RNS Number : 7037C
SQS Software Quality Systems AG
04 September 2008
Embargoed until 7am
04 September 2008
SQS Software Quality Systems AG
("SQS" or "the Company")
Interim results for the six months ended 30 June 2008
SQS Software Quality Systems AG (AIM:SQS.L) the global leader in independent software testing and quality management services, today
announces its interim results for the six months ended 30 June 2008.
Financial Highlights:
* Turnover up by 23% to EUR68.9m (H1 2007: EUR56.2m), five times the European IT Services growth rate for 2008*
* Gross profit up 23% to EUR23.9m (H1 2007 EUR19.4m) with gross margin increasing to 34.7% (H1 2007: 34.5%) owing to improved
utilisation of staff, success of off-shoring strategy and improved pricing conditions driven by strong market demand
* Adjusted profit before tax up by 45% to EUR6.7m (H1 2007 EUR4.6m) with profit margin improving to 9.7% (H1 2007: 8.1%) as a
consequence of synergies and improved operational efficiencies resulting from the successful integration of acquisitions
* Adjusted earnings per share grew by 21% to EUR0.23 (H1 2007 EUR0.19)
* Cash inflow from operating activities improved by 12% to EUR4.2m (H1 2007: EUR3.8m)
Operational Highlights:
* Gartner recognition of Independent Software Testing as a distinct sector in its own right, validating the SQS offering: "It seems
that independent testing is shaping as a separate market segment." (Gartner, August 2008)
* Investment in 139 new staff - mostly consultants - to support current strong demand for SQS's services and future organic growth
of the business
* 78 new client wins against 64 in the same period last year
* Long-term contracts increased to 23 (up from 14 six months ago), driven by blended off-shore solutions
* Mitigated risk by expanding activity into traditionally smaller verticals with particularly strong performance in the automotive
and insurance sectors
* Two substantial acquisitions made post the period end expanding the European presence into the Nordic countries and the offshore
operations into India
Commenting on the results, Rudolf van Megen, CEO, said:
"In the first six months of 2008 we further reinforced our position as the global leader in independent software testing and quality
management services, maintaining our growth rate at five times that of the European IT services market.*
"We also recorded further increases in our gross margins as the result of improved pricing conditions driven by strong market demand for
our services. Given that economic conditions are widely regarded as being difficult at present, this would suggest that our offerings
constitute a non-discretionary requirement among organisations.
"Adjusted profit margins showed still greater increases, largely as a consequence of lower overheads resulting from synergies and
economies of scale provided by prior acquisitions, while cash conversion remained high as the result of strong control over debtors and
creditors.
"Adding to our organic growth are two successful acquisitions made post the period end. Validate, headquartered in Sweden, expands our
European presence into Scandinavia and Finland while Verisoft of India is a considerable addition to our off-shore operations. We expect
these acquisitions to make a positive contribution to the full year results.
"As a consequence of the above, and having made a strong start to trading in the second half, we expect to again) exceed current market
forecasts for the full year and look forward to the future with confidence."
*According to IDC market study, European IT Services will grow 4.6% in 2008.
Enquiries:
SQS Software Quality Systems AG Tel. +49 (0) 2203 91 54 50
Rudolf van Megen, Chief Executive Officer
Rene Gawron, Chief Financial Officer
Altium Capital Limited Tel. +44 (0)20 7484 4040
Nick Tulloch
ICIS Limited Tel. +44 (0)20 7651 8688
Tom Moriarty
Bob Huxford
About SQS
SQS is the global leader in independent software testing and quality management services. SQS consultants design and oversee quality
management processes during software and IT systems development and test the resulting products for errors and omissions.
Headquartered in Cologne, Germany, SQS now has more than 1,400 employees across Europe, Asia, North America and Africa. The Group has a
strong presence in Germany (Cologne, Munich, Frankfurt, Stuttgart, Goerlitz and Hamburg) and in the UK (London, Woking, Birmingham,
Manchester, Belfast), Ireland, the Netherlands, Switzerland, Austria, Sweden, Norway, Finland, India, Egypt, the United States and South
Africa. SQS also has a minor stake in an operation in Portugal and a partnership operation in Spain.
With more than 4,800 completed projects under its belt, SQS has a strong customer base including 36 FTSE-100 companies, half of the DAX
30 and nearly a third of the STOXX-50. It supports clients in a wide range of industries, including major corporations such as Deutsche
Bank, Deutsche Telekom, Barclays, BP, Boots, Credit Suisse, Volkswagen, and Daimler.
www.sqs-group.com
Chief Executive's Statement
Introduction
I am pleased to present impressive interim results for the first half of 2008, in which SQS once again recorded a, chiefly organic,
revenue improvement some five times that of the wider European IT services sector. According to a Market Study by IDC, the European IT
Services sector is expected to grow by 4.6% in 2008. SQS recorded revenue growth of 23% to EUR68.9m (H1 2007: EUR56.2m) as we continued to
experience strong market demand for our specialist independent testing services, resulting in 78 new client wins during the period.
This strong demand saw still further increases in pricing for SQS's services which was only partially reflected in wage inflation. As a
result, the gross margin improved by 0.6% to 34.7% (H1 2007 34.5%) demonstrating that the markets in which we operate remain healthy and
implying that software testing constitutes an essential, non-discretionary item within an organisation's IT budget.
Profit margins for the period increased materially with adjusted profit before tax up by 45% to EUR6.7m (H1 2007 EUR4.6m), translating
to a PBT margin of 9.7% (H1 2007: 8.1%). Much of this improvement was achieved through synergies, efficiencies and economies of scale
resulting from the successful integration of prior acquisitions.
We have continued to strengthen our client base, particularly in newer or traditionally smaller verticals, with a record 78 new clients
across 22 industries signed during the period. Broadening the diversity of our client base has been a long-term strategic goal which enables
us to increase potential opportunities while simultaneously reducing reliance upon a given sector and the success we have had in
implementing this strategy is proof of the strength of our offering. The Company has increased its presence in the automotive, insurance,
telecom and public sectors which have all performed solidly during the period.
During the period we have increased the number of long-term contracts - those greater than 12 months in duration - to 23, representing
13% of total revenue, up from 11% last year. This has resulted in a greater proportion (approximately 77%) of revenues being of a repeatable
nature. Our ability to offer blended on-shore/off-shore solutions has had a particularly positive effect on this aspect of the business as
clients are keen to lock-in to the economic benefits such solutions can offer.
Off-shore solutions also provide higher margin business for us and the expansion of our off-shore facilities constitutes a central part
of our strategy. We were therefore pleased to acquire Verisoft, post the period end, which added an India based operation of some 150 staff
members to our existing portfolio of offshore operations in Egypt and South Africa. This acquisition is of particular strategic importance
as many global organisations have outsourced either all or part of their development to the region.
