29th Jun 2006 07:02
Micro Focus International plc29 June 2006 29 June 2006: embargoed for 7.00am Micro Focus International plc Preliminary results for the year to 30 April 2006 New management team in place Micro Focus International plc ("Micro Focus", "the Company" or "the Group", LSE:MCRO.L) announces full year results for the year to 30 April 2006. Key financial highlights • Turnover US$143.7m (2005: US$150.6m)• Operating profit before exceptional items* US$36.9m (2005: US$47.9m)• EBITDA** before exceptional items* US$38.8m (2005: US$50.0m)• Profit before tax US$22.6m (2005: US$32.6m)• Basic earnings per share*** before exceptional items* 14.4 cents (2005: 18.6 cents)• Net cash balance as at 30 April 2006, US$55.9m (2005: net debt of US$78.6m)• Final proposed dividend of 4 cents per share; total dividend for the year of 6 cents per share • Operating profit US$22.7m (2005: US$40.9m)• EBITDA** US$24.5m (2005: US$43.0m)• Basic earnings per share of 8.3 cents (2005: 14.3 cents) Key operational highlights• New management team in place o Stephen Kelly joined as Chief Executive Officer on 1 May 2006 o Nick Bray joined as Chief Financial Officer on 3 January 2006• Cost reduction programme to reduce fixed costs by approximately US$10.0m announced 6 April 2006 progressing well, with some savings already delivered in 4Q06 * Exceptional items are detailed in note 7** EBITDA is reconciled to operating profit in note 6*** Earnings per share are detailed in note 8 Kevin Loosemore, Chairman of Micro Focus, commented: "Whilst the full year results reflected a disappointing year for the business,the Company is financially strong and generated strong cash flow from itsoperating activities. "Having previously reported on the operational issues that lay behind ourperformance,we have made solid progress in addressing them. We identified thepotential to reduce our fixed costs and consequently began a cost reductionprogramme in April. The programme was designed to improve overall returns whilemaintaining the fabric of the business and the Company's sales capability and isprogressing well. "I am delighted that, with the appointments of Stephen Kelly and Nick Bray, wenow have a strong and experienced management team in place to drive the businessforward. Micro Focus is focused on growth and I remain confident that theCompany will deliver good value to all its stakeholders." Stephen Kelly, Chief Executive Officer of Micro Focus, commented: "The primary focus of the new management team is to continue to restore thebusiness to achieve significant, sustainable, profitable growth and to enhanceshareholder confidence over time. "Tough action has been taken in regard to costs, the benefits of which we expectto flow through to operating profits in FY2007. Returning to sustainable revenuegrowth is the key factor that will determine the long term success of theCompany and, while I believe we have broadly arrested the decline, our revenueoutlook remains cautious as we stabilise and focus the business. In a shortspace of time, we have made many changes to drive alignment and operationalexcellence as well as initiating a broader review of the market andopportunities for growth. I look forward to providing a further update onprogress at the half year." Enquiries Micro Focus Tel: +44 (0)1635 32646 Kevin Loosemore, Non Executive Chairman Stephen Kelly, Chief Executive Officer Nick Bray, Chief Financial Officer Financial Dynamics Tel: +44 (0)20 7831 3113 Giles Sanderson Harriet Keen Haya Chelhot About Micro Focus Micro Focus provides software that enables customers to significantly enhancetheir existing or "legacy" applications in a modern context. Through improvementof existing systems, our customers are able to avoid the high risk of, andassociated costs of replacement. Chairman's statement The past year has been very disappointing for the business. In September 2005and February 2006 we revised downwards our expectations for growth for the yearahead. We have since made solid progress in addressing the operational issuesthat lay behind our performance, restructured the Company to reduce fixed costsand put a strong new management team in place. As we reached the end of thefinancial year, it was encouraging that we marginally exceeded our revisedfourth quarter revenue expectations. At the beginning of the second quarter, we reported that trading for August hadbeen weaker than usual for two principal reasons: firstly, the rate of revenuecontribution from our larger, global Systems Integrator (SI) partners had beenslower than anticipated and secondly, disruptions within the sales force haddelayed a planned expansion of the sales team. As announced at the interim results, significant incremental revenue from ourglobal SI partners was not anticipated in the second half of the year to 30April 2006, given the size and nature of these organisations. However, wecontinue to focus on strengthening and expanding these relationships. We havealso maintained a strong focus on strengthening our sales force as a priorityfor the business. There is still some work to do in this regard but we arepleased with the progress made to date. A further update on trading was announced at the beginning of the fourth quarterdue to a number of changes in trading which had occurred since the half-yearend. These included delays in customer decisions and failure to close largeropportunities; the knock-on impact on maintenance revenues due to lower licencesales; and a reduction in the rate of closure of smaller deals. We are pleased to report that, since then, we have successfully completed asmall number of larger deals. While this portion of our revenues remainsinherently lumpy, we continue to focus on it as an important element inimproving our overall sales performance. On 6 April 2006 the Company announced a cost reduction programme to improveoverall returns while maintaining the fabric of the business and the Company'ssales capability. We have made solid progress in this respect. The Board is delighted to welcome Stephen Kelly as Chief Executive Officer andNick Bray as Chief Financial Officer. Stephen joined Micro Focus on 1 May 2006.He has over 20 years experience in the software sector and was previously CEO ofNASDAQ-listed Chordiant Software Inc. Nick joined