Last checked at 20 Mar 2008 07:00
20 March 2008 Corero plc ("Corero" or "the Group") Preliminary Results for the year ended 31 December 2007
Corero plc, the specialist provider of software solutions to the banking & securities and education markets, announces its preliminary results for the year ended 31 December 2007. This is the first full year that the results are reported under IFRS.
* 2007 has been a difficult year for Corero caused by poor trading in the Financial Markets division together with large increases in the cost base at the beginning of the year. * The problems started to become clear by the middle of 2007 and the Board instigated a full business review that has led to: * Corero operating as two independent divisions * Divisional MD's brought onto the Board * Corporate costs dramatically reduced * Overall head count reduced by 20 per cent. * Improved forecasting systems put in place * Overall results: ‚£5,244,000 of revenue; adjusted operating loss of ‚£ 798,000; loss after tax of ‚£1,443,000 and loss per share of 3.3 pence. The closing cash balance was ‚£825,000. * Operationally, Corero Business Systems achieved record revenues and profits whilst Corero Financial Markets suffered a serious project delay and a reduced level of new customer wins. * Current trading: we expect another excellent contribution from Business Systems in 2008: Financial Markets has good visibility of contracted revenues and there is an improving pipeline for new clients. The result is that 2008 should see a much improved performance and provide a strong base for future growth. Enquiries:Corero PLC Tel: 020 7392 1300Peter Waller John East & Partners Limited Tel: 020 7628 2200John East/Simon Clements College Hill Tel: 020 7457 2020Matthew Smallwood/Jamie Ramsay
About Corero
Corero designs, develops and delivers market leading software products for financial institutions through its Financial Markets Division, and business and education markets through its Business Systems Division.
Radica CAPS is the European leading software system that addresses the needs of asset servicing operations for the global banking & securities sector. By fully automating the life cycle of corporate actions, dividends, including taxation and new issues and placings, Radica reduces the serious operational risk of missing or miscalculating corporate events. This area of operations has traditionally been very manual with all the risk and cost associated with such processes. Radica is designed for a global market and can address the needs of financial institutions from Europe, North America or Asia Pacific.
Blue Curve software allows organisations to vastly improve the production and distribution of their financial research. It collates and presents complex financial data efficiently and quickly for analysts to make informed opinions on market conditions and trends. It speeds up the process of content creation, content approval and publishing. And it also makes sure that each piece of content conforms to the correct regulatory requirements, and that it gets sent to the right people, using the right method and at the right time.
ICAEW accredited, Resource Financials, is at the core of the Corero suite of business applications. Also featured are solutions for eProcurement, Project Costing, HR & Payroll, Continuing Professional Development and Learning Management. Together with Workflow and Web Applications, covering Reporting, Timesheets, Expenses and Requisitions, there are over 60 highly integrated modules offering large and small enterprises modern and dynamic business solutions.
Eclipse Learner Management system manages the students, tutors and processes within Further and Higher Education environments by electronically capturing the information required throughout the "learning lifecycle" and to satisfy Government reporting requirements and, most importantly, secure the funding upon which Colleges depend.
Chairman's Statement for the year ended 31 December 2007
Introduction
The year ended 31 December 2007 has been a difficult one for Corero. Detailed reasons for this were set out in my statements to shareholders on 27 September 2007 and 23 November 2007. These can be summarised as poor trading in the Financial Markets Division coupled with a significant increase in the cost base owing to an over optimistic reaction to the successes experienced in 2006. The problems started to become clear by the middle of 2007 and as a result the Board instigated a full review resulting in the creation of a business recovery plan. This plan included a restructuring of the business's operations and focus on the cost base. It was implemented in the second half of 2007.
Key action points in the plan were:
* Recognition that Corero has two totally separate businesses, Financial Markets and Business Systems, and to reflect this their respective managing directors were appointed to the plc Board * Chief Executive, Jarlath McGee and Finance Director, Ian Selby left without direct replacement * Corero group central costs for finance, IT, personnel and marketing needed to be reduced and considerable responsibility for these costs to be handed back to the businesses * Overall head count was to be reduced by 20 per cent and re-aligned to give a stronger focus on sales, customer support and revenue generation * A more rigorous revenue forecasting and budgeting systems was to be put in place
These actions have now been completed and although some of the benefits were seen in 2007 the full impact of the changes will only be realised in the year ending 31 December 2008.
Results
This is the first full year that Corero has reported under International Financial Reporting Standards ("IFRS"). For the year ended 31 December 2007, the Group reported revenues of ‚£5.24 million (2006: ‚£6.29 million) with the ‚£ 1.05 million revenue reduction due to ‚£1.35 million reduction in Financial Markets partially offset by a ‚£0.3 million increase in Business Systems. The loss before IFRS adjustments*, restructuring, interest and tax charges was ‚£0.8 million (2006: profit of ‚£0.67 million). The loss after tax and all charges was ‚£1.44 million (2006: loss of ‚£0.03 million). Interest charges were ‚£0.35 million and restructuring charges ‚£0.40 million.