We continued to invest in growth, increasing the number of staff during the period by 139 (of which 134 are revenue generating
consultants) to a total of 1,151. This compares to a total of 860 at the same time last year and 1,012 at the 2007 year end. Additional
administration costs incurred by the hiring and training of new staff has been more than offset by improvements in pricing and staff
utilisation, hence the improvements to the gross margin.
We are also pleased to report that in an independently commissioned study Gartner declared "independent testing is shaping as a separate
market segment". Educating the market as to the importance of employing independent software testing specialists, distinct from any
development function, in order to provide a thorough, objective and ultimately higher quality service, has been a key goal of our marketing
efforts. This recognition, therefore, is testament to our success in marketing our offering, particularly through our increasingly popular
conferences and events. It is also representative of the growing realisation within industry of the importance of the SQS offering.
Finally, we continue to further enforce our position as market leaders with our revenues now more than three times those of our nearest
independent software testing competitor. This position is predicted to strengthen still further in the second half with an expected positive
contribution from the post period acquisition of Validate, which gives SQS additional operations in the mature markets of Sweden, Finland
and Norway.
Dividend
SQS proposes to continue to operate a dividend policy in line with earnings. However, in accordance with German law, the Company may
only pay one dividend in each financial year and therefore SQS expects to declare a dividend following the announcement of our final results
for the year ending 31 December 2008.
Business strategy
Our strategy is to build upon our market position as the global leader in independent software testing and quality management services.
While retaining our focus on the European market, we will continue to look at opportunities to further extend into the Asiatic and Oceanic
regions, as we did with our acquisition in India, to exploit offshore as well as local business opportunities.
One aspect of this strategy involves increasing long-term outsourcing contracts to provide greater visibility of revenues. Our ability
to provide blended onshore-offshore solutions has helped us to increase the number of long term contracts during the period, leading to
greater levels of repeat revenues of approximately 77%. We have continued to build upon this strategy since the period end by expanding our
offshore operations with the acquisition of Verisoft in India.
We plan to continue our investments into new and expanding markets and, with 32 services, we offer the largest portfolio of solutions
among our competitors (as confirmed by the PAC market study on software testing 2008) in an ever greater diversity of verticals. New
offerings such as management consulting are proving especially successful for SQS, helping to connect our quality services to the business
departments ("Quality meets Business"). In addition, SQS is not reliant on business partners or third parties for securing contracts,
instead utilising our own sales and marketing resources and existing relationships with clients. This also provides us with an excellent
platform from which to cross-sell additional services into our clients.
A further aspect of our strategy is to strengthen our position in key European markets. This has been achieved through considerable
organic revenue growth across all European geographies during the period and with the acquisition of Validate in Sweden, giving us access to
the Nordic markets which have a mature understanding of the benefits of independence within testing services.
We will continue to look actively for acquisitions to support and accelerate our strategic goals going forward.
The Company's strategy is centred on five strategic business areas, all of which contribute to market leadership as a service company
and the resulting improvements in shareholder value. These are:
* Market Leadership: Extend leadership in independent quality management and testing by delivering added value to our customers in
order to help them achieve their goals
* Growth: Increase Group revenues significantly above the market growth rate for IT services
* Financial Strength: Remain the strongest independent software testing and quality-management services company in Europe
* Employment: Extend and retain a strong base of skilled and highly motivated employees
* Technology Leadership: Spot and anticipate trends in business and IT with respect to software quality management and utilise what
we learn for the benefit of our clients and shareholders.
Services and product lines
As the largest independent provider of software quality management services we are continuously developing our range of offerings. They
are:
* Professional services for business and IT: SQS offers over 32 software testing and quality management services, considerably more
than any of our competitors. Newer offerings such as management consulting or licence compliancy management help the Company to forge
relationships at the highest level with clients and give us greater influence over the projects on which we work creating plentiful
opportunities to cross sell additional services. Many of these newer services are attaining rapid growth rates at present, though from a
smaller base than our traditional testing services.
* Tools, licences, and maintenance: Our tools are unique in the market and have been developed around our 26 years experience of
testing software projects, resulting in a product set that provides consistent and measurable results, and where several components are
integrated into other market leading tools. Software and maintenance accounts for some 1.4% of our turnover.
* IT training: Revenue from training expanded in line with the Company's growth rate during the period. New offerings introduced by
SQS during the first half of the year, such as Requirements Management, saw a high demand for personal certification in this field, as
necessitated by the IREB (International Requirements Engineering Board). New qualifications such as QAMP (Quality Assurance Management
Professional) were also introduced during the period. As well as offering training for this qualification, SQS has also chosen to be one of
the first Professional Service Organisations to demand QAMP certification for its own employees.
* Conferences and events: We held successful SQC conferences (Software and Systems Quality Conferences), the largest quality
management and software testing events in Europe, in 5 cities during the period. Our next conference will be in London on September 29 - 30
2008 and our first conference outside Europe, in Canberra, Australia, will be held in late October 2008. These events have proved an
excellent marketing tool for SQS and are helping to raise awareness among organisations of the benefits an independent body can bring in
providing an impartial, and therefore more effective, level of testing to software projects.
Acquisitions
Validate, headquartered in Sweden
We announced our agreement to purchase 100% of the issued share capital of Validate Group, a software testing and quality management
business headquartered in Sweden, on 11 June 2008, and completed the acquisition on 2 July 2008.
Maximum consideration for the Acquisition will be Swedish Krona (SEK) 153.3m (EUR16.4m) of which, 25% will be satisfied in cash and up
to 75% can be satisfied by the issue of new SQS ordinary shares to the vendors. An initial consideration of SEK68.1m (EUR7.3m) was paid on
Closing.
In addition to its headquarters in Sweden, Validate has operations in Norway and Finland, providing SQS with access to the Nordic
markets with their mature understanding of the benefits of independence within testing services and in line with SQS's strategy of further
expansion into European markets. The acquisition is also of high strategic importance to Validate's management who recognised the benefits
of scale and off-shoring facilities in attracting larger, longer term contracts. As a result, the acquisition is expected to be immediately
earnings enhancing and whilst there has been no financial effect on these interim results.
Validate is one of the leading providers of software testing in Scandinavia and Finland with approximately 70 staff and 20 customers
including many of the region's blue chip corporations. In the year ended 31 December 2007 Validate generated profit before tax of EUR0.3m on
revenues of EUR4.6m and is expected to generate profit before tax of EUR0.8m on revenues of EUR8.0m in the current year. As at 31 December
2007, Validate had net assets of EUR0.4m.
Verisoft, India
We announced the agreement to acquire 75% of the issued share capital of VeriSoft, a leading provider of software testing and quality
assurance services within India, on 16 June 2008. The maximum consideration for the acquisition is EUR1.8m of which 44% will be satisfied in
cash and 56% in shares, which includes an initial cash payment of EUR0.61m. We retain the option to purchase the remaining shares in the
Company between April 2011 and April 2016 for a consideration determined by Verisoft's Profit after Tax performance.
