07.02.2011 07:01:00

Kofax Announces Record Results for the First Half of Fiscal Year 2011

Kofax plc (LSE: KFX), the leading provider of document driven business process automation solutions, today announces interim results for the six months ended December 31, 2010:

Financial Highlights

  • Software business
    • Revenues up 20% to $121.7M (2009: $101.5M) or 19% in organic, constant currency
    • Adjusted EBITA up 192% to $23.5M (2009: $8.0M)
    • Adjusted EBITA margin of 19.3% (2009: 7.9%)
  • Hardware business (discontinued operations)
    • Adjusted EBITA of $0.2M (2009: $2.0M)
  • Diluted EPS for the company was $.12 (2009: $.01)
  • Adjusted diluted EPS for the company was $.18 (2009: $.09)
  • Operating cash flow before restructuring payments of $16.2M (2009: $8.5M)
  • Cash of $69.0M ($55.5M at June 30, 2010)

Operating Highlights

  • Achieved major customer wins at Credit Mutuel, Intesa Sanpaolo, Iron Mountain, Japan Tobacco International, MegaFon, Ministry of the Interior in the Kingdom of Saudi Arabia, Stanlib, Synovus Financial and UBS
  • Announced an agreement to sell Kofax’s hardware business, which is expected to close during March of 2011
  • Announced the company’s intention to restructure and optimize its EMEA software business in light of the hardware business disposal
  • Introduced new releases of Kofax Virtual ReScan and Kofax Communication Server
  • Appointed Martyn Christian as Kofax’s Chief Marketing Officer

Reynolds C. Bish, Chief Executive Officer of Kofax said: "The first half of fiscal year 2011 yielded exceptional results. The performance in our software business exceeded our expectations and last month we were pleased to announce the pending disposal of our hardware business. Both of these achievements position us to better focus on and further grow our software business revenues and earnings both organically and via our acquisition strategy.”

Commenting on Kofax’s outlook, Bish said: "We believe we’ve built a strong foundation for our software business but plan to make further investments to grow this business during the second half of this fiscal year. We also believe that the global economic environment continues to be fragile and the extent and sustainability of any recovery is still difficult to predict. Our enthusiasm therefore remains cautiously optimistic and, as a result, management and the Board now expect our software business revenues to grow by approximately 14% on an organic, constant currency basis during this current fiscal year.”

He continued: "Finally, we’ve previously said we would expect to eventually achieve a 15% EBITA margin in our software business. In light of the adjusted EBITA margin realized in this business during the first half of this fiscal year and the recently announced restructuring to further optimize this business in EMEA, we have now raised our longer term, sustainable target closer to a 20% margin.”

Webcast

A webcast of the financial analyst presentation made this morning will be available on the Company’s website (http://www.kofax.com) from 2:00 pm UK time today.

About Kofax

Kofax plc (LSE: KFX) is the leading provider of document driven business process automation solutions. For more than 20 years, Kofax has provided award winning solutions that streamline the flow of information throughout an organization by managing the capture, transformation and exchange of business critical information arising in paper, fax and electronic formats in a more accurate, timely and cost effective manner. These solutions provide a rapid return on investment to thousands of customers in financial services, government, business process outsourcing, healthcare, supply chain and other markets. Kofax delivers these solutions through its own sales and service organizations, and a global network of more than 700 authorized partners in more than 60 countries throughout the Americas, EMEA and Asia Pacific. For more information, visit www.kofax.com.

Chief Executive Officer’s Review

An Overview of the Results

The six months ended December 31, 2010 was another successful period for Kofax, with the Company’s software business continuing to reflect the anticipated benefits of the strategic initiatives started in February of 2008.

Our software business revenue grew 20% to $121.7 million (2009: $101.5 million) on an "as reported” basis and 19% on an organic, constant currency basis. This was driven by:

1. Continuing progress with our hybrid go-to-market strategy in both our direct selling efforts and indirect channels in the applications software and services area, which resulted in 44% of applications software license revenues coming from direct engagements,

2. Improving sales execution and productivity across the Americas, EMEA and Asia Pacific in both the applications software and services area and OEM / POS product lines and

3. A continuing gradual although not pervasive recovery in the global economic environment.

All of this led to a number of significant major customer wins, including those at Credit Mutuel, Intesa Sanpaolo, Iron Mountain, Japan Tobacco International, MegaFon, Ministry of the Interior in the Kingdom of Saudi Arabia, Stanlib, Synovus Financial and UBS. We also introduced Kofax Virtual ReScan Elite, which should allow us to continue driving revenue growth in our OEM / POS product lines, and a new release of Kofax Communication Server, which enhances the positioning of Kofax as "Your Onramp to Document Driven Business Process Automation.” Finally, we appointed Martyn Christian as our Chief Marketing Officer, who has significant relevant enterprise software marketing experience and completes the upgrading of our Executive Management Team.