The working capital position of the Company remains strong. Cash at the end of 2007 was ‚£825,000 (2006: ‚£907,000). The administrative cost base for 2007 was ‚£ 5.69 million an increase of ‚£0.38 million over 2006. As we entered 2008 the cost run rate has been reduced to ‚£4.98 million. In addition, our contracted backlog of support and services revenue was ‚£3.02 million at 31 December 2007 which has increased to cover 61 per cent of the 2008 administrative expense.
* IFRS adjustments - holiday pay accrual, amortisation of customer lists, capitalisation of research and development, amortisation of research and development.
Business Systems Division
2007 was a successful year for the Business Systems division which not only achieved record revenue and profit figures but also launched several new products.
At the beginning of the year we set two strategic targets for the business; to continue to build our share of the City Academy market which had emerged as a sizeable opportunity and to release `Eclipse NG' a new product suite designed to both consolidate the best elements of our two existing Learner Management products, Eclipse & LMS, and also to offer increased functionality utilising the very latest web portal technology.
Of the 20 new name contracts we won during the year, 14 were City Academy clients based in cities such as Bristol, Grimsby, London and Leicester. These new contract wins meant that at the end of 2007 we had achieved a 25 per cent market share of academies opened since the City Academy initiative began. Current government plans are to increase the number of City Academies to 243 by the year 2010 which represents an exciting opportunity for this division.
In our other key market, Further Education, the Company has won several new clients. Of particular note was Haringey Sixth Form Centre, part of Haringey Council, who bought our integrated finance and learner management solution. South Trafford College, Sir George Monoux Sixth Form College and Central Sussex College all invested in our financial and web solutions. Finally Peterborough Adult College and Epping Forest College signed up for the newly released Eclipse NG Learner Management platform.
As we move further into 2008 we believe that the education sector will remain competitive but the investment in our new Learner Management product, Eclipse NG, is already generating additional revenue and planning is underway to offer new and innovative products from our core Financials suite to both existing and future customers. We are confident of another excellent contribution from the Business Systems division in 2008.
Financial Markets Division
2007 was a poor year for Financial Markets compared to a strong year in 2006. The single largest reason was a serious delay to a major investment banking project for which we were unable to compensate with other sales. Although we signed two new clients for the Blue Curve hosted service, Bank of Ireland and Blackmont Capital of Canada, as well as renewing three Blue Curve licence agreements we did not meet our own expectations for new customer wins.
As a result a number of significant changes were made in the Financial Markets division. These changes have been necessary to bring the division to a position where it is capable of producing sustainable future profit and growth. The reduction in headcount, changes in the organisation and the integration of the CAPS and Blue Curve teams makes us confident we can now deliver improved customer service from a reduced cost base.
2008 will be challenging. However, we enter it with greater confidence and a high degree of visibility in our contracted revenues due to sales in 2006 and 2007 of hosted services, annual licences and support revenues. We plan to extend our operations in North America and introduce further improvements to both CAPS and Blue Curve to maintain their premier position in the market. There is an improving pipeline for these products from new clients and given that the Company has doubled the Financial Markets customer base in the past two years and 75 per cent of revenue is historically generated from our existing clients, this reduces the ongoing revenue risk of the Company.
Business Model and Strategy
Our strategy at the operating level is to run Corero as two separate businesses, Financial Markets and Business Systems, with the minimum of central resources required for co-ordination; development and implementation of corporate strategy; and to meet public company requirements. The short term focus for 2008 is to restore the Company to profitability while continuing to make investment in our US operation, enhancements to our products and the development of our staff, all of which are necessary to achieve sustainable organic growth. In the longer term we intend to increase the size of both businesses through organic growth and acquisitions or mergers.
Staff
On behalf of the Board I would like to thank all of our staff for the contribution they have made in 2007. Whilst the overall results were disappointing this masks many individual achievements of great merit. As part of the re-structuring it was necessary to reduce staff numbers at the end of 2007 and although in most cases this was achieved through natural attrition some redundancies were necessary. I am confident we now have a talented group of people capable of taking Corero forward.
Outlook
The Board believes the results of the recovery plan should become evident in 2008. Our backlog of business is the strongest ever; our pipeline of realistic opportunities is growing and our cost base has been brought into line with the perceived revenue opportunity. In both divisions our product lines remain competitive in their markets. We have taken account in our planning of an uncertain UK and global economy. With the planned opening of several new City Academies, the availability of the new Eclipse NG product and the public sector focus we feel the Business Systems Division will be largely immune from downturn in the economy. Any risk resides in the Financial Markets Division with its focus on investment banks, brokers and similar financial institutions. We have taken a cautious approach with the expectation that most of our revenues will come from our existing customer base which has doubled in size since the beginning of 2006.The Board has been encouraged by trading in the past three months (December - February) which has shown a small overall profit and as a result is confident of a much improved performance in 2008.
Peter WallerChairman19 March 2008
Finance Officer's Report for the year ended 31 December 2007
Financial Performance
For the year ended 31 December 2007, the Group reported an adjusted loss before tax, interest, restructuring costs and IFRS adjustments* of ‚£798,000 compared with a profit of ‚£670,000 for the year ended 31 December 2006.
* IFRS adjustments - holiday pay accrual, amortisation of customer lists, capitalisation of research and development, amortisation of research and development.
