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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the fiscal year ended........
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the transition period from February 1, 1998 to April 30, 1998
Commission file number: 0-19696
MERANT plc
(Exact name of Registrant as specified in its charter)
ENGLAND AND WALES
(Jurisdiction of incorporation or organization)
The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14 1QN, England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares of 2p each.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None.
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the Transition
Report: 79,682,213 Ordinary Shares of 2p each.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 Item 18 X
----- -----
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TABLE OF CONTENTS
<TABLE>
Page
<S> <C>
General Introduction..............................................................................................1
PART I
Item 3. Legal Proceedings.......................................................................................3
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations...................4
PART III
Item 15. Defaults Upon Senior Securities........................................................................12
Item 16. Changes in Securities and Changes in Security
for Registered Securities and Use of Proceeds.....................................................12
PART IV
Item 17. Financial Statements...................................................................................13
Item 18. Financial Statements...................................................................................13
Signatures.......................................................................................................19
</TABLE>
*Parts and/or Items of Form 20-F which are not applicable to this Transition
Report have been omitted.
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GENERAL INTRODUCTION
As used herein, the terms "MERANT" and the "Group" refer to MERANT plc and its
subsidiaries, and the term "Company" refers to MERANT plc. MERANT is a foreign
private issuer with its primary share listing on the London Stock Exchange.
Effective February 16, 1999, the Company changed its corporate name from "Micro
Focus Group Public Limited Company" to "MERANT plc."
As a foreign private issuer in the United States, the Company is not required to
file quarterly reports with the Securities and Exchange Commission (the
"Commission"). However, beginning in June 1997, the Company began furnishing to
the Commission on a voluntary basis quarterly reports on Form 6-K which include
the results for the applicable Company fiscal quarter in a format similar to
that of a Form 10-Q. In addition, foreign private issuers in the United States
are not currently required to file electronically with the Commission but may
choose to do so. As of March 1997, the Company began voluntarily submitting its
filings electronically to the Commission.
Effective November 30, 1998, the Company elected to change its fiscal year end
and accounting reference date to April 30 from January 31.
Consequently, as a foreign private issuer, the Company is filing this transition
report covering the period between January 31, 1998 (the closing date of the
Company's most recent fiscal year) and May 1, 1998 (the opening date of the
Company's new fiscal year).
The Financial Statements and other financial information in this Transition
Report do not comprise "statutory accounts" within the meaning of Section 240 of
the Companies Act 1985 of Great Britain. Statutory accounts for the years ended
January 31, 1998, 1997 and 1996 have been delivered to the Registrar of
Companies for England and Wales. The auditor's reports on such accounts were
unqualified.
Prior to the election to change its fiscal year end, the Company's fiscal year
ended on January 31 of each year. The references in this Transition Report and
the financial statements incorporated herein by reference for fiscal years 1998,
1997 and 1996 are for the years ended January 31, 1998, 1997 and 1996,
respectively.
Micro Focus and INTERSOLV are registered trademarks, and MERANT is a trademark,
of the Group. Certain other trademarks belonging to other companies may appear
in this Transition Report and are the property of their respective owners.
In this Transition Report, references to "US dollars" or "$" are to US currency
and references to "GB pounds," "GBP" or "p" are to UK currency.
This Transition Report contains translations of certain amounts in GB pounds to
US dollars. Such translations have been made at the noon buying rates in New
York City for cable transfers in foreign currencies as announced for customs
purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") on the
relevant dates. These translations should not be construed as representations
that the GB pound amounts actually represent such US dollar amounts or could be
converted into US dollars at the rates indicated or at any other rate. The
exchange rates used by the Company in the preparation of its consolidated
financial statements are based on month end rates published at the close of
business in London. Such rates may differ from the Noon Buying Rates. For
additional information on exchange rates between GB pounds and US dollars, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Exchange Rate Fluctuations" on pages 22 and 50 in the Company's
Annual Report to Shareholders for the year ended January 31, 1998 contained in
the Report of Foreign Issuer on Form 6-K furnished to the Commission on May 28,
1998 (the "1998 Annual Report to Shareholders"), which sections of the 1998
Annual Report to Shareholders are incorporated herein by reference. On April 30,
1998, the Noon Buying Rate was $1.67 per GBP 1.
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The Company publishes Annual Reports containing annual audited consolidated
financial statements and opinions thereon by independent public accountants.
Such financial statements are prepared on the basis of generally accepted
accounting principles in the United States ("US GAAP") expressed in US dollars
and on the basis of accounting principles generally accepted in the United
Kingdom ("UK GAAP") expressed in GB pounds. There are differences between US
GAAP and UK GAAP in the treatment of goodwill and other intangibles acquired in
connection with the purchase of subsidiaries, with respect to the methods of
computing earnings per share, which is calculated using different formulas under
US GAAP and UK GAAP, and with respect to certain disclosures and presentation.
The Company has published quarterly updates and semi-Annual Reports containing
unaudited financial information prepared on the same basis as its audited
consolidated financial statements. The Company is not required to report
quarterly financial information. Such Annual Reports, quarterly updates and
semi-Annual Reports are furnished to The Bank of New York as "Depositary" under
an Amended and Restated Deposit Agreement dated as of March 16, 1998 by and
among the Company, The Bank of New York and all owners and holders from time to
time of American Depositary Receipts ("ADRs") issued by the Bank of New York
(the "Deposit Agreement"). Upon receipt thereof, the Depositary generally will
mail all such reports to record holders of ADRs evidencing American Depositary
Shares ("ADSs"). The Company also furnishes to the Depositary all notices of
shareholders' meetings and other reports and communications that are made
generally available to shareholders of the Company. The Depositary makes such
notices, reports and communications available for inspection by record holders
of ADRs and mails to all record holders of ADRs notices of shareholders'
meetings received by the Depositary.
