Regulatory Announcements
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RNS Number : 3903Z
SQS Software Quality Systems AG
March 7 2006
Embargoed until 0700
Tuesday, 7 March 2006
SQS Software Quality Systems AG
Maiden Preliminary Results
For the full year ended 31st December 2005
SQS Software Quality Systems AG (AIM:SQS.L) the leading independent pan-European provider of quality management and testing services for software development, today announces its maiden preliminary results for the full year ended 31st December 2005.
Financial Highlights:
- Turnover up by 12.5% to €54.7m (2004: €48.7m)
- Profit before tax up 38.5% to €3.7m (2004: €2.7m)
- BITDA up 18% to €6.8m (2004: €5.8m)
- Adjusted earnings per share up 66% to €0.22 (2004: €0.13)
- Improved gross margin
- Continued strong underlying cash flow; borrowings decreased by 57% to €6.7m
(2004: €15.8m)
Operational Highlights:
- Successful AIM flotation raising €16m on September 20, 2005, followed by a secondary listing on the new German Entry Standard on December 2, 2005
- Grew recurring revenues - secured significant contract renewals with existing client base
- Improved sales capabilities - to further grow the business and establish the framework for long term outsourcing contracts
- Invested in growth markets - increased activity in embedded systems by successfully securing a sizeable contract with a leading aircraft manufacturer; finished a major Mercury tool integration project at a telecom carrier by providing high tech software engineering services
Commenting on the results, Rudolf van Megen, CEO, said:
"During the year, SQS strengthened its position as the leading independent pan-European provider of quality management and testing services for software development and once again grew at almost three times the rate of the European IT service market."
"In 2006, we will concentrate on both acquisitive and organic growth, focusing on expanding markets such as outsourcing and embedded systems. Trading has been encouraging in the first two months of 2006, and as expected, growth is well ahead of the comparable period last year. The pipeline remains strong."
For further information please contact:
SQS Software Quality Systems AG
www.sqs.de
Rudolf van Megen (CEO)/Rene Gawron (CFO)
+49 (2203) 91 54 0
Evolution Securities Limited
020 7071 4300
Jeremy Ellis/Mike Read
Smithfield
020 7360 4900
Sara Musgrave
Print resolution images are available for the media to view and download from
www.vismedia.co.uk
Notes to Editors
SQS is the leading independent pan-European provider of quality management and testing services for software development. SQS consultants design and oversee quality management processes during software and systems development, and test the resulting products for errors and omissions.
Headquartered in Cologne, Germany, SQS now has operations across Europe with offices in seven countries and has over 470 employees. SQS has a strong presence in Germany (Cologne, Munich, Frankfurt, Stuttgart and Hamburg) with subsidiaries in the UK, Netherlands, Switzerland and Austria. SQS also has a minor stake in an operation in Portugal and a partnership operation in Spain.
With over 3,000 completed projects under its belt, SQS has a strong customer base including half of the DAX 30 companies and 30% of the STOXX-50. They include names like Dresdner Bank, Lloyds TSB, Deutsche Telekom, Vodafone, Daimler Chrysler, and Airbus spread across the full range of industries.
SQS is the first German company to have a primary listing on AIM, completing its IPO on 20 September 2005 raising £10.8m before expenses at an issue price of 190p. SQS is included in the Software and Computer Services sector (9530) within the Computer Services subsector (9533) and has a RIC code of SQS.L. SQS completed a secondary listing on the Deutsche Boerse in Frankfurt on 2nd December 2005. For further information, please visit www.sqs-uk.com.
Chief Executive's Statement
Introduction
I am pleased to present SQS's maiden preliminary results following its admission to AIM in September 2005. SQS had an excellent year, recording a material increase in both profit and revenues. This improvement resulted from an excellent underlying performance in our core businesses. During the year we also invested in three growth markets by developing our long term software testing outsourcing business, increasing our presence in the software testing of embedded systems, and building technical test frameworks that support automation of software testing. Business remained strong within our existing client base and we also secured a number of additional new projects which provide the platform for further growth in the current year.
Results
Turnover from continuing operations rose 12.5% to €54.7m (2004: €48.7m). Underlying profit before tax increased 38.5% to €3.7m (2004: €2.7m) benefitting from improved margins. EBITDA rose by 18% to €6.8m (2004: €5.8m).
Margins improved despite continuing price pressure as a result of improving utilisation of billable consultants throughout the Group.
Turnover growth was highest in Other European Countries (Switzerland, Austria and the Netherlands), especially Switzerland, where turnover grew by 67%, and in the United Kingdom where turnover grew by 18.2%.
Adjusted earnings per share (adjusted to add back deferred taxes and IFRS tax differences) of €0.22 rose by 66 % (2004: €0.13).
The balance sheet has been considerably strengthened during the year reflecting the benefit of the €14.1m net proceeds from our admission to AIM and the positive net income in 2005. We reduced our borrowings by €9.0m to €6.7m (2004: €15.8m). Cash balances and marketable securities at the year end stood at €6.5m (2004: cash €1.5m).
Dividend
As SQS was quoted for only three months of the year the Board is not proposing a dividend in respect of 2005. Moreover, the Directors consider that at this time it is more appropriate to reinvest funds in the development of the Company's growing businesses.
However, the Board intends to pursue a progressive dividend policy in future and therefore intends to pay a final dividend for the year ending 31st December 2006.
The Board
There has been one change to our supervisory board in preparation for our admission to AIM last year. There were no changes to our management board. We are pleased to welcome Jeremy Hamer who joined our supervisory board on August 25, 2005. Mr Hamer is also a director of a number of other quoted and unquoted companies including Inter Link Foods plc and Avingtrans plc, and he is non-executive chairman of Glisten plc. With over ten years experience as a board member of various UK quoted companies, his appointment is a significant step for SQS as a public company. Mr Hamer has replaced Hartmut Voss who had served on our supervisory board since 2000. We thank him for his valuable contribution and commitment.
Strategy
Our strategy is to strengthen our market position as the leading independent pan-European provider of quality management and testing services for software development. We aim to grow our business with long term outsourcing contracts and investment in expanding markets such as embedded systems in the aircraft manufacturing and automotive industries. We intend to strengthen our position in a number of key European markets and will actively look for acquisitions to support and accelerate this strategy.
Employees
On behalf of the board, I would like to thank all our employees for their contribution, hard work, and excellent support during the last year. I am confident that we have the team in place to capitalise on the opportunities available and to enable us to deliver long term shareholder value.
Outlook
During the year, SQS strengthened its position as the leading independent pan-European provider of quality management and testing services for software development and once again grew at almost three times the rate of the European IT service market.
In 2006, we will concentrate on both acquisitive and organic growth, focusing on expanding markets such as outsourcing and embedded systems. Trading has been encouraging in the first two months of 2006, and as expected, growth is well ahead of the comparable period last year. The pipeline remains strong.
Rudolf van Megen
Chief Executive Officer
7th March 2006
Review of Business
During 2005, we continued to strengthen our business by improving utilisation rates and overheads, and increasing the number of clients to over 300. We achieved this by increasing the number of projects staffed with international teams and by hiring 37 additional employees, mainly consultants, with strong software engineering backgrounds as well as senior project management skills. As a service company helping its clients to improve the quality of their software and IT systems, our commitment to quality is paramount.
Strategic Update
Market drivers
Software quality management and testing constitutes a segment of the IT services market and therefore growth in the IT services market closely correlates with growth in software quality management and testing. Research conducted by the European Information Technology Observatory ("EITO") showed the European growth rate for IT services to be approximately 4.7% in 2005. In 2005, SQS achieved growth at almost three times that rate.
Market drivers include the increasing complexity of software and IT systems, higher regulatory demands imposed on IT systems by requirements such as the Sarbanes Oxley Act, and the high number of IT projects that either fail or are out of budget and/or time.
In addition, continuing return on investment (ROI) pressures, coupled with increasing "industrialisation" of the software engineering process has led to an increased demand for outsourced software testing as well as better quality management of embedded systems.
Strategic Goals
The SQS Group strategy builds on five strategic goals which all contribute to market leadership as a service company and resulting shareholder value. They are:
- to extend leadership in independent quality management and testing by delivering added value to our customers in order to achieve their goals
- to grow the business significantly above the market growth rate for IT services
- to remain the financially strongest independent quality service company in Europe
- to extend and retain a strong base of highly motivated, skilled, and best performing employees
- to spot and anticipate trends in IT quality management and testing and use them for the benefit of our clients.
Services and product lines
- IT professional services: within its broad range of software testing and quality management services, SQS has enhanced its offerings in the fields of code quality management, assessments of software development and IT organisations, quality management in standard software package projects, and outsourcing.
- Tools, licences, and maintenance: SQS's specialist range of software testing tools which work in conjunction with the tools available from competitors has been enhanced by Version 8.0 of our SQS-Test Professional product. The first press release for this product was presented to the market in December 2005.
- IT training and IT events: The training business was extended. ISTQB and ISEB courses were updated for the new versions of the syllabus.
The successful SQC conferences (Software and Systems Quality Conferences), held in Germany and the UK are two of the largest quality management and software testing events in Europe. We plan to expand these into one further country in 2006. SQS has been investigating partnership opportunities for these conferences, and is pleased to have formed a media alliance with one of Europe's most influential publishers, IDG Communications (e.g. "Computerwoche" in Germany). The partnership with IDG is expected to increase the number of delegates, exhibitors, and sponsors attending our conferences in 2006.
Geographic review
Germany
Revenue in Germany, our traditional home market, was €34.2m (2004: €34.1m) contributing 63% to the Group's total revenue compared with 70% in the prior year. This reflects the increase in services rendered for Group companies in other territories as well as the fact that our growth in Germany was limited by the number of available skilled consultants. Services sold within the Group (mainly to Switzerland and the UK) increased by 59% to €3.9m (2004: €2.4m). We intensified our hiring activities and skills training in the second half of 2005 in order to be able to grow the local business in Germany significantly in 2006. During the year, we secured key contract renewals with our largest client (a public service organisation in Germany) and other major customers, all of which provide a solid base for the current year. We have also increased the business base in embedded systems by securing extended contracts with our largest aircraft manufacturing client. We have successfully finished the first major Mercury tool integration project at a telecom carrier by providing high tech software engineering services. Mercury is the worldwide leading company in the field of software testing tools. We have hired a number of high calibre sales managers, some with extensive experience in outsourcing projects and global account development, who will enable SQS to grow its business with international clients.