Group revenues declined to ‚£5,244,000 (2006: ‚£6,294,000). There was a reduction in the revenue in the Financial Markets division of ‚£1,347,000 and an increase in revenue in the Business Systems division of ‚£297,000.
The Business Systems division revenues grew to ‚£2,718,000 (2006: ‚£2,421,000) due to sales into new City Academy customers and from the launch of the new Eclipse NG product.
The Financial Markets division revenue declined to ‚£2,526,000 (2006: ‚£ 3,873,000). The decrease in Blue Curve revenues to ‚£1,296,000 (2006: ‚£ 1,968,000) was due to lower licence revenue from existing customer renewals and new customer sales. Radica revenues were ‚£1,230,000 (2006: ‚£1,905,000) the reduction being from the delay in the start of professional services to an existing customer.
Contracted annual licence and support revenues have increased to approximately ‚£2,900,000 (2006: ‚£2,800,000) due to the addition of new customers and sales of additional licences and services into the existing user base.
The cost base increased in 2007 in line with budgeted costs until it was recognised that the budgeted profit would not be achieved. Action was taken to reduce variable costs. Headcount at the end of 2007 was reduced to 61 from 75 at the start of the year.
Exceptional costs of ‚£401,000 (2006: ‚£170,000) include the restructuring costs of the business recovery plan implemented in the second half of the year and an increase to 100 per cent. in the provision against future property lease costs for the surplus Blue Curve property. The company is actively marketing these premises to potential tenants.
Net interest on the 8 per cent. Convertible Unsecured Loan Stock less amounts held in the bank was ‚£337,000 (2006: ‚£662,000). This includes notional interest payments as required by International Accounting Standard 32.
Tax credits of ‚£48,000 were received in the year which relate to prior year tax credits reclaimed. Total tax losses carried forward are approximately ‚£ 6,315,000.
Loss per share was 3.33 pence (2006: loss 0.09 pence). The average number of shares in issue in 2007 was 43,347,651 (2006: 36,251,573).
The loss for the period was ‚£1,443,000 (2006: ‚£31,000).
Financial Position
Net trade receivables were ‚£1,319,000 (2006: ‚£2,293,000), which represented 26 days sales outstanding (2006: 52).
Net cash generated from operations was ‚£697,000 (2006: outflow ‚£108,000). This was spent on investment and financing activities leading to a net decrease in cash and cash equivalents of ‚£82,000 (2006: increase ‚£510,000). The closing cash balance was ‚£825,000 (2006: ‚£907,000).
Deferred income, which represents future revenues for the Group, increased to ‚£ 1,962,000 (2006: ‚£1,466,000).
The Group's net deficit position was ‚£1,065,000 (2006: net funds ‚£378,000).
Duncan SwallowGroup Financial Controller19 March 2008
Consolidated Income Statement for the year ended 31 December 2007
2007 2006 Note ‚£'000 ‚£'000 Revenue 5,244 6,294 Cost of sales (303) (217) Gross profit 4,941 6,077 Administrative expenses - other (5,694) (5,314) Administrative expenses - restructuring 2 (401) (170)costs (Loss)/profit before financing (1,154) 593 Finance income 3 16 10 Finance costs 4 (353) (672) Loss before taxation (1,491) (69) Taxation 5 48 38
Loss attributable to equity shareholders 8 (1,443) (31)
Basic and diluted loss per share 6 (3.33p) (0.09p)
Consolidated Statement of recognised income and expense
2007 2006 ‚£'000 ‚£'000 Loss for the financial period (1,443) (31) Total recognised losses relating to the year (1,443) (31) Total recognised losses since the last (1,443) (31)financial statements
Consolidated Balance Sheet as at 31 December 2007
2007 2006 Note ‚£'000 ‚£'000 Assets Non-current assets Goodwill 2,361 2,361 Other intangible assets 1,187 1,116 Property, plant and equipment 148 78 3,696 3,555 Current assets Trade and other receivables 1,639 2,463 Cash and cash equivalents 825 907 2,464 3,370 Liabilities Current Liabilities Trade and other payables (1,093) (1,067) Provisions (90) (19) (1,183) (1,086) Net current assets 1,281 2,284 Deferred income (1,962) (1,466) Non-current liabilities Convertible 8 per cent. unsecured loan (4,027) (3,947)stock Provisions (53) (48) (4,080) (3,995) Net (liabilities)/assets (1,065) 378 Shareholders' equity Shares to be issued 8 - 1,531 Ordinary share capital 8 4,557 3,685 Share premium 8 6,369 6,369 Merger reserve 8 1,023 364 Convertible unsecured loan stock equity 8 146 146reserve Share options reserve 8 15 15 Retained earnings 8 (13,175) (11,732) Total equity attributable to equity (1,065) 378holders of the parent
Consolidated Cash Flow Statement for the year ended 31 December 2007
2007 2006 Note ‚£'000 ‚£'000 Net cash from operating activities A 697 (108) Cash flows from investing activities Acquisition of subsidiaries (net of cash) - 65 Purchase of intangible assets (345) (305) Purchase of property, plant and equipment (133) (54) Interest received 16 10 Net cash used in investing activities (462) (284) Cash flows from financing activities Net proceeds from issue of ordinary - 243shares Interest paid (317) (257) Borrowings raised net of expenses - 916 Net cash used in financing activities (317) 902 Net (decrease)/increase in cash and cash (82) 510equivalents Cash and cash equivalents at 1 January 907 397 Cash and cash equivalents at 31 December 825 907
Notes to the consolidated cash flow statement
A. Cash generated from operations
2007 2006 ‚£'000 ‚£'000 Continuing operations Loss before taxation (1,491) (69) Adjustments for: Depreciation 63 57 Amortisation 274 190 Finance income (16) (10) Finance expense 353 672 Increase in provisions 75 67 Share based payment charge - 13 Changes in working capital (Increase)/decrease in trade and other 824 (1,441)receivables Increase/(decrease) in payables 567 375 Cash generated from continuing operations 649 (146) Corporation tax credit 48 38 Net cash from operating activities 697 (108)
B. Major non-cash transactions
Corero issued 8,720,952 ordinary 10 pence shares on 3 April 2007 to satisfy the deferred consideration due to Blue Curve Limited under the acquisition agreement entered into at the time of the acquisition in January 2006 at which time it issued 5,606,060 Ordinary 10 pence as initial consideration. The deferred consideration shares have been issued in accordance with the earn-out provisions of that agreement.