This growth, coupled with the benefit of cost saving measures implemented in prior years and the ongoing prudent management of expenses, yielded an adjusted EBITA of $23.5 million (2009: $8.0 million) equating to a 19.3% margin (2009: 7.9%).

Hardware Business Disposal

On January 17, 2011 we announced that we had entered into a definitive agreement to sell our hardware business to Hannover Finanz Group, a private equity firm headquartered in Germany, and members of that business unit’s anticipated management team. Under the terms of the definitive agreement, Hannover Finanz will pay gross consideration of $23.2 million to acquire certain legal entities, the Dicom brand and name and certain assets and liabilities of the hardware business. We have also entered into a transition services agreement with Hannover Finanz to provide and over time transfer certain back office functions, information management systems and infrastructure and facilities to the new hardware business entity for a period of up to 12 months following the closing. After taking both the definitive and transition services agreements into account, we expect this transaction to yield at least $20 million of net after tax cash proceeds to Kofax. The transaction is expected to close during March of 2011, subject to usual and customary closing conditions.

As a result of this transaction, we have accounted for the hardware business as a discontinued operation and the details of the anticipated financial accounting treatment of the disposal are outlined in the Chief Financial Officer’s Review.

Exceptional Charge to Optimize the EMEA Software Business

On January 17, 2011 we also announced our intention to record an exceptional charge to restructure and optimize our software business in EMEA – where the hardware business is located and operates – which became probable by December 31, 2010 with the anticipated disposal. We therefore recorded an exceptional charge in the amount of $2.6 million during the six months ended December 31, 2010 to:

1. Consolidate our finance, accounting and other back office operations currently residing in 10 locations throughout EMEA into a single shared services center in Rotkreuz, Switzerland and

2. Write off the cost of onerous lease obligations for unused office space throughout EMEA.

These changes will all better position us to focus on and further grow our software business. In addition, the move to a single shared services center should improve the timeliness and quality of our internal and external reporting and thereby allow us to better manage the business.

We expect this restructuring to lead to approximately 20 redundancies and result in annual cost savings of at least $2.5 million in fiscal year 2012 and thereafter.

Outlook

The first half of fiscal year 2011 yielded very positive results. The performance in our software business exceeded our expectations and we were pleased to announce the pending disposal of our hardware business. Both of these achievements will position us to better focus on and further grow our software business revenues and earnings both organically and via our acquisition strategy.

We believe we’ve built a strong foundation for our software business and plan to make further investments to grow this business during the second half of this fiscal year. We also believe that the global economic environment continues to be fragile and the extent and sustainability of any recovery is still difficult to predict. Our enthusiasm therefore remains cautiously optimistic and, as a result, management and the Board now expect our software business revenues to grow by approximately 14% on an organic, constant currency basis during this current fiscal year.

Finally, we’ve previously said we would expect to eventually achieve a 15% EBITA margin in our software business. In light of the adjusted EBITA margin realized in this business during the first half of this fiscal year and the recently announced restructuring to further optimize this business in EMEA, we have now raised our longer term, sustainable target closer to a 20% margin.

Thank You

Our performance is the direct result of the dedication and hard work of our valued employees, channel partners and suppliers, and the continued support of our customers and shareholders. I would like to use this opportunity to once again thank all of these stakeholders for their ongoing contributions to our success.

Reynolds C. Bish
Chief Executive Officer

Chief Financial Officer’s Review

An Overview of the Results

The results for the first half of fiscal year 2011 reflect continued strong performance of our software business. We continue to realize benefits from our hybrid go-to-market model with revitalized performance in our indirect channel, which generated 56% of applications software license revenues, and our focus on improving sales management, execution and productivity, which yielded strong performance across all geographic regions and revenue categories.