United Kingdom
In the United Kingdom, which is our second largest regional segment and the largest European market for IT services in general, we generated revenues of €9.2m (2004: €7.8m), 17% of the Group's total. This represented an 18% increase year on year. While business with existing and new clients increased, professional training revenue grew by 17% and SQS conference revenue grew by 23%. We also achieved above average market growth in our services with logo certification for telecommunication applications. To improve earnings we have initiated measures for improving profits in the UK operation such as improving utilisation of billable staff and reducing overheads.
The UK market continues to be very fragmented as a handful of similar and larger sized pure play testing services companies serve this market. We continue to focus on further consolidation.
Other European Countries (Switzerland, Austria, and the Netherlands) Switzerland, Austria and the Netherlands contributed aggregate revenue of €11.3m (2004: €6.8m), or 21% of the Group's total turnover. This strong year on year increase of 67% predominantly came from our Swiss operation due to successful wins of recurring project business with major Swiss clients in financial services and telecommunications. During the year we doubled the number of local Swiss consultants to 16, and as we continue to add local staff we expect this to reduce the demand on our German operation, which limited our sales growth in Germany in 2005.
Summary
We aim to grow organically by adding more consultants and offering a greater range of services to our existing client base. In particular, we will look to increase our market presence in test outsourcing, software testing of embedded systems as well as building technical test frameworks that support test automation. The existing client relationships, of which we have over 300, are the backbone to our future growth.
Where appropriate, we will also seek to consolidate other specialists in our field and pursue infill acquisitions to further establish or strengthen our market position in selected European countries.
Finance Director's Review
Results
Total revenue for the year grew by 12.5% to €54.7m (2004: €48.7m). IT Professional Services was the major contributor with revenues of €50.7m (2004: €44.9m) a 13% increase year on year. Revenue from tool licenses and maintenance was €2.1m (2004: €2.2m), with IT training and IT events contributing €1.9m (2004: €1.6m).
Earnings before interest, tax, depreciation, and amortisation (EBITDA) was up 18% year on year to €6.8m (2004: €5.8m). Profit before tax was €3.7m (2004: €2.7m), up 38.5%. The improved result was based on improved gross margins and relatively reduced administrative expenses and research & development overheads, while sales & marketing expenses increased in order to foster future revenue growth.
Adjusted* earnings per share improved to €0.22 (2004: €0.13).
*based on net income increased by €1.1m deferred taxes and IFRS tax differences on capitalised R&D and IPO costs but including actual profit taxes of €0.2m payable under local GAAP
Costs
Administrative costs of €8.5m (2004: €7.9m) were 15.5% of sales (2004:16.3%), increased in absolute terms because of the improvement of local infrastructure in Switzerland and hiring costs. Sales & marketing costs of €3.5m increased relative to sales (to 6.4% from 5.8%), as we continued to invest in additional sales resources to support current and future organic growth of the business. Research and development costs of €2.7m were marginally reduced relative to sales (to 4.9% from 5.0%), reflecting a peak in efforts for Version 8.0 of the SQS-TEST Professional tool and course development for our training products.
Taxation
The Group tax charge of €1.3m has two components; one is tax on profits payable under local GAAP of €0.2m, and the other is the deferred tax and tax differences that we are required to show under IFRS of €1.1m. Due to tax breaks and a tax effective expensing of the IPO costs under German local GAAP, SQS will pay no or negligible tax on profits in Germany, Austria and the Netherlands. The remaining €0.2m tax on profits arose in the UK and Switzerland. Deferred tax and IFRS tax differences were €1.1m on capitalised R&D and IPO costs.
Cash Flow and Financing
The group generated operating cash inflow of €2.8m (2004: €4.4m). Although operating profits have risen, operating cash flow was impacted by an €0.9m increase in receivables and tax payments of €0.6m (2004: €-0.2m). Cash flow from financing activities was €5.1m (2004: €-1.9m) and includes a positive cash flow from the net proceeds of the IPO of €14.1m and the pay back of loans and convertible bonds of €-9.0m (2004: €-1.6m). Cash flow from investments was €-8.5m (2004: €-1.7m), including €-2.7m for capitalised R&D for products and investments in intangible assets (2004: €-1.4m), and an additional €-5.6m in marketable securities. In total, cash and marketable securities were €6.5m (2004: €1.5m) at the year end.
Foreign Exchange
Approximately 70% of the Group's turnover is generated in Euros. With the exception of SQS UK Group Ltd and Software Quality Systems (Schweiz) AG, all subsidiaries of SQS are located in the currency area of the Euro. For the conversion of the local currency into Euros, the official fixed exchange rate was chosen. For the conversion of the balance sheet items from foreign currency into Euros, the official mean rate as at 31st December 2005 was used.
The Group's exposure to foreign exchange risks is negligible as more than 90% of the business is billed and served locally.
Amortisation
Amortisation of goodwill is no longer carried out due to the changed IFRS accounting rules. On account of the high amortisation of these goodwill values in previous years, their book values today lie considerably below the original acquisition costs. No reductions in value were necessary by reason of the impairment tests carried out in accordance with IAS 36.
International Financial Reporting Standards (IFRS)
The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in accordance with all IFRS Standards, as has been the case since 2001. In addition, they conform with the Interpretations of the IASB (International Accounting Standards Board) applied to those financial statements which have reporting periods starting on or after 1st January 2005.
The SQS Group Consolidated Financial Statements for the business year 2005 were prepared in accordance with uniform accounting and valuation principles in Euros.
First-time application of new standards; change in the accounting policy and adjustment of figures from the previous year
SQS has applied standards of the Improvements Project of the IASB and other changed standards which are binding for the business year commencing 1 January 2005. The changes have led to some additional details but they did not have any effect on the approach and valuation.
Since 1 January 2004, SQS applies IFRS 3 and IAS 36 and 38 in the version of 2004. As a result, the scheduled amortisation of goodwill is no longer carried out. SQS performs annual intrinsic value tests for each cash generating unit.
Further, in 2004 SQS altered the presentation of minority interests in accordance with IAS 1 in the version of 2003. This item is now shown under equity. The accounting and valuation methods correspond to the methods applied in the previous year.
SQS does not apply any further changed or newly passed standards prior to the binding date stipulated. Nor, according to the assessment of SQS, would the application of these standards have any effects on the financial statements.
Rene Gawron
Chief Financial Officer
7th March 2006
Consolidated Profit and Loss Account
for the business year ended 31st December 2005 (IFRS)
€’’000
(Notes)
2005
2004
Revenue
54,737
48,668
-------
-------
Cost of sales
35,563
31,942
Gross profit
19,174
16,726
General and administrative expenses
8,473
7,942
Sales and marketing expenses
3,525
2,829
Research and development expenses
2,690
2,426
-------
-------
Profit before tax and financing result (EBIT)
4,486
3,529
Net interest
-773
-848
-------
-------
Profit before taxes (PBT)
3,713
2,681
Income tax
(5)
1,319
767
Value added tax
(5)
0
220
-------
-------
Profit for the year
2,394
1,694
Attributable to:
Equity shareholders
2,394
1,737
Minority interests
0
-43
-------
-------
Consolidated profit for the year
2,394
1,694
=======
=======
Earnings per share, undiluted (€)
(7)
0.21
0.17
=======
=======
Earnings per share, diluted (€)
(7)
0.20
0.17
=======
=======
Consolidated Balance Sheet as at 31st December 2005 (IFRS)
€’’000
(Notes)
2005
2004
Current assets
Cash and cash equivalents
839
1,478
Marketable securities
5,626
0
Trade receivables
11,433
8,804
Other receivables
518
438
Work in progress
135
251
Income tax receivables
306
218
-------
-------
18,857
11,189
Non-current assets
Intangible assets
(8)
2,395
1,649
Goodwill
(8)
11,589
11,589
Tangible assets
756
905
Deferred taxes
(5)
2,007
2,006
-------
-------
16,747
16,149
-------
-------
Total Assets
35,604
27,338
=======
=======
Current liabilities
Bank loans and overdrafts
3,776
3,159
Convertible bonds
0
1,130
Liabilities under leasing contracts
0
11
Trade creditors
1,844
2,261
Other accruals
75
67
Tax accruals
239
525
Tax liabilities
1,957
1,787
Other Current liabilities
5,232
4,943
-------
-------
13,123
13,883
Non-Current liabilities
Bank loans
2,971
11,478
Liabilities under leasing contracts
0
0
Other accruals
151
145
Pension accruals
305
323
Deferred taxes
(5)
859
574
-------
-------
4,286
12,520
-------
-------
Total Liabilities
17,409
26,403
=======
=======
Shareholders' equity
(17)
Share capital
15,763
4,202
Share premium
10,935
1,669
Statutory reserves
53
53
Foreign currency exchange adjustments
200
143
Retained earnings
-8,756
-5,132
-------
-------
Equity attributable to equity shareholders
18,195
935
Minority interests
0
0
-------
-------
Total Equity
18,195
935
-------
-------
-------
-------
Equity and Liabilities
35,604
27,338
=======
=======
Consolidated Cash Flow Statement as at 31st December 2005 (IFRS)
€’’000
(Notes)
2005
2004
Net cash flow from operating activities
Profit before taxes
3,713
2681
Add back for
Depreciation and amortisation
2,361
2288
Profit/(loss) on the sale of fixed assets
-33
-14
Other non-cash (expenses)/income not affecting payments
-145
-45
Net interest income
766
824
-------
-------
Operating profit before changes in the
net current assets
6,662
5,734
Decrease/(increase) in trade receivables and
receivables from partly completed contracts not yet billed
-2,629
-1737
Increase/(decrease) in work in progress, other assets
and pre-paid expenses and deferred charges
38
338
Decrease/(increase) in trade creditors
-417
-205
Increase/(decrease) in remaining accruals
14
198
Increase/(decrease) in pension accruals
-18
59
Increase/(decrease) in other liabilities and
deferred income
456
656
-------
-------
Cash flow from operating activities
4,106
5,043
Cash effect of foreign exchange rate movements
7
24
Interest payments
-833
-820
Tax payments
-509
164
-------
-------
Net cash flow from current business activities
2,771
4,411
Cash flow from investment activities
Purchase of intangible assets
-2,740
-1437
Purchase of tangible assets
-221
-230
Proceeds from the sale of tangible assets
35
24
Purchase of marketable securities available for sale
-5,632
0
Foreign currency result
-7
-24
Interest received
67
31
Changes in financial resources due to loss of control of subsidiary undertakings
0
-80
-------
-------
Net cash flow from investment activities
-8,498
-1,716
Cash flow from financing activities
Dividends paid
0
0
Proceeds from the issue of share capital
(17)
15,909
0
Repurchase of shares
0
-96
Costs for IPO
-1,790
0
Dividends paid to minority interest
0
0
Proceeds from borrowings
0
0
Repayment of convertible bonds
-1,130
0
Repayment of finance loans
-7,890
-1634
Redemption / termination of leasing contracts
-11
-89
-------
-------
Net cash flow from financing activities
5,088
-1,819
Change in the level of funds affecting payments
-639
876
Cash and cash equivalents
at the beginning of the year
1,478
602
-------
-------
Cash and cash equivalents
at the end of the year
839
1,478
=======
=======
Notes to the Financial Information
at 31 December 2005
1. Summary of Significant Accounting Policies
Basis of preparation
The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group" or "SQS Konzern") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards, formerly IAS = International Accounting Standards) and Interpretations of the IASB (International Accounting Standards Board) adopted by the EU Commission which are to be applied for those financial statements whose reporting period starts on or after 1 January 2005. The new and revised Standards and interpretations of the IASB were not applied in the business year 2005 prior to the binding date stipulated.
