Cover for PDF 2 27/5/03 10:01 AM Page 2 TM Annual Report 2003 8pp INTRO Section 03 23/5/03 3:15 PM Page 1 CHAIRMAN’S STATEMENT I am delighted to report AVEVA’s results for the year ended 31 March 2003 with the achievement of record revenues, profit and a strong balance sheet. These excellent results have been achieved against a difficult world economic background and reflect the strength of AVEVA’s market position and products. During the year, turnover increased 13% with recurring revenue contributing over 58% of the total, operating margins were sustained and profit before tax and intangible asset amortisation improved by 11%. An increased final dividend of 3.8p is proposed, making a total for the year of 5.6p (2002: 5.4p). AVEVA’s long-term strategy remains unchanged. The group is well established as a leader within its market for high level engineering information systems, reflecting the progressive development of the product and service portfolio through in-house developments and carefully selected acquisitions. AVEVA’s multi-national customer base already spans a broad range of sectors which build and operate major capital plant, giving resilience during a period when economic fortunes have varied between sectors. It is evident that additional gains in market share can be achieved by further developing the product and service portfolio to meet the needs of other market sectors requiring complex engineering data and design solutions similar to those provided by AVEVA. Dr Jeremy Fairbrother retired from the Board during the year to concentrate on his commitments as Senior Bursar of Trinity College, Cambridge. We have greatly appreciated his wise counsel during the six years he was a non- executive director and wish him well for the future. The robustness of AVEVA’s business has served it well over the past year. Looking ahead, global trading conditions remain uncertain. AVEVA has a compelling combination of an excellent product and services portfolio, a leading world market position, a ‘blue chip’ customer base, improved visibility of future revenues and strong finances. This gives us confidence in being able to sustain satisfactory progress in the coming year. Richard A King CBE Chairman 20 May 2003 Cover for PDF 2 27/5/03 10:01 AM Page 3 FINANCIAL HIGHLIGHTS 31-Mar-03 £000's 31-Mar-02 £000's Growth Contents Profit and loss account highlights Turnover Recurring licence fees Initial licence fees Other sales 20,946 9,196 5,866 18,506 8,065 5,247 Total 36,008 31,818 Europe, Middle East & Africa Asia Pacific Americas Total Gross profit Gross margin 17,375 8,531 10,102 16,267 7,322 8,229 36,008 31,818 22,961 20,230 64.0% 64.0% Amortisation of intangible assets software rights 267 352 267 370 13% 14% 12% 13% 7% 17% 23% 13% 13% i ii Chairman’s statement Chief Executive’s review vi Financial review 1 Directors’ report 4 Board of directors 6 Corporate governance statements 8 Directors’ remuneration report 15 Statement of directors’ responsibilities 16 Auditors’ report 18 19 20 22 Consolidated profit and loss account Consolidated statement of total recognised gains and losses Consolidated balance sheet Consolidated cash flow statement Operating profit Operating margin 5,618 4,924 14% 23 Notes to the financial statements 15.6% 15.5% 46 47 Five year record Company information and advisors Profit before taxation 5,580 4,938 Earnings per share – pence 21.46 19.82 Total dividend per share, paid and proposed – pence Balance sheet highlights 5.6 5.4 Intangible assets and software rights (net) 3,909 4,528 Cash and liquid resources 4,930 6,356 Shareholders' funds: all equity 18,582 16,297 4pp COVER Section 03 28/5/03 3:42 PM Page 4 TM Group Headquarters AVEVA Group plc High Cross Madingley Road Cambridge CB3 0HB UK Tel: +44 (0)1223 556611 Fax: +44 (0)1223 556622 www.aveva.com avevagroup@aveva.com Offices AVEVA Group plc ❚ Cambridge, UK ❚ Saudi Arabia AVEVA Solutions Ltd ❚ Cambridge, UK ❚ Manchester, UK ❚ Portsmouth, UK ❚ Sheffield, UK AVEVA Engineering IT Ltd ❚ Cambridge, UK ❚ Manchester, UK ❚ Portsmouth, UK ❚ Sheffield, UK AVEVA Managed Services Ltd ❚ Cambridge, UK AVEVA Consulting Ltd ❚ Cambridge, UK AVEVA S.A. ❚ Paris, France ❚ Genova, Italy AVEVA GmbH ❚ Frankfurt, Germany AVEVA A/S ❚ Stavanger, Norway ❚ Lysaker, Norway ❚ Kil, Sweden AVEVA Inc. ❚ Houston, USA ❚ Ontario, Canada ❚ Wilmington, USA AVEVA Asia Pacific Sendirian Berhad ❚ Kuala Lumpur, Malaysia ❚ Singapore, ❚ Melbourne, Australia ❚ Shanghai, China ❚ Guangzhou, China AVEVA Sendirian Berhad ❚ Kuala Lumpur, Malaysia AVEVA K.K. ❚ Yokohama, Japan ❚ Osaka, Japan AVEVA East Asia Ltd ❚ Hong Kong AVEVA Korea Ltd ❚ Seoul, Korea AVEVA Information Technology India Private Ltd ❚ Bangalore, India 8pp INTRO Section 03 23/5/03 3:15 PM Page 2 CHIEF EXECUTIVE’S REVIEW OVERVIEW With the business outlook little changed from the year before, the lessons learned and applied throughout the AVEVA organisation in 2001/2 proved to be a formula for success in 2002/3. With the trend towards rental of software products continuing during the year and the constant pressure on customers’ capital expenditure budgets, our strong financial position has enabled us to offer the favoured and more flexible rental option on an increasingly wide basis. Together with a global presence, this has enabled us to secure a high level of new customers over the last 12 months as well as expanding the use of our products within the existing customer base. We are pleased to report double-digit growth in revenues and profits for the year, a strong balance sheet along with a continuing dividend. 2002/3 PERFORMANCE At the start of the year we had a strong business based on our software products and a relatively immature consulting division which we had targeted at the gap between Engineering IT systems and mainstream ERP business systems. During the year we saw a very good performance from our software products-led businesses with strong sales of AVEVA’s market-leading 3D design system VANTAGE Plant Design, which incorporates PDMS. Early in the year we saw little improvement in the performance or prospects from our consulting division so scaled back the associated cost base to a minimum, leaving a small capability to handle short-term opportunities. Also during the first half, the new Managed Services business unit was launched with an early substantial new contract. The widespread geographic base of our customers and the performance of our own regional offices has seen an unsettled pattern throughout the year. The Americas 28% of group revenue : £10.1m (2002: £8.2m) The Americas has been a focus for us over the past year with new management in place and the hiring of some new senior personnel to make up the lost ground of the year before; we also opened a branch in Canada and have seen some success in this new market. The oil and gas sector is particularly important to us in the US and we have seen a much improved position in this sector over the past year with significant new sales and large-scale extensions within the installed base. One customer, which had committed to a two-year rental ii 8pp INTRO Section 03 23/5/03 3:15 PM Page 3 CHIEF EXECUTIVE’S REVIEW with an option on a third year, renewed in the second year for a further three years fixed with an option to extend beyond that, thus demonstrating the long-term visibility of the rental model. The chemical sector remained weak, although this still offered other substantial business opportunities within Managed Services (see page v). The pharmaceutical sector was also weak but is now showing signs of recovery. With the maturing of our new organisation in Canada, we see a growing market share for our products in the North American region. In South America we have added eight new customers, one of our best ever years in a market where we work with business partners on both sales and support. Asia Pacific 24% of group revenue : £8.5m (2002: £7.3m) In the year before last we invested heavily in new offices in the Asia Pacific region with only Australasia as a centre without a direct AVEVA presence. Last year Japan, serviced from our offices in Yokohama and Osaka, saw a slow down in activity, although we still have a very strong installed base which continues to provide a good level of support and upgrade business. In the previous year we had expanded our office in Korea and started a new direct sales and support presence in China. Both the Korean and Chinese offices performed well throughout the year with a marked upturn after the first quarter, gathering pace to achieve a very good second half. Other parts of Asia offer opportunities as we continue to gather strength. Much of the business in the region is driven by oil and gas projects, often driven by projects outside the Asia Pacific region. We have established a good position in the floating production vessel market and will look for further opportunities to work with the hull design engineers to penetrate deeper into the market for complex ships and floating oil/gas facilities. Europe, Middle East and Africa (EMEA) 48% of group revenue : £17.4m (2002: £16.3m) Throughout the year business conditions have been tough across the region with the obvious slow down in the Middle East after Christmas. What has been evident is the continued shift towards software rental as opposed to initial fees. One advantage of the rental model is the ease with which customers can join the growing user community without the need to go into a lengthy approval process for capital expenditure. As our rental base matures we are experiencing a high level of repeat business with associated good margins. During the last quarter we closed some very large iii 8pp INTRO Section 03 23/5/03 3:15 PM Page 4 CHIEF EXECUTIVE’S REVIEW extended rental contracts with a number of long-term customers. During the year we also benefited from a major contract with a long-term AVEVA customer for a ‘project-to-product’ deal; under this agreement we have taken technology built by the customer on AVEVA products and embedded it into a standard AVEVA product. The benefit is a reduced implementation cost for the customer and the ability for AVEVA to exploit the additional functionality to improve its product portfolio and to sell the new technology to other customers (with no ongoing royalties). PRODUCT STRATEGY AVEVA Engineering IT During the last year we have grouped our products under the VANTAGE brand. This has been successfully promoted both in the media and at the many events held around the world. Our flagship product, PDMS, has gone from strength to strength and formed the basis for many of the large-scale, multi- product contracts we have closed with customers. During the second half we have been demonstrating the next generation version of PDMS which will be launched in the first half of 2003. This new version will offer substantially improved productivity whilst being completely upgradeable for existing customers. It will hit the market at a time when many companies using competitors’ products will face considerable costs and the uncertainties associated with upgrading their systems. In the last quarter we announced the latest addition to our portfolio, VNET, which offers a platform for integrating the many applications used in the engineering of a complex process plant, giving customers the power to control, manage, integrate and present information from diverse sources to a wider group of information consumers. With the evolution of the VNET application family we will be able to penetrate a market segment that we have been targeting for some time, albeit without a web based product. Initial