7th Sep 2006 07:01
SQS Software Quality Systems AG07 September 2006 Embargoed until 0700 Thursday, 7 September 2006 SQS Software Quality Systems AG Interim Results For the six months ended 30th June 2006 SQS Software Quality Systems AG (AIM:SQS.L) the leading independent pan-Europeanprovider of quality management and testing services for software development,today announces its interim results for the six months ended 30th June 2006. Financial Highlights: •Turnover up by 18.5% to €31.50m (HY1 2005: €26.58m) •Profit before tax up 2.4% to €1.70m (HY1 2005: €1.66m) •Adjusted earnings per share up 11.1% to €0.10 (HY1 2005: €0.09) •Gross profit up 6.6% to €10.16m (HY1 2005: €9.53m) •Period end cash balance of €0.3m in line with plan; borrowings reduced further by €8.6m to €6.4m Operational Highlights: •Investment in 55 new consultants to support current strong demand for SQS services and future organic growth of the business •Achieved 18% top line growth - more than three times that expected by the European IT Services market* €26 new client wins (about 10% of the total number of clients), and expanded revenue in embedded systems by 33% to secure future revenue growth and expand in avionics and automotive •Extended all contracts with the top 20 clients from HY1 2005 into HY1 2006 •Cresta Group Ltd. acquisition successfully completed just after the period end to establish SQS as the clear market leader in the UK. The integration of SQS UK and Cresta are going to plan. *International Data Corporation (IDC) 2006 study Commenting on the results, Rudolf van Megen, CEO, said: "In the first six months of 2006, SQS made a big leap forward to strengthen itsposition as the leading independent pan-European provider of quality managementand testing services for software development. Our market-leading position hashelped us to accelerate our growth to more than three times the rate of theEuropean IT service market. The acquisition of Cresta Group Ltd. means that weare now the market leader in software testing in the UK and, together with ourtraditionally strong position in Germany, the two largest regional IT servicemarkets in Europe now contribute almost equally to our business. Thisacquisition has added new market verticals and is expected to save considerableoverhead costs in the enlarged UK operation. Trading continues to be encouragingin the second half of 2006, and as expected, revenue growth is well ahead of thecomparable period last year while the new business pipeline remains strong." For further information please contact: SQS Software Quality Systems AG www.sqs.deRudolf van Megen (CEO)/Rene Gawron (CFO) +49 (2203) 91 54 0 Evolution Securities Limited 020 7071 4300Jeremy Ellis/Mike Read Smithfield 020 7360 4900Sara Musgrave Print resolution images are available for the media to view and download fromwww.vismedia.co.uk Notes to Editors: SQS is the largest independent European provider of software testing and qualitymanagement services. SQS consultants design and oversee quality managementprocesses during software and IT systems development, and test the resultingproducts for errors and omissions. Headquartered in Cologne, Germany, SQS now has operations across Europe and inSouth Africa with over 700 employees. SQS has a strong presence in Germany (Cologne, Munich, Frankfurt, Stuttgart and Hamburg) and in the UK (London, Woking, Birmingham), Ireland, Netherlands, Switzerland, Austria and South Africa. SQS also has a minor stake in an operation in Portugal and a partnership operation in Spain. In May 2006, SQS made its first acquisition after its AIM flotation, buyingCresta Group Ltd in the UK for a consideration of up to £18m. The acquisitionincreased SQS' UK revenue threefold and secured its position as the largestindependent software testing and quality management company in the UK.With over 3,000 completed projects under its belt, SQS has a strong customerbase including half of the DAX 30 companies and 30% of the STOXX-50. Theyinclude names like Dresdner Bank, Lloyds TSB, Deutsche Telekom, Vodafone,Daimler Chrysler, and Airbus spread across the full range of industries.SQS is the first Germany company with a primary listing on AIM and completed itsIPO in September 2005, having raised £10.8m before expenses at an issue price of190p. SQS is included in the Software and Computer Services sector (9530) withinthe Computer Services subsector (9533) and has a RIC code of SQS.L. SQScompleted a secondary listing on the Deutsche Boerse in Frankfurt on 2ndDecember 2005. For further information, please visit www.sqs-uk.com. Chief Executive's Statement Introduction I am pleased to present SQS's first set of interim results following itsadmission to AIM in September 2005. SQS has had a strong first half, recording amaterial increase in revenues across the Group. This improvement resulted purelyfrom organic growth in our core businesses, both by extending contracts withexisting clients and from 26 new client wins achieved in the period.The first half of 2006 was also a period of investment when we increased thenumber of consultants by 55, bringing the total to 383. We expect theseconsultants to make a positive contribution in the second half of the year. Inparticular we are securing additional business in the area of software testingof embedded systems, in both the avionic and automotive industries, and ininsurance. Turnover from continuing operations rose by 18.5% to €31.50m (HY1 2005: €26.58m)while underlying profit before tax increased by 2.4% to €1.70m (HY1 2005:€1.66m), constrained by the training costs associated with the investment in newconsultants (approximately €1.0m in opportunity costs). Although the investmentin new consultants has impacted our gross margin in the first half of the yearthey are expected to fully contribute to gross margin generation in the secondhalf of 2006. The gross profit improved to €10.16m (HY1 2005: €9.53m), despite continuedpricing pressure and investment