Micro Focus on 3 January 2006.He has broad experience in the IT sector, both in the US and Europe and waspreviously Group Finance Director of London-listed Fibernet Group plc. The Board would like to thank all of Micro Focus' employees for their continuedhard work and commitment throughout the last year. FY2006 was a disappointing year in many respects. However, the Board tookdecisive action to recruit a new, experienced management team which hasimplemented the rapid restructuring of the business. In Q4, it was encouragingto see that we exceeded our revised fourth-quarter expectations. Micro Focus isfocused on growth and I remain confident that the Company will deliver goodvalue to all its stakeholders. Kevin Loosemore, Chairman Initial thoughts from the Chief Executive Officer In the short time since joining Micro Focus, I have been impressed by thequality of our employees and our technical expertise as well as our very strongcustomer and partner base. While the full year results were disappointing and below those of the previousyear, the Company is financially strong and has generated strong cash flow fromoperating activities. The cash balance at 30 April 2006 stood at US$56.1m. The Company has an enviable customer base with fifty percent of turnover beingderived from secure and predictable maintenance revenues. A significantproportion of licence fee revenues are from our channel partners. During theyear we continued to successfully conduct direct sales business with many of theworlds leading companies. The primary focus of the new management team is to continue to restore thebusiness to achieve significant, sustainable, profitable growth and to enhanceshareholder confidence over time. The fundamentals of the business are strong - great customers benefiting fromstrong returns on investment, high quality products and committed and talentedpeople. I believe that we have broadly arrested the decline and have thefoundations for a future of profitable growth. FY2007 will be a transition yearand driving the initial recovery of the licence business to deliver revenuegrowth will be a key focus. In a short space of time, tough action has been taken in regard to costs and wehave made many changes to drive alignment and operational excellence, as well asinitiating a broader review of the market and opportunities for growth. Outlook Our business model dictates that revenue growth will be largely dependent onachieving increased licence sales. While we anticipate that a proportion ofthese will be larger deals, this revenue stream is inherently lumpy. The smallest proportion of our revenues are derived from consultancy and it isanticipated that these revenues will remain a minor proportion of total revenuesfor the year ahead. Given the lower licence fee sales in the year to April2006, as compared to those achieved in the prior year, we anticipate thatmaintenance revenues for the current year will be about the same as thosereported in the year to 30 April 2006 (assuming that the retention rate ofexisting customers remains constant). Returning to sustainable revenue growth is the key factor that will determinethe long term success of the Company. Thus, management's emphasis will be onlicence fee sales to drive growth in the year to 30 April 2007. In this regard,whilst our foundations are solid and we have made good progress in addressingthe operational issues identified in the last financial year, our revenueoutlook remains cautious as we stabilise and focus the business. Licence revenues in the second half of the year to 30 April 2006 were $32.8m andour run rate currently reflects a similar level for the first half of 2007. Ourability to return to revenue growth will depend primarily on the development andexecution of larger licence deals in the pipeline as we move through the year.We will provide a further update on progress at the half year. Expenses are expected to reduce following the restructuring, the benefits ofwhich we expect to flow through to operating profits in FY2007. Interest incomeis expected to increase as a result of increasing the Company's cash reserves. Stephen Kelly, Chief Executive Chief Financial Officer's review At the point of listing on the London Stock Exchange on 17 May 2005, the Companyacquired the entire issued share capital of Micro Focus International Limited byway of a share-for-share exchange, pursuant to which the previous shareholdersof Micro Focus International Limited were issued and allotted three ordinaryshares in the capital of the Company for every one ordinary share theypreviously held in Micro Focus International Limited. The results presented inthe financial information therefore represent those of the Micro FocusInternational Limited group up to 17 May 2005 and the Micro Focus InternationalPlc group from that date onwards. Turnover for the year ended 30 April 2006 was $143.7m (2005: $150.6m). Whilstthe year on year reduction was disappointing, we achieved a solid fourth quarterto end the year marginally above our revised expectations. Turnover for the year by geographic region was as follows: 2006 2005 $'000 $'000 North America 68,847 73,173Europe and the Middle East 54,038 57,365Rest of the World 20,803 20,107 Total turnover 143,688 150,645 Although the Group experienced declines in Europe and the Middle East and inNorth America, our strong overall performance in Japan, despite a difficultthird quarter, contributed to a positive result for the Rest of World. Of thedecrease in revenues of $7.0m, $4.3m was from our North American operation. Turnover for the year by category was as follows: Year ended 30 April 2006 2005 2004 $'000 % $'000 % $'000 % Licence fees 67,985 47.3 79,860 53.0 64,211 50.9Maintenance fees 71,860 50.0 66,705 44.3 57,980 45.9Consultancy fees 3,843 2.7 4,080 2.7 4,077 3.2 Total turnover 143,688 100.0 150,645 100.0 126,268 100.0 It can be seen that the reduction in total revenues for the year relatedprimarily to the fall in licence fees of $11.9m or 14.9% to $68.0m for the yearended 30 April 2006 (2005: $79.9m). This reduction was in part offset by a $5.2myear on year increase in maintenance fees to $71.9m for the year ended 30 April2006 (2005: $66.7m). Consulting revenues showed a modest decline but representonly a minor proportion of total