29th Apr 2008 07:01
Flomerics Group PLC29 April 2008 Flomerics Group PLC29 April 2008 FLOMERICS GROUP PLC ("Flomerics" or "the Company") Preliminary Results for the year ended 31 December 2007 Flomerics Group PLC, the global supplier of simulation software to the engineeringand electronics industries, today announces its results for the year ended 31December 2007. Highlights • Record turnover up 14% at £16.3 million (2006 : £14.2 million); Turnover up 18% excluding electromagnetics business) • Adjusted Profit before tax* - £1.3m (2006: £1.5 million) • Proposed dividend increased by 14% to 1.6p per share (2006 : 1.4p) • Cash balance at year end £2.9 million (2006: £2.3 million). Cash balances at 31 March 2008 were in excess of £5.5m. • Disposal of non core electromagnetics business for £1.6m agreed in December 2007 Transaction completed in January 08 and full payment received by 31 March 2008. • Asia Pacific and European revenues up by 35% and 25% respectively • Very positive start to trading in 2008 *Adjusted Profit before tax is before impairment of goodwill, amortisation ofintangible assets (excluding software and R&D capitalization), impairment ofgoodwill, exceptional items and share-based payments. There were no exceptionalitems in 2007. Commenting on the results, David Mann, Chairman, said: "Investments in sales and marketing during 2007 have placed the Company in anexcellent position to take advantage of the wider market opportunity for the EFDproducts whilst maintaining Flomerics' leading position in the field ofelectronics cooling. As a result, the Directors are excited about the futureand confident that the investments will start to deliver a significant increasein shareholder value." Enquiries: Flomerics 020 8487 3000Gary Carter, Chief ExecutiveKeith Butcher, Finance Director Conduit PR 020 7429 6666Charlie Geller/ Christian Taylor-Wilkinson Oriel Securities 020 7710 7600Nominated AdviserAndrew Edwards CHAIRMAN'S STATEMENT During 2007 there was good progress with the strategic repositioning ofFlomerics following the acquisition of NIKA GmbH ('NIKA') in July 2006.Flomerics is continuing to maintain a strong competitive position in itsoriginal field, the application of fluid flow simulation to electronics cooling,where it is a world leader. It now addresses this specialist market both by itsoriginal product, FLOTHERM, and by the EFD product range acquired from NIKA. Atthe same time the Company is taking advantage of EFD to address much widerapplications of fluid flow simulation and hence a much larger market. Theelectromagnetics simulation business ("the EM business") was disposed of inJanuary 2008 so that Flomerics can have greater focus on fluid flow simulation. Good progress was made with integrating the FLOMERICS and NIKA technologies andincreasing the sales team to implement the new strategy. The Company is still atan early stage in building the EFD business outside of its original markets, butthe strong growth in sales of the product has demonstrated the significantbenefits that the investments can bring to future periods. Results Total revenues for the year ended 31 December 2007 were up by 14% at £16.3million (2006: £14.2 million). If revenues from the discontinued EM businessare excluded, revenues were up by 18% to £14.6m (2006: £12.4m) Profit before tax, amortisation of intangible assets (excluding software and R&Dcapitalisation), goodwill impairment and share-based payments and exceptionals("adjusted PBT") was £1.3 million (2006: £1.5 million) reflecting theinvestments made during the year. There were no exceptional items in 2007 (2006:£222,000). The unadjusted loss for the year was £1.90 million (2006: £0.80million profit) and basic loss per share was 8.81p (2006 : earnings per share4.45p) Cash generated from operations was £1.9 million (2006: £0.9 million). Cashbalances for the group at 31 December 2007 were £2.97m million (2006: £2.34million). After the year end £1.6 million cash was received from the disposal ofthe EM business. As at 31 March 2008 cash balances were in excess of £5.5m. Dividend The board is pleased with the progress being made and is proposing that thedividend should be increased by 14% to 1.6p per share (2006 : 1.4p). Subject toapproval at the Annual General Meeting, the dividend will be paid on 3 June 2008to shareholders on the register at 9 May 2008. Regional performance In Europe and Asia-Pacific there was good revenue growth of 25% and 35%,respectively, compared to 2006. In the US, revenue fell slightly as a result ofthe loss of some key sales staff, but we now have a full team in place toimplement the new strategy there. The breakdown of turnover by region was:Europe 45.8%, Asia Pacific 21.5% and US 31.7%. Impairment of intangible assets The main impact of IFRS on the 2007 accounts was that the acquisition of NIKAhas been restated under IFRS 3 and a value attributed to the intangible assetsacquired (such as customer lists and technology) with the balance deemed to