Restructuring activities Expenses of €6,940 thousand – thereof €2,835 thousand in the second quarter – were incurred in the first half due to restructuring activities, especially at Software AG Spain.
Due to the strength of the euro, especially against the U.S. dollar, currency translation losses of €10,030 thousand – thereof € 4,506 thousand in the second quarter – were incurred on Group sales and €6,920 thousand on Group EBITA – thereof €2,825 thousand in the second quarter – in comparison with the prior-year quarter.
Acquisition of SPL Software, Ltd., Israel and webMethods, Inc., USA Software AG carried out two acquisitions in the second quarter of 2007. As a result, due to IFRS requirements for measuring the cost of business combinations, deferred income has been stated at the lower fair value in the opening balance sheet instead of at the carrying amount. Therefore, initial inclusion of these acquisitions in the accounts of Software AG has reduced the Company’s revenues, since the deferred income primarily relates to future maintenance revenues as well as future licensing and service revenues. Revenues for the second quarter were reduced by a total of €2,813 thousand: €2,605 thousand for maintenance, €177 thousand for non-perpetual licenses, and €31 thousand for service revenues. With regard to maintenance revenues, which were €2,605 thousand less under IFRS, Software AG has presented the higher operating figures separately in the overview of key figures for both revenue as well as EBIT and EBITA.
In fiscal 2007, revenue under IFRS will decline by €10,788 thousand in comparison with operating revenue: maintenance revenue by €10,103 thousand, licensing revenue by €653 thousand, and service revenue by €32 thousand. Additional revenue reductions of €3,102 thousand will occur in fiscal 2008, with maintenance revenue declining by €2,296 thousand and licensing revenue by €806 thousand.
a) Acquisition of SPL Software, Ltd., Israel Effective April 1, 2007, Software AG acquired 80.08 percent of the shares in SPL Software, the Company’s former Israeli sales partner. This acquisition has established Software AG directly in the Israeli market. Prior to the takeover, SPL Software was a wholly-owned subsidiary of the Silverboim Group and was Software AG’s sales partner in Israel for 30 years. With its high-capacity IT business solutions, SPL Software is well positioned in banking and insurance, public utilities, and the public sector. Silverboim will retain a 19.92 percent share in SPL Software to secure its extensive contacts in the financial sector.
Cost of the business combination: The fixed cost for the 80.08 percent of the shares acquired amounted €43,174 thousand. The first installment was paid on April 1, 2007. With regard to the remaining 19.92 percent of the shares, Software AG holds a call option and the seller holds a put option, both of which may be exercised within two years of purchase of the company. The purchase price for the remaining shares will be calculated on the basis of the operating result for fiscal 2007. The price was initially set at €7,888 thousand in connection with inclusion of SPL in the financial statements of Software AG.
The cost of the business combination has been determined provisionally in accordance with IFRS 3.62 as follows:
|€ thousands||Fair value||Carrying
|Cash and cash equivalents||4,833||4,833|
|Trade receivables and other current assets||6,957||6,957|
|Property, plant and equipment||2,185||2,185|
|Non-current financial assets||108||108|
|Deferred tax assets||219||219|
|Liabilities to banks||– 3,416||– 3,416|
|Trade payables and other current liabilities||– 9,246||– 9,246|
|Deferred tax liabilities||– 6,341||– 141|
|Deferred income||– 2,918||– 5,789|
|Carrying amount of the assets acquired||2,958|
|Cost of the business combination||51,062|
Initial accounting pursuant to IFRS 3.62: As a result of the close proximity in time between the date of acquisition (April 1, 2007) and the balance sheet date of the quarterly financial statements (June 30, 2007), Software AG Israel was initially accounted for using the provisional fair values.
Goodwill: It was necessary to recognize goodwill in the amount of €39,411 thousand due to the good market position of SPL Software and the possibility of leveraging this position to establish direct client relationships and penetrate new market segments.
Customer base: SPL Software has been Software AG’s exclusive sales partner in Israel for 30 years. Based on modern software infrastructure technology from Software AG such as the “Adabas 2006” database software, the “Natural 2006” programming language, and the “SOA Crossvision Suite,” SPL has developed modern business applications for its customers. SPL’s customers include leading companies in Israel, among them banks, insurance carriers, telecommunications service providers, industrial enterprises, and government agencies. More than 80 companies and public institutions utilize Software AG products distributed by SPL Software. For this reason, the initial accounting for the business combination includes SPL’s customer base stated at €19,270 thousand.
Deferred income: Deferred income mainly includes future maintenance and licensing revenues for non-perpetual licenses for which customers had already made advance payments as of the acquisition date. Based on the requirements of IFRS 3 § 36, these items have been stated in the opening balance sheet at the fair values of the future maintenance obligations, which are €2,871 thousand less than the carrying amounts. Thus measuring the cost of the business combination in accordance with IFRS resulted in a decline in revenue of €614 thousand for the second quarter of 2007. Revenue will decrease by an additional €1,075 thousand in the second half of 2007 and by another €1,182 thousand in fiscal 2008.
Earnings contribution since the date of acquisition: Since the date of acquisition, the acquired company, SPL Software, Ltd., Israel, has contributed €504 thousand to Software AG’s net income for the second quarter of 2007.
Contribution to revenue and earnings since initial inclusion in the financial accounts as of
January 1, 2007: If SPL Software, Ltd., Israel, had been included in the Software AG Group since January 1, 2007, the company would have contributed €14,863 thousand to Group revenues and €3,806 thousand to net income in the first half of 2007.
Expenses related to the acquisition of SPL Software, Ltd., Israel: The customer base of SPL Software, Ltd., Israel, which was identified as an asset in connection with the acquisition, will be amortized over a period of 17 years for the Enterprise Transaction Services (ETS) division and 8 years for the webMethods division. Total amortization amounted to €183 thousand in the second quarter of 2007.
The deferred tax liabilities resulting from the accounting treatment of the customer base will be reversed in line with the amortization period. Deferred tax liabilities also resulted from the reduction of deferred income. These tax liabilities will be reversed in line with the corresponding reductions in revenue. Both factors led to deferred tax earnings of €224 thousand in the second quarter of 2007.