AVEVA
Annual Report 2004

Plain-text annual report

TM T C E J O R P A V E V A N A S ’ T I : E S N E S N O N O N Annual Report 2004 T I G N I R E E N G N E I S ’ Y A D O T S E T A N M O D I N O I T C U D O R P D N A Y G O L O N M R E T I T A H T N O I T A V O N N I F O Y R O T S I H A S D O H T E M E Z I S S H T N O M 6 3 Y R E V E D N A L R E Z T I W S F O H G U O N E S E C U D O R P T A H T T N A L P A E H T A E R A N A T E P R A C O T E L I T X E T N O I T C U D O R P G N I T A O L F A N A H T R E G G I B Y T I L I C A F F R A H W Y R A N A C S ’ N O D N O L 3 P O T E H T G N D U L C N I I S R E D L I U B P I H S 0 1 P O T E H T F O 7 E V I S S A M A D N A R A E Y R E P S P I H S F O S E N N O T N O I L L I M 0 3 S E T U T I T S N I N G I S E D R E W O P I E S E N H C 6 2 E H T F O 8 1 FINANCIAL HIGHLIGHTS 31-Mar-04 £000's 31-Mar-03 £000's Growth Contents i ii Chairman’s statement Chief Executive’s review vi Financial review 1 Directors’ report 5 Board of directors 6 Corporate governance statement 8 Directors’ remuneration report 15 Statement of directors’ responsibilities 16 Auditors’ report 18 19 20 21 22 Consolidated profit and loss account Consolidated statement of total recognised gains and losses Consolidated balance sheet Company balance sheet Consolidated cash flow statement 23 Notes to the financial statements 47 48 Five year record Company information and advisors Profit and loss account highlights Turnover Recurring revenues Initial licence fees Other sales 23,000 10,060 5,053 20,946 9,196 5,866 Total 38,113 36,008 Europe, Middle East & Africa Asia Pacific Americas Total Gross profit Gross margin 19,531 8,720 9,862 17,375 8,531 10,102 38,113 36,008 25,525 22,961 67.0% 64.0% Amortisation of intangible assets software rights 267 352 267 352 10% 9% -14% 6% 12% 2% -2% 6% 11% Operating profit Operating margin Profit before taxation Earnings per share – pence Total dividend per share, paid and proposed – pence Balance sheet highlights 6,137 5,618 9% 16.1% 15.6% 6,109 22.63 5,580 21.46 5.8 5.6 Intangible assets and software rights (net) 3,290 3,909 Cash and liquid resources 8,713 4,930 Shareholders' funds: all equity 21,570 18,582 CHAIRMAN’S STATEMENT I am pleased to report another year of good performance with increased revenue, profit and cash generation. Of equal importance are developments during the year, and more recently, which have positioned AVEVA for sustained growth in the future. PERFORMANCE AND DIVIDEND During the year, turnover increased 6% with recurring revenues contributing 60% of the total compared with 58% in 2003. Operating margins were increased with the result that profit before tax and intangible asset amortisation increased by 9% These results were achieved despite the adverse effect of the £/US$ exchange rate and, as already announced, the slippage of a material contract which was expected to be signed during the fourth quarter. An increased final dividend of 4.0p is proposed, making a total for the year of 5.8p (2003: 5.6p). The increased final dividend will be paid on the enlarged share capital. BUSINESS DEVELOPMENT On 21 April 2004, AVEVA announced the proposed acquisition of Tribon Solutions AB (“Tribon”) for £19.0 million, financed mainly by a £17.2 million Placing and Open Offer. Tribon is a leader in the market for engineering software for designing ships and complements AVEVA’s existing products and services. I am pleased to note that the necessary approvals have been given by shareholders at the recent EGM and that the funding has been well supported. This acquisition completes today. Detailed plans for integrating Tribon into AVEVA will be implemented over the next few months; a reduction in annualised operating costs of some £2.4 million is expected to be achieved at an estimated one-off cost of about £2.1 million. Tribon is expected to be earnings enhancing during the year to 31 March 2006 (before amortising goodwill and other intangible assets). The acquisition of Tribon, together with the partnership alliance with Autodesk signed during our second half year, places AVEVA in an excellent position within its marketplace. The Group now has a range of products which is unrivalled at a time when customers increasingly demand a ‘single supplier solution’ to their engineering IT needs. At the same time, we have been able to strengthen our international footprint and achieve greater scale in a global market. BOARD In July 2003, Tony Christian left the company and the Board, having previously played an important role in broadening AVEVA’s product offering. OUTLOOK As in recent years, we anticipate a seasonal bias in our results and there will be short- term distortions arising from the merging of the two businesses. The large contract delayed in March with an Asian consortium of engineering companies is still progressing and we expect this to be closed in the near future. We believe the enlarged group will have a greater international presence and improved prospects for growth, giving us confidence in our ability to achieve satisfactory results in the current year. Already AVEVA have made some joint visits to customers and prospects regarding opportunities for both expansion and new licence sales in the Asia Pacific region where news of the acquisition has been very positively received. Richard A King CBE Chairman 19 May 2004 D E C A F - N E P O T S E G G I B E H i T E H T N O E N M R E P P O C I CHIEF EXECUTIVE’S REVIEW TRIBON ACQUISITION For many years AVEVA has had a small amount of business in the marine market with our systems being used to design the internal layout for ships – essentially as a spill-over from the process plant sector. In order to capitalise on these opportunities, a serious hull design solution was needed. The acquisition of Tribon Solutions, the leading global provider of design software and services to the marine industry, will allow us to combine the technology from both companies and will allow AVEVA to extend its business into the adjacent and complementary sector of shipbuilding. In addition to achieving operational synergies, the enlarged group with be able to offer an unrivalled range of engineering IT products and services. Further, the companies’ presence in the important Asia Pacific market will be significantly enhanced. OVERVIEW The past year has seen sustained progress on all fronts for AVEVA. Our rental licence model, introduced in 2002, has become an essential sales tool in times that see capital expenditure increasingly under pressure within the engineering industry. This has now settled into a more predictable pattern, which will be covered in more detail below. Growth has been supported by continuing investment in products, resulting in a good flow of new releases over the last twelve months. We have achieved improved consistency against delivery schedules and reliability of product. Our investment in product development has been increased this year and we have some significant new products scheduled for launch in 2004/5. The acquisition of Tribon Solutions AB was a major project for much of the second half of the year, with this deal being announced and completed following the year-end. T E N A L ii P S M R O F T A L P D E N G I S E D - E G A T N A V Y B S I D E C U D O R P L I O A E S H T R O N K U F O % 0 5 N A H T E R O M : E S N E S N O N O N T C E J O R P A V E V A N A S ’ T I CHIEF EXECUTIVE’S REVIEW OPERATIONS Trends In a marketplace affected by global unrest, AVEVA has a solid bedrock of established customers built over a long period across multiple industries. One significant trend is the exporting engineering man-hours, often for design, into the country in which a plant is to be constructed. AVEVA has in place a global licensing policy and with our enlarged network of offices we are better placed than most to capitalise on the relocation of design work, often to the Asia Pacific region. Geographic Americas 26% of group revenue: £9.9 m (2003: £10.1m) The North American market has been affected by project migration to lower cost economies. In part this has been a business driver for AVEVA as we sell global licenses to North American based customers and local licenses direct to the lower cost economies via our network of international offices. The adverse movement in the £/US$ exchange rate resulted in a reduction in revenues although in constant currencies the revenue increased during the year. With many of the world’s largest full service engineering, procurement and contracting (EPCs) companies based in North America we are delighted to have concluded major license agreements with Jacobs, AMEC, Fluor and Technip. In addition we have implemented some of our latest technology in these companies, generating both rental licence income and long term services revenue. In the North American market the business has become predominantly rental based. South America has performed consistently