revenues. In the year ended 30 April 2005, the Company signed a number of high valuelicence fee deals, principally in North America. This success was not, however,replicated in the year to 30 April 2006 and the flow of smaller deals did notincrease to compensate for this. While licence fee revenues decreased year onyear, they remain above the level achieved for the year ended 30 April 2004 of$64.2m and of prior years. Maintenance revenues are recognised evenly over the life of each contract, whichis typically twelve months. As such, the profit and loss recognition ofmaintenance revenue lags the initial licence fee sale (assuming a constantretention rate of existing customers). Thus, maintenance revenues of $71.9m forthe year to 30 April 2006 (2005: $66.7m) were ahead of the prior year in partdue to improved licence fee performance in the year to 30 April 2005 compared tothe year to 30 April 2004. Costs Cost of sales for the year ended 30 April 2006 increased by 10.9% to $12.1m(2005: $10.9m). The increase principally reflected higher temporary staff costsin our consulting organisation. Costs have since been reduced and theperformance of this organisation is under critical review with furtherimprovements required. Selling and distribution costs for the year remained relatively flat at $48.5mfor the year ended 30 April 2006 (2005: $48.1m). Reduced commission paymentswere offset by higher marketing, travel and other employee costs. Research and development expenses for the year reduced by 2.9% to $17.1m (2005:$17.6m), driven primarily by the fact that no significant bonus amounts werepaid to non-sales staff in the current year. Underlying administrative expenses increased to $29.1m (2005: £26.1m). In partthis was driven by the costs of being a public company. However, a number ofexpense items had been allowed to increase above expected levels and measureshave been taken to bring these costs back to an appropriate level. Totaladministrative expenses for the year increased by 30.6% to $43.3m (2005:$33.1m). One-off IPO related costs of $6.9m were paid during the year. On 6 April 2006, the Company announced a cost reduction programme. A number ofpotential savings have been identified which are expected to reduce Group fixedcosts by approximately $10.0m in the financial year to 30 April 2007, thebenefits of which we expect to flow through to operating profits in FY2007. Someof those saving have already been achieved in 4Q06. The programme was designedto improve overall returns while maintaining the fabric of the business and theCompany's sales capability and is progressing well. The one-off charge for thiscost reduction programme is $7.4m falling in the second half of the financialyear to 30 April 2006. Operating profit Operating profit before exceptional items was $36.9m (2005: $47.9m). Operatingprofit for the year ended 30 April 2006 reduced by 44.4% to $22.7m (2005:$40.9m) as a result of the lower revenues and higher costs as detailed above. EBITDA EBITDA before exceptional items reduced by 22.5% to $38.8m for the year ended 30April 2006. EBITDA reduced by 42.9% to $24.5m for the year ended 30 April 2006from $43.0m for the year ended 30 April 2005. Net interest income The IPO proceeds allowed the Company to repay all its outstanding loan balances.Since this time, interest has been generated on the available cash balance. As aresult, interest expenses reduced to $1.1m (2005: $8.7m), of which $0.7m relatesto early payment penalties which the Company deemed appropriate to avoid higherinterest charges. Tax on profit on ordinary activities Tax on profit on ordinary activities for the year ended 30 April 2006 reduced to$6.3m (2005: $11.6m). The Company has an effective tax rate of 28.1% (2005:35.5%). The reduction in the effective tax rate reflects changes to the Group'sstructure resulting from the IPO in May 2005. Profit for the financial year The net profit after tax for the year ended 30 April 2006 reduced by 22.9% to$16.2m (2005: $21.0m). Cash flow For the financial year ended 30 April 2006, the Company generated a net cashinflow from operating activities of $35.0m (2005: $44.5m). At 30 April 2006,the Company's net cash balance was US$55.9m (2005: net debt of US$78.6m). Dividend The Board has adopted a progressive dividend policy reflecting the long-termearnings and cash flow potential of Micro Focus whilst targeting a level ofdividend cover for the financial year ended 30 April 2006 of approximately 2.5times on a pre-exceptional earnings basis. In line with the above policyannounced at the time of the IPO the directors recommend payment of a finaldividend in respect of 2006 of 4 cents per share, which, taken together with theinterim dividend of 2 cents per share paid in January 2006, gives a totaldividend in respect of 2006 of 6 cents per share. Subject to shareholderapproval, the final dividend will be paid on 2 October 2006 to shareholders onthe register on 8 September 2006. Dividends will be paid in sterling based on an exchange rate of 1.82 US$/£,equivalent to approximately 2.2 pence per share, being the rate applicable on 28June 2006, the date of recommendation of the dividend by the Board. Nick Bray, Chief Financial Officer CONSOLIDATED INCOME STATEMENT (unaudited)For the year ended 30 April 2006 2006 2005Continuing operations Notes $'000 $'000 Turnover 4,5 143,688 150,645Total cost of sales (12,104) (10,914) Gross profit 131,584 139,731Selling and distribution costs (48,500) (48,105)Research and development expense (17,088) (17,598)Administrative expenses (43,263) (33,114) Operating profit 22,733 40,914 Analysed as:Operating profit before exceptional items 36,946 47,889Exceptional items 7 (14,213) (6,975) Operating profit 6 22,733 40,914 Interest payable and similar charges (1,137) (8,656)Interest receivable and similar income 962 382 Profit before tax 22,558 32,640Taxation 9 (6,332) (11,597) Profit after tax 16,226 21,043 Earnings per share expressed in cents per share- basic 8 8.25 14.28- diluted 8 8.17 13.98 Earnings per share expressed in pence per share- basic 4.68 7.67- diluted 4.63 7.51 CONSOLIDATED BALANCE SHEET (unaudited)As at 30 April 2006 2006 2005 Note $'000 $'000ASSETSNon-current assetsGoodwill 42,404 42,404Other intangible assets 7,637 8,084Property, plant and equipment 2,386 