The Company is subject to various U.S. securities laws and regulations relating
to the disclosure of information. In particular, the Private Securities
Litigation Reform Act of 1995, which became effective in the United States as of
January 1, 1996 (the "Securities Litigation Reform Act"), applies to the Company
and its disclosure of information and provides that the Company can be exempt
from liability for making forward-looking statements if certain cautionary
language is included along with such statements. This Transition Report contains
certain "forward-looking statements" (as such term is defined in Section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and under Section
21E of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange
Act")) that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. Such forward-looking statements are subject to the safe harbor
created by the Securities Litigation Reform Act. When used in this document and
in documents incorporated herein by reference, the words "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Group, the Company or its management, are intended to identify
such forward-looking statements. In addition, statements concerning future
matters (such as future gross margins and operating expense levels, the
development of new products, matters related to the integration of INTERSOLV,
Inc. and other recently acquired businesses, proprietary rights, competition,
litigation and the Company's Year 2000 readiness), related costs and risks and
other statements that are not historical are forward-looking statements. Such
statements reflect the current views of the Company or its management with
respect to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, the Company's actual results,
performance or achievements in fiscal 1999 and beyond could differ materially
from those expressed in, or implied by, any such forward-looking statements.
Factors that could cause or contribute to such material differences include, but
are not limited to, those discussed below in Part I, Item 9 hereof under the
heading "Factors That May Influence Future Operating Results", as well as those
discussed elsewhere in this Transition Report. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to release publicly any updates or revisions to any such
forward-looking statements that may reflect events or circumstances occurring
after the date of this Transition Report.
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PART I
ITEM 3. LEGAL PROCEEDINGS
On December 3, 1998, a complaint was filed in the United States District Court
for the Southern District of New York entitled Seymour Lazar, et al. v. Micro
Focus Group plc, et al., 98 CIV. 8591. The plaintiff seeks to have the matter
certified as a class action of purchasers of the American Depository Shares of
Micro Focus Group plc during the period from June 17, 1998 to November 12, 1998,
including the former shareholders of INTERSOLV who acquired ADSs in connection
with the merger involving the two companies. In addition to naming as a
defendant Micro Focus Group plc, the complaint names as defendants Martin Waters
and Richard Van Hoesen. The complaint alleges that the Company and certain of
its officers and directors violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 (as amended), Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (as amended) and Securities and Exchange Commission Rule
10b-5 by failing to disclose allegedly adverse material nonpublic information
concerning the Company's business condition and prospects. In January 1999,
three other substantially similar complaints to the Lazar complaint were filed
in the Southern District of New York entitled Paul Bleustein, et al. v. Micro
Focus Group plc, et al., No. 99 CIV. 0373; Michael I. Goldman, et al. v. Micro
Focus Group plc, et al., No. 99 CIV. 0539; and Dawn A. Wylie, et al. v. Micro
Focus Group plc, et al., No. 99 CIV. 0689. In addition to naming the same
defendants as the Lazar Complaint, the Bleustein and Wylie complaints also name
Tower Merger Sub Inc., Paul Adams, J. Michael Gullard, Harold Hughes and Sidney
Webb as defendants.
On December 4, 1998, a complaint was filed in the United States District Court
for the Southern District of New York entitled Sol Poller, TTEE UAD 1/23/91, et
al. v. Micro Focus Group plc, et al., 98 CIV. 8619. The plaintiff seeks to have
the matter certified as a class action of persons who acquired securities of the
Company in the merger involving INTERSOLV and the Company. In addition to naming
as defendants Micro Focus Group plc and Tower Merger Sub Inc., the complaint
names as defendants Martin Waters, Richard Van Hoesen, Paul Adams, J. Michael
Gullard, Harold Hughes and J. Sidney Webb. The complaint alleges that the
Company and certain of its officers and directors violated Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933 (as amended), Sections 14(a) and 20(a) of
the Securities Exchange Act of 1934 (as amended) and Securities and Exchange
Commission Rule 14a-9 by failing to disclose allegedly adverse material
nonpublic information concerning the Company's business condition and prospects.
In January 1999, two substantially similar complaints to the Poller complaint
were filed in the United States District Court for the Southern District of New
York entitled Mark Levy, et al. v. Micro Focus Group plc, et al., 99 CIV. 0001,
and Samuel G. Bonuglie v. Micro Focus Group plc, et al., No. 99 CIV. 0310.
The Company anticipates that the seven actions described above will be
consolidated into a single action shortly. The Company is seeking to move the
actions to the Northern District of California, and the United States District
Court for the Southern District of New York has not yet decided this issue. The
Company intends to defend all of its litigation vigorously. However, due to the
inherent uncertainties of litigation, the Company cannot accurately predict the
ultimate outcome of the litigation. Any unfavorable outcome of litigation could
have an adverse impact on the Company's business, financial condition and
results of operations.
3
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ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
condensed consolidated financial statements and notes thereto included in Part
IV of this Transition Report, and with the Company's audited consolidated
financial statements in U.S. format for the fiscal year ended January 31, 1998
included in the Company's Annual Report on Form 20-F filed with the SEC on May
29, 1998.
For discussion purposes, the quarter ended April 30, 1998 is referred to as the
"transition quarter." The quarter ended April 30, 1997 is referred to as the
"prior year quarter," "corresponding quarter of the prior year" or "comparable
prior year period".
RESULTS OF OPERATIONS
Net revenue for the transition quarter ending April 30, 1998 increased 50% to
$48.7 million, compared with $32.5 million in the prior year quarter ending
April 30, 1997. Net income for the transition quarter grew 125% to $5.3 million
compared with $2.4 million for the prior year quarter and diluted earnings per
ordinary share were $0.06 per share compared with $0.03 for the prior year
quarter. Diluted earnings per ADS were $0.32 compared with $0.15 for the prior
year quarter. The following summarizes the significant factors reflected in the
Company's results of operations.
Revenue
Net revenue for the transition quarter was 50% above the corresponding quarter
of the prior fiscal year and was 6% below the revenue reported in the quarter
ended January 31, 1998. The quarter ended January 31 is historically the
Company's strongest sales quarter and typically is followed sequentially by a
quarter with lower revenues.
The year-over-year increase in transition quarter net revenue over the
comparable prior year period reflected a balanced contribution from all product
segments and territories, and substantial year-over-year growth in both the
Company's application transformation product and consulting business. The
Company's application transformation business includes licensing of Year 2000
and Euro currency conversion products. For the quarter ended January 31, 1998,
net revenue from North American customers grew by 40% and net revenue from
international customers grew 62% from the corresponding quarter of the prior
year.