C. Purchase of subsidiary undertaking
On 16 January 2006, the Company acquired 100 per cent. of the issued share capital of Blue Curve Limited whose assets and liabilities were
Book value Fair value Fair value adjustment ‚£'000 ‚£'000 ‚£'000 Property, plant, equipment 5 - 5 Receivables 181 - 181 Cash at bank and in hand 125 - 125 Payables (216) - (216) Deferred income (97) - (97) Net separable liabilities (2) - (2) Goodwill 1,852 - 1,852 Intangible Asset 667 - 667 Satisfied by: Consideration 2,517 Consideration comprised: Equity consideration 2,456 Costs of acquisition 61 Total consideration 2,517
Amounts incurred in restructuring, reorganising and integrating Blue Curve Limited since acquisition and included in the Company's financial results under restructuring costs amounted to approximately ‚£155,000.
The consideration comprised:
a) Initial consideration of ‚£925,000, satisfied by the issue of 5,606,060 new ordinary shares at a price of 16.5p per share; and
b) Deferred consideration of up to ‚£2,075,000, based on Blue Curve's revenues for the year ending 31 December 2006, after deducting any shortfall adjustment, at the rate of twice the excess above minimum revenue of ‚£1,150,000. The shortfall adjustment was defined as 1.5 times the amount by which Blue Curve's revenues for the year ending 31 December 2005 fell below ‚£925,000. Blue Curve's revenues for the year ended 31 December 2005 were ‚£883,000. Blue Curve's revenues for the 12 months to 31 December 2006 were ‚£1,978,913. The resulting deferred consideration of ‚£1,530,527 was satisfied by the issue of 8,720,952 new Corero ordinary shares, issued at 17.55p per share on 3 April 2007
Accounting polices
1.1 Basis of preparation
The Group and parent company financial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (IFRS), International Financial Reporting Interpretations Committee (IFRIC) interpretations and those parts of the Companies Act 1985 applicable to companies reporting under IFRS.
The Group and parent company financial statements have been prepared under the historical cost convention. A summary of the significant Group accounting policies adopted in the preparation of the financial statements is set out below.
The financial statements have been prepared on a going concern basis, although the Group incurred trading losses and cash outflows for the year. The Directors carried out a restructuring program during the second half of the year with the result that the current cost base is now appropriate to the forecast revenue opportunity. The Group has met its forecast revenue and profit targets for the first two months of the current year. The Directors have prepared detailed profit and cash flow projections for the period to 30 September 2009 which show that the Group will maintain an increasing positive cash balance. As a result, the Directors are of the opinion that the Group has adequate working capital to continue as a going concern for the foreseeable future and, in particular, for a period of at least 12 months from the date of approval of these financial statements.
1.2 First time adoption of IFRS
These are the Group's first financial statements prepared in accordance with IFRS. Accordingly, IFRS 1 `First Time Adoption of International Financial Reporting Standards' has been applied. The Group's transition date is 1 January 2006, and the Group prepared its opening balance sheet at that date in accordance with IFRS effective at 31 December 2007 except as specified below. In preparing these financial statements, the Group applied mandatory exceptions and certain of the optional exemptions available in IFRS 1 from the full retrospective application of IFRS:
Optional exemptions to full retrospective restatement elected by the Group
i. Business combinations exemption
The Group has taken the business combination exemption, which allows that IFRS 3 not be applied to business combinations that took place prior to 1 January 2006, the date of transition to IFRS.
Mandatory exceptions to full retrospective restatement applied by the Group
i. Estimates exception
Estimates under IFRS at the date of transition are consistent with estimates made at the same time under UK GAAP.
Reconciliations and explanations of the effect of the transition from UK GAAP to IFRS on the Group's equity and its profit or loss are provided in note 8.
