Annualreport2008
Keepingourworldworking Contents
Overview
1 Introduction
2 Highlights of the year
4 Chairman’s statement
5 What we do
10 Moving our markets forward
12 Key performance indicators
Business review
13 Chief Executive Officer’s statement
17 Finance review
22 Risk factors
23 Corporate and social responsibility
Management and governance
24 Board of directors
26 Directors’ report
30 Corporate governance
35 Remuneration report
42 Statement of directors’ responsibilities
Consolidated ﬁnancial statements and notes
43 Independent auditors’ report to the members
of Micro Focus International plc (Group)
44 Consolidated income statement
45 Consolidated balance sheet
46 Consolidated statement of changes
in shareholders’ equity
47 Consolidated cash flow statement
48 Summary of significant accounting policies
54 Notes to the financial statements
Company ﬁnancial statements and notes
74 Independent auditors’ report to the members
of Micro Focus International plc (Company)
75 Company balance sheet
76 Notes to the Company financial statements
Additional information
81 Offices
83 Historical summary
84 Directors, Secretary, registered office
and advisers
Micro Focus – the world leader in modernising
the applications that keep our world working
every day
Moving 72,000 containers
Caring for 60 million patients
At the heart of Fortune 500 business operations
Maintaining local government infrastructure
Processing 80% of point of sale transactions
Reducing government costs and risks
Making information accessible
Minimising the impact of flight delays
Connecting 500 million mobile phone users
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9 Overview
Micro Focus International plc Annual report 2008 01
Growth
Strong organic growth in the 12 months to
30April2008,supplementedbytheacquisition
of Acucorp. Since then Micro Focus has made
two further shrewd acquisitions (NetManage
Inc and Liant Software Corporation).
Solutions
During the year, Micro Focus launched
significant solutions and upgrades across
its three operating areas – application
development, application modernisation
andapplicationportfolio management.
Taking our customers into tomorrow
Micro Focus is an expanding software company. Operating from
32 offices in 17 countries, it enables its 15,000 customers – which
include 70% of the Fortune 100 – to meet their business objectives
by modernising their core IT systems, quickly and cost effectively.
Our ability to provide the most appropriate solutions is resulting
in an increasing number of companies – large and small – turning
to us to harness their existing IT strengths.
Our strategy
Our commitment to a profitable growth strategy is driven by the
technologymodernisationneedsofourincreasingnumberofcustomers.
We will continue to offer leading application management solutions,
and to develop and acquire complementary technology to meet a
broadening range of customer requirements. 02 Micro Focus International plc Annual report 2008
Overview
Highlights of the year
● Cash generated from continuing operations
$96.2 million (2007: $58.2 million)
● Cash balance as at 30 April 2008 of $92.4 million
(30 April 2007: $85.0 million)
● Final proposed dividend of 9.4 cents per share;
total dividend for the year up 30% to 13 cents
per share (2007: 10 cents per share)
Statutory results
● EBITDA
†
$80.7 million (2007: $59.6 million)
● Operating profit $74.8 million (2007: $57.3 million)
● Profit before tax $76.8 million (2007: $60.0 million)
● Basic earnings per share 27.67 cents
(2007: 21.96 cents)
‡
* In assessing the performance of the business the directors use “Adjusted EBITDA”,
“Adjusted operating proﬁt”, “Adjusted proﬁt before tax” and “Adjusted earnings per share”,
being the relevant statutory measures, prior to exceptional items, amortisation of purchased
intangibles and share-based compensation. Exceptional items, share-based compensation and
amortisation of purchased intangibles are detailed in note 4.
† EBITDA and Adjusted EBITDA are reconciled to operating proﬁt in note 4.
‡ Earnings per share and Adjusted earnings per share are detailed in note 8.
Key highlights
● Revenue up 33% to $228.2 million
(2007: $171.6 million)
– 15% organic revenue growth at constant
currencies for the full year
● Adjusted EBITDA* up 36% to $88.5 million
(2007: $65.3 million)
†
– 38.8% Adjusted EBITDA margin, up from
38.0% last year
● Adjusted operating profit* up 36% to $86.6 million
(2007: $63.5 million)
● Adjustedprofitbeforetax*up34%to$88.6million
(2007: $66.2 million)
● Adjusted earnings per share* up 32%
to 32.08 cents (2007: 24.38 cents)
‡
250
200
150
100
50
0
06 07 08
Revenue
$million
90
80
70
60
50
40
30
20
10
0
06 07 08
Adjustedoperatingproﬁt
$million
100
80
60
40
20
0
06 07 08
Net cash balance
$million
90
80
70
60
50
40
30
20
10
0
06 07 08
Adjusted EBITDA
$million New customer wins
Overview
Micro Focus International plc Annual report 2008 03
Volkswagen Financial Services (VW) – Increasing
productivity and gaining a complete view of their
COBOL applications
Micro Focus Revolve provides complete transparency for
Volkswagen Financial Services’ 1,600 COBOL and 1,900
assembler programmes, improving application speed and
enhancing customer service and business responsiveness.
For the full story, see page 20.
TESCO
Revenue by geographic
sector – 2008
$million
North America 96.5
EuropeandMiddleEast 96.0
Rest of World 35.7
Revenue by type – 2008
$million
Licence fees 113.3
Maintenance fees 104.2
Consultancy fees 10.7
Employees by function
– 2008
Number
Sales and distribution 229
Research and development 190
General and administration 172
Cost breakdown
(pre exceptionals) – 2008
$million
Cost of sales 22.6
Selling and distribution 63.2
Researchanddevelopment29.5
Administrative expenses 31.6
Tesco – A platform-independent common
operating model
Micro Focus’ modernisation expertise is helping Tesco
maintain momentum behind its strategic IT project, as well
as playing a key role in the development of its presence in
the US. For the full story, see page 15.
CSC Financial Services Group – A new solution
at lower cost
Micro Focus Mainframe Express enables thousands of
programmes that would normally run on a mainframe
environment to run in a lower-cost Windows server
environment, allowing CSC to deliver more system
capability to its clients. For the full story, see page 16.
Miller Brewing Company – Speeding application
development and testing environment, reducing
mainframe expense
By assisting the Miller Brewing Company in moving its
reliance from the mainframe into a server-based and
workstation environment, Micro Focus is helping the
company to achieve maximum competitive advantage,
while at the same time reducing risk and cost. For the
full story, see page 19. 04 Micro Focus International plc Annual report 2008
Overview
Chairman’s statement
The board continues to adopt a progressive dividend policy
reﬂecting the long-term earnings and cash ﬂow potential of
Micro Focus and I am pleased to announce a proposed ﬁnal
dividend of 9.4 cents per share, giving a full year dividend
of 13.0 cents per share. This represents a 30% increase when
compared to a full year dividend of 10.0 cents last year.
We ﬁnished the year with cash of $92.4 million, and generated
$96.2 million of cash from continuing operations during the year.
Our business model has low ongoing capital requirements and
delivers strong cash generation. During the year, $47.4 million
of cash was used to fund the acquisition and restructuring of
Acucorp. Since the year end we have announced the acquisition
of NetManage for $73.3 million. NetManage’s cash balance
immediately prior to closing was $27.9 million. In addition,
we announced on 11 July 2008 the acquisition of Liant Software
Corporation for $5 million.
The board would like to thank all of our employees for their
continued hard work and commitment throughout the year.
Our foundations are well established and we continue to build
for the future.
We remain focused on proﬁtable revenue growth and I am
conﬁdent in the Company’s ability to continue to deliver value
to all of its stakeholders. Micro Focus is well positioned for the
future and we look forward to the year ahead with conﬁdence.
Kevin Loosemore Chairman
Micro Focus has delivered another year of strong ﬁnancial results,
achieving signiﬁcant organic revenue growth whilst improving
our proﬁt margins. Our acquisition also delivered very positive
results. We successfully integrated Acucorp, Inc., a company
acquired in May 2007. Revenue and proﬁts from this acquisition
were both ahead of our initial expectations. On 18 June 2008,
we completed the acquisition of NetManage, Inc.
Our ambition is to maintain double digit organic revenue growth,
at constant currencies, over the long term. We will complement
our organic growth plan with compelling acquisitions that
provide a positive impact on shareholder value when the right
opportunities arise.
The performance achieved over the past year continues to reﬂect
well on the entire Micro Focus team and highlights the strong
fundamentals of the business. We have ﬁrst rate technology
solutions, a loyal and satisﬁed customer base and a leading
position in a substantial, sustainable and growing market place. What we do
Overview
05
Micro Focus – a world leader
in modernisation
Today’s tighter economic environment is driving business leaders to
consider their choices carefully when investing in technology. Across all
industry sectors, the appetite for expensive IT packages and technology
“rewrites” is disappearing as Boards increasingly recognise the rationale
behind a well-planned modernisation of their organisation’s core systems.
The clear advantage of lower costs, reduced risks and the preservation
of competitive intelligence is resulting in a substantial increase in
demand for Micro Focus solutions. 06
Overview
What we do
At Micro Focus we
believe in providing
an evolutionary
IT journey
Micro Focus’ Application Portfolio
Management (“APM”) solution enables
the CIO to align IT spend with business strategy,
by providing factual business intelligence for
informed decision making, taking the risk out
of change.
• Make fact-based IT decisions
• Save up to 30% of maintenance budgets
• Grow innovation capacity by over 25%
APM enables IT organisations to fully realise
the value of existing assets while delivering
the innovation the business needs to compete
and grow. Overview
Micro Focus International plc Annual report 2008 07
Micro Focus’ Application Modernisation
is all about extracting value from existing systems
in more efficient ways and provides the
opportunity to utilise existing business processes
with greater flexibility. Armed with the
appropriate understanding and information,
IT leaders can quickly see what strategies make
sense on an application by application basis and,
in many cases; the most rational approach is to
build on the strengths of existing applications
while addressing the issues that are truly
preventing IT from delivering projects that add
value to the business. Utilising Micro Focus
modernisation tools, companies are able to
modernise existing applications and deliver
significantly higher return on investment,
improving operational efficiency through
re-use of proven business logic.
• Enables developers to deliver up to
40% faster
• Reduces costs by moving workload to
lower-cost platforms
• Frees up resources to deliver on new
high-impact projects
Micro Focus’ Application Development
solution provides contemporary and highly
productive development environments for the
creation, maintenance and extension of
enterprise applications.
• Minimises cost and time to market through
enhanced developer productivity
• Reduces risk by promoting high quality
software development and testing
• Increases ROI by exploiting the potential
of existing enterprise applications
Disclaimer:
The Gartner Report(s) described herein, (the “Gartner Report(s)”) represent data, research
opinion or viewpoints published, as part of a syndicated subscription service available only
to clients, by Gartner, Inc., a corporation organised under the laws of the State of Delaware,
USA, and its subsidiaries (“Gartner”), and are not representations of fact. The Gartner Report(s)
do not constitute a speciﬁc guide to action and the reader of this Company report assumes
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thereof, in making any decision, including any investment decision. Each Gartner Report speaks
as of its original publication date (and not as of the date of this Company report) and the opinions
expressed in the Gartner Report(s) are subject to change without notice. Gartner is not responsible,
nor shall it have any liability, to the Company or to any reader of this Company report for errors,
omissions or inadequacies in, or for any interpretations of, or for any calculations based upon
data contained in, the Gartner Report(s) or any excerpts thereof.
“IT modernization represents the
changes that every IT organization
must face as the generations of
technology, skills and expectations
are inevitably replaced by the next
ones. Every enterprise must begin
to prepare for the inevitable impact
this will have.”
Dale Vecchio, Gartner Inc.,ITModernization:
TheChangingoftheGuard, 28 May 2008
Modernisation is not throwing out the
old and bringing in the new: old IT is not
necessarily bad; new IT is not necessarily good.
Successful modernisation evolves the old and
blends it with the best of the new.
It protects existing application, data and skills
investments, while enabling organisations
to respond to business requirements faster,
to reduce infrastructure costs and to improve
operational efficiencies. Overview
Micro Focus is the leading vendor of software for
the assessment, modernisation, and management of
business critical applications. Software written in the
COBOL programming language – 80% of the world’s
currently active computer code – presents us with a
substantial market opportunity.
Quantifying the value
of IT assets
INSEAD research, sponsored by Micro Focus, revealed
that a third of respondents did not know how much
they invest in their software assets. In the current
economic climate, it is surprising that many of the
world’s leading companies are overlooking the value
of these assets when other corporate assets, such as
cash, brand, property and intellectual property, are
measured regularly.
In the resulting report, written by Professor Soumitra
Dutta, INSEAD’s Chair of Business & Technology,
software was identified as being critical to business
strategy, and conjoint analysis* as the best approach
for measuring its value. Micro Focus solutions are at
the heart of companies’ efforts to evaluate, manage
and modernise their IT assets and, in a reaction to
the report, Micro Focus called for a radical shift
in the management and valuation of IT assets at
organisations, worldwide.
* Conjoint analysis methodology requires companies to make trade-offs across different business outcomes
associated with the software asset. If organisations analyse the conversion of real business outcome
attributes generated by core IT systems into measures of business value, then there is a strong opportunity
to calculate the real ﬁnancial value of core software assets to the business.
08
What we do Overview
Micro Focus International plc Annual report 2008 09
Keeping core IT assets running
Micro Focus recognises the challenges of maintaining core IT systems. They are at the heart of
companies’ day-to-day operations and hold vital information linked to competitive advantage.
Because sourcing the experienced and highly-trained people needed to manage these critical assets
is increasingly difficult, in 2007, Micro Focus launched its Academic Connections (“ACTION”)
Programme. This gives universities around the globe free access to the latest technology and
teaching tools for enterprise application development.
Safeguarding your IT assets (future proofing)
More than 65 academic institutions from around the world have joined the Micro Focus ACTION
Programme, with the result that core COBOL skills are being taught in 12 countries across four
continents, and more than 5,000 students a year are graduating from ACTION-assisted courses.
In addition, Micro Focus has formed a partnership with the UK’s Employer Strategy Forum (“ESF”),
to address growing concerns about declining IT skills in business.
“Despite the skills issues, many
organizations have COBOL portfolios
that are perfectly usable and work well.
Should these organizations throw
them all away in the near term? No.
The organizations can leverage not
only these COBOL transactions,
but also use their current COBOL
developers as service developers.”
Dale Vecchio/Susan Landry, Gartner Inc.,
HowToday’sApplicationDevelopment
OrganizationsCanManageRetiringITSkills,
July 2008 10 Micro Focus International plc Annual report 2008
Overview
Moving our markets forward
Global 2000 accounts
During the past year Micro Focus has continued to increase the
number of large deals it has secured in the global 2000 sector.
This results from a solid, go-to-market focus on a segment,
the complex infrastructures of which hold challenges and
opportunities for business innovation. Combined with organic
growth, our acquisition strategy, which began extending our
portfolio management capabilities last year, is also bringing
increased relevance to these customers as improved application
development and SOA (Service Oriented Architecture) solutions
are added to the Micro Focus family.
Systems integrators and outsourcers
Micro Focus has historically offered a strong commercial
proposition to its systems integrator and outsource partners.
This continues to be the case as companies strive to improve
the business value of their existing application assets, rather
than engage in high-risk replacement strategies. Our portfolio
management solution, which continues to gather momentum,
already supports many global providers. It combines well with
the only modernisation toolset positioned to provide support
for a diverse range of modernisation strategies, from platform
migration to extension, from .NET to Java and Web 2.0.
ISVs (Independent Software Vendors)
Micro Focus continues to earn strong revenues from its
application provider community across all industry sectors.
There is particular growth in deployment revenues, as
applications ﬁnd increasingly large audiences, not least through
deployment to internet-based end user models. The acquisition
of Acucorp at the start of the year has driven even greater
innovation and impetus into this community.
Small and mid-sized enterprises
Micro Focus has recorded good growth in this area of its
customer base by continuing to provide core functionality to
support existing applications. In much the same way as with
our global 2000 customers, our solid organic growth in this
sector continues to be enhanced by relevant acquisitions.
Companies’ increasing uptake of SOA, combined with the
need to mitigate risk in times of heightened economic
uncertainty, is driving an increasing number of them to
focus on modernising their core systems.
“The historical answer to legacy
modernization has been for CIOs to
buy into the next technology hype
cycle and allocate large sums of money
in the belief that newer is better.
The days when one-size-fits-all
technology solutions were successful
are largely over; IT needs more of a
surgical-precision approach, which
requiresapplicationtriageinformation.”
The Application Management Continuum
Offers CIOs A Contemporary Approach
to Modernization, Forrester Research, Inc.
July 2008
“Firms on smaller mainframes –
in the 1,000 MIPS range and below
– are seeing huge reductions in
third-party software costs by moving
COBOL applications to UNIX and
Wintel platforms.”
The Application Management Continuum
Offers CIOs A Contemporary Approach
to Modernization, Forrester Research, Inc.
July 2008 Overview
Micro Focus International plc Annual report 2008 11
Maximising value
according to
industry analysts
More than 20% of revenue
generated from the top 2,000 US and
European companies now comes from
alliances, with more expected soon.
These companies earn higher ROIs on
their alliances than they do from their
core businesses.
Leading-edge companies are
grouping alliances to create a string of
interconnected relationships to enable
them to overpower the competition.
These associations enable companies
to break into related markets while,
at the same time, enabling them to
minimise risk and maintain the integrity
of their core competencies.
Strategic partnerships
Micro Focus enjoys partnerships with many blue chip
IT companies, including Accenture, CSC, EDS, HP,
IBM, Intel, Lawson, Microsoft, Oracle and Sun
Microsystems. Micro Focus is also a member of the
Web Service Interoperability (“WS-I”) Group.
No single company can provide a complete solution for every customer.
To enable us to meet our customers’ needs more comprehensively
and effectively, we work with a selection of partners around the world,
from strategic partnerships, to key System Integrators and Software
Vendor relationships, through our consortium of partners, each of
which has its own particular skills and area of specialisation. 12 Micro Focus International plc Annual report 2008
Overview
Key performance indicators (“KPIs”)
Revenue growth
33.0%
19.4%
08
07
38.8%
38.0%
08
07
108.7%
89.1%
08
07
32.08 cents
24.38 cents
08
07
Revenue comprises total revenues including
the contribution of acquisitions and is
compared with the prior year. The board aims
to maintain double digit organic revenue
growth, supplemented with further growth
from compelling acquisitions.
Earnings before interest, tax, depreciation
and amortisation of intangible ﬁxed assets,
exceptional items and share-based
compensation charge. The adjusted EBITDA
margin represents adjusted EBITDA divided by
revenue for the year. The Company targets to
maintain margins at this level. The current year
included the results of the Acucorp acquisition
from May 2007 which contributed to the
increased margin.
This measure is calculated using the cash
ﬂows generated from continuing operations
divided by adjusted EBITDA – the result
indicates that the Group is generating cash
from its on-going business which can be used
to reinvest in the development of the business
including ﬁnancing acquisitions, fund liabilities
and pay dividends to shareholders.
Adjusted EPS is calculated by taking income
for the ﬁnancial year, prior to exceptional
items, amortisation of purchased intangibles
and share-based compensation, divided by the
weighted average number of ordinary shares
in issue during the year. This measure indicates
the ability of the Company to continue to
adopt a progressive dividend policy.
Adjusted EBITDA margin
Cash generation from
operations
Adjusted EPS
Description
TheCompanyusesseveralkeyperformanceindicatorsinternallytomonitortheperformanceofthe
businessagainsttheachievementofobjectives.AsummaryofsomeofthemoreimportantKPIsthat
areusedwithabriefdescriptiononhowtheyarecalculatedandtheresultsfortheyearareasfollows:
Metrics Performance Chief Executive Ofﬁcer’s statement
Business review
Micro Focus International plc Annual report 2008 13
Execution
Over the past year, we delivered a strong set of ﬁnancial results
and made another acquisition to further our strategic aims.
We have successfully executed ahead of our initial expectations.
Since the year end, the management team has been further
strengthened with the appointment of Paul Rodgers as Worldwide
Human Resources Director in May 2008 and Marc Andrews as
Executive Vice President, Sales and Marketing in June 2008.
Both individuals are highly experienced in the software industry.
The sales team has been further strengthened and we will
continue to invest to drive the business forward. It has been
particularly encouraging to see the improved performance in
our North American operation as well as continued excellent
performances from our Europe and Rest of World operations.
We continue to reﬁne our marketing and delivery capabilities
with a ﬁrm focus on developing senior level contacts within our
target customers. With signiﬁcant momentum building around
the “modernisation message” it has been encouraging to see
the Company establish itself as a thought leader in this area.
While organic revenue growth is our primary focus, our strategy
review, carried out in the six months to October 2006,
highlighted the potential for further proﬁtable revenue growth
through acquisitions. On 4 May 2007, we acquired Acucorp
for $40.9 million. Acucorp provides technology that is highly
complementary to Micro Focus’ core business in the COBOL
Development Tool space as well as providing the opportunity for
Micro Focus to expand its reach into the small and medium-sized
enterprise (“SME”) markets.
On 18 June 2008 we acquired NetManage, a software provider
of technologies to transform core applications into new
web-based business solutions. Combining the businesses of
Micro Focus and NetManage will further strengthen Micro Focus’
For over 30 years, Micro Focus has inﬂuenced and innovated
in the Enterprise Applications market and we have built up
a leading position in the Application Modernisation market.
Major corporations are increasingly becoming aware that it is
possible to obtain all of the required business beneﬁts through
modernising existing applications, as opposed to implementing
the high risk and costly alternative of rewriting these applications
or replacing them with a packaged solution with little additional
business beneﬁt.
Micro Focus technologies and solutions are a driving force
behind the day-to-day business success of many of the largest
companies in the world, helping these organisations achieve
competitive differentiation through modern, efﬁcient and low
cost platforms. This proposition is particularly relevant against
the backdrop of the uncertain economic outlook. 14 Micro Focus International plc Annual report 2008
Business review
Chief Executive Ofﬁcer’s statement
Continued future revenue growth is largely dependent on driving
licence sales. Our strategy review, undertaken in the six months
to October 2006, identiﬁed the major growth opportunity
around larger value licence fee transactions into the Global 2000
(“G2000”) companies. It was encouraging that we again signed
a number of these transactions in the year, including Boeing,
Wal-Mart and RBS, carrying on from our success last year.
