Final Results
Flomerics Group PLC
29 April 2008
Flomerics Group PLC
29 April 2008
FLOMERICS GROUP PLC
("Flomerics" or "the Company")
Preliminary Results for the year ended 31 December 2007
Flomerics Group PLC, the global supplier of simulation software to the engineering
and electronics industries, today announces its results for the year ended 31
December 2007.
Highlights
• Record turnover up 14% at £16.3 million (2006 : £14.2 million); Turnover up
18% excluding electromagnetics business)
• Adjusted Profit before tax* - £1.3m (2006: £1.5 million)
• Proposed dividend increased by 14% to 1.6p per share (2006 : 1.4p)
• Cash balance at year end £2.9 million (2006: £2.3 million). Cash balances at
31 March 2008 were in excess of £5.5m.
• Disposal of non core electromagnetics business for £1.6m agreed in December
2007 Transaction completed in January 08 and full payment received by
31 March 2008.
• Asia Pacific and European revenues up by 35% and 25% respectively
• Very positive start to trading in 2008
*Adjusted Profit before tax is before impairment of goodwill, amortisation of
intangible assets (excluding software and R&D capitalization), impairment of
goodwill, exceptional items and share-based payments. There were no exceptional
items in 2007.
Commenting on the results, David Mann, Chairman, said:
"Investments in sales and marketing during 2007 have placed the Company in an
excellent position to take advantage of the wider market opportunity for the EFD
products whilst maintaining Flomerics' leading position in the field of
electronics cooling. As a result, the Directors are excited about the future
and confident that the investments will start to deliver a significant increase
in shareholder value."
Enquiries:
Flomerics 020 8487 3000
Gary Carter, Chief Executive
Keith Butcher, Finance Director
Conduit PR 020 7429 6666
Charlie Geller/ Christian Taylor-Wilkinson
Oriel Securities 020 7710 7600
Nominated Adviser
Andrew Edwards
CHAIRMAN'S STATEMENT
During 2007 there was good progress with the strategic repositioning of
Flomerics following the acquisition of NIKA GmbH ('NIKA') in July 2006.
Flomerics is continuing to maintain a strong competitive position in its
original field, the application of fluid flow simulation to electronics cooling,
where it is a world leader. It now addresses this specialist market both by its
original product, FLOTHERM, and by the EFD product range acquired from NIKA. At
the same time the Company is taking advantage of EFD to address much wider
applications of fluid flow simulation and hence a much larger market. The
electromagnetics simulation business ("the EM business") was disposed of in
January 2008 so that Flomerics can have greater focus on fluid flow simulation.
Good progress was made with integrating the FLOMERICS and NIKA technologies and
increasing the sales team to implement the new strategy. The Company is still at
an early stage in building the EFD business outside of its original markets, but
the strong growth in sales of the product has demonstrated the significant
benefits that the investments can bring to future periods.
Results
Total revenues for the year ended 31 December 2007 were up by 14% at £16.3
million (2006: £14.2 million). If revenues from the discontinued EM business
are excluded, revenues were up by 18% to £14.6m (2006: £12.4m)
Profit before tax, amortisation of intangible assets (excluding software and R&D
capitalisation), goodwill impairment and share-based payments and exceptionals
("adjusted PBT") was £1.3 million (2006: £1.5 million) reflecting the
investments made during the year. There were no exceptional items in 2007 (2006:
£222,000). The unadjusted loss for the year was £1.90 million (2006: £0.80
million profit) and basic loss per share was 8.81p (2006 : earnings per share
4.45p)
Cash generated from operations was £1.9 million (2006: £0.9 million). Cash
balances for the group at 31 December 2007 were £2.97m million (2006: £2.34
million). After the year end £1.6 million cash was received from the disposal of
the EM business. As at 31 March 2008 cash balances were in excess of £5.5m.
Dividend
The board is pleased with the progress being made and is proposing that the
dividend should be increased by 14% to 1.6p per share (2006 : 1.4p). Subject to
approval at the Annual General Meeting, the dividend will be paid on 3 June 2008
to shareholders on the register at 9 May 2008.
Regional performance
In Europe and Asia-Pacific there was good revenue growth of 25% and 35%,
respectively, compared to 2006. In the US, revenue fell slightly as a result of
the loss of some key sales staff, but we now have a full team in place to
implement the new strategy there. The breakdown of turnover by region was:
Europe 45.8%, Asia Pacific 21.5% and US 31.7%.