well and our long established third party distribution channel is working closely with staff from our Houston office to secure both new and extension business. We expect the alliance with Autodesk to open further opportunities in the American market once we have a product to deliver at the end of 2004. Asia Pacific 23% of group revenue: £8.7 m (2003: £8.5m) As with the Americas, revenues were adversely affected by the US$ exchange rate. Asia Pacific now has a fully developed sales and support office network following the opening this year of an office in Perth, Australia. In this region, the bulk of business is initial licence fee with only a small number of customers choosing the rental model. Our most recent investment in the office network has been China where we have been very successful selling into the power industries, both nuclear and fossil fuelled. We now have a dominant position in the growing power segment, with 19 of the 26 fossil fuelled design institutes using our design systems along with half of the 18 nuclear design institutes. Korea has been a very strong market for AVEVA with significant expansion in business on the back of the booming market for offshore semi submersible structures being fabricated by the Korean shipyards. Daewoo Shipbuilders and Marine Engineering selected AVEVA systems for use on the BP Angola Project for which they will be one of the major designers and constructors. D T E S R E O G O G M I B - Y S L ’ T D N L E R N O A W M E R H E iii T P T S E G R A L S ’ D L R O W E H T F O 7 2 L A C I M E H C D E T O U Q 0 3 S E I N A P M O C CHIEF EXECUTIVE’S REVIEW In Japan, after a slow start to the year, activity picked up in the last two quarters and we expect this to continue into the current year. The combination of Tribon and AVEVA will give us a significantly increased presence across the Asia Pacific region. We already have a number of customers using both systems and are already actively promoting the combined company to customers and prospects. EMEA 51% of group revenue: £19.5 m (2003: £17.4m) AVEVA operates the Europe Middle East and Africa (EMEA) region in two streams, one covering Western EMEA the other covering Central and Southern Europe. Business within the core markets and including the large European based EPCs has been good with some important new business wins in a very competitive market. The business in Europe is a mix of rental and initial licence fee in broadly equal proportion. In Western EMEA we have further developed our Middle East operations with a head office in Dubai, providing sales and support to customers throughout Bahrain, Egypt, Iran, Kuwait, Oman, Pakistan, Qatar, Saudi Arabia and the UAE. In Central and Southern Europe the business has been made up of some very large deals, most notably a contract with Framatome to supply the full product range for use on the new generation of European Reactor. In the first half-year we started direct sales activity in Russia and have already been successful with a large sale to Lukoil. The enlarging of the EU will help alleviate some of the critical shortages of skilled engineers and overcome some of the problems of the past few years in trying to tap into the overcapacity of the eastern EU engineers. Presently AVEVA sells to the eastern EU through an established agent channel and we expect this remain the case for the coming year. Products The latest ‘Next Generation’ version of PDMS was delivered during the year, providing a major upgrade in usability (PDMS sales still drive the majority of the revenue and we continue to invest heavily for the future). In line with our policy of always maintaining the integrity of the customer’s data we have provided tools to migrate up to the new version without any loss of productivity, a facility not open to many users of competitor systems. The next version of PDMS is already close to being finalised and will contain much of the functionality designed as part of the alliance with AutoDesk, combining the best in 2D drafting and 3D database driven technologies in one product with a seamless interface between the two. As a spin out of work started by the AVEVA consulting group we have developed skills in providing interfaces to ERP systems. SAP is widely used within our customer base and over the last year we have implemented interfaces between a number of AVEVA products and various parts of SAP. With the AVEVA VNET product being implanted at a corporate level we expect to see demand for SAP interfaces continue as we roll our further VNET installations. D N A R A E Y R E P S P I H S F O S E N N O T N O I L L I M 0 3 M R O F T A L P N O I T C U D O R P G N I T A O L iv F S E T U T I T S N I N G I S E D R E W O P I E S E N H C 6 2 E H T F O 8 1 : E S N E S N O N O N T C E J O R P A V E V A N A S ’ T I CHIEF EXECUTIVE’S REVIEW 2003/4 PERFORMANCE AVEVA Managed Services AVEVA Engineering IT Oil & gas and power (both contributing some 35% of revenue) have been strong performers during the past year. We have seen a steady rise in the number of deep water platforms and floating production facilities being committed to construction. These highly complex projects lend themselves well to AVEVA solutions and, in the longer term to the combined Tribon hull system with AVEVA outfitting. The much expected increase in project activity in the chemical and pharmaceutical business in North America has been slow to materialise, although in Germany and France we have been making steady progress into these industries. Petrochemical plant has seen an increase over the last 12 months with owner operators using AVEVA’s new technology (VNET) to reduce plant maintenance costs and make engineering data available to a wider audience at low cost. Onshore petrochemical plant is likely to be an area of fierce competition as customers evaluate new technologies. The shipbuilding, or marine, market has been approximately 5% of AVEVA business for a number of years with the majority of the orders coming from Korea, China and Taiwan. With the combination of the 800 Tribon customers and revenue, this sector will rank equally in importance to oil & gas and power. Our multi year contract to provide services to DuPont is performing well and the team, based in Wilmington, has given excellent service on both AVEVA and third party solutions within our scope of work. User surveys conducted regularly have consistently rated our service close to 100% satisfaction. During the year we have taken on responsibility for the Bentley Microstation products within DuPont engineering groups as well as several additional projects to upgrade applications. In the second half we have concluded managed service contracts with three large engineering contractors, all providers of services to DuPont under the Full Service Design Contractor (FSDC) program. Over the next year we plan to put more emphasis on the AVEVA Managed Service proposition building on the success of DuPont and the new signings in the second half year. PEOPLE AND ORGANISATION AVEVA enjoys a low staff turnover by operating a devolved management structure - one in which developers can apply their skills, our finance and administrative staff can monitor the business and our sales, marketing and support people can serve customers, develop new markets and win new business. I’d like to thank all AVEVA staff for their responsiveness and flexibility during periods of continuous change. Richard Longdon Chief Executive 19 May 2004 3 P O T E H T G N D U L C N I I S R E D L I U B P I H S 0 1 P O T E H T F O 7 E V I S S A M A v FINANCIAL REVIEW E Z I S S H T N O M 6 3 Y R E V E D N A L R E Z T I W S F O H G U O N E S E C U D O R P T A H T T N A L P vi A E H T A E R A N A T E P R A C O T E L I T X E T FINANCIAL REVIEW Overview of the year The group results for the year show continued growth in revenues of 6% from £36.0m to £38.1m and growth in profit before tax of 9% from £5.6m to £6.1m and a strong year end cash position of £8.7m. RESULTS OF OPERATIONS Turnover Reported group turnover for the year was £38.1m (2003: £36.0m), an increase of approximately 6% from 2003 with the strongest region being Europe (including the UK), Middle East and Africa which had growth of 12%. Americas had a disappointing year due to the US market remaining depressed and highly competitive and there was further evidence of a continued shift of global projects from the US to other areas. Both Americas and Asia Pacific were partly impacted by the weakening of the US$ with Asia Pacific showing modest growth in revenues of 2%. The Chairman’s statement and the Chief Executive’s review provide more details of the group’s performance in the year. Licence fees were £10.0m in 2004 compared to £9.2m in 2003. Recurring revenues for the year were £23.0m (2003: £20.9m) and accounted for 60% of total revenue (2003: 58%). Service revenues, which include training, implementation and