begoodwill. These intangible assets have been amortised over an appropriateperiod and the residual goodwill arising was subject to an impairment review.After this review goodwill was written down by £2.22m resulting in a totalcharge to the P&L of £3.1m in respect of these two items. Disposal On 20 December 2007 the Board announced the disposal of the Group'selectromagnetics business to CST GmbH for a consideration of £1.6 million. Thesale was completed on 31 January 2008 and the gain on disposal will berecognised in 2008. The proceeds will be used to enhance the Company's positionfor future growth in its core business areas. Outlook There is the opportunity for sales of the EFD product range to continue growingstrongly and to make an increasingly significant contribution to the business.Investments in sales and marketing during 2007 have placed the Company in anexcellent position to take advantage of the wider market opportunity for the EFDproducts whilst maintaining Flomerics' leading position in the field ofelectronics cooling. As a result, the Directors are excited about the futureand confident that the investments will start to deliver a significant increasein shareholder value. David MannChairman28 April 2008 CHIEF EXECUTIVE'S REVIEW 2007 was a year of investment for Flomerics: investment in expanding our salesand support teams to drive sales of the EFD products acquired in 2006 (as partof the NIKA GmbH acquisition); investment in marketing to begin to build the 'EFD' brand in North America and in Europe outside of its original markets andinvestment in collaboration of our development operations in London, Moscow andIndia. Much was accomplished during the year which has put us into a strongposition to build sales and take advantage of the synergies between our variousproducts and technologies in 2008 and beyond. Investment in Sales The early part of 2007 saw our Regional Sales Directors active in expandingtheir teams to take advantage of the opportunity to sell the EFD products interritories where NIKA had not previously invested. The main focus for this wasin the USA, France and the UK. Finding the right people and organising theexpanded teams to give the best coverage of the geography and the opportunitiestook longer than we had anticipated. However we finished the year with a fullcomplement of sales people and the engineers to support their activities.Alongside the recruitment exercise we were active in making sure that all ourengineers were trained in our full suite of Computational Fluid Dynamics (CFD)products (EFD, FLOTHERM and FLOVENT). Investment in Marketing Following the disposal of the EM Business the group is now focussed on the CFDmarket. This broadly divides into two sub-markets: - Electronics Cooling (covered by our FLOTHERM, EFD and MicReD products) - Mechanical Design (covered by our EFD and FLOVENT products ) A market survey carried out in 2007 confirmed once again that Flomerics'flagship product, FLOTHERM, remains the clear market leader in thermal analysisof electronic equipment. At the same time, the EFD products, which have enjoyedgreat success in central Europe and in Japan but at the time of the acquisitionby Flomerics were little known outside of these territories, have seen asignificant increase in brand awareness in both North America and other parts ofEurope. The relationships with our mechanical CAD (Computer Aided Design) partners, inparticular SolidWorks and PTC, continued and in the case of SolidWorks saw therelease of a new product called FloXpress. FloXpress is a new flow simulationproduct that is fully embedded within SolidWorks(R)2008 3D CAD software and isavailable free of charge to all SolidWorks(R)2008 users. It is a cut-downversion of the popular COSMOSFloWorks product - also developed by Flomerics -that enables engineers and designers to simulate complex, 3D fluid flow and heattransfer processes via a simple, wizard-driven user interface inside theSolidWorks user environment. The release of this product means a big increasein the number of mechanical engineers able to access this remarkable technologyand this is expected to increase demand for Flomerics' software products in thefuture. Building familiarity with our products among young engineers and studentscontinues to be an important part of our marketing effort, and 2007 saw asignificant increase in the use of EFD by universities and research institutesaround the world. Many of Flomerics' customers are delighted to share their positive experiencesof using our products, and we continue to publish these success stories toassist our sales efforts and provide strong editorial for engineeringpublications and web portals around the world. During 2007 we published a recordnumber of success stories which generated a good response, increased our website traffic to record levels and led to an increased number of requests forsoftware demonstrations - especially for the EFD products. Research and Development During 2007 we began the first