Impairment of intangible assets
The main impact of IFRS on the 2007 accounts was that the acquisition of NIKA
has been restated under IFRS 3 and a value attributed to the intangible assets
acquired (such as customer lists and technology) with the balance deemed to be
goodwill. These intangible assets have been amortised over an appropriate
period and the residual goodwill arising was subject to an impairment review.
After this review goodwill was written down by £2.22m resulting in a total
charge to the P&L of £3.1m in respect of these two items.
Disposal
On 20 December 2007 the Board announced the disposal of the Group's
electromagnetics business to CST GmbH for a consideration of £1.6 million. The
sale was completed on 31 January 2008 and the gain on disposal will be
recognised in 2008. The proceeds will be used to enhance the Company's position
for future growth in its core business areas.
Outlook
There is the opportunity for sales of the EFD product range to continue growing
strongly and to make an increasingly significant contribution to the business.
Investments in sales and marketing during 2007 have placed the Company in an
excellent position to take advantage of the wider market opportunity for the EFD
products whilst maintaining Flomerics' leading position in the field of
electronics cooling. As a result, the Directors are excited about the future
and confident that the investments will start to deliver a significant increase
in shareholder value.
David Mann
Chairman
28 April 2008
CHIEF EXECUTIVE'S REVIEW
2007 was a year of investment for Flomerics: investment in expanding our sales
and support teams to drive sales of the EFD products acquired in 2006 (as part
of the NIKA GmbH acquisition); investment in marketing to begin to build the '
EFD' brand in North America and in Europe outside of its original markets and
investment in collaboration of our development operations in London, Moscow and
India. Much was accomplished during the year which has put us into a strong
position to build sales and take advantage of the synergies between our various
products and technologies in 2008 and beyond.
Investment in Sales
The early part of 2007 saw our Regional Sales Directors active in expanding
their teams to take advantage of the opportunity to sell the EFD products in
territories where NIKA had not previously invested. The main focus for this was
in the USA, France and the UK. Finding the right people and organising the
expanded teams to give the best coverage of the geography and the opportunities
took longer than we had anticipated. However we finished the year with a full
complement of sales people and the engineers to support their activities.
Alongside the recruitment exercise we were active in making sure that all our
engineers were trained in our full suite of Computational Fluid Dynamics (CFD)
products (EFD, FLOTHERM and FLOVENT).
Investment in Marketing
Following the disposal of the EM Business the group is now focussed on the CFD
market. This broadly divides into two sub-markets:
- Electronics Cooling (covered by our FLOTHERM, EFD and MicReD products)
- Mechanical Design (covered by our EFD and FLOVENT products )
A market survey carried out in 2007 confirmed once again that Flomerics'
flagship product, FLOTHERM, remains the clear market leader in thermal analysis
of electronic equipment. At the same time, the EFD products, which have enjoyed
great success in central Europe and in Japan but at the time of the acquisition
by Flomerics were little known outside of these territories, have seen a
significant increase in brand awareness in both North America and other parts of
Europe.
The relationships with our mechanical CAD (Computer Aided Design) partners, in
particular SolidWorks and PTC, continued and in the case of SolidWorks saw the
release of a new product called FloXpress. FloXpress is a new flow simulation
product that is fully embedded within SolidWorks(R)2008 3D CAD software and is
available free of charge to all SolidWorks(R)2008 users. It is a cut-down
version of the popular COSMOSFloWorks product - also developed by Flomerics -
that enables engineers and designers to simulate complex, 3D fluid flow and heat
transfer processes via a simple, wizard-driven user interface inside the
SolidWorks user environment. The release of this product means a big increase
in the number of mechanical engineers able to access this remarkable technology
and this is expected to increase demand for Flomerics' software products in the
future.
Building familiarity with our products among young engineers and students
continues to be an important part of our marketing effort, and 2007 saw a
significant increase in the use of EFD by universities and research institutes
around the world.
Many of Flomerics' customers are delighted to share their positive experiences
of using our products, and we continue to publish these success stories to
assist our sales efforts and provide strong editorial for engineering
publications and web portals around the world. During 2007 we published a record
number of success stories which generated a good response, increased our web
site traffic to record levels and led to an increased number of requests for
software demonstrations - especially for the EFD products.
