------------------------------------------------------------------------------
</TABLE>
7. MEMORANDUM AND ARTICLES OF ASSOCIATION
6.C.5
(1) Summary of memorandum of association
The memorandum of association provides that the Company's principal object
is to carry on the business of a holding company and to co-ordinate the
policy and administration of any group companies. The
90
<PAGE> 92
objects of the Company are set out in full in clause 4 of the memorandum
of association, a copy of which is available for inspection at the address
specified in Paragraph 20 of this Part 7 of the document.
6.B.7
(2) Articles of association
The articles of association of the Company contain, inter alia, the
provisions, which are summarised below, relating to the Micro Focus
Ordinary Shares:
(a) Voting
(i) Subject to any rights or restrictions attached to any shares, each
member who (being an individual) is present in person or (being a
corporation) is present by a duly authorised representative, who is
himself not a member entitled to vote at a general meeting, shall
upon a show of hands have one vote and upon a poll every member shall
have one vote for every share of which he is a holder.
(ii) Voting in any general meeting of the shareholders is by show of
hands unless a poll is demanded. A poll may be demanded by the
chairman of the meeting, by at least two shareholders present in
person or by proxy and having the right to vote at the meeting, by
any shareholder or shareholders present in person or by proxy
representing at least 10 per cent. of the voting rights of all
shareholders having the right to vote at the meeting, or by any
shareholder or shareholders present in person or by proxy and holding
shares conferring a right to vote at the meeting on which the
aggregate sum paid up on such shares is equal to not less than 10 per
cent. of the total sum paid up on all shares conferring such right.
(iii) If a member, or any other person appearing to be interested in
shares held by that member, has been given a notice requiring
information to be given pursuant to Section 212 of the Act and has
failed to give the Company the information thereby required within 28
days from the date of giving the notice (or 14 days in respect of a
member holding at least 0.25 per cent. in nominal value of the issued
shares of their class), the directors may impose the sanctions
outlined below.
The sanctions available are the suspension of voting (either in
person or by representative or proxy) and other rights conferred by
membership in relation to meetings of the Company and, in respect of
a member holding at least 0.25 per cent. in nominal value of the
issued shares of their class, the withholding of payment of dividends
on, and, in the case of such shares, the restriction of transfer of
the relevant shares.
(iv) No member shall vote at any general meeting or at any separate
meeting of the holders of any class of shares, either in person or by
representative or proxy, in respect of any share held by him unless
all amounts presently payable by him in respect of that share have
been paid.
(b) Income and dividends
Subject to the provisions of the Act, the Company may by ordinary
resolution declare dividends in accordance with the respective rights of
the members, but no dividend shall exceed the amount recommended by the
directors. The directors may pay interim dividends if it appears to them
that they are justified by the profits of the Company available for
distribution.
Except insofar as the rights attaching thereto, or the terms of issue of,
any share otherwise provide, all dividends shall be apportioned and paid
pro rata according to the amounts paid or credited as paid on such shares
during any portion or portions of the period in respect of which the
dividend is paid.
6.B.8 The Company or the directors may fix a date as the record date by
reference to which a dividend will be declared or paid, whether or not it
is before the date on which the declaration or payment is made. Any
dividend which remains unclaimed for a period of 12 years after having
become due for payment will, if the directors so resolve, be forfeited and
cease to remain owing by the Company. No dividend or other money payable
in respect of a share will bear interest against the Company unless the
rights attached to the share provide otherwise.
(c) Issue of shares
Subject to the provisions of the Act, the unissued shares in the Company
shall be at the disposal of the directors and they may allot, grant
options over or otherwise dispose of them to such person, and on such
terms as they think fit.
91
<PAGE> 93
(d) Capital and winding-up
On a winding-up, any surplus assets will be divided between the members
according to the number of Micro Focus Ordinary Shares held by them and in
accordance with the Act and the Insolvency Act 1986, subject to the rights
of any shares which may be issued with special rights or privileges. The
liquidator may, with the sanction of an extraordinary resolution and any
other sanction required by the Act and the Insolvency Act 1986, divide
among the members in specie the whole or any part of the assets of the
Company and may, for that purpose, value any assets and determine how the
division shall be carried out as between the members or different classes
of the members. The liquidator may, with the like sanction, vest the whole
or any part of the assets in trustees upon such trusts for the benefit of
the members as he may with the like sanction determine, but no member
shall be compelled to accept any assets upon which there is a liability.
(e) Variation of rights
6.C.13Subject to the provisions of the Act, if at any time the capital of the
Company is divided into different classes of shares, the rights attached
to any classes of shares may be varied in such manner as may be provided
by those rights or (in the absence of any such provision) with the consent
in writing of the holders of three quarters 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,
but not otherwise.
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 and at any
adjourned meeting, any person holding shares of the class or his proxy is
a quorum.
(f) Transfer of shares
6.B.11Subject to the restrictions referred to in this paragraph, shares which
are in certificated form may be transferred by an instrument in any usual
form or any other form approved by the board. All transfers of shares
which are in uncertificated form shall be registered only in accordance
with the terms of the Uncertificated Securities Regulations 1995. The
board may, in their absolute discretion and without assigning any reason
therefor, refuse to register a transfer of shares in certificated form if
it is (a) of shares which are not fully paid; (b) not stamped and duly
presented for registration together with the share certificate (unless one
has not been issued) and such other evidence of title as the board may
reasonably require; (c) in respect of more than one class of shares; or
(d) in favour of more than four transferees. In the case of shares in
uncertificated form, the board may refuse to register a transfer which
would require shares to be held jointly by more than four persons.
Fully paid shares are free from any lien and any restriction on the right
to transfer except in the case of a member who holds shares (in
certificated or uncertificated form) representing 0.25 per cent. or more
in nominal value of the issued shares of any class of capital in the
Company, then that member shall not be entitled to transfer any such
shares other than in certain specified circumstances if that member or any
person appearing to be interested in the shares has been given a Section
212 notice under the Act and has failed to give the Company the
information required within 14 days from the date of giving the notice.
(g) Changes in share capital
The Company may by ordinary resolution:
6.C.13(i) consolidate and divide all or any of its share capital into shares
of a larger amount;
(ii) sub-divide all or part of its share capital into shares of a
smaller amount;
(iii) cancel any shares which have not, at the date of the ordinary
resolution, been taken or agreed to be taken by any person and
diminish the amount of its authorised share capital by the amount of
the shares so cancelled; and
(iv) increase its share capital.
The Company may also:
(i) purchase its own shares (as outlined in paragraph (h) below); and
92
<PAGE> 94
(ii) by special resolution reduce its share capital, any capital
redemption reserve and any share premium account.
(h) Purchase of own shares
Subject to the provisions of the Act, the Company may purchase its own
shares, including redeemable preference shares, but not unless the
purchase has been sanctioned by an extraordinary resolution passed at a
separate meeting of the holders of any class of convertible shares in the
Company.
(i) Untraced shareholders
Subject to various notice requirements, the Company may sell at such price
as the directors think fit any share (including further shares issued in
respect of that share) in the Company of a member provided that for a
period of 12 years at least three dividends (whether interim or final) on
those shares have become payable and no such dividend has been claimed, no
cheque or warrant has been cashed and the Company has not received any
communication during the relevant period from the holder of the shares.
8. DIRECTORS' AND PROPOSED DIRECTORS' SERVICE AGREEMENTS AND EMOLUMENTS;
CHANGE IN CONTROL AGREEMENTS
(1) Save as set out in this Paragraph 8, there are no existing or proposed
service agreements between any of the Directors and the Company (or its
subsidiary undertakings):
(a) J. Michael Gullard, who is Non-Executive Chairman of the Company, does
not have a service agreement with the Company or any of its subsidiary
undertakings. His salary is reviewed on an annual basis by the executive
remuneration committee of the Company which provided for a salary of
L50,000 in 1998.
(b) Harold Hughes, who is the Non-Executive Deputy Chairman of the Company,
does not have a service agreement with the Company or any of its
subsidiary undertakings. His salary is reviewed on an annual basis by the
executive remuneration committee of the Company which provided for a
salary of L18,000 per annum in 1998.
6.F.12
(c) On 8 August 1997, Martin Waters entered into a letter of appointment with
the Company which engaged him as Chief Executive Officer of the Company.
The letter provides for a salary of $26,667 per month with an additional
target bonus for each fiscal year of at least $320,000 per annum. An
option to purchase 480,000 Micro Focus Ordinary Shares was awarded to him
upon joining the Company with 20 per cent. of this option vesting per year
until 100 per cent. is vested after completion of four years from the date
of employment. A remuneration committee may grant additional options at
its discretion. The letter provides for termination by the Company whereby
the Company will continue to pay salary, company health, life and
disability benefits for a period of 12 months as well as the target bonus
for the relevant fiscal year and the next 25 per cent. instalment of
option shares shall immediately vest. The letter also has specific
provisions for payment of up to 24 months' salary, target bonus for the
relevant fiscal year and for the following 12 month period and benefits
for a period of 24 months in the case of termination whether voluntary or
involuntary within 12 months after a change in control. All options will
become immediately exercisable and vest in full and shall remain so
exercisable for a period of 18 months following the termination date. The
appointment will otherwise continue at will whereby Martin Waters is free
to resign or the Company is free to conclude his employment at any time.
(d) J. Sidney Webb, a Non-Executive Director of the Company, has never
entered into a service agreement with the Company or any of its subsidiary
undertakings. His salary is reviewed on an annual basis by the executive
remuneration committee of the Company which provided for a salary of
L5,000 in 1998.
(e) Paul Adams who is Senior Vice President of International Sales for the
Company has no service agreement with the Company or any of its subsidiary
undertakings but is an employee of the Company. His salary is reviewed on
an annual basis by the executive remuneration committee of the Company
which provided for a salary of L210,000 in 1998. There are no provisions
for compensation in the event of early termination of Mr Adams' service
with the Company. On 11 September 1996, Paul Adams entered into a vesting
agreement with the Company. This agreement provides for options that have
been granted to acquire Micro Focus Ordinary Shares to be accelerated upon
the occurrence of a change in control of the Company for a period of 60
days beginning 30 days prior to the effective date of any change in
control or for a period of 60 days after the announcement of confirmed
earnings of a merged entity in the event that the change in control is
intended to be a "pooling of interest" transaction.
93
<PAGE> 95
10.37(G)
6.F.12
(2) None of the Proposed Directors have any service agreement with Micro
Focus. Their base annual salaries under their letters of appointments with
Micro Focus will be as follows:
<TABLE>
<CAPTION>
BASE
PROPOSED DIRECTOR SALARY
- --------------------------------------------
<S> <C>
Kevin Burns $16,000
Gary Greenfield $16,000
Michael Berty $16,000
- --------------------------------------------
</TABLE>
The Proposed Directors are also presently entitled to bonus plans, stock
options and stock incentive plans and other customary benefits in respect
of Intersolv which are summarised below.
6.C.22(B)
(3) Other than as disclosed in Paragraph (2) above, there will be no
variations in the total emoluments receivable by the Directors as a
consequence of the Merger.
6.F.3
(4) The total aggregate of the remuneration paid and benefits in kind granted
to the persons who are or were directors during the last completed
financial year to 31 January 1998 is L1,565,000.
(5) In respect of the Proposed Directors there will be no service contracts
in place with Micro Focus, but the following service agreements with
Intersolv have been entered into.
10.31(G)
6.F.12.