phase of our plans to make better use of theconsiderable expertise and technology managed and developed in our developmentcentres in the UK, Russia, India and Hungary. The first evidence of this was therelease of an electronics specific module to be used alongside the EFD products.The EFD products were already making inroads into certain electronicsapplications but the introduction of this new product which saw the UK basedFLOTHERM and Moscow based EFD teams working closely together, further enhancesthe dominant position that Flomerics has long held in the thermal design ofelectronics. Disposal of Electromagnetics Business In December 2007 we announced the divestment of our electromagnetics line ofbusiness ("the EM Business") for £1.6million, in order to increase our focus onareas where the Group has much better opportunities for growth. This disposalwas completed on 31 January 2008. Since entering the electromagnetics simulation market in 1999, Flomerics builtup the usage of its products around the world. However, with only a small shareof the market the directors concluded that it would be difficult on our own toachieve a strong competitive position in this field. The sale of the EM Businessto CST Gmbh, a company that specialises in electromagnetics simulation, signalsthe beginning of a strategic relationship providing best-in-class solutions tocustomers requiring understanding of both CFD and EM problems. Finance DirectorIn December, we announced the appointment of a new Finance Director. KeithButcher joined Flomerics from DataCash Group plc where he became FinanceDirector in 2002. During his time with DataCash he played an important role aspart of the management team overseeing a substantial growth in the company'smarket capitalisation. Keith's considerable experience is already having apositive impact on the running of the company. 2007 Achievements Despite difficult trading conditions in some territories we saw good growth inbillings in most areas of our business. Regionally, Europe (+25%) and Asia-Pacific (+35%) saw good revenue growth in2007, with a particularly strong performance in China and South-East Asia wherewe expect the opportunity to continue to grow. US revenues fell slightly as wewere impacted by the loss of a number of key sales staff, however we now have afull team in place. Turnover by region was: Europe 45.8% (2006: 42%), AsiaPacific 21.5% (2006:19%) and US 31.7% (2006:39%). Sales of the EFD products grew strongly and FLOVENT continued the strong growthfrom last year. Flomerics' business is made up of new licence sales and recurring revenues fromexisting customers who each year will renew their commitment with us for afurther year of maintenance or to extend an existing lease arrangement.Particularly encouraging in 2007 was the growth in new business which saw animproving trend throughout the year as the investments made in the sales teamsand in marketing started to have an impact. Flomerics 20th Anniversary Flomerics celebrates its 20th anniversary as an independent company in 2008,placing it firmly into a rare and elite group of engineering software companiesthat have prospered for such a long period. This landmark is a testimony to thecompany's high-integrity, people-oriented culture and its core concept ofdelivering engineering simulation software for use by designers and engineersrather than just full-time analysts and specialists. Flomerics has reached anage that puts it among the most established companies involved in computer aidedengineering, and has just completed a record-breaking fiscal year where it hasachieved a new high in revenue and seen its worldwide customer base grow to over2,500 sites and over 7,000 individuals. The Future The last three years have seen many changes at Flomerics. In addition to theincorporation of the former NIKA team, we have changed almost half of our seniormanagement team and by doing so added a significant level of sales managementexperience. We have made two acquisitions (MicReD and NIKA) and disposed ofour electromagnetics business. These changes together with the investments madein 2007 and the increased focus on our core CFD business will allow us to focuson delivering results in 2008. We are delighted with the positive start totrading in 2008 and I look forward to seeing the results of our hard work beginto show through. Gary CarterChief Executive28 April 2008 Flomerics Group plcConsolidated income statementYear ended 31 December Dis Dis Continuing -continued Year Continuing -continued Year operations operations ended operations operations ended 2007 2007 2007 2006 2006 2006 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 14,647 1,623 16,270 12,433 1,788 14,221Cost of sales (699) (31) (730) (519) (31) (550) Gross profit 13,948 1,592 15,540 11,914 1,757 13,671 Other operating income 61 - 61 61 - 61Impairment of goodwill (2,223) - (2,223) - - -Other administrative expenses (13,845) (1,336) (15,181) (11,314) (1,279) (12,593)Exceptional expenses - - - (222) - (222)Total administrative expenses (16,068) (1,336) (17,404) (11,536) (1,279) (12,815) Operating (loss) / profit (2,059) 256 (1,803) 439 478 917 Finance income 66 - 66 101 - 101Finance costs (25) - (25) (164) - (164) (Loss) / profit before tax (2,018) 256 (1,762) 376 478 854 Tax (57) (77) (134) 93 (143) (50) (Loss) / profit for the year (2,075) 179 (1,896) 469 335 804 (Loss)/earnings per share 2007 2006 Pence Pence From continuing operations:Basic (9.65) 2.59 Diluted (9.65) 2.04 From continuing and discontinued operations:Basic (8.81) 4.45 Diluted (8.81) 3.50 Consolidated statement of changes in equityfor the year ended 31 December 2007 Year ended Year ended 2007 2006 £'000 £'000 Balance at start of year 14,843 6,853 (Loss) / profit for the year (1,896) 804 Currency translation movement 1,018 (302) Deferred tax on currency translation movement (112) 16 Net income/(expense) recognised directly in equity 906 (286) Total recognised income and expense for the year (990) 518 Dividends paid (299) (195) Share based payment 116 97 Issue of new shares 43 7,603 Movements in merger reserve 145 - Movements in shares to be issued reserve - (33) Balance at end of year 13,858 14,843 Flomerics Group plcConsolidated balance sheet31 December 2007 2007 2006 £'000 £'000Non-current assetsProperty, plant and equipment 542 520Investment property - 1,189Goodwill 5,706 7,554Intangible assets 3,902 4,141Deferred tax asset 253 423 Total non-current assets 10,403 13,827 Current assetsInventories 110 33Trade and other receivables 6,149 5,467Cash and cash equivalents 2,971 2,339Assets held for sale 1,492 - Total current assets 10,722 7,839 Total assets 21,125 21,666 Current liabilitiesBank overdrafts and loans (76) (71)Trade and other payables (5,847) (5,217)Current tax liabilities (23) (14) Total current liabilities (5,946) (5,302) Non-current liabilitiesBank loans (229) (305)Deferred tax liabilities (1,092) (1,216) Total non current liabilities (1,321) (1,521) Total liabilities (7,267) (6,823) Total net assets 13,858 14,843 EquityShare capital 216 213Share premium account 1,775 1,735Shares to be issued 1,112 1,112Merger reserve 7,330 7,185Translation reserves 716 (302)Retained earnings 2,709 4,900 Total equity 13,858 14,843 The financial statements were approved by the board of directors and authorisedfor issue on 28 April 2008. They were signed on its behalf by: G C Carter K ButcherDirector Director Consolidated cash flow statementfor the year ended 31 December 2007 Year ended Year ended 2007 2006 £'000 £'000 Profit for the year (1,896) 804 Adjustments for:Finance income (66) (101)Finance costs 25 164Income tax expense / (income) 134 50Depreciation of plant and equipment 291 240Depreciation of investment property 14 14Amortisation of intangible assets 901 577Impairment of goodwill 2,223 -Share-based payment expense 116 97Loss on disposal of property, plant and equipment - 2 Operating cash flows before movements in working capital 1,742 1,847(Increase)/decrease in inventories (77) 30(Increase) in receivables (682) ((1,081))Increase in payables 921 89 Cash generated by operations 1,904 885 Income taxes paid (191) (176)Interest paid (25) (164) Net cash from operating activities 1,688 545 Cash flows from investing activities:Interest received 66 101Proceeds on disposal of property, plant and equipment 24 5Purchases of property, plant and equipment (333) (306)Purchase of intangibles (313) (312)Acquisition of subsidiary (net of cash acquired) - (1,418)Deferred consideration on acquisition of subsidiary (259) - Net cash used in investing activities (815) (1,930) Cash flows from financing activities:Proceeds from issue of shares 38 -Dividends paid (299) (195)Repayment of loans (71) (68) Net cash used in financing activities (332) (263) Net increase / (decrease) in cash and cash equivalents 541 (1,648) Cash and cash equivalents at the start of the year 2,339 4,081 Effect of foreign exchange rate changes 91 (94) Cash and cash equivalents at end of year 2,971 2,339 Notes to the Preliminary Resultsfor the year ended 31 December 2007 1 General information Flomerics Group plc is a company incorporated in the United Kingdom under theCompanies Act 1985. The address of the registered office is 81 Bridge Road,Hampton Court, Surrey, KT8 9HH. The Group's financial statements for the year ended 31 December 2007, from whichthis financial information has been extracted, and for the comparative yearended 31 December 2006 are prepared in accordance with International FinancialReporting Standards ('IFRS'). The financial information shown for the years ended 31 December 2007 and 2006set out above does not constitute statutory accounts but is derived from thoseaccounts. The results have been prepared using accounting policies consistentwith those used in the preparation of the statutory accounts. The financialinformation contained in this announcement does not constitute statutoryaccounts within the meaning of Section 240 of the Companies Act 1985. Statutoryaccounts for 2006 have been delivered to the registrar of companes and those for2007 will be delivered following the company's annual general meeting. Theauditors have reported on those accounts; their reports were unqualified, didnot contain statements under s 237(2) or (3) of the companies act 1985, and didnot contain any matters to which the auditors drew attention without qualifyingtheir report. . Copies of this announcement are available at the registered offices of theCompany (81 Bridge Road, Hampton Court, Surrey, KT8 9HH) and at the offices ofthe Company's nominated advisors, Oriel Securities Limited. (125 Wood Street,London, EC2V 7AN) for a period of 14 days from the date hereof. 