1.3 Basis of consolidation
The consolidated financial statements incorporate the results, assets, liabilities and cash flows of the company and each of its subsidiaries for the financial year ended 31 December 2007.
Subsidiaries are entities controlled by the Group. Control is deemed to exist when the Group has the power, directly or indirectly to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results, assets, liabilities and cash flows of subsidiaries are included in the consolidated financial statements from the date control commences until the date that control ceases.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.
Intra-group balances and transactions are eliminated on consolidation.
1.4 Business combinations
The purchase method is used to account for all acquisitions. The cost of an acquisition is measured at the fair values, on the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued, plus any costs directly attributable to the acquisition.
At the date of acquisition, the identifiable assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill.
1.5 Revenue
Revenue is measured at the fair value of the consideration received or receivable and represents the amounts receivable for services provided in the normal course of business, net of all related discounts and sales tax.
Corero has adopted the following in respect of software revenue recognition
1. Software Products
Revenue results mainly from licences, which provide customers with the right to use these products. Such revenue is recognised on the following basis:
i. If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customisation, the revenue for both services and software is recognised under the percentage of completion method.
ii. If services are essential to the functionality of the software and the payment terms are linked, the revenue for both software and services is recognised when the following conditions are met:
- A signed contract exists;
- Delivery has occurred;
- The sales price is fixed and determinable;
- Collection of the debt is probable;
- No significant obligations remain.
iii. If services are incidental to the functionality and/or the payment terms are linked to simple installations, revenue from the grant of perpetual or fixed term licences to use Corero's software is recognised when the above conditions are met and services revenue is recognised separately as the services are provided. Where services are not incidental to the functionality licence revenues are recorded as agreed project milestones are achieved.
Software rentals or licences invoiced on a periodic basis are recognised over the term of the agreement.
2. Consulting and Professional Services
Revenue from the provision of consultancy and professional services is recognised as the work is performed.
3. Support income is recognised over the life of the agreement.
4. Interest income is accrued on a time basis using the effective interest method.
1.6 Cost of sales
Cost of sales represents amounts due to external third parties for services and goods directly related to revenue. Examples of such costs would include, but not be limited to, external consultants and third party hardware and software.
1.7 Foreign currencies
Transactions in foreign currencies are translated at the exchange rate ruling at the date of each transaction. Foreign currency monetary assets and liabilities are retranslated using the exchange rates at the balance sheet date. Gains and losses arising from changes in exchange rates after the date of the transaction are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated at the exchange rate at the date of the original transaction.
In the consolidated financial statements, the net assets of the Group's foreign operations are translated at the balance sheet date. Income and expense items are translated at the average rates for the period. The resulting exchange differences are recognised in equity and included in the translation reserve. Such translation differences are recognised in the income statement on the disposal of the foreign operation.
1.8 Goodwill
Goodwill on acquisition of subsidiaries represents the excess of the cost of an acquisition over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary. Goodwill is not amortised, but tested at least annually for impairment, and carried at cost less accumulated impairment losses. Impairment losses are immediately recognised in the income statement and are not subsequently reversed.
1.9 Intangible assets
Separately acquired intangible assets
Purchased computer software is carried at cost less accumulated amortization and any impairment losses.
Internally generated intangible assets
The Group's internally generated intangible assets include development costs.
Development costs are capitalised only when it is probable that future economic benefit will result from the project and the following criteria are met:
* The technical feasibility of the product has been ascertained; * Adequate, technical, financial and other resources are available to complete and sell or use the intangible asset; * The Group can demonstrate how the intangible asset will generate future economic benefits and the ability to use or sell the intangible asset can be demonstrated; * It is the intention of management to complete the intangible asset and use it or sell it; and * The development costs can be measured reliably.
After initial recognition, internally generated intangible assets are carried at cost less accumulated amortisation and any impairment losses.
Acquisition as part of a business combination
Identifiable intangible assets acquired as part of a business combination are initially recognised separately from goodwill if the asset's fair value can be measured reliably, irrespective of whether the asset had been recognised by the acquiree before the business combination. An intangible asset is considered identifiable only if it is separable or if it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Intangible assets acquired as part of a business combination and recognised by the Group are customer sales lists.
After initial recognition, assets acquired as part of a business combination are carried at cost less accumulated amortisation and any impairment losses.
Amortisation
Intangible assets are amortised on a straight line basis, to reduce their carrying value to their residual value, over their estimated useful lives. The following useful lives were applied during the year:
Computer software acquired 2 to 6 years straight line
Computer software internally generated 5 to 7 years straight line
Customer lists 7 years straight line
Methods of amortisation, residual values and useful lives are reviewed, and if necessary adjusted, at each balance sheet date.
1.10 Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment losses. Cost comprises the purchase of property, plant and equipment together with any directly attributable costs.
Subsequent costs are included in an asset's carrying value or are recognised as a separate asset. When it is probable that future economic benefits associated with the additional expenditure will flow to the Group and the cost of the item can be measured reliably. All other costs are charged to the income statement as incurred.