consulting fees were £5.1m compared with £5.9m last year. Gross margins, operating expenses and operating profits Gross margins improved to 67% (2003: 64%) but operating expenses as a percentage of turnover increased from 48% in 2003 to 51% in 2004 reflecting the additional infrastructure costs in the year. Research and development expenditure for the year was £6.9m, an increase of 16% from 2003 and 18% of turnover (2003: 16%) reflecting a internal reorganisation of resources and continued investment in enhancing existing software and developing new software such as that for the Autodesk alliance. Consistent with previous years, all R&D expenditure is expensed in the profit and loss account. As a software business the largest single element of expenditure is on employees and the associated costs. Group staff costs in the year were £16.2m compared to £15.5m in 2003, an increase of 4.8%. The average number of employees decreased from 330 to 326 in 2004. Operating profit increased from £5.6m in 2003 to £6.1m in 2004, an increase of 9%. Taxation The group tax charge for the year was £2.2m (2003: £1.9m) representing an effective tax rate before amortisation of goodwill and intangible assets of 33% (2003: 31%). The main factor resulting in the effective tax rate being higher than the standard UK tax rate of 30% was that a significant proportion of the profits were earned by overseas subsidiaries which are subject to higher rates of tax. This was partially offset by the benefits of the tax credit on qualifying research and development expenditure in the UK. Earnings per share Basic earnings per share was 22.63p (2003: 21.46p) which is an increase of 5% on 2003. Adjusted earnings per share before the amortisation of goodwill and intangible assets arising from acquisitions was 26.20p (2003: 25.09p) which the directors believe provides a more meaningful measurement of performance of the underlying business. N O I T C U D O R P G N I T A O L F A N A H T R E G G I B Y T I L I C A F F R A H W Y R A N A C S ’ N O D N O L FINANCIAL REVIEW foreign currency contracts to manage the currency risk where material. The overseas subsidiaries trade in their own currencies and that also acts as a natural hedge against currency movements. The group is also exposed to foreign currency translation risk on the translation of its net investment overseas into sterling. This is managed to some extent by the overseas subsidiaries incurring costs denominated in their local currency. Further details of the group’s financial instruments are provided in note 17 to the financial statements. Acquisition of Tribon Tribon Solutions AB is a Swedish group which develops, markets and supports software solutions for use in the design and production processes in marine industry. Tribon has 164 employees, with headquarters in Sweden and offices in China, Germany, India, Japan, Republic of Korea, Russia, Singapore, the UK and the USA. The total consideration for the acquisition was £19.0m, £15.0m of which was satisfied in cash and £4.0m was satisfied through the issue of shares. The acquisition was approved by the shareholders at the Extraordinary General Meeting held on 14 May 2004. In order to finance the cash consideration for the acquisition and expenses related thereto, the company raised approximately £17.2m, (approximately £14.7m net of expenses) pursuant to a Placing and Open Offer of 3,645,112 ordinary shares of 10p each. Dividends The Board recommends a final dividend of 4.0p per ordinary share, resulting in a total dividend per share for the year of 5.8p (2003: 5.6p). The final dividend will be paid on 2 August 2004 to shareholders on the register at the close of business on 2 July 2004. The cost of dividends paid and proposed in respect of the financial year was £1.0m (2003: £1.0m). Balance sheet The group balance sheet continues to remain strong with net assets increasing from £18.6m to £21.6m at 31 March 2004. Trade debtors were £14.4m compared to £13.5m and deferred revenue was £6.0m compared to £5.7m last year. Cash flows Overall net cash balances increased by £3.8m from £4.9m to £8.7m. Cash flow for the year from operating activities was £7.9m (2003: £3.2m) reflecting continued focus on working capital management. Capital expenditure was £1.6m (2003: £1.7m) which was principally on the completion of the extension to the building at the Cambridge site and computer equipment, tax paid was £2.0m (2003: £2.1m) and equity dividends paid were £1.0m (2003: £0.9m) Capital structure and treasury policy The group finances its operations through a combination of retained profits, new equity and bank overdraft facilities. During the year the group had an overdraft facility of £1.5m in the UK which was utilised to manage short term fluctuations in cash before cash was remitted from the overseas entities. The group has agreed bank facilities of £6m subsequent to the year end to manage short term working capital requirements following the acquisition of Tribon. Approximately £34.7m (91%) of the group’s turnover is generated outside the UK and is invoiced in currencies other than sterling. The group enters into forward Paul Taylor Finance Director 19 May 2004 T C E J O R P A V E V A N A S ’ T vii I : E S N E S N O N O N S D O H T E M N O I T C U D O R P D N A Y G O L O N M R E T I T I G N I R E E N G N E I S ’ Y A D O T S E T A N M O D I T A H T N O I T A V O N N I F O Y R O T S I H A Directors’ report For the year ended 31 March 2004 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 2004. 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 £3,910,000 (2003 – £3,658,000). Sales were £38,113,000 (2003 – £36,008,000) with overseas sales representing 91% (2003 – 82%) 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, provided that all trading terms and conditions have been complied with. The company has no trade creditors (2003 – £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 4.0p per ordinary share Retained profit for the year RESEARCH AND DEVELOPMENT £000 3,910 (320) (699) __________ 2,891 __________ 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 Directors’ report (continued) DIRECTORS AND THEIR INTERESTS The directors who served during the year under review are shown below: (Chairman) Resigned 31 July 2003 * R A King A D Christian * 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 2004 are as follows: R A King C A Garrett R Longdon D W Mann P R Taylor 2003 _________________________________ 2004 10p ordinary shares 131,250 - 380,476 17,800 8,000 ___________ 10p ordinary shares 131,250 - 380,476 17,800 4,000 ___________ No changes took place in the interests of directors in the shares of the company between 31 March 2004 and 19 May 2004. Directors’ share options are disclosed in the Directors’ remuneration report on page 12. Resolutions will be submitted to the Annual General Meeting for the re-election of two directors. Brief biographical details of those directors who are proposed for re-election appear on page 5. ❚ 2 Directors’ report (continued) OTHER SUBSTANTIAL SHAREHOLDINGS On 14 May 2004, 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 Framlington Group Ltd Merrill Lynch Investment Managers Standard Life Invesco English and International Trust M&G Investment Management Hermes Administration Services Ltd F&C Management Schroder Investment Management UBS Global Asset Management Holding (No.2) Legal & General Investment Management 3i Smaller Quoted Companies Trust PLC CHARITABLE DONATIONS Number 1,501,240 1,459,098 1,420,544 1,261,217 1,074,247 904,747 730,320 633,817 631,997 674,992 525,000 ___________ Percentage held 8.59 8.35 8.13 7.22 6.15 5.18 4.18 3.63 3.62 3.86 3.00 __________ During the year the group made charitable donations of £5,403 (2003 – £5,413) to a combination of local and international charities. POST BALANCE SHEET EVENTS On 21 April 2004 the company signed a conditional agreement to acquire the entire issued share capital of Tribon Solutions AB, a Swedish company which develops, markets and supports software solutions for use in the design and production processes in marine industry all over the world. The total consideration for the acquisition was approximately £19.0 million, approximately £15.0 million of which was satisfied in cash and approximately £4.0 million was satisfied through the issue of 789,655 ordinary shares of 10p each to the vendors. In order to finance the cash consideration for the acquisition and expenses related thereto, the company has raised approximately £17.2 million, (approximately £14.7 million net of expenses) pursuant to a Placing and Open Offer of 3,645,112 ordinary shares of 10p each. In addition, the company has also entered into bank facility agreements for the provision of bank facilities amounting up to £6.0 million to support the enlarged group’s working capital requirements. At an Extraordinary General Meeting (EGM) held