The Financial Information has been prepared on the historical cost basis. The Financial Information is presented in Euros and amounts are rounded to the nearest thousand (€000) except when otherwise indicated.
Statement of compliance
The Financial Information of SQS and its subsidiaries (together the 'SQS Group') has been prepared in accordance with IFRS as adopted for use in the EU.
First-time application of new standards; Change in the accounting policy and adjustment to figures from the previous year
SQS has applied standards of the Improvements Project of the IASB and other changed standards which are binding for the business year commencing 1 January 2005. The changes had led to some additional details but did not have any effect on the approach and valuation.
Since 1 January 2004, SQS has applied IFRS 3 and IAS 36 and 38. As a result, the scheduled amortisation of the goodwill is no longer carried out. SQS performs annual intrinsic value tests for each cash generating unit.
Further, in 2004, SQS altered the presentation of minority interests in accordance with IAS 1 in the version of 2003. This item is now shown under equity. The accounting and valuation methods correspond to the methods applied in the previous year.
SQS does not apply any further changed or newly passed standards prior to the binding date stipulated. Nor, according to the assessment of SQS, would the application of these standards have any effects on the financial statements.
Basis of consolidation
The Financial Information comprises the financial statements of SQS Software Quality Systems AG and its subsidiaries as at 31 December each year. Subsidiary company financial statements are prepared on a consistent basis to those of other SQS Group companies. All companies in the SQS Group have the same accounting reference date of 31 December.
All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.
Subsidiaries are consolidated from the date on which control is transferred to the SQS Group and cease to be consolidated from the date on which control is transferred out of the SQS Group.
Goodwill
Goodwill arising on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer's interest in the fair value of the identifiable assets, liabilities and contingent liabilities. Any minority interest in the acquiree is stated at the minority's proportion of the net fair values of those items. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
At the acquisition date goodwill is allocated to each of the cash-generating units expected to benefit from the combination's synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operations within that cash generating unit are disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.
5. Taxes on earnings
Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The calculation is based on the tax rates anticipated in the respective countries as at the realisation date. These are essentially based on the statutory provisions applicable or passed by the government at the date of the Financial Statements.
As a basic principle, SQS Software Quality Solutions AG and its German subsidiaries are liable to corporate income tax, the solidarity surcharge and trade tax. The results of the Company are subject to corporate income tax at 25%. A 5.5 % solidarity surcharge is imposed on corporate income tax. The trade income tax amounts to 19% of the taxable income and is deductible for the purpose of determining the taxable income.
The tax credit granted to persons liable to tax in Germany follows the so-called half-income system, i.e. only 50 % of the income from the company is liable to tax in the hands of the shareholder.
Consolidated income tax expense / (income) are as follows:
31 December
31 December
2005
2004
€000
€000
Current tax expense/ (income)
238
372
Tax on IPO costs
716
-
Adjustments in respect of current income tax of
previous periods
115
(48)
Reversal of the value adjustment on deferred tax claims
-
(160)
Deferred tax
250
603
-------
-------
Taxes on income
1,319
767
=======
=======
A reconciliation of income tax applicable to the accounting profit before income tax at the statutory income tax rate to the income tax expense in the Financial Information is as follows:
31 December
31 December
2005
2004
€000
€000
Profit/ (loss) before tax multiplied by the standard
rate of German income tax of 40%
1,477
1,072
Adjustments in respect of current income tax
of previous years
115
(48)
Differential tax rates in respect of overseas subsidiaries
(209)
(77)
Expenditure not allowable for income tax purposes
16
14
Adjustments in respect of deferred taxes
-
(160)
Other
(80)
(34)
-------
-------
At effective income tax rate of 35 % (2004: 29 %)
1,319
767
=======
=======
In the SQS Group, there are tax credit balances of approx. € 2,000,000 (2004 € 2,000,000) which are partly available to the shareholders in the framework of distributions.
For the assessment of the deferred tax claims and debts, SQS Software Quality Solutions AG and its German subsidiaries apply a tax rate based on the current tax law in Germany of 40% (2004: 40 %) which takes into account corporation tax, the solidarity surcharge and trade tax.
For the deferred tax claims of the overseas subsidiaries, the local tax rates are taken as the basis.
Deferred income tax relates to the following:
31 December
31 December
2005
2004
€000
€000
Losses carried forward
1,857
1,861
Pension accruals
74
75
Other accruals
76
70
-------
-------
Deferred tax assets
2,007
2,006
-------
-------
Capitalised development costs
(780)
(557)
Trade receivables
(18)
(17)
Other
(61)
-------
-------
Deferred tax liabilities
(859)
(574)
-------
-------
Net deferred tax assets
1,148
1,432
=======
=======
Deferred tax assets are recognised when it is considered probable that economic benefit will flow to the entity. Based on the earnings situation of the past and on the business expectations for the foreseeable future, value allowances are formed if this criterion is not fulfilled.
Where a company has suffered losses, deferred tax claims thereon are capitalised if the ability in the future to set off the losses with later income is permissible under the respective national provisions. According to the planning of the company, a return to the tax profit zone in the short term is regarded as very probable.
Under other taxes, a back-payment of V.A.T. is shown following the results of an external audit. The payment continues to be the subject of dispute and will be clarified before the tax court.
7. Earnings per share
The earnings/ (loss) per share presented in accordance with IAS 33 are shown in the following table:
31 December
31 December
2005
2004
€000
€000
Profit/ (loss) for the year attributable to equity shareholders
2,394
1,737
=======
=======
Weighted average number of shares in issue, undiluted
11,671,119
10,085,497
Weighted average number of shares in issue, diluted
11,714,477
10,272,169
=======
=======
Undiluted earnings per share (€)
0.21
0.17
Diluted earnings per share (€)
0.20
0.17
Adjusted earnings per share (€)
0.22
0.13
=======
=======
Undiluted earnings per share are calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue during 2005: 11,671,119 (2004: 10,085,497) after adjusting for the impact of changes in the issued share capital in each year and of a 1.4:1 bonus share issue on 16 August 2005.
Diluted earnings per share are determined by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue plus the share equivalents which would lead to a dilution. The directors consider that there are no share equivalents which would have a dilutive effect. The former convertible bonds have no diluting effect under IAS 33 since the market value of the rights were below the price of the conversion right or option price. The new convertible bonds lead to a theoretically difference between undiluted earnings and diluted earnings per share but the effect is very minimal and does not change the amount of earnings per share.
The adjusted earnings per share were calculated by adding back IFRS differences on IPO costs of € 716,000 (2004: € nil) and deferred taxes of € 365,000 (2004: € 395,000). This results in taxes on income payable under local GAAP of € 238,000 (2004: € 592,000) and profit after adjusted taxes of € 3,475t (2004: € 2,089t), divided by 15,763,080 shares issued as at 31 December 2005 results in adjusted earnings per share of € 0.22 (2004: € 0.13).
8. Intangible assets
The development of the intangible assets of the SQS Group is presented as an Annex to the Consolidated Notes (Consolidated Fixed Asset Analysis).
The item is comprised as follows:
Book values
Remaining useful life
31.12.
2005
31.12.
2004
Years
T€
T€
SQS Group (UK) Ltd. and affiliated subsidiary companies, Great Britain
Part I
4,696
4,696
Part II
6,105
6,105
SQS BV, Netherlands
555
555
Other
233
233
Goodwill
11,589
11,589
Development costs
Capitalisation 2003
Capitalisation 2004
Capitalisation 2005
0
1
2
0
472
1,609
472
943
0
2,081
1,415
Software
1 to 3
256
234
Remaining intangible assets
59
0
Intangible assets
2,396
1,649
No impairment losses in accordance with IAS 36 on account of falling anticipated payments were necessary in the business year 2005. Development costs were capitalised in the business year in the amount of € 2,415t (in the previous year € 1,415t) and amortised over a period of 36 months, since the conditions under IAS 38 were fulfilled.
The scheduled amortisation of goodwill was, in compliance with IFRS 3, no longer carried out. Under the performance of an impairment test in accordance IAS 36 in the version of 2005, no reduction in the value of the goodwill was established.
The impairment test was carried out in accordance with IAS 36.80 for SQS Group (UK) Ltd, as well as the Dutch subsidiary at the business level of the subsidiary. This is the lowest level at which the management of the SQS Group continuously monitors the intrinsic value of the goodwill acquired with this company.
Thus, the cash generating unit is equal to the subsidiary company. In order to test the intrinsic value of the goodwill, the attainable amount (use value) of the cash generating unit is, under IAS 36, compared with the book value of this cash generating unit. The use value is determined as the future earnings value. In order to determine the use value, the discounted cash flow method (DCF method) was applied.
For this purpose, the current plans of the companies, which take into consideration the status of the accounts up until the end of October of the business year, were taken as the basis. For the year 2006, detailed planning is available in this regard; for the following years up until 2010, assumptions were made for the individual result and asset or debt items. For the period thereafter, a constant cash flow was assumed in accordance with the DCF method.