reaction to VNET is very favourable with a number of customers ready to buy at the launch of the first production version during Q1 2003/4. AVEVA Consulting This business was launched to bridge the gap between the engineering and business domains at a time when customers had an increasingly negative view of consulting in the ERP area. However, after a year of discussing our unique proposition with customers we decided to scale back our consulting activity in the first half to the point where any engagements can be handled with resources drawn from elsewhere in the group. The market for specialist consulting in this arena could return in future years and we have retained sufficient expertise to reactivate our consulting activities should market conditions change. iv 8pp INTRO Section 03 23/5/03 3:15 PM Page 5 CHIEF EXECUTIVE’S REVIEW AVEVA Managed Services PEOPLE AND ORGANISATION As a result of discussions with customers during the marketing of our consulting proposition we identified a requirement within the customer base for the outsourcing of the specialist support services used to maintain their complex engineering IT applications. The engineering applications have not been included in typical IT outsourcing contracts, largely due to the complex nature of the applications and the inter-relationships between applications from multiple vendors. There is also limited understanding of the engineering process by large outsourcing companies operating within our customer base. In June we launched AVEVA Managed Services with the specific aim of winning outsourcing contracts for complex engineering applications. The first contract was announced in June 2002; the three-year US$13 million deal (including software) with DuPont, an AVEVA customer of 15 years standing, will more than double the revenue from our largest North American customer. Margins in the Managed Services’ business are lower than for the products business but are ahead of those for the commodity outsourcing contractors. We expect further Managed Service contracts to be signed during this year. As a result of scaling back the consulting business we reduced staff in the first half and accordingly, during the second half, our recruitment has been minimal. However, to strengthen the Americas operation, we have hired some very talented and well recognised figures into the team who will enhance our ability to promote the extended product portfolio to senior managements at customers. Staff turnover in the group has been low and we have continued to attract highly skilled staff into our global operations and R&D teams. I would like to thank all staff for their outstanding dedication this year, especially those that have traveled extensively during some difficult times at the end of the year. Richard Longdon Chief Executive 20 May 2003 v 8pp INTRO Section 03 23/5/03 3:16 PM Page 6 FINANCIAL REVIEW GROUP RESULTS I am pleased to report results for the group, which show strong growth in revenue and record profits, with turnover increased by 13% to £36.0 million and profits before amortisation of intangible assets up by 11% to £6.2 million. OPERATIONS Geographically our strongest growth came from the Americas with revenues increasing by 23%. Growth in Asia Pacific was 16%, Europe, Middle East and Africa showing modest growth of 7%, in part reflecting unsettled conditions in the Middle East. Recurring licence revenues increased to £20.9 million (2002: £18.5 million) and account for over 58% of AVEVA’s total revenues. The rapid transition noted last year to the licensed rental model is now complete with initial sales of £9.2 million (2002: £8.1 million) expected to be consistent in future periods. Overall service-related revenue increased by 12% to £5.9 million. The Managed Services offering generated revenues of £1.2m where other service revenues fell by £0.5 million to £4.7 million (2002: £5.2 million) Gross margins and operating expenses, as a percentage of turnover, were consistent with last year at 64% and 48% respectively. Operating profit amounted to £5.6 million (2002: £4.9 million) this was after charging £0.6 million (2002: £0.6 million) for amortisation of intangible assets and software rights acquired on acquisition. Expenditure on R&D remained broadly in line with previous years, and now accounts for 16% of turnover (2002: 18%). R&D expenditure is written off to the profit and loss account as incurred, with no reflection of the substantial value of intellectual property in the net assets of the balance sheet. Basic earnings per share were 21.46p (2002: 19.82p). Earnings per share before amortisation of intangible assets and software rights acquired on acquisition were 25.09p (2002: 23.57p). A final dividend of 3.8p per share is to be proposed at the AGM, resulting in a total dividend for the year of 5.6p (2002: 5.4p). The final dividend will be paid on 1 August 2003 to shareholders on the register at the close of business on 4 July 2003. vi 8pp INTRO Section 03 23/5/03 3:16 PM Page 7 FINANCIAL REVIEW CASH AND CAPITAL EXPENDITURE Cash balances decreased by £1.5 million to £4.9 million, this reflects increased short-term working capital at the year end, tax payments of £2.1 million and purchases of tangible fixed assets of £1.8 million (2002: £1.6 million). Trade debtors increased by £2.1 million to £13.5 million, with debtor days remaining in line with previous years. TAXATION The group’s reporting tax charge is £1.9 million representing and effective tax charge before amortisation of intangible assets of 31%. PENSIONS AVEVA continues to account for pensions under SSAP24 and, based on a valuation date of 1 April 2001, there was an actuarial funding deficit of £0.3 million, for the UK final salary pension scheme. Using the FRS17 valuation basis, as at 31 March 2003 this was £8.7million compared with £2.7million at end of 2002. The Board are considering a range of options available to address this deficit whilst continuing to provide existing and future employees with a comprehensive post retirement benefits package. During the year end March 2003 the scheme has been closed to new entrants and a money purchase scheme introduced. FINANCIAL RISKS AND TREASURY MANAGEMENT Over 82% of the group’s revenue is sourced outside the United Kingdom and invoiced in currencies other than pounds sterling, and 40% of expenditure is in currencies other than sterling. The group therefore has a clearly defined policy for managing foreign exchange risk, which prohibits speculative dealings for which no underlying exposure exists. Foreign currency assets and liabilities are matched as far as possible and the net exposure may be hedged by means of forward currency contracts. Paul Taylor Finance Director 20 May 2003 vii 8pp INTRO Section 03 23/5/03 3:16 PM Page 8 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 1 Directors’ report For the year ended 31 March 2003 The directors present their annual report on the affairs of the group together with the financial statements and auditors’ report for the year ended 31 March 2003. PRINCIPAL ACTIVITIES The company is a holding company. The principal activities of the group are the marketing and development of computer software and services for engineering and related solutions. BUSINESS REVIEW A review of the group’s operations during the year and its plans for the future is given in the Chairman’s and Chief Executive’s Statements and Financial Review. The group made a profit for the year after taxation of £3,658,000 (2002 – £3,365,000). Sales were £36,008,000 (2002 – £31,818,000) with overseas sales representing 82% (2002 – 85%) of the business. CREDITORS’ PAYMENT PRACTICE It is the group’s policy that payments to suppliers are made in accordance with those terms and conditions agreed between the company and its suppliers, providing that all trading terms and conditions have been complied with. The company has no trade creditors (2002 – £nil). RESULTS AND DIVIDENDS The group results and dividends are as follows: Group profit for the year after taxation Dividends paid and proposed – interim dividend paid of 1.8p per ordinary share – final dividend proposed of 3.8p per ordinary share Retained profit for the year RESEARCH AND DEVELOPMENT £000 3,658 (308) (647) __________ 2,703 __________ The group continues an active programme of research and development and all costs are expensed as incurred. The research and development programme covers updating of and extension to the group’s range of products. INTELLECTUAL PROPERTY The group owns intellectual property both in its software tools and the products derived from them. The directors consider such properties to be of significant value to the business. Intellectual property acquired is capitalised at cost but internally developed intellectual property costs are written off as incurred. ❚ 1 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 2 Directors’ report (continued) DIRECTORS AND THEIR INTERESTS The directors who served during the year under review are shown below: (Chairman) Resigned 31 August 2002 * R A King A D Christian J R F Fairbrother * * C A Garrett R Longdon * D W Mann P R Taylor * Non-executive directors The beneficial interests in the shares of the company of directors who held office at 31 March 2003 are as follows: R A King A D Christian C A Garrett R Longdon D W Mann P R Taylor 2003 2002 (or earlier date of appointment) _________________________________ 10p ordinary shares 131,250 - - 380,476 17,800 4,000 ___________ 10p ordinary shares 131,250 6,722 - 778,000 17,800 4,000 ___________ No changes took place in the interests of directors in the shares of the company between 31 March 2003 and 19 May 2003. Directors’ share options are disclosed in the Directors’ remuneration report on page 8. ❚ 2 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 3 Directors’ report (continued) OTHER SUBSTANTIAL SHAREHOLDINGS On 15 May 2003, the company had been notified in accordance with sections 198 to 208 of the Companies Act 1985, of the following interests in the ordinary share capital of the company: Name of holder Amvescap PLC Gartmore Investment Management PLC The Throgmorton Trust plc Hermes Administration Services Ltd 3i Group PLC Invesco English and International Trust University of Cambridge Standard Life UBS Global Asset Management Holding (No.2) Legal & General Investment Management Barclays Bank plc Number 1,707,278 1,694,978 1,663,554 1,414,494 906,272 763,000 675,000 626,366 568,293 534,897 534,703 ___________ Percentage Held 10.02 9.95 9.76 8.30 5.32 4.48 3.96 3.67 3.33 3.14 3.14 __________ CHARITABLE DONATIONS During the year the group made charitable donations of £5,413 (2002 – £3,565). AUDITORS Ernst & Young LLP were appointed during the year to fill a casual vacancy. A resolution to reappoint Ernst & Young LLP as auditors for the ensuing year will be put to the members at the Annual General Meeting. High Cross Madingley Road Cambridge CB3 0HB 19 May 2003 By order of the Board, P R Taylor Secretary ❚ 3 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 4 Board of directors Richard King CBE, aged 73, Non-Executive Chairman Richard joined AVEVA at the time of the management buyout negotiations and was appointed Chairman at their conclusion in August 1994. Prior to that he held various senior management positions in both Pye of Cambridge and Philips NV in the UK and overseas. In 1980 he created, out of Philips, Cambridge Electronic Industries, a group of some 25 specialist companies. The group was listed on the London Stock Exchange (LSE) in 1982 and he was CEO throughout the 1980’s. Richard then turned