on 14th May 2004, a special resolution was passed to approve the acquisition and to increase the authorised share capital of the Company from £2,200,000 to £3,000,000 by the creation of 8,000,000 ordinary shares of 10p each. In addition, the directors were authorised to allot the relevant number of ordinary shares pursuant to the Placing and Open Offer and the acquisition. Also at the EGM ordinary resolutions were passed to adopt a new Long Term Incentive Plan and to amend the dilution limits of the Cadcentre Group plc Executive Share Option Scheme. AUTHORITIES TO ALLOT SHARES AND DISAPPLY PRE-EMPTION RIGHTS Resolution 9 set out in the notice convening the Annual General Meeting contains authority for the directors to allot relevant securities until the earlier of 15 October 2005 and the date of the next Annual General Meeting up to a maximum nominal amount of £730,168 (representing 33.33 per cent of the total issued ordinary share capital as at 28 May 2004. At that date, no treasury shares were held by the Company. Resolution 10 gives the directors the power to allot equity securities for cash pursuant to this authority, disapplying the pre- emption provisions contained in Section 89(1) of the Companies Act 1985. This power is valid for the same period and is limited to the allotment of equity securities up to a nominal amount of £109,525 (approximately 5 per cent of the issued ordinary share capital at 28 May 2004) or in connection with a rights issue or other pre-emptive offer. ❚ 3 Directors’ report (continued) AUTHORITIES TO ALLOT SHARES AND DISAPPLY PRE-EMPTION RIGHTS (continued) The directors have no present intention of issuing further shares other than to satisfy the exercise of option holders' rights under the Company's share option schemes or in relation to any appropriate acquisition opportunities which may become available to the Company. Following the introduction of The Companies (Acquisition of Own Shares)(Treasury Shares) Regulations 2003 (the "Treasury Regulations") which came into force on 1 December 2003, this authority will now also cover the sale of treasury shares for cash. AUTHORITY TO REPURCHASE ORDINARY SHARES Resolution 8 set out in the notice convening the Annual General Meeting gives authority to the Company to purchase its own ordinary shares up to a maximum of 2,190,506 ordinary shares until the earlier of 15 October 2005 and the date of the next Annual General Meeting. This represents 10 per cent of the ordinary shares in issue at 28 May 2004 and the Company's exercise of this authority is subject to the stated upper and lower limits on the price payable which reflects the requirements of the UK Listing Authority. Shares will only be repurchased if earnings per share are expected to be enhanced as a result and the directors believe it is in the best interests of shareholders generally. To the extent that any shares so purchased are held in treasury, earnings per share will be enhanced until such time, if any, as such shares are resold or transferred out of treasury. Pursuant to the Treasury Regulations, the Company now has the choice of cancelling shares which have been repurchased or holding them as treasury shares (or a combination of both). Treasury shares are essentially shares which have been repurchased by the Company and which it is allowed to hold pending either reselling them for cash, cancelling them or, if authorised, using them for the purposes of its employee share plans. The directors believe that it is desirable for the Company to have this choice. Holding the repurchased shares as treasury shares would give the Company the ability to reissue them quickly and cost effectively and would provide the Company with additional flexibility in the management of its capital base. No dividends will be paid on, and no voting rights will be exercised in respect of treasury shares. As at 28 May (being the latest practicable date prior to the publication of the notice of the Annual General Meeting), there were 624,700 outstanding options granted under all share option plans operated by the Company which, if exercised, would represent 2.85 per cent of the issued ordinary share capital of the Company. If this authority were exercised in full and the shares repurchased were to be cancelled, such options if exercised would represent 3.17 per cent of the issued ordinary share capital of the Company." AUDITORS A resolution to reappoint Ernst & Young LLP as auditors for the ensuing year will be put to the members at the Annual General Meeting. By order of the Board, P R Taylor Secretary High Cross Madingley Road Cambridge CB3 0HB 19 May 2004 ❚ 4 Board of directors Richard King CBE, aged 74, Non-Executive Chairman Richard King 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 48, 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 39, Finance Director and Company Secretary Paul Taylor 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. David Mann, aged 59, 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 ACA, aged 47, Non-Executive Director Colin Garrett has spent the majority of his career in corporate finance. For the last four years he has been involved, in a non executive capacity, with a number of companies and management teams. Colin is a Non-Executive Director of Intec Business Colleges plc and Sentec Limited. He is also Non-Executive Chairman of 3G Comms Limited, ZBD Displays Limited and Pelikon Limited. ❚ 5 Corporate governance statement 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. In addition, the company is currently reviewing the requirements of the New Combined Code, published in July 2003, and intends to adopt relevant changes where possible, to its governance framework during the course of the current financial year. 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 two 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. 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. The senior independent director is D W Mann. AUDIT COMMITTEE The audit committee comprises the three non-executive directors and is chaired by C A 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 Corporate governance statement (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 continue to monitor this going forward. ❚ 7 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 W Mann) and two non-executive directors (R A King and C A 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, benefit 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 2004 bonuses of £10,000 and £6,000 were paid to R Longdon and P R Taylor in respect of achievement of the group’s performance for the six months to 30 September 2003. The performance targets for the year ended 31 March 2004 were not achieved and therefore no further bonuses were payable. For the year ending 31 March 2005 there will be a cap on the bonus that an executive director can earn under the scheme and the maximum 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 was 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 2004. Following discussions with and approval from shareholders, a Long Term Incentive Plan (LTIP) was established by the company subsequent to the year end and the dilution limits under the existing share option scheme were extended. The key rules under the LTIP are as follows: The options will be granted at a price equal to the nominal value of an ordinary share which is 10p and will be subject to condition of exercise. The extent to which options will be capable of exercise will depend on the extent to which the condition of exercise has been satisfied. The condition of exercise will be based on the ranking of the company in terms of its total shareholder return measured against other companies in a relevant London Stock Exchange index such as the techMARK 100 index. The option will ‘vest’ in accordance with the following scale: ❚ 8 Directors’ remuneration report (continued) Total shareholder return ranking Percentage vesting of shares subject to option 75 per cent and above Median to 75 per cent Median Below median 100 per cent Pro rata on a straight line basis 33 per cent Nil The condition of exercise will be measured over a period of at least three years. There will be no retesting of the condition of exercise. It is the intention of the remuneration committee to grant options under the LTIP during the year ending 31 March 2005. Although it is the intention of the remuneration committee that options granted under the LTIP will be subject to the condition of exercise as described above for the year ending 31 March 2005, the remuneration committee will take note of practical experience, professional advice, market trends and investor feedback in determining the condition of exercise to be applied for option grants in subsequent years. 