The acquisition is of strategic significance to SQS as it leaves us better positioned to benefit from the increasing customer
requirement for blended on and off-shore testing solutions. The acquisition considerably increases our off-shoring capacity while further
improving our coverage of multiple languages and time zones. Also, it will allow SQS to provide an improved level of support to its, mainly
UK, customers who have located their test management operations in India.
VeriSoft has approximately 150 staff headquartered in Pune, a major software development region in India. The Company also has a small
operation in the US and brings with it our first US clients. Furthermore, as opposed to purely testing software projects, the acquisition
enters SQS into the growing market for the testing of packaged software products and computer games.
The acquisition, completed on 4 July 2008, had no effect on the results for the first half of 2008. However, we expect the acquisition
to have a material impact upon the sales of our blended onshoreoffshore solutions during the second half of the year.
The Company also announced the completion of the two year earn out period on 30 June 2008 associated with the acquisition of Cresta
Limited. The targets set for the period were exceeded by a significant margin, demonstrating the resounding success of the acquisition. The
final figures for the earn out payment are still to be confirmed.
Market drivers
Software quality management and testing is a specialised segment of the IT services market and therefore growth in the IT services
market correlates closely with growth in software quality management and testing. Research conducted by IDC in 2008 showed the European
growth rate for IT services to be 6.4% in 2007, with 4.6% expected for 2008. SQS reported growth of 23% for 2008 owing to our ability to
successfully exploit many of the factors that drive the market for software testing.
It is currently the case that a significantly high proportion of IT projects (19% according to the latest Standish report) result in
failure, either as a consequence of inadequate investment resulting in budget or time constraints or from a lack of impartiality during the
testing process.
The reality of this situation has been demonstrated by a number of high-profile project failures in the media over recent months. Such
events are helping to raise awareness within industry of the importance of independence in providing effective software testing solutions
and this increased awareness was evident in a recent study by Gartner in which Independent Software Testing was described as a potential
sector in its own right: "More and more companies look into independent testing as the offerings of an increasing number of service
providers mature. It seems that independent testing is shaping as a separate market segment".
The ubiquity of software project failures has also prompted the imposition of many new regulations on IT systems by directives such as
Basel II, SOX or MiFID Markets in Financial Instruments Directive. This provides further impetus to organisations to seek out testing
providers that can supply effective, measurable and consistent solutions that are independent from the development of the project and are
therefore not compromised by their vested interest in the project's success.
The Board
During the period we were pleased to announce the appointment of David Cotterell, CEO of SQS UK, Ireland and South Africa, to the
Management Board of SQS. Prior to working for SQS David was Managing Director of Cresta Ltd, SQS's successful acquisition made in 2006. The
appointment became effective on 1 July 2008. There were no further appointments to either the Management Board or the Board during the
period. Heinz Bons left the Management Board effective as of 31 December, 2007.
Employees
On behalf of the board, I would like to take this opportunity to thank all our employees for their excellent commitment, contribution
and hard work during the first half of the year. I would also like to welcome aboard the new employees who have joined SQS during the
period, bringing with them skills and initiatives that I am confident will contribute positively to the Company going forward.
Outlook
We experienced robust demand for our services during the first half of 2008 and the healthy market conditions are showing no sign of
abating at present. The second half has already started strongly with a number of significant contracts signed.
Furthermore, the two acquisitions made post the period end are expected to have a positive impact upon the performance in the second
half. Following our previous success in integrating acquisitions, the enlarged group is well positioned to leverage growth and as a result
we expect to again exceed current market forecasts for the full year and look forward to the future with confidence.
Rudolf van Megen
Chief Executive Officer
4th September 2008
Financial Review
Summary
Turnover for the Group was up by 23% to EUR68.9m (H1 2007: EUR56.2m) during the period. Geographically, we saw revenue growth across all
of the countries in which we operate. In Germany, our largest market, we achieved significant top line growth of 29.9%. We also performed
strongly in Switzerland with revenue growth of 15.6% and continued our penetration of the UK, Ireland and South African markets, recording
an increase in sales of 6.4%. Most of the above growth rates were organic.
Other European Countries recorded a 148% increase in turnover, the bulk of which came from the successful acquisition last August of
Triton in Austria, which has now been fully integrated into the Group.
Germany
Revenue in Germany, our largest market, amounted to EUR33.9m (H1 2007: EUR26.1m), a rise of 29.9%. Growth was mostly organic and the
performance is a reflection of our market leading presence in the region coupled with strong market demand which was enhanced by our
Homeshore centre in Goerlitz.
United Kingdom/Ireland/South Africa
We continue to make good progress within the UK based businesses market, with revenues rising 6.4% to EUR23.9m (H1 2007: EUR22.5m).
Following the successful integration of the Cresta acquisition, we are now focused on continuing to drive organic growth in the region,
which represented 34.7% of total revenues during the period. The solid performance included contributions from some key contract wins
including that with Anglo Irish Bank, Ireland's third largest bank announced in May.
Switzerland
Operations in Switzerland generated a 15.6% rise in revenue, all of which was organic, to EUR6.9m (H1 2007: EUR6.0m), such that the
region now represents 10% of total revenues.
Other Countries
We have seen the most significant revenue growth in Other European Countries, which consists primarily of Austria and the Netherlands.
Revenues in these markets increased 148.0% to EUR4.1m (H1 2007: EUR1.7m), however the bulk of this growth was due to the acquisition of
Triton in Austria which was made in August 2007 and therefore did not contribute to revenues in the comparable period last year.
Triton has proved a particularly successful acquisition to date. It has enhanced our management consulting business enormously,
providing many cross-selling opportunities as well as enabling us to foster relationships with clients at the top level and improve our
influence upon the projects on which we work.
New Geographies
Post the period end we acquired Verisoft of India which adds to our existing portfolio of offshore operations in Egypt and South Africa.
Validate of Sweden was also acquired after the period end, giving us a presence in the Nordic countries where previously we had none. We
expect these acquisitions to make a positive contribution to revenues for the full year.
Margins and Profitability
Gross profit continued to improve rising 23.1% to EUR23.9m (H1 2007: EUR19.4m), with gross margin now standing at 34.7% (H1 2007:
34.5%). This rise is primarily due to pricing improvements and continued high utilisation of staff.
Adjusted profit before tax for the period was EUR6.7m (H1 2007: EUR4.6m), an increase of 45.4%. We saw a significant improvement in the
profit margin which grew to 9.7% (H1 2007: 8.1%) largely as the consequence of cost savings resulting from synergies and economies of scale
provided by prior acquisitions.
Adjusted earnings per share grew by 21% to EUR0.23* (H1 2007: EUR0.19).
*(calculated by adjusting the profit after tax for the corporate income tax assets, deferred taxes, the pro forma interest cost of the
Cresta and Triton purchase obligations and amortisation cost of the acquired customer relationship as part of a business combination
Triton.)