(a) Gary Greenfield entered into an executive employment agreement with
Intersolv Group expiring on 31 July 2001 unless either party gives notice
that the agreement is not to be extended. If there is a change in control
of Intersolv, the agreement is automatically extended for a three year
term. The Merger will constitute a "change in control" of Intersolv for
the purposes of the agreement. If the agreement is terminated by Intersolv
other than for cause (as defined in the agreement) or the executive's
disability or by the executive for good reason or during the first year
following a change in control, Intersolv will make a lump sum payment to
the executive based on a multiple of the monthly salary and bonus. If
following the Merger, termination of employment occurred as of 31 October
1998, Mr. Greenfield will be entitled to a severance payment of
approximately $1,006,000, payments in respect of certain employee benefits
of approximately $96,000, and certain employee benefits such as health,
life and disability insurance for three years after the change in control.
In addition, during the 18 months after termination of employment
described above (except termination for cause) Mr. Greenfield will be
entitled to compensation for certain consulting services and
non-competition agreements. If the termination of employment occurred as
of 31 October 1998, Mr. Greenfield would be entitled to receive
approximately $1,006,000.
6.F.11
6.F.10
(b) Kevin Burns entered into an executive employment agreement with Intersolv
Group which expires 30 September 1999 unless either Intersolv or Kevin
Burns gives notice as allowed by the agreement. The Merger will constitute
a "change in control" of Intersolv for the purposes of the agreement. If
the agreement is terminated by Intersolv other than for cause (as defined
in the agreement) or the executive's disability or by the executive for
good reason or during the first year following a change in control,
Intersolv will make a lump sum payment to the executive of the remaining
unpaid salary and bonus as defined in the agreement. During the 18 months
following the termination of employment the executive will be subject to
certain non-competitive covenants. As of 30 September 1998 his unpaid
salary and bonus for the remaining period covered by the agreement will be
$300,000.
(c) Michel Berty does not have an employment agreement with Intersolv.
6.F.11
(6) The total aggregate remuneration and benefits in kind to be paid or
granted to the Directors and Proposed Directors from the Effective Date to
the year ending 31 January 1999 is estimated to be $300,000 (L182,927).
6.F.10
(7) There is no arrangement under which any Director has waived or agreed to
waive future endorsements.
10.42(A)
9. DIRECTORS', PROPOSED DIRECTORS' AND OTHER INTERESTS
6.F.4
(1) The interests of the Directors and the Proposed Directors, all of which
are beneficially owned, in the issued share capital of the Company which
have been notified to the Company pursuant to section 324 or section 328
of the Act, or which are required to be entered in the register maintained
under section 325 of the Act including (to the extent known or which can
with reasonable diligent enquiry be ascertained by the Directors or
Proposed Directors) the interests of the persons connected with the
Director and the Proposed Director (within the meaning of section 346 of
the Act) which would, if the connected person was a Director or a Proposed
Director, be required to be disclosed pursuant to those provisions of the
Act,
94
<PAGE> 96
as at 20 August 1998 (the latest practicable prior to the publication of
this document) and following completion of the proposed Merger are as
follows:
<TABLE>
<CAPTION>
BEFORE THE MERGER AFTER THE MERGER
----------------------------------------------------- ---------------------------------
DIRECTORS AND MICRO FOCUS % OF MICRO FOCUS
PROPOSED ORDINARY MICRO FOCUS EXISTING ISSUED ORDINARY MICRO FOCUS
DIRECTORS SHARES ADSS SHARE CAPITAL SHARES ADSS
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J. Michael Gullard -- 1,000 0.01% -- 1,000
Harold Hughes 100,000 -- 0.12% 100,000 --
Martin Waters -- -- 0.00% -- --
Paul Adams 539,500 300 0.66% 539,500 300
J. Sidney Webb 5,500 -- 0.01% 5,500 --
Gary Greenfield -- -- 0.00% -- 568,941
Kevin Burns -- -- 0.00% -- 109,313
Michel Berty -- -- 0.00% -- 10,083
----------------------------------------------------------------------------------------------------------------
<CAPTION>
AFTER THE MERGER
-----------------
DIRECTORS AND % OF
PROPOSED ENLARGED ISSUED
DIRECTORS SHARE CAPITAL
---------------------------------------------
<S> <C>
J. Michael Gullard 0.00%
Harold Hughes 0.07%
Martin Waters 0.00%
Paul Adams 0.88%
J. Sidney Webb 0.00%
Gary Greenfield 1.98%
Kevin Burns 0.38%
Michel Berty 0.04%
---------------------------------------------
</TABLE>
6.C.19
(2) Under the option arrangements described more fully in Part 5 of this
document, certain Directors have been granted options to subscribe for
Micro Focus Ordinary Shares or Intersolv Stock as follows:
(a) The following options to acquire Micro Focus Ordinary Shares were
beneficially owned by the Directors at 20 August 1998 (being the last
practicable date prior to the printing of this document):
<TABLE>
<CAPTION>
NUMBER OF
MICRO FOCUS EXERCISE LATEST
DIRECTORS ORDINARY SHARES DATE GRANTED PRICE EXERCISE DATE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Paul Adams 286,500 10 April 1996 L 1.37 9 April 2003
50,000 5 March 1997 L2.118 5 March 2007
Harold Hughes 50,000 19 August 1992 L2.996 19 August 2002
10,000 16 June 1994 L2.396 16 June 2004
J. Michael Gullard 50,000 2 June 1994 L2.134 2 June 2004
250,000 21 June 1996 L 1.67 21 June 2006
Martin Waters 3,000,000 16 September 1997 L4.202 16 September 2004
J. Sidney Webb 53,500 22 July 1998 L 4.85 22 July 2008
--------------------------------------------------------------------------------------------------
</TABLE>
(b) The following options to acquire Micro Focus ADSs will be beneficially
owned by the Proposed Directors as at the Effective Date:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF NUMBER OF AVERAGE
INTERSOLV MICRO FOCUS EXERCISE LATEST
PROPOSED DIRECTORS OPTIONS ADSS DATES GRANTED PRICE EXERCISE DATE
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kevin Burns 198,750 109,313 21 March 1994 $10.2000 21 April 2004
- 25 September 1996 - 25 October 2006
Gary Greenfield 1,025,290 563,910 20 August 1990 $10.3400 20 September 2000
- 1 May 1998 - 1 June 2008
Michel Berty 18,333 10,083 21 November 1996 - $14.6900 21 December 2006 -
24 September 1997 24 October 2007
-------------------------------------------------------------------------------------------------------
</TABLE>
(3) Save as disclosed above, none of the Directors or Proposed Directors nor
any member of their immediate families nor any person connected with them
has any interest in the share capital of the Company or any of its
subsidiaries.
6.F.6
(4) No Director has, or has had, any interest in any transaction which is or
was unusual in its nature or conditions or is or was significant to the
business of Micro Focus and which was effected by any member of Micro
Focus during the current or immediately preceding financial year or during
an earlier financial year and which remains in any respect outstanding or
unperformed.
(5) No loans or guarantees have been granted or provided to or for the
benefit of the Directors by Micro Focus.
(6) Save as set out below, the Directors are not aware of any interest
(within the meaning of Part VI of the Act) which will represent 3 per
cent. or more of the issued share capital of the Company following the
95
<PAGE> 97
Merger becoming effective or of any other persons who, directly or
indirectly, jointly and severally, exercise or could exercise control over
the Company.
(a) Major Micro Focus Shareholders
6.C.16
[10.42(A)]
As at 20 August 1998 (being the last practicable date prior to the
publication of this document), the following persons had notified Micro
Focus of interests (within the meaning of Part VI of the Act) which
represented 3 per cent. or more of the issued share capital of Micro Focus
as at that date:
<TABLE>
<CAPTION>
% OF MICRO FOCUS NUMBER OF MICRO FOCUS
NAME ORDINARY SHARES ORDINARY SHARES
- ------------------------------------------------------------------------
<S> <C> <C>
Prudential Client (MSS)
Nominees Limited PAC a/c 7.48% 6,025,495
Micro Focus 1994 EBT 4.74% 3,815,055
Legal & General Assurance
(Pensions Management)
Limited 3.81% 3,068,898
Clydesdale Bank Nominees
Limited 3.53% 2,843,535
Vidacos Nominees Limited 3.07% 2,473,261
- ------------------------------------------------------------------------
</TABLE>
There are no other persons known to Micro Focus to be the beneficial owner
of 3 per cent. or more of any class of Micro Focus voting share capital.
(b) Major Shareholders after the Effective Date
6.C.16
On the Merger becoming effective, the following are expected to have
interests of 3 per cent. or more in the issued share capital of Micro
Focus, assuming that there are no changes to the interests already
notified to Micro Focus and Intersolv as at 20 August 1998 being the
latest practicable date prior to the printing of this document:
<TABLE>
<CAPTION>
NUMBER OF
MICRO FOCUS % OF ENLARGED
ORDINARY NUMBER OF ISSUED SHARE
NAME SHARES MICRO FOCUS ADSS CAPITAL
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prudential Client (MSS) Nominees
Limited PAC a/c 6,025,495 -- 4.2%
-------------------------------------------------------------------------------------
</TABLE>
10. STOCK EXCHANGE QUOTATIONS
6.B.27
6.B.19
The following table sets out the middle market price for Micro Focus Ordinary
Shares as derived from the Official List of the London Stock Exchange and the
last sale price of the Micro Focus ADSs as derived from Nasdaq for the first
business day of each month from March to August 1998 (inclusive) and on 16 June
1998 (the day prior to the announcement of the Merger) and on 21 August 1998
(the latest practicable day prior to the printing of this document).
<TABLE>
<CAPTION>
MICRO FOCUS ORDINARY MICRO FOCUS ADS
MICRO FOCUS ORDINARY SHARES OF 10P EACH SHARE PRICE (P) PRICE ($)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Monday, 2 March 3,147.5 53.750
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MICRO FOCUS ORDINARY MICRO FOCUS ADS
MICRO FOCUS ORDINARY SHARES OF 2P EACH SHARE PRICE (P) PRICE ($)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
Wednesday, 1 April 612.5 48.625
Friday, 1 May 522.5 42.000
Monday, 1 June 545.0 43.938
Tuesday, 16 June 502.5 39.750
Wednesday, 1 July 430.0 34.000
Monday, 3 August 457.5 37.063
Friday, 21 August 452.5 36.375
- ------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 98
11. NEW MICRO FOCUS ADSS
The following is a summary of certain provisions of the Deposit Agreement
between Micro Focus and the Depositary:
Under the Deposit Agreement, the Depositary has agreed, subject to the terms and
conditions of the Deposit Agreement, that upon delivery to the custodian of
Micro Focus Ordinary Shares, it will, upon payment of the fee of the Depositary
and of all taxes and governmental charges and fees, execute and deliver Micro
Focus ADRs, representing Micro Focus ADSs, to such persons as are requested by
the person depositing the Micro Focus Ordinary Shares. Each Micro Focus ADS
represents five Micro Focus Ordinary Shares subject to the provisions of the
Deposit Agreement which may be amended from time to time. Only persons in whose
names Micro Focus ADRs are registered on the books of the Depositary will be
treated as owners by the Depositary and Micro Focus, and will be entitled to
delivery of the amount of deposited securities at the time represented by such
Micro Focus ADRs. The Depositary will convert all cash dividends proportionate
to the number of Micro Focus ADSs held subject to any tax. Any tax or charge
with respect to any Micro Focus ADR or any deposited securities represented by
any Micro Focus ADR will be payable by the owner. It is at the Depositary's
discretion as to whether it honours rights to subscribe for additional Micro
Focus Ordinary Shares. Micro Focus will pay all reasonable expenses of the
Depositary and those of the registrar. Neither the Depositary nor Micro Focus
will be liable to any owner of any Micro Focus ADR for non-performance or delay
under the Deposit Agreement except that they agree to perform their respective
obligations without negligence or bad faith.