Research and Development
During 2007 we began the first phase of our plans to make better use of the
considerable expertise and technology managed and developed in our development
centres in the UK, Russia, India and Hungary. The first evidence of this was the
release of an electronics specific module to be used alongside the EFD products.
The EFD products were already making inroads into certain electronics
applications but the introduction of this new product which saw the UK based
FLOTHERM and Moscow based EFD teams working closely together, further enhances
the dominant position that Flomerics has long held in the thermal design of
electronics.
Disposal of Electromagnetics Business
In December 2007 we announced the divestment of our electromagnetics line of
business ("the EM Business") for £1.6million, in order to increase our focus on
areas where the Group has much better opportunities for growth. This disposal
was completed on 31 January 2008.
Since entering the electromagnetics simulation market in 1999, Flomerics built
up the usage of its products around the world. However, with only a small share
of the market the directors concluded that it would be difficult on our own to
achieve a strong competitive position in this field. The sale of the EM Business
to CST Gmbh, a company that specialises in electromagnetics simulation, signals
the beginning of a strategic relationship providing best-in-class solutions to
customers requiring understanding of both CFD and EM problems.
Finance Director
In December, we announced the appointment of a new Finance Director. Keith
Butcher joined Flomerics from DataCash Group plc where he became Finance
Director in 2002. During his time with DataCash he played an important role as
part of the management team overseeing a substantial growth in the company's
market capitalisation. Keith's considerable experience is already having a
positive impact on the running of the company.
2007 Achievements
Despite difficult trading conditions in some territories we saw good growth in
billings in most areas of our business.
Regionally, Europe (+25%) and Asia-Pacific (+35%) saw good revenue growth in
2007, with a particularly strong performance in China and South-East Asia where
we expect the opportunity to continue to grow. US revenues fell slightly as we
were impacted by the loss of a number of key sales staff, however we now have a
full team in place. Turnover by region was: Europe 45.8% (2006: 42%), Asia
Pacific 21.5% (2006:19%) and US 31.7% (2006:39%).
Sales of the EFD products grew strongly and FLOVENT continued the strong growth
from last year.
Flomerics' business is made up of new licence sales and recurring revenues from
existing customers who each year will renew their commitment with us for a
further year of maintenance or to extend an existing lease arrangement.
Particularly encouraging in 2007 was the growth in new business which saw an
improving trend throughout the year as the investments made in the sales teams
and in marketing started to have an impact.
Flomerics 20th Anniversary
Flomerics celebrates its 20th anniversary as an independent company in 2008,
placing it firmly into a rare and elite group of engineering software companies
that have prospered for such a long period. This landmark is a testimony to the
company's high-integrity, people-oriented culture and its core concept of
delivering engineering simulation software for use by designers and engineers
rather than just full-time analysts and specialists. Flomerics has reached an
age that puts it among the most established companies involved in computer aided
engineering, and has just completed a record-breaking fiscal year where it has
achieved a new high in revenue and seen its worldwide customer base grow to over
2,500 sites and over 7,000 individuals.
The Future
The last three years have seen many changes at Flomerics. In addition to the
incorporation of the former NIKA team, we have changed almost half of our senior
management team and by doing so added a significant level of sales management
experience. We have made two acquisitions (MicReD and NIKA) and disposed of
our electromagnetics business. These changes together with the investments made
in 2007 and the increased focus on our core CFD business will allow us to focus
on delivering results in 2008. We are delighted with the positive start to
trading in 2008 and I look forward to seeing the results of our hard work begin
to show through.