Costs
General & Administrative expenses totalled EUR10.9m (H1 2007: EUR8.9m) falling slightly as a proportion of sales to 15.8% (H1: 2007
15.9%). Cost savings resulted chiefly from improved operational efficiencies and economies of scale brought about by the successful
integration of former acquisitions.
Sales & Marketing costs for the period were EUR4.8m (H1 2007: EUR3.9m) falling to 6.9% as a proportion of sales (H1 2007: 7.0%). This
proportionately lower expense resulted from economies of scale, as the growing business does not require a relative growth in marketing
costs to effect the same results, while sales costs are almost the same.
Finally our Research & Development expense was reduced to EUR1.4m (H1 2007: EUR1.8m) representing 2.1% (H1 2007: 3.2%) of revenues. The
reduction in spending on R&D was due to a more efficient use of research resources. Further to this, some additional work was carried out by
innovation groups composed of SQS consultants, whose efforts were not expensed as R&D.
Cash Flow and Financing
Cash flow from operating activities continued to improve to EUR4.2m (H1 2007: EUR3.8m), primarily as a consequence of continuing
improvements to the management of debtors and creditors. Debtor days reduced to 65 (H1 2007: 70) as a result from continued improved
invoicing processes and collection.
The share capital was reduced by EUR4.3m during the period as the result of the dividend payment in May 2008, while the termination of
leasing contracts reduced cash by a further EUR0.2m. The increase of finance loans returned EUR2.6m in cash, resulting in a net cash outflow
for the first 6 months of 2008 of EUR1.8m.
Balance Sheet
We closed the period with EUR1.8m (H1 2007: EUR3.6m) of cash on the balance sheet with borrowings standing at EUR2.9m (H1 2007:
EUR1.1m). These movements resulted chiefly from the dividend payment of EUR4.3m and acquisition related payments of EUR2.7m for Validate and
EUR0.6m for Verisoft during the period.
Taxation
A tax charge of EUR1.7m includes current tax expenses of EUR1.8m (H1 2007: EUR0.9m) and deferred tax income of EUR0.1m (H1 2007:
(EUR0.4m)).
For the full year, we expect an actual tax rate of 28% and a rate of 28% in 2009.
Foreign Exchange
Approximately 55% of the Company's turnover is generated in Euros. For the conversion of the local currency into Euros, the official
fixed exchange rate was chosen. For the conversion of the balance sheet items from foreign currency into Euros, the official mean rate as at
30 June 2008 was used.
Foreign exchange had a negative impact on earnings for the period. Had the Pound/Euro exchange rate remained the same as in H1 2007 our
UK revenues for the period would have been EUR2.8m higher, translating to an additional EUR0.54m PBT. Despite this, SQS still reported EPS
of EUR0.23 representing growth of 21% (H1 2007: EUR0.19m). Were there to have been no effect from the exchange of currencies on our results
the earnings number would have been EUR7.2m and the profit growth rate 57%, demonstrating the strong underlying health of our business.
Amortisation
Amortisation of goodwill is no longer carried out due to changes in IFRS accounting rules. On account of the high amortisation of
goodwill values in previous years, their book values today lie considerably below the original acquisition costs. As a result, no reduction
in value was necessary as a result of the impairment tests carried out in accordance with IAS 36.
International Financial Reporting Standards (IFRS)
The Interim Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS
Standards (International Financial Reporting Standards, formerly International Accounting Standards) and Interpretations of the IASB
(International Accounting Standards Board) which are mandatory at 30 June 2008, whereas the interim reports are published in an abbreviated
form according to IAS 34. The same accounting and valuation method used for the 2007 annual Consolidated Financial Statements was applied.
The Interim Consolidated Financial Statements have neither been audited nor reviewed.
The SQS Group Consolidated Financial Statements for the six month period ended 30 June 2008 were prepared in accordance with uniform
accounting and valuation principles in Euros.
Rene Gawron
Chief Financial Officer
4 September 2008
Consolidated Profit and Loss Account
Six months ended 30 June 2008
Six months ended Six months ended Year ended
30 June 2008 30June 2007 31 December 2007
EURm (Notes) (unaudited) (unaudited) (audited)
Revenue 68,867 56,214 121,059
Cost of sales (3) 44,966 36,801 79,307
Gross profit 23,901 19,413 41,752
General and administrative (3) 11,271 8,943 19,244
expenses
Sales and marketing expenses (3) 4,765 3,931 8,621
Research and development (3) 1,450 1,811 3,614
expenses
Profit before tax and 6,415 4,728 10,273
financing result (EBIT)
Finance income 205 201 556
Finance costs 684 636 1,163
Net interest (4) (479) (435) (607)
Profit before taxes (PBT) 5,936 4,293 9,666
Income tax (5) 1,672 1,369 2,932
Profit for the year 4,264 2,924 6,734
Attributable to:
Equity shareholders 4,264 2,924 6,734
Minority interests (14) 0 0 0
Consolidated profit for the 4,264 2,924 6,734
year
Earnings per share, undiluted (6) 0.20 0.16 0.35
(EUR)
Earnings per share, diluted (6) 0.19 0.16 0.34
(EUR)
Adjusted earnings per share (6) 0.23 0.19 0.41
(EUR), for comparison only
Consolidated Balance Sheet
Six months ended 30 June 2008
30 June 2008 30 June 2007 31 December 2007
EURm (Notes) (unaudited) (unaudited) (audited)
Current assets
Cash and cash equivalents (9) 1,774 3,578 7,220
Marketable securities (9) 0 1,020 0
Trade receivables 27,958 25,785 27,173
Other receivables 5,691 1,290 1,000
Work in progress 2,745 36 139
Income tax receivables 131 94 157
38,299 31,803 35,689
Non-current assets
Intangible assets (7) 6,391 3,153 5,999
Goodwill (7) 45,980 28,313 45,977
Property, plant and equipment (8) 2,664 1,202 2,243
Income tax receivable 1,547 1,464 1,512
Deferred taxes 651 1,435 867
57,233 35,567 56,598
Total Assets 95,532 67,370 92,287
Current liabilities
Bank loans and overdrafts (10) 2,827 989 191
Finance lease 406 0 515
Trade creditors 5,010 3,250 3,547
Other provisions (12) 78 109 102
Tax accruals 2,161 1,385 1,668
Tax liabilities 2,967 3,110 3,745
Other current liabilities (11) 23,216 16,270 24,162
36,665 25,113 33,930
Non-Current liabilities
Bank loans (10) 102 109 105
Finance lease 183 0 279
Other provisions (12) 241 112 92
Pension provisions 172 316 147
Deferred taxes 1,523 989 1,652
Other non-current liabilities (11) 7,263 6,575 7,064
9,484 8,101 9,339
Total Liabilities 46,149 33,214 43,269
Shareholders' equity (13)
Share capital 21,599 18,691 21,546
Share premium 25,204 16,692 25,029
Statutory reserves 53 53 53
Other reserves (1,189) (1,243) (1,381)