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 C A Garrett R Longdon D W Mann P R Taylor 28 November 1996 7 April 1998 14 July 2000 28 November 1996 17 May 2000 17 October 1989 28 November 1996 1 May 1999 1 August 2000 28 November 1996 8 June 1999 1 March 2001 3 9 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 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. 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 1999 2000 2001 2002 2003 2004 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 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* R Longdon P R Taylor Aggregate emoluments Basic salary £000 Fees £000 Bonus £000 Benefits in kind £000 Compensation for loss of office £000 - - - - 32 - 20 20 - - - - - - - - - - - - 2004 Total £000 32 - 20 20 2003 Total £000 32 6 20 20 48 210 133 - - - _________ _________ 5 19 17 _________ _________ - 10 6 391 72 _________ _________ 41 _________ _________ 16 160 193 132 __________ __________ __________ 188 239 156 135 - - 135 563 _________ __________ __________ 655 *Remuneration shown up to date of resignation from the board on 31 July 2003. The remuneration of each executive director includes the provision of a company car, or allowance, and a fuel allowance. 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 Directors’ remuneration report (continued) SHARE OPTIONS The interests of directors in options to acquire ordinary shares were as follows: Name As at 1 April 2003 Granted Exercised Lapsed As at 31 March 2004 Gain on exercise Exercise price exercise Earliest date of exercise Date of expiry Number Number Number Number Number £ A D Christian 150,000 50,000 200,000 R Longdon 100,000 P R Taylor 3,000 3,000 23,000 71,000 100,000 - - - - - - - - - 150,000 - - 50,000 150,000 50,000 - - - 225,000 - 272.5p 524.7p 01.06.01 19.01.04 31.05.05 18.01.08 - 3,000 3,000 23,000 - 29,000 - - - - - - 100,000 225,000 524.7p 19.01.04 18.01.08 - - - 71,000 12,588 8,100 66,884 - 71,000 87,572 50.4p 200.0p 179.2p 524.7p 27.11.99 24.05.00 16.03.02 19.01.04 28.11.03 23.05.04 15.03.06 18.01.08 The market price as at 31 March 2004 was 507.5p with a high-low spread for the year of 532.5p to 314.5p. The aggregate gain on exercise of options by directors for the year ended March 31 2004 was £312,572 (2003: £nil). 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. The share option rules were established at the time of the company’s initial public offering in 1996 and the performance conditions set were commonly used at that time. The board monitors whether the performance conditions have been achieved on an annual basis using a formula which is set out within the rules. The options which have an exercise price of 50.4p were granted when the group was privately owned and therefore were not subject to the earnings per share performance condition. ❚ 12 Directors’ remuneration report (continued) PENSIONS During the year, three directors, (R Longdon, A D Christian and P R Taylor) were 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. During the year, R Longdon’s salary for pension purposes was capped at £175,000. Future calculations of pension entitlement will be based upon the capped salary plus increases in line with those applicable to Inland Revenue limits. 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 2004 Accumulated accrued pension at 31 March 2003 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 £ 13,390 92,560 28,990 £ 12,530 87,890 25,870 £ 860 4,670 3,120 £ 510 2,210 2,400 Transfer value of increase, after removing the effects of inflation, less directors’ contributions £ 3,160 11,040 9,390 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 2004 £ 127,400 705,430 158,880 31 March 2003 £ 113,160 768,480 151,840 Movement, less directors’ contributions £ 12,520 (72,240) 1,840 * A D Christian left the scheme and became a deferred member as at 31 July 2003. The pension entitlement shown is that which would be paid annually on retirement based on the service to the end of the year. ❚ 13 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 2004 By order of the Board, P R Taylor Secretary ❚ 14 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 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 2004 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 27. 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 Chairman’s statement, Chief Executive’s review, Financial review, Directors’ report, Board of directors, unaudited part of the Directors’ remuneration report 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 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 2004 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 2004 ❚ 17 ❚ ❚ Consolidated profit and loss account For the year ended 31 March 2004 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 21 8 9 9 2004 £000 38,113 (12,588) __________ 25,525 (19,388) __________ 6,137 61 (89) __________ 6,109 (2,199) __________ 3,910 (1,019) __________ 2,891 __________ 2003 £000 36,008 (13,047) __________ 22,961 (17,343) __________ 5,618 53 (91) __________ 5,580 (1,922) __________ 3,658 (955) __________ 2,703 __________ 22.63p 21.46p __________ __________ 22.42p 21.24p __________ __________ ❚ 18 Consolidated statement of total recognised gains and losses For the year ended 31 March 2004 Profit for the financial year Translation loss arising on consolidation Total recognised gains and losses recognised since last annual report 2004 £000 3,910 (837) __________ 3,073 __________ 2003 £000 3,658 (437) __________ 3,221 __________ The accompanying notes are an integral part of this consolidated statement of total recognised gains and losses. ❚ 19 Consolidated balance sheet 31 March 2004 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 2004 £000 2003 £000 10 10 11 13 14 15 16 18 19 20 20 21 1,313 1,977 5,046 __________ 8,336 __________ 1,580 2,329 4,674 __________ 8,583 __________ 217 18,830 8,713 __________ 27,760 (14,150) __________ 13,610 __________ 21,946 (41) (335) __________ 21,570 __________ 758 15,772 5,129 __________ 21,659 (11,076) __________ 10,583 __________ 19,166 (112) (472) __________ 18,582 __________ 1,747 8,210 11,613 __________ 21,570 __________ 1,705 7,318 9,559 __________ 18,582 __________ ❚ 20 Company balance sheet 31 March 2004 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 2004 £000 2003 £000 12 7,205 __________ 7,205 __________ 14 15 4,369 52 __________ 4,421 3,439 15 __________ 3,454 (699) __________ 3,722 __________ (647) __________ 2,807 __________ 10,927 __________ 10,012 __________ 19 20 20 1,747 8,210 970 __________ 1,705 7,318 989 __________ 10,927 __________ 10,012 __________ The accompanying notes are an integral part of this balance sheet. The financial statements were approved by the Board of Directors on 19 May 2004 and signed on its behalf by: R A King R Longdon 19 May 2004 Directors ❚ 21 Consolidated cash flow statement For the year ended 31 March 2004 Net cash inflow from operating activities Returns on investments and servicing of finance Taxation Capital expenditure and financial investment Equity dividends paid Cash inflow / (outflow) before financing Financing Increase / (decrease) in cash in the year The accompanying notes are an integral part of this consolidated cash flow statement. Notes 2004 £000 2003 £000 22 23 23 23 23 24 7,880 3,232 (28) (2,006) (1,594) (967) __________ (38) (2,123) (1,735) (922) __________ 3,285 832 __________ 4,117 __________ (1,586) (11) __________ (1,597) __________ ❚ 22 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 £1,000,000 (2003 – £1,000,000). 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. 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. 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 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 re-valued unless by the balance sheet date there is a binding agreement to sell the re-valued 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 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 licence fee upon installation for a set number of users followed by an obligatory annual fee on each anniversary of installation. Additional users can be licensed at any time on payment of an extension fee similar to the initial and annual fees. The fees cover right to use and post contract support which includes core product enhancements and remote support services. The fees related to the right to use are recognised once the above conditions have been met. Post contract support fees are recognised ratably over the period of the contract. As an alternative to the initial/extension licence plus annual fee model, 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 two separate components, the right to use and post contract support. Revenue in respect of the right to use is recognised once the above conditions have been met and revenue for post contract support is recognised ratably over the period of the contract. ❚ 25 ❚ ❚ ❚ ❚ Notes to the financial statements (continued) 1 ACCOUNTING POLICIES (continued) j) Turnover (continued) Income from consultancy and other related services is recognised as the services are provided. The group has revised its revenue recognition policy, as described above, in view of the Amendment to FRS5 ‘Reporting the substance of transactions: Revenue Recognition’, which was issued in November 2003. This revision has had no material impact on the reported results of the group. 