Product licensing revenue for the transition quarter was 65% above the
comparable prior year period, primarily reflecting increased revenue from
application transformation products. Service revenue for the transition quarter
increased 211% from the prior year period primarily as a result of growth in the
Company's consulting and training business and revenue contributed from the
consulting business of Millennium UK Limited ("Millennium"), which was acquired
in April 1997. Maintenance revenue grew 3% from the prior year period. This rate
of increase was lower than the increase in product licensing revenue due to a
decrease in maintenance renewal rates and a shift in the Company's overall sales
mix to consulting and application transformation products licensed on a line of
code basis, neither of which includes maintenance.
There can be no assurance that the market for the Company's products and
services will grow in future periods at their historical rates of growth, that
certain products or services will not decline, or that the Company will be able
to increase or maintain its market share in the future or achieve its historical
revenue growth rates.
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Gross Profit
For the transition quarter, gross profit as a percentage of net revenue was 80%.
This margin was two percentage points higher than the 78% gross profit margin
reported for both the quarter ended April 30, 1997 and for the preceding quarter
ended January 31, 1998. The increase in gross profit margin compared with such
prior quarters primarily reflected the accelerated growth of high margin product
sales.
The Company's gross profit margin can be affected by a number of factors,
including changes in product or distribution channel mix, the mix of product and
service revenue, and competitive pressures on pricing. Gross margin also is
dependent on discounts selectively provided to customers in competitive sales
situations. In addition, gross margin may also be adversely affected by
expansion of the Company's consulting organization and the ability to deploy its
capacity to revenue generating projects. As a result of the above factors, gross
margin percentages may be difficult to predict, and gross margins may fluctuate
from current levels in future periods.
Operating Expenses
Research and development (R&D) expenses for the transition quarter were 2% lower
than the prior year quarter and 9% lower than the preceding quarter ended
January 31, 1998, and represented 17% of net revenue as compared to 26% of net
revenue for the prior year period and 18% for the preceding quarter ended
January 31, 1998. The decrease in year-over-year R&D expenses reflected lower
software product amortization expense and negligible growth in compensation
expense and overhead.
The decrease in R&D expenses for the transition quarter versus the preceding
quarter ended January 31, 1998 was due to lower variable compensation accruals.
The Company believes that ongoing development of new products and features is
required to maintain and enhance its competitive position. Accordingly, while
the Company intends to continue to control expenses where possible, the Company
anticipates that aggregate R&D expenses will increase over time, and may not be
directly related to the level of revenue realized in future quarters.
Sales and marketing expenses for the transition quarter were 60% above the prior
year quarter and 4% above the preceding quarter ended January 31, 1998. Such
expenses represented 40%, 37% and 35% of net revenue for the transition quarter,
the prior year quarter and the preceding quarter, respectively. The increases in
sales and marketing expenses reflected sales force expansion, higher commission,
and higher advertising and marketing expenses, including those associated with
the Company's user conference. The Company believes that continued investment in
sales, marketing, customer support and promotional activities are essential to
maintaining its competitive position. In addition, the Company is expanding its
sales and support staffs. Accordingly, the Company anticipates that sales and
marketing expenses will be higher in future periods.
General and administrative (G&A) expenses for the transition quarter were 96%
above the prior year quarter and 31% below the preceding quarter ended January
31, 1998. G&A expenses represented 9%, 7% and 12% of net revenue in the
transition quarter, the quarter ended April 30, 1997 and the quarter ended
January 31, 1998, respectively. The increase in G&A expenses for the transition
quarter over the comparable prior year period reflected professional fees
associated with recent acquisitions, staff additions, costs associated with
executive recruitment and goodwill amortization associated with the Millennium
acquisition. G&A expenses for the fourth quarter of fiscal 1998 included
proportionately higher incentive compensation costs associated with the
Company's financial performance. The Company is investing to strengthen its
infrastructure and anticipates that G&A expenses will increase in the aggregate
in future quarters.
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Net interest income for the transition quarter was 11% above the comparable
prior year period, and 6% below the preceding quarter. The year-over-year
increase in interest income reflected higher average cash and short-term
investment balances. The decrease for the quarter from the previous quarter
resulted from lower average investment yields from funds invested in money
market instruments.
The Company's tax rate was 34% for the transition quarter as compared to the 33%
rate recorded for the year ended January 31, 1998. The marginal increase in the
current year's tax rate reflected a decrease in the utility of operating losses
incurred in prior years. The Company's tax rate is dependent upon the regulatory
environment of the countries in which it operates, as well as the balance of
income reported in each statutory territory. While the Company monitors the
impact of business fluctuations on its tax structure, influences beyond the
Company's control may cause a change in the tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $12.8 million in cash from operating activities in the
transition quarter, primarily from income before depreciation and amortization
and an $8.8 million decrease in accounts receivable since the end of the prior
fiscal year ended January 31, 1998. These factors were offset in part during the
transition quarter by a $4.7 million decrease in accrued employee compensation
and a $1.0 million increase in prepaid expenses and other assets.
The Company had $92.8 million in cash, cash equivalents and short-term
investments at April 30, 1998. This balance was $8.3 million higher than at
January 31, 1998, reflecting cash provided by operating activities and proceeds
from the issuance of shares upon the exercise of employee stock options, offset
in part by cash used for capital and software product expenditures.
The Company has a GBP 5.0 million ($8.3 million at April 30, 1998) unsecured
revolving multi-currency LIBOR loan facility as a means of hedging currency
exposures against the French Franc. This line of credit expires in January 2001.
The interest rate on outstanding borrowings under this facility is equal to
0.75% above the LIBOR rate for the currency in which the borrowings are made.
Borrowings denominated in French Francs under the credit line at April 30, 1998
were the equivalent of $1.7 million, and were incurring interest at the rate of
4.4% per annum.
During the transition quarter, the Company spent $4.1 million for capital and
leasehold improvements largely on upgrades and expansions of its information
systems.
YEAR 2000 CONSIDERATIONS
The Year 2000 problem is the result of the widespread practice since the early
days of computing of using only two digits to refer to a year (such as "98" for
"1998") instead of four digits in computer systems. When the Year 2000 arrives
or the computer system refers to dates after December 31, 1999, such systems
will interpret the two digits "00" as "1900" as opposed to "2000". Failure to
address this problem could cause results ranging from system failures to
erroneous calculations in date-dependent operations for dates falling after
December 31, 1999. The Company has instituted various projects to become Year
2000 ready. "Year 2000 ready" as used in this report means that the performance
or functionality of the Company's internal systems will not be significantly
affected by the dates prior to, during and after the Year 2000.