Our solutions reduce cost, lower risk, and provide clear and
compelling returns on investment for our customers. Whilst we
recognise the current uncertain macro economic conditions, the
defensive characteristics of our business model, combined with
the relevance and compelling nature of our solutions, lead us to
view the current year with conﬁdence. Our ambition is to achieve
double digit organic growth, at constant currencies, over the
longer term whilst maintaining our EBITDA margin.
A robust and sustainable market exists to support our growth
strategy. Our key focus remains on organic growth although
we continue to review the potential for further acquisitions to
enhance the value of our business, as evidenced by the recent
acquisition of NetManage in June 2008 and Liant Software
Corporation in July 2008.
Stephen Kelly Chief Executive Ofﬁcer
position as a leading player in the growing Application
Modernisation market and provide the enlarged Group with
further opportunities for growth through a more comprehensive
and broader product offering. Due to the complementary nature
of the two businesses from a market, product and ﬁnancial
perspective, we are well placed to deliver value from this
acquisition and look forward to implementing the integration
of the NetManage business.
We continue to invest in expanding our solution set as well
as extending our partnerships with other technology companies,
system integrators and outsourcers to take advantage of the
considerable market opportunity open to us.
Summary and outlook
We are encouraged by the progress made over the past year
reﬂecting the strong fundamentals of the business.
Micro Focus beneﬁts from having a business model with a high
proportion of predictable and recurring revenue. Of licence
revenues, which made up 49.7% of Group revenues in the year,
the majority comes from high volume, low value transactions
which are supplemented by larger value transactions, the size
and volume of which we are seeing increase. Approximately one
third of licence revenues come from royalties from other software
companies, which provides additional predictability.
Maintenance revenues, which made up 45.6% of Group revenues
in the year, are secure and robust. Maintenance revenue growth
is driven by the retention of existing customers as well as the
addition of new maintenance revenue associated with the sale
of new licences. An encouraging performance in both of these
areas in the year provides high levels of revenue visibility going
forward. The smallest proportion of our revenue is derived from
our consultancy services and it is intended that this revenue will
remain a similar proportion of total revenue in the coming year. Business review
Micro Focus International plc Annual report 2008 15
Penetrating international markets
with a ground-breaking application
strategy
Tesco’s competitiveness in retail depends in no small part on its highly effective IT systems. This is
especially true for its innovative Continuous Replenishment (“CR”) system, which drives store
ordering. This highly sophisticated system resides on an IBM z/OS mainframe in the UK and Tesco
needed to make it available to the rest of its group.
A platform-independent common operating model (Retail)
Micro Focus Application Migration and Modernisation offering was
chosen to port the CR application to the IBM System p server running
the AIX operating system and integrate it with the existing Oracle Retail
solution. Elements of Tesco’s Common Operating Model are already in
place and beneﬁting some of its businesses. Micro Focus modernisation
expertise is not only helping Tesco maintain the momentum behind this
strategic IT project, but is also playing a key role in the development of
its presence in the United States.
Product solution
Micro Focus Application
Migration and Modernisation
Micro Focus Studio
Micro Focus Server
TESCO 16 Micro Focus International plc Annual report 2008
Business review
Extracting more value from
legacy assets
CSC’s Financial Services Group wanted to create a new, economical package to help its financial
services customers run critical mainframe-based applications on a lower-cost environment, such
as a desktop or server. It was already providing Micro Focus Mainframe Express, Enterprise Edition,
to those customers using its VANTAGE-ONE
®
solutions who wanted to do their own development
work. To create the new package it supplemented this with Micro Focus Server to enable
deployment to new platforms.
The new solution enables thousands of programmes that would
normally run on a mainframe environment under CICS and JCL to run
in a lower-cost Windows server environment. The server-based solution
reduces deployment charges and increases runtime. Clients are
impressed to see an industrial strength application running so quickly
with the server-based solution. Micro Focus Mainframe Express enables
CSC to deliver more system capability to its clients. It also saves the
Company cost and improves its own productivity. It estimates overall
cost savings from improved productivity to be 40%.
Product solution
Micro Focus Mainframe
Express Edition
Micro Focus Server
A new solution at lower cost (Finance) Finance review
Business review
Micro Focus International plc Annual report 2008 17
2008 2007 Growth
$m $m %
North America 85.7 71.2 20.4
Europe and the
Middle East 82.8 73.0 13.4
Rest of the World 33.5 30.7 9.1
Total revenue
(Pre-acquisition and pre-currency) 202.0 174.9 15.5
Acquisitions 26.2 4.6
Currency – (7.9)
Total revenue 228.2 171.6 33.0
The leadership and execution capability of the “go to market”
team has been continually strengthened. During the year we
have put in place a new Country General Manager to run our
German, Austrian and Swiss (“DACH”) region. In addition,
Marc Andrews joined in June 2008 as Executive Vice President,
Sales and Marketing.
Revenue for the year by category at actual reported $ was
as follows:
2008 2007
$m % $m %
Licence fees 113.3 49.6 82.6 48.2
Maintenance fees 104.2 45.7 82.1 47.8
Consultancy fees 10.7 4.7 6.9 4.0
Total revenue 228.2 100.0 171.6 100.0
All revenue categories increased through both organic growth
and acquisition. Excluding the beneﬁcial impact of exchange rate
movements and acquisitions, the Group’s organic revenue growth
at constant currency was 15.5% as shown in the table below.
2008 2007 Growth
$m $m %
Licence 100.4 84.5 18.8
Maintenance 93.1 84.5 10.1
Consulting 8.5 5.9 44.1
Total revenue
(Pre-acquisition and pre-currency) 202.0 174.9 15.5
Acquisitions 26.2 4.6
Currency – (7.9)
Total revenue 228.2 171.6 33.0
Revenue for the year increased by 33% to $228.2 million, adjusted
operating proﬁt increased by 36% to $86.6 million, adjusted
proﬁt before tax increased by 34% to $88.6 million and adjusted
earnings per share increased by 32% to 32.08 cents per share.
In the report below we have provided detail of total revenue at
actual exchange rates by both geography and revenue category.
In addition, to facilitate comparison on a like-for-like basis we
have also excluded the impact of exchange rate movements on
revenue and the impact of current and prior year acquisitions.
All areas showed solid improvement driven by both organic
growth and the impact of acquisitions. Revenue by geographic
region at actual reported $ was as follows:
2008 2007
$m % $m %
North America 96.5 42.3 70.6 41.1
Europe and the
Middle East 96.0 42.1 71.8 41.8
Rest of the World 35.7 15.6 29.2 17.1
Total revenue 228.2 100.0 171.6 100.0
Excluding the impact of exchange rate movements on revenue and
the impact of current and prior year acquisitions, all geographic
regions achieved solid growth as shown in the table top right.
The new North American leadership team established in February
2007 has quickly developed credibility and delivered strong results
withgrowthof20.4%.RevenuefromEuropeandtheMiddleEast
increased by 13.4% and Rest of the World revenues increased
9.1%. With solid sales execution in our two largest territories,
our focus now turns to the relatively untapped markets in our
Rest of the World region, initially assessing opportunities in
India and China. 18 Micro Focus International plc Annual report 2008
Business review
Finance review
Excluding restructuring charges of $6.5 million, administrative
expenses increased by 39% to $31.6 million. The increase in
costs includes costs of the acquired businesses as well as
expanding the Group’s support functions to facilitate current and
future growth. As the Group expands, our aim is reduce the cost
of this function as a percentage of revenue as we leverage
efﬁciencies of scale.
Currency impact
An analysis of both revenue and costs as a percentage of the
total by US$ and other currencies is shown below. As the Euro
has strengthened against the Dollar our revenue has improved
as compared to the prior year. However with a higher percentage
of costs in non-Dollar denominated currencies than revenues,
as the Dollar has weakened in the year, our expenses have
increased proportionately faster than revenues. As a result,
adjusted operating proﬁt as reported in US$ was not materially
different pre or post currency adjustments.
Revenue Cost
analysis by analysis by
major currency major currency
%%
US$ 49.5 29.8
Other 50.5 70.2
Total revenue 100.0 100.0
Operating proﬁt
Operating proﬁt for the year was $74.8 million (2007:
$57.3 million). Adjusted operating proﬁt increased by 36%
to $86.6 million (2007: $63.5 million), the improvement being
driven by increased revenue and an improvement in margins.
Adjusted EBITDA
Adjusted EBITDA increased by 36% to $88.5 million
(2007: $65.3 million) as a result of increased revenue and
improved margins.
Net ﬁnance income
Net ﬁnance income was 26% lower than for the previous year
at $2.0 million (2007: $2.7 million). At the start of the year we
reduced our cash balance through the purchase of Acucorp.
As a result, whilst our closing cash balance was higher than that
of the prior year, our average cash balance for the year was lower
than the prior year.
Organic licence fee revenue growth at constant currency was
18.8% driven by growth in our low value, high volume run
rate business combined with improved sales of larger value
transactions to larger enterprise customers. We deﬁne larger
value transactions as those in excess of $0.5 million. It is
encouraging to see both the number and average value of these
larger value transactions increasing year on year.
Organic maintenance revenue growth at constant currency was
10.1% reﬂecting the impact of solid licence fee sales combined
with inﬂationary price increases.
Organic consulting revenue growth at constant currency showed
a positive improvement against the prior year driven by improved
sales of higher value transactions to larger enterprise customers.
The recent acquisition of Hal and Acucorp added $26.2 million
of revenues in the year. Approximately half was from predictable
and secure maintenance. As with our core business the
substantial majority of the remaining revenue was from licence
fee transactions, typically high volume, low value, robust and
sustainable business predominantly from royalties from other
software companies.
Costs
All comments below relate to costs at actual reported US$.
Cost of sales for the year increased by 24% to $22.6 million.
The costs in this category predominantly relate to our consulting
and helpline support operations.
Selling and distribution costs increased by 39% to $63.2 million.
We have made signiﬁcant investments in the sales and marketing
functions to support growth and will continue to do so. This cost
category represents approximately 28% of revenue and is
expected to remain at a similar percentage of revenue for the
year ahead.
Research and development expenses increased by 28% to
$29.5 million. We expect to maintain this cost category at
approximately 13% of total revenue as we continue to enhance
and expand our solution set to take advantage of the
considerable market opportunity. Business review
Micro Focus International plc Annual report 2008 19
Brewing success in the US
The mainframe at the Miller Brewing Company features 40,000 programs and COBOL applications,
which are managed by its proprietary, Production Installation Transfer System (“PITS”) and PANVALET.
PITS is Miller’s process of moving mainframe jobs, programmes, and copybooks into production.
The flexibility of our Mainframe Express enabled Miller to integrate it into their existing business
process. For a number of business reasons, Miller sought a solution to help transition the Company’s
reliance from the mainframe into a server-based and workstation environment.
The implementation of Mainframe Express Enterprise Edition signiﬁed the
beginning of Miller’s mainframe modernisation strategy. By moving to a
server environment, Miller expects to realise cost savings as it expands its
modernisation over the next few years. Mainframe Express, Enterprise
Edition, enables COBOL programmers to extend mainframe application
development quickly and easily into J2EE, .NET or Web services, without
changing the original code, or having to learn new architectures. Micro
Focus is playing an important role in helping Miller to achieve maximum
competitiveadvantagethroughinnovativeandeffectivetechnologies,while
at the same time reducing risk and cost, and improving business agility.
Product solution
Micro Focus Mainframe Express,
Enterprise Edition (“MFEEE”)
Speedingapplicationdevelopmentandtestingenvironment,reducingmainframeexpense (Retail) 20 Micro Focus International plc Annual report 2008
Business review
Analysing applications with
Micro Focus Revolve
Volkswagen Financial Services (“VFS”) offers retail insurance policies – all run on a comprehensive
COBOL application – to millions of customers throughout Europe and Asia Pacific. Technical processes
are executed on 1,600 COBOL and 1,900 assembler programmes, which require 4,500 daily,
individual batch jobs and cover a total of around 6 million lines of code. Micro Focus Revolve provides
complete transparency of the programmes, improves application speed and enhances customer
service and business responsiveness. It ensures that overnight batch transactions are completed before
opening for business, eliminating the risk of downtime in working hours and potential loss of revenue.
Since using Revolve, VFS has had a comprehensive view of its COBOL
application, enabling it to estimate costs more precisely and protect
itself from “unpleasant surprises”. It has also been possible to reduce
the errors substantially. The range of functions offered by Micro Focus
Revolve has enabled VFS’s IT department to adapt to the constant
changes in products, customers, etc cost-effectively and without risk.
Micro Focus Revolve automates all processes, removing the possibility of
human error from manual methods. Since it shows the structures of the
application in a clear, visual display, new developers need little training.
Product solution
Micro Focus Revolve
Increasing productivity and gaining a complete view of COBOL application (Finance) Finance review
Business review
Micro Focus International plc Annual report 2008 21
Acquisition of Acucorp
On 4 May 2007, the Group acquired Acucorp for a total cash
consideration of $40.9 million.
Revenue for the year to 30 April 2008 was originally anticipated
to be approximately $17.0 million and our aim was to restructure
the business and increase margins over time to a level consistent
or better than our existing business. We exceeded both aims.
The consequent restructuring charge was initially expected
to be approximately $8.0 million in the year to 30 April 2008.
The actual restructure charge was $6.5 million.
Acquisition of NetManage and Liant Software
On 18 June 2008, Micro Focus announced that it had acquired
NetManage for a total cash consideration of $73.3 million, paid
in full on completion. On close, NetManage had $27.9 million
of cash providing for a net cash outﬂow of $45.4 million.
In the year to December 2007, NetManage generated revenue
of $36.0 million and recorded an operating loss of $2.1 million.
We are in the process of restructuring the business with the aim
of increasing margins over time to a level consistent or better
than our existing business. The consequent restructuring charge
is expected to be approximately $10.0 million in the year to
30 April 2009 and will be reported as an exceptional item.
In addition, the Company announced on 11 July 2008 that it had
acquired Liant Software Corporation for $5 million. Following the
acquisition, the Group plans to restructure the business and the
consequent restructuring charge is expected to be approximately
$2 million and again will be reported as an exceptional item.
Nick Bray Chief Financial Ofﬁcer
Taxation
Tax for the year was $21.4 million (2007: $16.1 million) based
on increased proﬁts. The Group’s effective tax rate is 27.9%
(2007: 26.9%). The effective tax rate has increased marginally
from last year due to a higher proportion of proﬁts being earned
and taxed in the United States. Our medium term effective tax
rate is expected to be maintained at approximately 28%.
Proﬁt after tax
Proﬁt after tax increased by 26% to $55.4 million (2007:
$43.9 million). The growth in post tax proﬁts was slightly lower
than the growth in revenue due to the marginally higher tax rate
in the current year and the higher level of exceptional items
arising on the restructure and integration of the Acucorp
business acquired in May 2007.
Cash ﬂow
At 30 April 2008, the Company’s cash balance was $92.4 million
(2007: $85.0 million). The Group generated a net cash inﬂow
from continuing operating activities of $96.2 million which was
offset by outﬂows of $47.4 million in respect of the acquisition
and restructuring of Acucorp as well as corporation tax payments
of $18.2 million and dividends of $21.2 million.
Dividend
The board continues to adopt a progressive dividend policy
reﬂecting the long-term earnings and cash ﬂow potential of
Micro Focus with a level of dividend cover for the ﬁnancial
year ending 30 April 2008 of approximately 2.5 times on a
pre-exceptional earnings basis. In line with the above policy,
the directors recommend payment of a ﬁnal dividend in respect
of the full year to 30 April 2008 of 9.4 cents per share providing
for total dividends in the year of 13 cents per share, an increase
of 30% above the total dividends of 10 cents per share for
the full year to 30 April 2007. The dividend will be paid on
29 September 2008 to shareholders on the register on
5 September 2008. The directors of Micro Focus International plc
have concluded that the Company has sufﬁcient reserves to
enable the payment of the ﬁnal dividend.
Dividends will be paid in Sterling based on an exchange rate
of £ = $1.99, equivalent to 4.72 pence per share, being the rate
applicable on 26 June 2008, the date of recommendation of
the dividend by the board. 22 Micro Focus International plc Annual report 2008
Business review
Risk factors
Research and development
The Group has expanded its various R&D facilities through organic
growth and through acquisitions. The success of the R&D function
in enhancing existing products and developing new products,
which are relevant to customer requirements is critical to the
ongoing success of the Group. If new products or enhancements
do not meet customer requirements, or competitors introduce
products which better meet the requirements of customers,
this may have a material impact on revenues and proﬁts.
The successful integration of the R&D functions of acquired
companies together with the effective management of existing
facilities is key to mitigating these risks.
Foreign exchange and treasury
The Group is not exposed to signiﬁcant foreign exchange
transactional exposure as generally its subsidiaries trade in their
own currency. The Group’s principal exposure to foreign currency
is the translation of overseas proﬁts into US$. Due to its limited
exposure, the Group does not hold any ﬁnancial instruments
such as derivatives.
The Group is also exposed to foreign currency translation risk on
the translation of its net investment overseas into US$ where the
functional currency of those subsidiaries is not the US$. This is
partially mitigated by the overseas subsidiaries incurring costs
denominated in their local currency.
Note 3 to the summary of signiﬁcant accounting policies gives
additional information on additional ﬁnancial risks that the Group
could be exposed to.
Group risk factors
The Group in common with all businesses could be affected
by risks not completely within its control which could have
a material effect on its short and longer term ﬁnancial
performance. These risks could cause actual results to differ
materially from forecasts or historic results.
The following are the key risks that are relevant to the Group
as a provider of enterprise application management solutions.
Please also refer to the section on internal controls within the
corporate governance report on page 33.
Employees
The retention and recruitment of highly skilled and motivated
employees is critical to the success and future growth of the
Group in all countries in which it currently operates and in which
it is likely to expand into in the future. The Group has policies in
place to help achieve these objectives and ensure that it is able
to attract and retain employees with the required skills.
Timing of concluding contracts
In common with other software companies, the recognition
of revenue is dependent upon obtaining signed contracts from
customers and delivery of product. With a high proportion of
costs being ﬁxed, mainly people related, failure to conclude sales
contracts at the end of the year could result in a material
decrease in margin. However, the Group has a growing diverse
mix of customers with a high proportion of predictable and
recurring revenue which reduces this exposure.
Acquisitions
As set out in the Chief Executive Ofﬁcer’s statement, acquisitions
could provide proﬁtable revenue growth. Concluding further
acquisitions is dependent on a number of factors such as the
global economic position, the availability of ﬁnance and suitable
target companies. There are also risks associated with successfully
integrating future acquisitions; for example the loss of key
personnel, system integration issues and other problems not
identiﬁed prior to acquisition. Corporate and social responsibility
Business review
Micro Focus International plc Annual report 2008 23
regularly within each department. The Company maintains both
an Internet website which is freely accessible and an Intranet site
accessible to all employees. During the year, a second Sharesave
scheme and a US ESPP scheme were introduced and the directors
actively encourage employee equity participation, subject to
compliance with the Group’s share dealing policy. Details of the
current employee share option schemes and options granted
during the year are given in note 24.
Ethical
The Company manages its resources prudently to ensure
appropriate investment is made in its research and development
programmes and its commercialisation activities. Up-to-date
security systems are utilised to protect the Company’s IT systems.
The Company’s intellectual property is protected through an
appropriate trademark registration and patenting programme.
Close attention is paid to maintaining relationships with
key stakeholders including business partners, suppliers
and shareholders.
The Company has adopted a Code of Business Conduct
and Ethics policy with which all Company staff are required
to comply.
Health and safety
The Company has well-developed health and safety policies
and procedures, safeguarding staff, contractors and visitors
in compliance with applicable legislation and best practice.
Environment
Micro Focus complies with applicable environmental legislation.
The directors acknowledge that the Company’s business as
a provider of enterprise application management solutions has
a minimal direct impact on the environment but there are areas
in which the Company does have an impact on the environment.
The Company has introduced a number of automated processes
to reduce the quantity of paper and packaging that is used in the
business. Employees are encouraged to eliminate unnecessary
travel and use video conferencing facilities and other methods
of communication in its place. Computer and other ofﬁce
equipment that has reached the end of its working life are resold,
recycled or donated to local organisations as appropriate. Having
many ofﬁces worldwide, the Company is conscious of its total
energy consumption and the amount of waste materials generated
and is actively working to reduce both energy usage and the
quantity of waste materials produced that cannot be recycled.
The board is committed to running the Company in accordance
with best practice in corporate governance. This commitment
includes recognition by the Company of the importance of
taking into account its corporate social responsibilities (“CSR”)
in operating the business. In this context, Micro Focus seeks
to integrate CSR considerations relating particularly to social,
ethical and health, safety and environment (“HS&E”) issues
in its day-to-day operations. The board acknowledges its duty
to ensure the Company conducts its activities responsibly and
with proper regard for all its stakeholders including employees,
shareholders, business partners, suppliers and the local
communities. The Company is a member company of the
FTSE4Good Index Series. This index identiﬁes companies that
meet globally recognised corporate responsibility standards.
In exercising its corporate social responsibility, Micro Focus seeks
to ensure that:
● The board takes account of the signiﬁcance of social, ethical
and HS&E issues;
● Business practices are managed ethically;
● The business is focused on delivering value to stakeholders;
● Existing legislation, regulations and guidelines are adhered
to as a minimum;
● Employees are recognised as key to the business with
individual skills and experience being valued and developed;
and
● Health, safety and environmental issues are treated as critical
areas of concern for the business.
Social
The health, welfare and development of the Company’s
employees remain a priority. With the intent of attracting,
recruiting, developing and retaining key employees, Micro Focus
maintains a number of policies and procedures for the beneﬁt
of its employees, for example an equal opportunities policy
approved by Acas. Employee development is encouraged through
appropriate training. Regular and open communication between
management and employees is viewed as essential for motivating
a highly educated workforce. Brieﬁngs are held regularly to
provide updates on Company business and to provide opportunity
for questions and feedback. Review meetings are also held 24 Micro Focus International plc Annual report 2008
Management and governance
Board of directors
Nick Bray, 43
(Executive director and Chief Financial Ofﬁcer)
Nick was previously Group Finance Director of Fibernet Group plc,
having joined that company in February 2001. Before that, he held
the positions of Group Chief Financial Ofﬁcer of Gentia Software plc
and Chief Accounting Ofﬁcer of Comshare Inc. He started his career
at Price Waterhouse where he qualiﬁed as a chartered accountant.