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: 2004 £000 2003 £000 United Kingdom Rest of Europe, Middle East and Africa Americas Asia Pacific 3,458 16,073 9,862 8,720 6,346 11,029 10,102 8,531 __________ __________ 36,008 __________ __________ 38,113 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 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 2004 £000 2003 £000 14,367 5,021 12,658 4,685 __________ __________ 17,343 __________ __________ 19,388 2004 £000 89 2003 £000 91 __________ __________ ❚ 27 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 Loss/(profit) 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 2004 £000 1,025 102 352 267 216 - 201 19 6,858 924 266 7 __________ 2003 £000 1,012 30 352 267 209 18 89 35 5,933 936 284 (4) __________ 2004 £000 12,895 1,717 1,601 __________ 16,213 __________ 2003 £000 12,479 1,532 1,465 __________ 15,476 __________ 2004 Number 102 156 68 __________ 326 __________ 2003 Number 100 166 64 __________ 330 __________ 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 11 to 14 and form part of these financial statements. ❚ 28 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 Adjustments 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% (2003 – 30%) Effects of: Expenses not deductible for tax purposes UK research & development tax credit Capital allowances in excess of depreciation Other timing differences Higher tax rates on overseas earnings Unrelieved tax losses Adjustments in respect of prior years Group current tax charge for period 2004 £000 2003 £000 945 115 __________ 1,060 1,243 33 __________ 2,336 604 (255) __________ 349 1,643 (9) __________ 1,983 (137) __________ (61) __________ 2,199 __________ 1,922 __________ 2004 £000 2003 £000 1,833 1,674 86 (125) 111 16 254 13 148 __________ 103 - - (56) 371 155 (264) __________ 2,336 __________ 1,983 __________ 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. ❚ 29 Notes to the financial statements (continued) 8 DIVIDENDS PAID AND PROPOSED ON EQUITY SHARES Interim dividend paid of 1.8p (2003 – 1.8p) per ordinary share Final dividend proposed of 4.0p (2003 – 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 £3,910,000 (2003 – £3,658,000) 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 2003 and 31 March 2004 Amortisation At 1 April 2003 Charge for the year At 31 March 2004 Net book value At 1 April 2003 At 31 March 2004 2004 £000 320 699 __________ 1,019 __________ 2003 £000 308 647 __________ 955 __________ 2004 Number 17,281,707 156,687 __________ 17,438,394 __________ 2003 Number 17,042,245 180,540 __________ 17,222,785 __________ Purchased software rights £000 Goodwill £000 3,523 __________ 2,669 __________ 1,194 352 __________ 1,089 267 __________ 1,546 __________ 1,356 __________ 2,329 __________ 1,580 __________ 1,977 __________ 1,313 __________ Purchased software rights arose on the acquisition of the products 'Vantage Project Resource Management' for £1,700,000 on 13 September 1999 and 'Vantage Plant Engineering' 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 Notes to the financial statements (continued) 11 TANGIBLE FIXED ASSETS Group Cost or valuation At 1 April 2003 Additions Disposals Exchange adjustment At 31 March 2004 Depreciation At 1 April 2003 Charge for the year Disposals Exchange adjustment At 31 March 2004 Net book value At 1 April 2003 At 31 March 2004 Long leasehold land and buildings £000 Computer equipment £000 Fixtures, fittings and office equipment £000 Motor vehicles £000 Total £000 2,375 706 - - __________ 6,694 506 (210) (120) _________ 2,177 382 (64) (82) 341 169 (56) (52) _________ __________ 11,587 1,763 (330) (254) __________ 3,081 __________ 6,870 _________ 2,413 402 _________ __________ 12,766 __________ 201 63 - - __________ 5,466 607 (61) (88) _________ 1,093 366 (64) (52) 153 91 (29) (26) _________ __________ 6,913 1,127 (154) (166) __________ 264 __________ 5,924 _________ 1,343 189 _________ __________ 7,720 __________ 2,174 __________ 2,817 __________ 1,228 _________ 946 _________ 1,084 188 _________ __________ 213 _________ __________ 1,070 4,674 __________ 5,046 __________ The net book value of computer equipment includes an amount of £112,000 (2003 - £214,000) in respect of assets held under finance leases. The company had no tangible fixed assets. The long leasehold land and buildings were re-valued, 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 Notes to the financial statements (continued) 12 FIXED ASSET INVESTMENTS Subsidiary undertakings All subsidiary undertakings have been included in the consolidation. At 31 March 2004 the parent company and the group had the following investments: Name of undertaking Country of incorporation or registration Principal activity 2004 _________ 2003 _________ 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 AS 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* AVEVA Information Technology India India Private Limited Cadcentre Engineering IT Limited Great Britain AVEVA Pty Limited Great Britain Norway Japan Malaysia Malaysia Australia 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 Software marketing 100% ordinary shares of £1 each 100% ordinary shares of AUD$1 each *All subsidiaries except AVEVA Solutions Limited, AVEVA Consulting Limited and Cadcentre Limited are indirectly owned. ** AVEVA Sendirian Berhad has been consolidated on the basis that the Group exercises dominant influence over its financial and operating policies under the terms of the shareholders’ agreement. ❚ 32 Notes to the financial statements (continued) 13 STOCKS Net cost 14 DEBTORS 2004 2003 _______________________ _______________________ Group £000 217 __________ Company £000 - Company £000 - __________ __________ __________ Group £000 758 2004 2003 _______________________ _______________________ 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 14,391 - - 4,127 312 __________ 18,830 __________ - - 4,369 - - - - 3,439 - - __________ __________ __________ 13,465 823 - 1,293 191 4,369 3,439 __________ __________ __________ 15,772 Included within prepayments are professional fees of £2,582,000 which relate to the acquisition of Tribon Solutions AB, which was acquired subsequent to the year-end (see note 27). Of these fees, £90,000 had been paid before the year-end. In the 2003 comparatives an amount of £472,000 relating to withholding tax has been reclassified from prepayments to UK corporation tax receivable. 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 2004 2003 _______________________ _______________________ Group £000 - 71 796 292 469 1,194 98 4,529 6,002 699 _________ 14,150 _________ Company £000 - - - - - - - - - 699 Company £000 - - - - - - - - - 647 __________ __________ __________ Group £000 199 102 1,042 - 1,254 791 55 1,278 5,708 647 647 __________ __________ __________ 11,076 699 Included within accruals is an amount of £2,492,000 for professional fees which relate to the acquisition of Tribon Solutions AB, which was acquired subsequent to the year-end (see note 27). ❚ 33 Notes to the financial statements (continued) 16 CREDITORS Amounts falling due after more than one year Obligations under finance leases, due within one to two years (note 17) Group £000 41 __________ Company £000 - __________ Group £000 112 __________ Company £000 - __________ 2004 2003 _______________________ _______________________ 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 Notes to the financial statements (continued) 17 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued) Interest rate profile The group has financial assets denominated in both sterling and foreign currency deposits. These comprise cash balances, overdrafts and deposits at short-term rates. Floating rate financial assets £000 721 1,060 3,818 1,466 151 904 246 180 71 - - - __________ 8,617 __________ Sterling US Dollar Euro Japanese Yen Norwegian Kroner Korean Won Malaysian Ringgit Indian Rupee Australian Dollar Swedish Kroner Hong Kong Dollar Other currencies Total Interest rate profile of financial liabilities Sterling Floating rate £000 - __________ 2004 Financial assets on which no interest is earned £000 - - - - - - - - - 25 35 36 __________ 96 __________ 2004 Fixed rate £000 112 __________ Total Floating rate financial assets £000 721 1,060 3,818 1,466 151 904 246 180 71 25 35 36 __________ 8,713 __________ £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 £000 (149) 1,104 2,214 786 139 801 128 43 - 17 28 18 __________ 5,129 __________ Total £000 112 __________ Floating rate £000 199 __________ 