State of Readiness
The Company has developed and implemented an enterprise-wide plan to analyze and
address potential Year 2000 issues affecting its internal systems, its
interaction with third party vendors and suppliers, and its products and
services.
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The Company has established a Year 2000 Project Team to implement a
comprehensive four-phase Year 2000 readiness plan addressing the Year 2000
readiness of the Company's internal systems. The Year 2000 readiness plan is
comprised of four phases (inventory, analysis, remediation and validation
phases) with a target completion date of June 30, 1999. The Year 2000 readiness
plan covers IT systems (desktop, laptop, servers, routers, hubs, switches, and
remote access systems, operating systems, software and critical business
systems), non-IT embedded systems (telephone, voice messaging, teleconferencing,
data services and equipment, fax, copiers and similar equipment), facilities
(elevators, security systems, card access systems and similar systems), and the
Company's vendors and suppliers. As part of its efforts, the Company has also
sought confirmation from its material suppliers on the current Year 2000
readiness of their systems and/or their intended time schedule for achieving
Year readiness. The Company's Year 2000 readiness plan is progressing as
scheduled, with the inventory phase having been substantially completed and the
analysis phase now underway and expected to be substantially completed by March
15, 1999.
With respect to its software products, each of the Company's product business
units has completed a Year 2000 assessment of its currently offered products. In
preparing for the Year 2000 date change, the Company has adopted the Year 2000
compliance standard published by the British Standards Institute (BSI) - BSI
DISC PD2000-1 "A Definition of Year 2000 Conformity Requirements." As a result
of this assessment, the Company believes that the vast majority of its currently
offered products are Year 2000 compliant, and expects virtually all of its
remaining currently offered products to become compliant during calendar 1999
through new releases. In any event, the Company expects that all the then
current versions of its offered products will be Year 2000 compliant before the
end of calendar 1999. Because Year 2000 compliance is generally integrated into
its normal product development activities, the Company has not incurred and does
not expect to incur any significant incremental expenses in addressing this
issue in its product lines. The Company believes that a small number of
customers who receive product support from the Company are operating product
versions that may not be Year 2000 compliant or products that the Company has
replaced or intends to replace with comparable Year 2000 compliant products. The
Company believes that the vast majority of such customers are migrating and will
continue to migrate to compliant versions and products through new releases,
which the Company is strongly encouraging. In addition, certain former customers
may be operating non-compliant versions of products in respect of which the
Company's agreed-upon product support and warranty periods have expired. The
Company has not undertaken, and does not plan to undertake in the future, an
assessment of whether these former customers are taking appropriate steps to
address any related Year 2000 issues.
The Company does not expect customers who purchase or migrate to Year 2000
compliant versions of its products to experience any Year 2000 failures caused
by such products. In addition, the Company believes that its licenses and other
agreements contain customary and appropriate limitations on the Company's
obligations with respect to any Year 2000 failures that may be caused by its
current or former products. However, there can be no assurance that the
Company's expectations and beliefs as to these matters will prove to be
accurate. Moreover, the Company's products are used in IT systems comprised of
third-party hardware and software, some of which may not be Year 2000 compliant.
Many of the Company's customers use legacy computer systems that are expected to
be particularly susceptible to Year 2000 compliance issues. Various commentators
have predicted that a significant amount of litigation may arise out of Year
2000 compliance issues. While the Company has not been subject to any Year 2000
product claims or lawsuits to date, there can be no assurance that customers or
former customers will not bring claims or lawsuits against the Company seeking
compensation for losses associated with Year 2000-related failures. A material
adverse outcome in a Year 2000 claim or lawsuit could have a material adverse
effect on the Company's business, financial condition and results of operations.
A small number of the products the Company sells are licensed from third
parties. Although the current versions of these products have generally been
warranted to the Company as being Year 2000 compliant, these products have
generally not been subjected to the same extensive Company testing as those
products developed or acquired by the Company. The Company is therefore working
with these third party suppliers to obtain assurance of Year 2000 compliance.
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The Company has designated its website as the Company's "Year 2000 Internet
Website" under the terms of the Year 2000 Information and Readiness Disclosure
Act (the "Act") (S.2392). The information provided on past and present pages on
this website regarding the Year 2000 compliance of Company products has been
designated as "Year 2000 Readiness Disclosures." The pages on this website have
been and will continue to be the Company's primary means for communicating to
customers regarding the Year 2000 compliance of its products.
Demand for Year 2000 Remediation Products and Services
The Company anticipates that demand in the Year 2000 product and service market
will decline, perhaps rapidly, in anticipation of or following the Year 2000,
and the demand for the Company's Year 2000 compliance products and services may
also decline significantly as a result of new technologies, competition or other
factors. In the quarter ended October 31, 1998, the Company's Year 2000 business
was affected by customers moving to the later stages of their remediation
processes, for which the Company did not have the appropriate products generally
available until November 1998. If these factors were to continue, the Company's
license revenue and professional service fees could be materially and adversely
affected.
Costs and Risks Associated with Year 2000 Issues; Contingency Plans
The Company currently does not anticipate that it will incur material operating
expenses or be required to invest heavily in internal systems improvements as a
result of Year 2000 readiness issues. In addition, the Company has not incurred
and does not currently expect to incur any significant incremental expenses in
addressing this issue in its product and services. Upon completion of the
analysis phase of the Company's Year 2000 readiness plan, the Company plans to
undertake an assessment of any material expenses it will be required to incur in
order to complete its Year 2000 readiness plan.
Although the Company believes that its Year 2000 readiness efforts are designed
to appropriately identify and address those Year 2000 issues that are within the
Company's control, there can be no assurance that the Company's efforts will be
fully effective or that Year 2000 issues will not have a material adverse effect
on the Company's business, financial condition or results of operations. The
novelty and complexity of the issues presented and the Company's dependence on
the preparedness of third parties are among the factors that could cause the
Company's efforts to be less than fully effective. Moreover, Year 2000 issues
present many risks that are simply beyond the Company's control, such as the
potential effects of Year 2000 issues on the economy in general and on the
Company's business partners and customers in particular. The Company intends to
continue to evaluate both existing and newly identified Year 2000 risks and to
develop and implement such further responsive measures as it deems appropriate.