On the operations side, we continued to realize the benefits of the restructurings and infrastructure investments made during the last three years as well as our ongoing efforts to manage expenses. This resulted in lower expenses as a percentage of revenues for all areas, including cost of sales, research and development, sales and marketing and general and administrative. Our focus on identifying additional opportunities for cost savings, such as centralizing our back office operations and rightsizing our facilities footprint in EMEA led to the restructuring of our software business in that region, which was initiated during this half year and announced on January 17, 2011.

Software Business

Our overall software business revenues increased by 20% to $121.7 million compared to $101.5 million in the prior year, and 19% on an organic, constant currency basis Applications software license revenues increased 15%, with growth across all geographic regions. The Americas achieved 14% growth, EMEA 16% and Asia Pacific 23%. Applications software services revenues grew 27%, again benefiting from high renewal rates, customers reinstating expired maintenance contracts and increased demand for professional services. OEM/POS revenues increased 6% to $12.7 million from $12.0 million in the prior year, reflecting a continuing recovery in this area of our business.

Gross profit in the software business was $97.2 million or an 80% margin compared to $76.6 million or a margin of 75% in the prior year. The margin improvement was in both the software license and services areas and driven by tight management of related costs and higher revenues.

Total overheads were $73.7 million compared to $68.6 million in the prior year. Research and development expenses were $15.0 million compared to $15.8 million in the prior year or 12% and 16% of total revenues, respectively. These decreases reflect the benefits of moving the development of more mature software products to our own lower cost, offshore sites and leveraging this function as revenues continue to grow. Sales and marketing expenses were $42.8 million compared to $37.6 million in the prior year or 35% and 37% of total revenues, respectively. The absolute increase reflects ongoing investments in additional sales resources and the decrease as percentage of total revenues reflects greater productivity as revenues continue to grow. General and administrative expenses were $15.9 million compared to $15.2 million in the prior year or 14% and 15% of total revenues, respectively. The reduction as a percentage of total revenues reflects efficiencies gained through prior restructurings and infrastructure investments, and leveraging this function as revenues continue to grow.

Adjusted EBITA was $23.5 million or a 19.3% margin compared to $8.0 million or a 7.9% margin in the prior year. This reflects the leverage in our business as we continue to realize the benefits of prior restructurings and new revenue growth initiatives.

Profit before tax from continuing operations was $18.1 million compared to $1.6 million in the prior year. Exceptional or reconciling charges include the amortization of acquired intangible assets, restructuring charges, share-based payment expense and net financial income and expense, and were $5.3 million compared to $6.4 million in the prior year.

Taxation

The tax charge of $7.6 million equals an effective tax rate of 41.9%, which is at that level primarily as the result of the non-deductibility of amortization of acquired intangible assets and share-based payment expense. The tax charge on an adjusted pre-tax profits basis equals an adjusted effective tax rate of 36.3%. The difference between the effective tax rate and the adjusted effective tax rate is due to the add back of taxes on certain charges, including the amortization of acquired intangible assets, restructuring charges, share-based payment expense and net financial income and expense.

Earnings per Share

Diluted earnings per share for the company was $.12 compared to $.01 in the prior year. Adjusted diluted earnings per share was $.18 compared to $.09 in the prior year. The adjusted earnings per share calculation excludes certain charges, including amortization of acquired intangible assets, restructuring charges, share-based payment expense and net financial income and expense.

Hardware Business (Discontinued Operations)

On January 17, 2011, we entered into a definitive agreement to sell the hardware business to Hannover Finanz and members of the business unit’s anticipated management team for gross consideration of $23.2 million. We expect this sale to close during March of 2011.

Revenue in the hardware business decreased 10% to $59.9 million in the first half of fiscal year 2011 from $66.8 million in the prior year, and its adjusted EBITA decreased to $0.2 million from $2.0 million. In this business we had assets held for sale of $57.3 million – including $15.4 million of goodwill and associated liabilities of $42.1 million or net assets held for sale of $15.2 million as of December 31, 2010.

In conjunction with the definitive agreement to sell the hardware business, we also entered into a transition services agreement to provide and over time transfer certain back office functions, information management systems and infrastructure and facilities to the new hardware business entity for a period of up to 12 months following the closing of the sale. These services are to be provided at no cost for the first four months and at fair or greater value for the remaining eight months of the agreement. We have estimated the fair value of the services to be provided at no cost to be $1.5 million, and will be deducting this amount from the gross consideration and recording it as deferred income to be recognized as the related services are provided.