Nick has a ﬁrst class honours degree in civil engineering from
Aston University.
David Dominik, 52
(Non-executive director) ‡
David has been a Managing Director of Golden Gate Capital since
its inception in 2000. He previously spent ten years as a Managing
Director at Bain Capital. He managed Information Partners,
a specialised fund within Bain Capital, that focused on opportunities
in the information services and software markets and also served on
the investment committee of Brookside, Bain Capital’s public equity
hedge fund. David has a juris doctor degree from Harvard Law
School (cum laude) and an AB in social studies (economics and
history) from Harvard College (magna cum laude; Phi Beta Kappa).
Kevin Loosemore, 49
(Non-executive Chairman) †‡
Kevin is Executive Chairman of Morse Plc and director of Farnham
Castle. He was previously the Chief Operating Ofﬁcer of Cable &
Wireless plc, President of Motorola Europe, Middle East and Africa
and, before that, was Chief Executive of IBM UK. He has a degree
in politics and economics from Oxford University.
Stephen Kelly, 46
(Executive director and Chief Executive Ofﬁcer)
Stephen served as Chief Executive Ofﬁcer of Chordiant from January
2002 until February 2006. He served as Chordiant’s President and
Chief Operating Ofﬁcer from October 2000 through January 2002,
and as senior vice president of International operations from October
1998 to October 2000. Prior to this, he spent almost ten years in
a number of senior management positions with Oracle. Stephen
received his BSc with honours in business administration from the
University of Bath.
* Audit committee † Remuneration committee
‡ Nomination committee
From left to right:
Kevin Loosemore, Stephen Kelly, Nick Bray, David Dominik, Prescott Ashe,
Paul Pester, David Maloney and Tom Skelton Management and governance
25
David Maloney, 52
(Non-executive director) *†‡
David is Chairman of Hoseasons Holdings Ltd and a non-executive
director of Ludorum plc, Cineworld Group plc, Carillion plc and
Enterprise Inns plc. He is also Chairman of the Board of Trustees of
Make-a-Wish Foundation (UK). His most recent executive role was as
Chief Financial Ofﬁcer of the global hotel group Le Meridien Hotels
and Resorts. Prior to that he was Chief Financial Ofﬁcer of Thomson
Travel Group and Preussag Airlines, and Group Finance Director
of Avis Europe plc. David is a fellow of the Chartered Institute of
Management Accountants and has a degree in economics from
Heriot-Watt University, Edinburgh.
Tom Skelton, 46
(Non-executive director) *†
Tom is a founding member of Conﬂuence Medical Systems,
a healthcare and technology consulting company. In his most recent
executive role, he served as Chief Executive Ofﬁcer for Misys
Healthcare Systems from January 2002 until March 2007 and as
a director of Misys plc. Prior to that, he was Chief Executive Ofﬁcer,
Medic Computer Systems, a US-based software company focused
on the healthcare information technology market. He earned his
BSBA from Robert Morris University, Pittsburgh, Pa.
Prescott Ashe, 41
(Non-executive director)
Prescott has been a Managing Director of Golden Gate Capital since
its inception in 2000. He was previously a principal at Bain Capital,
which he joined in 1991 and, before that, was a consultant at the
global strategy consultancy, Bain & Company. Prescott has a juris
doctor degree from Stanford Law School and a bachelor of sciences
degree in business administration from the University of California
at Berkeley.
Paul Pester, 44
(Non-executive director) *†
Paul was appointed a non-executive director in June 2007; he is
currently an independent consultant working in the banking and
ﬁnancial services industry. His most recent executive role was as
Chief Executive Ofﬁcer of Moneyfacts Group plc. Previously he
was Managing Director of Consumer Banking at Lloyds TSB Group,
Chairman of the British Bankers’ Association (“BBA”) Retail
Committee, a director at VISA International and Chairman of
the Travellers Cheque Association. Paul holds a ﬁrst class honours
degree in physics from Manchester University and a doctorate
in mathematical physics from Oxford University. 26 Micro Focus International plc Annual report 2008
Management and governance
Directors’ report
Donations
The Company’s policy is to make no donations to political parties
(2007: nil). During the year, the Group made charitable donations
of $31,000 to a number of local and national charities (2007:
$16,000). This included $6,500 to Street Child Africa, $2,800 to
NCH and $2,700 to Great Ormond Street Hospital. The Company
has a matching gift programme that matches employee donations
to charitable organisations. It also has a policy in place to
encourage employees to volunteer a certain number of hours
to assist local charitable organisations.
Post balance sheet events
On 18 June 2008, the Company announced that it had acquired
NetManage, Inc. for a total cash consideration of $73.3 million
paid in full on completion. On close, NetManage had $27.9 million
of cash providing for a net cash outﬂow of $45.4 million.
The Company announced on 11 July 2008 that it had acquired
Liant Software Corporation for a total cash consideration of
$5.0 million. Further information on the acquisitions is to be
found in the ﬁnance review.
Directors and their interests
The directors of the Company who served during the year are
as follows:
Executive
Stephen Kelly
Nick Bray
Mike Shinya (resigned 7 January 2008)
Non-executive
Kevin Loosemore (Chairman)
Prescott Ashe
David Dominik
David Maloney
Tom Skelton
Paul Pester (appointed 27 June 2007)
Details of the interests of the directors and their families in the
ordinary shares of the Company, as disclosed in the register of
directors’ interests, are given in the remuneration report on pages
35 to 41.
None of the directors had a material interest in any contract of
signiﬁcance to which the parent company or a subsidiary was
a party during the ﬁnancial year, except as disclosed in note 29,
related party transactions.
The directors of Micro Focus International plc (“the Company”)
present their report and the audited ﬁnancial statements of the
Company for the year ended 30 April 2008.
Principal activities
The principal activity of the Group during the year was the
provision of enterprise application management solutions.
The Company is limited by shares and is domiciled and
incorporated in the United Kingdom.
The registered ofﬁce of the Company is: The Lawn,
22–30 Old Bath Road, Newbury, Berkshire RG14 1QN.
Review of business and future developments
For details regarding the Group’s activity and the future
developments of the Group, please refer to the Chief Executive
Ofﬁcer’s statement on pages 13 to 14 and the ﬁnance review
on pages 17 and 21 and is incorporated in this Directors’ report
by reference. Risk factors are set out on page 22 and key
performance indicators (“KPIs”) are on page 12.
Dividends
The board continues to adopt a progressive dividend policy
reﬂecting the long-term earnings and cash ﬂow potential of
Micro Focus with a level of dividend cover for the ﬁnancial
year ended 30 April 2008 of approximately 2.5 times on a
pre-exceptional earnings basis. In line with the above policy,
the directors recommend payment of a ﬁnal dividend in respect
of 2008 of 9.4 cents per share, which, taken together with the
interim dividend of 3.6 cents per share paid in January 2008,
gives a total dividend in respect of 2008 of 13 cents per share.
Subject to shareholder approval, the ﬁnal dividend will be paid
on 29 September 2008 to shareholders on the register on
5 September 2008. Dividends will be paid in Sterling based
on an exchange rate of 1.99 $/£, equivalent to approximately
4.72 pence per share, being the rate applicable on 26 June 2008,
the date of recommendation of the dividend by the board.
Research and development
The Group expensed $29.5 million relating to research and
developmentduringtheyearto30April2008(2007:$23.1million).
In addition the Group capitalised $5.4 million of qualifying
expenditure (2007: $5.3 million). This expenditure was incurred
in improving the quality, functionality and extending the range
of the Group’s innovative software solutions. Management and governance
Micro Focus International plc Annual report 2008 27
Share option schemes
The directors remain committed to the principle that selected
employees should be able to participate in the Group’s progress
through share-based compensation schemes. Details of the
Group’s share-based compensation schemes are given in note 24.
Payment of creditors
Micro Focus International plc, which holds the investments in the
Group’scompanies,doesnottradeitselfanddoesnothavesuppliers
asdeﬁnedbytheCompaniesAct1985.Thedirectorsbelieve,however,
it would be helpful to give the disclosures on a consolidated basis.
The Group seeks the best possible terms from suppliers appropriate
to their business and in placing orders gives consideration to
quality, delivery, price and terms of payment. The Group does
not follow a speciﬁc payment code but has a policy to pay its
suppliers in accordance with the speciﬁc terms agreed with each
supplier. The average number of days’ purchases outstanding
at 30 April 2008 for the Group was 28 days (2007: 35 days).
Financial instruments
The exposure of the Group to ﬁnancial risks, including the use of
ﬁnancial instruments and policies for hedging and the exposure
to price, credit, cash ﬂow and liquidity risk, can be found in note
19 to the ﬁnancial statements.
Substantial shareholding
In accordance with the Disclosure and Transparency Rules of
the Financial Services Authority, at 25 July 2008, the Company
had been advised of the following notiﬁable interests in its
voting rights:
Ordinary shares Percentage of
Name of holder of 10 pence each issued capital
Golden Gate Capital 70,026,157 35.00%
Standard Life Investments Limited 17,872,249 8.92%
Majedie Asset Management Limited 16,330,461 8.17%
Legal and General Group Plc 7,996,159 3.98%
Fidelity International Limited 6,605,572 3.30%
Additional information for shareholders
Following the implementation of the EU Takeover Directive
into UK law, the following description provides the required
information for shareholders where not already provided
elsewhere in this report. This summary is based on the
Company’s current Articles of Association (“Current Articles”)
but please note that it is proposed that the Company will adopt
new articles of association (“New Articles”) with effect from
1 October 2008, brief details of which are set out in the notice
of AGM accompanying this report.
The Company maintains insurance cover for all directors and
ofﬁcers of Group companies against liabilities which may be
incurred by them whilst acting as directors and ofﬁcers.
As at the date of this report indemnities are in force under
which the Company has agreed to indemnify the directors to
the extent permitted by law and by the Articles of Association
against liabilities they may incur in the execution of their duties
as directors of the Company. Copies of these indemnities are
available for review at the registered ofﬁce of the Company.
Employment policy
Equal opportunities
The Group operates an equal opportunities policy.
Full consideration is given to all job applicants, irrespective
of gender, age, marital status, disability, sexuality, race, colour,
religion, ethnic or national origin or any other conditions not
relevant to the performance of the job, who can demonstrate
that they have the necessary skills and abilities.
Disabled employees
With regard to existing employees and those who may become
disabled, the Group’s policy is to examine ways and means to
provide continuing employment under its existing terms and
conditions and to provide training and career development,
including promotion, wherever appropriate. All employees accept
the commitment within this policy that the Group will not allow
discrimination or harassment by employees or others acting on
the Group’s behalf, in respect of sex, age, marital status, race,
nationality, disability or religious or political beliefs.
Employee involvement
The Group believes it is important that employees are aware
of the Group’s business strategy and objectives to assist them
to focus on working towards these goals. Communications at
the time of key announcements, including presentations by
directors to all employees, together with brieﬁngs throughout
the year, are part of the communication and consultation
programme. In addition, regular meetings are held with staff
and managers, both to raise issues and to assist with the
two-way ﬂow of information.
Further education and training
Continuing education, training and development are important
to ensure the future success of the Group. The Group supports
individuals who wish to obtain appropriate further education
qualiﬁcations and reimburses tuition fees up to a speciﬁed level.
Training needs of all employees are also analysed during the
annual appraisal process, at which time a training plan is agreed
as part of each individual’s ongoing development. 28 Micro Focus International plc Annual report 2008
Management and governance
Directors’ report
Transfer of shares
Subject to the Current Articles, any member may transfer all or
any of his or her certiﬁed shares in writing by an instrument of
transfer in any usual form or in any other form which the board
may approve. The board may, in its absolute discretion and
without giving any reasons, decline to register any instrument
of transfer of a certiﬁed share which is not a fully paid share
provided that, where any such shares are admitted to the ofﬁcial
list maintained by the UK Listing Authority, such discretion may
not be exercised in such a way as to prevent dealings in the
shares of that class from taking place on an open and proper
basis. The board may decline to recognise any instrument of
transfer relating to shares in certiﬁcated form unless it is in
respect of only one class of share and is lodged (duly stamped
if required) at the Transfer Ofﬁce accompanied by the relevant
share certiﬁcate(s) and such other evidence as the board may
reasonably require to show the right of the transferor to make
the transfer (and, if the instrument of transfer is executed by
some other person on his behalf, the authority of that person so
to do). In the case of a transfer of shares in certiﬁcated form by a
recognised clearing house or a nominee of a recognised clearing
house or of a recognised investment exchange the lodgement of
share certiﬁcates will only be necessary if and to the extent that
certiﬁcates have been issued in respect of the shares in question.
The directors may also refuse to register an allotment or transfer
of shares (whether fully-paid or not) in favour of more than four
persons jointly. Subject to the Current Articles and the rules (as
deﬁned in the CREST Regulations), and apart from any class of
wholly dematerialised security, the board may permit any class
of shares in the Company to be held in uncertiﬁcated form and,
subject to the Current Articles, title to uncertiﬁcated shares to be
transferred by means of a relevant system.
Repurchase of shares
The Company obtained shareholder authority at the last AGM
(held on 26 September 2007) to buy back up to 20,017,543
ordinary shares, which remains outstanding until the conclusion of
the next AGM on 25 September 2008. The minimum price which
must be paid for such shares is 10 pence and the maximum price
payable is the higher of 5% above the average of the mid-market
price of the ordinary shares of the Company as derived from the
London Stock Exchange Daily Ofﬁcial List for the ﬁve business
days immediately before the purchase is made and the amount
stipulated by Article 5(1) of the Buy-back and Stabilisation
Regulation 2003 (in each case exclusive of expenses).
Amendment to the Current Articles
Any amendments to the Current Articles may be made in
accordance with the provisions of the Companies Act 1985
by way of special resolution.
Share capital
The Company has a single class of share capital which is divided
into ordinary shares of 10 pence each.
Rights and obligations attaching to shares
Voting – in a general meeting of the Company, subject to the
provisions of the Current Articles and to any special rights or
restrictions as to voting attached to any class of shares in the
Company (of which there are none):
● On a show of hands, every member present in person shall
have one vote; and
● On a poll, every member who is present in person or by
proxy shall have one vote for every share of which he or she
is the holder.
No member shall be entitled to vote at any general meeting or
class meeting in respect of shares held by him or her if any call
or other sum then payable by him or her in respect of that share
remains unpaid. Currently, all issued shares are fully paid.
Deadlines for voting rights
Full details of the deadlines for exercising voting rights in respect
of the resolutions to be considered at the AGM to be held on
25 September 2008 are set out in the Notice of Meeting which
accompanies this report.
Dividends and distributions
Subject to the provisions of the Companies Act 1985 and the
Companies Act 2006 (“the Companies Acts”), the Company
may, by ordinary resolution, declare a dividend to be paid to
members, but no dividend shall exceed the amount
recommended by the board. The board may pay interim
dividends, and also any ﬁxed rate dividend, whenever the proﬁts
of the Company, in the opinion of the board, justiﬁes its
payment. All dividends shall be apportioned and paid pro rata
according to the amounts paid up on the shares.
Liquidation
Under the Current Articles, if the Company is in liquidation, the
liquidator may, with the authority of an extraordinary resolution
of the Company:
● Divide among the members in specie the whole or any part
of the assets of the Company: or
● Vest the whole or any part of the assets in trustees upon such
trusts for the beneﬁt of members as the liquidator, with the
like authority, shall think ﬁt. Management and governance
Micro Focus International plc Annual report 2008 29
On 13 May 2008 the Company entered into a $40 million credit
facility with HSBC Bank Plc and Lloyds TSB Bank Plc for general
corporate purposes. On a change of control, the lenders may give
notlessthanﬁvedaysnoticetotheCompanyandcancelthefacility
and require repayment of any outstanding loans and interest.
Branch
The Group continues to operate overseas branches in Hong Kong
and Sweden.
Annual General Meeting (“AGM”)
The notice convening the AGM of the Company together with
the explanatory notes on the proposed resolutions accompanies
this report. The meeting will be held at The Lawn, 22-30 Old
Bath Road, Newbury, Berkshire RG14 1QN on 25 September
2008 at 3pm.
Auditors and disclosure of information to auditors
So far as they are aware, the directors at the date of this report
conﬁrm that there is no relevant audit information (that is,
information needed by the Company’s auditors in connection
with preparing their report) of which the Company’s auditors are
unaware and that the directors have taken all the steps that they
ought to have taken as directors in order to make themselves
aware of any relevant audit information and to establish that the
Company’s auditors are aware of that information.
PricewaterhouseCoopers LLP have indicated their willingness to
continue in ofﬁce and a resolution that they be reappointed will
be proposed at the AGM.
Going concern
The directors, having made enquiries, consider that the Company
and the Group have adequate resources to continue in
operational existence for the foreseeable future, and therefore
it is appropriate to maintain the going concern basis in preparing
the ﬁnancial statements.
By order of the board
Jane Smithard Company Secretary
31 July 2008
Appointment and replacement of directors
Directors shall be no less than three and no more than 11 in
number. Directors may be appointed by the Company by ordinary
resolution or by the board. A director appointed by the board
holds ofﬁce only until the next AGM and is then eligible for
election by the shareholders and thereafter at least every three
years. The board may from time to time appoint one or more
directors to hold employment or executive ofﬁce for such period
(subject to the Companies Acts) and on such terms as they may
determine and may revoke or terminate any such employment.
The Company may by extraordinary resolution (or by ordinary
resolution of which special notice has been given) remove and
the board by unanimous decision may remove any director before
the expiration of his term of ofﬁce and the Company may elect
or the board may appoint another person in place of a director so
removed from ofﬁce.
The ofﬁce of director shall be vacated if: (i) he or she resigns (ii)
an order is made by any court claiming that he or she is or may
be suffering from a mental disorder; (iii) he or she is absent
without permission of the board from meetings for six months
and the board resolves that his or her ofﬁce is vacated; (iv) he or
she becomes bankrupt or compounds with his or her creditors
generally; (v) he or she is prohibited by law from being a
director; or (vi) he or she is removed from ofﬁce pursuant
to the Current Articles.
Powers of the directors
The business of the Company will be managed by the board
who may exercise all the powers of the Company, subject to the
provisions of the Company’s memorandum of association, the
Current Articles, the Companies Acts and any ordinary resolution
of the Company.
Shares held in the Employee Beneﬁt Trust
Where the trustee of the Micro Focus Employee Beneﬁt Trust
holds shares in the Company and the beneﬁcial interest in those
shares has not been transferred to a beneﬁciary of the Trust,
the Trustee may not vote in relation to those shares at any
meeting of shareholders of the Company.
Signiﬁcant agreements
The following signiﬁcant agreement contains provisions entitling
the counterparties to exercise termination or other rights in the
event of a change of control of the Company: 30 Micro Focus International plc Annual report 2008
Management and governance
Corporate governance
Introduction
The principal corporate governance guidance that applies to
companies listed with the UK Listing Authority that applies to
the year is contained in the 2006 Financial Reporting Council’s
Combined Code (“the Combined Code”). The Combined Code,
which operates on a “comply or explain” basis, incorporates,
amongst others, recommendations by the Higgs Review
regarding the role of non-executive directors, and the Smith
Review, which refers to audit committees. Through their
commitment to the highest standards of corporate governance,
the Board endorses and supports the essential elements of the
Combined Code and, apart from a few limited exceptions as
described below, believes the Group has fully complied with the
Combined Code during the year reported on. Where it has not,
an explanation has been provided.
Compliance statement
The directors are committed to ensuring that the Company will
work towards compliance with the provisions set out in Section 1
of the Combined Code (2006).
The Company has been in compliance with the Code provisions
set out in Section 1 of the Combined Code on corporate
governance, except for the following:
● A.3.2 – board of directors – The Combined Code requires
that at least half the board, excluding the Chairman, should
comprise non-executive directors determined by the board
to be independent. With two such non-executive directors
not regarded as independent, the Company did not comply
with this rule during the year ended 30 April 2008.
● B.2.1 – remuneration committee – The Company is aware
that the Chairman is not regarded as independent for
purposes of the Combined Code. The Code states that
the remuneration committee must comprise at least three
independent non-executive directors. Kevin Loosemore
resigned as Chairman of the committee on 6 February 2008
and was replaced by Paul Pester. The Company is now
in compliance.
● C.3.1 – audit committee – Similarly, the audit committee
should comprise at least three independent non-executive
directors. As the Chairman was not regarded as independent
throughout the year this requirement was not met. With Paul
Pester’s appointment as a non-executive director on 27 June
2007, and appointment to the audit committee, Kevin
Loosemore resigned from the audit committee and the
Company is now in compliance.
The principles set out in the Combined Code cover four areas:
the board, directors’ remuneration, accountability and audit
and shareholder relations. With the exception of directors’
remuneration (which is dealt with separately in the remuneration
report on pages 35 to 41) the following section sets out how
the board has applied these principles.
The board
The Group is controlled by the board, which is responsible for
the Group’s system of corporate governance. As at 30 April
2008, the board comprised eight directors:
Kevin Loosemore Non-executive Chairman
Stephen Kelly Chief Executive Ofﬁcer
Nick Bray Chief Financial Ofﬁcer
David Maloney Non-executive director
Prescott Ashe Non-executive director
David Dominik Non-executive director
Tom Skelton Non-executive director
Paul Pester Non-executive director
Paul Pester was appointed a non-executive director on
27 June 2007.
The role of the non-executive directors is to ensure that
independent judgement is brought to board deliberations
and decisions.
The non-executive directors possess a wide range of skills
and experience, relevant to the development of the Company,
which complement those of the executive directors.
The Chairman operates in a non-executive capacity and is
considered by the board to be independent of management and
free from any business or other relationship which could materially
interfere with the exercise of his independent judgement.
David Maloney, the senior independent non-executive director,
Tom Skelton and Paul Pester, non-executive directors, are
considered by the board to be independent. Prescott Ashe and
David Dominik are not considered by the Board to be independent
by virtue of their positions with the Company’s major shareholder,
Golden Gate Capital.