12. ADVISERS, BANKERS AND REGISTRARS
6.A.8
The joint sponsors to Micro Focus are Donaldson, Lufkin & Jenrette International
of 99 Bishopsgate, London EC2M 3XD and Warburg Dillon Read, a division of UBS
AG, of 1 Finsbury Avenue, London EC2M 2PP.
6.A.8.
The UK legal advisers to Micro Focus are Memery Crystal of 31 Southampton Row,
London WC1B 5HT.
6.A.8.
The bankers to Micro Focus are Midland Bank Plc, 1 Mansion House Street,
Newbury, Berkshire RG14 5ET.
6.A.4.
The auditors and reporting accountants to Micro Focus are Ernst & Young of Apex
Plaza, Reading, Berkshire RG1 1YE.
6.B.14.
The registrars to Micro Focus are Lloyds Bank Registrars of The Causeway,
Worthing, West Sussex BN99 6DA.
The depositary receipt agent to Micro Focus in the United States is The Bank of
New York, 101 Barclay Street, New York, NY, 100286, United States.
13. INDEBTEDNESS
10.41 (B)(I)
(1) At the close of business on 31 July 1998, the indebtedness of the Micro
Focus Group and the Intersolv Group and the Merged Group was as follows:
6.E.15(A)(I)
<TABLE>
<CAPTION>
SECURED UNSECURED
-------------------------------------- ---------------------------------
MICRO MICRO
FOCUS INTERSOLV MERGED FOCUS INTERSOLV MERGED
GROUP GROUP GROUP GROUP GROUP GROUP TOTAL
--------- --------- ---------- --------- --------- --------- ---------
L MILLION L MILLION L MILLION L MILLION L MILLION L MILLION L MILLION
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Term loans -- 0.1 0.1 1.0 -- 1.0 1.1
Bank overdrafts and other
borrowings -- -- -- -- 3.9 3.9 3.9
Deferred consideration -- -- -- -- 0.8 0.8 0.8
---------------------------------------------------------------------------
Total indebtedness -- 0.1 0.1 1.0 4.7 5.7 5.8
===========================================================================
------------------------------------------------------------------------------------------------------------------------
</TABLE>
6.E.15(A)(III)
(2) The Intersolv Group has provided guarantees to third parties totalling
L0.2 million of which no amounts have been included in the table above.
6.E.15(B)
(3) Save as disclosed in (1) and (2) above and apart from intra-group
liabilities and guarantees, at the close of business on 31 July 1998
neither Micro Focus nor any member of the Micro Focus Group nor Intersolv
nor any member of the Intersolv Group had outstanding any loan capital
(whether issued or created but unissued), nor any term loans, nor any
other borrowings or indebtedness in the nature of borrowing, including
bank overdrafts and liabilities under acceptances (other than normal trade
bills) or acceptance credits, mortgages, charges, hire purchase
commitments and obligations under finance leases nor any contingent
liabilities or guarantees.
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<PAGE> 99
(4) As at 31 July 1998, the Micro Focus Group had cash balances and short
term funds of L58.4 million and the Intersolv Group had cash balances and
short term funds of L20.5 million, resulting in total cash balances and
short term funds of L78.9 million.
(5) Amounts denominated in foreign currencies have been translated into
pounds sterling at the closing rates in effect at 31 July 1998.
10.41(C)
14. WORKING CAPITAL
6.E.16
Micro Focus is of the opinion that, taking into account bank and other
facilities, the Merged Group will have sufficient working capital for its
present requirements.
15. MATERIAL CONTRACTS
(1) Micro Focus
6.C.20(A)
10.41(A)(I)
In addition to the Merger Agreement and the Deposit Agreement, particulars of
which are summarised in Part 6 and Paragraph 11 of this Part 7 respectively of
this document, the following contracts, not being contracts entered into in the
ordinary course of business, have been entered into by members of the Micro
Focus Group within the two years immediately preceding the date of this document
and are, or may be, material:
(a) An agreement dated 26 March 1997 between Mr BAJ Collier, Mr G
Werrey-Easterbrook, Mr R Mumford, Mr L Thomas, Mr D Whitehead and Mr I
Park (1) and Micro Focus (2) under which Micro Focus acquired the whole of
the issued share capital of Millennium (UK) Limited for a consideration of
L4,000,000 which was satisfied as to L2,000,000 in cash and as to the
balance by the allotment and issue to the vendors of 149,142 ordinary
shares of 10p each in the capital of Micro Focus credited as fully paid.
(b) An agreement and plan of reorganisation dated 23 December 1997 between
Micro Focus (1), XDB (2) and Dr S Bing Yao and Lien Yao (3) under which
Micro Focus acquired the whole of the issued share capital of XDB for a
consideration of $14,243,000 which was satisfied by the allotment and
issue to the vendors of 378,395 ordinary shares of 10p each in the capital
of Micro Focus credited as fully paid and the exchange of stock options in
XDB for share options in Micro Focus which represented 40,042 options in
the Company as at the date of completion of the acquisition.
(c) An agreement dated 12 May 1998 between Domenico Mezzapesa, Giorgio
Tedeschini, Stefano Zanasi, Stefano Campodonico, Adriano Paglietti,
Stefanio Mancini, Lina Maggiori and Mauro Tedeschini (1) and Micro Focus
(2) under which Micro Focus acquired the whole of the issued share capital
of its Italian distributor, Micro Focus Italia S.r.L., for a cash
consideration of $ 4,300,000.
(2) Intersolv
10.41(A)(I)
The following contract, not being a contract entered into in the ordinary course
of business, has been entered into by members of the Intersolv Group within the
two years immediately preceding the date of this document and is, or may be,
material:
(a) An agreement dated 2 March 1998 between Mr T Haque, Mr M Dudley, Mr A
Bone (1), SEFTA Trustees Limited on behalf of each of Messrs Haque, Dudley
and Bone (2) and Intersolv (3) under which Intersolv acquired the whole of
the issued share capital of SQL Inc. for a consideration which was
satisfied by the allotment and issue to the vendors of 1,200,000 shares of
Intersolv Stock and 51,450 shares of Intersolv Stock, attributable to the
cancellation of options to purchase SQL shares which together represented
approximately $25,029,000 at the date of completion of the transaction.
6.C.20(A)
10.41(A)
16. TAXATION
6.B.9
6.B.10
THE PARAGRAPHS BELOW ARE A GENERAL GUIDE ONLY AND ARE NOT EXHAUSTIVE. MICRO
FOCUS SHAREHOLDERS WHO ARE IN ANY DOUBT AS TO THEIR TAXATION POSITION SHOULD
CONSULT AN INDEPENDENT PROFESSIONAL ADVISER WITHOUT DELAY.
(1) UK taxation
The following paragraphs summarise advice received by the Directors as to
the position of holders of Micro Focus Ordinary Shares who are resident or
ordinarily resident in the United Kingdom for tax purposes (unless the
position of non-residents is specifically referred to), who hold their
Micro Focus
98
<PAGE> 100
Ordinary Shares as an investment and who are the absolute beneficial
owners of those shares. The paragraphs are based on current legislation
and Inland Revenue practice which may change.
(a) Capital gains
Micro Focus Shareholders resident or ordinarily resident in the United
Kingdom for taxation purposes may, depending upon their personal
circumstances, be liable to tax on chargeable gains arising from the sale
or other disposal of their Micro Focus Ordinary Shares for the purposes of
the Taxation of Chargeable Gains Act 1992.
Micro Focus Shareholders who are not for the purposes of United Kingdom
taxation resident or ordinarily resident in the United Kingdom will not
normally be liable to United Kingdom taxation on chargeable gains arising
from the sale or other disposal of their Micro Focus Ordinary Shares
unless those shares are held through a United Kingdom branch or agency or,
in certain circumstances, are held by an individual who has, on or after
17 March 1998, ceased to be resident or ordinarily resident for a period
of less than five years and disposes of his Micro Focus Ordinary Shares
during that period, although they may be subject to charges to foreign
taxation depending upon their personal circumstances.
(b) Dividends
The tax regime will change for dividends paid after 5 April 1999 when UK
Advance Corporation Tax will be abolished. Micro Focus has never paid cash
dividends on the Micro Focus Ordinary Shares.
6.B.10
6.B.9
No tax will require to be withheld on payment of dividends by Micro Focus
after 5 April 1999. Dividends will carry a tax credit at the rate of 10
per cent. From 6 April 1999 the rate of income tax on dividend income will
be reduced to 10 per cent. for lower and basic rate taxpayers. The tax
credit will discharge the income tax liability of an individual
shareholder who is not liable to income tax at a rate greater than the
basic rate. Higher rate tax on dividends will be at the rate of 32.5 per
cent. so that a shareholder who is a higher rate taxpayer will have
further income tax to pay at a rate of 22.5 per cent. of the dividend and
related tax credit (being the excess of 32.5 per cent. over 10 per cent.).
However, the new rules will not mean that a higher rate taxpayer is
subject to a greater tax liability than at present. For a United Kingdom
resident individual shareholder who is not subject to tax on the dividend,
the tax credit will not be repayable.
Tax credits will also not be repayable to pension fund shareholders.
A corporate shareholder resident in the United Kingdom for taxation
purposes will not generally be liable to United Kingdom corporation tax on
any dividend received.
Shareholders who are not resident in the United Kingdom for tax purposes
will generally not benefit from any entitlement to a refund of any part of
the tax credit although, in certain circumstances, if resident in a
territory which has an applicable double tax treaty with the United
Kingdom, a shareholder may obtain a refund of part of the credit not
exceeding, in any event, an amount equal to one per cent. of the dividend.
Such shareholders should consult their own tax advisers concerning their
tax liabilities on dividends received.
(c) UK Stamp Duty and SDRT
No UK stamp duty will arise on the issue of the new Micro Focus Ordinary
Shares. Pursuant to changes enacted in Finance Act (No.2) 1998 a liability
to SDRT will arise as a result of the issue of the corresponding new Micro
Focus ADRs. While the liability for SDRT is imposed by statute on the
Depositary, such SDRT liability will be borne by Micro Focus.
A transfer for value of the Micro Focus Ordinary Shares or an agreement to
make such a transfer will generally be subject to UK ad valorem stamp duty
or to SDRT. Stamp duty and SDRT are normally a liability of the purchaser.
No UK stamp duty will be payable on the transfer of new Micro Focus ADSs
or beneficial ownership of new Micro Focus ADSs, provided that any
instrument of transfer or written agreement to transfer remains at all
times outside the UK, and provided further that any instrument of transfer
or written agreement to transfer is not executed in the UK and the
transfer does not relate to any matter or thing done or to be done in the
UK. An agreement for the transfer of new Micro Focus ADSs or beneficial
ownership of new Micro Focus ADSs will not give rise to a liability to
SDRT.
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<PAGE> 101
Any transfer for value of the underlying new Micro Focus Ordinary Shares
represented by new Micro Focus ADSs or an agreement to make such a
transfer may give rise to a liability to UK stamp duty or SDRT. Subject to
the discussion below in relation to depositary receipts and clearance
services, the amount of UK stamp duty or SDRT payable is generally
calculated at the applicable rate on the consideration for the transfer of
the Micro Focus Ordinary Shares at the rate of 50p per L100 (or part
thereof) in the case of stamp duty, or in the case of SDRT, at the rate of
0.5 per cent., in either case of the amount or value of the consideration.