Depreciation commences when an asset is available for use. Depreciation is calculated so as to write off the cost or value of an asset, net of anticipated disposal proceeds, over the useful life of that asset as follows:
Leasehold improvements 5 years straight line
Computer hardware 2 to 6 years straight line
Fixtures and fittings 5 to 6 years straight line
Office equipment 5 to 6 years straight line
Methods of depreciation, residual values and useful lives are reviewed, and if necessary adjusted, at each balance sheet date.
The gain or loss arising from the disposal or retirement of an item of property, plant and equipment is determined as the difference between the net disposal proceeds and the carrying amount of the item, and is included in the income statement.
1.11 Impairment
At each balance sheet date, the Group assesses whether there is any indication that its assets have been impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. If this is not possible to estimate the recoverable amount of the individual asset, the recoverable amount of the cash-generating unit to which the asset belongs is determined.
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. The value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. This present value is discounted using a pre-tax rate that reflects current market assessments of the time value of money and of the risks specific to the asset for which future cash flow estimates have not been adjusted. If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is recognised as an impairment loss.
An impairment loss relating to assets carried at cost less any accumulated depreciation or amortisation is recognised immediately in the income statement.
Goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the combination.
Goodwill is tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.
An impairment loss is recognised for cash-generating units if the recoverable amount of the unit is less than the carrying amount of the unit. The impairment loss is allocated to reduce the carrying amount of the assets of the unit by first reducing the carrying amount of any goodwill allocated to the cash-generating unit, and then reducing the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.
If an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount but limited to the carrying amount that would have been determined had no impairment loss been recognised in prior years. A reversal of an impairment loss is recognised in the income statement. Impairment losses on goodwill are not subsequently reversed.
1.12 Borrowing costs
All borrowing costs are recognised in the income statement in the period in which they are incurred.
1.13 Finance leases
Leases are classified as finance leases where the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases.
Property, plant and equipment held under finance leases are recognised as assets in the balance sheet at their fair values or, if lower, at the present value of the minimum lease payments, both determined at the inception of the lease. The corresponding obligation is recorded as finance lease obligations and presented within borrowings. The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to the income statement over the period of the lease.
1.14 Operating leases
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the period of the leases. Operating lease incentives are amortised over the period of the lease.
1.15 Investments in subsidiaries
In the company's separate financial statements, investments in subsidiaries are carried at cost less any impairment losses.
1.16 Taxation
The tax expense represents the sum of current tax and deferred tax.
Current tax
Current tax is based on taxable profit for the year and is calculated using tax rates enacted or substantively enacted at the balance sheet date. Taxable profit differs from accounting profit either because items are taxable or deductible in periods different to those in which they are recognised in the financial statements or because they are never taxable or deductible.
Deferred tax
Deferred tax on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes is accounted for using the balance sheet liability method.
Using the balance sheet liability method, deferred tax liabilities are recognised in full for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. However, if the deferred tax asset or liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit, it is not recognised.
Deferred taxation is measured at the tax rates that are expected to apply when the asset is realised or the liability settled based on tax rates and laws enacted or substantively enacted at the balance sheet date.
1.17 Provisions
A provision is recognised when, as a result of a past event, the Group has a legal or constructive obligation, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of such an obligation can be made.
Provisions are measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date. When the effect is material, the expected future cash flows required to settle the obligation are discounted at the pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the obligation.
Provision is made for the present value of any onerous element of operating leases. This typically arises when the Group ceases to use premises and they are left vacant for the remainder of the lease term or are sub-let at rentals which fall short of the amount payable by the Group under the lease.
1.18 Post-retirement benefits
The Group operates two defined contribution group personal pension plans under which it is required to pay fixed contributions to separate funds controlled by trustees. Contributions in these schemes are based on a proportion of the employee's earnings and are charged to the income statement when incurred. The Group has no obligation to the schemes beyond these contributions.
1.19 Financial instruments
The Group classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement.
Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes party to the contractual provisions of the instrument.
The particular recognition and measurement methods adopted for the Group's financial instruments are disclosed below:
Trade and other receivables
Trade and other receivables do not carry interest and are stated at their fair value, as reduced by appropriate allowances for estimated irrecoverable amounts. A provision for impairment of trade receivables is established when there is evidence that the Group will not be able to collect all amounts due according to the original terms of these receivables. The amount of the provision is the difference between the carrying value and the present value of estimated future cash flows, discounted at the effective interest rate. Impairment losses are recognised in the income statement.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits on call with banks and bank overdrafts. Bank overdrafts are disclosed as current borrowings on the balance sheet.
Trade and other payables
Trade and other payables are not interest bearing and are stated at their fair value.
Convertible unsecured loan stock
Under International Accounting Standard (IAS 32) `Financial Instruments: Disclosure and Presentation', convertible loan stock is regarded as a compound instrument, consisting of a liability component and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non- convertible debt. The difference between the proceeds of issue of the convertible loan stock and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity.
Issue costs are apportioned between the liability and the equity components of the convertible stock based on their relative carrying amounts at the date of issue. The portion relating to the equity component is charged directly against equity.
The interest expense on the liability component is calculated by applying the prevailing market interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible loan stock.