In accordance with the Combined Code, all directors will be
subject to election by the shareholders at the ﬁrst AGM of the
Company after their appointment, and, thereafter, at least every
three years. Tom Skelton and Paul Pester were elected at the
AGM held on 26 September 2007. As the remaining non-executive Management and governance
Micro Focus International plc Annual report 2008 31
review progress. A schedule of meetings has been established. All
directors receive an agenda and board papers in advance of
meetings to help them make an effective contribution at the
meetings. In addition, the executive directors ensure regular
informal contact is maintained with non-executive directors. The
board makes full use of appropriate technology as a means of
updating and informing all its members.
In the year under review, the board met on 15 occasions,
six such meetings being scheduled formal board meetings with
a further nine additional meetings of the board called at short
notice and held by telephone to consider board issues.
While the board retains overall responsibility for, and control
of, the Company, day-to-day management of the business is
conducted by the executive directors. Review of the Group’s
principal business activities is the responsibility of the executive
management team, comprising the executive directors together
with executives responsible for sales and marketing, HR, legal,
technology, development and customer care, who meet weekly.
The board receives papers on key subjects in advance of each
board meeting. These typically cover:
● Strategy and budgets
● Business and ﬁnancial performance
● Corporate activities
● Human resources
● Shareholders and city matters
The board has undertaken a formal and rigorous process for the
evaluation of its own performance and that of its committees
and individual directors (including the Chairman), as required by
Combined Code provision A6.1. This process takes the form of
questionnaires and personal interviews with the Chairman. The
performance of the Chairman is reviewed by the non-executives
led by the Senior Independent Director.
The Chairman holds meetings with non-executive directors
without the presence of executive directors.
directors were all elected to the board at the AGM of the
Company in September 2005, the directors have agreed to
offer themselves for re-election on a rotation basis. Accordingly,
Kevin Loosemore retired voluntarily and was re-elected at the
Company’s AGM in September 2006 and David Maloney and
David Dominik retired voluntarily and were re-elected by the
shareholders at the Company’s AGM in September 2007.
Prescott Ashe will be retiring voluntarily and submitting himself
for re-election by the shareholders at the AGM of the Company
on 25 September 2008. The non-executive directors are
appointed for speciﬁc terms. Full terms of their appointment
are to be found in the remuneration report.
The board has agreed procedures for directors to follow if they
believe they require independent professional advice in the
furtherance of their duties and these procedures allow the
directors to take such advice at the Company’s expense.
In addition, all the directors have direct access to the advice and
services of the Company Secretary. The Company Secretary is
accountable to the board through the Chairman on governance
matters. It is the responsibility of the Company Secretary to ensure
that board procedures are followed and all rules and regulations
are complied with. Under the direction of the Chairman, the
Company Secretary’s responsibilities include facilitating induction
and professional development and ensuring the smooth ﬂow of
information within the board and its committees, and between
non-executive directors and senior management. Any new
director receives a comprehensive, formal and tailored induction
into the Company’s operations. Appropriate training is provided to
new directors and is also available to other directors as required.
The terms of reference of the Chairman and Chief Executive
Ofﬁcer have been agreed with the board and, in accordance
with best practice, their roles remain separate.
As part of its leadership and control of the Company, the board
has agreed a list of items that are speciﬁcally reserved for its
consideration. These include business strategy, ﬁnancing
arrangements, material acquisitions and divestments, approval
of the annual budget, major capital expenditure projects, risk
management, treasury policies and establishing and monitoring
internal controls. At each meeting, the board reviews progress of
the Group towards its objectives, and monitors ﬁnancial progress
against budget.
In the year to 30 April 2009, the board will schedule meetings on
a regular basis approximately every two months, with additional
meetings when circumstances and business dictate. In months in
which the board does not meet update calls are scheduled to 32 Micro Focus International plc Annual report 2008
Management and governance
Corporate governance
The nature and scope of the internal audits completed during the
year was reviewed and approved, reports of results of completed
auditsreceivedandresponsesofexecutivemanagementconsidered.
The plan set out at the beginning of the year was achieved and
the outcome of the work was in line with expectations.
The audit committee will meet at least four times during
the coming ﬁnancial year (and, additionally as appropriate),
and a schedule of meetings for the year has been established.
The audit committee’s terms of reference include a process
for employees of the Company to raise in conﬁdence concerns
about possible impropriety in matters of ﬁnancial reporting or
other matters.
The written terms of reference of the audit committee include,
among other things, the following responsibilities:
● To report to the board, identifying any matters in respect of
which it considers that action or improvement is needed and
making recommendations as to the steps to be taken;
● To ensure that the interests of shareholders are properly
protected in relation to ﬁnancial reporting and internal control;
● To monitor the integrity of the ﬁnancial statements of the
Company, including its annual and interim reports, preliminary
results announcements and any other announcement relating
to its ﬁnancial performance;
● To review the consistency of, and changes to,
accounting policies;
● To keep under review the effectiveness of the Company’s
internal controls and risk management systems;
● To review the Company’s arrangements for its employees
to raise concerns, in conﬁdence, about possible wrongdoing
in ﬁnancial reporting or other matters;
● To monitor and review the need for, and the effectiveness of,
the Company’s internal audit function in the context of the
Company’s overall risk management system; and
● To consider and make recommendations to the board in
relation to the appointment, re-appointment and removal
of the Company’s external auditor.
Board committees
In accordance with best practice, the Company has established
audit, nomination and remuneration committees, with written
terms of reference for each that deal with their respective
authorities and duties. The full terms of reference of all the
committees are available from the Company Secretary or can be
located on the Company’s website. The Company is aware that
the Chairman is not regarded as independent for the purposes
of the Combined Code.
Audit committee
The audit committee is comprised entirely of non-executive
directors of the Company. It is chaired by David Maloney, who
the Board considers has recent and relevant ﬁnancial experience.
The other members are, Tom Skelton and Paul Pester.
The audit committee has met six times during the ﬁnancial year.
The audit committee is responsible for reviewing the Group’s
annual accounts and interim reports prior to submission for
approval to the full board. This committee also monitors the
Group’s accounting policies, internal ﬁnancial control systems
and ﬁnancial reporting procedures. The audit committee provides
a forum through which the Group’s external and internal auditors
report to the board. The auditors are invited to attend meetings
of the committee on a regular basis and have the opportunity
to meet privately with committee members in the absence of
executive management. The audit committee oversees the
relationship with the auditor, including the independence and
objectivity of the auditor (taking into account UK professional
and regulatory requirements and the relationship with the audit
ﬁrm as a whole) and the consideration of audit fees and fees
for other non-audit work. In addition, the audit committee
has developed a policy designed to ensure that the auditor’s
objectivity and independence is not compromised by its
undertaking inappropriate non-audit work. All signiﬁcant
non-audit work commissioned from the external auditor requires
audit committee approval.
An outsourced internal audit function continues to be provided
by KPMG. The Group’s Chief Financial Ofﬁcer provides oversight
and co-ordination of internal audit. In order to ensure
independence internal audit has a direct reporting line to the
audit committee and its chairman.
The role of internal audit is to advise executive management and
the board on the extent to which the Group’s systems of internal
control are effective. The internal audit plan for each year is
determined through a structured process of risk assessment and
is approved by the audit committee. Management and governance
Micro Focus International plc Annual report 2008 33
The key elements of the control system are:
● The Group operates a structured, objectives-driven approach
to fulﬁl its core purpose and goals in respect of sustained
proﬁtability and growth;
● Research and development and capital expenditure
programmes are subject to formal review and monitoring
procedures;
● All contracts are reviewed. The level of review depends
on the size and complexity of the contracts and associated
risks. There are formal limits above which the review level
is escalated;
● Reconciliations are performed on a timely basis for all
major accounts; and
● Systems and procedures are in place for all major transaction
types with appropriate authorisation controls.
There is an ongoing internal process for identifying, evaluating
and managing the signiﬁcant risks faced by the Company in
association with the work performed by the outsourced internal
audit function. This process has been in place throughout the
year and up to the date of approval of the report and accounts.
As part of the process that the Company has in place to review
the effectiveness of the internal control system, there are
procedures designed to capture and evaluate failings and
weaknesses, and in the case of those categorised by the board
as “signiﬁcant”, procedures exist to ensure that necessary action
is taken to remedy the failings.
This requirement is set out in the audit committee’s terms
of reference to report on a regular basis to the board on the
Group’s internal ﬁnancial control procedures and to make
recommendations to the board in this area.
The external auditors provide a supplementary, independent
and autonomous perspective on those areas of the internal
control system which they assess in the course of their work.
Their ﬁndings are regularly reported to both the audit committee
and the board. To ensure auditor objectivity and independence
there is a stringent process in place to approve non-audit work.
Human resources
The Group endeavours to appoint employees with appropriate
skills, knowledge and experience for the roles they undertake.
Nomination committee
The nomination committee is comprised entirely of non-executive
directors of the Company and has met three times during the
ﬁnancial year. The nomination committee will meet at least twice
during the coming ﬁnancial year. It is chaired by Kevin Loosemore
and the other members are David Maloney and David Dominik.
The nomination committee is responsible to the full board for
proposing candidates to the board, having regard to the balance
and structure of the board. The nomination committee uses
consultants to identify suitable candidates where a position
is identiﬁed.
The terms of reference of the nomination committee include,
among other things, the following responsibilities:
● To review the structure, size and composition of the board
and make recommendations to the board with regard to
any changes;
● To identify and nominate, for the approval of the board,
candidates to ﬁll board vacancies as and when they arise;
● To give full consideration to succession planning for directors
and other senior executives; and
● To keep under review the leadership needs of the Group,
both executive and non-executive, with a view to ensuring
the continued ability of the organisation to compete
effectively in the market place.
Remuneration committee
Details of the remuneration committee are described in the
remuneration report on pages 35 to 41.
Accountability and audit
The board is responsible for the preparation of ﬁnancial
statements that present a balanced assessment of the Group’s
ﬁnancial position and prospects. This responsibility is administered
primarily by the audit committee, the terms of reference of which
are referred to above.
Internal controls
The board is ultimately responsible for establishing and monitoring
internal control systems throughout the Group and reviewing their
effectiveness. It recognises that rigorous systems of internal control
are critical to the Group’s achievement of its business objectives,
that those systems are designed to manage rather than eliminate
risk and that they can only provide reasonable and not absolute
assurance against material misstatement or loss. 34 Micro Focus International plc Annual report 2008
Management and governance
Corporate governance
Shareholder relations
The Company values the views of shareholders and recognises
their interests in the Group’s strategy and performance.
The Company has historically reported formally to shareholders
twice a year, around June (preliminary announcement of annual
results) and December (interim statement). This shall remain the
case going forward but, in addition, following the implementation
of the Transparency Directive, the Company also publishes
interim management statements in or around August and
February each year. The annual report is expected to be mailed
to shareholders in August. Separate announcements of all
material events are made as necessary. Regular communications
are maintained with institutional shareholders and presentations
are given to shareholders when the half-year and full-year
ﬁnancial results are announced. In addition to the Chief Executive
Ofﬁcer and Chief Financial Ofﬁcer, who have regular contact with
investors, Kevin Loosemore, Chairman, and David Maloney,
Senior Independent Director, are available to meet with
shareholders as and when required. The whole board is kept up
to date at its regular meetings with the views of shareholders and
analysts. External analysts’ reports are also circulated to directors.
The Company’s website (www.microfocus.com) provides
an overview of the business including its strategy, products
and objectives.
All Group announcements are available on the website and
new announcements are published without delay. The terms
of reference of each of the board’s three committees and other
important corporate governance documents are available on the
website and from the Company Secretary. Additionally, the Chief
Financial Ofﬁcer provides a focal point for shareholders’ enquiries
and dialogue throughout the year.
Annual General Meeting (“AGM”)
The Company’s AGM, which will be held on 25 September 2008
at 3pm will provide an opportunity for the board to meet with
all shareholders and participation of shareholders is encouraged.
At the meeting, in addition to the statutory business, the board
will be available for questions from shareholders.
In accordance with the Combined Code recommendations,
the Company will count all proxy votes and will indicate the level
of proxies lodged, the number of proxy votes for and against
such resolution and the number of abstentions. A resolution
will be proposed for each substantive issue and the chairs of
the audit, remuneration and nomination committees will attend
to answer questions.
The Group has a range of policies which are aimed at retaining
and providing incentives for key staff. Objectives are set for
departments and employees that are derived from the Group’s
business objectives and performance is formally measured against
these objectives twice per year. The Group has a clear and
well-understood organisational structure and each employee
knows his or her line of accountability.
Announcements
All major announcements are approved by the Chairman and the
executive directors and circulated to the board prior to issue.
The Group also has internal and external checks to guard against
unauthorised release of information.
Financial
A comprehensive budgeting system allows managers to submit
detailed budgets which are reviewed and amended by executive
directors prior to submission to the board for approval.
Insurance
The Group keeps under review its portfolio of insurance policies
with its insurance brokers to ensure that the policies are
appropriate to the Group’s activities and exposures.
Attendance at meetings
The number of board meetings and committee meetings
attended by each director in the year to 30 April 2008 was
as follows:
Audit Remuneration Nomination
Board committee committee committee
Held* Attended Held* Attended Held* Attended Held* Attended
Kevin Loosemore 15 15116633
Stephen Kelly 15 15––––––
Nick Bray 15 15––––––
Mike Shinya 9 7––––––
David Maloney 15 14666633
David Dominik 15 14–––– 3 3
Prescott Ashe 15 10––––––
Tom Skelton 15 136666 – –
Paul Pester 14 135566 – –
* During period of appointment.
Note:
Paul Pester was appointed on 27 June 2007.
Kevin Loosemore resigned from the audit committee on 27 June 2007.
Mike Shinya resigned on 7 January 2008. Remuneration report
Management and governance
Micro Focus International plc Annual report 2008 35
● To determine the policy for, and scope of, pension
arrangements for each executive director and other
senior executives;
● To approve the framework of salaries for senior managers,
and determine targets for any performance-related pay
schemes operated by the Company, and approve the total
annual payments;
● To review the design of all share incentive plans for approval
by the board and shareholders;
● To oversee any major changes in employee beneﬁt structures
throughout the Company or Group; and
● To review the ongoing appropriateness and relevance of the
remuneration policy;
Paul Pester replaced Kevin Loosemore as the Chairman of the
committee with effect from 6 February 2008. The remuneration
committee therefore comprises Paul Pester as Chairman with
David Maloney, Tom Skelton and Kevin Loosemore as its other
members. Where appropriate the committee invites the views
of the Chief Executive Ofﬁcer, the Chief Financial Ofﬁcer and the
Vice President of Human Resources, as well as that of external
remuneration consultants. The Chairman absents himself from
any discussion relating to his own remuneration.
The committee has been materially assisted by New Bridge Street
Consultants LLP (who are the principal advisors to the committee,
and which became part of Hewitt Associates Limited during the
year), in providing remuneration advice, by Steen and Co,
solicitors, by the Company Secretary and by Linklaters, solicitors.
Hewitt Associates Limited, trading as Hewitt New Bridge Street
provided no other services to the Group. During the year the
Chief Executive Ofﬁcer and Vice President of HR attended some
of the meetings by invitation of the committee on speciﬁc items,
however they did not participate in discussions relating to their
own remuneration.
The terms of reference of the committee are available from the
Company Secretary.
Remuneration policy
The Company’s policy on the remuneration of executive directors
and their direct reports is established by the committee and
approved by the board. The individual remuneration packages
of each executive director is determined by the committee.
Introduction
This is the Company’s remuneration report in respect of
the year to 30 April 2008 and, subject to ongoing review
by the remuneration committee (the “committee”) as to its
appropriateness, sets out the ongoing policy in respect of the
following and subsequent years.
The Company seeks to comply with the relevant conditions
of the 2006 Combined Code on corporate governance relating
to directors’ remuneration as published by the London Stock
Exchange and the directors’ remuneration report regulations
2002 (the “regulations”). The regulations require the auditors
to report to the Company’s members on the “auditable part”
of the directors’ remuneration report and to state whether in
their opinion that part of the report has been properly prepared
in accordance with the Companies Act 2006 (as amended by the
regulations). The report has therefore been divided into separate
sections for audited and unaudited information.
In accordance with the Companies Act 2006, a resolution
to approve the remuneration report will be proposed at the
Company’s AGM on 25 September 2008. Details of the resolution
may be found in the Notice of Meeting accompanying this
annual report. The vote will be advisory and will be considered
carefully by the members of the committee in the formulation
and approval of the Company’s future remuneration policies.
Unaudited information
The remuneration committee
The committee has met six times during the ﬁnancial year.
The committee is responsible for reviewing remuneration
arrangements for members of the board and for providing
general guidance on aspects of remuneration policy throughout
the Group. The committee will meet at least twice during the
coming ﬁnancial year.
The terms of reference of the committee include, among other
things, the following responsibilities:
● To determine and agree with the board the framework
or broad policy for the remuneration of the Company’s
Chief Executive Ofﬁcer, Chairman, the executive directors,
the Company Secretary and other members of the executive
management team (as appointed from time to time);
● To determine the total individual remuneration package of
each executive director and other senior executives including
bonuses, incentive payments and share options or other
share awards; 36 Micro Focus International plc Annual report 2008
Management and governance
Remuneration report
Directors’ service contracts
Executive directors
The Group’s policy in entering into service contracts with
executive directors is to enable the recruitment of high-quality
executives and to obtain protection from their sudden departure
whether or not to competitor companies. In addition, service
contracts are an important element in maintaining maximum
protection for the Group’s intellectual property rights and other
commercially sensitive information.
The executive directors are employed subject to service contracts.
The service contract dated 1 May 2006 with Stephen Kelly
requires the Company to give 12 months’ notice of termination.
Stephen Kelly is required to give six months’ notice of the
termination of his employment should he wish to leave.
The service contract dated 30 November 2005 with Nick Bray
requires the Company to give 12 months’ notice of termination.
Nick Bray is required to give six months’ notice of the termination
of his employment should he wish to leave.
With regard to the executive director, Mike Shinya, who resigned
during the year, the service contract dated 24 July 2006 and
amending deed dated 26 February 2007 provided for a base
salary of £250,000 and required the Company to give six
months’ notice of termination. Mike Shinya was required to give
six months’ notice of termination of his employment.
If an executive director is guilty of a material breach of his service
contract or commits any crime or act of gross misconduct or
dishonesty, the Company is entitled summarily to terminate the
service contract without notice and without payment in lieu
of notice or other compensation. Such a contract term cannot,
however, as a rule of law, affect the executive director’s statutory
rights such as rights in respect of unfair dismissal.
Should an executive director be dismissed other than as described
above, the Company may pay him, in lieu of notice, a sum equal
to his basic pay over his notice period.
At the discretion of the committee having regard to the
Company’s performance at the time of dismissal, the committee
may in addition pay all or a proportion of the bonus which
would, but for the dismissal, have become payable up to the
date of notice being served by the Company. The Company’s
policy on the duration of such contracts with executive directors
is explained above.
Stephen Kelly acts in the capacity of a non-executive director
at Cúram Software Limited, for which he receives remuneration
of £40,000 per annum.
No executive director or employee participates in discussions
relating to the setting of their own remuneration.
The objective of the Group’s remuneration policies is that all
employees, including executive directors, should receive
appropriate remuneration for their performance, responsibility,
skills and experience. Remuneration packages are designed to
enable the Group to attract and retain key employees by
ensuring they are remunerated appropriately and competitively
and that they are motivated to achieve the highest level of Group
performance in line with the best interests of shareholders.
It is intended that an appropriate and signiﬁcant proportion of
remuneration will continue to be performance related (see details
below). Performance conditions for performance-related bonuses
and long-term incentives will represent challenging growth
targets which are designed to increase shareholder value.
The committee will review the performance conditions used
to ensure that they remain demanding and appropriate.
It is the board’s intention to award share incentives to executive
directors and selected employees as appropriate to reward and
encourage performance. These share incentives will be granted
at the discretion of the committee.
Policies on remuneration take account of the pay structure,
employment conditions and relativities within the Group and
also the industry sector.To determine the elements and level
of remuneration appropriate to each executive director,
the committee considers benchmark remuneration data for
selected comparable technology companies and seeks to ensure
that ﬁxed costs are no higher than market median, that an
appropriately signiﬁcant proportion of potential pay is
performance related and that total pay is consistent with
appropriately competitive levels of pay for superior performance.
The chart below shows the relative mix of the remuneration
package at “target” for the executive directors (ie assuming they
earn a target bonus and their share option grants have an
expected value of approximately 20% of their face value).
0 10 20 30 40 50 60708090100
Salary Pension
Target bonus Expected value of LTIs
Chief Executive
Ofﬁcer
Chief Financial
Ofﬁcer Management and governance
Micro Focus International plc Annual report 2008 37
Annual salary
The board approves the overall budget for employee salary
increases and the committee agrees the speciﬁc increases for
executive directors and certain other senior members of the
management team. In determining appropriate salary levels
for each executive director and senior employee, the committee
considers both the nature and the status of the Company’s
operations and the responsibilities, skills, experience and
performance of the executive director or employee.
The committee compares the Group’s remuneration packages
for its directors and employees with those for directors and
employees of similar seniority in companies whose activities are
comparable with the Group and with which it competes for staff.
The committee has used Hewitt New Bridge Street in making
these comparisons.
With effect from 1 July 2008, the salaries of the executive
directors are as follows:
● Stephen Kelly £330,000*
● Nick Bray £220,000*
* With effect from 1 July 2008, the committee agreed to increase each of the executive directors’
salaries by 10% (from £300,000 to £330,000 for Stephen Kelly and from £200,000 to £220,000
for Nick Bray) reﬂecting both the increased scale of the roles in line with the growth of the
Company and current market salaries.
Performance-related bonus
The executive directors and all other employees, except for
sales staff, participate in a performance-related bonus scheme.
The level of commission for sales staff is based on a percentage
of revenue generated, with the percentages increasing as
revenue exceeds target levels. The level of bonus for non-sales
staff is based on overall Group performance in meeting its
primary ﬁnancial objectives in worldwide earnings before interest,
tax, depreciation and amortisation (“EBITDA”) and revenue goals.