On a transfer of Micro Focus Ordinary Shares from the custodian or the
Depositary to a holder of a Micro Focus ADSs upon cancellation of the
Micro Focus ADSs, only a fixed UK stamp duty of 50p per instrument of
transfer will be payable.
UK stamp duty will, subject to certain exemptions, be payable at the rate
of L1.50 per L100 or part of L100 of the value of Micro Focus Ordinary
Shares in registered form on any instrument pursuant to which Micro Focus
Ordinary Shares are transferred (i) to, or to a nominee for, a person
whose business is or includes the provision of clearance services or (ii)
to, or to a nominee or agent for, a person whose business is or includes
issuing depositary receipts. This would include transfers of Micro Focus
Ordinary Shares in registered form to the custodian for deposits under the
Deposit Agreement. SDRT, at the rate of 1.5 per cent. of the value of the
Micro Focus Ordinary Shares, could also be payable in these circumstances,
and on issue to such a person, but no SDRT will be payable if stamp duty
equal to the SDRT liability is paid. In circumstances where stamp duty is
not payable on the transfer of Micro Focus Ordinary Shares in registered
form to the custodian at the rate of 1.5 per cent. (i.e., where there is
no chargeable instrument) SDRT will be payable to bring the charge up to
1.5 per cent. in total. In accordance with the terms of the Deposit
Agreement, any tax or duty payable by the Depositary or the custodian on
any such transfers of Micro Focus Ordinary Shares in registered form will
be charged by the Depositary to the party to whom Micro Focus ADSs are
delivered against such transfers.
(2) US Federal income taxation
6.B.9(A)
The following paragraphs summarise the US Federal income tax position of
Micro Focus Shareholders who are citizens or residents of the United
States, US domestic corporations or persons otherwise subject to US
Federal income tax on their world-wide income (a "US Holder"; collectively
"US Holders"). This summary is based on the Internal Revenue Code of 1986,
as amended to the date hereof ("the Code"), administrative pronouncements,
judicial decisions and existing and proposed US Treasury Regulations,
changes to any of which subsequent to the date hereof may affect the tax
consequences described herein. It does not address the consequences of any
state, local or foreign tax laws that may be applicable to US Holders.
This summary assumes that Micro Focus Ordinary Shares or Micro Focus ADSs
will be held as capital assets at all relevant times. It does not discuss
all the tax consequences that may be relevant to a US Holder in light of
such person's particular circumstances or to holders subject to special
rules, such as certain financial institutions, regulated investment
companies, insurance companies, dealers in securities and holders whose
functional currency is not the US dollar.
(a) Capital gains
Under UK law, US Holders will not be liable for UK tax on capital gains
realised on the disposal of their Micro Focus Ordinary Shares or Micro
Focus ADSs unless the Micro Focus Ordinary Shares or Micro Focus ADSs are
held in connection with a trade, profession or vocation carried on in the
UK through a UK branch or agency.
A US Holder will generally recognise capital gains or losses for US
Federal income tax purposes on the sale or disposition of their Micro
Focus Ordinary Shares or Micro Focus ADSs in an amount equal to the
difference between the amount realised upon the disposition and the US
Holder's tax basis in such Micro Focus Ordinary Shares or Micro Focus
ADSs. Such gain or loss generally will be subject to US federal income tax
and will not be treated as short-term capital gain or loss if the US
Holder has a holding period of more than one year for the Micro Focus
Ordinary Shares or Micro Focus ADSs. Under current law, capital gains of
individuals that are not short-term capital gains are, under certain
circumstances, taxed at lower rates than items of ordinary income and
short-term capital gains. For example, under current law, a US Holder who
has a holding period of more than 12 months for Micro Focus Ordinary
Shares or Micro Focus ADSs will be taxed at a maximum capital gains rate
of 20 per cent. Gains, if any, will generally be US source. Under proposed
Treasury regulations, losses, if any, may be treated as foreign source.
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<PAGE> 102
(b) Dividends
Distributions made by Micro Focus with respect to the Micro Focus Ordinary
Shares or Micro Focus ADSs will be treated as dividends for US Federal
income tax purposes to the extent paid out of the current or accumulated
earnings and profits of Micro Focus determined for US Federal income tax
purposes. For these purposes, the amount of any dividend paid in pounds
will be equal to the dollar value of the pounds on the date of receipt,
regardless of whether or when the payment is in fact converted into US
dollars. A gain or loss recognised by a US Holder on a sale or other
disposition of the pounds generally will be US source ordinary income or
loss. Dividend payments by Micro Focus generally are not eligible for the
dividends received deduction that is generally allowed to US corporations.
For foreign tax credit purposes, dividends distributed by Micro Focus will
generally constitute foreign source "passive income".
(3) Other Jurisdictions
Micro Focus Shareholders subject to tax in any other jurisdiction who are
in any doubt as to their tax position, should consult an independent
professional adviser without delay.
17. LITIGATION AND INVESTIGATIONS
6.D.8
(1) Neither Micro Focus nor any other member of the Micro Focus Group is or
has been engaged in any legal or arbitration proceedings (including any
such proceedings which are pending or threatened of which Micro Focus is
aware) which may have or have had a significant effect on the Micro Focus
Group's financial position in the 12 months prior to the date of this
document.
6.D.8
(2) Neither Intersolv nor any other member of the Intersolv Group is or has
been engaged in any legal or arbitration proceedings (including any such
proceedings which are pending or threatened of which Intersolv is aware)
which may have or have had a significant effect on the Intersolv Group's
financial position in the 12 months prior to the date of this document.
18. FINANCIAL AND TRADING POSITION
6.E.8
10.41(A)
(1) There has been no significant change in the financial or trading position
of the Micro Focus Group since 31 July 1998, being the date of the Micro
Focus Group's latest interim accounts.
6.E.8
10.41(A)(I)
(2) There has been no significant change in the financial or trading position
of the Intersolv Group since 31 July 1998, being the date of the Intersolv
Group's latest quarterly accounts.
19. MISCELLANEOUS
6.A.9
14.1(I)
10.38(G)
(1) Tower Merger Sub was incorporated in June 1998 for the sole purpose of
effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the proposed Merger.
(2) Ernst & Young has given and has not withdrawn its written consent to the
inclusion in this document of its name and its reports and references to
it in the form and context in which they are included and has authorised
the contents of its reports included in this document for the purposes of
section 152(1)(e) of the Financial Services Act 1986.
(3) Donaldson, Lufkin & Jenrette and Warburg Dillon Read have given and not
withdrawn their written consents to the issue of this document with the
inclusion herein of their names and references to them in the form and
context in which they are included.
6.B.2
(4) The new Micro Focus Ordinary Shares have not been marketed, nor are they
available in whole or in part to the public.
(5) Certain financial projections for Intersolv have been previously
published by Intersolv and are included in the registration statement on
Form F-4 filed with the SEC and the proxy statement/prospectus despatched
to Intersolv Stockholders. These financial projections do not reflect the
directors' view of Intersolv's prospects and financial performance and
should not be relied upon when considering the proposed Merger.
None of Micro Focus or its financial advisers or any other party accepts
responsibility for the accuracy, reasonableness, validity or completeness
of the financial projections or the estimates and assumptions that
underlie them.
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<PAGE> 103
The projections were not intended for publication in the UK and should not
be regarded as a forecast of profits by Micro Focus or Intersolv and
accordingly have not been prepared or reviewed to a standard to which
published projections would be prepared and reviewed in the UK.
Shareholders should not rely on any of the Intersolv financial projections
in making any decision about investment in Micro Focus, or Intersolv or in
deciding whether or not to approve the Merger.
(6) This document has been prepared in accordance with the rules of the
London Stock Exchange for distribution to Micro Focus Shareholders.
However, it will be available in the US. It is not subject to, and has not
been prepared in accordance with, the rules of the SEC.
20. COSTS AND EXPENSES
6.B.15(I)
The costs and expenses of, and incidental to, the Merger payable by Micro Focus
are estimated to amount to $16.0 million (L9.8 million) (exclusive of any value
added tax). This includes accountancy fees and legal fees, the costs of
printing, $8.0 million (L4.9 million) relating to stamp duty charges and $6.1
million (L3.7 million) in respect of advice from Donaldson, Lufkin & Jenrette
and Warburg Dillon Read.
The costs and expenses of, and incidental to, the Merger payable by Intersolv
are estimated to amount to $15.0 million (L9.2 million), including $8.0 million
(L4.9 million) in respect of advice from Hambrecht & Quist.
6.C.7.
21. DOCUMENTS FOR INSPECTION
Copies of the following documents may be inspected at the offices of Memery
Crystal, 31 Southampton Row, London WC1B 5HT during usual business hours on any
weekday (Saturdays and public holidays excepted) until the Effective Date:
6.C.7(A)
(1) the memorandum and articles of association of the Company;
6.C.7(G)
(2) the audited consolidated accounts of Micro Focus for the 1996, 1997 and
1998 financial years;
6.C.7(G)
(3) the audited consolidated accounts of Intersolv for the 1996, 1997 and
1998 financial years included in US Form 10-K;
(4) the rules of the Micro Focus Share Option Schemes, the XDB Plans, the
Intersolv Options and the Intersolv Warrants;
6.C.7(E)
(5) the rules of the new Micro Focus Plan and the text of the proposed
amendments to the Micro Focus 1996 Approved Scheme;
(6) the Directors' service agreements referred to in Paragraph 8 above;
6.C.7(C).
6.C.7(D)
(7) the material contracts (including the Merger Agreement and the Deposit
Agreement) referred to in Paragraph 15 above;
(8) the written consents referred to in Paragraphs 19 above;
6.C.7(E)
(9) the reports by Ernst & Young contained in Parts 3 and 4 of this document;
and
(10) the US Registration Statement on Form F-4.
Dated 24 August 1998
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<PAGE> 104
APPENDIX I -- RISK FACTORS
The following risk factors were incorporated into the US Registration Statement
on Form F-4 and have been reproduced here without material alteration
1. RISKS RELATING TO THE MERGER
INTEGRATION OF OPERATIONS AND ADMINISTRATION
Micro Focus and Intersolv have entered into the Merger Agreement with the
expectation that the proposed Merger will result in long-term strategic
benefits. Realisation of these anticipated benefits will depend in part on
whether the operations and administration of the companies can be integrated in
an efficient and effective manner. There can be no assurance that this will
occur. The successful integration of Micro Focus and Intersolv will require,
among other things, integration of the product offerings of the companies, the
co-ordination of their respective management, sales and marketing and research
and development efforts and the co-operation and co-ordination of the business
managers of the two companies. It is possible that this integration will not be
accomplished smoothly or successfully, and that efforts to achieve integration
may require more time, expense and management attention than anticipated. The
diversion of management's attention from day-to-day operations and any
difficulties encountered in the transition process could have a material adverse
effect on the Merged Group's business, financial condition and results of
operations. Disruption of the Merged Group's business might result from employee
uncertainty or lack of focus, as well as from customer or supplier confusion,
following announcement of the Merger. Further, as a result of the integration of
the financial and administrative infrastructures of Micro Focus and Intersolv,
the policies and procedures of the Merged Group may be different than those of
either company individually. For example, if there is a change in accounting
policies and procedures, even if the Merged Group meets or exceeds its target
for total licensing and other contracting activity, it is possible that the
Merged Group's financial results would not meet expectations. The process of
combining the operations of the two organisations could cause the interruption
of, or a loss of momentum in, the activities of either or both of the companies'
businesses, which could have a material adverse effect on their combined
operations. In addition, during the pre-Merger and integration phase,
competitors may try to recruit key employees of Micro Focus or Intersolv and to
gain a competitive advantage with the prospective and existing customers of
Micro Focus or Intersolv. Despite the efforts of the Merged Group, it might not
be able to retain key management, technical and sales personnel.