his attention and interests to the development of early stage technical companies, mostly in Cambridge. Three of these, apart from AVEVA, where at various times he was Chairman, obtained LSE listings. He also committed considerable time to public service appointments as a director or Governor of Addenbrooke’s Hospital; Anglia Polytechnic University and Eastern Arts and is currently Deputy Chairman of Xaar plc; Chairman of Sentec; governor of Norwich School of Art and Design and a trustee of the East Anglian Air Ambulance Trust. He is an Emeritus Fellow of Darwin College in the University of Cambridge. Richard Longdon, aged 47, Chief Executive Richard Longdon received an engineering training in the defence industry then gained experience in the project management of high value engineering projects. He moved into sales and held a series of international sales and marketing positions. He joined AVEVA in 1984 and shortly afterwards was made marketing manager for the process products. In January 1992 he relocated to Frankfurt where he was responsible for setting up and running the group’s German office. He returned to the UK as part of the management buyout team in 1994 subsequently taking responsibility for the group’s worldwide sales and marketing activities before being appointed Managing Director in May 1999. He took over as Group Chief Executive in December 1999. Paul Taylor FCCA, aged 38, Finance Director and Company Secretary Paul Taylor is a Fellow of the Association of Chartered Certified Accountants and joined AVEVA in 1989. He was heavily involved in the flotation process and has been responsible for both UK accounting and the development of its overseas subsidiaries including adherence to group standards. Between 1998 and 2001 Paul was also UK Director of Human Resources and was appointed to the position of Finance Director and Company Secretary of AVEVA Group plc on 1 March 2001. Prior to joining AVEVA, Paul originally trained within the accountancy profession before moving to Philips Telecommunications (UK) where he was responsible for the management accounts of its Public sectors division. Tony Christian, aged 48, Director Tony Christian joined AVEVA in 1998 from Computer Sciences Corporation (CSC), where he was a director of UK Consulting and Systems Integration, managing the process industry practice. He holds a Bachelor’s degree in Mechanical Engineering and a Master’s degree in Acoustics from the University of Nottingham. Following research and development posts at Racal and British Rail, he moved into the CAD industry in 1982. His subsequent experience includes three years with British Aerospace and four years with the computing subsidiary of Davy Corporation (now part of Kvaerner Group), where he was responsible for its process industry solutions division. Tony headed up AVEVA’s Services and Technology division and then went on to manage the introduction of the Consulting and Managed Services divisions. He is currently responsible for the company’s product development and for the delivery of consulting and managed services contracts. ❚ 4 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 5 Board of directors (continued) David Mann, aged 58, Non-Executive Director and Senior Independent Director David Mann was educated at Jesus College, Cambridge. He is Non-Executive Chairman of Charteris plc, a business and IT management consultancy, which he established with some colleagues in 1996 and was floated on AIM in 2000. He is also Non- Executive Chairman of Flomerics Group plc (quoted on AIM) and Non-Executive Director of Ansbacher Holdings Ltd and Room Solutions Limited. Prior to setting up Charteris, he spent almost all his career with Logica plc where he became head of worldwide operations, then Group Chief Executive and finally Deputy Chairman. He is a Past President of the British Computer Society and a Past Master of the Worshipful Company of Information Technologists in the City of London. Colin Garrett, aged 46, Non-Executive Director Colin Garrett was formerly the head of Plc Advisory at PricewaterhouseCoopers in the Midlands. Previously, Colin was a Director of Corporate Finance at Albert E Sharp. For the last three years he has advised a number of companies and worked closely with management teams on their strategy and plans for growth. Colin is a Non-Executive Director of Intec Business Colleges plc, Sentec Limited and Vocalis Group plc. He is also Non-Executive Chairman of 3G Comms Limited and ZBD Displays Limited. ❚ 5 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 6 Corporate governance statements The company is committed to the principles of corporate governance contained in the Combined Code, which is appended to the Listing Rules of the Financial Services Authority and for which the Board is accountable to shareholders. STATEMENT OF COMPLIANCE WITH THE CODE OF BEST PRACTICE The company has complied throughout the year with the Provisions of the Code of Best Practice set out in section 1 of the Combined Code. STATEMENT ABOUT APPLYING THE PRINCIPLES OF GOOD GOVERNANCE The company has applied the Principles of Good Governance set out in section 1 of the Combined Code by complying with the Code of Best Practice as described above. Further explanation of how the Principles have been applied is set out below and, in connection with directors’ remuneration, in the Directors’ remuneration report. BOARD OF DIRECTORS The executive directors of the group are fully involved in its management at all levels, and its direction and control remains firmly in their hands. The board is fully involved in the nomination, selection and appointment of non-executive and executive directors, although there is no formal written procedure in place. The board currently comprises the non-executive chairman, two non-executive directors, including the senior independent director, and three executive directors. The board meets at least eight times during the year. It is responsible for the business and commercial strategy of the group, monitoring progress, the approval of major transactions and the approval of the financial statements and operating and capital expenditure budgets. To enable the board to discharge its duties, all directors receive appropriate and timely information. Briefing papers are distributed by the company secretary to all directors in advance of board meetings. The chairman ensures that the directors take independent professional advice as required. A nomination committee for board appointments has not been established, because the full board is actively involved in all appointments. There is currently no intention to form a nomination committee given the board’s size. All directors are subject to re-election at least every three years. It is the view of the board that all non-executive directors are independent. AUDIT COMMITTEE The Audit Committee comprises the three non-executive directors and is chaired by Colin Garrett with R A King and D W Mann as members. The Committee meets as required to review the scope of the audit and the audit procedures, the format and content of the audited financial statements and interim reports, including their notes and the accounting principles applied. The Committee will also review any proposed change in accounting policies and any recommendations from the group’s auditors regarding improvements to internal controls and the adequacy of resources within the group’s finance function. The Audit Committee advises the board on the appointment of external auditors and on their remuneration both for audit and non-audit work, and discusses the nature, scope and results of the audit with external auditors. The Audit Committee keeps under review the cost effectiveness and the independence and objectivity of the external auditors. DIALOGUE WITH INSTITUTIONAL SHAREHOLDERS The chief executive and the finance director have meetings with representatives of institutional shareholders at least twice annually. These meetings seek to build a mutual understanding of objectives by discussing long-term issues and obtaining feedback. All shareholders are encouraged to participate in the company’s Annual General Meeting. ❚ 6 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 7 Corporate governance statements (continued) INTERNAL CONTROL The board has applied Principle D.2 of the Combined Code by establishing a continuous process for identifying, evaluating and managing the significant risks the group faces. The board regularly reviews the process, which has been in place from the start of the year to the date of approval of this report and which is in accordance with Internal Control: “Guidance for Directors on the Combined Code” published in September 1999. The board is responsible for the group’s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance with respect to the preparation of financial information and the safeguarding of assets and against material misstatement or loss. In compliance with Provision D.2.1 of the Combined Code, the board continuously reviews the effectiveness of the group’s system of internal control. The board’s monitoring covers all controls, including financial, operational and compliance controls and risk management. It is based principally on reviewing reports from management to consider whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. The board has also performed a specific assessment for the purpose of this annual report. This assessment considered all significant aspects of internal control arising during the period covered by the report. The audit committee assists the board in discharging its review responsibilities. The board has considered the requirement to have an internal audit function and given the group’s relative size, does not consider one necessary at this point but will monitor this going forward. ❚ 7 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 8 Directors’ remuneration report This report has been prepared in accordance with Schedule 7A of the Companies Act 1985. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the board has applied the Principles of Good Governance relating to directors’ remuneration. As required by the Regulations, a resolution to approve the report will be proposed at the Annual General Meeting of the company at which the financial statements of the company will be approved. The Regulations require the auditors to report to the company members on the ‘auditable part’ of the Directors’ remuneration report and to state whether in their opinion that part of the report has been properly prepared in accordance with the Companies Act 1985 (as amended). The report has therefore been divided into separate sections for audited and unaudited information. UNAUDITED INFORMATION REMUNERATION COMMITTEE The Remuneration Committee’s principal responsibility is to determine the remuneration of both the company’s executive directors and its senior management within broad policies agreed with the board. In addition it reviews the remuneration policy for the Company as a whole. The remuneration of the non-executive directors is determined by the executive directors, not the Committee. The Committee comprises a Chairman (D Mann) and two non-executive directors (R King and C Garrett). The Chief Executive (R Longdon) is invited to submit recommendations to the Committee and both he and the members of the Committee take into consideration relevant external market data as well as the reviews of remuneration for employees of the group generally. REMUNERATION POLICY The Committee aims to ensure that members of the executive management are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the Company. It also aims for a combination of fixed and variable payments, benefits and share option plans that will achieve a balance in incentives to achieve short and long-term goals. BASIC SALARIES In determining the basic salary of each executive director the Committee takes account of the performance of the Company as a whole and the performance of the individual in achieving financial and non-financial goals within his areas of responsibility. BONUS PAYMENTS The executive directors participate in annual performance-related bonus schemes determined by the Committee. The schemes are based substantially or entirely on the performance of the Company as a whole; part may be based on the achievement of personal objectives. In the year ended 31 March 2003 no bonuses were actually paid. For the year ending 31 March 2004 there will be a cap on the bonus that an executive director can earn under the scheme and the highest cap will be 60% of basic salary. SHARE OPTIONS The Committee considers that periodic grants of share-related incentives should constitute an important element of the remuneration of the Company’s senior executives, in line with common practice in competitive companies. However there is currently very little scope for providing such incentives via the Company’s existing share option scheme and no options were granted to executive directors during the year ended 31 March 2003. The board is therefore making separate proposals to shareholders concerning the introduction of a new share-related incentive scheme and the Committee hopes that this scheme can be introduced soon. ❚ 8 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 9 Directors’ remuneration report (continued) SERVICE CONTRACTS The service contracts and letters of appointment of the directors include the following terms: Date of Contract Date of Appointment Notice Period (months) R A King A D Christian J R F Fairbrother C A Garrett R Longdon D W Mann P R Taylor 28 November 1996 7 April 1998 28 November 1996 14 July 2000 28 November 1996 17 May 2000 17 October 1989 28 November 1996 1 May 1999 28 November 1996 1 August 2000 28 November 1996 8 June 1999 1 March 2001 3 9 Resigned 3 12 3 9 The Committee considers that the notice periods of the executive directors are in line with those in other companies of a similar size and nature and are in the best interests of the group to ensure stability in senior management. The non-executive and executive directors retire at any Annual General Meeting where they are so required by the Articles of Association, accordingly their contracts have no set termination date. There are no predetermined special provisions for executive or non-executive directors with regard to compensation in the event of loss of office. The Remuneration Committee would be responsible for considering the circumstances of the early termination and in exceptional circumstances will determine compensation payments in excess of the company’s contractual obligations. ❚ 9 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 10 Directors’ remuneration report (continued) PERFORMANCE GRAPH The following graph shows the Company’s performance, measured by total shareholder return, compared with the performance of the techMARK All Share Index. 500.00 450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 9 9 - r a M 0 0 - r a M 1 0 - r a M 2 0 - r a M 3 0 - r a M The directors consider the techMARK All Share index to be an appropriate choice as the Index includes the group. AVEVA Group plc techMARK All Share Index ❚ 10 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 11 Directors’ remuneration report (continued) AUDITED INFORMATION DIRECTORS’ REMUNERATION The total amounts for directors’ emoluments and other benefits were as follows: Name of director Non-executive R A King J R F Fairbrother* C A Garrett D W Mann Executive A D Christian J R Dersley* P D Littleton* R Longdon P R Taylor Aggregate emoluments Basic salary £000 Fees £000 Bonus £000 - - - - 32 6 20 20 - - - - Benefits in kind £000 - - - - 2003 Total £000 32 6 20 20 2002 Total £000 32 12 20 16 147 - - 175 115 _________ 437 _________ - - - - - _________ 78 _________ - - - - - _________ - _________ 13 - - 18 17 _________ 48 _________ 160 - - 193 132 __________ 153 42 94 178 125 __________ 563 _________ 672 __________ *Remuneration shown up to date of resignation from the board. The remuneration of each executive director includes non-cash benefits comprising the provision of a company car. Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted to or held by the directors. ❚ 11 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 12 Directors’ remuneration report (continued) SHARE OPTIONS The interests of directors in options to acquire ordinary shares were as follows: Name As at 1 April 2002 Granted Exercised As at 31 March 2003 Gain on exercise Exercise price Earliest date of exercise Date of expiry Number Number Number Number £ A D Christian 150,000 50,000 R Longdon 100,000 P R Taylor 3,000 3,000 23,000 71,000 - - - - - - - - - - - - - - 150,000 50,000 100,000 3,000 3,000 23,000 71,000 - - - - - - - 272.5p 524.7p 01.06.01 19.01.04 31.05.05 18.01.08 524.7p 19.01.04 18.01.08 50.4p 200.0p 179.2p 524.7p 27.11.99 24.05.00 16.03.02 19.01.04 26.11.03 23.05.04 15.03.06 18.01.08 The market price as at 31 March 2003 was 321.5p with a high-low spread for the year of 430.0p to 251.5p. The options are normally exercisable in full or in part between the third and seventh anniversaries of the date of grant. All options except for those at 50.4p are subject to performance conditions, which require earnings per share to outperform RPI (utilisation) by a total of 10% over a three-year rolling period. ❚ 12 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 13 Directors’ remuneration report (continued) PENSIONS R Longdon, A D Christian and P R Taylor are members of the AVEVA Solutions Limited’s defined benefit pension scheme. It is a contributory, funded, final salary occupational pension scheme approved by the Inland Revenue. Under this scheme they are entitled to a pension on normal retirement, or on retirement due to ill health, equivalent to two-thirds of their pensionable salary provided they have completed (or would have completed in the case of ill-health) 25 years’ service. Inland Revenue earnings limits apply to A D Christian and P R Taylor when calculating final salary. A lower pension is payable on earlier retirement after the age of 50 by agreement with the Company. Pensions are payable to dependants on the director’s death in retirement and a lump sum is payable if death occurs in service. The following directors had accrued entitlements under the pension scheme as follows: Accumulated accrued pension at 31 March 2003 Accumulated accrued pension at 31 March 2002 Increase in accrued pension during year Increase in accrued pension during the year, after removing the effects of inflation A D Christian R Longdon P R Taylor £ 12,530 87,890 29,360 £ 9,750 76,090 26,340 £ 2,780 11,800 3,020 £ 2,610 10,510 2,630 Transfer value of increase, after removing the effects of inflation, less directors’ contributions £ 18,460 82,275 10,060 The transfer value as at date of retirement of each directors’ accrued benefits at the end of the financial year is as follows: A D Christian R Longdon P R Taylor 31 March 2003 £ 113,160 768,480 151,840 31 March 2002 £ 77,220 548,670 115,705 Movement, less directors’ contributions £ 30,840 210,620 31,030 __________ __________ __________ The pension entitlement shown is that which would be paid annually on retirement based on the service to the end of the year. ❚ 13 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 14 Directors’ remuneration report (continued) The transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11 (and are net of directors’ own contributions). Members of the scheme have the option to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table. High Cross Madingley Road Cambridge CB3 0HB 19 May 2003 By order of the Board, P R Taylor Secretary ❚ 14 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 15 Statement of directors’ responsibilities FINANCIAL STATEMENTS, INCLUDING ADOPTION OF GOING CONCERN BASIS Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and group and of the profit or loss of the group for that period. After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. In preparing the financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; and state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements. OTHER MATTERS The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and group and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. ❚ 15 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 16 Auditors’ report INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF AVEVA GROUP PLC We have audited the financial statements of AVEVA Group plc for the year ended 31 March 2003 which comprise the Consolidated profit and loss account, Consolidated statement of total recognised gains and losses, Consolidated balance sheet, Company balance sheet, Consolidated cash flow statement, and the related notes numbered 1 to 26. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the directors’ remuneration report that is described as having been audited. This report is made solely to the company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an Auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors’ responsibilities for preparing the Annual Report, including the financial statements which are required to be prepared in accordance with applicable United Kingdom law and accounting standards are set out in the Statement of directors’ responsibilities in relation to the financial statements. Our responsibility is to audit the financial statements and the part of the Directors’ remuneration report to be audited in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards and the Listing Rules of the Financial Services Authority. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Director’s remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the group is not disclosed. We review whether the Corporate governance statement reflects the company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. This other information comprises the Directors’ report, Board of directors, unaudited part of the Directors’ remuneration report, Chairman’s statement, Chief Executive’s statement, Financial review and Corporate governance statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. BASIS OF AUDIT OPINION We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ remuneration report to be audited. ❚ 16 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 17 Auditors’ report (continued) OPINION In our opinion: the financial statements give a true and fair view of the state of affairs of the company and of the group as at 31 March 2003 and of the profit of the group for the year then ended; and the financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. Ernst & Young LLP Registered Auditor Cambridge 19 May 2003 ❚ 17 ❚ ❚ 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 18 Consolidated profit and loss account For the year ended 31 March 2003 Turnover Cost of sales Gross profit Other operating expenses Operating profit Interest receivable Interest payable and similar charges Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation, being profit for the financial year Dividends paid and proposed on equity shares Retained profit for the year Basic earnings per share Diluted earnings per share The accompanying notes are an integral part of this consolidated profit and loss account. All results are derived from continuing activities. Notes 2 3 4 5 7 20 8 9 9 2003 £000 36,008 (13,047) __________ 22,961 (17,343) __________ 5,618 53 (91) __________ 5,580 (1,922) __________ 3,658 (955) __________ 2,703 __________ 2002 £000 31,818 (11,588) __________ 20,230 (15,306) __________ 4,924 40 (26) __________ 4,938 (1,573) __________ 3,365 (921) __________ 2,444 __________ 21.46p 19.82p __________ __________ 21.24p 19.48p __________ __________ ❚ 18 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 19 Consolidated statement of total recognised gains and losses For the year ended 31 March 2003 Profit for the financial year Translation arising on consolidation Total recognised gains and losses recognised since last annual report 2003 £000 3,658 (437) __________ 3,221 __________ 2002 £000 3,365 (38) __________ 3,327 __________ The accompanying notes are an integral part of this consolidated statement of total recognised gains and losses. ❚ 19 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 20 Consolidated balance sheet 31 March 2003 Fixed assets Goodwill Other intangible assets Tangible assets Current assets Stocks Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Net current assets Total assets less current liabilities Creditors: Amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called-up share capital Share premium account Profit and loss account Shareholders’ funds – all equity The accompanying notes are an integral part of this consolidated balance sheet. Notes 2003 £000 2002 £000 10 10 11 13 14 15 16 18 19 20 20 21 1,580 2,329 4,674 __________ 8,583 __________ 1,847 2,681 3,779 __________ 8,307 __________ 758 15,772 5,129 __________ 21,659 (11,076) __________ 10,583 __________ 19,166 (112) (472) __________ 18,582 __________ 958 12,818 6,356 __________ 20,132 (11,609) __________ 8,523 __________ 16,830 - (533) __________ 16,297 __________ 1,705 7,318 9,559 __________ 18,582 __________ 1,704 7,300 7,293 __________ 16,297 __________ ❚ 20 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 21 Company balance sheet 31 March 2003 Fixed assets Investments Current assets Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Net current assets Total assets less current liabilities, being net assets Capital and reserves Called-up share capital Share premium account Profit and loss account Shareholders’ funds – all equity Notes 2003 £000 2002 £000 12 7,205 __________ 7,205 __________ 14 15 3,439 15 __________ 3,454 3,308 48 __________ 3,356 (647) __________ 2,807 __________ (614) __________ 2,742 __________ 10,012 __________ 9,947 __________ 19 20 20 1,705 7,318 989 __________ 1,704 7,300 943 __________ 10,012 __________ 9,947 __________ The accompanying notes are an integral part of this balance sheet. The financial statements were approved by the Board of Directors on 19 May 2003 and signed on its behalf by: R A King R Longdon 19 May 2003 Directors ❚ 21 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 22 Consolidated cash flow statement For the year ended 31 March 2003 Net cash inflow from operating activities Returns on investments and servicing of finance Taxation Capital expenditure and financial investment Equity dividends paid Cash (outflow) / inflow before financing Financing (Decrease) / increase in cash in the year The accompanying notes are an integral part of this consolidated cash flow statement. Notes 2003 £000 2002 £000 22 23 23 23 23 24 3,232 4,135 (38) (2,123) (1,735) (922) __________ 14 (1,202) (1,606) (914) __________ (1,586) (11) __________ (1,597) __________ 427 161 __________ 588 __________ ❚ 22 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 23 Notes to the financial statements 1 ACCOUNTING POLICIES A summary of the principal accounting policies, all of which have been applied consistently throughout the year and the preceding year, is set out below. a) Basis of accounting The financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards. b) Basis of consolidation The group financial statements consolidate the financial statements of AVEVA Group plc and its subsidiary undertakings made up to 31 March each year. The acquisition method of accounting has been adopted. Under this method, the results of subsidiary undertakings acquired or disposed of in the year are included in the Consolidated profit and loss account from the date of acquisition or up to the date of disposal. Where the company does not hold a majority shareholding in an investee company, but the directors consider that dominant influence is exercised over its operating and financial policies, the investee company will be treated as a subsidiary for the purposes of consolidation. No profit and loss account is presented for AVEVA Group plc as provided by Section 230 of the Companies Act 1985. The company’s profit after taxation for the financial year, determined in accordance with the Act, was £1 million (2002 – £1 million). c) Intangible assets Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and written off on a straight-line basis over its useful economic life, which is between seven and a maximum of twenty years. Goodwill arising on acquisitions in the year ended 31 March 1998 and earlier periods was written off to reserves in accordance with the accounting standard then in force. As permitted by the current accounting standard the goodwill previously written off to reserves has not been reinstated in the balance sheet. On disposal or closure of a previously acquired business, the attributable amount of goodwill previously written off to reserves is included in determining the profit or loss on disposal. Purchased software rights are capitalised at cost and amortised on a straight line basis over their estimated useful lives of ten years. The carrying value of goodwill and intangible assets is reviewed for impairment at the end of the first full year following acquisition and in other periods if events or changes in circumstances indicate the carrying value may not be recoverable. d) Research and development Research and development expenditure is written off in the year of expenditure. ❚ 23 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 24 Notes to the financial statements (continued) 1 ACCOUNTING POLICIES (continued) e) Tangible fixed assets Tangible fixed assets are stated at cost, net of depreciation and any provision for impairment. The group has taken advantage of the transitional provisions of FRS15 Tangible Fixed Assets and retained the book amounts of certain freehold properties which were revalued prior to implementation of that standard. The properties were last revalued in 1994 and the valuations have not subsequently been updated. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, based on prices prevailing at the date of acquisition, of each asset on a straight-line basis over its expected useful life, as follows: Computer equipment Fixtures and fittings and office equipment Motor vehicles - - - 25% 12–15% 25% per annum per annum per annum Leasehold buildings are amortised on a straight-line basis over the period of the lease or useful economic life if shorter. The carrying values of tangible fixed assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. f) Investments Fixed asset investments are shown at cost less any provision for impairment. g) Taxation Current tax including UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the group’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is not recognised when fixed assets are revalued unless by the balance sheet date there is a binding agreement to sell the revalued assets and the gain or loss expected to arise on sale has been recognised in the financial statements. Neither is deferred tax recognised when fixed assets are sold and it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the replacement assets are sold. Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in the future has been entered into by the subsidiary or associate. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis. ❚ 24 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 25 Notes to the financial statements (continued) 1 ACCOUNTING POLICIES (continued) h) Pension costs The defined benefit pension scheme, previously available to all UK employees was closed to new applicants during the year. UK employees are now offered membership of a defined contribution scheme after a qualifying period. Pension costs are accounted for on the basis of charging the expected cost of providing pensions over the period during which the group benefits from the employees' services. The effect of variations from regular cost is spread over the expected average remaining service lives of current members of the schemes. The pension cost is assessed in accordance with the advice of qualified actuaries. The group also operates a defined contribution pension scheme for a number of non-UK employees. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet. i) Foreign currency Transactions denominated in foreign currencies are recorded at actual exchange rates as of the date of the transaction, or, if hedged, at the forward contract rate. Monetary assets and liabilities denominated in foreign currencies at the year-end are reported at the rates of exchange prevailing at the year end, or, where appropriate at the forward contract rate. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the profit and loss account. The results of overseas subsidiary undertakings are translated at the average exchange rate during the year, and their balance sheets at the rates ruling at the balance sheet date. Exchange differences arising on translation of the opening net assets and results of overseas subsidiary undertakings are dealt with through reserves. j) Turnover Turnover comprises fees in respect of initial and extension licences, annual licences, and rentals together with income from consultancy and other related services (excluding VAT and similar taxes). For each revenue stream, no revenue is recognised unless and until: a clear contractual arrangement can be evidenced; delivery has been made in accordance with that contract; if required, contractual acceptance criteria have been met; and the fee has been agreed and collectability is probable. Users can pay an initial fee upon installation followed by an obligatory annual fee on each anniversary of installation. Additional usage can be licensed at any time on payment of an extension fee similar to the initial fees. The annual fee covers right to use, core product enhancements and remote support services. Initial and extension fees are recognised in full once the above conditions have been met. No provision is made for uninvoiced post contract support in the twelve months following an initial contract, as the incremental cost of this is considered incidental. Annual revenues are recognised ratably over the period of the contract. As an alternative to the initial/extension plus annual fee, the group also supplies its software under two different types of rental contract. Rentals which are invoiced monthly and which are cancellable by the customer are recognised on a monthly basis. Other rental contracts are invoiced at the start of the contracted period, are non-cancellable and consist of the right to use and the right for support and enhancements. Revenue in respect of the right to use is recognised once the above conditions have been met and a deferral of revenue is made for the right for support and enhancements which is recognised equally over the period of the contract. Income from consultancy and