With regard to the development of earnings, it is assumed for both subsidiaries that also in the future an above-average growth in sales against the market will be achieved. In both geographical partial markets, the recovery is clear. In the UK, a growth of 24 % against prior year was achieved in the business year 2005 as 22 % in 2004. A corresponding further increase in personnel is planned. It is further assumed that the gross margin can be increased. It is assumed in this respect that as from the year 2007 the price level will approach the level of 2004. In the following years, further increases are expected; however, the level of 2001 will not be exceeded in this respect. In addition, it is assumed that there will be an increase in the utilisation of the full work capacity of the employees. The marketing costs and also the general and administrative costs are planned to rise absolutely, falling relative to sales. The administration is, with the capacities existing today, sufficient to cope with further growth.
In the planning period, on the basis of these expectations and planning assumptions, annual cash flows will be achieved which ensure a reasonable rate of return on the funds invested.
In accordance with IAS 36, the following special features were taken into account:
- Expenses and income, assets and debts in connection with taxes on earnings, such as active and passive deferred taxes, tax reimbursement claims, tax liabilities and tax accruals, were eliminated both from the book value and from the use value,
- the cash flows, either in or out, from financing activities have not been taken into account,
- For reasons of practicability, in compliance with IAS 36.79, the trade receivables and trade creditors and also other liabilities were included in our calculations when estimating the future cash flows and the book value,
- For the transition from the value of the entire business to the use value of the equity holders, the entire liabilities at the market value (= book value) were eliminated. The goodwill was allocated entirely to the book value of the cash generating unit in accordance with IAS 36.80 and IAS 36.81,
- The determination of the discount rate was made in accordance with IAS 36.55-57; as the capital cost rate for the equity, a risk-adjusted interest rate of 18.5 % p.a was assumed, which was calculated from a risk-free interest rate, an average risk surcharge and also a factor to take into consideration branch and other risks. For the interest on capital from outside sources, the actual interest rate of the companies of 5.7 % for capital from outside sources was taken, with a slightly increasing tendency in the future. Neither interest rate is corrected by taxes. The discounting was then made with the average interest rate weighted according to the ratio of shareholders' equity / capital from outside sources.
For the remaining goodwill values, the cash generating unit is the operating unit which today derives the benefit from the investment. This is, in the one case, the region North, in the other case the region West of SQS AG. In both cases, the book values still present of the cash generating units or the goodwill are so small in relation to the anticipated returns that a detailed investigation was waived.
The amortisation of development costs is contained in the costs for research and development. The amortisation of software and remaining intangible assets as well as the impairment losses under IAS 36 are spread over the functional costs in accordance with an allocation key.
No write-ups on account of the lapse of the grounds which led to value adjustments in previous years needed to be carried out in 2005, as was already the case in the business year 2004.
17. Share capital
On 20 September 2005 SQS AG was floated on the AIM market of the London Stock Exchange. On that date, 5,673,000 new shares were issued at a price of 190 pence per share. This corresponded to about € 2.82 per share on the basis of the exchange rate at that time. In total, approx. € 16 million were raised.
On 2 December 2005, SQS additionally listed in the Entry-Standard in Frankfurt (Main).
Subscribed Capital
The subscribed capital amounts to € 15,763,080 (2004: € 4,204,126). It is divided into 15,763,080 (2004: 4,204,126) fully paid shares of € 1 each.
The subscribed capital developed as follows:
Individual shares
Nominal
value
Number
€
Status at 1 January and 31 December 2004
4,204,126
4,204,126
Increase in capital in return for contributions
74
74
Increase in capital as result of capitalisation of reserves
5,885,880
5,885,880
Increase in capital as a result of issue of shares for cash on flotation
5,673,000
5,673,000
Status at 31 December 2005
15,763,080
15,763,080
Own Shares
The Management Board was authorised to acquire up to a total of 10 % of the nominal capital of the Company for purposes other than trading in securities. The quotation price has been fixed with regard to the upper and lower limit and any offer has to be issued to all shareholders. The authorisation expired on 31 July 2005.
The Management Board is authorised, with the consent of the Supervisory Board, to offer the shares to employees or former employees of the SQS Group or to shareholders. The price at which these shares are offered must not be below the purchase price.
The Management Board is further authorised, with the consent of the Supervisory Board, to redeem the shares so purchased.
In 2004, the Management Board exercised this right to purchase 2,448 shares, which were acquired for an aggregate consideration of € 95,000. In 2005, a further 200 shares were acquired for a consideration of € 7,000.
Through the increase in capital from company funds, the number of own shares rose to 6,356, which were subsequently sold at the issue price within the framework of the stock exchange floatation to two members of the supervisory board at a total price of € 18,000. Accordingly, SQS had no shares in its ownership as at 31 December 2005.
Conditional capital
The General Meeting of 12 April 2002 resolved the conditional increase in the share capital by an amount of up to € 31,112. The resolution became effective with the entry of 6 June 2002. Following the increase in capital, the conditional capital amounted to 43,556.80 € as at 16 August 2005 and to 74,668.80 € as at 20 September 2005. By resolution of the General Meeting of 14 September 2005 and the subsequent entry in the Commercial Register of 23 September 2005, the existing conditional capital was revoked and increased again by 52,800 €.
The conditional capital serves as security for the convertible bonds (see above "Convertible bonds" and point 13 of the Notes).
Authorised capital
By resolution of the General Meeting of 12 July 2005, the capital (€ 243t) previously authorised was revoked.
The executive board is empowered, by resolution of the General Meeting of 12 July 2005, to increase the nominal capital by € 3,500t up until 12 July 2010 with the approval of the supervisory board, either through one single or several issues of new individual registered shares, in return for cash or contributions in kind (Authorised capital 1). The power to increase the nominal capital is restricted to the purpose of acquisition of businesses or the acquisition of holdings in businesses.
In addition, the executive board was empowered, likewise by resolution of 12 July 2005, to increase the nominal capital by € 1,500t up until 12 July 2010 with the approval of the supervisory board, either through one single or several issues of new individual registered shares in return for cash or contributions in kind (Authorised capital 2).
Thereafter, the authorised capital developed as follows:
T€
Status at 1 January 2004
243
Status at 31 December 2004
243
Revocation of the authorised capital
(243)
Increase in the authorised capital 1
3,500
Increase in the authorised capital 2
1,500
Status at 31 December 2005
5,000
Convertible bonds with conversion rights
The executive board was, in the Extraordinary General Meeting of 12 April 2002, authorised to issue a total of 31,112 interest-bearing convertible bonds by 30 April 2002, in either a single or several transactions, in a nominal value of € 36.32 each with a term of no longer than two years.
The executive board exercised this right and issued a convertible bond in a total value of € 1,130t.
Through the redemption of the convertible bond which is the subject of this agreement in the amount of 50 % of the total amount as at 3 January 2005 and the remaining 50 % as at 26 September 2005, these conversion rights have been extinguished in full.
SQS has, on the basis of the resolution of the General Meeting of 14 September 2005, undertaken to grant the vendor of the shares in SQS Group (UK) Ltd convertible bonds in a total nominal amount of € 53t, divided into 52,800 convertible bonds of a nominal value of € 1.00 each, if the party entitled pays into SQS the nominal amount of € 1.00 per share. The exercise of the right of conversion is limited in time up until 31 July 2008. Up until completion of the preparation of these Financial Statements, the party entitled had not exercised this right.
20. Notes to the Statement of Cash flows
The cash flow statement shows how the funds of the Group have changed in the course of the business year through outflows and inflows of funds. The payments are arranged according to investment, financing and business activities.
The sources of funds on which the cash flow statement is based consist of cash and cash equivalents (cash on hand and bank balances) as well as tradable securities.
This information is provided by
RNS The company news service from the London Stock Exchange
END
| Embargoed until 0700 | Tuesday, 7 March 2006 |
SQS Software Quality Systems AG
Maiden Preliminary Results
For the full year ended 31st December 2005
SQS Software Quality Systems AG (AIM:SQS.L) the leading independent pan-European provider of quality management and testing services for software development, today announces its maiden preliminary results for the full year ended 31st December 2005.
Financial Highlights:
- Turnover up by 12.5% to €54.7m (2004: €48.7m)
- Profit before tax up 38.5% to €3.7m (2004: €2.7m)
- BITDA up 18% to €6.8m (2004: €5.8m)
- Adjusted earnings per share up 66% to €0.22 (2004: €0.13)
- Improved gross margin
- Continued strong underlying cash flow; borrowings decreased by 57% to €6.7m
(2004: €15.8m)
- Successful AIM flotation raising €16m on September 20, 2005, followed by a secondary listing on the new German Entry Standard on December 2, 2005
- Grew recurring revenues - secured significant contract renewals with existing client base
- Improved sales capabilities - to further grow the business and establish the framework for long term outsourcing contracts
- Invested in growth markets - increased activity in embedded systems by successfully securing a sizeable contract with a leading aircraft manufacturer; finished a major Mercury tool integration project at a telecom carrier by providing high tech software engineering services
Commenting on the results, Rudolf van Megen, CEO, said:
"During the year, SQS strengthened its position as the leading independent pan-European provider of quality management and testing services for software development and once again grew at almost three times the rate of the European IT service market."
"In 2006, we will concentrate on both acquisitive and organic growth, focusing on expanding markets such as outsourcing and embedded systems. Trading has been encouraging in the first two months of 2006, and as expected, growth is well ahead of the comparable period last year. The pipeline remains strong."
For further information please contact:
| SQS Software Quality Systems AG | www.sqs.de |
| Rudolf van Megen (CEO)/Rene Gawron (CFO) | +49 (2203) 91 54 0 |
| Evolution Securities Limited | 020 7071 4300 |
| Jeremy Ellis/Mike Read | |
| Smithfield | 020 7360 4900 |
| Sara Musgrave |
Print resolution images are available for the media to view and download from
www.vismedia.co.uk
Notes to Editors
SQS is the leading independent pan-European provider of quality management and testing services for software development. SQS consultants design and oversee quality management processes during software and systems development, and test the resulting products for errors and omissions.
Headquartered in Cologne, Germany, SQS now has operations across Europe with offices in seven countries and has over 470 employees. SQS has a strong presence in Germany (Cologne, Munich, Frankfurt, Stuttgart and Hamburg) with subsidiaries in the UK, Netherlands, Switzerland and Austria. SQS also has a minor stake in an operation in Portugal and a partnership operation in Spain.
With over 3,000 completed projects under its belt, SQS has a strong customer base including half of the DAX 30 companies and 30% of the STOXX-50. They include names like Dresdner Bank, Lloyds TSB, Deutsche Telekom, Vodafone, Daimler Chrysler, and Airbus spread across the full range of industries.