EXECUTION BY COMBINED SALES AND MARKETING FORCES
Each of Micro Focus and Intersolv may experience disruption in sales and
marketing as a result of attempting to integrate the sales forces of the two
companies, and may be unable to effectively correct such disruption, or to
successfully execute its sales and marketing objectives, even after the
companies' respective sales and marketing forces have been combined. In
addition, sales cycles and sales models for the various products that will make
up the Merged Group's product line may vary significantly from product to
product. Sales personnel not accustomed to the different approaches required for
products newly added to their portfolio may experience delays and difficulties
in selling these newly added products. Furthermore, it may be difficult to
retain key sales personnel during the period prior to and after the
effectiveness of the Merger. As a result, the Merged Group may be unable to take
full advantage of the combined sales forces' efforts, and the sales approach and
distribution channels of one company may be ineffective in promoting the
products of the other. Micro Focus and Intersolv also use a number of
distribution channels in the various geographic locations in which their
respective products are sold, and channel conflicts may develop following the
Merger.
INTEGRATION OF PRODUCTS AND ENGINEERING TEAMS
After the Merger, the Merged Group plans to combine its product offerings. It is
possible that such integration efforts will not be accomplished in a timely
manner or will not be feasible technologically. There can be no assurance that
either company will retain its key technical personnel, that the engineering
teams of the two companies will successfully co-operate and realise any
technological benefits, or that the focus on product integration and extension
efforts will not have an adverse effect on the development, introduction or
delivery of new or enhanced Micro Focus or Intersolv products.
FINANCIAL IMPACT OF FAILURE TO ACHIEVE SYNERGIES
If the integration of Micro Focus' and Intersolv's operations is not successful,
if the Merged Group does not achieve the operational efficiencies and other
business synergies that are anticipated or if those synergies are not achieved
as quickly as may be expected by financial analysts or at the level expected by
financial analysts, or if
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the effect of the Merger on earnings per share is not in line with the
expectation of financial analysts, the market price of the Micro Focus Ordinary
Shares or the Micro Focus ADSs could be significantly and adversely affected.
See "Risks related to Micro Focus, Intersolv and the Merged Group -- Volatility
of stock price."
INTEGRATION OF GEOGRAPHICALLY DISPERSED ORGANISATIONS
The difficulties of integrating the organisations of Micro Focus and Intersolv
will be compounded by the fact that Micro Focus and Intersolv each have
significant operations on both the East Coast and the West Coast of the United
States and in a number of foreign countries. It is intended that the Merged
Group will maintain its presence in these various regions following the Merger,
which may complicate co-ordination and communication among development,
marketing and service teams and may require additional management resources and
attention. In addition, Micro Focus and Intersolv each have a worldwide sales
organisation with offices in numerous states and foreign countries, and
integration of these geographically dispersed sales operations is expected to
require a significant amount of management resources and attention.
INCREASED INTEGRATION DIFFICULTIES ASSOCIATED WITH RECENT ACQUISITIONS
The challenges of integrating the organisations and operations of Micro Focus
and Intersolv will be compounded by ongoing efforts associated with the
integration of recent acquisitions by both companies, including the acquisitions
by Micro Focus of Millennium UK Limited in April 1997, XDB in January 1998,
Micro Focus Italia S.r.L. in May 1998 and Advanced Software Engineering Pty. Ltd
in August 1998 and the acquisition by Intersolv of SQL Software, Ltd. in March
1998. The integration of multiple organisations will require a substantial
amount of management resources and attention. See "Risks related to Micro Focus
and Intersolv and the Merged Group -- Recent and future acquisitions."
EFFECT OF MERGER ON SUPPLIERS, RESELLERS AND CUSTOMERS
The announcement and completion of the Merger could cause suppliers, resellers
and present and potential customers of either company to delay or cancel orders
for products as a result of concerns and uncertainty over evolution, integration
and support of Micro Focus' and Intersolv's products following the Merger. The
Merged Group's combination of products could cause present and potential
customers of Micro Focus and Intersolv to delay or cancel orders for products.
Such delays or cancellations of orders could have a material adverse effect on
the business, financial condition and results of operations of Micro Focus,
Intersolv or the Merged Group. In particular, such delays or cancellations could
be expected to disrupt revenue and earnings, which in turn would have a negative
effect on the market price of the Micro Focus ADSs or, before the Merger,
Intersolv Stock.
FIXED EXCHANGE RATIO
Under the terms of the Merger Agreement, each outstanding share of Intersolv
Stock will be converted into the right to receive 0.55 of a Micro Focus ADS at
the Effective Date. The Merger Agreement does not provide for adjustment of the
Exchange Ratio based on fluctuations in the price of either Micro Focus ADSs or
Intersolv Stock. The price of Micro Focus ADSs has declined from the price at
the date of execution of the Merger Agreement and may vary significantly between
the date hereof and the date on which stockholders vote with respect to the
Merger Agreement due to, among other factors, a high level of speculative
trading of the kind that generally accompanies the announcement of a merger
coupled with typically low trading volume for the ADSs on Nasdaq, market
perception of the synergies expected to be achieved by the Merger, changes in
the business, operations or prospects of Micro Focus or Intersolv, market
assessments of the likelihood that the Merger will be completed and the timing
of completion of the Merger and general market and economic conditions. To the
extent that the market price of Micro Focus ADSs increases or decreases before
the Effective Date, the value at the Effective Date of the Micro Focus ADSs to
be received by Intersolv Stockholders in the Merger would correspondingly
increase or decrease. Intersolv Stockholders will not be compensated for
decreases in the market price of the Micro Focus ADSs that could occur before
the Effective Date. The Micro Focus ADSs and the Intersolv Stock historically
have been subject to substantial price volatility. No assurance can be given as
to the market prices of the Micro Focus ADSs or Intersolv Stock. Micro Focus
Shareholders voting on the Merger Agreement and the Merger are urged to obtain
recent market quotations for Micro Focus ADSs and Intersolv Stock. The current
market quotations for the Micro Focus ADSs and shares of Intersolv Stock may be
obtained on the Internet at http://www.nasdaq.com. See "Risks related to Micro
Focus, Intersolv and the Merged Group -- Volatility of stock price."
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COSTS OF INTEGRATION; TRANSACTION EXPENSES
Micro Focus and Intersolv estimate that they will incur aggregate direct
transaction costs of approximately $31 million (L18.9 million) associated with
the Merger, which will result in a non-recurring charge to operations upon
consummation of the Merger. Micro Focus also expects to incur a non-recurring
charge to operations primarily in the quarter ending 31 October 1998, the
quarter in which the Merger is expected to be completed, to reflect costs
associated with integrating the two companies. Actual costs may substantially
exceed such estimates, unanticipated expenses associated with the integration of
the two companies may arise, or Micro Focus may incur additional material
charges in subsequent quarters to reflect additional costs associated with the
integration of the two companies.
REDUCTION OF OWNERSHIP INTEREST OF CURRENT SHAREHOLDERS
Following the Merger, and based on the number of shares of Intersolv Stock
outstanding as of 20 August 1998, the current Micro Focus Shareholders and
Intersolv Stockholders will own approximately 56 per cent. and 44 per cent.,
respectively, of the issued Micro Focus Ordinary Shares and Micro Focus ADSs and
54 per cent. and 46 per cent., respectively, of Micro Focus Ordinary Shares and
Micro Focus ADSs on a fully diluted basis. This represents a substantial
reduction of the ownership interest in the Merged Group of the current Micro
Focus Shareholders and the current Intersolv Stockholders, in each case compared
to their ownership interests in their respective companies before the Effective
Date. The issuance of additional Micro Focus ADSs pursuant to the Intersolv
Options and Intersolv Warrants being assumed by Micro Focus in the Merger and
pursuant to the Micro Focus Share Option Schemes will result in further dilution
to the current Micro Focus Shareholders and Intersolv Stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Micro Focus ADSs on Nasdaq or Micro Focus
Ordinary Shares on the London Stock Exchange (including shares issued upon the
exercise of outstanding options and warrants) could adversely affect the market
price of Micro Focus ADSs prevailing from time to time and could impair the
ability of the Merged Group to raise capital through the sale of equity or debt
securities. At the Effective Date, Micro Focus will issue to Intersolv
Stockholders an aggregate of approximately 12,576,350 Micro Focus ADSs
representing approximately 62,881,753 Micro Focus Ordinary Shares, based on the
number of shares of Intersolv Stock outstanding as of 20 August 1998.
Immediately upon completion of the Merger, approximately 62,344,470 of such
Micro Focus Ordinary Shares will be freely tradable, and the remainder can be
publicly sold following publication of financial results covering 30 days of
post-Merger combined operations, subject to volume and other limitations imposed
upon affiliates of either company under Rule 145 promulgated under the
Securities Act. In addition, based on the number of Intersolv Options and
Intersolv Warrants outstanding as of 20 August 1998, approximately 2,340,385
additional Micro Focus ADSs representing approximately 11,701,924 Micro Focus
Ordinary Shares will be reserved for issuance following the Merger.
Substantially all of the approximately 80,545,471 Micro Focus Ordinary Shares
and 7,697,313 Micro Focus Ordinary Shares issuable upon exercise of options
outstanding before the Merger will either be freely tradable, or tradable within
the volume and manner of sale restrictions imposed under Rule 144 or Rule 145
promulgated under the Securities Act. Any substantial sales of Micro Focus
securities in the public market could have a material adverse effect on the
market price of such securities.
POOLING OF INTERESTS
To qualify the Merger as a pooling of interests for US accounting purposes,
Micro Focus, Intersolv and their respective affiliates must meet the criteria
for pooling of interests accounting established in opinions published by the
Accounting Principles Board and interpreted by the Financial Accounting
Standards Board and the Commission. These opinions are complex and the
interpretation of them is subject to change. Consummation of the Merger is
conditioned, among other things, upon (i) the receipt by Intersolv of a letter
from its independent accountants regarding concurrence with Intersolv
management's conclusions that no conditions exist that would preclude Intersolv
from being a party to a merger accounted for as a pooling of interests and (ii)
receipt by Micro Focus of a letter from its independent auditors regarding
concurrence with Micro Focus management's conclusions as to the appropriateness
of pooling of interests accounting treatment for the Merger under APB No. 16 if
consummated in accordance with the Merger Agreement. However, the availability
of pooling of interests accounting treatment for the Merger depends, in part,
upon circumstances and events occurring after the Effective Date. For example,
affiliates of Micro Focus and Intersolv must not sell, or otherwise reduce their
risk with respect to, any shares of stock, except for a de minimis number as
defined by certain Commission rules and regulations, of either Micro Focus or
Intersolv during the period beginning 30 days before the Effective Date and
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continuing until the day that Micro Focus publicly announces financial results
covering at least 30 days of combined operations of Micro Focus and Intersolv.
If the Merger is completed and the Effective Date occurs during September 1998,
Micro Focus expects that such combined financial results would be published in
November or December 1998. If the Merger is completed and the Effective Date
occurs after September 1998, Micro Focus expects that such combined financial
results would be published in February or March 1999. If affiliates of Micro
Focus or Intersolv sell their Micro Focus ADSs despite a contractual obligation
not to do so, the Merger may not qualify for accounting as a pooling of
interests for financial reporting purposes in accordance with US generally
accepted accounting principles ("US GAAP"). The failure of the Merger to qualify
for pooling of interests accounting treatment for financial reporting purposes
in accordance with US GAAP for any reason would materially and adversely affect
Micro Focus' reported earnings and, potentially, the price of the Micro Focus
ADSs.