As a result of the foregoing, while the actual gain on sale will be determined using the actual net assets held for sale as of the closing of the sale, had this occurred as of December 31, 2010, we would have recorded a gain on sale in the amount of approximately $3.6 million. This is equal to the gross consideration of $23.2 million less the net assets held for sale of $15.2 million, the fair value of the services to be provided at no cost of $1.5 million and expected taxes, advisor fees and other expenses of $2.9 million.

Cash Flow

Operating cash flow before restructuring and taxation charges was $16.2 million compared to $8.5 million in the prior year. The increase in operating cash flow was due to improved profitability offset in part by movements in working capital balances. Total cash outflows for investments were $1.6 million compared to $21.4 million in the prior year, which included payments relating to the acquisition of 170 Systems during September of 2009. Total cash outflows related to financing activities were $7.1 million, which includes a deferred payment of $9.0 million to complete the acquisition of 170 Systems, compared to $0.9 million in the prior year.

Going Concern

The financial statements have been prepared on the basis that the company is a going concern. In connection with this presentation, the Board of Directors have reviewed the company's forecasts and budgets, borrowing facilities, plans and various other analyses to determine the level of uncertainties of the business. The use of the going concern basis of accounting is appropriate because there are no material uncertainties relating to events or conditions that may cast significant doubt about the ability of the company to continue as a going concern.

J. R. Arnold, Jr.
Chief Financial Officer

Condensed Consolidated Interim Income Statement

$’000     Note     6 months to     6 months to     Year to
December 31, December 31, June 30,
2010 2009 2010
            unaudited     unaudited     audited
                         
Continuing operations                        
Software licenses             47,221         40,937         87,165  
Software services             61,744         48,589         104,069  
OEM/POS             12,703         11,995         24,604  
Total software revenue     3       121,668         101,521         215,838  
                         
Cost of sales             (24,503 )       (24,890 )       (49,929 )
                         
Total gross profit             97,165         76,631         165,909  
                         
Research and development             (15,013 )       (15,800 )       (33,038 )
Sales and marketing             (42,797 )       (37,612 )       (77,537 )
General and administrative             (15,896 )       (15,184 )       (30,570 )
Expenses     4       (73,706 )       (68,596 )       (141,145 )
                         
Adjusted operating profit before:*             23,459         8,035         24,764  
                         
Amortisation of acquired intangible assets     4       (1,657 )       (2,981 )       (4,628 )
Restructuring costs     4 / 7       (2,560 )       -         -  
Share-based payment expense             (1,664 )       (2,571 )       (4,395 )
Other income and expenses             120         -         90  
Operating profit             17,698         2,483         15,831  
                         

Share of results and disposal of associated undertakings

            -         (164 )       (33 )
Finance income             780         39         1,997  
Finance expense             (353 )       (762 )       (799 )
Profit before tax from continuing operations             18,125         1,596         16,996  
                         
Tax expense     5       (7,607 )       (1,748 )       (8,988 )
                         
Discontinued operations                        
Profit after tax for the period from discontinued operations     2       100         1,235         (392 )
                         
Profit for the period attributable to equity holders of the parent             10,618         1,083         7,616  
                         
Earnings per share for the period attributable to equity holders of the parent     6                  
> basic           $ 0.128       $ 0.013       $ 0.093  
> diluted           $ 0.120       $ 0.013       $ 0.090  
> adjusted basic           $ 0.191       $ 0.086       $ 0.208  
> adjusted diluted           $ 0.179       $ 0.086       $ 0.201  
                         
Earnings per share from continuing operations                        
> basic           $ 0.127         ($.002 )     $ 0.098  
> diluted           $ 0.119         ($.002 )     $ 0.095  
> adjusted basic           $ 0.182       $ 0.071       $ 0.190  
> adjusted diluted           $ 0.171       $ 0.071       $ 0.184  
* Adjusted operating profit is a KPI used by the group to help in assessing the underlying trading results of the Group.
 