other related services is recognised on a time and material basis. ❚ 25 ❚ ❚ ❚ ❚ 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 26 Notes to the financial statements (continued) 1 ACCOUNTING POLICIES (continued) k) Leases Rentals payable under operating leases are charged on a straight-line basis over the lease term, even if the payments are not made on such a basis. Where fixed assets are financed by leasing arrangements which transfer to the group substantially all the benefits and risks of ownership, the assets are treated as if they had been purchased outright and are included in tangible fixed assets. The capital element of the leasing commitments is shown as obligations under finance leases. The lease rentals are treated as consisting of capital and interest elements. The capital element is applied to reduce the outstanding obligations and the interest element is charged against profit in proportion to the reducing capital element outstanding. Assets held under finance leases are depreciated over the shorter of the lease terms and the useful lives of equivalent owned assets. l) Derivative financial instruments The group uses derivative financial instruments to reduce exposure to foreign exchange risk. The group does not hold or issue derivative financial instruments for speculative purposes. For a forward foreign exchange contract to be treated as a hedge the instrument must be related to actual foreign currency assets or liabilities or to a probable commitment. It must involve the same currency or similar currencies as the hedged item and must also reduce the risk of foreign currency exchange movements on the group’s operations. Gains and losses arising on these contracts are deferred and recognised in the profit and loss account, or as adjustments to the carrying amount of fixed assets, only when the hedged transaction has itself been reflected in the group’s financial statements. m) Long-term contracts Cumulative costs incurred net of amounts transferred to costs of sales, less provision for contingencies and anticipated future losses on contracts, are included as long-term contract balances in stock. Profit is recognised on long-term contracts, if the final outcome can be assessed with reasonable certainty, by including in the profit and loss account turnover and related costs as contract activity progresses. 2 TURNOVER A geographical analysis of turnover by destination is set out below: 2003 £000 2002 £000 United Kingdom Rest of Europe, Middle East and Africa Americas Asia Pacific 6,346 11,029 10,102 8,531 4,678 11,589 8,229 7,322 __________ __________ 31,818 __________ __________ 36,008 No further geographical segmental analysis is given as, in the opinion of the directors, disclosure of this information would be seriously prejudicial to the interests of the group. ❚ 26 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 27 Notes to the financial statements (continued) 3 OTHER OPERATING EXPENSES Selling costs Administrative expenses 4 INTEREST PAYABLE AND SIMILAR CHARGES Bank interest payable and similar charges 2003 £000 2002 £000 12,658 4,685 11,051 4,255 __________ __________ 15,306 __________ __________ 17,343 2003 £000 91 2002 £000 26 __________ __________ 26 __________ __________ 91 ❚ 27 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 28 Notes to the financial statements (continued) 5 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Profit on ordinary activities before taxation is stated after charging / (crediting): Depreciation of owned tangible fixed assets Depreciation of tangible fixed assets held under finance leases Amortisation of purchased software rights Amortisation of goodwill Auditors’ remuneration audit (current auditors) - audit (previous auditors) - non-audit (current auditors) - - non-audit (previous auditors) Research and development costs Operating lease rentals land and buildings - - plant and machinery (Profit) / loss on disposal of tangible fixed assets 6 STAFF COSTS Particulars of employees (including executive directors) are shown below: Wages and salaries Social security costs Other pension costs The average monthly number of persons (including executive directors) employed by the group was as follows: Research, development and product support Sales, marketing and customer support Administration Directors’ remuneration 2003 £000 1,012 30 352 267 209 18 89 35 5,933 2002 £000 1,167 - 370 267 - 190 - 21 5,780 936 284 (4) __________ 875 291 143 __________ 2003 £000 12,479 1,532 1,465 __________ 15,476 __________ 2002 £000 12,120 1,122 1,283 __________ 14,525 __________ 2003 Number 100 166 64 __________ 330 __________ 2002 Number 111 164 65 __________ 340 __________ The disclosure of individual directors’ remuneration and interests required by the Companies Act 1985 and those specified for audit by the Listing Rules of the Financial Services Authority are shown in the Directors’ remuneration Report on pages 8 to 14 and form part of these financial statements. ❚ 28 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 29 Notes to the financial statements (continued) 7 TAX ON PROFIT ON ORDINARY ACTIVITIES The tax charge comprises: UK corporation tax Adjustments in respect of prior periods Foreign tax Adjustment in respect of prior periods Total current tax Deferred tax Origination and reversal of timing differences (note 18) Total tax on profit on ordinary activities The differences between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows: Tax on group profit on ordinary activities at standard UK corporation tax rate of 30% (2002 – 30%) Effects of: Expenses not deductible for tax purposes Other timing differences Higher tax rates on overseas earnings Unrelieved tax losses Adjustments in respect of prior years Group current tax charge for period 2003 £000 2002 £000 604 (255) __________ 349 1,643 (9) __________ 1,983 728 - __________ 728 852 - __________ 1,580 (61) __________ (7) __________ 1,922 __________ 1,573 __________ 2003 £000 2002 £000 1,674 1,481 103 (56) 371 155 (264) __________ 89 - 10 - - __________ 1,983 __________ 1,580 __________ The group’s tax rate is higher than the UK tax rate because a significant proportion of its profits are earned overseas and are subject to higher rates of tax. This is expected to continue for the foreseeable future. The group has overseas tax losses of approximately £450k (2002: £nil) available for offset against future taxable profits of the overseas subsidiary that incurred the loss. No deferred tax asset has been recognised in respect of these losses because the losses do not satisfy the recognition criteria for deferred tax assets in FRS19. ❚ 29 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 30 Notes to the financial statements (continued) 8 DIVIDENDS PAID AND PROPOSED ON EQUITY SHARES Interim dividend paid of 1.8p (2002 – 1.8p) per ordinary share Final dividend proposed of 3.8p (2002 – 3.8p) per ordinary share 9 EARNINGS PER SHARE The calculations of earnings per share are based on the profit after tax for the year of £3,658,000 (2002 – £3,365,000) and the following weighted average numbers of shares: For basic earnings per share Employee share options For diluted earnings per share 10 INTANGIBLE FIXED ASSETS Group Cost At 1 April 2002 and 31 March 2003 Amortisation At 1 April 2002 Charge for the year At 31 March 2003 Net book value At 1 April 2002 At 31 March 2003 2003 £000 308 647 __________ 955 __________ 2002 £000 307 614 __________ 921 __________ 2003 Number 17,042,245 180,540 __________ 17,222,785 __________ 2002 Number 16,976,508 301,710 __________ 17,278,218 __________ Purchased software rights £000 Goodwill £000 3,523 __________ 2,669 __________ 842 352 __________ 822 267 __________ 1,194 __________ 1,089 __________ 2,681 __________ 1,847 __________ 2,329 __________ 1,580 __________ Purchased software rights arose on the acquisition of the products 'FOCUS' for £1,700,000 on 13 September 1999 and 'VANTAGE' for £1,500,000 on 2 December 1999. On 7 September 2000, the group acquired OPE software for £323,000. Purchased goodwill arose on the acquisition of rights to integrate, develop and market 3D design software from AEA Technology on 30 March 1999. The initial cost of goodwill was £2,169,000. In addition, on 12 November 1998 AVEVA agreed to acquire from the distributor Kyokuto Boeki Kaisha all AVEVA’s business in Japan. The goodwill arising on acquisition was £500,000. All intangible assets are being amortised over their useful economic life of ten years. The company had no intangible fixed assets in either year. ❚ 30 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 31 Notes to the financial statements (continued) 11 TANGIBLE FIXED ASSETS Group Cost or valuation At 1 April 2002 Additions Disposals Exchange adjustment At 31 March 2003 Depreciation At 1 April 2002 Charge for the year Disposals Exchange adjustment At 31 March 2003 Net book value At 1 April 2002 At 31 March 2003 Long leasehold land and buildings £000 Computer equipment £000 Fixtures, fittings and office equipment £000 Motor vehicles £000 Total £000 1,100 1,275 - - __________ 6,338 397 (10) (31) _________ 1,855 308 - 14 512 57 (228) - _________ __________ 9,805 2,037 (238) (17) __________ 2,375 __________ 6,694 _________ 2,177 341 _________ __________ 11,587 __________ 178 23 - - __________ 4,833 614 (2) 21 _________ 778 307 - 8 237 98 (182) - _________ __________ 6,026 1,042 (184) 29 __________ 201 __________ 5,466 _________ 1,093 153 _________ __________ 6,913 __________ 922 __________ 2,174 __________ 1,505 _________ 1,228 _________ 1,077 275 _________ __________ 188 _________ __________ 1,084 3,779 __________ 4,674 __________ The net book value of computer equipment includes an amount of £214,000 (2002 – £nil) in respect of assets held under finance leases. The company had no tangible fixed assets. The long leasehold land and buildings were revalued, on the basis of the open market value for existing use, by Bidwells, Chartered Surveyors, as at 29 July 1994. There was no original historical cost to the group. ❚ 31 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 32 Notes to the financial statements (continued) 12 FIXED ASSET INVESTMENTS Subsidiary undertakings All subsidiary undertakings have been included in the consolidation. At 31 March 2003 the parent company and the group had the following investments: Name of undertaking Country of incorporation or registration Principal activity 2003 _________ 2002 _________ Company £000 7,205 _________ Company £000 7,205 _________ Description and proportion of shares and voting rights held 100% ordinary shares of £1 each 100% common stock of US$1 each 100% ordinary shares of Euros 25,565 each 100% ordinary shares of Euros 30 each 100% ordinary shares of HK$1 each 100% ordinary shares of £1 each 100% ordinary shares of £1 each Software development and marketing Software marketing Software marketing Software marketing Software marketing Holding property Trustee company AVEVA Solutions Limited* Great Britain USA Germany France Hong Kong Great Britain Great Britain AVEVA Inc. AVEVA GmbH AVEVA SA AVEVA East Asia Limited Cadcentre Property Limited Cadcentre Pension Trustee Limited AVEVA Engineering IT Limited AVEVA A/S AVEVA KK AVEVA Sendirian Berhad AVEVA Asia Pacific Sendirian Berhad AVEVA Korea Limited AVEVA Managed Services Limited Great Britain Great Britain Cadcentre Limited* Great Britain AVEVA Consulting Limited* India AVEVA Information Technology India Private Limited Cadcentre Engineering IT Limited Great Britain Great Britain Norway Japan Malaysia Malaysia Korea Software marketing Training and consultancy Software marketing Software marketing Software marketing 100% ordinary shares of £1 each 100% ordinary shares of NOK 500 each 100% ordinary shares of 50,000 Yen each 49% ordinary shares of MYR1 each 100% ordinary shares of MYR1 each 100% ordinary shares of KRW500,000 each Software marketing Consulting & support services 100% ordinary shares of £1 each Consulting & support services 100% ordinary shares of £1 each Consulting & support services 100% ordinary shares of £1 each Software marketing 100% ordinary shares of 10 Rupee each Software marketing 100% ordinary shares of £1 each *All subsidiaries except AVEVA Solutions Limited, AVEVA Consulting Limited and Cadcentre Limited are indirectly owned. ❚ 32 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 33 Notes to the financial statements (continued) 13 STOCKS 2003 2002 _______________________ _______________________ Net cost less foreseeable losses and applicable payments on account Group £000 758 __________ Company £000 - Company £000 - __________ __________ __________ Group £000 958 There is no material difference between the balance sheet value of stocks and their replacement costs. 