2. RISKS RELATING TO MICRO FOCUS, INTERSOLV AND THE MERGED GROUP
FLUCTUATIONS IN OPERATING RESULTS; ABSENCE OF SIGNIFICANT BACKLOG
Each of Micro Focus and Intersolv has experienced, and the Merged Group may
continue to experience, significant fluctuations in its results of operations on
a quarterly and an annual basis. Historically, the quarterly net revenue of
Micro Focus and Intersolv have been difficult to predict due to a number of
factors. Factors that have influenced Micro Focus and Intersolv and will
continue to influence the Merged Group's results of operations in a particular
period include: demand for the products marketed by Micro Focus and Intersolv;
the size and timing of customer orders; product life cycles; the ability of the
Merged Group to introduce and market new and enhanced versions of its products
on a timely basis; the introduction and acceptance of new products and product
enhancements by Micro Focus, Intersolv or the Merged Group or their competitors;
customer order deferrals in anticipation of new or enhanced products or
technologies; timing of product introductions or enhancements by the Merged
Group or its competitors; technological changes in the software industry;
changes in the mix of distribution channels through which the Merged Group's
products will be offered; purchasing patterns of distributors and other
customers, including customer budgeting cycles; the quality of products sold;
price and other competitive conditions in the industry; changes in the Merged
Group's operating expenses; changes in the Merged Group's sales incentive plans;
cancellation of licenses during the warranty period; non-renewal of maintenance
agreements; the effects of extended payment terms (particularly for
international customers), delays of orders by customers; customers' delay in or
failure to pay accounts receivable; and economic conditions generally or in
various geographic areas. In addition, a majority of Micro Focus' net revenue is
denominated in U.S. dollars, while its costs are incurred approximately equally
in U.S. dollars and other currencies, predominately GB pounds. Consequently,
fluctuations in exchange rates, particularly between the U.S. dollar and the GB
pound, may have a material effect on the operating results of the combined
company.
A relatively high percentage of the expenses of Micro Focus and Intersolv 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 operating results
for that quarter would be immediately and adversely affected. Micro Focus and
Intersolv historically have operated with little product backlog because their
products are generally shipped as orders are received. As a result, revenue of
the Merged Group in any quarter will depend on the volume and timing of, and the
ability to fill, orders received in that quarter. In addition, Micro Focus and
Intersolv have at times recognised a substantial portion of their total revenue
from sales booked and shipped in the last month of the quarter such that the
magnitude of quarterly fluctuations of the Merged Group may not become evident
until late in, or at the end of, a particular quarter.
SEASONALITY OF OPERATING RESULTS
Historically the businesses of Micro Focus and Intersolv have been subject to
seasonal variations. Micro Focus customers tend to make product purchase
decisions in the fourth quarter of the Micro Focus fiscal year as a result of
purchase cycles related to expiration or renewal of budgetary authorisations.
Intersolv sales historically also tend to be stronger in the fourth quarter of
the Intersolv fiscal year. As a result, the Merged Group expects to experience
lower revenue for the first quarter of a fiscal year than in the fourth quarter
of the prior fiscal year. Both Micro Focus and Intersolv typically have
recognised a high proportion of their quarterly revenue during the last month of
a fiscal quarter and significant fluctuations in new order revenue can occur due
to the timing of customer orders. Quarterly results therefore can vary to the
extent that sales for a quarter are delayed, particularly since a large portion
of the companies' expenses do not vary with revenue. In addition, Micro Focus'
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
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the Merged Group's operating results will be below the expectations of stock
market analysts and investors. In such event, the price of the Micro Focus ADSs
could be materially adversely affected.
PRODUCT CONCENTRATION
Substantially all of the total net revenue of Micro Focus is derived from
products and related services for mainframe applications development in the
COBOL language and COBOL compilers running on workstations and PCs. After the
Merger, a substantial portion of the total net revenue of the Merged Group will
be derived from such products and services. As a result, the future operating
results of the Merged Group will depend upon continued market acceptance and use
of the COBOL language. There can be no assurance as to how long COBOL 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 application development tools
marketed by Micro Focus. 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 could have a material adverse effect on Merged Group's
business, financial condition and results of operations.
YEAR 2000 BUSINESS AND COMPLIANCE ISSUES
Micro Focus and Intersolv market certain of their products and services to
customers for managing the maintenance and redevelopment of mission-critical
computer software systems. In addition, an increasing proportion of the business
of both companies is devoted to providing solutions for the Year 2000 problem,
which affects the performance and reliability of many mission-critical systems.
The Micro Focus and Intersolv customer agreements typically contain provisions
designed to limit their respective exposure to potential product and service
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Micro Focus and Intersolv customer agreements may
not be effective as a result of existing or future federal, state, local or
foreign laws or ordinances or judicial decisions. Although neither Micro Focus
nor Intersolv has experienced any material product or service liability claims
to date, the sale and support of their respective 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 their respective products and
services in mission-critical applications. A successful product or service
liability claim brought against Micro Focus, Intersolv or the Merged Group could
have a material adverse effect upon the Merged Group's business, financial
condition and results of operations. Furthermore, Micro Focus and Intersolv
anticipate that demand in the Year 2000 market will decline, perhaps rapidly, in
anticipation of or following the Year 2000 and the demand for the Merged Group'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 Merged Group's license revenue and professional services fees
could be materially and adversely affected.
Micro Focus and Intersolv are in the process of reviewing their respective major
internal corporate systems for potential Year 2000 compliance issues and each
intends to take appropriate corrective action based on the results of such
review. Neither Micro Focus nor Intersolv currently anticipates 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 and Intersolv each believes that the current versions of their
respective 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 business, financial condition or results of operations of
the Merged Group.
LENGTHY SALES CYCLE
The sale of Micro Focus application development tools and the Intersolv
application development products typically involves a significant technical
evaluation and commitment of capital and other resources, with the delays
frequently associated with customers' internal procedures to approve such
expenditures, to engineer deployment of new technologies and to test and accept
new technologies that affect key operations. For these and other reasons, the
sales cycle associated with the purchase of the products of Micro Focus and
Intersolv is typically lengthy, generally ranging from three to nine months, and
is subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance reviews, over which Micro Focus and
Intersolv have little or no control. Because of the lengthy sales cycle, if
orders forecasted from a specific customer for a particular quarter are not
realised in that quarter or any significant customer delays payment or fails to
pay, the Merged Group is likely not to 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 Merged Group's quarterly operating results and
cash flow. Moreover,
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to the extent that significant sales occur earlier than expected, operating
results for subsequent quarters may be adversely affected.
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
Both Micro Focus and Intersolv must continually change and improve their
respective 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 Merged 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 Merged Group will be
successful in developing and marketing, on a timely basis or at all, fully
functional and integrated product enhancements or new products that respond to
changing market conditions, that the Merged Group's enhanced or new products
will achieve market acceptance, or that other software vendors will not develop
and market products that are superior to the products offered by the Merged
Group. Further, customers may delay purchases in anticipation of technological
changes. In addition, as the Merged Group introduces new products that cause
existing products to become obsolete, the Merged Group could experience
inventory write-offs, which could have a material adverse effect on the Merged
Group's business, results of operations and financial condition. In the past,
both Micro Focus and Intersolv have experienced delays and increased expenses in
developing certain new products. The Merged Group's ability to develop and
market new products depends upon its ability to attract and retain qualified
employees. Any failure by the Merged Group to anticipate or respond adequately
to changes in technology and market conditions, to complete product development
and introduce new products on a timely basis and with an adequate level of
performance and functionality, or to attract and retain qualified employees,
could materially adversely affect the Merged Group's business, financial
condition and results of operations.
PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY
Software products as complex as those offered by Micro Focus and Intersolv may
contain undetected errors or failures, especially when first introduced or when
new versions are released. In the past, such errors have occurred in products
offered by Micro Focus and Intersolv, and there can be no assurance that errors
will not be found in their respective current products or the Merged Group's
future products. The occurrence of such errors, defects or failures could result
in product returns and other losses to the Merged Group or its customers. There
can be no assurance that, despite product testing by the Merged Group and
testing and use by 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 Merged Group's products, which
could have a material adverse effect on the Merged Group's business, financial
condition and results of operations.
In addition, each of Micro Focus' and Intersolv's customer agreements typically
contain provisions designed to limit exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in such agreements may not be effective as a result of existing or
future federal, state, local or foreign laws or ordinances or judicial
decisions. Although neither Micro Focus nor Intersolv has experienced any
material product liability claims to date, the sale and support of Micro Focus'
and Intersolv's products entails the risk of such claims. A successful product
liability claim brought against the Merged Group could have a material adverse
effect on the Merged Group's business, financial condition and results of
operations.
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
6.D.6
Each of Micro Focus and Intersolv relies on a combination of trade secret,
copyright and trademark laws and contractual restrictions to establish and
protect proprietary rights in its products. In addition, Micro Focus has one
patent issued in the United States, as well as pending patent applications in
the United States, Europe and Japan. In the future, the Merged Group expects to
seek additional United States and foreign patents on its technology. There can
be no assurance that any patents will issue from any of the pending applications
or applications in preparation or that any claims allowed will be of sufficient
scope or strength, or issue in sufficient countries where the Merged Group's
products can be sold, to provide meaningful protection or any commercial
advantage to the Merged Group. Moreover, any patents that have been or may be
issued might be challenged. Any such challenge could result in time consuming
and costly litigation and result in the Merged Group's patents being held
invalid or unenforceable. Furthermore, even if the patents are not challenged or
are upheld, third parties might be able to develop other technologies or
products without infringing any such patents.
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Each of Micro Focus and Intersolv has entered into confidentiality and invention
assignment agreements with its employees, and non-disclosure agreements with
certain of its suppliers, distributors and customers in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by Micro Focus or
Intersolv to protect its intellectual property will prove sufficient to prevent
misappropriation of its technology or to deter independent third-party
development of similar technologies. The laws of certain foreign countries may
not protect the products or intellectual property rights of the Merged Group to
the same extent as do the laws of the United States.
In the past, each of Micro Focus and Intersolv has received, and in the future
may receive, notices from third parties claiming that its products or
proprietary rights infringe the proprietary rights of third parties. Any such
claim, whether meritorious or not, could be time consuming, result in costly
litigation, cause product shipment delays or require the Merged Group to enter
into royalty or licensing agreements. The failure to obtain a license from a
third party for technology used by Micro Focus, Intersolv or the Merged Group
could cause the Merged Group to incur substantial liabilities and to suspend the
production and sale of certain of its products, which could have a material
adverse effect upon the Merged Group's business, financial condition and results
of operations. Litigation to determine the validity of any claims could result
in significant expense to the Merged Group and divert the efforts of the
technical and management personnel of the Merged Group from operating
activities, whether or not such litigation is determined in favour of the Merged
Group. In the event of an adverse ruling in any such litigation, the Merged
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 Merged Group and the failure of the Merged Group to
develop or license a substitute technology, the Merged 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, Micro Focus believes that software
developers may become increasingly subject to infringement claims. Any such
claims against Micro Focus, Intersolv or the Merged Group, with or without
merit, as well as claims initiated by the Merged Group against third parties,
can be time consuming and expensive to defend or prosecute and to resolve.