Retained earnings 3,716 (37) 3,771
Equity attributable to equity 49,383 34,156 49,018
shareholders
Minority interests (14) 0 0 0
Total Equity 49,383 34,156 49,018
Equity and Liabilities 95,532 67,370 92,287
Consolidated Cash Flow Statement
Six months ended 30 June 2008
notes Six months ended 30 Six months ended 30 Year ended 31
June 2008 June 2007 December 2007
EURm (unaudited) (unaudited) (audited)
Net cash flow from operating
activities
Profit before taxes 5,936 4,292 9,666
Add back for
Depreciation and amortisation 2,059 1,474 3,854
Profit (Loss) on the sale of 10 0 52
fixed assets
Other non-cash income not 295 (100) (554)
affecting payments
Net interest income 405 449 855
Operating profit before 8,705 6,115 13,873
changes in the net current
assets
Increase in trade receivables
and
receivables from partly (786) (3,555) (3,991)
completed contracts not yet
billed
Increase (Decrease) in work in
progress, other assets
and pre-paid expenses and (4,030) 47 518
deferred charges
Increase in trade creditors 1,463 91 1
Increase in remaining accruals 113 1,116 3,780
Increase (Decrease) in pension 25 22 (147)
accruals
Decrease (Increase) in other
liabilities and
deferred income (1,280) (77) (494)
Cash flow from operating 4,210 3,759 13,540
activities
Cash effect of foreign (29) (14) (249)
exchange rate movements
Interest payments (4) (184) (216) (497)
Tax payments (5) (1,585) (138) (1,440)
Net cash flow from current 2,412 3,391 11,354
business activities
Cash flow from investment
activities
Purchase of intangible assets (1,926) (1,009) (2,090)
Purchase of tangible assets (1,078) (409) (840)
Cashflows arising from 0 0 (3,088)
business combinations
Transfer into an notary trust (3,270) 0 0
account to purchase of shares
Sale/(Purchase) of marketable (9) 0 (1,020) 0
securities available for sale
Foreign currency result 41 (1) 249
Interest received (4) 127 28 241
Net cash flow from investment (6,106) (2,411) (5,528)
activities
Cash flow from financing activities
Proceeds from the issue of share capital 140 4,817 4,817
Costs for IPO 0 (98) (100)
Dividends paid (4,320) 0
Repayment of finance loans (10) (182) (4,686) (5,497)
Increase of finance loans (10) 2,815 0 0
Redemption / termination of leasing contracts (205) 0 (391)
Net cash flow from financing activities (1,752) 33 (1,171)
Change in the level of funds affecting (5,446) 1,013 4,655
payments
Cash and cash equivalents
at the beginning of the period 7,220 2,565 2,565
Cash and cash equivalents
at the end of the period 1,774 3,578 7,220
Consolidated Development of Shareholders' Equity
Six months ended 30 June 2008 (IFRS)
TEUR Minority Share Share Statutory Other Currency Retained Total
interests capital premium reserves reserves translation earnings Equity
differences
1st January 2007 0 17,191 13,323 53 (1,074) (31) (2,963) 26,499
Capital increase by cash 1,500 3,317 4,817
contribution
Currency translation (79) (79)
differences
Stock option program 53 53
Costs for Capital increase by (60) (60)
cash contribution (net of tax)
Effects directly recognised in 1,500 3,370 (60) (79) 4,731
equity
Profit for the period 2,924 2,924
30th June 2007 (unaudited) 0 18,691 16,693 53 (1,134) (110) (39) 34,154
Capital increase as 2,855 8,281 11,136
consideration for business
combinations
Currency translation (137)
differences
Stock option program 55 55
Costs for Capital increase by 0
cash contribution (net of tax)
Effects directly recognised in 2,855 8,336 (137) 11,191
equity
Profit for the period 3,810 3,810
31st December 2007 (audited) 0 21,546 25,029 53 (1,134) (247) 3,771 49,018
Capital increase as 53 87 140
consideration for business
combinations
Dividends paid (4,319) (4,319)
Currency translation 192 192
differences
Stock option program 88
Costs for IPO 0
Effects directly recognised in 53 175 0 192 (3,987)
equity
Profit for the period 4,264 4,264
30th June 2008 (unaudited) 0 21,599 25,204 53 (1,134) (55) 3,716 49,383
1. Summary of Significant Accounting Policies
Basis of preparation
The Interim Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS
Standards (International Financial Reporting Standards, formerly IAS = International Accounting Standards) and Interpretations of the IASB
(International Accounting Standards Board) which are mandatory at 30 June 2008, whereas the interim reports are published in an abbreviated
form according to IAS 34. The Interim Consolidated Financial Statements have neither been audited nor reviewed.
The Financial Information has been prepared on the historical cost basis. The same accounting and valuation method used for the 2007
annual Consolidated Financial Statements was applied. Further information about the Group's accounting principles and policies is contained
in the SQS Consolidated Financial Statement at 31st December 2007.
The Financial Information is presented in Euros and amounts are rounded to the nearest thousand (EURk) except when otherwise indicated.
The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual
financial statements, and should be read in conjunction with the SQS Consolidated Financial Statement at 31st December 2007.
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.
Basis of consolidation
As at 30 June, the Company held interests in the share capital of more than 20 % of the following undertakings:
Consolidated companies Country of Six month ended 30 Six month ended 30 Year ended 31
incorporation June 2008 June 2007 December 2007
Share of capital Share of capital Share of capital
% % %
SQS Group (UK) Limited, Woking UK 100.0 100.0 100.0
SQS Group Limited, London UK 100.0 100.0 100.0
SQS Software Quality Systems Ireland 100.0 100.0 100.0
(Ireland) Ltd.
SQS Nederland BV, Zaltbommel The Netherlands 90.5 90.5 90.5
SQS GesmbH, Vienna Austria 100.0 100.0 100.0
SQS Software Quality Systems Switzerland 97.0 97.0 97.0
(Schweiz) AG, Zh
SQS Group Management Austria 100.0 - 100.0
Consulting GmbH (formely
Triton Unternehmensberatung
GmbH Deutschland), Vienna
PPT Unternehmensberatung GmbH, Austria 100.0 - 100.0
Vienna
SQS Group Management Germany 100.0 - 100.0
Consulting GmbH (formely
Triton Unternehmensberatung
GmbH Deutschland), Munich
SQS Egypt Egypt 100.0 - -
3 % of the shares in SQS Software Quality Systems (Schweiz) AG are held for legal reasons by members of the board of this entity in
accordance with the interests of SQS.
Use of estimates
The preparation of the Interim Financial Statements in compliance with the International Financial Reporting Standards requires the
disclosure of assumptions and estimates made by the management, which have an effect on the amount and the presentation of the assets and
liabilities shown in the balance sheet, the income and expenditure as well as any contingent items. The actual results may deviate from
these estimates.