Gary Carter
Chief Executive
28 April 2008
Flomerics Group plc
Consolidated income statement
Year ended 31 December
Dis Dis
Continuing -continued Year Continuing -continued Year
operations operations ended operations operations ended
2007 2007 2007 2006 2006 2006
£'000 £'000 £'000 £'000 £'000 £'000
Revenue 14,647 1,623 16,270 12,433 1,788 14,221
Cost of sales (699) (31) (730) (519) (31) (550)
Gross profit 13,948 1,592 15,540 11,914 1,757 13,671
Other operating income 61 - 61 61 - 61
Impairment of goodwill (2,223) - (2,223) - - -
Other administrative expenses (13,845) (1,336) (15,181) (11,314) (1,279) (12,593)
Exceptional expenses - - - (222) - (222)
Total administrative expenses (16,068) (1,336) (17,404) (11,536) (1,279) (12,815)
Operating (loss) / profit (2,059) 256 (1,803) 439 478 917
Finance income 66 - 66 101 - 101
Finance costs (25) - (25) (164) - (164)
(Loss) / profit before tax (2,018) 256 (1,762) 376 478 854
Tax (57) (77) (134) 93 (143) (50)
(Loss) / profit for the year (2,075) 179 (1,896) 469 335 804
(Loss)/earnings per share 2007 2006
Pence Pence
From continuing operations:
Basic (9.65) 2.59
Diluted (9.65) 2.04
From continuing and discontinued operations:
Basic (8.81) 4.45
Diluted (8.81) 3.50
Consolidated statement of changes in equity
for the year ended 31 December 2007
Year ended Year ended
2007 2006
£'000 £'000
Balance at start of year 14,843 6,853
(Loss) / profit for the year (1,896) 804
Currency translation movement 1,018 (302)
Deferred tax on currency translation movement (112) 16
Net income/(expense) recognised directly in equity 906 (286)
Total recognised income and expense for the year (990) 518
Dividends paid (299) (195)
Share based payment 116 97
Issue of new shares 43 7,603
Movements in merger reserve 145 -
Movements in shares to be issued reserve - (33)
Balance at end of year 13,858 14,843
Flomerics Group plc
Consolidated balance sheet
31 December 2007
2007 2006
£'000 £'000
Non-current assets
Property, plant and equipment 542 520
Investment property - 1,189
Goodwill 5,706 7,554
Intangible assets 3,902 4,141
Deferred tax asset 253 423
Total non-current assets 10,403 13,827
Current assets
Inventories 110 33
Trade and other receivables 6,149 5,467
Cash and cash equivalents 2,971 2,339
Assets held for sale 1,492 -
Total current assets 10,722 7,839
Total assets 21,125 21,666
Current liabilities
Bank overdrafts and loans (76) (71)
Trade and other payables (5,847) (5,217)
Current tax liabilities (23) (14)
Total current liabilities (5,946) (5,302)
Non-current liabilities
Bank loans (229) (305)
Deferred tax liabilities (1,092) (1,216)
Total non current liabilities (1,321) (1,521)
Total liabilities (7,267) (6,823)
Total net assets 13,858 14,843
Equity
Share capital 216 213
Share premium account 1,775 1,735
Shares to be issued 1,112 1,112
Merger reserve 7,330 7,185
Translation reserves 716 (302)
Retained earnings 2,709 4,900
Total equity 13,858 14,843
The financial statements were approved by the board of directors and authorised
for issue on 28 April 2008.
They were signed on its behalf by:
G C Carter K Butcher
Director Director
Consolidated cash flow statement
for the year ended 31 December 2007
Year ended Year ended
2007 2006
£'000 £'000
Profit for the year (1,896) 804
Adjustments for:
Finance income (66) (101)
Finance costs 25 164
Income tax expense / (income) 134 50
Depreciation of plant and equipment 291 240
Depreciation of investment property 14 14
Amortisation of intangible assets 901 577
Impairment of goodwill 2,223 -
Share-based payment expense 116 97
Loss on disposal of property, plant and equipment - 2
Operating cash flows before movements in working capital 1,742 1,847
(Increase)/decrease in inventories (77) 30
(Increase) in receivables (682) ((1,081))
Increase in payables 921 89
Cash generated by operations 1,904 885
Income taxes paid (191) (176)
Interest paid (25) (164)
Net cash from operating activities 1,688 545
Cash flows from investing activities:
Interest received 66 101
Proceeds on disposal of property, plant and equipment 24 5
Purchases of property, plant and equipment (333) (306)
Purchase of intangibles (313) (312)
Acquisition of subsidiary (net of cash acquired) - (1,418)
Deferred consideration on acquisition of subsidiary (259) -
Net cash used in investing activities (815) (1,930)
Cash flows from financing activities:
Proceeds from issue of shares 38 -
Dividends paid (299) (195)
Repayment of loans (71) (68)
Net cash used in financing activities (332) (263)
Net increase / (decrease) in cash and cash equivalents 541 (1,648)
Cash and cash equivalents at the start of the year 2,339 4,081
Effect of foreign exchange rate changes 91 (94)
Cash and cash equivalents at end of year 2,971 2,339
Notes to the Preliminary Results
for the year ended 31 December 2007
1 General information
Flomerics Group plc is a company incorporated in the United Kingdom under the
Companies Act 1985. The address of the registered office is 81 Bridge Road,
Hampton Court, Surrey, KT8 9HH.