2003 Fixed rate £000 214 __________ Total £000 413 __________ The floating rate financial liability for 2003 comprised 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% (2003: 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 2004 £000 71 41 - __________ 112 __________ 2003 £000 301 112 - __________ 413 __________ ❚ 35 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 2004 and 31 March 2003 these exposures (including those arising on short term debtors and creditors) were as follows: Functional currency of group operation US $ Euro SNG$ AUS$ Total 2004 Sterling (£000) Malaysian Ringgit (MYR 000’s) 2003 Sterling (£000) Malaysian Ringgit (MYR 000’s) Borrowing facilities 1,188 118 __________ 418 - __________ - 7 __________ - 48 __________ 1,606 173 __________ 2,329 50 __________ 358 - __________ - - __________ - - __________ 2,687 50 __________ The group had undrawn committed borrowing overdraft facilities at 31 March 2004 of £1,500,000 (2003 - £1,500,000) in respect of which all conditions precedent had been met. The group has agreed bank facilities of £6,000,000 subsequent to the year-end to manage short-term working capital requirements following the acquisition of Tribon (note 27). Fair values The book values of the group’s financial assets and liabilities consist of cash of £8,713,000 (2003 - £5,129,000), overdraft of £nil (2003 – £199,000) and finance leases of £112,000 (2003 - £214,000). 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 2004 or 31 March 2003. As at 31 March 2004 there were forward contracts in the UK to sell US $1,500,000 and 1,000,000 on 30 June 2004, and to sell US $1,000,000 and 1,000,000 on 30 September 2004. These contracts hedged US dollar cash and short term deposits of US $363,000 and US dollar debtors of US $1,821,099 held in the UK at that date, and also Euro cash and short term deposits of 3,000 and Euro debtors of 623,000. The balance of the forward contracts was held to hedge US Dollar and Euro income expected to arise from recurring revenues over the period to 30 September 2004. The directors consider these to qualify for hedge accounting since the following criteria are met: the instruments are related to foreign exchange existing assets or probable future income whose characteristics have been identified; they involve the same currency as the hedged item; and they reduce the risk of foreign currency exchange movements to the group operations. ❚ 36 ❚ ❚ ❚ Notes to the financial statements (continued) 18 PROVISIONS FOR LIABILITIES AND CHARGES Deferred tax At 1 April 2003 Released during year At 31 March 2004 Accelerated capital allowances Short term timing differences Tax losses Group £000 472 (137) _________ 335 _________ Provided Unprovided 2004 £000 365 (30) - __________ 2003 £000 480 (8) - __________ 2004 £000 - - (13) __________ 2003 £000 - - (155) __________ 335 472 (13) (155) In addition, if the long leasehold property were to be sold at its current net book value, a tax liability of up to £269,000 (2003 – £270,000) 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 17,470,300 (2003 – 17,047,150) ordinary shares of 10p each Group and company 2003 2004 £000 £000 2,200 __________ 2,200 __________ 1,747 __________ 1,705 __________ During the year 423,150 ordinary shares with a nominal value of £42,315 were issued following the exercise of employee share options of 1,200 at an exercise price of 395.0p per share, 14,200 at an exercise price of 342.5p per share, 70,000 at an exercise price of 309.5p per share, 150,000 at an exercise price of 272.5p per share, 85,700 at an exercise price of 200.0p per share, 25,400 at an exercise price of 179.2p per share and 76,650 at an exercise price of 50.4p per share. This resulted in proceeds of £934,323 including a premium of £892,008. ❚ 37 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 and remain outstanding as follows: Date of Grant 13 June 1997 16 March 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) 25,000 17,750 5,400 30,000 45,550 10,000 357,300 108,700 25,000 __________ 230.0 395.0 179.2 309.5 342.5 491.8 524.7 479.5 463.3 __________ 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 2003 Profit for the year Dividends Translation arising on consolidation Share issues At 31 March 2004 Share premium account £000 7,318 - - - 892 __________ Profit and loss account £000 9,559 3,910 (1,019) (837) - __________ 8,210 __________ 11,613 __________ Included within profit and loss account reserves is goodwill of £3,934,000 which was directly eliminated against reserves in 1995 (2003: £3,934,000). ❚ 38 Notes to the financial statements (continued) 20 RESERVES (continued) Company At 1 April 2003 Share issues Profit for the year Dividends At 31 March 2004 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 Loss/(profit) on disposal of fixed assets Decrease in stocks Increase in debtors Increase/(decrease) in creditors Net cash inflow from operating activities Share premium account £000 7,318 892 - - __________ 8,210 __________ Profit and loss account £000 989 - 1,000 (1,019) __________ 970 __________ 2004 £000 3,910 (837) __________ 3,073 (1,019) 934 __________ 2,988 18,582 __________ 21,570 __________ 2003 £000 3,658 (437) __________ 3,221 (955) 19 __________ 2,285 16,297 __________ 18,582 __________ 2004 £000 6,137 1,746 7 541 (4,677) 4,126 __________ 7,880 __________ 2003 £000 5,618 1,661 (4) 200 (2,798) (1,445) __________ 3,232 __________ ❚ 39 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 Taxation UK corporation tax received/(paid) Foreign tax paid Net cash outflow Capital expenditure and financial investment Purchase of tangible 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 inflow / (outflow) 24 ANALYSIS AND RECONCILIATION OF NET FUNDS Cash at bank and in hand Bank overdraft Cash Finance leases Net funds ❚ 40 2004 £000 2003 £000 61 (89) __________ (28) __________ 53 (91) __________ (38) __________ 55 (2,061) __________ (2,006) __________ (1,597) (526) __________ (2,123) __________ (1,763) 169 __________ (1,594) __________ (1,793) 58 __________ (1,735) __________ 934 (102) __________ 19 (30) __________ 832 __________ (11) __________ 1 April 2003 £000 5,129 (199) __________ 4,930 (214) __________ 4,716 __________ Cash flow £000 3,918 199 __________ 4,117 102 __________ 4,219 __________ Exchange differences £000 (334) - __________ (334) - __________ (334) __________ 31 March 2004 £000 8,713 - __________ 8,713 (112) __________ 8,601 __________ Notes to the financial statements (continued) 24 ANALYSIS AND RECONCILIATION OF NET FUNDS (continued) Increase /(decrease) in cash in the year Cash outflow from decrease in 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 the year Net funds at end of the year 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS a) Pension arrangements SSAP24 Disclosures 2004 £000 4,117 102 __________ 4,219 - (334) __________ 3,885 4,716 __________ 8,601 __________ 2003 £000 (1,597) 30 __________ (1,567) (244) 171 __________ (1,640) 6,356 __________ 4,716 __________ 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 2003. 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 assets of the scheme were taken into account at a smoothed market value. Consistent with this, the liabilities were valued using financial assumptions derived from yields on index-linked and fixed interest government securities. 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. ❚ 41 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 deficit identified at the 2001 valuation, amounting to £314,000, is expected to be eliminated over the period to 2018 through increased employer contributions. The market value of the assets of the scheme was £14,521,000 and the smoothed market value of the assets represented 98% of the benefits that had accrued to members after allowing for expected future increases in earnings. The pension charge for the defined benefit schemes in the UK amounted to £1,137,000 (2003 – £1,167,000). 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 £438,000 (2003 – £298,000). 