Condensed Consolidated Interim Statement of Comprehensive Income

$’000   6 months to     6 months to     Year to
December 31, December 31, June 30,
2010 2009 2010
    unaudited     unaudited     audited
                 
Profit for the period   10,618       1,083       7,616  
                 
Other comprehensive income/losses                
Exchange income/(losses) arising on translation of foreign operations   5,491       398       (9,173 )
Actuarial gains/(losses) on defined benefit pension plans   220       156       (676 )
Income tax effects on components of other comprehensive income   (165 )     (175 )     1,082  
Other comprehensive income/(losses) for the period, net of tax   5,546       379       (8,767 )
                 
Total comprehensive income/(losses) for the period, net of tax, attributable to equity holders of the parent   16,164       1,462       (1,151 )
 

Condensed Consolidated Interim Statement of Financial Position

$’000     Note     At     At     At
December 31, December 31, June 30,
2010 2009 2010
            unaudited     unaudited     audited
                         
Non-current assets                        
Intangible assets           150,014       174,201       164,089  
Property, plant and equipment           7,662       9,005       7,879  
Deferred tax assets           5,876       12,031       6,110  
Investments           -       691       -  
Other non-current assets           2,630       203       4,176  
Total non-current assets           166,182       196,131       182,254  
                         
Current assets                        
Inventories           1,811       13,987       16,380  
Trade and other receivables           66,742       110,463       83,769  
Investments-current           162       32       311  
Current tax assets           9,007       6,169       10,075  
Cash and cash-equivalents           68,971       31,456       55,451  
Total current assets           146,693       162,107       165,986  
                         
Assets classified as held for sale     2     57,315       -       -  
                         
Total assets           370,190       358,238       348,240  
                         
Current liabilities                        
Trade and other payables           37,262       73,147       61,999  
Deferred income - current           49,373       54,812       58,216  
Other financial liabilities           476       9,483       9,802  
Current tax liabilities           19,080       7,767       9,386  
Provisions – current     7     4,636       2,087       2,645  
Total current liabilities           110,827       147,296       142,048  
                         
Non-current liabilities                        
Other payables           -       -       1,403  
Employee benefit           3,101       3,398       3,769  
Deferred income – non current           4,345       11,704       10,238  
Deferred tax liabilities           10,290       16,301       10,866  
Provision – non current     7     477       620       646  
Total non-current liabilities           18,213       32,023       26,922  
                         
Liabilities directly associated with the assets classified as held for sale     2     42,095       -       -  
                         
Total liabilities           171,135       179,319       168,970  
                         
Net assets           199,055       178,919       179,270  
                         
Capital and reserves                        
Share capital           4,179       4,130       4,152  
Share premium account           7,478       4,310       5,519  
ESOP shares           (14,518 )     (14,478 )     (14,518 )
Treasury shares           (15,980 )     (15,980 )     (15,980 )
Merger reserve           2,835       2,835       2,835  
Retained earnings           193,326       173,275       180,853  
Currency translation adjustment           21,735       24,827       16,409  
Shareholder’s equity           199,055       178,919       179,270  
                         
Total equity           199,055       178,919       179,270  
 
Condensed Consolidated Interim Statement of Changes in Equity
for the six months to December 31, 2009 (unaudited)
$’000     Share     Share     ESOP     Treasury     Merger     Retained     Currency     Total
capital premium shares shares reserve earnings translation equity
            account                             adjustment      
Group at July 1, 2009     4,121     3,880     (14,478 )     (15,980 )     2,835     170,146       24,604     175,128  
Change in accounting policy of 170 Systems     -     -     -       -       -     (752 )     -     (752 )
Group at July 1, 2009 (restated)     4,121     3,880     (14,478 )     (15,980 )     2,835     169,394       24,604     174,376  
Profit for the period     -     -     -       -       -     1,083       -     1,083  
Other comprehensive income, net of tax and before FX recycling     -     -     -       -       -     156       223     379  
Share-based payment charge     -     -     -       -       -     2,642       -     2,642  
New share capital issued     9     430     -       -       -     -       -     439  
Group at December 31, 2009     4,130     4,310     (14,478 )     (15,980 )     2,835     173,275       24,827     178,919  
 