2 Significant accounting policies Basis of accounting The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRSs). The financial statements have also beenprepared in accordance with IFRSs adopted by the European Union and thereforethe group financial statements comply with Article 4 of the EU IAS Regulation.While the financial information included in this preliminary announcement hasbeen prepared in accordance with the recognition and measurement criteria ofIFRS, and the policies set out below, the announcement does not itself containsufficient information to comply with IFRSs. The company expects to publish fullfinancial statements that comply with IFRSs on 5 May 2008. The principal accounting policies adopted are set out below. First time adoption The group has adopted IFRS from 1 January 2006 ('the date of transition'). Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company (its subsidiaries) made up to31 December each year. Control is achieved where the Company has the power togovern the financial and operating policies of an investee entity so as toobtain benefits from its activities. The Group income statement includes theresults of subsidiaries acquired or disposed of during the year from theeffective date of acquisition or up to the effective date of disposal, asappropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used bythe group. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. Business combinations The acquisition of subsidiaries or trade and assets, is accounted for using thepurchase method. The cost of the acquisition is measured at the aggregate of thefair values, at the date of exchange, of assets given, liabilities incurred orassumed, and equity instruments issued or to be issued, by the Group in exchangefor control of the acquiree, plus any costs directly attributable to thebusiness combination. The acquiree's identifiable assets, liabilities andcontingent liabilities that meet the conditions for recognition under IFRS 3 arerecognised at their fair value at the acquisition date. Goodwill arising on acquisition is recognised as an asset and initially measuredat cost and is accounted for according to the policy below. The Group has taken the exemption conferred in IFRS 1, "First-time Adoption ofInternational Financial Reporting Standards", not to restate businesscombinations prior to the transition date of 1 January 2006 under IFRS 3. Goodwill Goodwill represents the excess of the cost of acquisition over the Group'sinterest in the fair value of the identifiable assets, intangible fixed assetsand liabilities of a subsidiary, or acquired sole trade business at the date ofacquisition. Goodwill is initially recognised as an asset at cost and issubsequently measured at cost less any accumulated impairment losses. Goodwillwhich is recognised as an asset is reviewed for impairment at least annually.Any impairment is recognised immediately in the Group income statement and isnot subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of theGroup's cash-generating units expected to benefit from the synergies of thecombination. Cash-generating units to which goodwill has been allocated aretested for impairment annually, or more frequently when there is an indicationthat the unit may be impaired. If the recoverable amount of the cash-generatingunit is less than the carrying amount of the unit, the impairment loss isallocated first to reduce the carrying amount of any goodwill allocated to theunit and then to the other assets of the unit pro-rata on the basis of thecarrying amount of each asset in the unit. An impairment loss recognised forgoodwill is not reversed in a subsequent period. On disposal of a subsidiary the attributable amount of goodwill is included inthe determination of the profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS has beenretained at the previous UK GAAP amounts subject to being tested for impairmentat that date and subsequently as required by the provisions of IAS 36 "impairment of assets". Intangible assets Intangible assets with a finite useful life are carried at cost lessamortisation and any impairment losses. Intangible assets represent items whichhave been separately identified under IFRS 3 arising in business combinations,or meet the recognition criteria of IAS 38, "Intangible Assets". These assetscomprise of customer relationships, contract based asset, completed technologyand non competition agreements. Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cash flows are discountedto their present value using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to theasset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairment lossis recognised in the income statement as an expense immediately, unless therelevant asset is carried at a revalued amount, in which case the impairmentloss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of an impairmentloss is recognised as income immediately, unless the relevant asset is carriedat a revalued amount, in which case the reversal of the impairment loss istreated as a revaluation increase. Amortisation of intangible assets acquired in a business combination iscalculated over the following periods on a straight line basis: Customer relationships - 10% per annumContract based assets - 50% per annumCompleted technology - over a useful life of 7 yearsNon-competition agreement - 25% per annum Amortisation of other intangible assets (computer software) is calculated usingthe straight-line method to allocate the cost of the asset less its assessedrealisable value over its estimated useful life, which equates to 33% to 50% perannum. Impairment of financial assets Determining whether a provision is required against trade receivables requiresmanagement to make a judgment of the likely proportion of receivables that willnot be recovered. In order to establish a reasonable provisioning level,therefore, the directors use historical trends in order to predict likelyirrecoverable receivables at any point in time. When an event occurs which makesit more likely than not that a debt will not be recovered, provision is madeaccordingly. For further discussion on trade and other receivables refer to note19 to the accounts. Internally-generated intangible assets - research and development expenditure Expenditure on research activities is recognised as an expense in the period inwhich it is incurred. Any internally-generated intangible asset arising from the Group's developmentprojects are recognised only if all of the following conditions are met: • The technical feasibility of completing the intangible asset so that itwill be available for use or sale. • The intention to complete the intangible asset and use or sell it. • The ability to use or sell the intangible asset. • How the intangible asset will generate probable future economicbenefits. Among other things, the Group can demonstrate the existence of amarket for the output of the intangible asset or the intangible asset itself or,if it is to be used internally, the usefulness of the intangible asset. • The availability of adequate technical, financial and other resources tocomplete the development and to use or sell the intangible asset. • Its ability to measure reliably the expenditure attributable to theintangible asset during its development. Internally-generated intangible assets are amortised on a straight-line basisover their useful lives of three years. Where no internally-generatedintangible asset can be recognised, development expenditure is recognised as anexpense in the period in which it is incurred. Capitalisation of internal research and development costs In order to comply with the group's accounting policy relating to internallygenerated intangible assets (research and development expenditure), thedirectors are required to assess the fair value of the costs incurred on thegroup's development projects that are allowed to be capitalized. The vastmajority of these costs are salary related, representing the costs of theemployees conducting the research and development. In order to measure the coststhat should be capitalized, the directors conduct an exercise whereby theyestimate the proportion of each employee's working hours that have been spent onqualifying research and development projects. The directors are then able todetermine that this proportion of each employee's salary is capital in nature,and is therefore accounted for accordingly. The directors are of the opinionthat as a number of people are working on such projects at any time, and thatthey can reliably assess the amount of time that is being spent by eachindividual on qualifying capital research, that this is a reasonably accurateestimation technique. The total value of internal costs capitalized asintangible assets related to research and development at the balance sheet datewas £336,000 (2006 - £103,000). Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value inuse of the cash-generating units to which goodwill has been allocated. The valuein use calculation requires the group to estimate the future cash flows expectedto arise from the cash-generating units and a suitable discount rate in order tocalculate present value. Actual events may vary materially from managementexpectation. Following the impairment review the carrying value of goodwill for Nika GmbH wasimpaired in the year by £2,223,000. The directors consider the impairment to beappropriate to reflect the slower than initially anticipated sales growth of theproducts purchased with Nika GmbH. 3 Business and geographical segments Business segments For management purposes, the group is currently organised into one operatingdivision and it is on this basis that the group reports its primary segmentinformation. The principal activities of the group's operating division is the provision ofvirtual prototyping software and other related services. The group was alsopreviously involved in electromagnetic virtual prototyping. This operation wasdiscontinued during the period, in accordance with IFRS 5. Geographical segments The group's operations are located in the United States of America, Europe andthe Far East. The following table provides an analysis of the group's sales by geographicalmarket, irrespective of the origin of the goods/services: Sales revenue by geographical market 2007 2006 £'000 £'000 United States of America 5,150 5,563Europe 7,450 5,946Far East 3,670 2,712 16,270 14,221 Revenue from the group's discontinued operations was derived as follows: UnitedStates of America (2007: £586,000, 2006: £832,000), Europe (2007: £602,000,2006: £477,000) and the Far East (2007: £435,000, 2006: £478,000) 4. Discontinued operations On 20 December 2007, the group entered into a sale agreement to dispose of theelectromagnetics division, which carried out all of the group's electromagneticvirtual prototyping operations. The disposal completed on 31 January 2008, onwhich date control of the division passed to the acquirer. The results of the discontinued operations, which have been included in theconsolidated income statement, were as follows: 2007 2006 £'000 £'000 Revenue 1,623 1,787Expenses other than finance costs (1,367) (1,309) Profit before taxation 256 478Tax expense (77) (143) Profit for the year 179 335 During the year, the electromagnetics division contributed £179,000 (2006:£335,000) to the group's net operating cash flows, and made no payments inrespect of investing activities or financing activities (2006 - £nil). The major classes of assets and liabilities of the electromagnetics division areas follows: 2007 £'000 Goodwill and other intangible assets 296Property, plant and equipment 19 Total assets of division being net assets of disposal group 315 5. Goodwill £'000CostAt 1 January 2006 1,353Exchange differences (99)Recognised on acquisition of a subsidiary 6,370Other changes (70) At 1 January 2007 7,554 Exchange differences 554Reclassified as held for sale (294)Other changes 115 At 31 December 2007 7,929 Accumulated impairment lossesAt 1 January 2006 and 1 January 2007 -Impairment charge in the year 2,223 At 31 December 2007 2,223 Carrying amountAt 31 December 2007 5,706 At 31 December 2006 7,554 Goodwill for Nika GmbH has been retranslated at year end as the underlyinggoodwill is in Euros. Following the impairment review the carrying value of goodwill for Nika GmbH wasimpaired by £2,223,000. The directors consider the impairment to be appropriateto reflect the slower than initially anticipated sales growth of the productspurchased with Nika GmbH. Goodwill for Microelectronics Research and Development Limited has increasedfrom the previous year as a result of the year 2 earn out consideration being inexcess of amounts accrued for at the last reporting date. The directors havecarried out an impairment review of the carrying value goodwill forMicroelectronics Research and Development Limited and do not consider anyimpairment to be appropriate. 6. Other intangible assets Customer Contract Non- relationship leased Completed competition Develop- intangible technology agreement ment cost Software Total £'000 £'000 £'000 £'000 £'000 £'000 £'000CostAt 1 January 2006 - - - - 132 344 476Additions - - - - 77 235 312Disposals - - - - - (4) (4)Acquired on acquisition ofa subsidiary 230 236 3,647 92 - - 4,205Foreign exchange adjustment (4) (4) (59) (1) - (12) (80) At 1 January 2007 226 232 3,588 91 209 563 4,909 Additions - - - - 260 53 313Disposals - - - - - (6) (6)Reclassified as held for sale - - - - - (4) (4)Foreign exchange adjustment 22 21 336 8 - 2 389 At 31 December 2007 248 253 3,924 99 469 608 5,601 AmortisationAt 1 January 2006 - - - - - 209 209Charge for the year 11 58 256 11 106 135 577Disposals - - - - - (4) (4)Foreign exchange adjustment - - (3) - - (11) (14) At 1 January 2007 11 58 253 11 106 329 768 Charge for the year 25 127 561 25 27 136 901Disposals - - - - - (6) (6)Reclassified as held for sale - - - - - (2) (2)Foreign exchange adjustment 2 5 27 1 - 3 38 At 31 December 2007 38 190 841 37 133 460 1,699 Carrying amountAt 31 December 2007 210 63 3,083 62 336 148 3,902 At 31 December 2006 215 174 3,335 80 103 234 4,141 The amortisation period for development costs incurred on the group'sdevelopment is 3 years. 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