2,277Deferred tax assets 7,718 8,331 60,145 61,096Current assetsInventories 331 350Trade and other receivables 37,629 50,244Cash and cash equivalents 56,066 32,870 94,026 83,464 Total assets 154,171 144,560 LIABILITIESCurrent liabilitiesTrade and other payables 70,516 71,103Current tax liabilities 10,777 11,972Financial liabilities - borrowings 3 117 8,099 81,410 91,174 Non-current liabilitiesNon-current deferred income 6,720 6,932Deferred tax liabilities 8,446 7,748Financial liabilities - borrowings 3 94 103,367 15,260 118,047 Net assets / (liabilities) 57,501 (64,661) SHAREHOLDERS' EQUITYCapital and reserves attributable to the Company'sequity holdersShare capital 36,644 1Share premium 103,641 3,376Profit and loss reserve (deficit) (55,267) (67,869)Foreign currency translation reserve (432) (169)Other reserves (27,085) - Total shareholders' equity/(deficit) 57,501 (64,661) CONSOLIDATED CASH FLOW STATEMENT (unaudited)For the year ended 30 April 2006 2006 2005 $'000 $'000Cash flow from operating activitiesNet profit 16,226 21,043Adjustments for Net interest 175 8,274 Taxation 6,332 11,597 Depreciation 1,006 1,005 Loss on disposal of property, plant and equipment 17 19 Amortisation of intangibles 5,433 5,687 Share-based compensation (224) 3,581Changes in working capital Inventories 19 (38) Trade and other receivables 12,615 (12,317) Payables and other non current liabilities 371 15,610 Cash generated from operations 41,970 54,461Interest received 666 379Interest paid (1,551) (7,926)Tax paid (6,103) (2,368) Net cash from operating activities 34,982 44,546 Cash flows from investing activitiesPayments for intangible assets (4,986) (6,176)Purchase of property, plant and equipment (1,123) (1,329)Proceeds on disposal of tangible fixed assets - 23 Net cash used in investing activities (6,109) (7,482) Cash flows from financing activitiesProceeds from issue of ordinary share capital 109,823 506Proceeds from issue of new bank loan - 50,500Repayment of borrowings (111,250) -Dividends paid to shareholders (3,987) (78,800) Net cash used in financing activities (5,414) (27,794)Effects of exchange rate changes (263) (820) Net increase in cash and cash equivalents 23,196 8,450Cash and cash equivalents at 1 May 2005 32,870 24,420 Cash and cash equivalents at 30 April 2006 56,066 32,870 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)For the year ended 30 April 2006 Foreign currency Share Share translation Other Profit and capital premium reserve reserves loss Total reserve $'000 $'000 $'000 $'000 $'000 $'000 Balance as at 1 May 2004 1 2,871 118 - (13,156) (10,166)Currency translation differences - - (287) - - (287)Profit for the year - - - - 21,043 21,043Dividends - - - - (78,800) (78,800)Issue of share capital - 505 - - - 505Value of share options issuedunder employee share optionplans - - - - 3,044 3,044 Balance as at 30 April 2005 1 3,376 (169) - (67,869) (64,661) Currency translation differences - - (263) - - (263)Profit for the year - - - - 16,226 16,226Dividends - - - - (3,987) (3,987)Share for share exchange 27,085 - - (27,085) - -Issue of external share capital 9,558 100,265 - - - 109,823Value of share options issuedunder employee share option plans - - - - 363 363 Balance as at 30 April 2006 36,644 103,641 (432) (27,085) (55,267) 57,501 The amount transferred to other reserves as part of the share for share exchangerepresents the excess of the nominal value of shares issued in Micro FocusInternational Plc over the nominal value of share capital of Micro FocusInternational Limited. NOTES TO THE FINANCIAL STATEMENTS 1) Basis of preparation Micro Focus International Plc's consolidated financial statements were preparedin accordance with the United Kingdom Generally Accepted Accounting Principles("UK GAAP") until 30 April 2005. For the year ended 30 April 2006 the Group isrequired to prepare its annual consolidated financial statements in accordancewith accounting standards adopted in the European Union. As such thosefinancial statements will take account of the requirements and options of IFRS1'First-time Adoption of International Financial Reporting Standards ('IFRS') asthey relate to the 2005 comparatives included therein. The financial information based on IFRS for the year ended 30 April 2005 and 30April 2006 is unaudited and has been prepared in accordance with the Group'saccounting policies. The financial statements have been prepared under thehistorical cost convention. A summary of the more important Group accountingpolicies is set out below. Reconciliations and descriptions of the effect of the transition from UK GAAP toIFRS on the Group's equity and its net income and cash flows are provided inNote 11. The preliminary financial information has not been audited and does notconstitute statutory accounts within the meaning of Section 240 of the CompaniesAct 1985. The Company's statutory accounts for the year ended 30 April 2005,prepared under UK GAAP, have been delivered to the Registrar of Companies; thereport of the auditors on these accounts was unqualified and did not contain astatement under Section 237 (2) or (3) of the Companies Act 1985. On 17 May 2005, the Company acquired the entire issued share capital of MicroFocus International Limited by way of a share-for-share exchange, pursuant towhich the previous shareholders of Micro Focus International Limited were issuedand allotted three ordinary shares in the capital of the Company for every oneordinary share they previously held in Micro Focus International Limited. Theresults presented in the financial information therefore represent those of theMicro Focus International Limited group up to 17 May 2005 and the Micro FocusInternational Plc group from that date onwards. The preparation of financial statements requires estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Although the estimates are based on management's bestknowledge of the amounts, events or actions, actual results may differ fromthose estimates. Copies of the annual report for the year ended 30 April 2006 will be sent to allshareholders and will also be available on the company's website atwww.microfocus.com. Copies of the annual report for the year ended 30 April2005 can be obtained by writing to the Company Secretary, Micro FocusInternational plc, Old Bath