Each of Micro Focus and Intersolv has, and the Merged Group in the future may,
license its patents or proprietary rights for commercial or other reasons, to
parties who are competitors of Micro Focus or Intersolv, or who may become
competitors of the Merged Group. Further, the Merged Group may also elect to
initiate claims or litigation against third parties for infringement of patents
or proprietary rights or to establish the validity of patents or proprietary
rights held by the Merged Group. Such litigation could be time consuming and
costly and have a material adverse effect on the Merged Group's business,
financial condition and results of operations.
COMPETITION
The markets in which Micro Focus and Intersolv compete are characterised by
rapid technological change and aggressive competition. Micro Focus competes with
other COBOL vendors that offer compilers and application development tools. The
companies that distribute COBOL compilers for operation on personal computers
and workstations include: Acucobol, Inc., Computer Associates International,
Inc., International Business Machines Corporation and Liant Software
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. In the automated software quality business, Intersolv competes
with Microsoft Corporation, Mortice Kern Systems Inc., Platinum Technology, Inc.
and Rational Software Corporation among others. In the data connectivity market,
Intersolv competes with most major database vendors, including Informix
Corporation, International Business Machines Corporation, Microsoft Corporation,
Oracle Corporation and Sybase, Inc. Micro Focus and Intersolv also compete with
many vendors of Year 2000 tools and services.
Micro Focus and Intersolv believe that the principal competitive factor in the
software development tools industry is the ability to offer open, end-to-end
solutions that operate across multiple platforms and development environments.
The other competitive factors in the markets served by Micro Focus and Intersolv
include product performance and reliability, functionality, integration, product
quality, product enhancement, price, training and support; the success and
timing of new product development efforts; changes affecting the hardware,
operating systems or database systems that they support; the level of
demonstrable economic benefits for users relative to cost; ease of installation;
and vendor reputation, experience and financial stability. Micro Focus and
Intersolv believe that they compete favourably with respect to all of these
factors. Existing conditions in the market for development environments, data
connectivity tools, enterprise application renewal tools and automated software
quality tools could change rapidly and significantly as a result of
technological changes, and the deployment of
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alternative technologies could decrease the demand for such products or render
them obsolete. To be successful in the future, the Merged Group must respond
promptly and effectively to the challenges of changing customer requirements,
technological change and competitors' innovations. There can be no assurance
that the Merged Group will be able to compete successfully with existing or new
competitors.
Micro Focus and Intersolv both also encounter competition from a broad range of
firms in the market for professional services. Many current and prospective
competitors in the professional services market have significantly greater
financial, technical, recruiting and marketing resources devoted to professional
services than Micro Focus or Intersolv. The competitive factors affecting the
market for the professional services offered by Micro Focus and Intersolv
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 Merged 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 business,
financial condition and results of operations of the Merged Group.
Micro Focus and Intersolv expect competition to increase in the future from
existing competitors and from other companies that may enter the Merged 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 competitors
of Micro Focus and Intersolv have greater financial, marketing or technical
resources, as well as greater name recognition and access to customers than
Micro Focus or Intersolv, 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 or Intersolv. There can be no assurance that
other companies will not develop competitive products in the future. In
addition, current and potential competitors have established or may establish
co-operative relationships among themselves or with third parties to offer
complete solutions. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly gain market share. Also, the
software industry is characterised generally by low barriers to entry, as a
result of which new competitors possessing technological, marketing or other
competitive advantages may emerge and rapidly acquire market share. There can be
no assurance that additional competitors will not introduce new products that
will be priced lower, provide superior performance or achieve greater market
acceptance than the Merged Group's products.
There can be no assurance that the Merged Group will meet these challenges, that
it will be able to compete successfully against current or future competitors,
or that the competitive pressures faced by the Merged Group will not materially
and adversely affect the Merged Group's business, financial condition and
results of operations. Further, as a strategic response to changes in the
competitive environment, the Merged Group may make certain promotional pricing,
service, marketing or other decisions or enter into acquisitions or new ventures
that could have a material adverse effect on the Merged Group's business,
financial condition or results of operations.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Merged 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, Micro
Focus believes that certain customers might reduce or delay their purchases of
the Merged Group's products or services, leading to a reduction in the Merged
Group's revenue. The factors that might influence current and prospective
customers to reduce their information technology budgets under these
circumstances are beyond the Merged Group's control. In the event of an economic
downturn, the Merged Group's business, financial condition and results of
operations could be materially adversely affected.
GLOBAL OPERATIONS
For the fiscal years ended 31 January 1996, 1997 and 1998, sales to customers
outside of the United States represented approximately 40.5 per cent., 45.7 per
cent. and 45.0 per cent., respectively, of Micro Focus' total net revenue. For
the fiscal years ended 30 April 1996, 1997 and 1998, sales to customers outside
of the United States represented approximately 33.3 per cent., 30.5 per cent.
and 26.5 per cent., respectively, of Intersolv's total net revenue. The Merged
Group intends to continue to expand its operations outside of the United States
and to enter additional international markets. Each of Micro Focus and Intersolv
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 Merged 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
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accounts receivable collection and enforcing agreements, tariffs and other
restrictions on foreign trade, United States 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. Additionally, intellectual property rights may be more difficult
to enforce outside of the United States. There can be no assurance that the
factors described above will not have a material adverse effect on the Merged
Group's future international revenue and, consequently, on the Merged Group's
business, financial condition and results of operations.
RELIANCE ON OPERATIONS IN THE UNITED KINGDOM; ORGANISATION IN ENGLAND AND WALES
A substantial portion of Micro Focus' engineering and research and development
operations are located in the United Kingdom. Intersolv's engineering and
research and development operations are located primarily in the United Kingdom
and Belgium. The geographic distance between the engineering personnel in the
United Kingdom, USA (Oregon and North Carolina) and Belgium on the one hand and
the primary markets of Micro Focus and Intersolv in the United States on the
other hand could lead to logistical and communication difficulties. There can be
no assurance that the geographic and cultural differences between the United
States and United Kingdom and Belgian personnel and operations of the Merged
Group will not result in problems that materially adversely affect the Merged
Group's business, financial condition and results of operations. Furthermore,
given that the Merged Group will have substantial research and development
operations 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 rights of holders of Micro Focus Ordinary
Shares and, therefore, certain of the rights of holders of Micro Focus ADSs, are
governed by the laws of England and Wales, including the Act, and by Micro
Focus' memorandum and articles of association. These rights differ in certain
respects from the rights of stockholders in typical United States corporations.
DEPENDENCE ON KEY PERSONNEL
Competition for qualified personnel in the software industry is intense, and
there can be no assurance that the Merged Group will be able to attract and
retain a sufficient number of qualified personnel to conduct its business in the
future. The Merged 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 Merged Group will not have employment agreements with
most of its key personnel, nor does it maintain key person life insurance on any
of these persons. Several of the senior management personnel of Micro Focus are
relatively new to Micro Focus and the Merged Group's success will depend in part
on the successful assimilation and performance of these individuals. In
addition, to the extent that the senior personnel of Intersolv become part of
the management of the Merged Group, the success of the Merged Group will depend
in part on the successful assimilation of these individuals. It may become
increasingly difficult for the Merged Group to hire, train and assimilate the
number of new employees required to support any growth in its business. In
particular, the vesting of many of the options to purchase Intersolv Stock held
by employees of Intersolv will accelerate at the Effective Date. Micro Focus
believes that the ability of the Merged Group to retain these employees and
other employees will depend in part upon its ability to grant further options to
purchase shares of Micro Focus. If the Merged Group is limited in the number of
options it can grant to its employees, the ability of the Merged Group to
attract and retain employees could be negatively affected. In addition, it is
possible that the business changes or uncertainty brought about by the Merger or
other acquisitions may cause key employees to leave the Merged Group, and
certain key members of the management of acquired companies, including
Intersolv, may not continue with the Merged Group. Any difficulty in attracting
and retaining key personnel could have a material adverse effect on the Merged
Group's business, financial condition and results of operations.
MANAGEMENT OF GROWTH
Each of Micro Focus and Intersolv has recently experienced a period of rapid
growth in net revenue. This growth has placed a significant strain on the
financial, management, operational and other resources of Micro Focus and
Intersolv, and if it continues is expected to continue to place a significant
strain on the Merged Group's financial, management, operational and other
resources. There can be no assurance that the Merged Group's management
personnel, systems, procedures and controls will be adequate to support the
Merged Group's existing and future operations. The Merged Group's ability to
manage its growth effectively will require it to continue to expand its
operating, manufacturing and financial procedures and controls, to replace or
upgrade its operational, financial and management information systems and to
attract, train, motivate, manage and retain key employees. Micro Focus has hired
many key employees and officers during the last twelve months and, as a result,
Micro Focus'
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entire management team has worked together for only a brief time. If management
of the Merged Group is unable to manage growth effectively, the Merged Group's
business, financial condition and results of operations could be materially
adversely affected.
VOLATILITY OF STOCK PRICE
The market prices of the securities of Micro Focus and Intersolv have
experienced significant price volatility and such volatility may occur in the
future. Factors such as actual or anticipated fluctuations in operating results,
changes in financial estimates by securities analysts, announcements of
technological innovations, new products or new contracts by Micro Focus,
Intersolv, the Merged 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 Merged Group'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,
interest rates or international currency fluctuations, may adversely affect the
market price of the Merged Group's securities. The trading prices of many
technology companies' stocks are at or near historical highs and reflect price
earnings ratios substantially above historical levels. There can be no assurance
that these trading prices and price earnings ratios will be sustained. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such company. Such litigation, if instituted, could result in substantial costs
and a diversion of management's attention and resources, which would have a
material adverse effect on the Merged Group's business, financial condition and
results of operations.
RECENT AND FUTURE ACQUISITIONS
6.D.11
Micro Focus completed two business combinations during the fiscal year ended 31
January 1998 and two during fiscal 1999 to date. In April 1997, Micro Focus
acquired the entire issue of share capital of Millennium UK Limited
("Millennium"), a privately-held consulting firm, in a transaction accounted for
as a purchase. In January 1998, Micro Focus acquired XDB, a provider of database
development, maintenance and connectivity solutions, in a transaction accounted
for as a pooling of interests. In May 1998, Micro Focus acquired Micro Focus
Italia, S.r.L. ("MF Italia"), the distributor for Micro Focus products in Italy,
in a transaction accounted for as a purchase. In August 1998, Micro Focus
acquired Advanced Software Engineering Pty. Ltd. ("MF Australia"), the
distributor for Micro Focus products in Australia, in a transaction accounted
for as a purchase. During the fiscal year ended 30 April 1998, Intersolv
completed the acquisition of SQL Software, Ltd ("SQL") in a transaction
accounted for as a pooling of interests. There can be no assurance that the
anticipated benefits of these recently concluded business combinations will be
realised. In addition, these acquisitions have required and could continue to
require significant additional management attention. The Merged Group expects to
continue to grow its business through acquisitions. There can be no assurance
that the Merged Group will successfully identify, acquire on favourable terms or
integrate acquired businesses, products, services or technologies. The Merged
Group may in the future face increased competition for acquisition
opportunities, which may inhibit the Merged Group's ability to complete suitable
acquisitions and increase the costs of completing such acquisitions. The
acquisitions of Millennium, XDB, MF Italia, MF Australia and SQL, as well as
potential future acquisitions, will require the Merged Group to successfully
manage and integrate such acquired businesses, which are located in diverse
geographic locations. Acquiring other businesses will also require the Merged
Group to co-ordinate (and possibly change) the diverse operating structures,
policies and practices of the acquired companies and to integrate the employees
of the acquired companies into the organisation and culture of the Merged Group.