The percentages increase as revenue and proﬁt exceed target.
The committee will continue to place a signiﬁcant proportion of
executive pay “at risk”, so that it is closely linked to the interests
of shareholders. The committee will ensure that challenging and
clearly-assessable targets are set for executive directors, which will
include regard to consensus brokers’ forecasts where relevant.
Details of bonuses paid to executive directors in the year to
30 April 2008 are detailed in the remuneration tables on page 39.
Bonuses are awarded wholly in cash. The performance targets for
Stephen Kelly were substantially met, resulting in a bonus of
105% of salary. The performance targets for Nick Bray were also
substantially met, resulting in a bonus of 73% of salary. In respect
of the year 2008/2009 the cap on bonuses payable to Stephen
Kelly remain at 150% of salary and 100% of salary for Nick Bray.
Nick Bray does not serve as a non-executive director for any
company. The executive directors may not accept non-executive
appointments without the consent of the board.
Non-executive directors
Non-executive directors are appointed by letter of appointment
for a ﬁxed term of three years subject to earlier termination
by either the director or the Company on 90 days notice.
Except for Prescott Ashe and David Dominik, who are directors
of Golden Gate Capital, non-executive directors receive fees
for services as members of the board and its committees.
The level of fees is determined by the board after taking into
account appropriate advice.
Non-executive directors do not participate in the Group’s share
incentives or otherwise receive performance related pay.
Kevin Loosemore and David Maloney signed re-appointment
letters with the Company which became effective on 4 April
2008. Prescott Ashe and David Dominik are non-independent
directors of the Company and signed re-appointment letters
with the Company on 12 April 2008 which became effective
immediately. Tom Skelton signed an appointment letter with
effect from 23 October 2006. Paul Pester signed an appointment
letter which took effect from 27 June 2007.
All appointments are subject to election by the shareholders
at the ﬁrst AGM of the Company after their appointment, and,
thereafter, at least every three years. Tom Skelton and Paul Pester
were elected at the AGM held on 26 September 2007. As the
remaining non-executive directors were all elected to the board
at the AGM of the Company in September 2005, the directors
have agreed to offer themselves for re-election on a rotation
basis. Accordingly, Kevin Loosemore retired voluntarily and
was re-elected at the Company’s AGM in September 2006,
David Maloney and David Dominik retired voluntarily and
were re-elected at the Company’s AGM in September 2007.
Prescott Ashe will be retiring voluntarily and submitting himself
for re-election by the shareholders at the AGM of the Company
on 25 September 2008. Each non-executive director still serving
at the end of his term will have his appointment reviewed by
the board and a further term of ofﬁce may be agreed. Where a
non-executive director does not serve until the end of his term,
the policy is to pay the fees due pro rata to the date of cessation.
Remuneration package
Executive directors’ remuneration currently comprises annual
salary, a performance-related bonus, a long-term incentive in the
form of share incentives, pension contributions and other beneﬁts. 38 Micro Focus International plc Annual report 2008
Management and governance
Remuneration report
the cumulative EPS growth will be required to be RPI + 15% pa.
Straight-line vesting will apply between these points.
The maximum aggregate value of awards that can normally be
granted to any individual in any ﬁnancial year will not exceed
two-times his or her basic salary. For these purposes, the value
of the awards is deemed to be equal to the market value of free
shares at the time of the award or, in the case of market value
options, 50% of the market value of the shares under option at
the time of the award. This limit may be exceeded only where the
committee determines that there are exceptional circumstances.
During the previous year, shareholders approved a resolution
allowing the company to satisfy option awards via the use of
share appreciation rights. This is intended to allow the company
additional ﬂexibility to manage dilution. Consistent with the ABI
Guidelines, all the shares potentially subject to an outstanding
option will count towards the limits until such time as a smaller
number of shares are actually issued on exercise. The committee
ensures that the Company complies with its dilution limits at
all times.
All-employee share incentives
Executive directors are entitled to participate in the Company
Sharesave scheme. Under the Sharesave scheme UK employees
are eligible to acquire shares in the Company at a discount of up
to 20% of the market value at grant if they agree to enter into
a savings contract for a period. Consistent with the relevant
legislation, no performance conditions apply.
Pension contributions
All employees, including executive directors, are invited to
participate in a Group Personal Pension Plan. All major schemes
are money purchase in nature and have no deﬁned beneﬁts.
A deﬁned beneﬁt scheme is operated in Japan, but, given the
number of members, is insigniﬁcant for Group purposes.
The Group has no obligation to the pension scheme beyond
the payment of contributions. The Company was not, therefore,
impacted by the new pensions regime which came into force
on 6 April 2006.
The Company contributions for the executive directors are 5%
of salary.
Pension beneﬁts include death in service.
Other beneﬁts
Beneﬁts in kind for executive directors can include the provision
of a company car allowance or service, fuel, life insurance and
medical beneﬁts.
Long-term incentives
The board believes that long-term incentive schemes are
important in retaining and recruiting high-calibre individuals and
ensuring that the performance of executives is focused on
creating long-term shareholder value whilst allowing the Group’s
cash reserves to be conserved. Further awards of options or free
shares will be considered by the committee on an ongoing basis.
The Company adopted the Micro Focus International plc
Incentive Plan 2005 (the “Plan”) prior to admission to the
London Stock Exchange in 2005. This is intended to provide a
ﬂexible framework to allow the Company to make awards of
free shares in the form of nil-cost options, conditional awards
or forfeitable shares, or to grant market value options (“awards”).
Currently, the Company’s on-going policy is to make awards of
market value options, to the executive directors and market value
options or nil cost options to other senior and key employees.
The targets for market value option awards made to the executive
directors during the year ended 30 April 2008 have been reviewed
by the committee. These require that cumulative EPS growth
over a three-year vesting period is at least equal to RPI + 11% pa
(at which point 25% of awards will vest). 60% of shares will vest
for cumulative EPS growth of RPI + 13% pa and for full vesting
the cumulative EPS growth will be required to be RPI + 15% pa.
Straight-line vesting will apply between these points.
Previously, market value options granted to executive directors
were subject to a performance condition measuring the
Company’s earnings per share (“EPS”) growth and revenue
growth over three ﬁnancial years. The performance condition
applying to awards granted in the 12 months to 30 April 2007
require that, for any awards to vest, compound annual EPS
growth must be at least equal to 15% pa. Once this hurdle has
been reached, awards may vest, provided revenue growth targets
are reached. For 25% of awards to vest, compound annual
revenue growth must be at least equal to 6%, with awards
vesting in full for compound annual revenue growth of 15%.
The performance condition applying to awards made to Nick Bray
on 11 January 2006 was based on growth in EPS over a three-
year performance period with a minimum average annual EPS
growth of RPI + 3% (25% of awards vest) and 100% vesting
at an average annual EPS growth of RPI + 7%.
In addition the targets for market value option awards made
to the executive directors on 3 July 2008 have been reviewed
by the committee. These require that cumulative EPS growth over
a three-year vesting period is at least equal to RPI + 11% pa
(at which point 25% of awards will vest). 60% of shares will vest
for cumulative EPS growth of RPI + 13% pa and for full vesting Management and governance
Micro Focus International plc Annual report 2008 39
Audited information
Detailed emoluments of the directors of the Group
The aggregate remuneration paid to directors during the year ending 30 April 2008 was as follows:
Compensation
Base salary Benefits for loss Total Total
and fees Bonus in kind Pensions of office 2008 2007
£’000 £’000 £’000 £’000 £’000 £’000 £’000
Executive directors
Stephen Kelly 300 315 21 15 – 651 769
Nick Bray 197 146 13 10 – 366 377
Mike Shinya (resigned 7 January 2008) 179 – 15 8 112 314 93
Total 676 461 49 33 112 1,331 1,239
Non-executive directors
Kevin Loosemore 146–––– 146 152
David Maloney 60–––– 60 60
Tom Skelton 38–––– 38 16
Paul Pester (appointed 26 June 2007) 38–––– 38 –
John Browett (resigned 27 September 2006) –––––– 20
Total 282–––– 282 248
In the year ended 30 April 2007, £27,000 was paid to Mr Loosemore as additional remuneration when acting as interim Chief Executive Ofﬁcer.
The compensation for loss of ofﬁce payment to Mike Shinya was made in accordance with the terms of his service contract.
Non-executive director fees for the year were £150,000 for the Chairman, Kevin Loosemore, effective 1 July 2007 (2007: £125,000); £60,000
for the Senior Independent Director, David Maloney (2007: £60,000), £40,000 for each of Tom Skelton (2007: £30,000 pro-rated) and Paul Pester
(pro-rated). Paul Pester’s fees were increased to £45,000, effective 6 February 2008, to reﬂect his appointment as Chairman of the remuneration
committee. Non-executive fees are subject to periodic review. David Maloney’s fees were increased to £65,000 effective 1 July 2008.
Neither of the non-independent non-executive directors of the Company (David Dominik and Prescott Ashe) received any emoluments during the year
ended 30 April 2008 (2007: nil). David Dominik and Prescott Ashe are directors of Golden Gate Capital.
This graph shows the value, by 30 April 2008, of £100 invested in Micro Focus International plc on 17 May 2005 (the date of Admission) compared with the value of £100 invested in the FTSE 250 and
the FTSE Software & Computer Services Indices. The intervening points are daily values. The graph above shows the performance of the Company relative to the FTSE 250 and the FTSE Software &
Computer Services indices which have been chosen as they are considered to be the most relevant indices for the Company.
Total shareholder return
Micro Focus FTSE 250 FTSE Software & Computer Services Index
17 May 05 30 Apr 06 30 Apr 07 30 Apr 08
Value of hypothetical £100 holding
Source: Datastream
250
200
150
100
50 40 Micro Focus International plc Annual report 2008
Management and governance
Remuneration report
Directors’ interests in share capital
At 30 April 2008 the directors owned the following shares in the Company including interests held by their connected persons were:
At 30 April 2007
or date of
appointment
Director At 30 April 2008 if later
Kevin Loosemore 500,000 450,000
Stephen Kelly 125,000 125,000
Nick Bray 57,770 77,770
David Maloney 50,000 50,000
David Dominik – –
Prescott Ashe – –
Tom Skelton – –
Paul Pester – –
As at 31 July 2008 there had been no changes to these interests except for 200,000 shares held by a connected person of Kevin Loosemore which were
sold on 18 July 2008.
Micro Focus International plc Incentive Plan 2005 (“Plan”)
The following grants made to the executive directors under the terms of the Plan are as follows:
Number
At 1 May Granted Exercised Lapsed At 30 April Exercise
2007 in year in year in year 2008 price Dates of exercise
Stephen Kelly
2
1,153,846––– 1,153,846 104.0p 17 July 2009 to 16 July 2016
Stephen Kelly
3
– 169,332 – – 169,332 265.75p 12 July 2010 to 11 July 2017
Nick Bray
1
412,955––– 412,955 123.5p 11 January 2009 to 10 January 2016
Nick Bray
2
100,000––– 100,000 104.0p 17 July 2009 to 16 July 2016
Nick Bray
3
– 75,258 – – 75,258 265.75p 12 July 2010 to 11 July 2017
Mike Shinya
2
717,703 – – (717,703) –
Total 2,384,504 244,590 – (717,703) 1,911,391
1 The performance condition applying to awards made to Nick Bray on 11 January 2006 was based on growth in EPS over a three-year performance period with a minimum average annual EPS growth
of RPI + 3% (25% of awards vest) and 100% vesting at an average annual EPS growth of RPI + 7%.
2 The performance condition applying to awards granted in the 12 months to 30 April 2007 require that, for any awards to vest, compound annual EPS growth must be at least equal to 15% pa.
Once this hurdle has been reached, awards may vest, provided revenue growth targets are reached. For 25% of awards to vest, compound annual revenue growth must be at least equal to 6%,
with awards vesting in full for compound annual revenue growth of 15%. Mike Shinya’s LTIP options lapsed upon his resignation on 7 January 2008.
3 The performance conditions applying to awards granted in the 12 months to 30 April 2008 require that, for any shares to vest, cumulative EPS growth over a three year vesting period is at least equal
to RPI + 11% pa (at which point 25% of awards will vest). 60% of shares will vest for cumulative EPS growth of RPI + 13% pa and for full vesting the cumulative EPS growth will be required to be RPI
+ 15% pa. Straight-line vesting will apply between these points.
On 3 July 2008 market value option awards were granted to Stephen Kelly over 134,831 shares and Nick Bray over 89,888 shares, in each case at an
exercise price of 244.75 pence. Dates of exercise are from 3 July 2011 to 2 July 2018. The targets for these awards require that cumulative EPS growth
over a three-year vesting period is at least equal to RPI + 11% pa (at which point 25% of awards will vest). 60% of shares will vest for cumulative EPS
growth of RPI + 13% pa and for full vesting the cumulative EPS growth will be required to be RPI + 15% pa. Straight-line vesting will apply between
these points. Management and governance
Micro Focus International plc Annual report 2008 41
LTIP – Matching Share Scheme
During the prior year the following grants were made to the executive directors in accordance with the terms of the Plan:
Number
At 1 May Lapsed At 30 April Exercise
2007 in year 2008 price Vesting date
Stephen Kelly 125,000 – 125,000 10p 11 January 2010
Nick Bray 20,000 (20,000) – 10p
Nick Bray 57,659 – 57,659 10p 17 October 2009
Mike Shinya 239,234 (239,234) – 10p
Total 441,893 (259,234) 182,659
These conditional matching shares will vest after three years to the extent that the purchased shares are held continuously by the participant until
the vesting date. Mike Shinya’s matching shares lapsed upon his resignation on 7 January 2008. 20,000 of Nick Bray’s matching shares lapsed on
3 September 2007 following disposal by him of 20,000 of the linked purchase shares.
Sharesave
In relation to the Sharesave scheme, the outstanding options which have been granted to each director of the Company are as follows:
Number
At 1 May Granted Lapsed At 30 April Exercise
2007 in year in year 2008 price Dates of exercise
Nick Bray 11,130 – – 11,130 84.0p 15 August 2009 to 15 February 2010
Mike Shinya 11,130 – (11,130) –
Total 22,260 – (11,130) 11,130
These options are not subject to performance conditions since performance conditions do not apply to this all-employee share scheme. Mike Shinya’s
Sharesave options lapsed upon his resignation on 7 January 2008.
Share option schemes
Details of the Company’s share option schemes are given in note 24 of the ﬁnancial statements.
The mid-market price of the shares at 30 April 2008 was 233.75 pence and during the year the price varied between 171.25 pence and 355.50 pence.
On behalf of the board,
Paul Pester Chairman of the remuneration committee
31 July 2008 42 Micro Focus International plc Annual report 2008
Management and governance
Statement of directors’ responsibilities in respect of the
annual report, the directors’ remuneration report and the
ﬁnancial statements
The directors are responsible for preparing the annual report, the directors’ remuneration report and the Group and the parent company ﬁnancial
statements in accordance with applicable law and regulations.
Company law requires the directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the directors have prepared the Group
ﬁnancial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, and the parent company
ﬁnancial statements and the directors’ remuneration report in accordance with applicable law and United Kingdom Accounting Standards (United
Kingdom Generally Accepted Accounting Practice). The Group and parent company ﬁnancial statements are required by law to give a true and fair view
of the state of affairs of the Company and the Group and of the proﬁt or loss of the Group for that period.
In preparing those ﬁnancial statements, the directors are required to:
● Select suitable accounting policies and then apply them consistently;
● Make judgements and estimates that are reasonable and prudent;
● State that the Group ﬁnancial statements comply with IFRS as adopted by the European Union, and with regard to the parent company ﬁnancial
statements that applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the
ﬁnancial statements; and
● Prepare the Group and parent company ﬁnancial statements on the going concern basis unless it is inappropriate to presume that the Group will
continue in business.
The directors conﬁrm that they have complied with the above requirements in preparing the ﬁnancial statements.
The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the ﬁnancial position of the
Company and the Group and to enable them to ensure that the Group ﬁnancial statements comply with the Companies Act 1985 and Article 4 of the
IAS Regulation and the parent company ﬁnancial statements and the directors’ remuneration report comply with the Companies Act 1985. They are
also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation
and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions.
By order of the board
Jane Smithard Company Secretary
31 July 2008 Independent auditors’ report to the members
of Micro Focus International plc
Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 43
We have audited the Group ﬁnancial statements of Micro Focus International plc for the year ended 30 April 2008 which comprise the consolidated
income statement, the consolidated balance sheet, the consolidated statement of changes in shareholders’ equity, the consolidated cash ﬂow statement
and the related notes. These Group ﬁnancial statements have been prepared under the accounting policies set out therein.
We have reported separately on the parent company ﬁnancial statements of Micro Focus International plc for the year ended 30 April 2008 and on the
information in the directors’ remuneration report that is described as having been audited.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report and the Group ﬁnancial statements in accordance with applicable law and International
Financial Reporting Standards (“IFRS”) as adopted by the European Union are set out in the statement of directors’ responsibilities.
Our responsibility is to audit the Group ﬁnancial statements in accordance with relevant legal and regulatory requirements and International Standards on
Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with
Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the Group ﬁnancial statements give a true and fair view and whether the Group ﬁnancial statements have
been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion
the information given in the directors’ report is consistent with the Group ﬁnancial statements. The information given in the directors’ report includes
that speciﬁc information presented in the Chief Executive Ofﬁcer’s statement and the Finance review that is cross referenced in the review of business
and future developments section of the directors’ report.
In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information
speciﬁed by law regarding director’s remuneration and other transactions is not disclosed.
We review whether the corporate governance statement reﬂects the Company’s compliance with the nine provisions of the Combined Code (2006)
speciﬁed for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether
the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance
procedures or its risk and control procedures.
We read other information contained in the annual report and consider whether it is consistent with the audited Group ﬁnancial statements.
The other information comprises only the Chairman’s statement, the Chief Executive Ofﬁcer’s statement, the Finance review and the directors’ report,
the corporate governance statement and the statement of corporate and social responsibility and the unaudited part of the remuneration report.
We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group ﬁnancial
statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group ﬁnancial statements. It also includes an
assessment of the signiﬁcant estimates and judgments made by the directors in the preparation of the Group ﬁnancial statements, and of whether
the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with
sufﬁcient evidence to give reasonable assurance that the Group ﬁnancial statements are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group ﬁnancial statements.
Opinion
In our opinion:
● the Group ﬁnancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s
affairs as at 30 April 2008 and of its proﬁt and cash ﬂows for the year then ended;
● the Group ﬁnancial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and
● the information given in the directors’ report is consistent with the Group ﬁnancial statements.
PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors
Reading
31 July 2008 44 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Consolidated income statement
for the year ended 30 April 2008
2008 2007
Notes $’000 $’000
Revenue 1,2 228,196 171,590
Cost of sales (22,582) (18,148)
Gross profit 205,614 153,442
Selling and distribution costs (63,233) (45,592)
Research and development expense (29,484) (23,051)
Administrative expenses (38,105) (27,532)
Operating profit 74,792 57,267
Analysed as:
Operating profit before exceptional items 81,294 62,128
Exceptional items 3 (6,502) (4,861)*
Operating profit 74,792 57,267
Finance costs 5 (12) (70)
Finance income 5 2,043 2,810
Profit before tax 1,3 76,823 60,007
Taxation 6 (21,404) (16,143)
Profit after tax 55,419 43,864
Earnings per share expressed in cents per share
– basic 8 27.67 21.96
– diluted 8 26.97 21.37
Earnings per share expressed in pence per share
– basic 8 13.79 11.49
– diluted 8 13.44 11.18
* Stock-based compensation has been reclassiﬁed from exceptional to non-exceptional items as disclosed in note 3.
All results are from continuing operations.
The notes on pages 48 to 73 are an integral part of these consolidated ﬁnancial statements. Consolidated balance sheet
as at 30 April 2008
Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 45
2008 2007
Notes $’000 $’000
Assets
Non-current assets
Goodwill 9 65,784 42,533
Other intangible assets 10 35,282 18,245
Property, plant and equipment 11 4,359 2,543
Deferred tax assets 20 15,577 10,813
121,002 74,134
Current assets
Inventories 12 192 255
Trade and other receivables 13 59,205 44,031
Cash and cash equivalents 14 92,405 84,971
151,802 129,257
Total assets 272,804 203,391
Liabilities
Current liabilities
Trade and other payables 15 103,859 76,612
Current tax liabilities 16 19,245 17,023
Financial liabilities – borrowings 17 – 72
123,104 93,707
Non-current liabilities
Non-current deferred income 18 6,518 7,265
Deferred tax liabilities 20 16,660 10,873
Financial liabilities – borrowings 17 – 41
23,178 18,179
Net assets 126,522 91,505
Shareholders’ equity
Capital and reserves attributable to the Company’s equity holders
Share capital 21 36,837 36,767
Share premium 22 103,904 104,054
Proﬁt and loss reserve (deﬁcit) 12,679 (23,394)
Foreign currency translation reserve 187 1,163
Other reserves (deﬁcit) (27,085) (27,085)
Total shareholders’ equity 126,522 91,505
The notes on pages 48 to 73 are an integral part of these consolidated ﬁnancial statements.