The main estimates and judgements of the management of SQS refer to:
* the useful life of intangible assets and property, plant and equipment,
* the valuation of the liability from the Cresta and Triton purchases
* deferred taxes on losses carried forward,
* the valuation of pension assets and liabilities,
* the planning premises relating to the value in use of cash generating units.
2. Segmental reporting
The following tables present revenue and profit information regarding the SQS Group's business segments for the interim period ended 30
June 2008 and 30 June 2007 and for the year ended 31 December 2007.
Six month ended 30 June 2008 Germany UK Switzerland Other Total
(unaudited) based European
business Countries
EURk EURk EURk EURk EURk
Sales
External sales 33,941 23,905 6,879 4,142 68,867
Internal sales between the 617 356 294 887 2,154
segments
Result 3,720 2,213 247 235 6,415
Segment result 0
Consolidation
Financial result (479)
Taxes on income (1,672)
Result for the period 4,264
Profit share of minority 0
shareholders
Result of the Group for the 4,264
period
Six month ended 30 June 2007 Germany UK Switzerland Other Total
(unaudited) based European
business Countries
EURk EURk EURk EURk EURk
Sales
External sales 26,132 22,461 5,951 1,670 56,214
Internal sales between the 1,209 161 200 230 1,800
segments
Result
Segment result 2,064 2,235 466 (37) 4,728
Consolidation 0
Financial result (435)
Taxes on income (1,369)
Result for the period 2,924
Profit share of minority 0
shareholders
Result of the Group for the 2,924
period
Year ended 31 December 2007 Germany UK Switzerland Other Total
(audited) based European
business Countries
EURk EURk EURk EURk EURk
Sales
External sales 55,708 48,704 12,534 4,113 121,059
Internal sales between the 2,351 407 550 812 4,120
segments
Result
Segment result 3,533 5,580 822 338 10,273
Consolidation 0
Financial result (607)
Taxes on income (2,932)
Result for the period 6,734
Profit share of minority 0
shareholders
Result of the Group for the 6,734
period
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 2008 amounted to EUR7,378k (at mid-year 2007: EUR7,334k). Cost of material
relates mainly to the procurement of external services such as contract software engineers. In addition, certain project-related or
internally used hardware and software is shown under cost of material.
Employee benefits expenses
Six month ended 30 Six month ended 30 June 2007 Year ended 31 December 2007
June 2008 (unaudited) (audited)
(unaudited)
EURk EURk EURk
Wages and salaries 35,389 28,356 60,072
Social security contributions 4,440 3,596 7,577
Expenses for retirement 415 198 618
benefits
40,244 32,150 68,267
The expenses for retirement benefits include the change in pension accruals and other retirement provisions such as direct insurance and
provident fund costs.
Amortisation and depreciation
Amortisation and depreciation charged in the interim period ended 30 June 2008 amounted to EUR 2,060k (at mid-year 2007: EUR1,474k). Of
this, EUR938k (at mid-year 2007: EUR978k) was attributable to the amortisation of development costs.
4. Financial result
The financial result is comprised as follows:
Six month ended 30 Six month ended 30 Year ended 31
June 2008 June 2007 December 2007
(unaudited) (unaudited) (audited)
EURk EURk EURk
Interest income 167 66 241
Exchange rate gains 38 12 315
Total finance income 205 78 556
Interest payable (573) (515) (1.096)
Exchange rate gains / losses (111) 2 (67)
Total finance costs (684) (513) (1,163)
Financial result (479) (435) (607)
Finance income results from fixed deposit investments and investments in securities maturing in the short term which yield interest
income, or securities negotiable at short notice.
Interest payable relates to interest on bank liabilities and liabilities from the Cresta purchase and from the purchase of Triton
Unternehmensberatung GmbH calculated using the effective interest method.
Finance income and expenses are stated after foreign exchange rate gains and losses.
The interest income represents the interest income of EUR36k caused by the increase in the present value of the corporation tax
receivable in accordance with � 37 KStG (German corporation tax law).
5. Taxes on earnings
The line item includes current tax expenses in the amount of EUR1,779k (previous interim period: EUR934k) and deferred tax income in the
amount of EUR107k (previous interim period: EUR(435)k).
Further information about the recognition and measurement of the income tax is contained in the SQS Consolidated Financial Statements at
31 December 2007.
6. Earnings per share
The earnings per share presented in accordance with IAS 33 are shown in the following table:
Six month ended 30 Six month ended 30 Year ended 31
June 2008 June 2007 December 2007
(unaudited) (unaudited) (audited)
Profit for the year 4,264 2,924 6,734
attributable to equity
shareholders, EURk
Diluted profit for the year, 4,264 2,924 6,734
EURk
Weighted average number of 21,584,894 17,920,105 19,098,779
shares in issue, undiluted
Weighted average number of 22,479,324 18,614,683 19,843,595
shares in issue, diluted
Undiluted profit per share, 0.20 0.16 0.35
EUR
Diluted profit per share, EUR 0.19 0.16 0.34
Adjusted earnings per share 0.23 0.19 0.41
(for comparison only), EUR
Undiluted earnings per share are calculated by dividing the profit for the six month period attributable to equity shareholders by the
weighted average number of shares in issue during the six month period ended 30 June 2008: 21,584,894 (at mid-year 2007: 17,920,105).
Diluted earnings per share are determined by dividing the profit for the year attributable to equity shareholders by the weighted
average number of shares in issue plus any share equivalents which would lead to a dilution.
The adjusted earnings per share were calculated by adjusting the profit after tax for the corporate income tax assets, deferred taxes,
the interest cost of the Cresta and Triton purchase obligations and amortisation cost of the acquired customer relationship as part of the
business combination "Triton". Further the difference between taxes on income payable under local GAAP and IFRS has been adjusted. This
adjusted profit after tax divided by the number of shares issued as at 30.6.2008 of 21,599,109 shares, (previous year 18,690,823 shares)
shows adjusted earnings per share of EUR0.23 (at mid-year 2007: EUR0.19).
7. Intangible assets
The item is comprised as follows:
Book values Six month ended 30 Six month ended 30 Year ended 31
June 2008 June 2007 December 2007
(unaudited) (unaudited) (audited)
EURk EURk EURk
Goodwill 45,980 28,313 45,977
Development costs 2,270 2,511 2,103
Software 1,103 640 516
Customer relationships Triton 3,018 2 3,380
(30 June 2007: Remaining
intangible assets)
Intangible assets 52,371 31,466 51,976
Development costs were capitalised in the interim period ended 30 June 2008 in the amount of EUR1,114k (half-year 2007 EUR922k) and
amortised over a period of 36 months, since the conditions under IAS 38 were fulfilled.