SQS is the first German company to have a primary listing on AIM, completing its IPO on 20 September 2005 raising £10.8m before expenses at an issue price of 190p. SQS is included in the Software and Computer Services sector (9530) within the Computer Services subsector (9533) and has a RIC code of SQS.L. SQS completed a secondary listing on the Deutsche Boerse in Frankfurt on 2nd December 2005. For further information, please visit www.sqs-uk.com.
Chief Executive's Statement
Introduction
I am pleased to present SQS's maiden preliminary results following its admission to AIM in September 2005. SQS had an excellent year, recording a material increase in both profit and revenues. This improvement resulted from an excellent underlying performance in our core businesses. During the year we also invested in three growth markets by developing our long term software testing outsourcing business, increasing our presence in the software testing of embedded systems, and building technical test frameworks that support automation of software testing. Business remained strong within our existing client base and we also secured a number of additional new projects which provide the platform for further growth in the current year.
Results
Turnover from continuing operations rose 12.5% to €54.7m (2004: €48.7m). Underlying profit before tax increased 38.5% to €3.7m (2004: €2.7m) benefitting from improved margins. EBITDA rose by 18% to €6.8m (2004: €5.8m).
Margins improved despite continuing price pressure as a result of improving utilisation of billable consultants throughout the Group.
Turnover growth was highest in Other European Countries (Switzerland, Austria and the Netherlands), especially Switzerland, where turnover grew by 67%, and in the United Kingdom where turnover grew by 18.2%.
Adjusted earnings per share (adjusted to add back deferred taxes and IFRS tax differences) of €0.22 rose by 66 % (2004: €0.13).
The balance sheet has been considerably strengthened during the year reflecting the benefit of the €14.1m net proceeds from our admission to AIM and the positive net income in 2005. We reduced our borrowings by €9.0m to €6.7m (2004: €15.8m). Cash balances and marketable securities at the year end stood at €6.5m (2004: cash €1.5m).
Dividend
As SQS was quoted for only three months of the year the Board is not proposing a dividend in respect of 2005. Moreover, the Directors consider that at this time it is more appropriate to reinvest funds in the development of the Company's growing businesses.
However, the Board intends to pursue a progressive dividend policy in future and therefore intends to pay a final dividend for the year ending 31st December 2006.
The Board
There has been one change to our supervisory board in preparation for our admission to AIM last year. There were no changes to our management board. We are pleased to welcome Jeremy Hamer who joined our supervisory board on August 25, 2005. Mr Hamer is also a director of a number of other quoted and unquoted companies including Inter Link Foods plc and Avingtrans plc, and he is non-executive chairman of Glisten plc. With over ten years experience as a board member of various UK quoted companies, his appointment is a significant step for SQS as a public company. Mr Hamer has replaced Hartmut Voss who had served on our supervisory board since 2000. We thank him for his valuable contribution and commitment.
Strategy
Our strategy is to strengthen our market position as the leading independent pan-European provider of quality management and testing services for software development. We aim to grow our business with long term outsourcing contracts and investment in expanding markets such as embedded systems in the aircraft manufacturing and automotive industries. We intend to strengthen our position in a number of key European markets and will actively look for acquisitions to support and accelerate this strategy.
Employees
On behalf of the board, I would like to thank all our employees for their contribution, hard work, and excellent support during the last year. I am confident that we have the team in place to capitalise on the opportunities available and to enable us to deliver long term shareholder value.
Outlook
During the year, SQS strengthened its position as the leading independent pan-European provider of quality management and testing services for software development and once again grew at almost three times the rate of the European IT service market.
In 2006, we will concentrate on both acquisitive and organic growth, focusing on expanding markets such as outsourcing and embedded systems. Trading has been encouraging in the first two months of 2006, and as expected, growth is well ahead of the comparable period last year. The pipeline remains strong.
Rudolf van Megen
Chief Executive Officer
7th March 2006
Review of Business
During 2005, we continued to strengthen our business by improving utilisation rates and overheads, and increasing the number of clients to over 300. We achieved this by increasing the number of projects staffed with international teams and by hiring 37 additional employees, mainly consultants, with strong software engineering backgrounds as well as senior project management skills. As a service company helping its clients to improve the quality of their software and IT systems, our commitment to quality is paramount.
Strategic Update
Market drivers
Software quality management and testing constitutes a segment of the IT services market and therefore growth in the IT services market closely correlates with growth in software quality management and testing. Research conducted by the European Information Technology Observatory ("EITO") showed the European growth rate for IT services to be approximately 4.7% in 2005. In 2005, SQS achieved growth at almost three times that rate.
Market drivers include the increasing complexity of software and IT systems, higher regulatory demands imposed on IT systems by requirements such as the Sarbanes Oxley Act, and the high number of IT projects that either fail or are out of budget and/or time.
In addition, continuing return on investment (ROI) pressures, coupled with increasing "industrialisation" of the software engineering process has led to an increased demand for outsourced software testing as well as better quality management of embedded systems.
Strategic Goals
The SQS Group strategy builds on five strategic goals which all contribute to market leadership as a service company and resulting shareholder value. They are:
- to extend leadership in independent quality management and testing by delivering added value to our customers in order to achieve their goals
- to grow the business significantly above the market growth rate for IT services
- to remain the financially strongest independent quality service company in Europe
- to extend and retain a strong base of highly motivated, skilled, and best performing employees
- to spot and anticipate trends in IT quality management and testing and use them for the benefit of our clients.
- IT professional services: within its broad range of software testing and quality management services, SQS has enhanced its offerings in the fields of code quality management, assessments of software development and IT organisations, quality management in standard software package projects, and outsourcing.
- Tools, licences, and maintenance: SQS's specialist range of software testing tools which work in conjunction with the tools available from competitors has been enhanced by Version 8.0 of our SQS-Test Professional product. The first press release for this product was presented to the market in December 2005.
- IT training and IT events: The training business was extended. ISTQB and ISEB courses were updated for the new versions of the syllabus.
The successful SQC conferences (Software and Systems Quality Conferences), held in Germany and the UK are two of the largest quality management and software testing events in Europe. We plan to expand these into one further country in 2006. SQS has been investigating partnership opportunities for these conferences, and is pleased to have formed a media alliance with one of Europe's most influential publishers, IDG Communications (e.g. "Computerwoche" in Germany). The partnership with IDG is expected to increase the number of delegates, exhibitors, and sponsors attending our conferences in 2006.
Geographic review
Germany
Revenue in Germany, our traditional home market, was €34.2m (2004: €34.1m) contributing 63% to the Group's total revenue compared with 70% in the prior year. This reflects the increase in services rendered for Group companies in other territories as well as the fact that our growth in Germany was limited by the number of available skilled consultants. Services sold within the Group (mainly to Switzerland and the UK) increased by 59% to €3.9m (2004: €2.4m). We intensified our hiring activities and skills training in the second half of 2005 in order to be able to grow the local business in Germany significantly in 2006. During the year, we secured key contract renewals with our largest client (a public service organisation in Germany) and other major customers, all of which provide a solid base for the current year. We have also increased the business base in embedded systems by securing extended contracts with our largest aircraft manufacturing client. We have successfully finished the first major Mercury tool integration project at a telecom carrier by providing high tech software engineering services. Mercury is the worldwide leading company in the field of software testing tools. We have hired a number of high calibre sales managers, some with extensive experience in outsourcing projects and global account development, who will enable SQS to grow its business with international clients.
United Kingdom
In the United Kingdom, which is our second largest regional segment and the largest European market for IT services in general, we generated revenues of €9.2m (2004: €7.8m), 17% of the Group's total. This represented an 18% increase year on year. While business with existing and new clients increased, professional training revenue grew by 17% and SQS conference revenue grew by 23%. We also achieved above average market growth in our services with logo certification for telecommunication applications. To improve earnings we have initiated measures for improving profits in the UK operation such as improving utilisation of billable staff and reducing overheads.
The UK market continues to be very fragmented as a handful of similar and larger sized pure play testing services companies serve this market. We continue to focus on further consolidation.
Other European Countries (Switzerland, Austria, and the Netherlands) Switzerland, Austria and the Netherlands contributed aggregate revenue of €11.3m (2004: €6.8m), or 21% of the Group's total turnover. This strong year on year increase of 67% predominantly came from our Swiss operation due to successful wins of recurring project business with major Swiss clients in financial services and telecommunications. During the year we doubled the number of local Swiss consultants to 16, and as we continue to add local staff we expect this to reduce the demand on our German operation, which limited our sales growth in Germany in 2005.
Summary
We aim to grow organically by adding more consultants and offering a greater range of services to our existing client base. In particular, we will look to increase our market presence in test outsourcing, software testing of embedded systems as well as building technical test frameworks that support test automation. The existing client relationships, of which we have over 300, are the backbone to our future growth.
Where appropriate, we will also seek to consolidate other specialists in our field and pursue infill acquisitions to further establish or strengthen our market position in selected European countries.
Finance Director's Review
Results
Total revenue for the year grew by 12.5% to €54.7m (2004: €48.7m). IT Professional Services was the major contributor with revenues of €50.7m (2004: €44.9m) a 13% increase year on year. Revenue from tool licenses and maintenance was €2.1m (2004: €2.2m), with IT training and IT events contributing €1.9m (2004: €1.6m).
Earnings before interest, tax, depreciation, and amortisation (EBITDA) was up 18% year on year to €6.8m (2004: €5.8m). Profit before tax was €3.7m (2004: €2.7m), up 38.5%. The improved result was based on improved gross margins and relatively reduced administrative expenses and research & development overheads, while sales & marketing expenses increased in order to foster future revenue growth.
Adjusted* earnings per share improved to €0.22 (2004: €0.13).
*based on net income increased by €1.1m deferred taxes and IFRS tax differences on capitalised R&D and IPO costs but including actual profit taxes of €0.2m payable under local GAAP
Costs
Administrative costs of €8.5m (2004: €7.9m) were 15.5% of sales (2004:16.3%), increased in absolute terms because of the improvement of local infrastructure in Switzerland and hiring costs. Sales & marketing costs of €3.5m increased relative to sales (to 6.4% from 5.8%), as we continued to invest in additional sales resources to support current and future organic growth of the business. Research and development costs of €2.7m were marginally reduced relative to sales (to 4.9% from 5.0%), reflecting a peak in efforts for Version 8.0 of the SQS-TEST Professional tool and course development for our training products.