The ﬁnancial statements on pages 44 to 73 were approved by the board of directors on 31 July 2008 and were signed on its behalf by:
Stephen Kelly Nick Bray
Chief Executive Ofﬁcer Chief Financial Ofﬁcer 46 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Consolidated statement of changes in shareholders’ equity
for the year ended 30 April 2008
Foreign
currency Proﬁt
translation Other and loss
Share Share reserve reserves reserve
capital premium (deﬁcit) (deﬁcit) (deﬁcit) Total
$’000 $’000 $’000 $’000 $’000 $’000
Balance as at 1 May 2006 36,644 103,641 (432) (27,085) (55,267) 57,501
Currency translation differences – – 1,595 – – 1,595
Proﬁt for the year –––– 43,864 43,864
Dividends –––– (13,981) (13,981)
Issue of share capital 123 3––– 126
Movement in relation to share options – 410 – – 355 765
Deferred tax on share options –-––– 1,635 1,635
Balance as at 30 April 2007 36,767 104,054 1,163 (27,085) (23,394) 91,505
Currency translation differences – – (976) – – (976)
Proﬁt for the year –––– 55,419 55,419
Dividends –––– (21,229) (21,229)
Issue of share capital 70–––– 70
Movement in relation to share options – (150) – – 1,487 1,337
Deferred tax on share options –––– 396 396
Balance as at 30 April 2008 36,837 103,904 187 (27,085) 12,679 126,522
The notes on pages 48 to 73 are an integral part of these consolidated ﬁnancial statements. Consolidated cash ﬂow statement
for the year ended 30 April 2008
Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 47
2008 2007
Notes $’000 $’000
Cash flows from operating activities
Cash generated from operations 23 96,188 58,170
Interest received 2,051 2,780
Interest paid (12) (70)
Tax paid (18,193) (7,316)
Net cash from operating activities 80,034 53,564
Cash flows from investing activities
Payments for intangible assets 10 (6,272) (5,456)
Purchase of property, plant and equipment 11 (3,183) (830)
Acquisition of subsidiary 28 (41,576) (4,832)
Net cash acquired with subsidiary 28 678 (1,218)
Net cash used in investing activities (50,353) (12,336)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 71 125
Repayment of borrowings (113) (46)
Dividends paid to shareholders 7 (21,229) (13,981)
Net cash used in financing activities (21,271) (13,902)
Effects of exchange rate changes (976) 1,579
Net increase in cash and cash equivalents 7,434 28,905
Cash and cash equivalents at 1 May 2007 84,971 56,066
Cash and cash equivalents at 30 April 2008 14 92,405 84,971
The notes on pages 48 to 73 are an integral part of these consolidated ﬁnancial statements. 48 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Summary of signiﬁcant accounting policies
for the year ended 30 April 2008
The principal accounting policies applied in the preparation of these consolidated ﬁnancial statements are set out below. These policies have been
consistently applied to all the years presented, unless otherwise stated.
1 Group accounting policies
A Basis of preparation
The consolidated ﬁnancial statements of Micro Focus International plc have been prepared in accordance with EU Endorsed International Financial
Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS. The consolidated ﬁnancial
statements have been prepared under the historical cost convention as modiﬁed by the share options at fair value through the income statement.
The preparation of ﬁnancial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management
to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity,
or areas where assumptions and estimates are signiﬁcant to the consolidated ﬁnancial statements are disclosed in Note 2, critical accounting estimates
and assumptions.
B Consolidation
The ﬁnancial statements of the Group comprise the ﬁnancial statements of the Company and entities controlled by the Company, its subsidiaries,
prepared at the balance sheet date. Control exists where the Group has the power to govern the ﬁnancial and operating policies of the entity so as
to obtain beneﬁts from its activities.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of acquisition is measured as the
fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to
the acquisition. Identiﬁable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the
Group’s share of the identiﬁable net assets acquired is recorded as goodwill.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated.
C Revenue recognition
The Group recognises revenues from sales of software licences to end-users or resellers upon persuasive evidence of an arrangement, delivery of
the software and determination that collection of a ﬁxed or determinable fee is reasonably assured. When the fees for software upgrades and
enhancements, maintenance, consulting and training are bundled with the licence fee, they are unbundled using the Group’s objective evidence of the
fair value of the elements represented by the Group’s customary pricing for each element in separate transactions. If evidence of fair value exists for all
undelivered elements and there is no such evidence of fair value established for delivered elements, revenue is ﬁrst allocated to the elements where fair
value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for any undelivered element of the
arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value exists or undelivered elements of
the arrangement are delivered.
If the arrangement includes acceptance criteria, revenue is not recognised until the Group can objectively demonstrate that the software or service
can meet the acceptance criteria, or the acceptance period lapses, whichever is earlier. The Group recognises licence revenue derived from sales to
resellers, upon delivery to resellers, provided that all other revenue recognition criteria are met, otherwise revenue is deferred and recognised upon
delivery of the product to the end-user. Maintenance revenue is derived from providing technical support and software updates to customers.
Maintenance revenue is recognised on a straight-line basis over the term of the contract, which in most cases is one year. Revenue from consulting
and training services is recognised as the services are performed.
Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred income.
D Segmental reporting
A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns
that are different from those of components operating in other economic environments.
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different
from those of other business segments. The Group considers there to be only one business segment being the provision of enterprise application
management and modernisation solutions. Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 49
E Leases
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classiﬁed as ﬁnance leases.
Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased property and the present value of the
minimum lease payments. Each lease payment is allocated between the liability and ﬁnance charges so as to achieve a constant rate of interest
on the liability outstanding. The corresponding rental obligations, net of ﬁnance charges, are included in ﬁnancial liabilities – borrowings.
The property, plant and equipment acquired under ﬁnance leases is depreciated over the shorter of the asset’s useful life and the lease term.
Leases where the lessor retains a signiﬁcant portion of the risks and rewards of ownership are classiﬁed as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of
the lease.
F Foreign currency translation
a) Functional and presentation currency
Items included in the ﬁnancial statements of each of the Group’s entities are measured using the currency of the primary economic environment
in which the entity operates (“the functional currency”). The consolidated ﬁnancial statements are presented in US Dollars, which is the Group’s
functional currency.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
c) Group companies
The results and ﬁnancial position of all the Group entities that have a functional currency different from the presentation currency are translated into
the presentation currency as follows:
i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation
of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the
transactions); and
iii) all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to shareholders’ equity.
When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated
at the closing rate, with exception for goodwill arising before 1 May 2004 which is treated as an asset of the Company and expressed in the Company’s
functional currency.
G Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Transaction costs incurred in the arrangement of new borrowing
facilities are capitalised and netted against the capital element of the outstanding borrowing. These costs are then amortised over the life of the facility
to which the costs relate on the effective interest basis. 50 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Summary of signiﬁcant accounting policies
for the year ended 30 April 2008
1 Group accounting policies (continued)
H Property plant and equipment
All property, plant and equipment are stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that
is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset,
as appropriate, only when it is probable that future economic beneﬁts associated with the item will ﬂow to the Group and the cost of the item can
be measured reliably. All other repairs and maintenance expenditures are charged to the income statement during the ﬁnancial period in which they
are incurred. Depreciation is calculated using the straight-line method to write off the cost of each asset to its residual value over its estimated useful
life as follows:
Leasehold improvements Over the lease term
Furniture and ﬁxtures Five to seven years
Computer equipment One to ﬁve years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written
down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on
disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the income statement.
I Intangible assets
a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identiﬁable assets of the acquired subsidiary at the date
of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost
less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Group’s
investment in each area of operation by each primary reporting segment.
As permitted under IFRS 1, the Group has elected to deem the UK GAAP net book value at 1 May 2004 as the IFRS cost of goodwill at transition date.
b) Computer software
Computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the speciﬁc software. These costs are
amortised using the straight-line method over their estimated useful lives of three to ﬁve years.
c) Research and development
Research expenditure is recognised as an expense as incurred. Costs incurred on development projects relating to the developing of new computer
software programmes and signiﬁcant enhancement of existing computer software programmes are recognised as intangible assets when it is probable
that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Only direct costs are
capitalised which include the software development employee costs and an appropriate portion of relevant overheads. Development costs previously
recognised as an expense are not recognised as an asset in a subsequent period. Development costs are amortised from the commencement of the
commercial production of the product on a straight-line basis over the period of its expected beneﬁt, typically being three years.
d) Intangible assets – arising on business combinations
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation. Amortisation is charged to the income
statement on a straight-line basis over the estimated useful lives of each intangible asset. Intangible assets are amortised from the date they are
available for use. The estimated useful lives will vary for each category of asset acquired and to date are as follows:
Trade names Three years
Technology Seven to ten years
Customer relationships Two to ten years
Non-compete agreements Five years
J Impairment of tangible and intangible assets
Assets that have an indeﬁnite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment
loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an
asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are
separately identiﬁable cash ﬂows (cash generating units). Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 51
K Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of ﬁnished
goods comprises software for resale and packaging materials. Net realisable value is the estimated selling price in the ordinary course of business,
less applicable variable selling expenses.
L Trade receivables
Trade receivables are recognised at fair value less provision for impairment. A provision for impairment of trade receivables is established when there is
objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision
is the difference between the asset’s carrying amount and the present value of estimated future cash ﬂows, discounted at the effective interest rate.
The amount of the provision is recognised in the income statement.
M Employee beneﬁt costs
a) Pension obligations
Group companies operate various pension schemes. All of the major schemes are deﬁned contribution plans for which the Group pays contributions to
publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations
once the contributions have been paid. The contributions are recognised as an employee beneﬁt expense when they are due. Prepaid contributions are
recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
b) Share-based compensation
The Group operated various equity-settled, share-based compensation plans during the year.
For shares or share options granted after 7 November 2002 and vested after 1 January 2005 the fair value of the employee services received in
exchange for the grant of the shares or options is recognised as an expense. The total amount to be expensed over the vesting period is determined
by reference to the fair value of the shares or options granted. Non-market vesting conditions are included in assumptions about the number of options
that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of options that are expected to
become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to
equity over the remaining vesting period.
The shares are recognised when the options are exercised and the proceeds received allocated between share capital and share premium.
Fair value is measured using the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on management’s best
estimate for the effects of non-transferability, exercise restrictions and behavioural considerations.
N Share capital, share premium and dividend distribution
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s ﬁnancial statements in the period in which the
dividends are approved by the Company’s shareholders.
O Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and
their carrying amounts in the consolidated ﬁnancial statements. However, if the deferred income tax arises from initial recognition of an asset or liability
in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable proﬁt or loss, it is not
accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date
and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax
assets are recognised to the extent that it is probable that future taxable proﬁt will be available against which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the
temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. 52 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Summary of signiﬁcant accounting policies
for the year ended 30 April 2008
1 Group accounting policies (continued)
P Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities
of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
Q Exceptional items
Exceptional items are those signiﬁcant items which are separately disclosed by virtue of their size or incidence to enable a full understanding of
the Group’s ﬁnancial performance.
R Financial instruments and hedge accounting
Financial assets and liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provision of
the instrument. Trade receivables are non-interest bearing and are stated at their nominal value less the amount of any appropriate provision
for irrecoverable amounts. Trade payables are non-interest bearing and are stated at their nominal value.
In accordance with its treasury policy, the Group does not hold or issue derivative ﬁnancial instruments or hedge accounting for trading purposes.
S Adoption of new and revised International Financial Reporting Standards
At the date of approval of these ﬁnancial statements, the following standards, amendments and interpretations were issued but not yet mandatory
effective for the Group:
International Financial Reporting Standards “IFRS”
● IFRS 8, Operating Segments – 1 January 2009
International Financial Reporting Interpretations Committee (“IFRIC”) interpretations:
● IFRIC 12, Service Concession arrangements – 1 January 2008
● IFRIC 13, Customer Loyalty Programmes – 1 July 2008
● IFRIC 14, IAS19 – The Limit of a Deﬁned Beneﬁt Asset, Minimum Funding Requirements and their Interaction – 1 January 2009
Amendments to existing standards:
● Amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures – 1 January 2009
● Amendment to IAS 23, Borrowing Costs – 1 January 2009
● Amendment to IAS 27, Consolidated and Separate Financial Statements – 1 January 2010
● Amendment to IFRS 2, Share-based Payment – Vesting Conditions and Cancellations – 1 January 2009
● Amendment to IFRS 3, Business Combinations – 1 January 2010
All the IFRS, IFRIC interpretations and amendments to existing standards had been adopted by the EU at the date of approval of these consolidated
statements with the exception of: IFRS 8, IFRIC 12, IFRIC 13, IFRIC 14, IAS 23 (revised), IFRS 2 (revised) and IFRS 3 (revised).
The implementation date for the above will be the annual period beginning on or after the date shown.
The directors anticipate that the future adoption of these standards, interpretations and amendments listed above will not have a material impact
on the consolidated ﬁnancial statements.
2 Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by deﬁnition, seldom equal the related
actual results. The estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next ﬁnancial year are summarised below.
a) Impairment of goodwill
The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note I. The recoverable
amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 53
b) Income taxes
The Group is subject to income taxes in numerous jurisdictions. Signiﬁcant judgement is required in determining the worldwide provision for income
taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business.
The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the ﬁnal tax outcome
of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions
in the period in which such determination is made.
c) Acquisitions
When making acquisitions, the Group has to make judgements and best estimates about the fair value allocation of the purchase price.
Appropriate advice is sought from professional advisors before making such allocations. The valuation of goodwill and other intangibles is tested
annually or whenever there are changes in circumstances indicating that the carrying amounts may not be recoverable. These tests require the use
of estimates.
The Group makes judgements on speciﬁc items when applying its accounting policies. The judgement that has a signiﬁcant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year is discussed below.
The Group invests in the development of future products in accordance with the accounting policy stated in note Ic). The assessment as to whether this
expenditure will achieve a complete product for which the technical feasibility is assured is a matter of judgement, as is the forecasting of how the
product will generate future economic beneﬁt. Finally, the period of time over which the economic beneﬁt associated with the expenditure occurred
will arise is also a matter of judgement. These judgements are made by evaluating the development plan prepared by the research and development
department and approved by management, regularly monitoring progress by using an established set of criteria for assessing technical feasibility and
benchmarking to other products.
3 Financial risk factors
The Group’s multi-national operations expose it to a variety of ﬁnancial risks that include the effects of changes in credit risks, foreign currency
exchange rates, liquidity and interest rates.
a) Credit risk
Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash equivalents and accounts receivable.
Cash equivalents are deposited with high-credit quality ﬁnancial institutions. The Group provides credit to customers in the normal course of business.
Collateral is not required for those receivables, but ongoing credit evaluations of customers’ ﬁnancial conditions are performed. The Group maintains
a provision for impairment based upon the expected collectibility of accounts receivable. The Group sells products and services to a wide range of
customers around the world and, therefore, believes there is no material concentration of credit risk.
b) Foreign currency risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the UK
Sterling, the Euro and the Japanese Yen. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net
investments in foreign operations. Foreign exchange risk arises when future commercial transactions, recognised assets and liabilities are denominated
in a currency that is not the entity’s functional currency.
There were no hedging transactions in place at 30 April 2008.
The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.
c) Interest rate risk
The Group’s income and operating cash ﬂows are substantially independent of changes in market interest rates. The interest rates of ﬁnance leases
to which the Group is lessee are ﬁxed at inception of the lease. These leases expose the Group to fair value interest rate risk.
The Group’s cash ﬂow interest rate risk arises from cash deposits. Deposits placed at variable rates expose the Group to cash ﬂow interest rate risk. 54 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
1 Segmental reporting
Primary reporting format – geographical segments
Year ended 30 April 2008
Europe
and the Rest of
North America Middle East the world Total
$’000 $’000 $’000 $’000
Revenue 96,482 96,018 35,696 228,196
Segment result (operating proﬁt) before exceptional items 12,384 68,154 756 81,294
Exceptional items (3,094) (3,408) – (6,502)
Segment result (operating proﬁt) 9,290 64,746 756 74,792
Finance income – net 2,031
Profit before tax 76,823
Taxation (21,404)
Net profit attributable to equity shareholders 55,419
Segment assets 74,992 135,979 10,974 221,945
Unallocated assets:
Other intangible assets (note 10) 35,282
Deferred tax assets (note 20) 15,577
Total assets 272,804
Segment liabilities 71,455 26,004 12,918 110,377
Unallocated liabilities:
Current and deferred tax liabilities 35,905
Total liabilities 146,282
Other segment items
Capital expenditure (note 11) 1,275 1,850 58 3,183
Depreciation (note 11) 460 1,085 58 1,603
Share-based compensation 167 1,143 27 1,337
Amortisation of intangible assets (note 10) 9,590 Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 55
Year ended 30 April 2007
Europe
and the Rest of
North America Middle East the world Total
$’000 $’000 $’000 $’000
Revenue 70,634 71,808 29,148 171,590
Segment result (operating proﬁt) before exceptional items 4,684 56,424 1,020 62,128
Exceptional items (1,726) (3,131) (4) (4,861)
Segment result (operating proﬁt) 2,958 53,293 1,016 57,267
Finance costs – net 2,740
Profit before tax 60,007
Taxation (16,143)
Net profit attributable to equity shareholders 43,864
Segment assets 66,084 95,666 12,583 174,333
Unallocated assets:
Other intangible assets (note 10) 18,245
Deferred tax assets (note 20) 10,813
Total assets 203,391
Segment liabilities 29,836 47,651 6,390 83,877
Unallocated liabilities:
Current and deferred tax liabilities 27,896
Corporate borrowings (note 17) 113
Total liabilities 111,886
Other segment items
Capital expenditure (note 11) 148 668 14 830
Depreciation (note 11) 430 683 56 1,169
Share-based compensation 96 737 16 849
Amortisation of intangible assets (note 10) 5,972
The Group is organised on a worldwide basis into three main geographical segments.
● North America
● Europe and the Middle East
● Rest of the world
There are immaterial sales between the geographical segments. The revenue analysis in the table above is based on the location of the customers
where the order is received which is not materially different from the location of the assets.
Segment assets include goodwill, property, plant and equipment, stocks, debtors and operating cash and exclude other intangible assets and deferred
tax assets. Segment liabilities comprise operating liabilities and exclude deferred tax liabilities and corporate borrowings. Capital expenditure comprises
additions to property, plant and equipment.
Secondary reporting format – business segment
The Group considers there is only one business segment being the provision of enterprise management and modernisation solutions. 56 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
2 Supplementary information
Set out below is an analysis of revenue recognised between the principal product categories, which the directors use to assess the future revenue ﬂows
from the current portfolio of customers.
2008 2007
$’000 $’000
Licence 113,314 82,652
Maintenance 104,144 82,056
Consulting 10,738 6,882
Total 228,196 171,590
3 Proﬁt before tax
Proﬁt before tax is stated after charging:
2008 2007
Note $’000 $’000
Staff costs 24 89,581 68,247
Depreciation of property, plant and equipment
– owned assets 11 1,593 1,038
– assets under ﬁnance lease 11 10 131
Amortisation of intangibles 10 9,590 5,972
Changes in inventories of ﬁnished goods 63 76
Operating lease rentals payable
– plant and machinery 1,366 1,151
– other 4,908 4,247
Exceptional items
2008 2007
$’000 $’000
Reorganisation costs 6,502 4,861
Current year reorganisation costs relate to restructuring programmes carried out in Europe and the USA resulting from the acquisition of Acucorp, Inc.
The prior year reorganisation costs relate to restructuring programmes carried out in Europe, the USA and at HAL Knowledge Solutions SpA.
Severance costs included within reorganisation costs are not included within staff costs disclosed in note 24.
In prior periods, the directors considered share-based compensation to be of an exceptional nature due to the accelerated payments made at the time
of the Company’s ﬂotation. The directors have reviewed the classiﬁcation and believe that on an on-going basis these costs are no longer exceptional
in nature and have reclassiﬁed the expenditure accordingly. The impact is to reduce exceptional items by $1.3 million (2007: $0.8 million).
All exceptional items relate to administrative expenses. Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 57
Services provided by the Group’s auditors and network of ﬁrms
During the year the Group obtained the following services from the Group’s auditor as detailed below:
2008 2007
$’000 $’000
Audit services
– Fees payable to the Company auditor for the audit of the parent Company and consolidated accounts 98 114
Non-audit services
Fees payable to the Company’s auditor and their associates for other services:
– The audit of the Company’s subsidiaries pursuant to legislation 314 373
– Services related to taxation 828 317
– Other services pursuant to legislation 34 30
– Other services 302 30
Total 1,576 864
The Group’s auditors, PricewaterhouseCoopers LLP, provide non-audit services for the Group over and above the external audit (principally tax
compliance, tax advice and due diligence work). The board of directors reviews the level of non-audit fees and believes that the Group receives
particular beneﬁt from tax advice provided by its auditors given their wide and detailed knowledge of the Group. The board is conﬁdent that the
objectivity and independence of the auditors is not impaired in any way by reason of its non-audit work.
Other services relate to due diligence.
4 Reconciliation of operating proﬁt to EBITDA
2008 2007
$’000 $’000
Operating profit 74,792 57,267
Exceptional items – reorganisation costs 6,502 4,861
Share-based compensation charge 1,337 849
Amortisation of purchased intangibles 3,946 532
Adjusted operating profit 86,577 63,509
Depreciation 1,603 1,169
Amortisation of software 337 608
Adjusted EBITDA 88,517 65,286
EBITDA 80,678 59,576
Exceptional items – reorganisation costs 6,502 4,861
Share-based compensation charge 1,337 849
Adjusted EBITDA 88,517 65,286
The directors use EBITDA and EBITDA before exceptional items as key performance measures of the business. 58 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
5 Interest payable/receivable and similar charges
2008 2007
$’000 $’000
Finance costs
Interest expense on bank borrowings 11 61
Interest expense on ﬁnance leases 1 9
Total 12 70
Finance income
Finance income consists of interest receivable, which relates to interest on bank deposits.
6 Taxation
2008 2007
$’000 $’000
Current tax
Current year 21,574 15,176
Adjustments to tax in respect of previous years (1,569) –
20,005 15,176
Deferred tax
Current year 1,329 1,537
Adjustments to tax in respect of previous years 70 (570)
1,399 967
Total 21,404 16,143
Deferred tax of $0.4 million (2007: $1.6 million) has been recognised in relation to the share options charged against equity in the year.
The taxation for the period differs from the theoretical amount that would arise using the weighted average tax rate applicable to proﬁts of the
consolidated companies as explained below.