Road, Newbury, Berkshire, RG14 1QN. This announcement was approved by the board of Micro Focus International Plc on28 June 2006. A summary of the significant accounting policies applied by the Group in theyear ended 30 April 2006 is provided below. A Consolidation On 17 May 2005 Micro Focus International Plc ("the Company") acquired, by meansof a share-for-share exchange, the share capital of Micro Focus InternationalLimited ("Operating Company"), a company incorporated in the Cayman Islands, andits wholly-owned subsidiaries (together "Operating Group"). The consolidatedfinancial statements comprise the results of the Operating Group up to 17 May2005 and the Group from that date onwards. Inter-company transactions, balancesand unrealised gains on transactions between group companies are eliminated. B Turnover The Group recognises turnover from sales of software licences to end-users orresellers upon persuasive evidence of an arrangement, delivery of the softwareand determination that collection of a fixed or determinable fee is reasonablyassured. When the fees for software upgrades and enhancements, maintenance,consulting and training are bundled with the licence fee, they are unbundledusing the Group's objective evidence of the fair value of the elementsrepresented by the Group's customary pricing for each element in separatetransactions. If evidence of fair value exists for all undelivered elements andthere is no such evidence of fair value established for delivered elements,turnover is first allocated to the elements where fair value has beenestablished and the residual amount is allocated to the delivered elements. Ifevidence of fair value for any undelivered element of the arrangement does notexist all turnover from the arrangement is deferred until such time thatevidence of fair value exists for undelivered elements of the arrangement aredelivered. If the arrangement includes acceptance criteria, turnover is not recogniseduntil the Group can objectively demonstrate that the software or service canmeet the acceptance criteria, or the acceptance period lapses, whichever isearlier. The Group recognises licence turnover derived from sales to resellers, upondelivery to resellers, provided that all other turnover recognition criteria aremet, otherwise turnover is deferred and recognised upon delivery of the productto the end-user. Maintenance turnover is derived from providing technical support and softwareupdates to customers. Maintenance turnover is recognised rateably over the termof the contract, which in most cases is one year. Turnover from consulting andtraining services is recognised as the services are performed. Amounts collected prior to satisfying the above revenue recognition criteria areincluded in deferred income. C Segmental reporting A geographical segment is engaged in providing products or services within aparticular economic environment that are subject to risks and returns that aredifferent from those of components operating in other economic environments. A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. The Group considers there to be only onebusiness segment being the provision of legacy application development anddeployment software for contemporary platforms. D Leases Leases of property, plant and equipment where the Group has substantially allthe risks and rewards of ownership are classified as finance leases. Financeleases are capitalised at the lease's commencement at the lower of the fairvalue of the leased property and the present value of the minimum leasepayments. Each lease payment is allocated between the liability and financecharges so as to achieve a constant rate of interest on the liabilityoutstanding. The corresponding rental obligations, net of finance charges, areincluded in Financial liabilities - borrowings. The property, plant and equipment acquired under finance leases is depreciatedover the shorter of the asset's useful life and the lease term. Leases where the lessor retains a significant portion of the risks and rewardsof ownership are classified as operating leases. Payments made under operatingleases (net of any incentives received from the lessor) are charged to theincome statement on a straight-line basis over the period of the lease. E Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates ("the functional currency"). The consolidated financialstatements are presented in US Dollars, which is the Group's functionalcurrency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions and from thetranslation at year-end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement. (c) Group companies The results and financial position of all the Group entities that have afunctional currency different from the presentation currency are translated intothe presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (iii) all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the netinvestment in foreign entities are taken to shareholders' equity. When aforeign operation is sold, such exchange differences are recognised in theincome statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate, with exception for goodwill arising before 1 May2004 which is treated as an asset of the Company and expressed in the Company'sfunctional currency. F Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred. Transaction costs incurred in the arrangement of new borrowingfacilities are capitalised and netted against the capital element of theoutstanding borrowing. These costs are then amortised over the life of thefacility to which the costs relate on the effective interest basis. G Property plant and equipment All property, plant and equipment are stated at historical cost less accumulateddepreciation and impairment. Historical cost includes expenditure that isdirectly attributable to the acquisition of the items. Subsequent costs areincluded in the asset's carrying amount or recognised as a separate asset, asappropriate, only when it is probable that future economic benefits associatedwith the item will flow to the Group and the cost of the item can be measuredreliably. All other repairs and maintenance expenditures are charged to theincome statement during the financial period in which they are incurred.Depreciation is calculated using the straight-line method to