Taxation
The Group tax charge of €1.3m has two components; one is tax on profits payable under local GAAP of €0.2m, and the other is the deferred tax and tax differences that we are required to show under IFRS of €1.1m. Due to tax breaks and a tax effective expensing of the IPO costs under German local GAAP, SQS will pay no or negligible tax on profits in Germany, Austria and the Netherlands. The remaining €0.2m tax on profits arose in the UK and Switzerland. Deferred tax and IFRS tax differences were €1.1m on capitalised R&D and IPO costs.
Cash Flow and Financing
The group generated operating cash inflow of €2.8m (2004: €4.4m). Although operating profits have risen, operating cash flow was impacted by an €0.9m increase in receivables and tax payments of €0.6m (2004: €-0.2m). Cash flow from financing activities was €5.1m (2004: €-1.9m) and includes a positive cash flow from the net proceeds of the IPO of €14.1m and the pay back of loans and convertible bonds of €-9.0m (2004: €-1.6m). Cash flow from investments was €-8.5m (2004: €-1.7m), including €-2.7m for capitalised R&D for products and investments in intangible assets (2004: €-1.4m), and an additional €-5.6m in marketable securities. In total, cash and marketable securities were €6.5m (2004: €1.5m) at the year end.
Foreign Exchange
Approximately 70% of the Group's turnover is generated in Euros. With the exception of SQS UK Group Ltd and Software Quality Systems (Schweiz) AG, all subsidiaries of SQS are located in the currency area of the Euro. For the conversion of the local currency into Euros, the official fixed exchange rate was chosen. For the conversion of the balance sheet items from foreign currency into Euros, the official mean rate as at 31st December 2005 was used.
The Group's exposure to foreign exchange risks is negligible as more than 90% of the business is billed and served locally.
Amortisation
Amortisation of goodwill is no longer carried out due to the changed IFRS accounting rules. On account of the high amortisation of these goodwill values in previous years, their book values today lie considerably below the original acquisition costs. No reductions in value were necessary by reason of the impairment tests carried out in accordance with IAS 36.
International Financial Reporting Standards (IFRS)
The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in accordance with all IFRS Standards, as has been the case since 2001. In addition, they conform with the Interpretations of the IASB (International Accounting Standards Board) applied to those financial statements which have reporting periods starting on or after 1st January 2005.
The SQS Group Consolidated Financial Statements for the business year 2005 were prepared in accordance with uniform accounting and valuation principles in Euros.
First-time application of new standards; change in the accounting policy and adjustment of figures from the previous year
SQS has applied standards of the Improvements Project of the IASB and other changed standards which are binding for the business year commencing 1 January 2005. The changes have led to some additional details but they did not have any effect on the approach and valuation.
Since 1 January 2004, SQS applies IFRS 3 and IAS 36 and 38 in the version of 2004. As a result, the scheduled amortisation of goodwill is no longer carried out. SQS performs annual intrinsic value tests for each cash generating unit.
Further, in 2004 SQS altered the presentation of minority interests in accordance with IAS 1 in the version of 2003. This item is now shown under equity. The accounting and valuation methods correspond to the methods applied in the previous year.
SQS does not apply any further changed or newly passed standards prior to the binding date stipulated. Nor, according to the assessment of SQS, would the application of these standards have any effects on the financial statements.
Rene Gawron
Chief Financial Officer
7th March 2006
Consolidated Profit and Loss Account
for the business year ended 31st December 2005 (IFRS)
€’’000 |
|
(Notes) |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Revenue |
|
|
|
54,737 |
|
48,668 |
|
|
|
|
------- |
|
------- |
Cost of sales |
|
|
35,563 |
|
31,942 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
19,174 |
|
16,726 |
|
|
|
|
|
|
|
General and administrative expenses |
|
|
8,473 |
|
7,942 |
|
Sales and marketing expenses |
|
|
3,525 |
|
2,829 |
|
Research and development expenses |
|
|
2,690 |
|
2,426 |
|
|
|
|
|
------- |
|
------- |
Profit before tax and financing result (EBIT) |
|
|
|
4,486 |
|
3,529 |
|
|
|
|
|
|
|
Net interest |
|
|
-773 |
|
-848 |
|
|
|
|
|
------- |
|
------- |
Profit before taxes (PBT) |
|
|
|
3,713 |
|
2,681 |
|
|
|
|
|
|
|
Income tax |
|
(5) |
|
1,319 |
|
767 |
Value added tax |
|
(5) |
|
0 |
|
220 |
|
|
|
|
------- |
|
------- |
Profit for the year |
|
|
|
2,394 |
|
1,694 |
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
|
Equity shareholders |
|
|
|
2,394 |
|
1,737 |
Minority interests |
|
|
0 |
|
-43 |
|
|
|
|
|
------- |
|
------- |
Consolidated profit for the year |
|
|
|
2,394 |
|
1,694 |
|
|
|
|
======= |
|
======= |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, undiluted (€) |
|
(7) |
|
0.21 |
|
0.17 |
|
|
|
|
======= |
|
======= |
Earnings per share, diluted (€) |
|
(7) |
|
0.20 |
|
0.17 |
|
|
|
|
======= |
|
======= |
Consolidated Balance Sheet as at 31st December 2005 (IFRS)
|
|
|
|
|
|
|
€’’000 |
|
(Notes) |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
839 |
|
1,478 |
|
Marketable securities |
|
|
5,626 |
|
0 |
|
Trade receivables |
|
|
11,433 |
|
8,804 |
|
Other receivables |
|
|
518 |
|
438 |
|
Work in progress |
|
|
135 |
|
251 |
|
Income tax receivables |
|
|
|
306 |
|
218 |
|
|
|
|
------- |
|
------- |
|
|
|
|
18,857 |
|
11,189 |
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
Intangible assets |
|
(8) |
|
2,395 |
|
1,649 |
Goodwill |
|
(8) |
|
11,589 |
|
11,589 |
Tangible assets |
|
|
756 |
|
905 |
|
Deferred taxes |
|
(5) |
|
2,007 |
|
2,006 |
|
|
|
|
------- |
|
------- |
|
|
|
|
16,747 |
|
16,149 |
|
|
|
|
|
|
|
|
|
|
|
------- |
|
------- |
Total Assets |
|
|
|
35,604 |
|
27,338 |
|
|
|
|
======= |
|
======= |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Bank loans and overdrafts |
|
|
3,776 |
|
3,159 |
|
Convertible bonds |
|
|
0 |
|
1,130 |
|
Liabilities under leasing contracts |
|
|
0 |
|
11 |
|
Trade creditors |
|
|
|
1,844 |
|
2,261 |
Other accruals |
|
|
75 |
|
67 |
|
Tax accruals |
|
|
|
239 |
|
525 |
Tax liabilities |
|
|
|
1,957 |
|
1,787 |
Other Current liabilities |
|
|
5,232 |
|
4,943 |
|
|
|
|
|
------- |
|
------- |
|
|
|
|
13,123 |
|
13,883 |
|
|
|
|
|
|
|
Non-Current liabilities |
|
|
|
|
|
|
Bank loans |
|
|
2,971 |
|
11,478 |
|
Liabilities under leasing contracts |
|
|
0 |
|
0 |
|
Other accruals |
|
|
151 |
|
145 |
|
Pension accruals |
|
|
305 |
|
323 |
|
Deferred taxes |
|
(5) |
|
859 |
|
574 |
|
|
|
|
------- |
|
------- |
|
|
|
|
4,286 |
|
12,520 |
|
|
|
|
|
|
|
|
|
|
|
------- |
|
------- |
Total Liabilities |
|
|
|
17,409 |
|
26,403 |
|
|
|
|
======= |
|
======= |
|
|
|
|
|
|
|
Shareholders' equity |
|
(17) |
|
|
|
|
Share capital |
|
|
|
15,763 |
|
4,202 |
Share premium |
|
|
|
10,935 |
|
1,669 |
Statutory reserves |
|
|
|
53 |
|
53 |
Foreign currency exchange adjustments |
|
|
|
200 |
|
143 |
Retained earnings |
|
|
|
-8,756 |
|
-5,132 |
|
|
|
|
------- |
|
------- |
Equity attributable to equity shareholders |
|
|
18,195 |
|
935 |
|
|
|
|
|
|
|
|
Minority interests |
|
|
0 |
|
0 |
|
|
|
|
|
------- |
|
------- |
Total Equity |
|
|
|
18,195 |
|
935 |
|
|
|
|
------- |
|
------- |
|
|
|
|
|
|
|
|
|
|
|
------- |
|
------- |
Equity and Liabilities |
|
|
|
35,604 |
|
27,338 |
|
|
|
|
======= |
|
======= |
Consolidated Cash Flow Statement as at 31st December 2005 (IFRS)
€’’000 |
|
(Notes) |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Net cash flow from operating activities |
|
|
|
|
|
|
Profit before taxes |
|
|
|
3,713 |
|
2681 |
Add back for |
|
|
|
|
|
|
Depreciation and amortisation |
|
|
|
2,361 |
|
2288 |
Profit/(loss) on the sale of fixed assets |
|
|
|
-33 |
|
-14 |
Other non-cash (expenses)/income not affecting payments |
|
|
|
-145 |
|
-45 |
Net interest income |
|
|
|
766 |
|
824 |
|
|
|
|
------- |
|
------- |
Operating profit before changes in the |
|
|
|
|
|
|
net current assets |
|
|
|
6,662 |
|
5,734 |
Decrease/(increase) in trade receivables and |
|
|
|
|
|
|
receivables from partly completed contracts not yet billed |
|
|
|
-2,629 |
|
-1737 |
Increase/(decrease) in work in progress, other assets |
|
|
|
|
|
|
and pre-paid expenses and deferred charges |
|
|
|
38 |
|
338 |
Decrease/(increase) in trade creditors |
|
|
|
-417 |
|
-205 |
Increase/(decrease) in remaining accruals |
|
|
|
14 |
|
198 |
Increase/(decrease) in pension accruals |
|
|
|
-18 |
|
59 |
Increase/(decrease) in other liabilities and |
|
|
|
|
|
|
deferred income |
|
|
|
456 |
|
656 |
|
|
|
|
------- |
|
------- |
Cash flow from operating activities |
|
|
|
4,106 |
|
5,043 |
Cash effect of foreign exchange rate movements |
|
|
7 |
|
24 |
|
Interest payments |
|
|
-833 |
|
-820 |
|
Tax payments |
|
|
|
-509 |
|
164 |
|
|
|
|
------- |
|
------- |
Net cash flow from current business activities |
|
|
|
2,771 |
|
4,411 |
|
|
|
|
|
|
|
Cash flow from investment activities |
|
|
|
|
|
|
Purchase of intangible assets |
|
|
|
-2,740 |
|
-1437 |
Purchase of tangible assets |
|
|
|
-221 |
|
-230 |
Proceeds from the sale of tangible assets |
|
|
|
35 |
|
24 |
Purchase of marketable securities available for sale |
|
|
|
-5,632 |
|
0 |
Foreign currency result |
|
|
|
-7 |
|
-24 |
Interest received |
|
|
67 |
|
31 |
|
Changes in financial resources due to loss of control of subsidiary undertakings |
|
|
|
0 |
|
-80 |
|
|
|
|
------- |
|
------- |
Net cash flow from investment activities |
|
|
|
-8,498 |
|
-1,716 |
|
|
|
|
|
|
|
Cash flow from financing activities |
|
|
|
|
|
|
Dividends paid |
|
|
|
0 |
|
0 |
Proceeds from the issue of share capital |
|
(17) |
|
15,909 |
|
0 |
Repurchase of shares |
|
|
|
0 |
|
-96 |
Costs for IPO |
|
|
|
-1,790 |
|
0 |
Dividends paid to minority interest |
|
|
|
0 |
|
0 |
Proceeds from borrowings |
|
|
|
0 |
|
0 |
Repayment of convertible bonds |
|
|
-1,130 |
|
0 |
|
Repayment of finance loans |
|
|
-7,890 |
|
-1634 |
|
Redemption / termination of leasing contracts |
|
|
-11 |
|
-89 |
|
|
|
|
|
------- |
|
------- |
Net cash flow from financing activities |
|
|
|
5,088 |
|
-1,819 |
|
|
|
|
|
|
|
Change in the level of funds affecting payments |
|
|
|
-639 |
|
876 |
Cash and cash equivalents |
|
|
|
|
|
|
at the beginning of the year |
|
|
|
1,478 |
|
602 |
|
|
|
|
------- |
|
------- |
Cash and cash equivalents |
|
|
|
|
|
|
at the end of the year |
|
|
|
839 |
|
1,478 |
|
|
|
|
======= |
|
======= |
Notes to the Financial Information
at 31 December 2005
1. Summary of Significant Accounting Policies
Basis of preparation
The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group" or "SQS Konzern") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards, formerly IAS = International Accounting Standards) and Interpretations of the IASB (International Accounting Standards Board) adopted by the EU Commission which are to be applied for those financial statements whose reporting period starts on or after 1 January 2005. The new and revised Standards and interpretations of the IASB were not applied in the business year 2005 prior to the binding date stipulated.
