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. Initial inclusion of these acquisitions in the consolidated accounts of Software AG has, therefore, reduced the Company’s revenues, since the deferred income primarily relates to future maintenance revenues as well as future licensing and service revenues. On the whole revenues in the second and third quarter were reduced by €7,200 thousand (€4,391 thousand in the third quarter), of which €6,823 thousand (third quarter: €4,220 thousand) relates to maintenance, €347 thousand for non-perpetual licenses (€171 thousand in the third quarter) and €30 thousand for professional services revenues. The €7,170 thousand lower maintenance and license revenues according to IFRS have been presented separately by Software AG in the overview of key figures for both revenue and EBIT as well as EBITA.
In fiscal 2007, revenues according to IFRS will be lower than operating revenues by €10,522 thousand, of which €9,863 thousand applies to maintenance, €629 thousand to licenses and €30 thousand to professional services. Additional revenue reductions of €2,943 thousand will occur in fiscal 2008, with maintenance revenue declining by €2,193 thousand and licensing revenue by €750 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-performance 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 to €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 set at €7,888 thousand in connection with initial inclusion of SPL in the consolidated financial statements of Software AG.
The cost of the business combination has been allocated 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|
|Intangible assets – customer base||19,270||0|
|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|
|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 (September 30, 2007), Software AG Israel was initially accounted for using 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 and company name: 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. Over 80 companies and public institutions utilize Software AG products distributed by SPL Software. For these reasons a total of €19,270 thousand was recorded as part of the initial consolidation for the customer base and company name.
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, these items have been stated in the opening balance sheet at the fair values of future maintenance obligations, which are €2,871 thousand less than the carrying amounts. Revenues in the second and third quarter of 2007 were reduced by €1,086 thousand (€480 thousand in the third quarter) due to the effects of the cost of the business combination. Revenue will decrease by an additional €539 thousand in the fourth quarter of 2007 and another €1,101 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 €1,016 thousand to Software AG’s net income for the second and third quarter of 2007. Of this amount, €801 thousand were recorded in the third quarter.
Contribution to revenue and earnings since initial inclusion in the consolidated 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 €19,950 thousand to Group revenues in the first three quarters of 2007 (of which €6,174 thousand would have been in the third quarter) and €3,559 thousand to net income (of which €764 thousand would have been in the third quarter).
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 Systems (ETS) division and 8 years for the webMethods division. Amortization totaled €353 thousand in the second and third quarter of 2007, of which €178 thousand was recorded in the third quarter.
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 in deferred income. These tax liabilities will be reversed in line with the corresponding reductions in revenue. The three factors together resulted in deferred tax income of €403 thousand in the second and third quarter of 2007, of which €184 thousand relates to the third quarter.