Failure of the Merged Group to successfully integrate and manage the recently
acquired businesses or other businesses it may acquire in the future and to
retain the employees of such businesses, would have a material adverse effect on
the business, financial condition and results of operations of the Merged Group.
In addition, although the acquisitions of XDB and SQL were accounted for as
poolings of interests, future acquisitions by Micro Focus may be accounted for
as purchases, resulting in potential charges that may adversely affect the
earnings of the Merged Group in future periods. Additional acquisitions may also
involve the issuance of Micro Focus ADSs or Micro Focus Ordinary Shares to
owners of acquired businesses, resulting in reduction in the percentage of such
securities owned by other shareholders of the Merged Group.
ENFORCEABILITY OF UNITED STATES JUDGMENTS
Judgments of United States courts, including judgements against Micro Focus,
predicated on the civil liability provisions of the federal securities laws of
the United States, may not be enforceable in English courts.
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APPENDIX II -- NOTICE OF EXTRAORDINARY GENERAL MEETING
MICRO FOCUS GROUP PLC
NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of Micro Focus
Group Plc will be held at The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14
1QN on Wednesday, 23 September 1998 at 4 p.m. for the purpose of considering
and, if thought fit, passing the following resolutions of which resolution 1
will be proposed as a special resolution and resolutions 2, 3 and 4 will be
proposed as ordinary resolutions.
SPECIAL RESOLUTION
1. THAT subject to the passing of resolution 2 and to the Merger Agreement
having become unconditional in all respects other than as to the condition
relating to Admission (as defined in the listing particulars dated 24
August 1998)(the "Listing Particulars"):
6.B.4 (a) the proposed acquisition of INTERSOLV, Inc. on the terms of the
Merger Agreement as described in the Listing Particulars be and it is
hereby approved and that the directors be and they are hereby
unconditionally authorised to do all such acts, deeds and things and
execute such documents as may be necessary or desirable, in their
opinion, to complete the Merger in accordance with its terms and to
waive, vary or extend the terms and/or conditions of the Merger
Agreement (to such an extent as will not constitute a material waiver,
variation or extension of the terms and conditions of the Merger
Agreement) as they may, in their absolute discretion, think fit;
6.C.10(A)
(b) the authorised share capital of the Company be increased from
L2,250,000 to L4,240,000 by the creation of 99,500,000 additional
ordinary shares of 2p each having the rights and subject to the
restrictions set out in the Company's articles of association;
6.B.4 (c) without prejudice to the generality of the authority granted by
paragraph (a) of this resolution, the directors be and are hereby
authorised for the purposes of effecting the Merger, to exercise all
the powers of the Company to allot relevant securities (within the
meaning of Section 80 of the Companies Act 1985, as amended (the
"Act")) up to an aggregate nominal amount of L1,508,174, such
authority to expire no later than 15 November 1998;
6.B.15(A)
(d) Section 89(1) of the Act shall not apply to any allotment of equity
securities (within the meaning of Section 94 of the Act) made pursuant
to the authorities given by the preceding paragraphs of this
resolution for the purpose of complying with obligations to be
undertaken by Intersolv pursuant to the Merger Agreement to allot
equity securities to holders of Intersolv Options and to holders of
Intersolv Warrants as defined in the Listing Particulars (namely,
outstanding options or rights granted to employees, directors or
consultants of INTERSOLV, Inc. or its subsidiaries or predecessors
pursuant to any stock option, stock bonus, stock award or stock
purchase plan, programme or arrangement and warrants, exchangeable or
convertible securities or other rights to acquire common stock of
INTERSOLV, Inc.);
(e) the directors be and are hereby generally and unconditionally
authorised (in addition to the authority conferred by paragraph (c) of
this resolution) to exercise all the powers of the Company to allot
relevant securities (within the meaning of Section 80 of the Act) up
to an aggregate amount of L1,110,128, such authority to expire no
later than 22 September 2003, provided that:
(i) the Company may before such expiry make an offer or agreement
which would or might require relevant securities to be allotted
after such expiry and the directors may allot relevant securities
in pursuance of such offer or agreement as if the authority
conferred hereby had not expired; and
(ii) the authority conferred on the directors hereby shall be in
substitution for the authority conferred on the directors on 19
June 1996 which to the extent not used is hereby revoked;
14.8(A)
(f) the directors be and are hereby empowered pursuant to Section 95 of
the Act to allot equity securities (within the meaning of Section 94
of the Act) for cash pursuant to and subject to the authority
conferred by paragraph (e) of this resolution as if Section 89(1) of
the Act did not apply to any such allotment, provided that this power
shall be limited:
(i) to the allotment of equity securities in connection with a
rights issue or other issue of shares in favour of ordinary
shareholders of the Company where the equity securities for which
such ordinary shareholders are respectively entitled to subscribe
are proportionate (as nearly as
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may be) to the respective numbers of ordinary shares held by
them, but subject to such exclusions or other arrangements as the
directors may deem necessary or expedient in relation to
fractional entitlements or any legal or practical problems under
the laws of any overseas territory or the requirements of any
regulatory body or stock exchange; and
(ii) to the allotment (otherwise than pursuant to sub-paragraph (i)
above) of equity securities up to an aggregate nominal value of
L143,427
14.8(B)(II)
and further, that this power shall expire on the date of the annual
general meeting of the Company to be held in 1999 or, if earlier,
fifteen months after the date of passing of this resolution, save that
the Company may before such expiry make an offer or agreement which
would or might require equity securities to be allotted after such
expiry and the board may allot equity securities in pursuance of such
offer or agreement as if the power conferred hereby had not expired.
ORDINARY RESOLUTIONS
13.13(A)
13.15
2. THAT the Micro Focus 1998 Share Option Plan ("the new Micro Focus Plan")
as outlined in Paragraph 3 of Part 5 of the Listing Particulars be and is
hereby approved and adopted and that the directors be and are hereby
authorised to grant options to subscribe for or purchase fully paid
ordinary shares in the capital of the Company in accordance with the terms
and conditions of the new Micro Focus Plan and the directors be and are
hereby authorised to do all acts and things necessary to implement the new
Micro Focus Plan, to ensure and maintain treatment as Incentive Stock
Options (as defined in the new Micro Focus Plan) of those which are
intended to be treated as such and to carry the same into effect and to
make alterations to the new Micro Focus Plan as may be necessary or
desirable in order to obtain or maintain approval of the new Micro Focus
Plan from any government or other regulatory or advisory body whether in
the United Kingdom or the United States of America or elsewhere provided
that any such alterations shall not affect the basic principles of the new
Micro Focus Plan; and the directors may be counted in the quorum and their
votes may be counted on any matter connected with the grant of options in
accordance with this resolution (except that no director may vote or be
counted in the quorum in any matter solely relating to an option granted
or to be granted to him) notwithstanding that they may be interested in
the same and the prohibitions in this regard contained in the articles of
association of the Company be and they are hereby suspended and relaxed to
that extent.
3. THAT the directors be and they are hereby authorised to amend, subject
where necessary in any case to the approval of the Inland Revenue, the
Company's Inland Revenue approved share option scheme as outlined in
Paragraph 4 of Part 5 of the Listing Particulars and the directors be and
they are hereby authorised to vote as directors in relation to any such
amendment and to be counted in the quorum at any relevant board meeting
notwithstanding that they may be interested in the same.
4. THAT the amount of the aggregate directors' fees set out in article 102
of the Company's articles of association be increased from L50,000 to
L250,000 per annum with effect from 1 February 1998.
DATED: 24 AUGUST 1998 BY ORDER OF THE BOARD
R VAN HOESEN
SECRETARY
Registered Office:
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN
United Kingdom
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Notes
1. A member entitled to attend and vote at the above meeting is entitled to
appoint one or more proxies to attend and vote in his place. A proxy need
not also be a member of the Company. Members wishing to vote by proxy may
use the enclosed form of proxy.
2. To be valid, the instrument appointing a proxy and the power of attorney or
other authority, if any, under which it is executed or a notarially
certified copy of such authority, must be lodged at the office of the
Company's registrar, Lloyds Bank Registrars, The Causeway, Worthing, West
Sussex BN99 3UH, not later than 4 p.m. on 21 September 1998. Appointment of
a proxy will not prevent a member from attending the meeting and voting in
person.
3. Pursuant to Regulation 34 of the Uncertificated Securities Regulations 1995,
only those shareholders registered in the register of members of the Company
as at 4 p.m. on 21 September 1998 will be entitled to attend and vote at the
meeting in respect of the numbers of shares registered in their names at
that time. Subsequent changes to the register shall be disregarded in
determining the rights of any person to attend or vote at the meeting.
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For Office Use Only
Number of Shares
MICRO FOCUS GROUP PLC
FORM OF PROXY FOR EXTRAORDINARY GENERAL MEETING
OF MICRO FOCUS GROUP PLC AT THE LAWN, 22-30 OLD BATH ROAD,
NEWBURY, BERKSHIRE RG14 1QN
AT 4.00 P.M. ON 23 SEPTEMBER 1998
I/We ...........................................................................
(FULL NAMES IN BLOCK CAPITALS PLEASE)
................................................................................
of .............................................................................
being a member/members of Micro Focus Group plc hereby appoint the Chairman of
the Meeting (SEE NOTE 2)
................................................................................
as my/our proxy to vote for me/us on my/our behalf at the Extraordinary General
Meeting of the Company to be held at The Lawn, 22-30 Old Bath Road, Newbury,
Berkshire RG14 1QN on 23 September 1998 and at any adjournment thereof.
Please indicate which way you wish your proxy to vote by inserting "X" in the
appropriate space provided.
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
SPECIAL RESOLUTION FOR AGAINST ORDINARY RESOLUTIONS
- ---------------------------------------------------------------------------------------------------------------------------------
1. Approve the Merger with Intersolv, Inc., and 2. Adopt the new Micro Focus Plan
authorise the issue of shares
- ---------------------------------------------------------------------------------------------------------------------------------
3. Approve amendments to the Micro Focus 1996
Approved Scheme
- ---------------------------------------------------------------------------------------------------------------------------------
4. Increase aggregate directors' fees
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Unless otherwise instructed the proxy will at his/her discretion vote or abstain
from voting as he/she thinks fit on any matter properly presented to the
Meeting.
Signature ............................................... Date .......... 1998
NOTES:-
1. In the case of joint holdings only one holder need sign but the names of all
joint holders should be given. The vote of the first named in the register
of members who tenders a proxy, will be accepted to the exclusion of the
votes of other joint holders.
2. The words "the Chairman of the Meeting" may be struck out and the name(s) of
some other person(s) substituted; all alterations should be initialled.
3. This form must be signed by the appointer or his attorney duly authorised in
writing. A corporation must execute this form either under its Common Seal
or under the hand of an officer duly authorised in writing.
4. To be valid, this form, duly completed together with any authority under
which it is executed or a notarially certified copy of such authority, must
be lodged at the office of the Company's registrar, Lloyds Bank Registrars,
The Causeway, Worthing, West Sussex BN99 3UH at the address overleaf no
later than 4 p.m. on 21 September 1998.
5. A member can appoint more than one person (who need not be a member) to act
as his/her proxy. Appointment of a proxy will not prevent a member from
attending the meeting and voting in person.
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Micro Focus Group Public Limited Company
(Registrant)
Date: August 25, 1998 By: /s/ Richard Van Hoesen
-------------------------------------
Richard Van Hoesen
Senior Vice President, Chief Financial
Officer and Secretary