Fair value determination
Whenever available, the fair value of a financial instrument is derived from quoted prices in an active market. For assets held, fair value is the bid price and for liabilities held it is the asking price. If there is no active market, fair value is established by using a valuation technique. Valuation techniques include the use of information from recent arm's length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of similar instruments and discounted cash flow analysis. The valuation technique used incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments.
1.20 Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all its liabilities. Equity instruments issued by the company are recorded at the proceeds received, net of directly attributable issue cost.
1.21 Employee share option schemes
The Group operates an equity-settled share-based compensation plan. The fair value of the employee services received in exchange for the grant of share options is measured at grant date and recognised as an expense on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. Fair value is determined by reference to the Black Scholes option pricing model.
At each balance sheet date, the Group revises its estimate of the number of options that are expected to become exercisable.
When share options are exercised, the proceeds received, net of any transaction costs, are credited to share capital (nominal value) and share premium.
In accordance with the exemption available in IFRS 1, this accounting treatment has only been applied to grants of equity instruments after 7 November 2002 that had not vested at 1 January 2006.
1.22 Standards and Interpretations not yet effective
The following Standards and Interpretations have been issued, but are not yet effective and have not been early adopted by the Group:
Title Latest effective Date of EU date - reporting Endorsement periods starting on or later than IFRS 3 Business Combinations 01 July 2009 - (Revised 2008) IAS 27 Consolidated and Separate 01 July 2009 - Financial Statements IFRS 2 Amendment to IFRS 2 01 January 2009 - Share-based Payment: Vesting Conditions and Cancellations IAS 1 Presentation of Financial 01 January 2009 - Statements IAS 23 Revision to IAS 23 Borrowing 01 January 2009 - Costs Amendment to IAS32 Financial 01 January 2009 - Instruments: Presentation and IAS1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations arising on liquidation IFRS 8 Operating Segments 01 January 2009 21 November 2007 IFRIC 12 Service Concession 01 January 2008 - Arrangements IFRIC 13 Customer Loyalty Programmes 01 July 2008 -
IFRIC 14 IAS 19 - The Limit on a 01 January 2008 -
Defined Benefit Asset, Minimum Funding Requirements and their Interaction
IFRIC 11 IFRIC 11 IFRS 2 - Group and 01 March 2007 02 June 2007
Treasury Share Transactions
IAS 1 Presentation of Financial Statements (revised 2007) will result in changes to the presentation of the Group's financial statements as the format currently adopted for the Statement of Changes in Equity will no longer be permitted. Instead, the Group will present a Statement of Comprehensive Income combining the existing Income Statement with other income and expenses currently presented as part of the Statement of Changes in Equity. In addition, the Group will present a separate Statement of Changes in Equity showing owner changes in Equity.
2. Administrative expenses - restructuring costs
2007 2006 ‚£'000 ‚£'000 Staff restructuring including professional 346 13fees Integration costs of Eclipse Learner Systems - 14 Accrual against surplus premises arising on 55 132Blue Curve acquisition Other Blue Curve integration costs - 11 401 1703. Finance income 2007 2006 ‚£'000 ‚£'000 Interest on bank deposits 16 104. Finance costs 2007 2006 ‚£'000 ‚£'000 Interest payable on other loans (285) (283) Bank interest payable (6) (2) Notional charges from variation of CULS - (262)under IAS 32 arising from a change in fair value assumptions Amortisation of notional CULS interest (62) (62)charges and renegotiation costs under IAS 32 Renegotiation of CULS - (63) (353) (672)5. Taxation
The amounts represent refunds in respect of corporation tax and research and development tax credits received during the year.
6. Loss per share
Basic loss per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average of ordinary shares outstandingduring the period. 2007 2006 Loss ‚£'000 after taxation (1,443) (31) Basic earnings per share (3.33p) (0.09p) Weighted average number of 43,347,651 36,251,573ordinary shares
The CULS and share options were non-dilutive for both periods and thus the diluted loss per share is the same as the basic amount.
7. Dividend
The Directors do not recommend paying a dividend (2006: ‚£nil).
8. Statement of changes in shareholder's equity
Shares Share Share CULS Merger Share Profit Total to be capital options equity reserve premium and loss issued reserve reserve account reserve ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 1 January 2006 - 2,823 3 - - 6,428 (11,701) (2,447) Retained loss - - - - - - (31) (31)for year ended 31 December 2006 3,445 3,445 Share based - - 12 - - - - 12payments Equity arising - - - 146 - - - 146on CULS renegotiation Shares issued - 561 - - 364 - - 925on acquisition of Blue Curve Issue of new - 301 - - - (59) - 242shares less costs of issue Deferred 1,531 - - - - - - 1,531consideration for Blue Curve Limited 31 December 1,531 3,685 15 146 364 6,369 (11,732) 3782006 Shares Share Share CULS Merger Share Profit Total to be capital options equity reserve premium and loss issued reserve reserve account reserve ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 1 January 2007 1,531 3,685 15 146 364 6,369 (11,732) 378 Retained loss - - - - - - (1,443) (1,443)for year ended 31 December 2007 3,445 3,445 Deferred (1,531) 872 - - 659 - - -consideration for Blue Curve Limited 31 December - 4,557 15 146 1,023 6,369 (13,175) (1,065)2007 Shares issued
In April 2007, Corero issued 8,720,952 ordinary 10 pence shares to satisfy the deferred consideration due to Blue Curve Limited under the acquisition agreement entered into at the time of the acquisition.