in new consultants. Geographically we saw thestrongest turnover growth in Switzerland where the top line grew by 50.2%,followed by Germany which saw 17.7% growth. In the United Kingdom, theconsolidated revenues were flat; however, revenue derived by UK resourcesincreased by 11% as a number of UK consultants were allocated to a largestrategic project in Switzerland which accounted for €0.5m of revenues. AdjustedEPS (adjusted for deferred taxes and IFRS tax differences) of €0.10 rose by11.1% (HY1 2005: €0.09). The balance sheet strengthened considerably during the period reflecting thebenefit of the €14.1m net proceeds from our admission to AIM in September 2005and the positive net income in the first half of the year. We further reducedour borrowings by €8.6m to €6.4m (HY1 2005: €15.0m). Cash balances at the sixmonths period end stood at €0.3m (HY1 2005: cash €0.1m). The acquisition ofCresta required us to show €4.4m of cash recorded under other receivables whichwas a notary account as cash consideration for the Cresta acquisition, whosecompletion occurred a few days after the six months period end. Dividend No dividend will be paid in respect of the interim results, however the Boardintends to pursue a progressive dividend policy in future and therefore intendsto pay a final dividend for the year ending 31st December 2006. The Board There have been no changes to our supervisory board and management board in thelast six months period. Strategy Our strategy is to strengthen our market position as the leading independentpan-European provider of quality management and testing services for softwaredevelopment. We aim to grow our business with long term outsourcing contractsand investment in expanding markets such as embedded systems in the aircraftmanufacturing and automotive industries. We intend to strengthen our position ina number of key European markets and will continue to actively look foracquisitions to support and accelerate this strategy. Employees On behalf of the board, I would like to thank all our employees for theircontribution, hard work, and excellent support during the year. I also welcomethe many new employees who have joined our company to contribute with their richtalents to our growth strategy. I am confident that we have the team in place tocapitalise on the opportunities available and to enable us to deliver long termshareholder value. A stock option programme which will be executed within the next two months willhelp SQS retain key employees and attract quality individuals into the business.As a result of the acquisition of Cresta, SQS now has a training facility basedin South Africa which is to be used for new employees. We believe that ourability to provide first class training will be a crucial part of attracting newemployees to the business. Outlook During the year, SQS strengthened its position as the leading independentpan-European provider of quality management and testing services for softwaredevelopment and once again accelerated its growth rate, now at more than threetimes the rate of the European IT services market. In the second half of 2006, we will continue to grow the business organically,focusing on expanding growth markets such as outsourcing and embedded systems,whilst consolidating the contribution from the Cresta acquisition. Trading hasbeen encouraging in the first two months of HY2 2006, and as expected, growth iswell ahead of the comparable period last year while the new business pipelineremains strong. Rudolf van MegenChief Executive Officer6th September 2006 Business and Financial Review During the first half of 2006, we continued to strengthen our business throughstrong organic growth and repeat revenues. Client numbers now stand at 280,following 26 new account wins in the period. We accelerated our investmentprogramme of consultants and further reduced our overheads relative to sales atstable utilisation rates. Although the investment in new consultants hasimpacted our gross margin in the first half of the year they are expected tofully contribute to gross margin generation in the second half of 2006. Theacquisition of Cresta Group Ltd., which will be consolidated from July 2006onwards, has reduced our high exposure to the German market and moved us to theclear market leadership in our field in the United Kingdom. Strategic Update Market drivers Software quality management and testing constitutes a segment of the IT servicesmarket and therefore growth in the IT services market closely correlates withgrowth in software quality management and testing. Research conducted byInternational Data Corporation ("IDC") in 2006 shows that the European growthrate for IT services is expected to be approximately 5.0% in 2006, of that theUK is forecast to grow 5.2% with Germany growing 4.0%. In HY1 2006, SQS achieved18.5% growth thus more than three times that rate. As proven by the Standish Group studies since 1994, there are still 71% ofworldwide IT projects either failing or falling behind time and budget. This isa key driver for the growth in the independent third party quality managementand testing market and the second opinion that companies such as SQS providehelps to improve the success rate of IT projects. Other market drivers includethe increasing complexity of software and IT systems and higher regulatorydemands imposed on IT systems by requirements such as the Sarbanes Oxley Act.In addition, continuing return on investment (ROI) pressures, coupled withincreasing "industrialisation" of the software engineering process has led to anincreased demand for outsourced software testing as well as better qualitymanagement of embedded systems. Strategic Goals The SQS Group strategy builds on five strategic goals which all contribute tomarket leadership as a service company and resulting shareholder value. Theseare: • 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 continues to enhance its offerings in the fields of code quality