The Group's financial statements for the year ended 31 December 2007, from which
this financial information has been extracted, and for the comparative year
ended 31 December 2006 are prepared in accordance with International Financial
Reporting Standards ('IFRS').
The financial information shown for the years ended 31 December 2007 and 2006
set out above does not constitute statutory accounts but is derived from those
accounts. The results have been prepared using accounting policies consistent
with those used in the preparation of the statutory accounts. The financial
information contained in this announcement does not constitute statutory
accounts within the meaning of Section 240 of the Companies Act 1985. Statutory
accounts for 2006 have been delivered to the registrar of companes and those for
2007 will be delivered following the company's annual general meeting. The
auditors have reported on those accounts; their reports were unqualified, did
not contain statements under s 237(2) or (3) of the companies act 1985, and did
not contain any matters to which the auditors drew attention without qualifying
their report.
. Copies of this announcement are available at the registered offices of the
Company (81 Bridge Road, Hampton Court, Surrey, KT8 9HH) and at the offices of
the Company's nominated advisors, Oriel Securities Limited. (125 Wood Street,
London, EC2V 7AN) for a period of 14 days from the date hereof.
2 Significant accounting policies
Basis of accounting
The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRSs). The financial statements have also been
prepared in accordance with IFRSs adopted by the European Union and therefore
the group financial statements comply with Article 4 of the EU IAS Regulation.
While the financial information included in this preliminary announcement has
been prepared in accordance with the recognition and measurement criteria of
IFRS, and the policies set out below, the announcement does not itself contain
sufficient information to comply with IFRSs. The company expects to publish full
financial statements that comply with IFRSs on 5 May 2008.
The principal accounting policies adopted are set out below.
First time adoption
The group has adopted IFRS from 1 January 2006 ('the date of transition').
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and entities controlled by the Company (its subsidiaries) made up to
31 December each year. Control is achieved where the Company has the power to
govern the financial and operating policies of an investee entity so as to
obtain benefits from its activities. The Group income statement includes the
results of subsidiaries acquired or disposed of during the year from the
effective date of acquisition or up to the effective date of disposal, as
appropriate.
Where necessary, adjustments are made to the financial statements of
subsidiaries to bring the accounting policies used into line with those used by
the group.
All intra-group transactions, balances, income and expenses are eliminated on
consolidation.
Business combinations
The acquisition of subsidiaries or trade and assets, is accounted for using the
purchase method. The cost of the acquisition is measured at the aggregate of the
fair values, at the date of exchange, of assets given, liabilities incurred or
assumed, and equity instruments issued or to be issued, by the Group in exchange
for control of the acquiree, plus any costs directly attributable to the
business combination. The acquiree's identifiable assets, liabilities and
contingent liabilities that meet the conditions for recognition under IFRS 3 are
recognised at their fair value at the acquisition date.
Goodwill arising on acquisition is recognised as an asset and initially measured
at cost and is accounted for according to the policy below.
The Group has taken the exemption conferred in IFRS 1, "First-time Adoption of
International Financial Reporting Standards", not to restate business
combinations prior to the transition date of 1 January 2006 under IFRS 3.
Goodwill
Goodwill represents the excess of the cost of acquisition over the Group's
interest in the fair value of the identifiable assets, intangible fixed assets
and liabilities of a subsidiary, or acquired sole trade business at the date of
acquisition. Goodwill is initially recognised as an asset at cost and is
subsequently measured at cost less any accumulated impairment losses. Goodwill
which is recognised as an asset is reviewed for impairment at least annually.
Any impairment is recognised immediately in the Group income statement and is
not subsequently reversed.
For the purpose of impairment testing, goodwill is allocated to each of the
Group's cash-generating units expected to benefit from the synergies of the
combination. Cash-generating units to which goodwill has been allocated are
tested for impairment annually, or more frequently when there is an indication
that the unit may be impaired. If the recoverable amount of the cash-generating
unit is less than the carrying amount of the unit, the impairment loss is
allocated first to reduce the carrying amount of any goodwill allocated to the
unit and then to the other assets of the unit pro-rata on the basis of the
carrying amount of each asset in the unit. An impairment loss recognised for
goodwill is not reversed in a subsequent period.
On disposal of a subsidiary the attributable amount of goodwill is included in
the determination of the profit or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRS has been
retained at the previous UK GAAP amounts subject to being tested for impairment
at that date and subsequently as required by the provisions of IAS 36 "
impairment of assets".