Condensed Consolidated Interim Statement of Changes in Equity
for the six months to June 30, 2010 (audited)
$’000     Share     Share     ESOP     Treasury     Merger     Retained     Currency     Total
capital premium shares shares reserve earnings translation equity
            account                             adjustment      
Group at January 1, 2010     4,130     4,310     (14,478 )     (15,980 )     2,835     173,275       24,827       178,919  
Profit for the period     -     -     -       -       -     6,533       -       6,533  
Other comprehensive income, net of tax and before FX recycling     -     -     -       -       -     (728 )     (8,483 )     (9,211 )
CTA recycling     -     -     -       -       -     -       65       65  
Share-based payment charge     -     -     -       -       -     1,773       -       1,773  
Changes in ESOP shares     -     -     (40 )     -       -     -       -       (40 )
New share capital issued     22     1,209     -       -       -     -       -       1,231  
Group at June 30, 2010     4,152     5,519     (14,518 )     (15,980 )     2,835     180,853       16,409       179,270  
 
Condensed Consolidated Interim Statement of Changes in Equity
for the six months to December 31, 2010 (unaudited)
$’000     Share     Share     ESOP     Treasury     Merger     Retained     Currency     Total
capital premium shares shares reserve earnings translation equity
            account                             adjustment      
Group at July 1, 2010     4,152     5,519     (14,518 )     (15,980 )     2,835     180,853     16,409     179,270
Profit for the period     -     -     -       -       -     10,618     -     10,618
Other comprehensive income, net of tax and before FX recycling     -     -     -       -       -     220     5,326     5,546
Share-based payment charge     -     -     -       -       -     1,635     -     1,635
New share capital issued     27     1,959     -       -       -     -     -     1,986
Group at December 31, 2010     4,179     7,478     (14,518 )     (15,980 )     2,835     193,326     21,735     199,055
 

Consolidated Condensed Interim Cash Flow Statement

$’000     6 months to     6 months to     Year to
December 31, December 31, June 30,
2010 2009 2010
      unaudited     unaudited     audited
Cash flows from operating activities                  
Profit before tax from continuing operations     18,125       1,596       16,996  
Profit before tax from discontinued operations     248       1,978       (732 )
Profit before tax     18,373       3,574       16,264  
Share results from associated undertakings     -       164       (145 )
Finance income     (780 )     (39 )     (1,997 )
Finance expense     353       762       799  
Depreciation and amortisation     4,992       5,583       11,065  
Impairment related to disposal     603       -       -  
Share-based payment expense     1,657       2,588       4,415  
Movement in working capital     (11,146 )     (3,782 )     2,350  
Loss on disposal of property, plant and equipment     -       3       116  
Movement in provisions     2,173       (360 )     1,000  
Cash generated from operations before restructuring     16,225       8,493       33,867  
Payments under restructuring     (857 )     (3,156 )     (3,504 )
Cash generated from operations     15,368       5,337       30,363  
Income tax refunded (paid)     1,849       (1,792 )     (7,021 )
Net cash inflow/(outflow) from operating activities     17,217       3,545       23,342  
Cash flows from investing activities                  
Purchase of property, plant and equipment, licences and similar rights     (1,729 )     (2,697 )     (5,315 )
Disposal of property, plant and equipment, licences and similar rights     21       3       17  
Acquisition of a subsidiary, net of cash acquired     -       (19,900 )     (19,998 )
Disposal of associates     -       1,203       2,282  
Interest received     136       34       294  
Net cash outflow from investing activities     (1,572 )     (21,357 )     (22,720 )
Cash flows from financing activities                  
Issue of share capital     1,986       440       1,670  
Decrease in short term borrowings     -       (1,297 )     (1,312 )
(Decrease)/increase in long term borrowings     (9,000 )     (3 )     9,000  
Interest paid     (31 )     (49 )     (168 )
Net cash outflow from financing activities     (7,045 )     (909 )     9,190  
Net decrease in cash and cash-equivalents in the period     8,600       (18,721 )     9,812  
Cash and cash-equivalents at start of the period     55,018       48,067       48,067  
Exchange rate effects     4,877       1,542       (2,861 )
Cash and cash-equivalents at the end of the period     68,495       30,888       55,018  
Cash and cash-equivalents consists of:                  
Cash and cash-equivalents     68,971       31,456       55,451  
Overdrafts     (476 )     (568 )     (433 )
      68,495       30,888       55,018  
 

Notes to the Financial Statements

NOTE 1 - ACCOUNTING POLICIES

1.1 BASIS OF PREPARATION

The unaudited Condensed Consolidated Interim Financial Statements for the six months ended December 31, 2010 have been prepared in accordance with IAS 34, "Interim Financial Reporting” and the Disclosure and Transparency Rules of the Financial Services Authority.