The Financial Information has been prepared on the historical cost basis. The Financial Information is presented in Euros and amounts are rounded to the nearest thousand (€000) except when otherwise indicated.
Statement of compliance
The Financial Information of SQS and its subsidiaries (together the 'SQS Group') has been prepared in accordance with IFRS as adopted for use in the EU.
First-time application of new standards; Change in the accounting policy and adjustment to figures from the previous year
SQS has applied standards of the Improvements Project of the IASB and other changed standards which are binding for the business year commencing 1 January 2005. The changes had led to some additional details but did not have any effect on the approach and valuation.
Since 1 January 2004, SQS has applied IFRS 3 and IAS 36 and 38. As a result, the scheduled amortisation of the goodwill is no longer carried out. SQS performs annual intrinsic value tests for each cash generating unit.
Further, in 2004, SQS altered the presentation of minority interests in accordance with IAS 1 in the version of 2003. This item is now shown under equity. The accounting and valuation methods correspond to the methods applied in the previous year.
SQS does not apply any further changed or newly passed standards prior to the binding date stipulated. Nor, according to the assessment of SQS, would the application of these standards have any effects on the financial statements.
Basis of consolidation
The Financial Information comprises the financial statements of SQS Software Quality Systems AG and its subsidiaries as at 31 December each year. Subsidiary company financial statements are prepared on a consistent basis to those of other SQS Group companies. All companies in the SQS Group have the same accounting reference date of 31 December.
All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.
Subsidiaries are consolidated from the date on which control is transferred to the SQS Group and cease to be consolidated from the date on which control is transferred out of the SQS Group.
Goodwill
Goodwill arising on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer's interest in the fair value of the identifiable assets, liabilities and contingent liabilities. Any minority interest in the acquiree is stated at the minority's proportion of the net fair values of those items. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
At the acquisition date goodwill is allocated to each of the cash-generating units expected to benefit from the combination's synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operations within that cash generating unit are disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.
5. Taxes on earnings
Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The calculation is based on the tax rates anticipated in the respective countries as at the realisation date. These are essentially based on the statutory provisions applicable or passed by the government at the date of the Financial Statements.
As a basic principle, SQS Software Quality Solutions AG and its German subsidiaries are liable to corporate income tax, the solidarity surcharge and trade tax. The results of the Company are subject to corporate income tax at 25%. A 5.5 % solidarity surcharge is imposed on corporate income tax. The trade income tax amounts to 19% of the taxable income and is deductible for the purpose of determining the taxable income.
The tax credit granted to persons liable to tax in Germany follows the so-called half-income system, i.e. only 50 % of the income from the company is liable to tax in the hands of the shareholder.
Consolidated income tax expense / (income) are as follows:
|
|
31 December |
|
31 December |
|
|
2005 |
|
2004 |
|
|
€000 |
|
€000 |
|
|
|
|
|
Current tax expense/ (income) |
|
238 |
|
372 |
Tax on IPO costs |
|
716 |
|
- |
Adjustments in respect of current income tax of |
|
|
|
|
previous periods |
|
115 |
|
(48) |
Reversal of the value adjustment on deferred tax claims |
|
- |
|
(160) |
Deferred tax |
|
250 |
|
603 |
------- |
|
------- |
||
Taxes on income |
|
1,319 |
|
767 |
======= |
|
======= |
A reconciliation of income tax applicable to the accounting profit before income tax at the statutory income tax rate to the income tax expense in the Financial Information is as follows:
|
|
31 December |
|
31 December |
|
|
2005 |
|
2004 |
|
|
€000 |
|
€000 |
Profit/ (loss) before tax multiplied by the standard |
|
|
|
|
rate of German income tax of 40% |
|
1,477 |
|
1,072 |
Adjustments in respect of current income tax |
|
115 |
|
(48) |
Differential tax rates in respect of overseas subsidiaries |
|
(209) |
|
(77) |
Expenditure not allowable for income tax purposes |
|
16 |
|
14 |
Adjustments in respect of deferred taxes |
|
- |
|
(160) |
Other |
|
(80) |
|
(34) |
|
|
|
|
|
------- |
|
------- |
||
At effective income tax rate of 35 % (2004: 29 %) |
|
1,319 |
|
767 |
|
|
|
|
|
======= |
|
======= |
In the SQS Group, there are tax credit balances of approx. € 2,000,000 (2004 € 2,000,000) which are partly available to the shareholders in the framework of distributions.
For the assessment of the deferred tax claims and debts, SQS Software Quality Solutions AG and its German subsidiaries apply a tax rate based on the current tax law in Germany of 40% (2004: 40 %) which takes into account corporation tax, the solidarity surcharge and trade tax.
For the deferred tax claims of the overseas subsidiaries, the local tax rates are taken as the basis.
Deferred income tax relates to the following:
|
|
31 December |
|
31 December |
|
|
2005 |
|
2004 |
|
|
€000 |
|
€000 |
|
|
|
|
|
Losses carried forward |
|
1,857 |
|
1,861 |
Pension accruals |
|
74 |
|
75 |
Other accruals |
|
76 |
|
70 |
------- |
|
------- |
||
|
|
|
|
|
Deferred tax assets |
|
2,007 |
|
2,006 |
------- |
|
------- |
||
|
|
|
|
|
Capitalised development costs |
|
(780) |
|
(557) |
Trade receivables |
|
(18) |
|
(17) |
Other |
|
(61) |
|
|
------- |
|
------- |
||
|
|
|
|
|
Deferred tax liabilities |
|
(859) |
|
(574) |
------- |
|
------- |
||
|
|
|
|
|
Net deferred tax assets |
|
1,148 |
|
1,432 |
======= |
|
======= |
Deferred tax assets are recognised when it is considered probable that economic benefit will flow to the entity. Based on the earnings situation of the past and on the business expectations for the foreseeable future, value allowances are formed if this criterion is not fulfilled.
Where a company has suffered losses, deferred tax claims thereon are capitalised if the ability in the future to set off the losses with later income is permissible under the respective national provisions. According to the planning of the company, a return to the tax profit zone in the short term is regarded as very probable.
Under other taxes, a back-payment of V.A.T. is shown following the results of an external audit. The payment continues to be the subject of dispute and will be clarified before the tax court.
7. Earnings per share
The earnings/ (loss) per share presented in accordance with IAS 33 are shown in the following table:
|
|
31 December |
|
31 December |
|
|
2005 |
|
2004 |
|
|
€000 |
|
€000 |
|
|
|
|
|
Profit/ (loss) for the year attributable to equity shareholders |
|
2,394 |
|
1,737 |
======= |
|
======= |
||
|
|
|
|
|
Weighted average number of shares in issue, undiluted |
|
11,671,119 |
|
10,085,497 |
Weighted average number of shares in issue, diluted |
|
11,714,477 |
|
10,272,169 |
======= |
|
======= |
||
|
|
|
|
|
Undiluted earnings per share (€) |
|
0.21 |
|
0.17 |
Diluted earnings per share (€) |
|
0.20 |
|
0.17 |
Adjusted earnings per share (€) |
|
0.22 |
|
0.13 |
======= |
|
======= |
Undiluted earnings per share are calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue during 2005: 11,671,119 (2004: 10,085,497) after adjusting for the impact of changes in the issued share capital in each year and of a 1.4:1 bonus share issue on 16 August 2005.
Diluted earnings per share are determined by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue plus the share equivalents which would lead to a dilution. The directors consider that there are no share equivalents which would have a dilutive effect. The former convertible bonds have no diluting effect under IAS 33 since the market value of the rights were below the price of the conversion right or option price. The new convertible bonds lead to a theoretically difference between undiluted earnings and diluted earnings per share but the effect is very minimal and does not change the amount of earnings per share.
The adjusted earnings per share were calculated by adding back IFRS differences on IPO costs of € 716,000 (2004: € nil) and deferred taxes of € 365,000 (2004: € 395,000). This results in taxes on income payable under local GAAP of € 238,000 (2004: € 592,000) and profit after adjusted taxes of € 3,475t (2004: € 2,089t), divided by 15,763,080 shares issued as at 31 December 2005 results in adjusted earnings per share of € 0.22 (2004: € 0.13).