The amortisation of development costs is contained in the costs for research and development. The amortisation of software and remaining
intangible assets as well as the impairment losses under IAS 36 are spread over the functional costs in 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 30 Six month ended 30 Year ended 31
June 2008 June 2007 December 2007
(unaudited) (unaudited) (audited)
EURk EURk EURk
Freehold Land and Buildings 578 228 251
Office and Business equipment 2,086 974 1,992
Property, Plant and Equipment 2,664 1,202 2,243
9. Cash and cash equivalents
Cash and cash equivalents comprise cash and credit balances at banks which can be realised in the short term and which earn commercial
rates of interest. The carrying amounts are considered to be reasonable approximation of fair value.
The development of cash and cash equivalents is presented in the Consolidated Cash Flow Statement.
10. Bank loans, overdrafts and other loans
The finance liabilities are comprised as follows:
Six month ended 30 Six month ended 30 June 2007 Year ended 31 December 2007
June 2008 (unaudited) (audited)
(unaudited)
EURk EURk EURk
Bank loan and overdraft 2,827 989 191
Current finance liabilities 2,827 989 191
Bank loans 102 109 105
Non-current finance 102 109 105
liabilities
Total finance liabilities 2,929 1,098 296
Of these, secured 108 1,015 288
The current account liabilities exist both with SQS Software Quality Systems AG and its subsidiaries. For some subsidiaries bank
overdraft agreements are in place.
11. Other liabilities
The item is comprised as follows:
Six month ended 30 Six month ended 30 Year ended 31 December 2007
June 2008 June 2007 (audited)
(unaudited) (unaudited)
EURk EURk EURk
Liabilities in regard to 1,611 641 1,164
social security
Personnel liabilities (leave, 6,933 5,860 8,504
bonus claims)
Obligations from Cresta 6,767 10,921 7,538
purchase
Obligations from Triton 8,745 0 8,439
purchase
Remaining other liabilities 3,427 2,490 2,396
Deferred income 43 (9) 237
Bonded loans 2,953 2,942 2,948
30,479 22,845 31,226
The remaining other liabilities comprise trade accruals and other items due in the short term. The carrying amounts are considered to be
reasonable approximation of fair value.
SQS has remaining liabilities from the Cresta purchase with a fair value of EUR6,767k (at mid-year 2007: EUR10,921k). The non-current
liability has an amount of EUR0k (at mid-year 2007: EUR3,617k).
Further SQS has remaining liabilities from the Triton purchase with a fair value of EUR8,745k. The non-current liability has an amount
of EUR4,299k. For further details see SQS Consolidated Financial Statements at 31st December 2007.
The bonded loan represents a nominal amount of EUR3,000k. The loan payment is reduced by a discount. The discount is set off against the
loan in accordance with IAS 39.AG 65. The interest rate is agreed with 6.93% p.a. The redemption is due in 2012. The Deutsche Bank AG acts
as appointed paying agent. The Deutsche Bank is entitled to assign the bond to a special purpose entity, a trustee thereof, a bank or an
insurance company. The interest rate is linked to the rating of the SQS Group following a defined rating system. If the SQS Group improves
the rating the interest rate will be decreased. If the rating decreases below a certain bound the creditors have the right to terminate the
bonded loan immediately.
12. Other provisions
Other provisions in the amount of EUR319k (31 December 2007: EUR194k) include the warranty costs in the amount of EUR78k (31 December
2007: EUR74k) and the vacant property provision in the amount of EUR97k (31 December 2007 EUR120k).
13. Equity
SQS is listed on the AIM market in London and on the Open Market in Frankfurt (Main).
The development of the equity is presented in the Consolidated Development of Shareholders' Equity.
Subscribed Capital
The subscribed capital amounts to EUR21,599,109 (at 31 December 2007: EUR21,546,309). It is divided into 21,599,109 (at 31 December
2007: 21,546,309) individual registered shares with an arithmetical share in the share capital of EUR1 each. Each share entitles the holder
to one right to vote. No preference shares have been issued. The capital is fully paid up.
The movements in the issued share capital are as follows:
Individual shares Nominal value
Number EUR
As at 30 June 2007 18,690,823 18,690,823
Increase in capital against redemption of 2,855,486 2,855,486
obligations
from Cresta purchase
(Entry of 21 September 2007)
As at 31 December 2007 21,546,309 21,546,309
Increase in capital against redemption of 52,800 52,800
convertible bond
(Issue on 18 February 2008)
As at 30 June 2008 21,599,109 21,599,109
The General Meeting of 14 September 2005 resolved the authorisation of the management board with the approval of the supervisory board
to issue non-interest bearing convertible bonds in the aggregate nominal value of up to EUR52,800 and to offer such convertible bonds for
subscription to Gresham Computing plc, UK. In accordance with this authorisation 52,800 convertible bond in the nominal amount of EUR1.00
each were issued to Gresham Computing plc. by the declaration of conversation and by the issue of the share certificates of 52,800
registered SQS shares of 18 February 2008.
Accordingly, SQS had no shares in its ownership as at 30. June 2008.
Conditional capital
The General Meeting of 2 June 2006 resolved a new conditional capital by an amount of up to EUR1,500,000 by issuance of up to 1,500,000
new individual registered shares (Conditional Capital II). The conditional capital II serves to grant up to 1,500,000 share options until 31
December 2008 as incentive compensation for SQS employees and executives. This resolution became effective with the entry of 30 June 2006.
Authorised capital
The General Meeting of 28 May 2008 resolved the authorisation of the management board with the approval of the supervisory board to
increase the share capital until 30 April 2013 by issuing of up to 4,300,000 new registered non-par value shares against contributions in
cash or in kind (authorised capital IV).
Thereafter, the authorised capital developed as follows:
EURk
As at 30 June 2007 4,954
Increase of authorised capital II 4,300
Usage of authorised capital II (2,856)
As at 31 December 2007 6,398
Increase of authorised capital IV 4,300
As at 30 June 2008 10,698
Share premium
Additional paid-in capital includes any premiums received on the issuing of the share capital. Any transaction costs associated with the
issuing of shares are deducted or set off from additional paid-in capital, net of any related income tax benefits. Equity-settled
share-based employee remuneration is also credited to additional paid-in capital until related stock options are exercised.
Statutory reserves
The statutory reserves in SQS AG were formed in accordance with Section 150 of the Stock Corporation Act (Germany).
Other reserves
The foreign currency translation differences arise on conversation of the opening reserves of subsidiary undertakings where the
functional currency of the subsidiary is not the Euro.
14. Retained earnings
Retained earnings represent the accumulated retained profits less payments of dividend and losses of SQS Group.
15. Minority Interests
There is no change in this item compared to 30 June 2007.
Up to 2003 losses applicable to the minority have exceeded the minority interest in the subsidiary's equity. In accordance with IAS
27.35 the excess and any further losses applicable to the minority have been allocated against the majority interest. In the case that the
subsidiary reports profits, such profits are allocated to the majority interest until the minority's share of losses previously absorbed by
the majority bas been recovered. In the interim period ended 30 June 2008 no minority profits were allocated to the majority (half year
2007: EUR2k).
16. Notes to the Statement of Cash flows
The Cash Flow Statement shows how the funds of the Group have changed in the course of the business year through outflows and inflows of
funds. The payments are arranged according to investment, financing and business activities.