Intangible assets
Intangible assets with a finite useful life are carried at cost less
amortisation and any impairment losses. Intangible assets represent items which
have been separately identified under IFRS 3 arising in business combinations,
or meet the recognition criteria of IAS 38, "Intangible Assets". These assets
comprise of customer relationships, contract based asset, completed technology
and non competition agreements.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any).
Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment loss
is recognised in the income statement as an expense immediately, unless the
relevant asset is carried at a revalued amount, in which case the impairment
loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset
(cash-generating unit) is increased to the revised estimate of its recoverable
amount, but so that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been recognised
for the asset (cash-generating unit) in prior years. A reversal of an impairment
loss is recognised as income immediately, unless the relevant asset is carried
at a revalued amount, in which case the reversal of the impairment loss is
treated as a revaluation increase.
Amortisation of intangible assets acquired in a business combination is
calculated over the following periods on a straight line basis:
Customer relationships - 10% per annum
Contract based assets - 50% per annum
Completed technology - over a useful life of 7 years
Non-competition agreement - 25% per annum
Amortisation of other intangible assets (computer software) is calculated using
the straight-line method to allocate the cost of the asset less its assessed
realisable value over its estimated useful life, which equates to 33% to 50% per
annum.
Impairment of financial assets
Determining whether a provision is required against trade receivables requires
management to make a judgment of the likely proportion of receivables that will
not be recovered. In order to establish a reasonable provisioning level,
therefore, the directors use historical trends in order to predict likely
irrecoverable receivables at any point in time. When an event occurs which makes
it more likely than not that a debt will not be recovered, provision is made
accordingly. For further discussion on trade and other receivables refer to note
19 to the accounts.
Internally-generated intangible assets - research and development expenditure
Expenditure on research activities is recognised as an expense in the period in
which it is incurred.
Any internally-generated intangible asset arising from the Group's development
projects are recognised only if all of the following conditions are met:
• The technical feasibility of completing the intangible asset so that it
will be available for use or sale.
• The intention to complete the intangible asset and use or sell it.
• The ability to use or sell the intangible asset.
• How the intangible asset will generate probable future economic
benefits. Among other things, the Group can demonstrate the existence of a
market for the output of the intangible asset or the intangible asset itself or,
if it is to be used internally, the usefulness of the intangible asset.
• The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
• Its ability to measure reliably the expenditure attributable to the
intangible asset during its development.
Internally-generated intangible assets are amortised on a straight-line basis
over their useful lives of three years. Where no internally-generated
intangible asset can be recognised, development expenditure is recognised as an
expense in the period in which it is incurred.
Capitalisation of internal research and development costs
In order to comply with the group's accounting policy relating to internally
generated intangible assets (research and development expenditure), the
directors are required to assess the fair value of the costs incurred on the
group's development projects that are allowed to be capitalized. The vast
majority of these costs are salary related, representing the costs of the
employees conducting the research and development. In order to measure the costs
that should be capitalized, the directors conduct an exercise whereby they
estimate the proportion of each employee's working hours that have been spent on
qualifying research and development projects. The directors are then able to
determine that this proportion of each employee's salary is capital in nature,
and is therefore accounted for accordingly. The directors are of the opinion
that as a number of people are working on such projects at any time, and that
they can reliably assess the amount of time that is being spent by each
individual on qualifying capital research, that this is a reasonably accurate
estimation technique. The total value of internal costs capitalized as
intangible assets related to research and development at the balance sheet date
was £336,000 (2006 - £103,000).
Impairment of goodwill
Determining whether goodwill is impaired requires an estimation of the value in
use of the cash-generating units to which goodwill has been allocated. The value
in use calculation requires the group to estimate the future cash flows expected
to arise from the cash-generating units and a suitable discount rate in order to
calculate present value. Actual events may vary materially from management
expectation.
Following the impairment review the carrying value of goodwill for Nika GmbH was
impaired in the year by £2,223,000. The directors consider the impairment to be
appropriate to reflect the slower than initially anticipated sales growth of the
products purchased with Nika GmbH.
3 Business and geographical segments
Business segments
For management purposes, the group is currently organised into one operating
division and it is on this basis that the group reports its primary segment
information.
The principal activities of the group's operating division is the provision of
virtual prototyping software and other related services. The group was also
previously involved in electromagnetic virtual prototyping. This operation was
discontinued during the period, in accordance with IFRS 5.