8. Intangible assets
The development of the intangible assets of the SQS Group is presented as an Annex to the Consolidated Notes (Consolidated Fixed Asset Analysis).
The item is comprised as follows:
Book values |
Remaining useful life |
|
31.12. |
|
31.12. |
|
Years |
|
T€ |
|
T€ |
|
|
|
|
|
|
SQS Group (UK) Ltd. and affiliated subsidiary companies, Great Britain |
|
|
|
|
|
Part I |
|
|
4,696 |
|
4,696 |
Part II |
|
|
6,105 |
|
6,105 |
SQS BV, Netherlands |
|
|
555 |
|
555 |
Other |
|
|
233 |
|
233 |
Goodwill |
|
|
11,589 |
|
11,589 |
Development costs Capitalisation 2003 Capitalisation 2004 Capitalisation 2005 |
0 1 2 |
|
0 472 1,609 |
|
472 943 0 |
|
|
|
2,081 |
|
1,415 |
Software |
1 to 3 |
|
256 |
|
234 |
Remaining intangible assets |
|
|
59 |
|
0 |
Intangible assets |
|
|
2,396 |
|
1,649 |
No impairment losses in accordance with IAS 36 on account of falling anticipated payments were necessary in the business year 2005. Development costs were capitalised in the business year in the amount of € 2,415t (in the previous year € 1,415t) and amortised over a period of 36 months, since the conditions under IAS 38 were fulfilled.
The scheduled amortisation of goodwill was, in compliance with IFRS 3, no longer carried out. Under the performance of an impairment test in accordance IAS 36 in the version of 2005, no reduction in the value of the goodwill was established.
The impairment test was carried out in accordance with IAS 36.80 for SQS Group (UK) Ltd, as well as the Dutch subsidiary at the business level of the subsidiary. This is the lowest level at which the management of the SQS Group continuously monitors the intrinsic value of the goodwill acquired with this company.
Thus, the cash generating unit is equal to the subsidiary company. In order to test the intrinsic value of the goodwill, the attainable amount (use value) of the cash generating unit is, under IAS 36, compared with the book value of this cash generating unit. The use value is determined as the future earnings value. In order to determine the use value, the discounted cash flow method (DCF method) was applied.
For this purpose, the current plans of the companies, which take into consideration the status of the accounts up until the end of October of the business year, were taken as the basis. For the year 2006, detailed planning is available in this regard; for the following years up until 2010, assumptions were made for the individual result and asset or debt items. For the period thereafter, a constant cash flow was assumed in accordance with the DCF method.
With regard to the development of earnings, it is assumed for both subsidiaries that also in the future an above-average growth in sales against the market will be achieved. In both geographical partial markets, the recovery is clear. In the UK, a growth of 24 % against prior year was achieved in the business year 2005 as 22 % in 2004. A corresponding further increase in personnel is planned. It is further assumed that the gross margin can be increased. It is assumed in this respect that as from the year 2007 the price level will approach the level of 2004. In the following years, further increases are expected; however, the level of 2001 will not be exceeded in this respect. In addition, it is assumed that there will be an increase in the utilisation of the full work capacity of the employees. The marketing costs and also the general and administrative costs are planned to rise absolutely, falling relative to sales. The administration is, with the capacities existing today, sufficient to cope with further growth.
In the planning period, on the basis of these expectations and planning assumptions, annual cash flows will be achieved which ensure a reasonable rate of return on the funds invested.
In accordance with IAS 36, the following special features were taken into account:
- Expenses and income, assets and debts in connection with taxes on earnings, such as active and passive deferred taxes, tax reimbursement claims, tax liabilities and tax accruals, were eliminated both from the book value and from the use value,
- the cash flows, either in or out, from financing activities have not been taken into account,
- For reasons of practicability, in compliance with IAS 36.79, the trade receivables and trade creditors and also other liabilities were included in our calculations when estimating the future cash flows and the book value,
- For the transition from the value of the entire business to the use value of the equity holders, the entire liabilities at the market value (= book value) were eliminated. The goodwill was allocated entirely to the book value of the cash generating unit in accordance with IAS 36.80 and IAS 36.81,
- The determination of the discount rate was made in accordance with IAS 36.55-57; as the capital cost rate for the equity, a risk-adjusted interest rate of 18.5 % p.a was assumed, which was calculated from a risk-free interest rate, an average risk surcharge and also a factor to take into consideration branch and other risks. For the interest on capital from outside sources, the actual interest rate of the companies of 5.7 % for capital from outside sources was taken, with a slightly increasing tendency in the future. Neither interest rate is corrected by taxes. The discounting was then made with the average interest rate weighted according to the ratio of shareholders' equity / capital from outside sources.
For the remaining goodwill values, the cash generating unit is the operating unit which today derives the benefit from the investment. This is, in the one case, the region North, in the other case the region West of SQS AG. In both cases, the book values still present of the cash generating units or the goodwill are so small in relation to the anticipated returns that a detailed investigation was waived.
The amortisation of development costs is contained in the costs for research and development. The amortisation of software and remaining intangible assets as well as the impairment losses under IAS 36 are spread over the functional costs in accordance with an allocation key.
No write-ups on account of the lapse of the grounds which led to value adjustments in previous years needed to be carried out in 2005, as was already the case in the business year 2004.
17. Share capital
On 20 September 2005 SQS AG was floated on the AIM market of the London Stock Exchange. On that date, 5,673,000 new shares were issued at a price of 190 pence per share. This corresponded to about € 2.82 per share on the basis of the exchange rate at that time. In total, approx. € 16 million were raised.
On 2 December 2005, SQS additionally listed in the Entry-Standard in Frankfurt (Main).
Subscribed Capital
The subscribed capital amounts to € 15,763,080 (2004: € 4,204,126). It is divided into 15,763,080 (2004: 4,204,126) fully paid shares of € 1 each.
The subscribed capital developed as follows:
|
Individual shares |
|
Nominal |
|
Number |
|
€ |
|
|
|
|
Status at 1 January and 31 December 2004 |
4,204,126 |
|
4,204,126 |
|
|
|
|
Increase in capital in return for contributions |
74 |
|
74 |
Increase in capital as result of capitalisation of reserves |
5,885,880 |
|
5,885,880 |
Increase in capital as a result of issue of shares for cash on flotation |
5,673,000 |
|
5,673,000 |
Status at 31 December 2005 |
15,763,080 |
|
15,763,080 |
Own Shares
The Management Board was authorised to acquire up to a total of 10 % of the nominal capital of the Company for purposes other than trading in securities. The quotation price has been fixed with regard to the upper and lower limit and any offer has to be issued to all shareholders. The authorisation expired on 31 July 2005.
The Management Board is authorised, with the consent of the Supervisory Board, to offer the shares to employees or former employees of the SQS Group or to shareholders. The price at which these shares are offered must not be below the purchase price.
The Management Board is further authorised, with the consent of the Supervisory Board, to redeem the shares so purchased.
In 2004, the Management Board exercised this right to purchase 2,448 shares, which were acquired for an aggregate consideration of € 95,000. In 2005, a further 200 shares were acquired for a consideration of € 7,000.
Through the increase in capital from company funds, the number of own shares rose to 6,356, which were subsequently sold at the issue price within the framework of the stock exchange floatation to two members of the supervisory board at a total price of € 18,000. Accordingly, SQS had no shares in its ownership as at 31 December 2005.
Conditional capital
The General Meeting of 12 April 2002 resolved the conditional increase in the share capital by an amount of up to € 31,112. The resolution became effective with the entry of 6 June 2002. Following the increase in capital, the conditional capital amounted to 43,556.80 € as at 16 August 2005 and to 74,668.80 € as at 20 September 2005. By resolution of the General Meeting of 14 September 2005 and the subsequent entry in the Commercial Register of 23 September 2005, the existing conditional capital was revoked and increased again by 52,800 €.
The conditional capital serves as security for the convertible bonds (see above "Convertible bonds" and point 13 of the Notes).
Authorised capital
By resolution of the General Meeting of 12 July 2005, the capital (€ 243t) previously authorised was revoked.
The executive board is empowered, by resolution of the General Meeting of 12 July 2005, to increase the nominal capital by € 3,500t up until 12 July 2010 with the approval of the supervisory board, either through one single or several issues of new individual registered shares, in return for cash or contributions in kind (Authorised capital 1). The power to increase the nominal capital is restricted to the purpose of acquisition of businesses or the acquisition of holdings in businesses.
In addition, the executive board was empowered, likewise by resolution of 12 July 2005, to increase the nominal capital by € 1,500t up until 12 July 2010 with the approval of the supervisory board, either through one single or several issues of new individual registered shares in return for cash or contributions in kind (Authorised capital 2).
Thereafter, the authorised capital developed as follows:
|
T€ |
Status at 1 January 2004 |
243 |
Status at 31 December 2004 |
243 |
Revocation of the authorised capital |
(243) |
Increase in the authorised capital 1 |
3,500 |
Increase in the authorised capital 2 |
1,500 |
Status at 31 December 2005 |
5,000 |
Convertible bonds with conversion rights
The executive board was, in the Extraordinary General Meeting of 12 April 2002, authorised to issue a total of 31,112 interest-bearing convertible bonds by 30 April 2002, in either a single or several transactions, in a nominal value of € 36.32 each with a term of no longer than two years.
The executive board exercised this right and issued a convertible bond in a total value of € 1,130t.
Through the redemption of the convertible bond which is the subject of this agreement in the amount of 50 % of the total amount as at 3 January 2005 and the remaining 50 % as at 26 September 2005, these conversion rights have been extinguished in full.
SQS has, on the basis of the resolution of the General Meeting of 14 September 2005, undertaken to grant the vendor of the shares in SQS Group (UK) Ltd convertible bonds in a total nominal amount of € 53t, divided into 52,800 convertible bonds of a nominal value of € 1.00 each, if the party entitled pays into SQS the nominal amount of € 1.00 per share. The exercise of the right of conversion is limited in time up until 31 July 2008. Up until completion of the preparation of these Financial Statements, the party entitled had not exercised this right.
20. Notes to the Statement of Cash flows
The cash flow statement shows how the funds of the Group have changed in the course of the business year through outflows and inflows of funds. The payments are arranged according to investment, financing and business activities.
The sources of funds on which the cash flow statement is based consist of cash and cash equivalents (cash on hand and bank balances) as well as tradable securities.
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