management, assessments of software development and IT organisations, project and risk management mainly 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. • IT training and IT events: The number of delegates at the SQC conference in Germany has increased by more than 15% this year. The successful SQC conferences (Software and Systems Quality Conferences), heldin Germany and the UK are two of the largest quality management and softwaretesting events in Europe. We have expanded these into Switzerland this year,where the first SQC conference will be held in September 2006. The mediaalliance with one of Europe's most influential publishers, IDG Communications(e.g. "Computerwoche" in Germany) has resulted in an increase in the number ofdelegates, exhibitors, and sponsors attending our German and Swiss conferencesin 2006. Geographic review Germany Revenue in Germany was €20.27m (HY 2005: €17.22m), an increase of 17.7%,contributing 64% to the Group's total revenue compared with 65% in the priorperiod. We intensified our hiring activities in the first half of 2006 in orderto grow the local business in Germany significantly in the current year. Profitshave been impacted by the number of non-fee earning consultants as we increasedthe headcount and trained our new employees although this is expected this topay off in the second half of the year. During the first half, we secured keycontract renewals with all our large clients. We also increased the businessbase in embedded systems by 33% to €2.4m (HY1 2005: €1.8m) which to a largeextent is business with German based aircraft manufacturers and automotiveclients. Switzerland In Switzerland revenues were at €4.99m (HY1 2005: €3.32m), an increase of 50.3%.We won additional clients in banking and insurances in Switzerland. Furthermorewe built a new service line which has been marketed as "SQS Group BusinessConsulting," focusing on bridging the gap between customers' business andIT-departments with project and risk management services. United Kingdom UK revenues were €4.43m (HY1 2005: €4.48m), 14% of the Group's total. Althoughthese consolidated numbers are flat year on year, revenues generated by UK staffincreased by 11% as they contributed to €0.5m of turnover generated inSwitzerland that could not otherwise have been set up successfully. The CrestaGroup Ltd. acquisition will only be consolidated in the last six months of 2006and is expected to more than triple our UK business. Other European Countries The business in Austria and the Netherlands generated €1.82m (HY1 2005: €1.56m)which was an increase of 16.7%. Financial Review Profit before tax was €1.70m (HY1 2005: €1.66m), up 2.4%. Profit was constrainedby the training costs of 55 new consultants (during HY1 2005: 20 newconsultants) which on average each had 1.5 months of training before they becamefully billable. Their direct costs were fully expensed in the gross margin andhave impacted the margin with €1.0m in opportunity costs. In order to facilitatefurther growth and improved margins in the full year, such investments werenecessary in the first half of the year. A higher than average number ofholidays were taken by consultants in June 2006 due to The World Cup in Germanywhich has shifted approximately €0.3m of revenue and pre-tax profits from Juneto Q3 2006. Adjusted* earnings per share improved to €0.10 (HY1 2005: €0.09). *based on net income increased by €0.4m deferred taxes and IFRS tax differenceson capitalised R&D but including actual profit taxes of €0.2m payable underlocal GAAP Costs Administrative costs totalled €4.71m (HY1 2005: €4.40m) and represented 15.0% ofsales (HY1 2005:16.6%). This reduced from the same period last year due to morecentralised use of overheads in an enlarged company. Sales & marketing costswere €2.1m and grew relative to turnover (to 6.7% from 6.3%) as SQS continued toinvest in additional sales resources to support current and future organicgrowth of the business. Research and development costs of €1.4m fell as aproportion of turnover (to 4.5% from 5.0%), as these efforts for tool and coursedevelopment for our training products remain stable in absolute termsirrespective of the overall revenue growth. In total overhead costs relative tosales were reduced to 26.2% from 27.9% in HY1 2005. Taxation The Group tax charge of €0.6m has two components; one is tax on profits payableunder local GAAP of €0.2m, and the other is the deferred tax and tax differencesthat SQS is required to show under IFRS of €0.4m. Due to tax breaks in Germanyunder local GAAP, SQS will pay no or negligible taxes on profits in Germany,Austria and the Netherlands. The remaining €0.2m tax on profits arose in the UKand Switzerland. Deferred tax and IFRS tax differences were €0.4m on capitalisedR&D costs. Cash Flow and Financing Cashflow for the period was neutral, compared to an inflow of €1.2m in 2005.Operating cash flow was negatively impacted in 2006 by an increase of €2.3m inreceivables, partly due to an increase in debtor days to 70 from 69 at end June2005. Cash outflow from financing activities was €0.3m compared to an outflow of €0.8min 2005, mainly due to the repayment of finance loans. Cash inflow frominvestments was €0.1m against an outflow of €0.9m last year. This figureincludes an outflow of €1.0m for capitalised R&D for products and investments inintangible assets (HY1 2005 comparable was an outflow of €0.8m), the sale of€5.6m in marketable securities and €4.4m, which was a payment on a notaryaccount for the cash consideration of Cresta Group Ltd.. This completed on 3July 2006 after the balance sheet date. Foreign Exchange Approximately 70% of the Group's turnover is generated in Euros. With theexception of SQS UK Group Ltd and Software Quality Systems (Schweiz) AG, allsubsidiaries of SQS are located in the currency area of the Euro. For theconversion of the local currency into Euros, the official fixed exchange ratewas chosen. For the conversion of the balance