write-off the costof each asset to its residual value over its estimated useful life as follows: Leasehold improvements Remainder of the lease termFurniture and fixtures 5 - 7 yearsComputer equipment 1-5 years The assets' residual values and useful lives are reviewed, and adjusted ifappropriate, at each balance sheet date. An asset's carrying amount is writtendown immediately to its recoverable amount if the asset's carrying amount isgreater than its estimated recoverable amount. Gains and losses on disposalsare determined by comparing the disposal proceeds with the carrying amount andare included in the income statement. H Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the net identifiable assets of the acquired subsidiary at the date ofacquisition. Goodwill on acquisitions of subsidiaries is included in intangibleassets. Goodwill is tested annually for impairment and carried at cost lessaccumulated impairment losses. Gains and losses on the disposal of an entityinclude the carrying amount of goodwill relating to the entity sold. Goodwillis allocated to cash-generating units for the purpose of impairment testing.Each of those cash-generating units represents the Group's investment in eacharea of operation by each primary reporting segment. (ii) Computer software Acquired computer software licences are capitalised on the basis of the costsincurred to acquire and bring to use the specific software. These costs areamortised using the straight-line method over their estimated useful lives ofthree to five years. (iii) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred ondevelopment projects relating to the developing of new computer softwareprogrammes and significant enhancement of existing computer software programmesare recognised as intangible assets when it is probable that the project will bea success, considering its commercial and technological feasibility, and costscan be measured reliably. Only direct costs are capitalised which include thesoftware development employee costs and an appropriate portion of relevantoverheads. Development costs previously recognised as an expense are notrecognised as an asset in a subsequent period. Development costs are amortisedfrom the commencement of the commercial production of the product on astraight-line basis over the period of its expected benefit, not exceeding threeyears. I Impairment of tangible and intangible assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment. Assets that are subject to amortisation arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An impairment loss isrecognised for the amount by which the asset's carrying amount exceeds itsrecoverable amount. The recoverable amount is the higher of an asset's fairvalue less costs to sell and value in use. For the purposes of assessingimpairment, assets are grouped at the lowest levels for which there areseparately identifiable cash flows (cash-generating units). J Inventories Inventories are stated at the lower of cost and net realisable value. Cost isdetermined using the weighted average method. The cost of finished goodscomprises software for resale and packaging materials. Net realisable value isthe estimated selling price in the ordinary course of business, less applicablevariable selling expenses. K Trade receivables Trade receivables are recognised at fair value less provision for impairment. Aprovision for impairment of trade receivables is established when there isobjective evidence that the Group will not be able to collect all amounts dueaccording to the original terms of receivables. The amount of the provision isthe difference between the asset's carrying amount and the present value ofestimated future cash flows, discounted at the effective interest rate. Theamount of the provision is recognised in the income statement. L Employee benefit costs (a) Pension obligations Group companies operate various pension schemes. All of the major schemes aredefined contribution plans for which the Group pays contributions to publicly orprivately administered pension insurance plans on a mandatory, contractual orvoluntary basis. The Group has no further payment obligations once thecontributions have been paid. The contributions are recognised as an employeebenefit expense when they are due. Prepaid contributions are recognised as anasset to the extent that a cash refund or a reduction in the future payments isavailable. (b) Share-based compensation The Group operated five equity-settled, share-based compensation plans and onecash settled share based compensation plan during the year. No expense is recognised in respect of share options granted before 7 November2002 and vested before 1 January 2005. For shares or share options granted after 7 November 2002 and vested after 1January 2005 the fair value of the employee services received in exchange forthe grant of the shares or options is recognised as an expense. The totalamount to be expensed over the vesting period is determined by reference to thefair value of the shares or options granted. Non-market vesting conditions areincluded in assumptions about the number of options that are expected to becomeexercisable. At each balance sheet date, the Group revises its estimates of thenumber of options that are expected to become exercisable. It recognises theimpact of the revision of original estimates, if any, in the income statement,and a corresponding adjustment to equity over the remaining vesting period. The shares are recognised when the options are exercised and the proceedsreceived allocated between share capital and share premium. M Share capital, share premium and dividend distribution Incremental costs directly attributable to the issue of new shares or optionsare shown in equity as a deduction, net of tax, from the proceeds. Dividend distributions to the Company's shareholders are recognised as aliability in the Group's financial statements in the period in which thedividends are approved by the Company's shareholders. N Deferred income tax Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. However,if the deferred income tax arises from initial recognition of an asset orliability in a transaction other than a business combination that at the time ofthe transaction affects neither accounting nor taxable profit