2008 2007
$’000 $’000
Proﬁt before taxation 76,823 60,007
Tax calculated at domestic tax rates applicable to proﬁts in the respective countries 23,047 18,507
Effects of:
Adjustments to tax in respect of previous years – current tax (1,569) –
Adjustments to tax in respect of previous years – deferred tax 70 (570)
Expenses not deductible for tax purposes 1,891 551
Losses not recognised – 1,121
Utilisation of unrecognised tax losses (844) (377)
Other (1,191) (3,089)
Total taxation 21,404 16,143
The movement in deferred tax assets and liabilities during the period, without taking into consideration the offsetting of balances within the same tax
jurisdiction, is provided in note 20. Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 59
7 Dividends
Equity – ordinary
2008 2007
$’000 $’000
2007 ﬁnal paid 7 cents (2006: 4 cents) per ordinary share 14,016 7,983
2008 interim paid 3.6 cents (2007: 3 cents) per ordinary share 7,213 5,998
21,229 13,981
Whilst the Group as a whole had a deﬁcit in its proﬁt and loss reserve at 30 April 2007 and throughout most of the year to 30 April 2008, the directors
of Micro Focus International plc have concluded that the Company had sufﬁcient reserves to enable the payment of the ﬁnal dividend relating to the
year ended 30 April 2007 and the interim dividend relating to the year ended 30 April 2008. The directors are proposing a ﬁnal dividend in respect
of the year ended 30 April 2008 of 9.4 cents per share which will utilise $18.8 million of shareholders’ funds. The directors have concluded that the
Company has sufﬁcient reserves to pay this dividend. It has not been included as a liability in these ﬁnancial statements.
8 Earnings per share
The calculation of the basic earnings per share has been based on the earnings attributable to ordinary shareholders and the weighted average number
of shares for each year.
2008 2007
Weighted Weighted
average average
number Per share number Per share
Earnings of shares amount Earnings of shares amount
$’000 ‘000 cents $’000 ‘000 cents
Basic EPS
Earnings attributable to ordinary shareholders 55,419 200,268 27.67 43,864 199,744 21.96
Effect of dilutive securities
Options 5,216 5,562
Diluted EPS
Earnings attributable to ordinary shareholders 55,419 205,484 26.97 43,864 205,306 21.37
Supplementary EPS to exclude exceptional items
Basic EPS 55,419 200,268 27.67 43,864 199,744 21.96
Adjusted items
1
11,785 6,242
Tax relating to above items (2,954) (1,402)
Basic EPS – adjusted 64,250 200,268 32.08 48,704 199,744 24.38
Diluted EPS 55,419 205,484 26.97 43,864 205,306 21.37
Adjusted items
1
11,785 6,242
Tax relating to above items (2,954) (1,402)
Diluted EPS – adjusted 64,250 205,484 31.27 48,704 205,306 23.72
1 Adjusted items comprise amortisation of acquired intangibles, share-based compensation and exceptional costs.
Earnings per share expressed in pence has used the exchange rate of $2.01 to £1 (2007: $1.91 to £1). 60 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
9 Goodwill
2008 2007
$’000 $’000
Cost and net book amount
At 1 May 2007 42,533 42,404
Acquisition (note 28) 23,321 129
Adjustment relating to prior years (70) –
At 30 April 2008 65,784 42,533
A segment-level summary of the goodwill allocation is presented below:
North America 47,521 24,200
Europe and the Middle East 14,824 14,894
Rest of the world 3,439 3,439
At 30 April 2008 65,784 42,533
Details of the acquisition in the year are shown in note 28.
Goodwill is allocated to the Group's cash generating units (CGUs) which represent the operations of a country or, in more material operations, divisions
within a country. For each CGU the Group has determined its recoverable amount. The recoverable amount is determined based on value-in-use
calculations. No impairment charge was required in the year (2007: $Nil) and the cumulative impairment charge recognised to date is $Nil (2007: $Nil).
The key assumption used in the impairment calculations is the forecast operating cash ﬂows for the next ﬁve years based on approved budgets
and plans. These budgets and plans are based on past performance and expectations for the market development of the CGU. In the case of
the business relating to the acquisition of HAL Knowledge Solutions SpA in the prior ﬁnancial year cash ﬂows beyond the ﬁve-year period are
extrapolated using an estimated growth rate of 20%, which does not exceed the long-term estimate for the business in which the CGU operates.
The resulting cash ﬂows were discounted using a post-tax discount rate of 8.9% (2007: 8.9%).
Sensitivity analysis as at 30 April 2008 has indicated that no reasonably foreseeable change in the key assumptions used in the impairment model
would result in a signiﬁcant impairment charge being recorded in the ﬁnancial statements.
10 Other intangible assets
Purchased Development Customer Non-compete
software costs Technology Trade names relationships agreements Total
$’000 $’000 $’000 $’000 $’000 $’000 $’000
Cost
At 1 May 2007 4,333 26,426 10,904––– 41,663
Exchange adjustments 110––––– 110
Additions 884 5,388–––– 6,272
Acquisition (note 28) – – 7,818 1,175 10,960 292 20,245
Disposals (6) ––––– (6)
At 30 April 2008 5,321 31,814 18,722 1,175 10,960 292 68,284
Aggregate amortisation and impairment
At 1 May 2007 4,107 18,779 532––– 23,418
Exchange adjustments –––––––
Charge for the year 338 5,306 2,181 392 1,314 59 9,590
Disposals (6) ––––– (6)
At 30 April 2008 4,439 24,085 2,713 392 1,314 59 33,002
Net book amount at 30 April 2008 882 7,729 16,009 783 9,646 233 35,282
Net book amount at 1 May 2007 226 7,647 10,372––– 18,245 Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 61
Purchased Development Customer Non-compete
software costs Technology Trade names relationships agreements Total
$’000 $’000 $’000 $’000 $’000 $’000 $’000
Cost
At 1 May 2006 3,894 21,112–––– 25,006
Exchange adjustments 272––––– 272
Additions 142 5,314–––– 5,456
Acquisition 25 – 10,904––– 10,929
At 30 April 2007 4,333 26,426 10,904––– 41,663
Aggregate amortisation and impairment
At 1 May 2006 3,422 13,947–––– 17,369
Exchange adjustments 77––––– 77
Charge for the year 608 4,832 532––– 5,972
At 30 April 2007 4,107 18,779 532––– 23,418
Net book amount at 30 April 2007 226 7,647 10,372––– 18,245
Net book amount at 1 May 2006 472 7,165–––– 7,637
Intangible assets, with the exception of purchased software and internally generated development costs, relate to identiﬁable assets purchased as part
of the Group’s business combinations. Intangible assets are amortised on a straight line basis over their expected useful economic life – see note Id).
11 Property, plant and equipment
Leasehold Computer Fixtures and
improvements equipment ﬁttings Total
$’000 $’000 $’000 $’000
Cost
At 1 May 2007 1,705 5,705 1,680 9,090
Exchange adjustments 83 61 76 220
Additions 1,087 1,659 437 3,183
Acquisition 20 296 129 445
Disposals (22) (727) (191) (940)
At 30 April 2008 2,873 6,994 2,131 11,998
Depreciation
At 1 May 2007 752 4,717 1,078 6,547
Exchange adjustments 25 56 33 114
Charge for the year 440 920 243 1,603
Disposals (22) (574) (29) (625)
At 30 April 2008 1,195 5,119 1,325 7,639
Net book amount at 30 April 2008 1,678 1,875 806 4,359
Net book amount at 1 May 2007 953 988 602 2,543 62 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
11 Property, plant and equipment continued
Assets held under ﬁnance leases, capitalised and included in computer equipment:
2008 2007
$’000 $’000
Cost – 368
Aggregate depreciation – (292)
Net book amount – 76
Leasehold Computer Fixtures and
improvements equipment ﬁttings Total
$’000 $’000 $’000 $’000
Cost
At 1 May 2006 1,232 5,235 1,210 7,677
Exchange adjustments 68 337 105 510
Additions 288 349 193 830
Acquisition 149 – 207 356
Disposals (32) (216) (35) (283)
At 30 April 2007 1,705 5,705 1,680 9,090
Depreciation
At 1 May 2006 471 3,992 828 5,291
Exchange adjustments 18 273 53 344
Charge for the year 273 665 231 1,169
Disposals (10) (213) (34) (257)
At 30 April 2007 752 4,717 1,078 6,547
Net book amount at 30 April 2007 953 988 602 2,543
Net book amount at 1 May 2006 761 1,243 382 2,386
12 Inventories
2008 2007
$’000 $’000
Finished goods 192 255 Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 63
13 Trade and other receivables
2008 2007
$’000 $’000
Trade receivables 52,676 35,634
Less: provision for impairment of trade receivables (1,217) (242)
Trade receivables net 51,459 35,392
Prepayments 3,659 4,581
Accrued income 4,087 4,058
Total 59,205 44,031
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large and unrelated. In determining
the recoverability of a trade receivable, the Group considers the ageing of each debtor and any change in the circumstances of the individual debtor.
Due to this, management believe there is no further credit risk provision required in excess of the normal provision for doubtful receivables. At 30 April
2008, the carrying amount approximates the fair value of the instrument due to the short-term nature of the instrument.
At 30 April 2008, trade receivables of $7.8 million (2007: $8.9 million) were past due but not impaired. These relate to a large number of independent
companies for whom there is no recent history of default. The amounts are regarded as recoverable. The average age of these receivables was 32 days
in excess of due date (2007: 34 days).
As at 30 April 2008, trade receivables of $1.1 million (2007: $0.4 million) were either partially or fully impaired. The amount of the provision was
$1.2 million (2007: $0.2 million). The ageing of these receivables is as follows:
2008 2007
$’000 $’000
Three to four months 434 135
Over four months 692 223
Total 1,126 358
14 Cash and cash equivalents
2008 2007
$’000 $’000
Cash at bank and in hand 25,626 13,521
Short-term bank deposits 66,779 71,450
Total 92,405 84,971
The effective interest rate on short-term deposits was 2.8% (2007: 4.6%) and these deposits have an average maturity of three days (2007: four days).
At 30 April 2008, the carrying amount approximates the fair value of the instrument due to the instrument bearing interest at market rates and/or the
short-term nature of the instrument. 64 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
15 Trade and other payables – current
2008 2007
$’000 $’000
Trade payables 4,964 4,374
Other tax and social security payable 4,477 185
Accruals 26,053 21,750
Deferred income 68,365 50,303
Total 103,859 76,612
At 30 April 2008, the carrying amount approximates to fair value of the instrument due to the short-term nature of the instrument.
16 Current tax liabilities
2008 2007
$’000 $’000
Corporation tax 19,245 17,023
17 Financial liabilities – borrowings
2008 2007
$’000 $’000
Due within one year
Finance lease obligations – 72
Total – 72
2008 2007
$’000 $’000
Due after more than one year
Finance lease obligations – 41
Total – 41
Lease liabilities are effectively secured as the rights to the leased assets revert to the lessor in the event of default.
2008 2007
$’000 $’000
Finance lease liabilities – minimum lease payments:
Not later than one year – 82
More than one year, but not more than two years – 48
– 130
Future ﬁnance charges on ﬁnance leases – (17)
Present value of finance lease liabilities – 113
The Group did not have any ﬁnance lease liabilities at 30 April 2008. Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 65
18 Other non-current liabilities
2008 2007
$’000 $’000
Deferred income 6,518 7,265
19 Financial instruments
Fair value of non-current borrowings
Fair value is the amount at which a ﬁnancial instrument could be exchanged in an arm’s length transaction between informed and willing parties,
other than a forced or liquidation sale and excludes accrued interest. The Group’s ﬁnancial liabilities at 30 April 2008 are deemed to be equal to their
fair value at that date.
Maturity of non-current borrowings
The maturity proﬁle of non-current borrowings is as follows:
2008 2007
$’000 $’000
Between one and two years – 41
– 41
The effective interest rates at the balance sheet date were as follows:
2008 2007
Finance lease obligations – 8.5%
The Group’s other currency exposures comprise only those that give rise to net currency gains and losses to be recognised in the income statement.
Such exposures reﬂect the monetary assets and liabilities of the Group that are not denominated in the operating or functional currency of the
operating unit involved. At 30 April 2008 and 30 April 2007, these exposures are immaterial to the Group.
Capital risk management
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for
shareholders and beneﬁts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders,
issue new shares or sell assets to reduce debt.
Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by
total capital. Net debt is calculated as total borrowings (including “current and non-current borrowings” as shown in the consolidated balance
sheet) less cash and cash equivalents. Total capital is calculated as “equity”, as shown in the consolidated balance sheet, plus net debt.
At 30 April 2008, the Group did not have net debt and therefore no gearing. As outlined in note 30, borrowing facilities, the Company entered into
a $40 million credit facility on 13 May 2008 which can be used for general corporate purposes. 66 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
20 Deferred tax
2008 2007
$’000 $’000
Net deferred tax liability
Beginning of the year (60) (728)
Charged to income statement (1,399) (967)
Credited directly to equity 396 1,635
Acquisition of subsidiary (20) –
End of the year (1,083) (60)
Other
temporary
Tax losses differences Total
$’000 $’000 $’000
Deferred tax assets
At 1 May 2007 4,426 6,387 10,813
Charged to income statement (46) (1,235) (1,281)
Credited directly to equity – 396 396
Acquisition of subsidiary 3,974 1,675 5,649
At 30 April 2008 8,354 7,223 15,577
Deferred income tax assets are recognised for tax loss carry-forwards to the extent that the realisation of the related tax beneﬁt through the utilisation
of future taxable proﬁts is probable.
Other
temporary
differences Total
$’000 $’000
Deferred tax liabilities
At 1 May 2007 10,873 10,873
Charged to income statement 118 118
Acquisition of subsidiary 5,669 5,669
At 30 April 2008 16,660 16,660 Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 67
21 Called up share capital
2008 2007
$ $
Authorised
2,500,000,000 ordinary shares of £0.10 each 476,770,000 476,770,000
Total authorised share capital 476,770,000 476,770,000
2008 2007
Number $ Number $
Issued and fully paid
Ordinary shares of £0.10 each 200,430,656 36,836,791 200,068,405 36,767,042
Total allotted, called up and fully paid share capital 200,430,656 36,836,791 200,068,405 36,767,042
Potential issues of ordinary shares
Certain employees hold options to subscribe for shares in the Company at prices ranging from 1 pence to 292.25 pence under the share option
schemes approved by shareholders in 2001, the Long-Term Incentive Plan 2005, Sharesave and ESPP. The number of shares subject to options at
30 April 2008 was 6,369,627 (2007: 6,946,407). Further information on these options is disclosed in note 24.
Each holder of an ordinary share is entitled to one vote for each share held at all meetings of shareholders and will be entitled to any dividends declared
by the board of directors.
22 Share premium account
2008 2007
$’000 $’000
Beginning of year 104,054 103,641
Adjustment to premium on shares issued during prior year –3
Movement in relation to share options (150) 410
End of the year 103,904 104,054
23 Cash generated from operations
2008 2007
Note $’000 $’000
Continuing operations
Net proﬁt 55,419 43,864
Adjustments for:
Net interest (2,031) (2,740)
Taxation 6 21,404 16,143
Depreciation 11 1,603 1,169
Loss on disposal of property, plant and equipment 9 26
Amortisation of intangibles 10 9,590 5,972
Share-based compensation 1,337 849
Changes in working capital:
Inventories 118 76
Trade and other receivables (9,469) (5,532)
Payables and other non-current liabilities 18,208 (1,657)
Cash generated from continuing operations 96,188 58,170 68 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
24 Employees and directors
2008 2007
$’000 $’000
Staff costs
Wages and salaries 75,789 58,641
Social security costs 9,859 6,713
Other pension costs (note 25) 2,596 2,044
Cost of employee share schemes 1,337 849
Total 89,581 68,247
2008 2007
Average monthly number of people (including executive directors) employed by business group:
Sales and distribution 229 182
Research and development 190 141
General and administration 172 144
Total 591 467
2008 2007
$’000 $’000
Key management compensation
Salaries and short-term employee beneﬁts 5,629 4,980
Post-employment beneﬁts 121 92
Share-based payments 667 513
Total 6,417 5,585
The key management ﬁgures above include the executive management team and directors.
Share-based payments
The Group has various equity-settled share-based compensation plans details of which are provided below.
Share Purchase and Option Plan 2001
The Group had a share-based compensation plan (“the Plan”) under which employees and directors could be granted options to purchase the
Company’s ordinary shares. On the full listing of the Company to the London Stock Exchange the options were treated as having vested and were
exchanged for three options in the ordinary shares of the newly listed entity. At this date the Plan was closed for new issues. No options were granted
under the Plan during the year.
Options over ordinary shares held by employees under the Plan, all of which were exercisable, were as follows:
Weighted average
Weighted remaining life (years):
Range of average
exercise prices exercise price 2008 2007
Options pence pence Expected Expected
At 1 May 2007 1,329,905 1p – 29p 8p
Exercised (362,251) 6p
Forfeited (63,572) 6p
At 30 April 2008 904,082 1p – 29p 7p 0.0 0.0
The weighted average share price for options exercised during the period was 273 pence.
No amount was charged through the income statement (2007: nil). Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 69
24 Employees and directors (continued)
Incentive Plan 2005
On 27 April 2005 the remuneration committee approved the rules of the Incentive Plan 2005 (“LTIP”) which will permit the granting of share options
to executive directors and senior management. The total number of options they will receive is determined by the Company’s aggregate earnings per
share (“EPS”) growth, exceeding inﬂation (“RPI”), over a three-year period commencing from the date of the grant.
Weighted average
Weighted remaining life (years):
Range of average
exercise prices exercise price 2008 2007
Options pence pence Expected Expected
At 1 May 2007 4,663,580 10p – 251.5p 89p
Forfeited (1,430,515) 101p
Granted 1,329,154 244p
At 30 April 2008 4,562,219 10p – 292.25p 131p 1.4 2.6
The amount charged to the income statement in respect of the scheme was $1.2 million (2007: $0.7 million).
All options are valued using the Black-Scholes option pricing model. The following assumptions have been used in the option pricing models:
Grant date 29 June 2005 11 January 2006 17 July 2006 30 October 2006 13 December 2006
Shares under option 50,000 944,129 1,923,850 84,000 209,659
Share price at grant date 156.7p 123.5p 104p 144p 198p
Exercise price 10p 10p – 123.5p 104p 144p 10p – 198p
Expected volatility 33% 33% 33% 34% 34%
Expected option life (years) 33333
Expected dividend yield 3% 3% 3% 2% 2%
Risk-free interest rate 4.25% 4.25% 4.25% 5.09% 5.09%
Fair value per option 143.2p 27.1p – 103.1p 22.8p 36.4p 50.0p – 186.5p
Grant date 21 December 2006 22 January 2007 21 February 2007 12 July 2007 17 August 2007 11 October 2007
Shares under option 46,000 125,000 47,000 842,090 20,000 2,500
Share price at grant date 211p 204p 251.5p 265.8p 271.5p 292.3p
Exercise price 211p 10p 251.5p 265.8p 271.5p 292.3p
Expected volatility 34% 34% 34% 54% 54% 54%
Expected option life (years) 333333
Expected dividend yield 2% 2% 2% 1.8% 1.8% 1.8%
Risk-free interest rate 5.09% 5.09% 5.09% 4.93% 4.93% 4.93%
Fair value per option 53.3p 192.1p 63.5p 97.5p 99.6p 107.2p
Grant date 18 October 2007 5 March 2008 27 March 2008 15 April 2008 21 April 2008
Shares under option 107,500 86,206 14,285 50,000 10,000
Share price at grant date 281.4p 203p 180.0p 198.5p 216p
Exercise price 281.4p 10p 10p 198.5p 216p
Expected volatility 54% 54% 54% 54% 54%
Expected option life (years) 33333
Expected dividend yield 1.8% 1.8% 1.8% 1.8% 1.8%
Risk-free interest rate 4.93% 4.93% 4.93% 4.93% 4.93%
Fair value per option 107.2p 192.3p 170.5p 72.8p 79.3p 70 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
24 Employees and directors (continued)
Sharesave and Employee Stock Purchase Plan 2006
In August 2006, the Company introduced the Micro Focus Employee Stock Purchase Plan 2006, approved by members on 25 July 2006.
There are two plans; the Sharesave Plan (“Sharesave”) primarily for UK employees, and the Employee Stock Purchase Plan (“ESPP”) for employees
in the USA and Canada. The Sharesave and ESPP provide for an annual award of options at a discount to the market price and are open to all eligible
Group employees. Further Sharesave and ESPP grants were made during the year to 30 April 2008.
Exercise price
per share 2008 2007
Date of grant pence Exercise period number number
Sharesave 15 August 2006 84p 15 August 2009 – 647,539 733,240
14 February 2010
17 August 2007 239.3p 17 August 2010 – 93,736 –
16 February 2011
ESPP 1 October 2006 97p 1 October 2008 – 162,051 219,682
31 March 2009
1 October 2007 242.8p 1 October 2009 – 30,311 –
31 March 2010
Total 933,637 952,922
The amount charged to the income statement in respect of the schemes was $185,000 (2007: $100,000).
All options are valued using the Black-Scholes option pricing model. The following assumptions have been used in the option pricing models:
Grant date 15 August 2006 1 October 2006 17 August 2007 1 October 2007
Shares under option 647,539 162,051 93,736 30,311
Share price at grant date 105p 114.5p 270p 300p
Exercise price 84p 97p 239.3p 242.8p
Expected volatility 33% 33% 54% 54%
Expected option life (years) 3232
Expected dividend yield 3% 3% 1.8% 1.8%
Risk-free interest rate 4.25% 4.25% 4.93% 4.93%
Fair value per option 31.6p 28.7p 109p 129.4p Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 71
25 Pension commitments
The Group has established a number of pension schemes around the world covering many of its employees. The principal funds are those in the US,
the UK and Germany. These are funded schemes of the deﬁned contribution type. Outside of these territories, the schemes are also of the deﬁned
contribution type, except for Japan which is a deﬁned beneﬁt scheme, but which has few members and therefore is not signiﬁcant to the Group.
Pension costs for deﬁned contributions schemes are as follows:
2008 2007
$’000 $’000
Defined contribution schemes 2,596 2,044
26 Operating lease commitments – minimum lease payments
At 30 April 2008 the Group has total lease agreements in respect of properties, vehicles, plant and equipment, for which the payments extend over
a number of years.
2008 2007
$’000 $’000
Commitments under non-cancellable operating leases expiring:
Within one year 2,463 1,023
Later than one year and less than ﬁve years 9,017 7,567
After ﬁve years 14,771 14,770
Total 26,251 23,360
The Group leases various ofﬁces under non-cancellable operating lease agreements that are included in the table. The leases have various terms,
escalation clauses and renewal rights.