The Company currently does not have a contingency plan, but plans to develop a
contingency plan upon the completion of the analysis phase of its Year 2000
readiness plan. Should the evaluation of both existing and newly identified Year
2000 risks indicate that there is a sooner need for a contingency plan,
responsive measures will be developed as appropriate. Any such contingency plan
will seek to minimize the impact on the Company's business, financial condition
and results of operations.
FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. This section of the
discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
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The factors set forth below as well as statements made elsewhere in this
quarterly report contain certain forward looking statements that are based on
the beliefs of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. The Company's
actual results, performance or achievements in the remainder of fiscal 1999 and
beyond could differ materially from those expressed in, or implied by, any such
forward-looking statements.
Factors that could cause or contribute to such material differences include, but
are not limited to, those discussed in this section below, as well as those
discussed elsewhere in this Transition Report. The Company undertakes no
obligation to release publicly any updates or revisions to any such
forward-looking statements that may reflect events or circumstances occurring
after the date of this Transition Report. For more information regarding
forward-looking statements, see "General Introduction" above.
Integration of INTERSOLV; Synergies. In September 1998, the Company acquired all
the share capital of INTERSOLV, Inc. ("INTERSOLV") (see Note 5 of "Notes to
Condensed Consolidated Financial Statements (Unaudited)). The Company acquired
INTERSOLV with the expectation that the acquisition will result in long-term
strategic benefits. Realization of these anticipated benefits depends in part on
whether the operations and administration of the companies are integrated in an
efficient and effective manner. There can be no assurance that this will occur.
The combined company's integration efforts have yet to be completed and are
still ongoing. The successful integration of MERANT and INTERSOLV will require,
among other things, integration of the product offerings of the companies, sales
and marketing and research and development efforts, the cooperation and
coordination of the business managers of the two companies, and the integration
of globally dispersed operations. It is possible that this integration will not
be accomplished smoothly or successfully, and that efforts to achieve
integration may require more time, expense and management attention than
anticipated. The diversion of management's attention from day-to-day operations
and any difficulties encountered in the integration process could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the integration of the Company's and INTERSOLV's
operations is not successful, if the combined companies do not achieve the
operational efficiencies and other business synergies that are anticipated or if
those synergies are not achieved as quickly as may be expected by financial
analysts or at the level expected by financial analysts, or if the effect of the
merger on earnings per share is not in line with the expectation of financial
analysts, the market price of the MERANT Ordinary Shares or the MERANT ADSs
could be significantly and adversely affected.
Fluctuations in Operating Results; Absence of Significant Backlog. The Company's
future operating results are subject to quarterly and annual fluctuations due to
a variety of factors, including demand for the Company's products, the size and
timing of customer orders and the lengthy sales cycle, product life cycles, the
ability of the Company to introduce and market new and enhanced versions of the
Company's products on a timely basis, the introduction and acceptance of new
products and product enhancements by the Company or its competitors, customer
order deferrals in anticipation of new or enhanced products or technologies, the
timing of product introductions or enhancements by the Company or its
competitors, technological changes in the software industry, changes in the mix
of distribution channels through which the Company's products are offered,
purchasing patterns of distributors and retailers, including customer budgeting
cycles, the quality of products sold, price and other competitive conditions in
the industry, changes in the Company's level of operating expenses, changes in
the Company's sales incentive plans, the cancellation of licenses during the
warranty period, non-renewal of maintenance agreements, the effects of extended
payment terms (particularly for international customers), economic conditions
generally or in various geographic areas, and other factors discussed in this
section.
A relatively high percentage of the Company's operating expenses is fixed over
the short term and if anticipated revenue for a fiscal quarter does not occur or
is delayed, the operating results for that quarter would be immediately and
adversely affected. The Company historically has operated with little product
backlog, because its products are generally shipped as orders are received. As a
result, revenue of the Company in any quarter will depend on the volume and
timing of, and the ability to fill, orders received in that quarter. In
9
<PAGE> 12
addition, a substantial portion of the Company's revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter.
Seasonality of Operating Results. The Company's revenue also is affected by
seasonal fluctuations resulting from lower sales that typically occur during the
summer months in Europe and other parts of the world. In addition, the Company
has historically experienced lower revenue for the first quarter of a fiscal
year than in the fourth quarter of the prior fiscal year. The Company typically
has recognized a high proportion of its quarterly revenue during the last month
of a fiscal quarter and significant fluctuations in new order revenue can occur
due to the timing of customer orders. Quarterly results therefore can vary to
the extent that sales for a quarter are delayed, particularly since a relatively
high proportion of the Company's expenses do not vary with revenue. Due to all
of the foregoing factors, it is possible that in some future quarters the
Company's operating results will be below the expectations of stock market
analysts and investors and that the Company's share price would likely be
materially adversely affected.
Product Concentration. Substantially all of the Company's total net revenue is
derived from products and related services for mainframe application development
in the COBOL language and COBOL compilers running on workstations and personal
computers. The Company expects that a substantial portion of its total net
revenue will be derived from such products and services in the future. As a
result, the Company's future operating results depend upon continued market
acceptance and use of the COBOL language. Any decline in the demand for or
market acceptance or use of the COBOL language or mainframes as a result of
competition, technological change or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Year 2000 Business and Compliance Issues. Information concerning the Company's
state of Year 2000 readiness, the demand for its Year 2000 remediation products
and services, the costs associated with its Year 2000 issues and its contingency
plans are incorporated herein by reference to the information included above in
this Transition Report under the caption entitled "Item 9 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Considerations".
Rapid Technological Change; Dependence on New Products. The Company is in a
market that is subject to rapid technological change. The Company must
continually adapt to that change by improving its products and introducing new
products, technologies and services. The growth and financial performance of the
Company will depend in part on its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market enhancements of existing products and new products depends in part on
its ability to attract and retain qualified employees. In the past, the Company
has experienced delays and increased expenses in developing certain new
products. Any failure by the Company to anticipate or respond adequately to
changes in technology and market conditions, to complete product development and
introduce new products on a timely basis and with an adequate level of
performance and functionality, or to attract and retain qualified employees
could materially adversely affect the Company's business, financial condition
and results of operations.