Share options reserve
A credit of ‚£483 was made during the twelve months ended 31st December 2007 representing the estimated cost of any share options. The estimate was calculated using the Black Scholes option pricing model. No employee share options were exercised during the period.
Convertible unsecured loan stock equity reserve
Convertible loan stock is a compound instrument consisting of a liability component and an equity component. The fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, was transferred to reserves at the inception of the new instrument in August 2006.
Merger reserve
The premium on the issue of 5,606,060 10 pence ordinary shares in relation to the acquisition of Blue Curve Limited was transferred to the merger reserve during the year ended 31 December 2006. The premium on the issue of 8,720,952 10 pence ordinary shares in relation to the deferred consideration for Blue Curve Limited was transferred to the merger reserve during the twelve month period ended 31 December 2007.
9. Reconciliation of equity and loss under UK GAAP to IFRS
Corero plc reported under UK GAAP in its previously published financial statements for the year ended 31 December 2006. The reconciliation below shows a reconciliation of equity and profit as reported under UK GAAP as at 31 December 2006 to the revised equity and profit under IFRS. In addition, there is a reconciliation of equity under UK GAAP to IFRS at the transition date for the Group and company, being 1 January 2006.
Reconciliation of consolidated loss for year ended 31 December 2006
UK GAAP IAS 19 IAS 38 IFRS ‚£'000 ‚£'000 ‚£'000 ‚£'000 Revenue 6,294 - - 6,294 Cost of sales (218) - - (218) Gross profit 6,076 - - 6,076 Administrative (5,701) (39) 427 (5,313)expenses Restructure expense (170) - - (170) Operating profit 205 (39) 427 593 Finance income 10 - - 10 Finance costs (672) - - (672) Loss before taxation (457) (39) 427 (69) Taxation 38 - - 38 Loss for the year (419) (39) 427 (31)attributable to shareholders
Reconciliation of consolidated equity for year ended 31 December 2006
(a) (b) (c) Reclass- UK GAAP IAS 19 IAS 38 IFRS 2 ifications IFRS ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Assets Non-current assets Goodwill 2,734 - (373) - - 2,361 Other - - 1,116 - - 1,116intangible assets Property, 92 - (14) - - 78plant and equipment 2,826 - 729 - - 3,555 Current assets Trade and 2,463 - - - - 2,463other receivables Cash and cash 907 - - - - 907equivalents 3,370 - - - - 3,370 Liabilities Current Liabilities Trade and (1,095) (39) - - 67 (1,067)other payables Provisions - - - - (19) (19) (1,095) (39) - - 48 (1,086) Net current 2,275 (39) - - 48 2,284assets Deferred (1,466) - - - - (1,466)income Non-current (3,947) - - - - (3,947)liabilities Convertible 8 per cent. unsecured loan stock Provisions - - - - (48) (48) (3,947) - - - (48) (3,995) (312) (39) 729 - - 378 Shareholders' equity Shares to be 1,531 - - - - 1,531issued Ordinary share 3,685 - - - - 3,685capital Share premium 6,369 - - - - 6,369 Merger reserve 364 - - - - 364 Convertible 146 - - - - 146unsecured loan stock equity reserve Share options 15 - - - - 15reserve Retained (12,422) (39) 729 - - (11,732)earnings Total equity (312) (39) 729 - - 378attributable to equity holders of the parent
Explanation of reconciling items between UK GAAP and IFRS
a. IAS 19 Employee benefits
In accordance with IAS 19 an accrual has been made for annual leave which can be carried forward in to the next year.
b. IAS 38 Intangible Assets
Under UK GAAP all capitalised software was included within tangible fixed assets. IAS 38 "Intangible Assets" requires software that is not an integral part of an item of computer hardware to be classified within intangible assets.
Under UK GAAP goodwill was amortised over its estimated useful life. IAS 38 requires that goodwill be subject to annual impairment reviews and not amortisation.
IAS 28 requires that Research and development costs be capitalised providing they meet certain criteria.
Reclassifications
The portion of provisions for onerous leases expected to be settled within twelve months of the balance sheet date has been reclassified to current liabilities in accordance with IAS 1.
10. Sundry Information
This preliminary statement, which has been agreed with the auditors, was approved by the Board on 19 March 2008. It is not the Company's statutory accounts for the year ended 31 December 2007 but has been extracted from them. Copies of the report and accounts for the year to 31 December 2007 will be posted to shareholders shortly and may be obtained from the company's registered offices.
The statutory accounts for the year ended 31 December 2007 received an audit report which was unqualified and did not contain a statement under s237 (2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31 December 2006 have been delivered to the Registrar of Companies but the audited 31 December 2007 accounts have not yet been filed.
11. Copies of Report and Accounts
Copies of the Report and Accounts will be sent to shareholders shortly and will be available to members of the public from the Company's registered office, 3rd Floor, 3 London Wall Buildings, London Wall, London EC2M 5SY and from the Company's website www.corero.com.
CORERO PLC