sheet items from foreign currencyinto Euros, the official mean rate as at 30th June 2006 was used. The Group's exposure to foreign exchange risks is negligible as more than 90% ofthe business is billed and served locally. Amortisation Amortisation of goodwill is no longer carried out due to the changed IFRSaccounting rules. On account of the high amortisation of these goodwill valuesin previous years, their book values today lie considerably below the originalacquisition costs. No reduction in value was necessary by reason of theimpairment tests carried out in accordance with IAS 36. International Financial Reporting Standards (IFRS) The Interim Consolidated Financial Statements of SQS and its subsidiarycompanies ("SQS Group") are prepared in conformity with all IFRS Standards(International Financial Reporting Standards, formerly IAS = InternationalAccounting Standards) and Interpretations of the IASB (International AccountingStandards Board) which are mandatory at 30 June 2006, whereas the interimreports are published in an abbreviated form according to IAS 34. The sameaccounting and valuation method used for the 2005 annual Consolidated FinancialStatements was applied. The Interim Consolidated Financial Statements haveneither been audited nor reviewed. The SQS Group Consolidated Financial Statements for the six month period endedJune 30th 2006 were prepared in accordance with uniform accounting and valuationprinciples in Euros. Rene GawronChief Financial Officer6th September 2006 Consolidated Profit and Loss AccountSix months ended 30 June 2006 Six months Six months Year ended 31 ended 30 June ended 30 June December 2005 2006 2005T• (Notes) (unaudited) (unaudited) (audited) Revenue 31,499 26,582 54,737 Cost of sales (3) 21,337 17,049 35,563 --------- --------- --------Gross profit 10,162 9,533 19,174 General andadministrativeexpenses (3) 4,719 4,401 8,473Sales andmarketingexpenses (3) 2,115 1,674 3,525Research anddevelopmentexpenses (3) 1,428 1,336 2,690 --------- --------- --------Profit before tax and financingresult (EBIT) 1,900 2,122 4,486 Net interest (4) -199 -458 -773 --------- --------- --------Profit beforetaxes (PBT) 1,701 1,664 3,713 Income tax (5) 604 628 1,319 --------- --------- --------Profit for theyear 1,097 1,036 2,394 Attributable to:Equityshareholders 1,097 1,036 2,394Minorityinterests (14) 0 0 0 --------- --------- --------Consolidatedprofit for theyear 1,097 1,036 2,394 ========= ========= ======== Earnings per share,undiluted (•) (6) 0.07 0.10 0,21 ========= ========= ======== Earnings per share, diluted (•) (6) 0.07 0.10 0,20 ========= ========= ======== Consolidated Balance SheetAs at 30 June 2006 (IFRS) 30 June 30 June 31 December 2006 2005 2005T• (Notes) (unaudited) (unaudited) (audited) Current assetsCash and cashequivalents (9) 265 82 839Marketablesecurities (9) 0 0 5,626Trade receivables 13,976 11,621 11,433Other receivables 5,228 912 518Work in progress 406 177 135Income taxreceivables 330 159 306 --------- --------- -------- 20,205 12,951 18,857Non-current assetsIntangible assets (7) 2,544 1,757 2,395Goodwill (7) 11,589 11,589 11,589Tangible assets (8) 721 797 756Deferred taxes 1,653 1,844 2,007 --------- --------- -------- 16,507 15,987 16,747 --------- --------- --------Total Assets 36,712 28,938 35,604 ========= ========= ======== Current liabilitiesBank loans andoverdrafts (10) 4,578 3,432 3,776Convertible bonds (13) 0 530 0Trade creditors 2,492 2,244 1,844Other accruals (12) 75 67 75Tax accruals 380 655 239Tax liabilities 1,421 1,619 1,957Other Currentliabilities (11) 5,260 6,192 5,232 --------- --------- -------- 14,206 14,739 13,123Non-Current liabilitiesBank loans (10) 1,822 10,995 2,971Other accruals (12) 126 144 151Pension accruals 325 343 305Deferred taxes 938 706 859 --------- --------- -------- 3,211 12,188 4,286 --------- --------- --------Total Liabilities 17,417 26,927 17,409 ========= ========= ======== Shareholders' equity (13)Share capital 15,763 4,201 15,763Share premium 10,936 1,669 10,936Statutory reserves 53 53 53Other reserves -905 191 -908Retained earnings -6,552 -4,103 -7,649 --------- --------- --------Equity attributable to equityshareholders 19,295 2,011 18,195 Minority interests (14) 0 0 0 --------- --------- --------Total Equity 19,295 2,011 18,195 --------- --------- -------- --------- --------- --------Equity andLiabilities 36,712 28,938 35,604 ========= ========= ======== Consolidated Cash Flow StatementSix months ended 30 June 2006 (IFRS) Six months Six months Year ended ended 30 June ended 30 June 31 December 2006 2005 2005T• (Notes) (unaudited) (unaudited) (audited) Net cash flow from operating activitiesProfit before taxes 1,701 1,664 3,713Add back for Depreciation and amortisation 1,017 909 2,361Profit (Loss) on the sale of fixed assets 25 5 -33Other non-cash income not affecting payments 3 182 -145Net interest income 96 455 766 --------- --------- --------Operating profit beforechanges in the net current assets 2,842 3,215 6,662Decrease in trade receivables andreceivables from partly completed contracts not yet billed -2,543 -2,817 -2,629Decrease in work in progress, other assetsand pre-paid expenses anddeferred charges -615 -247 38Decrease in trade creditors 648 -18 -417Increase in remaining accruals 116 -1 14Increase in pension accruals 20 20 -18Decrease in other liabilities and deferred income -509 1,081 456 --------- --------- --------Cash flow from operatingactivities -41 1,233 4,106Cash effect of foreignexchange rate movements 103 3 7Interest payments (4) -174 -474 -833Tax payments -194 -439 -509Net cash flow from current business activities -306 323 2,771 Cash flow from investmentactivitiesPurchase of intangible assets -1,039 -812 -2,741Purchase of tangible assets -117 -102 -220Transfer into an notary trust account to purchase of shares -4,366 0 0Proceeds from the sale oftangible assets 0 0 35Sale/(Purchase) of marketablesecurities available forsale 5,626 0 -5,632Foreign currency result -103 -3 -7Interest received (4) 78 2 67Net cash flow from investment activities 79 -915 -8,498 Consolidated Cash Flow Statement (Continued) Cash flow from financing activitiesProceeds from the issue ofshare capital 0 0 15,909Costs for IPO 0 0 -1,790Proceeds from borrowings 0 510 0Repayment of convertiblebonds 0 -600 -1,130Repayment of finance loans (10) -347 -703 -7,890Redemption / termination ofleasing contracts 0 -11 -11Net cash flow from financing -347 -804 5,088activities Change in the level of fundsaffecting payments -574 -1,396 -639Cash and cash equivalents at the beginning of the period 839 1,478 1,478 --------- --------- --------Cash and cash equivalentsat the end of the period 265 82 839 ========= ========= ======== 1. Summary of Significant Accounting Policies Basis of preparation The Interim Consolidated Financial Statements of SQS and its subsidiarycompanies ("SQS Group") are prepared in conformity with all IFRS Standards(International Financial Reporting Standards, formerly IAS = InternationalAccounting Standards) and Interpretations of the IASB (International AccountingStandards Board) which are mandatory at 30 June 2006, whereas the interimreports are published in an abbreviated form according to IAS 34. The sameaccounting and valuation method used for the 2005 annual Consolidated FinancialStatements was applied. The Interim Consolidated Financial Statements haveneither been audited nor reviewed. The Financial Information has been prepared on the historical cost basis.Further information about the Group's accounting principles and policies iscontained in the SQS Consolidated Financial Statement at 31st December 2005. TheFinancial Information is presented in Euros and amounts are rounded to thenearest thousand (T•) 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. Consolidated Companies As at 30 June, the Company held interests in the share capital of more than 20 %of the following undertakings: Consolidated companies Country of 30 June 2006 30 June 2005 incorporation Share of Share of capital capital % % SQS Group (UK) Limited UK 100.0 100.0(formerly SIM Group Limited),WokingSQS Nederland BV,Zaltbommel The Netherlands 90.5 90.5SQS GesmbH, Vienna Austria 100.0 100.0Software Quality Systems (Schweiz) AG, Zug Switzerland 97.0 97.0 3 % of the shares in Software Quality Systems (Schweiz) AG are held for legalreasons by members of the board of this entity in accordance with the interestsof SQS. Use of estimates The preparation of the Interim Financial Statements in compliance with theInternational Financial Reporting Standards requires the disclosure ofassumptions and estimates made by the management which have an effect on theamount and the presentation of the assets and liabilities shown in the balancesheet, the income and expenditure as well as any contingencies. The actualresults may deviate from these estimates. There were no changes in accounting estimates and assumptions reported in theprior financial year. 2. Segmental reporting The following tables present revenue and profit information regarding the SQSGroup's business segments for the interim period ended 30 June 2006 and 30 June2005 and for the year ended 31 December 2005. Six month ended 30 June Germany United Switzerland Other Total2006 (unaudited) Kingdom European Countries T• T• T• T• T• SalesExternal sales 20,265 4,433 4,985 1,816 31,499Internal sales between the segments 1,566 535 69 30 2,200 ResultSegment result 1,279 205 354 52 1,890Consolidation 10Financial result -199Taxes on income -604Result for the period 1,097Profit share of minorityshareholders 0Result of the Group forthe period 1,097 2. Segmental reporting (continued) Six month ended 30 June Germany United Switzerland Other Total2005 (unaudited) Kingdom European Countries T• T• T• T• T• SalesExternal sales 17,222 4,482 3,319 1,559 26,582Internal sales betweenthe segments 1,654 0 0 0 1,654 ResultSegment result 1,558 299 243 22 2,122Consolidation -Financial result -458Taxes on income -628Result for the period 1,036Profit share of minorityshareholders 0Result of the Group forthe period 1,036 Year ended 31 December Germany United Switzerland Other Total2006 (audited) Kingdom European Countries T• T• T• T• T• SalesExternal sales 34,273 9,177 7,327 3,960 54,737Internal sales betweenthe segments 3,875 0 170 69 4,114 ResultSegment result 3,333 381 714 53 4,481Consolidation 5Financial result -773Taxes on income -1,319Result for the period 2,394Profit share of minorityshareholders 0Result of the Group forthe period 2,394 3. Expenses The Consolidated Income Statement presents expenses according to function.Additional information concerning the origin of these expenses, by type of cost,is provided below: Cost of material The cost of material in the interim period ended 30 June 2006 amounted to T•3,552 (at mid-year 2005: T• 2,056). Cost of material relates mainly to theprocurement of external services such as contract software engineers. Inaddition, certain project-related or internally used hardware and software isshown under cost of material. Employee benefits expenses Six month ended Six month ended Year ended 31 30 June 2006 30 June 2005 December 2005 T• T• T• Wages and salaries 15,647 13,491 27,552Social security contributions 2,172 2,059 4,249Expenses for retirementbenefits 450 250 506 18,269 15,800 32,307 The expenses for retirement benefits include the change in pension accruals andother retirement provisions such as direct insurance and provident fund costs. Depreciation Depreciation charged in the interim period ended 30 June 2006 amounted to T•1,016 (at mid-year 2005: T• 865). Of this, T• 803 (at mid-year 2005: T• 590) wasattributable to the amortisation of development costs. 