27 Capital commitments and contingent liabilities
The Group had no capital commitments or contingent liabilities at 30 April 2008 (2007: nil). 72 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the ﬁnancial statements
for the year ended 30 April 2008
28 Business combinations
A Acquisition of Acucorp, Inc
On 4 May 2007, the Group acquired 100% of the share capital of Acucorp, Inc. for $41.6 million, inclusive of $0.7 million related costs.
A fair value review was carried out on the assets and liabilities of the business, resulting in the identiﬁcation of intangible assets.
The acquired business contributed revenues of $21.4 million and a proﬁt of $4.1 million (after exceptional costs of $6.5 million) to the Group for the
period from acquisition, 4 May 2007 to 30 April 2008.
Details of the net assets acquired and goodwill are as follows:
Carrying value at
acquisition Fair value
$’000 $’000
Intangible ﬁxed assets 70 20,245
Property, plant and equipment 445 445
Inventories 55 55
Trade and other receivables 4,517 4,517
Cash and cash equivalents 678 678
Tax receivable 1,188 1,188
Trade and other payables (8,371) (8,371)
Net deferred tax assets/(liabilities) 262 (431)
Net (liabilities)/assets (1,156) 18,326
Goodwill 23,321
Consideration 41,647
Consideration satisﬁed by:
Cash 41,647
Outﬂow of cash to acquire business, net of cash acquired:
Cash consideration 40,928
Acquisition costs 719
Cash acquired (678)
40,969
The intangible assets acquired as part of the acquisition can be analysed as follows:
Trade name 1,175
Software 7,818
Customer relationships 10,960
Non-compete agreements 292
Total 20,245
Goodwill includes non-identiﬁed intangible assets which do not meet the separable and reliably measurable criteria including business processes,
know-how and work force related industry speciﬁc knowledge and technical skills. Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 73
28 Business combinations (continued)
B Analysis of outﬂow of cash in respect of acquisitions
The outﬂow of cash and cash equivalents on the acquisitions is as follows:
$’000
Acucorp, Inc 41,647
Refund in respect of prior years’ acquisition (71)
Net cash outflow 41,576
29 Related party transactions
The Group has taken advantage of the exemption available under IAS 24, “Related Party Disclosures”, not to disclose details of transactions with
subsidiary undertakings.
As described in the remuneration report, the non-executive directors David Dominik and Prescott Ashe are directors in Golden Gate Capital who
held 35% of the Company’s issued share capital at 31 July 2008. There were no related party transactions with this company during the year ended
30 April 2008 or with any other third party.
30 Borrowing facilities
On 13 May 2008 the Company entered into a $40 million credit facility with HSBC Bank Plc and Lloyds TSB Bank Plc for general corporate purposes.
The facility expires in May 2009 and incurs facility fees at market rates.
31 Events after the balance sheet date
On 18 June 2008, the Company announced that it had acquired NetManage, Inc for a total cash consideration of $73.3 million, paid in full
on completion. On close, NetManage had $27.9 million of cash providing for a cash outﬂow of $45.4 million. In the year to 31 December 2007,
NetManage generated revenue of $36.0 million and recorded an operating loss of $2.1 million.
The Company announced on 11 July 2008 that it had acquired Liant Software Corporation for a total consideration of $5 million.
In accordance with IFRS 3, the directors will assess the fair value of the net assets acquired as further information becomes available in respect
of both acquisitions. 74 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Independent auditors’ report to the members of
Micro Focus International plc
We have audited the parent company ﬁnancial statements of Micro Focus International plc for the year ended 30 April 2008 which comprise the
Company balance sheet and the related notes. These parent company ﬁnancial statements have been prepared under the accounting policies set
out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.
We have reported separately on the Group ﬁnancial statements of Micro Focus International plc for the year ended 30 April 2008.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the annual report, the directors’ remuneration report and the parent company ﬁnancial statements in
accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in
the statement of directors’ responsibilities.
Our responsibility is to audit the parent company ﬁnancial statements and the part of the directors’ remuneration report to be audited in accordance
with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been
prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose.
We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the parent company ﬁnancial statements give a true and fair view and whether the parent company
ﬁnancial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the Companies
Act 1985. We also report to you whether in our opinion the information given in the directors’ report is consistent with the parent company ﬁnancial
statements. The information given in the directors’ report includes that speciﬁc information presented in the Chief Executive Ofﬁcer’s statement and the
Finance review that is cross referenced in the review of business and future developments section of the directors’ report.
In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and
explanations we require for our audit, or if information speciﬁed by law regarding directors’ remuneration and other transactions is not disclosed.
We read other information contained in the annual report and consider whether it is consistent with the audited parent company ﬁnancial statements.
The other information comprises only the Chairman’s statement, the Chief Executive Ofﬁcer’s statement, the Finance review, the directors’ report,
the corporate governance statement, the statement of corporate and social responsibility and the unaudited part of the directors’ remuneration report.
We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company
ﬁnancial statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company ﬁnancial statements and the part of
the directors’ remuneration report to be audited. It also includes an assessment of the signiﬁcant estimates and judgements made by the directors in
the preparation of the parent company ﬁnancial statements, and of whether the accounting policies are appropriate to the Company’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with
sufﬁcient evidence to give reasonable assurance that the parent company ﬁnancial statements and the part of the directors’ remuneration report to be
audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the parent company ﬁnancial statements and the part of the directors’ remuneration report to be audited.
Opinion
In our opinion:
● the parent company ﬁnancial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice,
of the state of the Company’s affairs as at 30 April 2008;
● the parent company ﬁnancial statements and the part of the directors’ remuneration report to be audited have been properly prepared in
accordance with the Companies Act 1985; and
● the information given in the directors’ report is consistent with the parent company ﬁnancial statements.
PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors
Reading
31 July 2008 Company balance sheet
as at 30 April 2008
Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 75
2008 2007
Note $’000 $’000
Fixed assets
Investments in subsidiary undertakings V 27,873 27,086
27,873 27,086
Current assets
Deferred tax assets 322 760
Debtors VI 130,676 130,049
Cash at bank 3,382 4,983
134,380 135,792
Creditors: amounts falling due within one year VII 5,113 5,513
Net current assets 129,267 130,279
Net assets 157,140 157,365
Shareholders’ equity
Capital and reserves attributable to the Company’s equity holders
Share capital VIII 36,837 36,767
Share premium IX 100,528 100,678
Proﬁt and loss account X 19,775 19,920
Equity shareholders’ funds 157,140 157,365
The Company ﬁnancial statements on pages 75 to 80 were approved by the board of directors on 31 July 2008 and were signed on its behalf by:
Stephen Kelly Nick Bray
Chief Executive Ofﬁcer Chief Financial Ofﬁcer 76 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the Company ﬁnancial statements
for the year ended 30 April 2008
I Summary of signiﬁcant accounting policies
The basis of preparation and the principal accounting policies adopted in the preparation of the ﬁnancial information are set out below.
A Basis of preparation
The Company ﬁnancial statements have been prepared under the historical cost convention as modiﬁed by the share options at fair value through
the income statement and in accordance with the Companies Act 1985 and all applicable UK accounting standards.
B Foreign currency translation
The functional currency of the Company is United States Dollars. Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions
and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the
income statement.
C Investments in subsidiaries
Investments in subsidiaries are held at cost less any accumulated impairment losses.
D Share capital, share premium and dividend distribution
Ordinary shares are classiﬁed as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction,
net of tax, from the proceeds.
Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s ﬁnancial statements in the period in which the dividends
are approved by the Company’s shareholders.
E Taxation
Corporation tax is payable on taxable proﬁts at amounts expected to be paid, or recovered, under the tax rates and laws that have been enacted
or substantively enacted at the balance sheet date.
F Employee beneﬁt costs
a) Pension obligations
The Company operates a deﬁned contribution plan for which it pays contributions to publicly or privately administered pension insurance plans on a
mandatory, contractual or voluntary basis. The Company has no further payment obligations once the contributions have been paid. The contributions
are recognised as employee beneﬁt expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or
a reduction in the future payments is available.
b) Share-based compensation
The Company operated various equity-settled, share-based compensation plans and one cash-settled share-based compensation plan during the year.
No expense is recognised in respect of share options granted before 7 November 2002 and vested before 1 January 2005. For shares or share options
granted after 7 November 2002 and vested after 1 January 2005 the fair value of the employee services received in exchange for the grant of the shares
or options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares
or options granted. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable.
At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognises the impact
of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period.
The shares are recognised when the options are exercised and the proceeds received allocated between share capital and share premium. Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 77
II Proﬁt attributable to the Company
As permitted by Section 230 of the Companies Act 1985, no separate proﬁt and loss account is presented in respect of the Company.
The proﬁt for the ﬁnancial year before dividends for the Company was $19.4 million (2007: proﬁt $23.9 million).
III Employees and directors
Staff costs for the Company during the year
2008 2007
$’000 $’000
Wages and salaries 3,536 2,448
Social security costs 360 440
Other pension costs 67 66
Cost of employee share schemes 550 849
Total salary costs 4,513 3,803
The average monthly number of employees, including remunerated directors, during the year was eight (2007: seven). For further information on the
directors of the Company please refer to the remuneration report on pages 35 to 41.
IV Dividends
A ﬁnal dividend in respect of the year ended 30 April 2007 of 7 cents per share was proposed and paid during the year ($14.0 million in total).
In addition, an interim dividend in respect of the year ended 30 April 2008 of 3.6 cents per share ($7.2 million in total) was proposed and paid during
the year.
The directors are proposing a ﬁnal dividend in respect of the year ended 30 April 2008 of 9.4 cents per share, which would reduce shareholders’ funds
by $18.8 million. The proposed dividend is subject to approval at the AGM on 25 September 2008.
V Investments in subsidiary undertakings
2008
$’000
At 1 May 2007 27,086
Additions 787
At 30 April 2008 27,873 78 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the Company ﬁnancial statements
for the year ended 30 April 2008
V Investments in subsidiary undertakings continued
At 30 April 2008, the Company held directly or indirectly 100% of the ordinary share capital of the following principal subsidiary undertakings.
Only Micro Focus Holdings Limited is directly owned by the Company with all other subsidiaries being indirectly owned.
Company name Country of incorporation Principal activities
Acucorp, Inc USA Holding company, sale and support of software
Acucorp BV Netherlands Sale and support of software
Acucorp GmbH Germany Sale and support of software
Acucorp Limited UK Sale and support of software
Acucorp Sarl France Sale and support of software
Acucorp Srl Italy Sale and support of software
Micro Focus AG Switzerland Sale and support of software
Micro Focus APM Solutions EOOD Bulgaria Development and support of software
Micro Focus APM Solutions SL Spain Sale and support of software
Micro Focus APM Solutions SpA Italy Holding company, sale and support of software
Micro Focus AS Norway Sale and support of software
Micro Focus (Canada) Limited Canada Sale and support of software
Micro Focus GmbH Germany Sale and support of software
Micro Focus Group Holdings Unlimited Ireland Holding company
Micro Focus Holdings Limited UK Holding company
Micro Focus India Private Limited India Sale and support of software
Micro Focus International Limited Cayman Islands Holding company
Micro Focus International Holdings Limited Ireland Sale and support of software
Micro Focus (IP) Limited UK Sale and support of software
Micro Focus KK Japan Sale and support of software
Micro Focus Limited UK Development, sale and support of software
Micro Focus NV (Belgium) Belgium Sale and support of software
Micro Focus NV (Holland) Netherlands Sale and support of software
Micro Focus Pty Limited Australia Sale and support of software
Micro Focus SAS France Sale and support of software
Micro Focus Srl Italy Sale and support of software
Micro Focus (US) Inc USA Holding company, development, sale and support of software
These companies operate principally in the country in which they are incorporated.
VI Debtors
2008 2007
$’000 $’000
Amounts due from Group companies 130,493 130,007
Other debtors 139 –
Prepayments 44 42
Total 130,676 130,049
The amounts due from Group companies are unsecured, interest free and repayable on demand. Consolidated ﬁnancial statements and notes
Micro Focus International plc Annual report 2008 79
VII Creditors: amounts falling due within one year
2008 2007
$’000 $’000
Trade payables 562 16
Taxation and social security 89 –
Amounts payable to Group undertakings 230 1,498
Accruals 4,232 3,999
Total 5,113 5,513
The amounts payable to Group companies are unsecured, interest free and repayable on demand.
VIII Called up share capital
2008 2007
$’000 $’000
Authorised
2,500,000,000 ordinary shares of £0.10 each 476,770,000 476,770,000
Total authorised share capital 476,770,000 476,770,000
2008 2007
Number $ Number $
Issued and fully paid
Ordinary shares at £0.10 each 200,430,656 36,836,791 200,068,405 36,767,042
Total allotted, called up and fully paid share capital 200,430,656 36,836,791 200,068,405 36,767,042
Further information on share capital is provided in note 21 and 24 of the Group accounts.
IX Share premium account
2008 2007
$’000 $’000
Beginning of year 100,678 100,265
Adjustment to premium on shares issued during prior year –3
Movement in relation to share options (150) 410
End of the year 100,528 100,678 80 Micro Focus International plc Annual report 2008
Consolidated ﬁnancial statements and notes
Notes to the Company ﬁnancial statements
for the year ended 30 April 2008
X Company statement of changes in shareholder’s equity
Proﬁt
Share Share and loss
capital premium account Total
$’000 $’000 $’000 $’000
Balance as at 1 May 2006 36,644 100,265 8,833 145,742
Proﬁt for the year – – 23,953 23,953
Dividends – – (13,981) (13,981)
Issue of share capital 123 3 – 126
Movement in relation to share options – 410 355 765
Deferred tax on share options – – 760 760
Total changes in shareholders’ equity 123 413 11,087 11,623
Balance as at 30 April 2007 36,767 100,678 19,920 157,365
Proﬁt for the year – – 19,434 19,434
Dividends – – (21,229) (21,229)
Issue of share capital 70–– 70
Movement in relation to share options – (150) 1,487 1,337
Deferred tax on share options – – 163 163
Total changes in shareholders’ equity 70 (150) (145) (225)
Balance as at 30 April 2008 36,837 100,528 19,775 157,140
XI Capital commitments and contingent liabilities
The Company had no capital commitments or contingent liabilities at 30 April 2008 (2007: nil).
XII Related party transactions
The Company has taken advantage of the exemption under FRS 8, “Related Party Transactions” from, disclosing transactions with other members
of the Group headed by Micro Focus International plc. There are no related party transactions or other external related parties. Ofﬁces
Additional information
Micro Focus International plc Annual report 2008 81
Europe & Middle East
UK – head ofﬁce
The Lawn
22-30 Old Bath Road
Newbury
Berkshire
RG14 1QN
T: +44 (0) 1635 32646
F: +44 (0) 1635 33966
Belgium
Uitbreidingstraat 84/3
2600 Berchem
Antwerp
T: +32 (0) 3218 2126
F: +32 (0) 3218 2229
Bulgaria
76, James Bautcher Blvd
Lozenetz
Soﬁa 1407
T: +359 (0) 888 745 026
France
Tour Atlantique
La Defense 9
1 Place de la Pyramide
92911 La Defense Cedex
Paris
T: +33 (0) 1557 03013
F: +33 (0) 1557 03113
Germany
NL Dortmund
Emil-Figge Strasse 85
44227 Dortmund
T: +49 (0) 2317 5850
F: +49 (0) 2317 585555
Carl Zeiss Ring 5
D-85737 Ismaning
T: +49 (0) 8942 0940
F: +49 (0) 8942 094444
Israel
Matam-Advance Tech Center
Building 3/1
Haifa 31 905
T: +972 (0) 4 813 0111
F: +972 (0) 4 855 0122
Italy
Via Ugo Bassi 8/a
20159 Milan
T: +39 02 69 43401
F: +39 02 69 434034
Via Vida 11
Milan
Italy
T: + 39 02 28 0161
F: + 39 02 28 016400
Via Caterina Troiani 71/79
00144 Rome
T: +39 06 52 62191
F: +39 06 52 621935
The Netherlands
Regus Schipol Tetra
Suite 1-3
Siriusdreef 17-27,
WT, Hoofddorp 2132
Amsterdam
T: +31 (0) 2356 89138
F: +31 (0) 2356 89444
Norway
Christiania Kontorsenter
Dronningens Gate 6
N-0152, Oslo
T: +47 (0) 2291 0720
F: +47 (0) 2291 0721
Spain
Cuzco IV
Paseo De Castellana 141
8th Floor
Madrid 28046
T: +34 912 94 8072
F: +34 915 72 6485
Switzerland
Glatt Tower
Postfach 1544
8301 Glattzentrum Wallisellen
T: +41 (0) 432 333 111 82 Micro Focus International plc Annual report 2008
Additional information
Ofﬁces
North America
USA – regional head ofﬁce
9420 Key West Avenue
Rockville
Maryland 20850
T: +1 800 872 6265
+1 301 838 5000
F: +1 301 838 5314
15455 NW Greenbrier Parkway
The Commons, Suite 140
Beaverton
Oregon 97006
T: +1 503 716 1100
F: +1 503 614 1862
One Lincoln Center
18 West 140 Butterﬁeld Road
Oakbrook Terrace
Chicago
IL 60181
T: +1 630 613 7371
1431 Greenway Drive
Suite 850
Irving
TX 75038
T: +1 972 815 2367
F: +1 972 815 2369
2171 Landings Drive
Mountain View
California 94043
T: +1 650 930 2200
F: +1 650 930 2201
9920 Paciﬁc Heights Blvd
San Diego
California 92121
T: +1 858 795 1900
F: +1 858 795 1950
Canada
Suite 228
750 Marcel Laurin Boulevard
Montreal H4M 2M4
T: +1 800 280 9487
F: +1 514 855 9853
Rest of the World
Australia
Suite 109
566 St Kilda Road
Melbourne
Victoria 3004
T: +61 (0) 3953 32943
F: +61 (0) 3951 02822
Level 1, 845 Paciﬁc Highway
Chatswood, Sydney
New South Wales 2067
T: +61 (0) 2990 46111
F: +61 (0) 2990 46007
China
Suite 3006
30 Queens Road
Central Hong Kong
T: +852 2168 0600
F: +852 2168 0899
1 Huaihai Zhong Road
Suite 2207, Liulin Plaza
Shanghai 200021
T: +86 21 6386 6001
F: +86 21 6386 6005
India
Elegance Level 2
Mathura Road
Jasola
New Delhi 110025
T: +91 11 4060 1560
F: +91 11 4060 1360
Japan
6th Floor Sumitomo Fudsan
Takanawa Park Tower
20-14 Higashi Gotanda
Shinagawa-Ku
Tokyo 141-0022
T: +81 (0) 3 5793 8550
F: +81 (0) 3 5793 8548 Historical summary
Additional information
Micro Focus International plc Annual report 2008 83
UK GAAP*
IFRS
year to Year to Year to Year to Year to
30 April 30 April 30 April 30 April 30 April
2004 2005 2006 2007 2008
$’000 $’000 $’000 $’000 $’000
Results
Revenue 126,268 150,645 143,688 171,590 228,196
Operating proﬁt before exceptional items 30,208 44,308 37,167 62,128 81,294
Exceptional items (1,200) (3,394) (14,434) (4,861) (6,502)
Operating proﬁt 29,008 40,914 22,733 57,267 74,792
Proﬁt before tax 25,775 32,640 22,558 60,007 76,823
Earnings per share*
Basic (cents) 12.37 14.28 8.25 21.96 27.67
Diluted (cents) 12.00 13.98 8.17 21.37 26.97
* The amounts disclosed for the year ended 30 April 2004 are stated on the basis of UK GAAP, with the exception of the exclusion of goodwill amortisation, because it is not practicable to restate
amounts for periods prior to the date of transition to IFRS. 84 Micro Focus International plc Annual report 2008
Additional information
Directors, Secretary, registered ofﬁce and advisers
Forward-looking statements
Certain statements contained in this annual report, including those under the captions entitled Chairman’s statement, Chief Executive Ofﬁcer’s statement, ﬁnance review,
directors’ report, corporate governance and remuneration report constitute “forward-looking statements”. All statements other than statements of historical facts included
in this annual report, including, without limitation, those regarding the Company’s ﬁnancial condition, business strategy, plans and objectives, are forward-looking
statements. These forward-looking statements can be identiﬁed by the use of forward-looking terminology, including the terms “believes”, “estimates”, “anticipates”,
“expects”, “intends”, “may”, “will” or “should” or, in each case, their negative or other variations or comparable terminology. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are
based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which the Company will operate in the future.
Such risks, uncertainties and other factors include, among others: the level of expenditure committed to development and deployment applications by organisations;
the level of deployment-related revenue expected by the Company; the degree to which organisations adopt web-enabled services; the rate at which large organisations
migrate applications from the mainframe environment; the continued use and necessity of the mainframe for business critical applications; the degree of competition faced
by Micro Focus; growth in the information technology services market; general economic and business conditions, particularly in the United States; changes in technology
and competition; and the Company’s ability to attract and retain qualiﬁed personnel. These forward-looking statements speak only as at the date of this annual report.
Except as required by the FSA, or by law, the Company does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result
of new information, future events or otherwise.
Directors
Kevin Loosemore (Non-executive Chairman)
Stephen Kelly (Chief Executive Ofﬁcer)
Nick Bray (Chief Financial Ofﬁcer)
David Dominik (Non-executive director)
Prescott Ashe (Non-executive director)
David Maloney (Non-executive director)
Tom Skelton (Non-executive director)
Paul Pester (Non-executive director)
Company Secretary, registered and head ofﬁce
Jane Smithard
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 lQN
United Kingdom
www.microfocus.com
Legal advisers
Linklaters
One Silk Street
London EC2Y 8HQ
United Kingdom
Auditors
PricewaterhouseCoopers LLP
9 Greyfriars Road
Reading
Berkshire RGl IJG
United Kingdom
Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
BN99 6DA
United Kingdom
www.shareview.co.uk
Brokers
UBS
2 Finsbury Square
London EC2 2PP
United Kingdom Designed and produced by 85four. Printed in England by Cousin,
a CarbonNeutral® company. Environmentally accredited printers, ISO 14001. Micro Focus International plc
The Lawn
22-30 Old Bath Road
Newbury
Berkshire RG14 1QN
United Kingdom
Tel: +44 (0) 1635 32646
Fax: +44 (0) 1635 33966
Registered No. 5134647
www.microfocus.com