14 DEBTORS 2003 2002 _______________________ _______________________ Group £000 Company £000 Group £000 Company £000 Amounts falling due within one year: Trade debtors UK corporation tax receivable Amounts owed by group undertakings Prepayments Accrued income 15 CREDITORS Amounts falling due within one year Bank overdraft Obligations under finance leases Trade creditors UK corporation tax payable Foreign tax Social security, PAYE and VAT Other creditors Accruals Deferred income Proposed dividend 13,465 351 - 1,765 191 __________ 15,772 __________ - - 3,439 - - - - 3,308 - - __________ __________ __________ 11,409 - - 1,357 52 3,439 3,308 __________ __________ __________ 12,818 2003 2002 _______________________ _______________________ Group £000 199 102 1,042 - 1,254 791 55 1,278 5,708 647 _________ 11,076 _________ Company £000 - - - - - - - - - 647 Company £000 - - - - - - - - - 614 __________ __________ __________ Group £000 - - 610 897 146 625 55 1,482 7,180 614 614 __________ __________ __________ 11,609 647 ❚ 33 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 34 Notes to the financial statements (continued) 16 CREDITORS Amounts falling due after more than one year Obligations under finance leases, due within two to five years 2003 2002 _______________________ _______________________ Group £000 112 __________ Company £000 - __________ Group £000 - __________ Company £000 - __________ 112 __________ - __________ - __________ __________ - 17 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS The disclosures in this note deal with financial assets and financial liabilities as defined in FRS13 “Derivatives and other financial instruments: Disclosures”. Certain financial assets such as investments in subsidiaries are excluded from the scope of these disclosures. The group’s financial instruments comprise cash and liquid resources, and various items, such as trade debtors and trade creditors, that arise directly from its operations. As permitted by FRS13, short-term debtors and creditors have also been excluded from the disclosures (except as indicated below). It is, and has been, throughout the period under review, the group’s policy that no trading in financial instruments shall be undertaken. The main risks arising from the group’s financial instruments are interest rate risk, liquidity risk and foreign currency risk. The board reviews and agrees policies for managing such risks on a regular basis as summarised below. Interest rate and liquidity risks The group holds net funds, and hence its interest rate risk and liquidity risk are associated with short-term cash deposits. The group’s overall objective with respect to holding these deposits is to maintain a balance between accessibility of funds and competitive rates of return. In practice this has meant that no deposits have been made with a maturity date greater than three months in the course of the year. Foreign currency risk Foreign currency risk arises from the group undertaking a significant number of foreign currency transactions in the course of operations. Where such transactions are material, the board has a policy of entering into foreign currency contracts or currency matching to help manage currency risk. The group’s objectives in managing the currency exposure arising from its net investments overseas are to maintain a low cost of borrowing, and to retain some potential for currency related appreciation, while partially hedging against currency depreciation. Gains and losses arising from these structural currency exposures are recognised in the Consolidated statement of total recognised gains and losses. ❚ 34 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 35 Notes to the financial statements (continued) 17 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued) Interest rate profile The group has financial assets and liabilities denominated in both sterling and currency deposits. These comprise cash balances, overdrafts and deposits at short-term rates. Floating rate financial assets £000 (149) 1,104 2,214 786 139 801 128 43 - - - __________ 5,066 __________ 2003 Financial assets on which no interest is earned £000 - - - - - - - - 17 28 18 __________ 63 __________ Total Floating rate financial assets £000 (149) 1,104 2,214 786 139 801 128 43 17 28 18 __________ 5,129 __________ £000 (880) 2,194 2,704 1,081 81 569 459 84 - - - __________ 6,292 __________ 2002 Financial assets on which no interest is earned £000 - - - - - - - - 5 40 19 __________ 64 __________ Total £000 (880) 2,194 2,704 1,081 81 569 459 84 5 40 19 __________ 6,356 __________ Sterling US Dollar Euro Japanese Yen Norwegian Kroner Korean Won Malaysian Ringgit Indian Rupee Swedish Kroner Hong Kong Dollar Other currencies Total Interest rate profile of financial liabilities Floating rate £000 __________ 2003 Fixed rate £000 __________ Total £000 __________ Floating rate £000 __________ 2002 Fixed rate £000 __________ Total £000 __________ Sterling 199 214 413 - - - The floating rate financial liability comprises a bank overdraft facility bearing interest at 5.54%. The fixed rate financial liability comprises two finance leases with weighted average interest rate of 12%. The maturity profile of the group’s financial liabilities is as follows: In one year or less, or on demand Between one and two years Between two and three years 2003 £000 199 92 122 __________ 2002 £000 - - - __________ 413 - ❚ 35 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 36 Notes to the financial statements (continued) 17 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued) Currency exposures The table below shows the group’s transactional currency exposures that give rise to the net currency gains and losses recognised in the profit and loss account. Such exposures comprise the monetary assets and liabilities of the group that are not denominated in the functional currency of the operating unit. As at 31 March 2003 and 31 March 2002 these exposures (including those arising on short term debtors and creditors) were as follows: Functional currency of group operation US Dollar Euro Total 2003 Sterling (£000) Malaysian Ringgit (MYR 000’s) 2002 Sterling (£000) Malaysian Ringgit (MYR 000’s) Borrowing facilities 2,329 50 __________ 1,743 321 __________ 358 - __________ 2,158 - __________ 2,687 50 __________ 3,901 321 __________ The group had undrawn committed borrowing facilities at 31 March 2003 of £1,500,000 (2002 – £1,000,000) in respect of which all conditions precedent had been met. This facility is due for review on 30 September 2003. Fair values The book values of the group’s financial assets and liabilities consist of cash of £5,129,000 (2002 – £6,356,000), overdraft of £199,000 (2002 – £nil) and finance leases of £214,000 (2002 – £nil). There is no material difference between the book value and fair value of the group’s financial instruments in the current or the preceding year. Gains and losses on hedges The group enters into forward foreign currency contracts to minimise the currency exposures that arise on sales denominated in foreign currencies. Changes in the fair value of instruments used as hedges are not recognised in the financial statements until the hedge position matures. No material unrecognised gains or losses on hedged financial instruments existed at 31 March 2003 or 31 March 2002. ❚ 36 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 37 Notes to the financial statements (continued) 18 PROVISIONS FOR LIABILITIES AND CHARGES Deferred tax At 1 April 2002 Released during year At 31 March 2003 Accelerated capital allowances Short-term timing differences Tax losses Group £000 533 (61) _________ 472 _________ Provided Unprovided 2003 £000 480 (8) - __________ 2002 £000 533 - - __________ 2003 £000 - - (155) __________ 2002 £000 - - - __________ 472 __________ 533 __________ (155) __________ - __________ In addition, if the long leasehold property were to be sold at its current net book value, a tax liability of up to £270,000 (2002 – £276,000) may arise. No provision has been made for this liability as there is no intention to dispose of the property. If the property were to be sold in the future, the tax liability would probably be mitigated or deferred by available reliefs. The company has no deferred tax liability. 19 CALLED-UP SHARE CAPITAL Authorised 22,000,000 ordinary shares of 10p each Allotted, called-up and fully paid 17,047,150 (2002 – 17,036,650) ordinary shares of 10p each Group and company 2002 2003 £000 £000 2,200 __________ 2,200 __________ 1,705 __________ 1,704 __________ During the year 10,500 ordinary shares with a nominal value of £1,050 were issued following the exercise of employee share options of 1,200 at an exercise price of 200.0p per share, 9,000 at an exercise price of 179.2p per share and 300 at an exercise price of 50.4p per share. This resulted in proceeds of £18,679 and a premium of £17,629. ❚ 37 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 38 Notes to the financial statements (continued) 19 CALLED-UP SHARE CAPITAL (continued) Share options Share options have been granted to certain employees of the group (excluding directors) and remain outstanding as follows: Date of Grant 27 November 1996 27 November 1996 13 June 1997 16 March 1998 1 June 1998 16 March 1999 10 January 2000 30 March 2000 31 August 2000 19 January 2001 12 July 2001 6 August 2001 Number of options Exercise price (p) 93,500 84,200 25,000 18,950 150,000 31,600 100,000 63,900 10,000 407,300 112,200 25,000 __________ 200.0 50.4 230.0 395.0 272.5 179.2 300.9 342.5 491.8 524.7 479.5 463.3 __________ These options are normally exercisable in full or in part between the third and seventh anniversaries of the date of grant. 