4. Financial result The financial result is comprised as follows: Six month ended Six month ended Year ended 30 June 2006 30 June 2005 31 December 2005 T• T• T• Interest income 78 2 67Exchange rate gains 6 -1 2Total finance income 84 1 69Interest payable -174 -457 -833Exchange rate losses -109 -2 -9 Total finance costs -283 -459 -842 Financial result -199 -458 -773 4. Financial result (continued) Finance income results from fixed deposit investments and investments insecurities maturing in the short term which yield interest income, or securitiesnegotiable at short notice. Interest payable relates to interest on bankliabilities and on the convertible bonds. Finance income and expenses are statedafter foreign exchange rate gains and losses. 5. Taxes on earnings The line item includes current tax expenses in the amount of T• 172 (previousinterim period: T• 233) and deferred tax expenses in the amount of T• 432(previous interim period: T• 395). Further information about the recognition and measurement of the income tax iscontained in the SQS Consolidated Financial Statements at 31 December 2005. 6. Earnings per share The earnings / (loss) per share presented in accordance with IAS 33 are shown inthe following table: Six month ended Six month ended Year ended 30 June 2006 30 June 2005 31 December 2005 Profit for the yearattributable to equityshareholders, T• 1,097 1,036 2,394Weighted average numberof shares in issue 15,763,080 10,142,503 11,671,168Undiluted profit pershare, • 0.07 0.10 0.21Diluted profit per share, • 0.07 0.10 0.20Adjusted earnings per share (for comparison only), • 0.10 0.09 0.22 Undiluted earnings per share are calculated by dividing the profit for the sixmonth period attributable to equity shareholders by the weighted average numberof shares in issue during the six month period ended 30 June 2005: 10,142,503after adjusting for the impact of changes in the issued share capital in eachyear 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 yearattributable to equity shareholders by the weighted average number of shares inissue plus any share equivalents which would lead to a dilution. Adjusted earnings by share were calculated by adding back deferred taxes andIFRS tax differences as well as IPO costs to the profit, divided by the numberof shares issued as at 30.6.2006 (15,763,080 shares). 7. Intangible assets The item is comprised as follows: Book values Six month ended Six month ended Year ended 30 June 2006 30 June 2005 31 December 2005 T• T• T• Goodwill 11,589 11,589 11,589Development costs 2,287 1,588 2,081Software 212 169 256Remaining intangible assets 45 0 59 Intangible assets 14,133 13,346 13,985 Development costs were capitalised in the interim period ended 30 June 2006 inthe amount of T• 1,010 (31 December 2005 T• 2,415) and amortised over a periodof 36 months, since the conditions under IAS 38 were fulfilled. The amortisation of development costs is contained in the costs for research anddevelopment. The amortisation of software and remaining intangible assets aswell as the impairment losses under IAS 36 are spread over the functional costsin accordance with an allocation key. 8. Property, plant and equipment The development of the tangible assets of the SQS Group is presented as follows: Book values Six month ended Six month ended Year ended 30 June 2006 30 June 2005 31 December 2005 T• T• T• Freehold Land and Buildings 187 192 190Office and Businessequipment 534 605 566Property, Plant and Equipment 721 797 756 9. Marketable securities and cash and cash equivalents Cash and cash equivalents comprise cash and credit balances at banks which canbe realised in the short term and which earn commercial rates of interest.The development of cash and cash equivalents is presented in the ConsolidatedCash Flow Statement. The portfolio of marketable securities of the SQS Group contains investments inmoney market funds, fixed interest securities and shares. They are heldavailable for sale. The valuation of the securities is made at the attributable current value on thebasis of the market rates at the balance sheet date. Changes in the attributablevalues are recorded directly in equity. During the interim period ended 30 June 2006 all marketable securitiesclassified as available for sale were sold. The total losses of T• 34 that hasbeen recorded in shareholders equity as the net gains/losses on available forsale securities at 31 December 2005 were recognised in the result for theinterim period. 10. Bank loans, overdrafts and other loans The finance liabilities are comprised as follows: Six month ended Six month ended Year ended 30 June 2006 30 June 2005 31 December 2005 T• T• T• Bank loans and overdraft 4,578 3,432 3,776Convertible bonds 0 530 0 Current finance liabilities 4,578 3,962 3,776 Bank loans 1,822 10,995 2,971 Non-current finance liabilities 1,822 10,995 2,971 Total finance liabilities 6,400 14,957 6,747 Of these, secured 4,328 12,754 5,477 The current liabilities to bank are secured on the assets of the Company andthose of its subsidiary undertakings. As security for the long-term bank loan, the shares in SQS Group (UK) Ltd. werepledged in a pool contract jointly for the lenders. Furthermore, under anassignment agreement all current and future trade receivables of SQS SoftwareQuality Systems AG were assigned to Deutsche Bank AG for and on behalf of thesyndicate. 11. Other creditors The item is comprised as follows: Six month ended Six month ended Year ended 30 June 2006 30 June 2005 31 December 2005 T• T• T•Liabilities in regard tosocial security 360 744 756Liabilities from wagesand salaries 8 33 183Remaining personnel liabilities (holiday,bonus claims) 3,493 3,377 3,386Liabilities under shareholder loans andinterest 0 500 0Commission 95 50 39Remaining other liabilities 1.173 1,328 793Deferred income 131 160 75 5,259 6,191 5,232 The remaining other liabilities comprise trade accruals and other items due inthe short term. 12. Other accruals Other accruals in the amount of T• 201 (31 December 2005: T• 226) include thewarranty costs in the amount of T• 29 (31 December 2005: T• 29) and the vacantproperty provision in the amount of T• 172 (31 December 2005 T• 197). 