The sources of funds on which the Cash Flow Statement is based consist of cash and cash equivalents (cash on hand and bank balances).
17. Related party transactions
Under IAS 24, related persons and related companies are persons and companies who have the possibility of controlling another party or
exercising significant influence over their finance or business policy. In the SQS Group, these are the Management Board members as well as
the members of the Supervisory Board and Mr. and Mrs. van Megen, by reason of their position as shareholders, as well as the real estate
investment fund "S.T.O.L. Immobilien Verwaltung GmbH & Co. KG", Cologne, and "Am Westhover Berg GbR mbH", Cologne. Since 01 January 2008 Mr.
Bons retired from the Management Board. So he and his wife are not regarded as related parties anymore.
Details in individual shares Six month ended 30 Six month ended 30 Year ended 31 December 2007
June 2008 June 2007 (audited)
(unaudited) (unaudited)
Non-par shares Non-par shares Non-par shares
Rudolf van Megen, Member of 3,268,149 3,657,647 3,251,681
Management Board
Ilona van Megen, n Rumsch 932,544 932,544 932,544
Children of van Megen 3,170 - -
Heinz Bons, retired Member of - 3,295,945 2,899,979
Management Board
Maria Helene Bons, n Peters
- 932,544 932,544
RenGawron, Member of 47,129 2,289 44,129
Management Board
Supervisory Board 17,500 17,500 17,500
Total 4,268,492 8,838,469 8,068,377
In detail, the following transactions have taken place with these persons and companies:
As a part of the remuneration for the Management Board activities, SQS has granted a pension commitment to a Management Board member.
Mr. Gawron holds a minority stake of one share in the Swiss subsidiary on trust for SQS Software Quality Systems AG since his office as
member of the administrative board of this company makes this necessary under Swiss law.
SQS uses property owned by the closed real estate investment fund "S.T.O.L. Immobilien Verwaltung GmbH & Co. KG", Cologne, and also the
real estate investment fund "Am Westhover Berg GbR mbH", Cologne. The shares in the fund are held by employees and also a Management Board
member of SQS AG. The contractual conditions of the lease of properties are compatible with normal market conditions. The total expenses
incurred under these contracts amounted in the interim period to EUR691k (half year 2007: EUR651k).
The total emoluments of the Management Board members amounted in the interim period ended 30 June 2008 to EUR458k (half-year 2007:
EUR556k). The emoluments of the Supervisory Board members amounted in total to EUR41k (half-year 2007: EUR41k) of which EUR41k had not been
paid by the end of the interim period.
Members of the Management board held 15.3 % (half-year 2007: 37.2 %) of the shares in SQS as at 30 June 2008. The reduction is mostly
due to Mr. Bons' retirement from the Management Board as at 31 December 2007.
18. Proposed Dividend
The General Meeting of 28 May 2008 resolved to pay EUR0.20 dividends per share for the business year 2007 in the total amount of
EUR4,319,821.80.
19. Other Information
There is currently no litigation that might have significant impact on the earnings situation of SQS AG.
20. Post interim period events
Validate Group, Sweden
SQS has entered into an agreement to acquire 100 % of the issued share capital of the Validate Group ("Validate"), Sweden, a software
testing and quality management business in Sweden, and its subsidiaries including all formerly existing minority shares. The Acquisition
will be executed predominantly via the acquisition of "2020 Governance AB", the holding company. The closing is effective on the begin July
2008.
Validate is headquartered in Kista, Sweden and has subsidiaries in Finland and Norway. As one of the leading providers of software
testing in Scandinavia, the Validate Group, currently has approximately 70 staff and 20 customers including many of the region's blue chip
corporations. In the year ended 31 December 2007 Validate generated profit before tax of EUR0.3m on revenues of EUR4.6m and is expected to
generate profit before tax of EUR0.8m on revenues of EUR8.0m in the current year. As at 31 December 2007, Validate had net assets of
EUR0.4m.
Maximum consideration for the Acquisition (assuming the purchase of 100% of the Validate Group and subject to certain adjustments
depending on the development of the SQS share price) will be Swedish Krona (SEK) 153.3m (EUR16.4m) of which, overall, 25% will be satisfied
in cash and up to 75% can be satisfied by the issue of new SQS ordinary shares to the vendors (who include current Validate management). Of
this maximum consideration, SEK68.1m (EUR7.3m) (the "Initial Consideration") is due on Closing and SEK85.2m (EUR9.1m) will be deferred and
payable over the three years following Closing, dependent upon the achievement by Validate of specified growth and profit targets. Of the
Initial Consideration, 37% (SEK25.2m (EUR2.7m)) will be satisfied in cash from internal SQS resources and 63% (SEK42.9m (EUR4.6m)) through
the issuance of 1,221,144 new SQS ordinary shares (the "New Ordinary Shares").
VeriSoft, India
SQS has entered into an agreement to acquire 75% of the issued share capital of VeriSoft with an option to purchase the remaining
shares.
VeriSoft is headquartered in Pune, India, one of the country's leading technology centres, and is a leading provider of software testing
and quality assurance in the region, with subsidiaries in the US and the UK. With approximately 150 staff, VeriSoft has completed over 300
testing projects for some 100 customers of which 50% are based outside India. In the year ended 31 March 2008, VeriSoft generated profit
before tax of EUR0.1m on revenues of EUR1.2m.
The maximum consideration for the acquisition of 75% of VeriSoft will be INR121m (EUR1.8m) of which 44% will be satisfied in cash and up
to 56% can be satisfied by the issue of new SQS ordinary shares to the vendors (who include current VeriSoft management). Of this maximum
consideration, INR40m (EUR0.61m) (the "Initial Consideration") is due as a cash payment on Closing and INR68m (EUR1m) will be deferred and
payable (up to 100% in newly issued ordinary SQS shares) over the two years following Closing, dependent upon the achievement by VeriSoft of
specified growth and profit targets. A further consideration of INR13m (EUR0.2m) will be paid for a 95 year lease over land that VeriSoft
has been allotted in the Special Economic Zone ("SEZ") IT Technology Park in Pune. The SEZ provides a favourable tax status for new work and
SQS expects that it will build its new offshore testing centre there over the next 2 years. The acquisition is completed on 1 July 2008.
There is a further option for SQS to acquire the remaining 25% of the shares in VeriSoft between April 2011 and April 2016 for a
consideration which is determined by VeriSoft's achieved profit after taxes and SQS' price/earnings ratio at the time, when the option is
exercised. This option is exercisable either by SQS or the vendors and 50% of the consideration for the option can be satisfied by the issue
of new SQS ordinary shares to the vendors.
Cologne, 4 September 2008
SQS Software Quality Systems AG
(D.Cotterell) (R. Gawron) (R. van Megen)
SQS Software Quality Systems AG
Stollwerckstrasse 11
D-51149 Cologne
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