20 RESERVES Group At 1 April 2002 Profit for the year Dividends Translation arising on consolidation Share issues At 31 March 2003 Share premium account £000 7,300 - - - 18 __________ Profit and loss account £000 7,293 3,658 (955) (437) - __________ 7,318 __________ 9,559 __________ Included within profit and loss account reserves is goodwill of £3,934,000 which was directly eliminated against reserves in 1995. ❚ 38 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 39 Notes to the financial statements (continued) 20 RESERVES (continued) Company At 1 April 2002 Share issues Profit for the year Dividends At 31 March 2003 21 RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS’ FUNDS Profit for the financial year Other recognised gains and losses relating to the year Dividends paid and proposed on equity shares New shares issued Net addition to shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 22 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Operating profit Depreciation and amortisation charges (Profit)/ loss on disposal of fixed assets Decrease / (increase) in stocks (Increase) in debtors (Decrease) / increase in creditors Net cash inflow from operating activities Share premium account £000 7,300 18 - - __________ 7,318 __________ Profit and loss account £000 943 - 1,001 (955) __________ 989 __________ 2003 £000 3,658 (437) __________ 3,221 (955) 19 __________ 2,285 2002 £000 3,365 (38) __________ 3,327 (921) 161 __________ 2,567 16,297 __________ 18,582 __________ 13,730 __________ 16,297 __________ 2003 £000 5,618 1,661 (4) 200 (2,798) (1,445) __________ 3,232 __________ 2002 £000 4,924 1,804 143 (958) (3,084) 1,306 __________ 4,135 __________ ❚ 39 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 40 Notes to the financial statements (continued) 23 ANALYSIS OF CASH FLOWS Returns on investments and servicing of finance Interest received Interest paid Net cash (outflow) / inflow Taxation UK corporation tax (paid) / received Foreign tax paid Net cash outflow Capital expenditure and financial investment Purchase of tangible fixed assets Purchase of intangible fixed assets Proceeds from sale of tangible fixed assets Net cash outflow Financing Issue of ordinary share capital Capital element of finance lease rental payments Net cash (outflow) / inflow 24 ANALYSIS AND RECONCILIATION OF NET FUNDS 2003 £000 53 (91) 2002 £000 40 (26) __________ (38) __________ __________ 14 __________ (1,597) (526) __________ (2,123) __________ 43 (1,245) __________ (1,202) __________ (1,793) - 58 __________ (1,735) __________ (1,628) - 22 __________ (1,606) __________ 19 (30) __________ 161 - __________ (11) __________ 161 __________ Cash in hand and at bank Bank overdraft Cash Finance leases Net funds 1 April 2002 £000 6,356 - __________ 6,356 - __________ Cash flow £000 (1,398) (199) __________ Other non-cash movements £000 - - __________ Exchange differences £000 171 - __________ 31 March 2003 £000 5,129 (199) __________ (1,597) 30 __________ - (244) __________ 171 - __________ 4,930 (214) __________ 6,356 (1,567) (244) 171 4,716 ❚ 40 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 41 Notes to the financial statements (continued) 24 ANALYSIS AND RECONCILIATION OF NET FUNDS (continued) (Decrease) / increase in cash in the year Cash inflow from increase in debt and lease financing Change in net funds resulting from cash flows New finance leases Currency translation differences Movement in net funds in year Net funds at start of year Net funds at end of year 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS a) Pension arrangements SSAP24 Disclosures 2003 £000 (1,597) 30 __________ (1,567) (244) 171 __________ (1,640) 6,356 __________ 2002 £000 588 - __________ 588 - 148 __________ 736 5,620 __________ 4,716 __________ 6,356 __________ The group operates a defined benefit pension plan providing benefits based on final pensionable pay. This scheme was closed to new employees on 30 September 2002. Administration on behalf of the members is governed by a Trust Deed, and the funds are held and managed by professional investment managers who are independent of the group. Contributions to the scheme are made in accordance with advice from an independent professionally qualified actuary at rates which are calculated to be sufficient to meet the future liabilities of the scheme. The employees’ contributions are fixed as a percentage of salary, the balance being made up by the employer. The most recent actuarial valuation was carried out as at 1 April 2001 using the projected unit method. The main actuarial assumptions were that: a) the return on scheme investments would be: past service 6.00% future service 6.25% b) salaries would increase by 4.40% per annum c) pensions in payment would increase by 2.40% per annum. The market value of the assets of the scheme was £14,521,000 and the level of funding, being the actuarial value expressed as a percentage of the benefits accrued to members after allowing for expected future increases in earnings, was 98%. This deficit, amounting to £314,000, is expected to be eliminated over the period to 2018 through increased employer contributions. ❚ 41 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 42 Notes to the financial statements (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (continued) a) Pension arrangements (continued) Since the date of the actuarial valuation the group has closed the pension scheme to new entrants (with the option of re-opening if required). The group’s actuarial advisers have confirmed that this event is unlikely to have had a significant effect on the position of the fund. Under the projected unit method the current service cost will increase as members approach retirement age. The pension charge for the defined benefit schemes in the UK amounted to £1,167,000 (2002 – £982,000). The group also operates a defined contribution scheme for UK, US, German, French and Norwegian employees for which the pension charge for the year amounted to £298,000 (2002 – £300,900). FRS17 Disclosures Additional disclosures regarding the group’s defined benefit pension scheme are required under the transitional provisions of FRS17 “Retirement benefits” and these are set out below. The disclosures relate to the second year of the transitional provisions. The valuation used for FRS17 disclosures has been based on the most recent actuarial valuation at 1 April 2001, as updated to 31 March 2003 by a qualified independent actuary, to take account of the requirements of FRS17 in order to assess the liabilities of the scheme at 31 March 2003 and 2002. Scheme assets are stated at their market values at the respective balance sheet dates. Main assumptions: Rate of salary increases Rate of increase in pensions in payment Discount rate Inflation assumption 2003 % 2002 % __________ __________ 4.5 2.5 5.5 2.5 4.8 2.8 6.0 2.8 ❚ 42 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 43 Notes to the financial statements (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (continued) a) Pension arrangements (continued) The assets and liabilities of the scheme and the expected rates of return at 31 March are: 2003 Long-term rate of return Expected % Value £000 2002 Long-term rate of return Expected % Value £000 6.60 3.60 2.75 10,300 1,700 600 __________ 12,600 (25,000) __________ (12,400) 3,700 __________ (8,700) 7.25 4.25 3.00 12,800 1,800 800 __________ 15,400 (19,300) __________ (3,900) 1,200 __________ (2,700) Equities Bonds Properties Total market value of assets Present value of scheme liabilities Pension liability before deferred tax Related deferred tax asset Net pension liability An analysis of the defined benefit cost for the year ended 31 March 2003 is as follows: Current service cost Past service cost Total operating charge Expected return on pension scheme assets Interest on pension scheme liabilities Total other finance cost Actual return less expected return on pension scheme assets Experience losses arising on scheme liabilities Loss arising from changes in assumptions underlying the present value of scheme liabilities Actuarial loss recognised in the Statement of total recognised gains and losses £000 __________ 1,200 - __________ 1,200 1,100 (1,200) __________ (100) (5,000) - (3,400) __________ (8,400) __________ ❚ 43 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 44 Notes to the financial statements (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (continued) a) Pension arrangements (continued) Analysis of movements in deficit during the year: At 1 April 2002 Total operating charge Total other finance cost Actuarial loss Exchange difference Contributions At 31 March 2003 £000 (3,900) (1,200) (100) (8,400) - 1,200 __________ (12,400) __________ The updated actuarial valuation at 31 March 2003 showed an increase in the deficit from £3.9 million to £12.4 million. No improvements in benefits were made in the year ended 31 March 2003 and contributions increased to £1.2 million (18.5% of pensionable pay). It has been agreed with the trustees that contributions for the next three years will remain at that level. History of experience gains and losses: Difference between expected return and actual return on pension scheme assets: – amount (£000) – % of scheme assets Experience (losses)/gains arising on scheme liabilities: – amount (£000) – % of the present value of scheme liabilities Total actuarial (loss)/gain recognised in the Statement of total recognised gains and losses – amount (£000) – % of the present value of scheme liabilities 2003 (5,000) (40) - - (8,400) (34) ❚ 44 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 45 Notes to the financial statements (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (continued) b) Lease commitments At 31 March 2003 the group had annual commitments under non-cancellable operating leases as follows: Expiring within one year Expiring between two and five years Expiring over five years 2003 2002 Land and buildings £000 371 676 5 __________ Plant and machinery £000 138 116 - __________ Land and buildings £000 364 500 5 __________ Plant and machinery £000 121 156 - __________ 1,052 __________ 254 __________ 869 __________ 277 __________ c) Capital commitments At the end of the year the group and company had capital commitments contracted for but not provided for of £757,000 (2002 – £12,000). 26 RELATED PARTY TRANSFERS There were no transactions with related parties in either year that require disclosure within these financial statements. ❚ 45 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 46 Five year record Summarised consolidated results Turnover Gross profit Operating profit before intangible asset amortisation Intangible asset amortisation Operating profit Taxation Profit for the financial year Earnings per share Total dividend per share Summarised consolidated balance sheet. Fixed assets Cash and liquid resources Net current assets Shareholders funds: all equity 2003 £000 36,008 22,961 6,237 619 5,618 1,922 3,658 21.46 5.6 8,583 4,930 10,583 18,582 2002 £000 31,818 11,588 5,561 637 4,924 1,573 3,365 19.82 5.4 8,307 6,356 8,523 2001 £000 28,100 9,039 5,759 602 5,157 1,722 3,503 20.80 5.4 8,652 5,620 5,668 2000 £000 23,889 15,594 4,643 404 4,239 1,388 2,950 17.72 5.4 8,853 4,214 2,224 16,297 13,730 10,866 1999 £000 17,861 11,286 2,859 21 2,838 1,105 1,896 11.41 4.8 5,581 4,307 3,149 8,723 ❚ 46 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 47 Company information and advisors Directors Richard King CBE Chairman Richard Longdon Chief Executive Paul Taylor Finance Director Tony Christian Director Colin Garrett Non-executive Director David Mann Non-executive Director Secretary Paul Taylor Registered Office High Cross Madingley Road Cambridge CB3 0HB Registered Number 2937296 Auditors Bankers Solicitors Stockbroker and Financial Advisors Registrars Ernst & Young LLP Compass House 80 Newmarket Road Cambridge CB5 8DZ Barclays Bank plc 15 Bene't Street Cambridge CB2 3PZ Mills & Reeve Francis House 112 Hills Road Cambridge CB2 1PH Hoare Govett Ltd 250 Bishopsgate London EC2M 4AA Capita IRG plc Bourne House 34 Beckenham Road Beckenham, Kent BR3 4TU ❚ 47 40pp ACCOUNTS SECTION 03 29/5/03 9:50 AM Page 48 ❚ 48 Cover for PDF 2 27/5/03 10:00 AM Page 1 TM AVEVA Group plc High Cross, Madingley Road Cambridge CB3 0HB UK Tel: +44 (0)1223 556611 Fax: +44 (0)1223 556622 www.aveva.com avevagroup@aveva.com