13. Equity The development of the equity is presented in the Consolidated Development ofShareholders' Equity. Subscribed Capital The subscribed capital developed as follows: Individual Nominal shares value Number • Status at 30 June 2005 4,204,126 4,204,126 Increase in capital in return for contributions 74 74(Entry of 16 August 2005)Increase in capital from company funds 5,885,880 5,885,880(Entry of 16 August 2005)Increase in capital in return for cash contributions 5,500,000 5,500,000from the floatation on the stock exchange of 20September 2005(Entry of 16 September 2005)Increase in capital in return for cash contributions 173,000 173,000from the floatation on the stock exchange of 20September 2005(Entry of 23 September 2005)Status at 31 December 2005 15,763,080 15,763,080Status at 30 June 2006 15,763,080 15,763,080 Conditional capital The General Meeting of 12 April 2002 resolved the conditional increase in theshare capital by an amount of up to • 31,112. The resolution became effectivewith the entry of 6 June 2002. Following the increase in capital, theconditional capital amounted to 43,556.80 • as at 16 August 2005 and to74,668.80 • as at 20 September 2005. By resolution of the General Meeting of 14September 2005 and the subsequent entry in the Commercial Register of23 September 2005, the existing conditional capital was revoked and increasedagain by 52,800 •. The conditional capital serves as security for convertible bonds.The General Meeting of 2 June 2006 resolved a new conditional capital by anamount of up to €1,500,000 by issuance of up to 1,500,000 new individualregistered shares (conditional capital II). This resolution became effectivewith the entry of 30 June 2006. The conditional capital II in the share capital serves the granting of thesubscription rights to employees and members of the Management Board of thecompany and employees and managing directors of domestic and foreignsubsidiaries based on the SQS Share based Compensation plan 2006. 13. Equity (continued) Authorised capital By resolution of the General Meeting of 12 July 2005, the capital (T• 243)previously authorised was revoked. The Management Board was empowered, by resolution of the General Meeting of 12July 2005, to increase the nominal capital by T• 3,500 up until 12 July 2010with the approval of the Supervisory Board, either through one single or severalissues of new individual registered shares, in return for cash or contributionsin kind (Authorised capital 1). The power to increase the nominal capital wasrestricted to the purpose of acquisition of businesses or the acquisition ofholdings in businesses. In addition, the Management Board was empowered, likewise by resolution of 12July 2005, to increase the nominal capital by T• 1,500 up until 12 July 2010with the approval of the Supervisory Board, either through one single or severalissues of new individual registered shares in return for cash or contributionsin kind (authorised capital 2). By resolution of the General Meeting of 2 June 2006 the Management Board is,with the consent of the supervisory board, authorized to increase the Company'sshare capital until 1 June 2011 once or several times up to a maximum amount ofEUR 2.881.540 by issuance of new registered non-par value shares against cashcontribution and/or contribution in kind (authorised capital 3). This resolutionbecame effective with the entry in the commercial register on 30 June 2006.The Management Board resolved on 20 June 2006, with the approval of theSupervisory Board on 21 June 2006, using the authorization of 12 July 2005, onthe increase of the share capital from • 15,763,080.00 to • 17,190,823.00 byissuance of 1,427,743 new registered non-par value shares against contributionin kind. The contribution in kind shall be 34,210,761 shares in Cresta Group Limited,Mill Lane House, Mill Lane, Ightham, Sevenoaks, Kent TN15 9BH, Great Britain.The consideration for this contribution shall be the new registered non-parvalue shares in the Company as well as the cash amount of approximately •4,366,245. The increase of the share capital became effective with the entry of 3 July2006. Once this transaction is effective on 3 July 2006 the remaining authorizedcapital 1 is amounting to EUR 2,072,257. Thereafter, the authorised capitaldeveloped as follows: T•Status at 30 June 2005 243Revocation of the authorised capital (243)Increase in the authorised capital 1 3,500Increase in the authorised capital 2 1,500Increase in the authorised capital 3 2,882Status at 30 June 2006 7,882 Convertible bonds with conversion rights SQS has, on the basis of the resolution of the General Meeting of 14 September2005, undertaken to grant the vendor of the shares in SQS Group (UK) Ltdconvertible bonds in a total nominal amount of T• 53, divided into 52,800convertible bonds of a nominal value of • 1.00 each, if the party entitled paysinto SQS the nominal amount of • 1.00 per share. The exercise of the right ofconversion expires on 31 July 2008. Up until completion of the preparation ofthese Financial Statements, the party entitled had not exercised this right. 14. Minority Interests No change in this item compared to 30 June 2005. Profits were allocated to the parent company in the amount of T• 0 (half year2005: T• 1). Since the losses accrued up until 2003 in individual subsidiariesare not covered by capital contributions of minority shareholders, the profitswere, in accordance with IAS 27.35, allocated to the parent company. Profits areallocated in full to the parent company until the losses have been offset. Thisaffects only one subsidiary as at 30 June 2006. 15. Notes to the Statement of Cash flows The Cash Flow Statement shows how the funds of the Group have changed in thecourse of the business year through outflows and inflows of funds. The paymentsare arranged according to investment, financing and business activities. The sources of funds on which the Cash Flow Statement is based consist of cashand cash equivalents (cash on hand and bank balances). 