Geographical segments
The group's operations are located in the United States of America, Europe and
the Far East.
The following table provides an analysis of the group's sales by geographical
market, irrespective of the origin of the goods/services:
Sales revenue by
geographical market
2007 2006
£'000 £'000
United States of America 5,150 5,563
Europe 7,450 5,946
Far East 3,670 2,712
16,270 14,221
Revenue from the group's discontinued operations was derived as follows: United
States of America (2007: £586,000, 2006: £832,000), Europe (2007: £602,000,
2006: £477,000) and the Far East (2007: £435,000, 2006: £478,000)
4. Discontinued operations
On 20 December 2007, the group entered into a sale agreement to dispose of the
electromagnetics division, which carried out all of the group's electromagnetic
virtual prototyping operations. The disposal completed on 31 January 2008, on
which date control of the division passed to the acquirer.
The results of the discontinued operations, which have been included in the
consolidated income statement, were as follows:
2007 2006
£'000 £'000
Revenue 1,623 1,787
Expenses other than finance costs (1,367) (1,309)
Profit before taxation 256 478
Tax expense (77) (143)
Profit for the year 179 335
During the year, the electromagnetics division contributed £179,000 (2006:
£335,000) to the group's net operating cash flows, and made no payments in
respect of investing activities or financing activities (2006 - £nil).
The major classes of assets and liabilities of the electromagnetics division are
as follows:
2007
£'000
Goodwill and other intangible assets 296
Property, plant and equipment 19
Total assets of division being net assets of disposal group 315
5. Goodwill
£'000
Cost
At 1 January 2006 1,353
Exchange differences (99)
Recognised on acquisition of a subsidiary 6,370
Other changes (70)
At 1 January 2007 7,554
Exchange differences 554
Reclassified as held for sale (294)
Other changes 115
At 31 December 2007 7,929
Accumulated impairment losses
At 1 January 2006 and 1 January 2007 -
Impairment charge in the year 2,223
At 31 December 2007 2,223
Carrying amount
At 31 December 2007 5,706
At 31 December 2006 7,554
Goodwill for Nika GmbH has been retranslated at year end as the underlying
goodwill is in Euros.
Following the impairment review the carrying value of goodwill for Nika GmbH was
impaired by £2,223,000. The directors consider the impairment to be appropriate
to reflect the slower than initially anticipated sales growth of the products
purchased with Nika GmbH.
Goodwill for Microelectronics Research and Development Limited has increased
from the previous year as a result of the year 2 earn out consideration being in
excess of amounts accrued for at the last reporting date. The directors have
carried out an impairment review of the carrying value goodwill for
Microelectronics Research and Development Limited and do not consider any
impairment to be appropriate.
6. Other intangible assets
Customer Contract Non-
relationship leased Completed competition Develop-
intangible technology agreement ment cost Software Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Cost
At 1 January 2006 - - - - 132 344 476
Additions - - - - 77 235 312
Disposals - - - - - (4) (4)
Acquired on acquisition of
a subsidiary 230 236 3,647 92 - - 4,205
Foreign exchange adjustment (4) (4) (59) (1) - (12) (80)
At 1 January 2007 226 232 3,588 91 209 563 4,909
Additions - - - - 260 53 313
Disposals - - - - - (6) (6)
Reclassified as held for sale - - - - - (4) (4)
Foreign exchange adjustment 22 21 336 8 - 2 389
At 31 December 2007 248 253 3,924 99 469 608 5,601
Amortisation
At 1 January 2006 - - - - - 209 209
Charge for the year 11 58 256 11 106 135 577
Disposals - - - - - (4) (4)
Foreign exchange adjustment - - (3) - - (11) (14)
At 1 January 2007 11 58 253 11 106 329 768
Charge for the year 25 127 561 25 27 136 901
Disposals - - - - - (6) (6)
Reclassified as held for sale - - - - - (2) (2)
Foreign exchange adjustment 2 5 27 1 - 3 38
At 31 December 2007 38 190 841 37 133 460 1,699
Carrying amount
At 31 December 2007 210 63 3,083 62 336 148 3,902
At 31 December 2006 215 174 3,335 80 103 234 4,141
The amortisation period for development costs incurred on the group's
development is 3 years.
This information is provided by RNS
The company news service from the London Stock Exchange
Friday, 17th May 2024
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