or loss, it is notaccounted for. Deferred income tax is determined using tax rates (and laws)that have been enacted or substantially enacted by the balance sheet date andare expected to apply when the related deferred income tax asset is realised orthe deferred income tax liability is settled. Deferred income tax assets arerecognised to the extent that it is probable that future taxable profit will beavailable against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investmentsin subsidiaries, except where the timing of the reversal of the temporarydifference is controlled by the Group and it is probable that the temporarydifference will not reverse in the foreseeable future. O Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, other short-term highly liquid investments with original maturities ofthree months or less, and bank overdrafts. Bank overdrafts are shown withinborrowings in current liabilities on the balance sheet. P Exceptional items Exceptional items are those significant items which are separately disclosed byvirtue of their size or incidence to enable a full understanding of the group'sfinancial performance. 2) Functional currency Items included in the financial statements of each of the group's entities aremeasured using the currency of the primary economic environment in which theentity operates ("the functional currency"). The consolidated financialstatements are presented in US Dollars, which is the Company's functionalcurrency. 3) Bank and other borrowings On 20 May 2005 the outstanding debt of $111.3 million owed by the Company toWells Fargo Foothill, Inc. and DB Zwirn Special Opportunities Fund was repaid infull. 4) Segmental information Geographical analysis 2006 2005 $'000 $'000 North America 68,847 73,173Europe and the Middle East 54,038 57,365Rest of the World 20,803 20,107 143,688 150,645 There is no material difference between turnover by origin above and turnover bydestination. 5) Supplemental information Set out below is an analysis of turnover recognised between the principalproduct categories, which the directors use to assess the future revenue flowsfrom the current portfolio of customers. Turnover 2006 2005 $'000 $'000 Licence fees 67,985 79,860 Maintenance fees 71,860 66,705 Consultancy fees 3,843 4,080Total 143,688 150,645 6) Reconciliation of operating profit to EBITDA 2006 2005 $'000 $'000 Operating profit 22,733 40,914Depreciation 1,006 1,005Amortisation of software 806 1,099 EBITDA 24,545 43,018Exceptional items IPO related costs 6,909 - Reorganisation costs 7,403 2,194 Share based compensation (224) 3,581 Management charges 125 1,200 EBITDA before exceptional items 38,758 49,993 7) Exceptional items 2006 2005 $'000 $'000 IPO related costs 6,909 -Reorganisation costs 7,403 2,194Share based compensation (224) 3,581Management charges 125 1,200 14,213 6,975 The IPO related costs include termination fees of $4,683,000 in respect ofmanagement charges previously paid by the Group prior to the IPO. They alsoinclude fees incurred during the process that did not directly relate to theraising of share capital. Reorganisation costs relate to the cost reduction programme announced by theBoard of Directors on 6 April 2006. These costs include those associated withthe redundancy of employees and the onerous lease cost of a building vacated aspart of the programme. A credit has arisen for share based compensation as result of the actual payoutunder the Equity Bonus Plan being lower than the estimate made at 30 April 2005. All exceptional items relate to administrative expenses. 8) Earnings per share The calculation of basic earnings per share has been based on the earningsattributable to ordinary shareholders of the Company and the weighted averagenumber of shares for each period. This is after taking account of therestructuring of the Group, which resulted in the previous shareholders of MicroFocus International Limited receiving three ordinary shares in the Company forevery one ordinary share they previously held. The diluted earnings per share has been calculated after taking account of theshare options. Year ended 30 April 2006 Year ended 30 April 2005 Weighted Weighted average average number of Per share number of Per share Earnings shares amount Earnings shares amount $'000 '000 cents $'000 '000 centsBasic EPSEarnings attributable toordinary shareholders 16,226 196,709 8.25 21,043 147,375 14.28 Effect of dilutive securitiesShare options 2,002 3,162Diluted EPS Earnings attributable toordinary shareholders 16,226 198,711 8.17 21,043 150,537 13.98 Supplementary EPS to excludeexceptional itemsBasic EPS 16,226 196,709 8.25 21,043 147,375 14.28Exceptional items 14,213 6,975Tax relating to exceptional items (2,154) (658) Basic EPS excludingexceptional items 28,285 196,709 14.38 27,360 147,375 18.56 Diluted EPS 16,226 198,711 8.17 21,043 150,537 13.98Exceptional items 14,213 6,975Tax relating to exceptional items (2,154) (658) Diluted EPS excludingexceptional items 28,285 198,711 14.23 27,360 150,537 18.17 9) Taxation Year ended 30 April 2006 2005 $'000 $'000 Current tax 5,021 7,825Deferred tax 1,311 3,772 6,332 11,597 The taxation for the period differs from the theoretical amount that would ariseusing the weighted average tax rate applicable to profits of the consolidatedcompanies as explained below. Year ended 30 April 2006 2005 $'000 $'000 Profit before taxation 22,558 32,640 Tax calculated at domestic tax rates applicable to profits 7,182 11,152in the respective countriesEffects of:Adjustments to tax in respect of previous years - current tax (138) -Adjustments to tax in respect of previous years - deferred tax (189) (211)Expenses not deductible for tax purposes (523) 84Losses not recognised 247 -Other (247) 572 6,332 11,597 10) Dividends Year ended 30 April 2006 2005 $'000 $'000Equity - ordinaryInterim paid ($0.04 per ordinary share): 3,987 78,800 Under Cayman Law the unrealised profit on the revaluation of an asset may beused to fund a dividend. As such the Directors of Micro Focus InternationalLimited obtained independent valuations of the intellectual property held bythat company in 2003 and 2005. Subsequently, the directors considered thevaluations of the intellectual property, which confirmed the adequacy ofdistributable reserves under Cayman Law in proposing dividends in the year ended30 April 2005. Whilst the Group as a whole has a deficit in its profit and loss reserve, theDirectors of Micro Focus International Plc have concluded that the Company hadsufficient reserves to enable the payment of the interim dividend relating tothe year ended 30 April 2006 and has sufficient reserves to enable the paymentof the final dividend being recommended relating to the year ended 30 April2006. 