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 valuation used for FRS17 disclosures has been based on the most recent actuarial valuation at 1 April 2001, as updated to 31 March 2004 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 2004 and 2003. Scheme assets are stated at their market values at the respective balance sheet dates. Main assumptions: Rate of salary increases Rate of increase of pensions in payment Rate of increase of pensions in deferment Discount rate Inflation assumption 2004 % 2003 % 4.75 2.75 2.75 5.5 2.75 4.5 2.5 2.5 5.5 2.5 ❚ 42 Notes to the financial statements (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (continued) a) Pension arrangements (continued) FRS17 disclosures (continued) The assets and liabilities of the scheme and the expected rates of return at 31 March 2004 are: 2004 Long-term rate of return 2003 Long-term rate of return Expected % Value £000 Expected % Value £000 Equities Bonds Properties 6.70 3.70 3.00 Total market value of assets Present value of scheme liabilities Pension liability before deferred tax Related deferred tax asset Net pension liability 14,300 1,500 700 __________ 16,500 (25,000) __________ (8,500) 2,600 __________ (5,900) __________ 6.60 3.60 2.75 10,300 1,700 600 __________ 12,600 (25,000) __________ (12,400) 3,700 __________ (8,700) __________ An analysis of the defined benefit cost for the year ended 31 March 2004 is as follows: Current 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 Gain/(loss) arising from changes in assumptions underlying the present value of scheme liabilities Actuarial gain/(loss) recognised in the Statement of total recognised gains and losses 2004 £000 2003 £000 1,400 __________ 1,400 __________ 800 (1,400) __________ (600) __________ 2,000 1,200 __________ 1,200 __________ 1,100 (1,200) __________ (100) __________ (5,000) 2,800 __________ (3,400) __________ 4,800 __________ (8,400) __________ ❚ 43 Notes to the financial statements (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (continued) a) Pension arrangements (continued) FRS17 disclosures (continued) Analysis of movements in the deficit during the year: At 1 April 2003 Total operating charge Total other finance cost Actuarial gain/(loss) Exchange difference Contributions At 31 March 2004 2004 £000 2003 £000 (12,400) (3,900) (1,400) (1,200) (600) (100) 4,800 (8,400) – – 1,100 1,200 ____________ ____________ (8,500) (12,400) ____________ ____________ The updated actuarial valuation at 31 March 2004 showed a decrease in the deficit from £12.4 million to £8.5 million. No improvements in benefits were made in the year ended 31 March 2004 and contributions remained at 18.5% of pensionable pay, with members’ contributions remaining at 5.25% of pensionable salary. It has been agreed with the trustees that contributions for the next two years will remain at that level. History of experience gains and loses: 2004 2003 Difference between expected return and actual return on pension scheme assets: – amount (£000) – % of scheme assets 2,000 (5,000) 12% (40%) Experience (losses)/gains arising on scheme liabilities: – amount (£000) – % of the present value of scheme liabilities - - - - Total actuarial gain/(loss) recognised in the Statement of total recognised gains and losses: – amount (£000) 4,800 (8,400) – % of the present value of scheme liabilities 19% (34%) ❚ 44 Notes to the financial statements (continued) 25 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (continued) a) Pension arrangements (continued) FRS17 disclosures (continued) Reconciliation of net assets and reserves under FRS17 Net assets - Group Net assets as stated in the balance sheet FRS17 defined benefit liabilities Net assets including defined benefit liabilities Reserves – Group Profit and loss reserve as stated in the balance sheet FRS17 defined benefit liabilities Profit and loss reserve including amounts relating to defined benefit liabilities 2004 £000 21,570 (5,900) __________ 15,670 __________ 2004 £000 11,613 (5,900) __________ 5,713 2003 £000 18,582 (8,700) __________ 9,822 __________ 2003 £000 9,559 (8,700) __________ 859 __________ __________ b) Lease commitments At 31 March 2004 the group had annual commitments under non-cancellable operating leases as follows: Net assets - Group 2004 2003 Expiring within one year Expiring between two and five years Expiring in more than five years Land and buildings £000 416 104 327 __________ 847 __________ Plant and machinery £000 203 44 - __________ 247 __________ Land and buildings £000 371 676 5 __________ 1,052 __________ Plant and machinery £000 138 116 - __________ 254 __________ c) Capital commitments At the end of the year the group and company had capital commitments contracted for but not provided for of £123,000 (2003 - £757,000). 26 RELATED PARTY TRANSACTIONS There were no transactions with related parties in either year that require disclosure within these financial statements. ❚ 45 Notes to the financial statements (continued) 27 POST BALANCE SHEET EVENTS On 21 April 2004 the company signed a conditional agreement to acquire the entire issued share capital of Tribon Solutions AB, a Swedish company which develops, markets and supports software solutions for use in the design and production processes in marine industry all over the world. The total consideration for the acquisition was approximately £19.0 million, approximately £15.0 million of which was satisfied in cash and approximately £4.0 million was satisfied through the issue of 789,655 ordinary shares of 10p each to the vendors. In order to finance the cash consideration for the acquisition and expenses related thereto, the company has raised approximately £17.2 million, (approximately £14.7 million net of expenses) pursuant to a Placing and Open Offer of 3,645,112 ordinary shares of 10p each. In addition, the company has also entered into bank facility agreements for the provision of bank facilities amounting up to £6.0 million to support the enlarged group’s working capital requirements. At an Extraordinary General Meeting (EGM) held on 14 May 2004, a special resolution was passed to approve the acquisition and to increase the authorised share capital of the Company from £2,200,000 to £3,000,000 by the creation of 8,000,000 ordinary shares of 10p each. In addition, the directors were authorised to allot the relevant number of ordinary shares pursuant to the Placing and Open Offer and the acquisition. Also at the EGM ordinary resolutions were passed to adopt a new Long Term Incentive Plan and to amend the dilution limits of the Cadcentre Group plc Executive Share Option Scheme. ❚ 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 2004 £000 38,113 25,525 6,756 619 6,137 2,199 3,910 22.63p 5.8p 8,336 8,713 13,610 21,570 2003 £000 36,008 22,961 6,237 619 5,618 1,922 3,658 21.46 5.6p 8,583 4,930 10,583 18,582 2002 £000 31,818 20,230 5,561 637 4,924 1,573 3,365 19.82 5.4p 8,307 6,356 8,523 2001 £000 28,100 19,061 5,759 602 5,157 1,722 3,503 20.80 5.4p 8,652 5,620 5,668 2000 £000 23,889 16,007 4,643 404 4,239 1,388 2,950 17.72 5.4p 8,853 4,214 2,224 16,297 13,730 10,866 ❚ 47 Company information and advisors Directors Richard King CBE Chairman Richard Longdon Chief Executive Paul Taylor Finance 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 Registrars Bourne House 34 Beckenham Road Beckenham, Kent BR3 4TU ❚ 48 FINANCIAL HIGHLIGHTS 31-Mar-04 £000's 31-Mar-03 £000's Growth Contents i ii Chairman’s statement Chief Executive’s review vi Financial review 1 Directors’ report 5 Board of directors 6 Corporate governance statement 8 Directors’ remuneration report 15 Statement of directors’ responsibilities 16 Auditors’ report 18 19 20 21 22 Consolidated profit and loss account Consolidated statement of total recognised gains and losses Consolidated balance sheet Company balance sheet Consolidated cash flow statement 23 Notes to the financial statements 47 48 Five year record Company information and advisors Profit and loss account highlights Turnover Recurring revenues Initial licence fees Other sales 23,000 10,060 5,053 20,946 9,196 5,866 Total 38,113 36,008 Europe, Middle East & Africa Asia Pacific Americas Total Gross profit Gross margin 19,531 8,720 9,862 17,375 8,531 10,102 38,113 36,008 25,525 22,961 67.0% 64.0% Amortisation of intangible assets software rights 267 352 267 352 10% 9% -14% 6% 12% 2% -2% 6% 11% Operating profit Operating margin Profit before taxation Earnings per share – pence Total dividend per share, paid and proposed – pence Balance sheet highlights 6,137 5,618 9% 16.1% 15.6% 6,109 22.63 5,580 21.46 5.8 5.6 Intangible assets and software rights (net) 3,290 3,909 Cash and liquid resources 8,713 4,930 Shareholders' funds: all equity 21,570 18,582 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 Locations ❚ Bangalore, India ❚ Calgary, Canada ❚ Cambridge, UK ❚ Dubai ❚ Frankfurt, Germany ❚ Genova, Italy ❚ Guangzhou, China ❚ Hong Kong ❚ Houston, USA ❚ Kil, Sweden ❚ Kuala Lumpur, Malaysia ❚ Lyon, France ❚ Lysaker, Norway ❚ Manchester, UK ❚ Osaka, Japan ❚ Paris, France ❚ Perth, Australia ❚ Portsmouth, UK ❚ Saudi Arabia ❚ Seoul, Korea ❚ Shanghai, China ❚ Sheffield, UK ❚ Singapore ❚ Stavanger, Norway ❚ Wilmington, USA ❚ Yokohama, Japan S M R O F T A L P D E N G I S E D - E G A T N A V Y B S I D E C U D O R P L I O A E S H T R O N K U F O % 0 5 N A H T E R O M D E C A F - N E P O T S E G G I B E H T E H T N O E N M R E P P O C I T E N A L P 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 M R O F T A L P N O I T C U D O R P G N I T A O L F D E R O O M - Y L T N E N A M R E P T S E G G I B S ’ D L R O W E H T T S E G R A L S ’ D L R O W E H T F O 7 2 L A C I M E H C D E T O U Q 0 3 S E I N A P M O C 

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