Competition. The markets in which the Company competes are characterized by
rapid technological change and aggressive competition. The Company expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets with similar
or substitute solutions that may be less costly or provide better performance or
functionality than the Company's products. Some of the Company's current and
prospective competitors in its product and service markets have greater
financial, marketing or technical resources than the Company and may be able to
adapt more quickly to new or emerging technologies, or devote greater resources
to the promotion and sale of their products than can the Company. There can be
10
<PAGE> 13
no assurance that other companies will not develop competitive products in the
future. In addition, the software industry is characterized generally by low
barriers to entry, as a result of which new competitors possessing
technological, marketing or other competitive advantages may emerge and rapidly
acquire market share. Furthermore, there can be no assurance that the Company
will be able to compete effectively in the future in the professional services
market and, particularly, in the Year 2000 professional services market.
Susceptibility to General Economic Conditions. The Company's revenue and results
of operations are subject to fluctuations in the general economic conditions in
the various areas of the world in which it does business. The risks inherent in
conducting international business generally include exposure to exchange rate
fluctuations (see the section entitled "Exchange Rate Fluctuations" below),
longer payment cycles, greater difficulties in accounts receivable collection
and enforcing agreements, tariffs and other restrictions on foreign trade, U.S.
export requirements, economic and political instability, withholding and other
tax consequences, restrictions on repatriation of earnings, and the burdens of
complying with a wide variety of foreign laws. In addition, the laws of certain
foreign countries in which the Company's products may be marketed may not
protect the Company's intellectual property rights to the same extent, as do the
laws of the United States and Europe. There can be no assurance that the factors
described above will not have an adverse effect on the Company's future
international revenue.
Dependence on Key Personnel. Several of the senior management personnel of the
Company are relatively new to the Company, including the Company's Chief
Executive Officer and Chief Financial Officer, and the Company's success will
depend in part on the successful assimilation and performance of these
individuals. Competition for qualified personnel in the software industry is
intense, and there can be no assurance that the Company will be able to attract
and retain a sufficient number of qualified personnel to conduct its business in
the future. The Company's success depends to a significant degree upon the
continued contributions of its key management, marketing, product development,
professional services and operational personnel, including key personnel of
acquired companies. The Company will not have employment agreements with most of
its key personnel, nor does it maintain key person life insurance on any of
these persons.
Management of Growth. Both of the Company and INTERSOLV have recently
experienced a period of rapid growth in net revenue. This growth has placed a
significant strain on the financial, management, operational and other resources
of the combined companies, and if it continues is expected to continue to place
a significant strain on the Company's financial, management, operational and
other resources. There can be no assurance that the Company's management
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations.
Volatility of Stock Price. The market price of the Company's securities has
experienced significant price volatility, particularly since the announcement of
the Company's proposed acquisition of INTERSOLV in June 1998, and such
volatility may occur in the future. Factors such as actual or anticipated
fluctuations in the Company's operating results, changes in financial estimates
by securities analysts, announcements of technological innovations, new products
or new contracts by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, conditions and trends in the software
and other technology industries, adoption of new accounting standards affecting
the software industry, general market conditions and other factors may have a
significant impact on the market price of the Company's securities. Furthermore,
the stock market has experienced extreme volatility that has particularly
affected the market prices of equity securities of many high technology
companies. These market fluctuations, as well as general economic, political and
market conditions may adversely affect the market price of the Company's
securities.
Recent and Future Acquisitions. The challenges of integrating the organizations
and operations of the Company and INTERSOLV have been compounded by ongoing
efforts associated with the integration of recent acquisitions by both
companies, including the acquisitions by the Company of Millennium UK Limited in
11
<PAGE> 14
April 1997, XDB Systems, Inc. in January 1998, Micro Focus Italia S.r.L. in May
1998 and Advanced Software Engineering Pty. Ltd. in August 1998 and the
acquisition by INTERSOLV of SQL Software, Ltd. in March 1998. The Company is
still in the process of integrating the operations acquired in these
transactions with its own. There can be no assurance that the anticipated
benefits of recently concluded business combinations will be realized. In
addition, these acquisitions have required significant additional management
resources and attention. The Company expects to continue growing its business
through acquisitions. If the Company is unsuccessful in integrating and managing
the recently acquired businesses or other businesses it may acquire in the
future, the Company's business, financial condition and results of operations
could be adversely affected in future periods.
Enforceability of U.S. Judgments. The Company is a public limited company
organized under the laws of England and Wales. Judgments of U.S. courts,
including judgments against the Company, predicated on the civil liability
provisions of the federal securities laws of the United States, may not be
enforceable in English courts.
Exchange Rate Fluctuations
Revenue, costs and expenses arising in currencies other than U.S. dollars are
translated using average exchange rates for the applicable period. Assets and
liabilities denominated in currencies other than the reporting currency are
translated at exchange rates in effect at the balance sheet date. The majority
of the Company's net revenue arises in U.S. dollars, 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 significant
impact on the Company's operating results, notably when expressed in GB pounds.
During the transition quarter, fluctuations between the U.S. dollar and the GB
pound were not significant, and net exchange rate gains or losses on operational
transactions were immaterial.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
Effective as of the close of business on March 13, 1998, the Company undertook a
subdivision (or stock split) of its Ordinary Shares on a 5-for-1 basis. The
Company's ADSs have been adjusted such that each ADS represents 5 Ordinary
Shares. All share and per share references included in this Transition Report
have been adjusted to reflect the impact of the above-mentioned stock split of
the Ordinary Shares.
12
<PAGE> 15
PART IV
ITEM 17. FINANCIAL STATEMENTS
See Item 18.