11) UK GAAP to IFRS reconciliation The analysis below shows a reconciliation of net assets and profit as reportedunder UK GAAP as at 30 April 2005 to the revised net assets and profit underIFRS as reported in these financial statements. In addition, there is areconciliation of net assets under UK GAAP to IFRS at the transition date forthe Group, being 1 May 2004. Effect of transition toReconciliation of equity at 1 May 2004 (Date of UK GAAP IFRS IFRStransition to IFRS) Note $'000 $'000 $'000ASSETSNon-current assetsGoodwill 42,404 - 42,404Intangible assets (b),(c) - 7,628 7,628Property, plant and equipment (c) 4,115 (2,155) 1,960Deferred tax assets (a),(b) - 8,837 8,837 46,519 14,310 60,829 Current assetsInventories 312 - 312Trade and other receivables 37,925 - 37,925Investments (d) 7,166 (7,166) -Cash and cash equivalents (d) 17,254 7,166 24,420Deferred tax asset (a),(b) 5,998 (5,998) - 68,655 (5,998) 62,657 Total assets 115,174 8,312 123,486 LIABILITIESCurrent liabilitiesTrade and other payables 53,736 - 53,736Current tax liabilities 9,821 - 9,821Financial liabilities - borrowings 10,097 - 10,097 73,654 - 73,654 Non-current liabilitiesFinancial liabilities - borrowings 50,037 - 50,037Deferred tax liability (a),(b) - 4,481 4,481Non-current deferred income 5,480 - 5,480 55,517 4,481 59,998 Net liabilities (13,997) 3,831 (10,166) SHAREHOLDERS' EQUITYCapital and reserves attributable to theCompany's equity holdersShare capital 1 - 1Share premium 2,946 - 2,946Profit and loss reserve (deficit) (a),(b),(e) (17,062) 3,906 (13,156)Other reserves (e) 118 (75) 43 Total shareholders' equity (deficit) (13,997) 3,831 (10,166) Effect of transition to UK GAAP IFRS IFRSReconciliation of equity at 30 April 2005 Note $'000 $'000 $'000ASSETSNon-current assetsGoodwill (a) 38,636 3,768 42,404Intangible assets (b),(c) - 8,084 8,084Property, plant and equipment (c) 3,667 (1,390) 2,277Deferred tax assets (a),(b) - 8,331 8,331 42,303 18,793 61,096Current assetsInventories 350 - 350Trade and other receivables 50,244 - 50,244Cash and cash equivalents (d) 32,870 - 32,870Deferred tax asset (a),(b) 3,722 (3,722) - 87,186 (3,722) 83,464 Total assets 129,489 15,071 144,560 LIABILITIESCurrent liabilitiesTrade and other payables (f) 71,192 (89) 71,103Current tax liabilities 11,972 - 11,972Financial liabilities - borrowings (f) 8,010 89 8,099 91,174 - 91,174 Non-current liabilitiesFinancial liabilities - borrowings (f) 103,240 127 103,367Deferred tax liability (a),(b) - 7,748 7,748Non-current deferred income (f) 7,059 (127) 6,932 110,299 7,748 118,047 Net liabilities (71,984) 7,323 (64,661) SHAREHOLDERS' EQUITYCapital and reserves attributable to theCompany's equity holdersShare capital 1 - 1Share premium 3,376 - 3,376Profit and loss reserve (deficit) (a),(b),(e) (75,192) 7,323 (67,869)Other reserves (e) (169) - (169) Total shareholders' equity (deficit) (71,984) 7,323 (64,661) Effect of transition to UK GAAP IFRS IFRS Note $'000 $'000 $'000Reconciliation of profit for the period ended30 April 2005Turnover 150,645 - 150,645Cost of sales (b) (6,327) (4,587) (10,914) Gross profit 144,318 (4,587) 139,731Selling and distribution costs (48,105) - (48,105)Research and development (b) (23,407) 5,809 (17,598)Administrative expenses (a) (36,882) 3,768 (33,114) Operating profit 35,924 4,990 40,914Interest payable and similar charges (8,656) - (8,656)Interest receivable and similar income 382 - 382Taxation (a),(b) (10,101) (1,496) (11,597) Profit for the financial period 17,549 3,494 21,043 Explanation of reconciling differences between UK GAAP and IFRS (a) The goodwill arising from the acquisition of the Group from Merant Plc was previously amortised under UK GAAP on a straight line basis over its estimated useful economic life of 14 years. As at 1 May 2004 the net book amount under UK GAAP was adopted as the opening cost under IFRS. This goodwill is no longer amortised, but is subject to reviews for impairment. There is also a corresponding deferred tax movement as a result. (b) Development costs were previously expensed through the profit and loss account, as permitted by UK GAAP. In accordance with IAS 38, development costs that meet certain criteria, must be capitalised and amortised over the useful economic life to which they relate. The creation of this intangible represents a temporary difference under IFRS that leads to a corresponding deferred tax liability. (c) Purchased computer software costs were previously recorded as property, plant and equipment, as permitted by UK GAAP. In accordance with IAS 38, all purchased computer software is recorded as an intangible asset. (d) Under UK GAAP deposits held with financial institutions that cannot be withdrawn without penalty are categorised as current asset investments, provided they can be withdrawn within one year. Under IFRS cash and cash equivalents includes all deposits with up to three months notice. (e) Under UK GAAP treasury shares are shown as a movement in the profit and loss reserve. Under IFRS treasury shares are shown in other reserves. (f) Under UK GAAP finance lease liabilities are shown under trade and other payables and other non-current liabilities. Under IFRS these are shown as borrowings. Explanation of material adjustments to the cash flow statement (a) Amounts paid for capitalised development costs during the period ended 30 April 2006 are classified as part of cash flows from investing activities under IFRS, but were included as part of operating cash flows under UK GAAP. (b) Under IFRS cash and cash equivalents includes short term deposits, under UK GAAP the same has been included in the management of liquid resources category. There are no other material differences between the cash flow statementpresented under IFRS and the cash flow statement presented under UK GAAP. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MCRO.L