16. Related party transactions Under IAS 24, related persons and related companies are persons and companieswho have the possibility of controlling another party or exercising significantinfluence over their finance or business policy. In the SQS Group, these are theManagement Board members as well as the members of the Supervisory Board, Mr.and Mrs. Bons and Mr. and Mrs. van Megen, by reason of their position asshareholders, as well as the real estate investment fund "Stollwerckstrasse GbRmbH" Cologne and "Am Westhover Berg GbR mbH", Cologne, since these are likewisedominated by the married couples mentioned. In addition, SQS regards the Germanregional managers as well as the directors of subsidiary companies (seniorexecutives) as belonging to this circle of persons. In detail, the following transactions have taken place with these persons andcompanies: The married couples Bons and van Megen receive dividends if these are paid andemoluments as shareholders of SQS. Mr. Bons and Mr. van Megen are ManagementBoard members. The senior management (regional managers, directors of subsidiarycompanies) of SQS hold shares as follows: Details in individual Six month ended Six month ended Year ended 31shares 30 June 2006 30 June 2005 December 2005 Non-par shares Non-pare shares Non-pare sharesHeinz Bons, Member ofManagement Board 3,295,945 1,699,344 3,295,945Maria Helene Bons, nee Peters 932,544 388,560 932,544Rudolf van Megen, Memberof Management Board 3,657,647 1,699,344 3,657,647Ilona van Megen, nee Rumsch 932,544 388,560 932,544Rene Gawron, Member ofManagement Board 2,289 160 2,289Shares held by senior executives 59,086 12,209 59,086 Total 8,880,055 4,188,177 8,880,055 16. Related party transactions (continued) In addition, Mr. Bons administers on trust alone (in Germany) and jointly (inUK) with a senior executive of SQS Group (UK) Ltd a further 113,070 shares(half-year 2005: 25,510 shares) within the framework of the employeeparticipation programme. The total emoluments of the Management Board members amounted in the interimperiod ended 30 June 2006 to T• 484 (half-year 2005: T• 446). The emoluments ofthe Supervisory Board members amounted in total to T• 41 (half-year 2005: T• 17)of which T• 41 had not been paid by the end of the interim period. As a part of the remuneration for the Management Board activities, SQS hasgranted a pension commitment to two Management Board members. These pensionplans amount to T• 325 (half-year 2005: T• 343). Within the framework of a stock option programme, the two major shareholdershave granted shares to employees from their own holdings in SQS shares.Mrs. Bons and Mrs. van Megen are employed at SQS and have received remunerationin a total of T• 7 (half-year 2005: T• 5). No claims or liabilities existed between the company and the two majorshareholders at the date of these Interim Statements (half-year 2005: T• 513). Mr. Gawron holds a minority stake of one share in the Swiss subsidiary on trustfor SQS Software Quality Systems AG since his office as president of theadministrative board of this company makes this necessary under Swiss law. Senior Management (regional managers, directors of subsidiary companies) receiveremuneration at rates usual in the market, including the usual ancillarybenefits. SQS uses property owned by the closed real estate investment fund"Stollwerckstrasse GbR mbH", Cologne, and, since the business year 2001, alsothe real estate investment fund "Am Westhover Berg GbR mbH", Cologne. The sharesin the fund are held by employees and also Management Board members of SQS AG.The conditions of use agreed are compatible with normal market conditions. Thetotal expenses incurred under these contracts amounted in the interim period toT• 647 (half year 2005: T• 687). Members of the Management board held 44.1% (half-year 2005: 80.8 %) of theshares in SQS as at 30 June 2006. 17. Proposed Dividend The General Meeting of 2 June 2006 resolved not to pay any dividend for thebusiness year 2005. The profit for the year is to be taken in full to retainedearnings. 18. Other Information There is currently no litigation that might have significant impact on theearnings situation of SQS AG. 19. Post interim period events SQS Software Quality System AG has agreed to acquire 100 % of the shares ofCresta Group Limited ("Cresta") for a consideration of up to £18 Mio. SQS willmerge its UK operation with Cresta, to create the largest independent pure playsoftware testing and quality management consulting practice in UK. Cresta has 200 employees and is headquartered in Central London, with asubsidiary in Ireland and an office in South Africa. For the year ended 31December 2005, Cresta recorded turnover of £ 12.9 Mio. (2004: £ 8.4 Mio.) andprofit before tax of £ 0.72 Mio. (2004: £ 0.53 Mio.). The net assets beingacquired in this transaction had a book value of £ 1.4 Mio. as at 31 December2005. The consideration for the acquisition will comprise SQS shares up to a maximumof 78 % of the deal value with the remainder in cash. The initial considerationof £ 6 Mio. (£ 3 Mio. in cash and £ 3 Mio. by the issue of 1,427,743 newordinary shares in SQS) will be paid upon completion, with the balance to bepaid depending on the achievement of specific earn out targets over the next twoyears, up to an additional maximum of £ 12 Mio. SQS will apply to AIM foradmission of the 1,427,723 initial consideration shares on completion, which hasbeen effective on 3 July 2006. The new shares will rank parri passu with theexisting ordinary shares. The German Commercial register has enlisted the new shares on 3rd July 2006 andtherefore the transaction became effective. Cologne, 06 September 2006SQS Software Quality Systems AG --------------- --------------- ---------------(H. Bons) (R. Gawron) (R. van Megen) SQS Software Quality Systems AGStollwerckstrasse 11D-51149 Cologne This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
SQS Software Quality Systems AG