ITEM 18. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income
(in thousands, except per share and per ADS data)
(unaudited)
<TABLE>
Three months Three months
ended ended
April 30, 1998 April 30, 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenue
Product revenue $29,542 $17,892
Maintenance revenue 13,015 12,683
Service revenue 6,093 1,958
- ------------------------------------------------------------------------------------------------------------
Total net revenue 48,650 32,533
- ------------------------------------------------------------------------------------------------------------
Cost of revenue
Cost of product revenue 2,116 2,177
Cost of maintenance revenue 3,438 2,823
Cost of service revenue 4,243 2,310
- ------------------------------------------------------------------------------------------------------------
Total cost of revenue 9,797 7,310
- ------------------------------------------------------------------------------------------------------------
Gross profit 38,853 25,223
- ------------------------------------------------------------------------------------------------------------
Operating expenses
Research and development 8,378 8,527
Sales and marketing 19,217 11,987
General and administrative 4,267 2,178
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 31,862 22,692
- ------------------------------------------------------------------------------------------------------------
Income from operations 6,991 2,531
Interest income, net 1,096 983
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 8,087 3,514
Income taxes (2,750) (1,139)
Net income $5,337 $2,375
- ------------------------------------------------------------------------------------------------------------
Net income per share: basic $0.07 $0.03
Net income per ADS: basic $0.34 $0.15
- ------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding: basic 79,483 77,767
Shares converted to ADS equivalent 15,897 15,553
- ------------------------------------------------------------------------------------------------------------
Net income per share: diluted $0.06 $0.03
Net income per ADS: diluted $0.32 $0.15
- ------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding: diluted 84,191 80,755
Shares converted to ADS equivalent 16,838 16,151
- ------------------------------------------------------------------------------------------------------------
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. Instead the conversion rights of such ADSs were adjusted such that each
ADS now represents five ordinary shares. Per share earnings also are shown on an ADS equivalent basis.
The accompanying notes are an integral part of these condensed consolidated financial statements
</TABLE>
13
<PAGE> 16
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
April 30, 1998 January 31, 1998
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $52,377 $48,174
Short-term investments 40,448 36,316
Accounts receivable, net 39,074 47,798
Inventories 421 519
Prepaid expenses and other assets 3,787 2,833
- -------------------------------------------------------------------------------------------------------------------
Total current assets 136,107 135,640
- -------------------------------------------------------------------------------------------------------------------
Fixed assets:
Property, plant and equipment, net 40,224 39,083
Goodwill, net 4,883 5,346
Software product assets, net 19,824 20,328
- -------------------------------------------------------------------------------------------------------------------
Total assets $201,038 $200,397
- -------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Bank loans $1,663 $1,652
Accounts payable 6,346 6,957
Accrued employee compensation 7,568 12,383
Income taxes payable 12,926 10,459
Deferred revenue 29,208 32,848
Other current liabilities 11,643 12,085
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 69,354 76,384
- -------------------------------------------------------------------------------------------------------------------
Long-term debt and other liabilities 18 20
Deferred income taxes 9,463 9,159
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 78,835 85,563
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Ordinary shares: 2 pence (GB) par value,
112,500,000 shares authorized, 79,682,000
outstanding (79,417,000 at January 31, 1998) 2,547 2,546
Additional paid-in capital 34,731 33,362
Unrealized (loss) gain on available-for-sale securities, net of tax (28) 44
Treasury stock (7,769) (7,769)
Retained earnings 94,356 89,019
Currency translation adjustment (1,634) (2,368)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 122,203 114,834
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $201,038 $200,397
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements
</TABLE>
14
<PAGE> 17
Condensed Consolidated Statements of Cash Flow
(in thousands)
(unaudited)
<TABLE>
Three months Three months
ended ended
April 30, 1998 April 30, 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $5,337 $2,375
Adjustments to reconcile net income to cash provided by operations
Depreciation of fixed assets 2,896 1,968
Amortization of software product assets 2,782 3,121
Amortization of goodwill 464 0
Loss on sale of fixed assets (4) (3)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 8,818 (1,710)
Decrease in inventories 92 104
(Increase) in prepaid expenses and other assets (1,037) (822)
Increase (decrease) in accounts payable (559) 144
Increase in product royalties payable 6 453
Increase (decrease) in accrued employee compensation (4,678) 315
Increase in accrued payroll taxes 461 204
Increase in income taxes payable 2,471 1,099
Increase (decrease) in deferred revenue (3,782) 2,246
(Decrease) in other current liabilities (452) (2,671)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,815 6,823
- ------------------------------------------------------------------------------------------------------------
Investing activities
Purchases of property, plant & equipment, net of capital lease obligations (4,085) (1,223)
incurred
Software product asset purchases (1,999) (2,168)
Acquisition of subsidiary, net of cash balances acquired 0 (3,208)
Available-for-sale securities (4,132) (36,629)
Disposals of property, plant and equipment 13 566
- ------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (10,203) (42,662)
- ------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of ordinary shares, net of expenses 1,408 (281)
Borrowings (17) 263
Repayment of capital leases (1) (10)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,390 8
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 201 (44)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 4,203 (35,875)
Cash at beginning of period 48,174 73,119
- ------------------------------------------------------------------------------------------------------------
Cash at end of period $52,377 $37,244
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements
</TABLE>
15
<PAGE> 18
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
MERANT plc (the "Company") is incorporated in England and Wales. Where
applicable, the term "Company" also includes the direct and indirect
subsidiaries of MERANT plc. The condensed consolidated financial statements
shown herein are stated in U.S. dollars and are prepared under U.S. generally
accepted accounting principles for interim financial information.
The financial information at April 30, 1998 and for the quarters ended April 30,
1998 and 1997 is unaudited but includes all adjustments the Company considers
necessary for a fair presentation of its financial position at such date and the
operating results and cash flows for such periods. The year-end balance sheet at
January 31, 1998 was derived from audited financial statements, but does not
include all disclosures required by U.S. generally accepted accounting
principles. Results for the transition period ended April 30, 1998 are not
necessarily indicative of results that may be expected for the fiscal year
ending April 30, 1999 or any future interim or full-year period. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to SEC regulations. Management believes that
the disclosures are adequate to make the information presented herein not
misleading. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended January 31, 1998 included in the Company's Annual Report on
Form 20-F which was filed with the Commission on May 29, 1998.
The financial information contained in this quarterly report does not constitute
statutory accounts as defined in section 240 of the UK Companies Act 1985. The
figures for the fiscal year ended January 31, 1998 are based on the audited
financial statements which have been filed with the UK Registrar of Companies,
and the auditors' reports on both the U.S. and UK financial statements for the
year ended January 31, 1998 were unqualified.
2. Cash and Cash Equivalents - Short-Term Investments
Cash and cash equivalents include cash placed on short-term deposit and
short-term money market instruments with original maturities of less than three
months.
The Company invests its excess cash in accordance with an investment policy
approved by the Board of Directors and implemented as of February 1997. This
policy authorizes investment in U.S. government securities, municipal bonds,
certificates of deposit with highly rated financial institutions and other
specified money market instruments of similar liquidity and credit quality.
In accordance with Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," management
of the Company determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation 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.
The Company has determined that all of its investment securities are to be
classified as available-for-sale. Such securities are stated at amounts which
approximate fair value, based on quoted market prices, with the unrealized gains
and losses reported as a separate component of shareholders' equity.
Available-for-sale securities with original maturities of less than three months
are classified as cash equivalents.
16
<PAGE> 19
3. Earnings Per Share
The Company's ordinary shares have been listed on the London Stock Exchange
since 1983, and are currently listed under the symbol MRN. Since 1992, the
Company's ordinary shares also have been listed on the Nasdaq Stock Market in
the U.S. in the form of American Depositary Shares ("ADSs"), as evidenced by
American Depositary Receipts. The Company's current NASDAQ symbol is MRNT.
Effective as of the close of business on March 13, 1998, the Company undertook a
subdivision (or stock split) of its ordinary shares on a 5-for-1 basis. The
conversion ratio of the Company's ADSs has been adjusted such that each ADS
represents 5 ordinary shares. All share and per-share references included in
this report have been restated to reflect the impact of the above-mentioned
stock split.
4. Acquisitions
On April 30, 1997, the Company acquired all the share capital of Millennium UK
Limited ("Millennium") for total consideration of approximately $6.5 million,
which consisted of a payment of $3.25 million in cash and the issuance of
745,710 ordinary shares of the Company with a value of approximately $3.25
million on the date the acquisition was completed. The transaction was accounted
for as a purchase. Millennium provided consulting and project management
services and had expertise in the estimating, planning and management of Year
2000 compliance projects for large systems. Effective January 31, 1998,
Millennium's consulting services were integrated with the professional service
operations of the Company.
On January 20, 1998, the Company acquired all the share capital of XDB Systems,
Inc. ("XDB") for total consideration of approximately $18.6 million on the date
of the acquisition, which consisted of the issuance of 2,084,825 ordinary shares
of the Company (including up to 192,850 ordinary shares to be issued to holders
of XDB options upon exercise of such options). The transaction was accounted for
as a pooling of interests. XDB, a privately held corporation based in Columbia,
Maryland, is a provider of DB2 database development, maintenance and
connectivity solutions.
5. Subsequent Events
On May 15, 1998, the Company acquired all the share capital of its Italian
distributor, Micro Focus Italia, s.r.l., for total cash consideration of $4.3
million. On August 13, 1998, the Company acquired all the share capital of its
Australian distributor, Advanced Software Engineering Pty Ltd., for total cash
consideration of $2.4 million. These transactions are intended to beaccounted
for as purchases.
On September 24, 1998, the Company completed the acquisition of INTERSOLV, Inc.
("INTERSOLV"). The acquisition is intended to be accounted for as a pooling of
interests under U.S. GAAP. Under the terms of the agreement, each common share
of INTERSOLV was exchanged for 0.55 MERANT ADSs. In addition, each outstanding
option or right to purchase or acquire shares of INTERSOLV stock was assumed by
the Company and became an option or right to purchase or acquire MERANT ADSs,
with appropriate adjustments to the price and number of shares based on the
exchange ratio of 0.55 ADSs per INTERSOLV share. The merger was structured as a
tax-free reorganization under U.S. tax law. The Company issued approximately
12.6 million new MERANT ADSs (representing approximately 63.1 million new MERANT
ordinary shares) in exchange for INTERSOLV's common stock and share equivalents
outstanding, which at the time of the completion of the merger represented
approximately 46% of MERANT's share capital on a fully-diluted basis. Prior to
the merger, INTERSOLV was a public company listed on the Nasdaq National Market.
INTERSOLV was based in Rockville, Maryland and was a provider of software
solutions that facilitate the development, delivery and deployment of business
information systems. INTERSOLV's products and services were focused primarily in
the areas of automated software quality, data connectivity and enterprise
application renewal.
17
<PAGE> 20
The following selected historical financial information of MERANT and Intersolv
has been derived from their respective historical consolidated financial
statements, and should be read in conjunction with such consolidated financial
statements and the notes thereto. For pro forma purposes, MERANT's statements of
operations for the three fiscal years ended January 31, 1998 have been combined
with the statements of operations of Intersolv for the three fiscal years ended
April 30, 1998 and give effect to the merger as a pooling of interests. MERANT's
balance sheet at April 30, 1998 has been combined with Intersolv's balance sheet
at April 30, 1998.
The unaudited pro forma information presented below is for illustrative purposes
only and is not necessarily indicative of the operating results or the financial
position that would have occurred if the merger had been consummated as of the
beginning of the periods presented nor is it necessarily indicative of future
operating results or financial position.
Summary Historical and Unaudited Pro Forma
Combined Condensed Financial Information'
(in thousands)
<TABLE>
As of or for the Year Ended
January 31 / April 30,
------------------------------------------------
1996 1997 1998
------------ ------------ -------------
Income Statement Data
---------------------
<S> <C> <C> <C>
Net revenue $280,097 $283,640 $363,789
Gross profit 205,299 208,473 265,285
Net Income (loss) (14,867) (35,856) 20,148
Balance Sheet Data
-------------------
Working Capital $69,968 $62,421 $94,230
Total assets 272,523 257,887 333,263
Long-term debt 2,519 1,314 612
Shareholder's equity 157,109 123,493 172,073
</TABLE>
Effective November 30, 1998, the Company changed its fiscal year end from
January 31 to April 30.
Effective February 16, 1999, the Company changed its corporate name from "Micro
Focus Group Public Limited Company" to "MERANT plc".
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this Transition Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: February 26, 1999 MERANT plc
By: /s/ Kenneth A. Sexton
--------------------------------
Kenneth A. Sexton
Senior Vice President, Finance and
Administration, Chief Financial
Officer and Secretary
19