The Condensed Consolidated Interim Financial Statements do not include all information and disclosures as required in the annual financial statements, and should be read in conjunction with the Group’s Consolidated Annual Financial Statements for the year ended June 30, 2010.

The financial information contained in these Condensed Consolidated Interim Financial Statements do not comprise statutory financial statements within the meaning of section 435 of the UK Companies Act 2006. The Consolidated Annual Financial Statements for the year ended June 30, 2010, from which information has been extracted were prepared under IFRS and have been delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain a statement under section 498 of the UK Companies Act 2006.

The Condensed Consolidated Interim Financial Statements were approved by the Board of Directors on February 2, 2011.

1.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies adopted in preparation of the Condensed Consolidated Interim Financial Statements are consistent with those followed in preparation of the Consolidated Annual Financial Statements for the year ended June 30, 2010.

The adoption of the standards/ interpretations that have become effective for year 2011 have already been outlined in detail in the Consolidated Annual Financial Statements for the year ended June 30, 2010 and were not considered to have a significant impact on these condensed consolidated interim statements.

NOTE 2 - DISCONTINUED OPERATIONS

During the six months ended December 31, 2010, the Board of Directors made a decision to dispose of the Group’s hardware business segment to better position the Group to focus on, and further grow, the software business revenues and earnings. As of December 31, 2010, final negotiations of the sale were in progress with the buyer and the Group considered the disposal to be highly probable. On January 15, 2011, the Group entered into a definitive Share Purchase Agreement to sell the hardware business. The disposal of the hardware business is expected to occur in March 2011. Accordingly, at December 31, 2010, the hardware business was presented as a discontinued operation and the assets and liabilities to be disposed were classified as held for sale.

Under the terms of the definitive agreement, Hannover Finanz, will pay gross consideration of $23.2 million to acquire certain legal entities, the Dicom brand and name, the assets and liabilities of the hardware business, other than those that must remain with Kofax – such as taxes payable, and assume the employment of personnel in the hardware business. Of the $23.2 million, $15.0 million will be paid at closing, $5.3 million will be paid one year from closing, with $2.0 million thereof subject to certain indemnification terms and conditions, and the remaining $2.9 million, including interest thereon at the rate of five percent per annum, will be paid 18 months from closing. The payment of all amounts beyond the closing date will be adequately secured.

In addition, Kofax will lend $0.5 million at closing to Joachim Froning and two other members of the business unit’s management team to partially finance the cost of their minority equity purchases in the new hardware business entity. These loans will be in the form of full recourse promissory notes paid over a four year period, together with interest thereon at the rate of five percent per annum, or in full upon the earlier disposal of said equity.

The results of the hardware business for the half year ended December 31, 2010 are presented below.

$’000     6 months to     6 months to     Year to
December 31, December 31, June 30,
2010 2009 2010
      unaudited     unaudited     audited
Hardware distribution     42,724       47,750       90,826  
Hardware services     17,138       19,053       35,758  
Total hardware revenue     59,862       66,803       126,584  
Cost of sales     (50,261 )     (55,000 )     (106,397 )
Gross profit     9,601       11,803       20,187  
Sales and marketing     (5,336 )     (6,622 )     (11,947 )
General and administrative     (3,203 )     (3,186 )     (6,414 )
Expenses     (8,539 )     (9,808 )     (18,361 )
Adjusted operating profit     1,062       1,995       1,826  
Share based payment expense     29       (17 )     (20 )
Restructuring costs     (240 )     -       (2,538 )
Impairment of intangible assets     (603 )     -       -  
Profit/ (loss) before tax from a discontinued operation     248       1,978       (732 )
Tax (expense)/income                  
Related to current pre-tax profit/(loss)     (148 )     (743 )     340  
Profit/ (loss) for the year from a discontinued operation     100       1,235       (392 )
 

The major classes of assets and liabilities of the hardware business classified as held for sale are as follows:

$’000     At     At     At
December 31, December 31, June 30,
2010 2009 2010
      unaudited     unaudited     Audited
Assets                  
Intangible assets     15,431     -     -
Property, plant and equipment     271     -     -
Deferred tax assets     442     -     -
Current tax assets     250     -     -
Prepaid maintenance     4,296     -     -
Trade receivables     21,965     -     -
Inventories     14,660     -     -
Assets classified as held for sale     57,315     -     -
                   
Liabilities                  
Trade payables and accruals     22,348     -     -
Deferred income     18,228     -     -
Current tax liabilities     530     -     -
Deferred tax liabilities     303     -     -
Pension and employee benefits     686     -     -
Liabilities directly associated with assets classified as held for sale     42,095     -     -
Net assets directly associated with disposal group     15,220     -     -
 

The net cash flows provided by the hardware business are as follows:

$’000     6 months to     6 months to     Year to
December 31, December 31, June 30,
2010 2009 2010
      unaudited     unaudited     Audited
Operating     (56 )     6,409     9,585
Investing     387       479     842
Financing     -       -     -
Net cash inflow     331       6,888     10,427
$’000     6 months to     6 months to     Year to
December 31, December 31, June 30,
2010 2009 2010
      unaudited     unaudited     Audited
Earnings per share from discontinued operations:                  
Basic     $ 0.001     $ 0.015     ($0.005 )
Diluted     $ 0.001     $ 0.015     ($0.005 )
 

Transition Services Agreement

As part of the transaction to sell the hardware business, the Group has entered into a transition services agreement to provide and, over time, transfer certain back office functions, information management systems/ infrastructure, and facilities to the new hardware business entity for a period of up to 12 months following the closing. These services will be provided at no cost to the buyer for the first four months following the sale and at a fair value consideration for the subsequent eight months thereafter. The fair value of the services to be provided at no cost is estimated at $1.5M and will be reallocated from the gross consideration to deferred income.

Impairment

As a result of the conclusion that the hardware business should be presented as a discontinued operation, non currents assets were reclassified as disposal assets held for sale, and the group incurred an impairment charge deriving from capitalized software, which is of no further use for the Group.

Along with this, the carrying value of goodwill, $15.4M at December 31, 2010, was compared to the fair value less cost to sell. As the net consideration exceed the disposal group net assets of $15.2M, including goodwill, no impairment was identified.

NOTE 3 - OPERATING SEGMENTS

As a result of the disposal of the hardware business segment, the Group now has one single reportable operating segment, which is the software business. The chief operating decision makers assess performance of the software business as a whole. The regional information for Total software revenue outlined below should be read in conjunction with the information outlined on the face of the Condensed Consolidated Interim Income Statement and reflects the software business only.

Total software revenue $’000     America     UK     Germany     Rest of EMEA     Asia-Pacific     Total
6 months to December 31, 2010    

62,897

   

8,215

   

8,364

   

35,248

   

6,944

   

121,668

6 months to December 31, 2009    

50,160

   

9,753

   

8,348

   

27,429

   

5,831

   

101,521

Year to June 30, 2010     110,930     19,718     16,201     53,338     15,651     215,838
                       

NOTE 4 - PROFIT ON OPERATING ACTIVITIES BEFORE TAXATION

$’000     6 months to     6 months to     Year to
December 31, December 31, June 30,
2010 2009 2010
      unaudited     unaudited     audited
Profit on ordinary activities before taxation is stated after charging:                  
Total staff costs     50,889     46,572     98,152
Depreciation of property, plant and equipment     2,062     2,297     5,407
Amortisation of acquired intangible assets     1,657     2,981     4,628
Restructuring costs     2,560     -     -
Loss on disposal of property, plant and equipment     -     3     116
Auditors, remuneration     1,329     765     1,707
Operating lease expense – minimum lease payments     2,756     2,860     5,578
Other operating expenses     18,214     18,670     34,490
Total operating expenses     79,467     74,148     150,078
 

NOTE 5 - TAX EXPENSE

$’000     6 months to     6 months to     Year to
December 31, December 31, June 30,
2010 2009 2010
      unaudited     unaudited     audited
Current tax                  
Income tax on profit for the period     7,940       3,421       9,479  
Adjustment for over provision in prior periods     (158 )     470       (130 )
                   
Total current tax     7,782       3,891       9,349  
                   
Deferred tax                  
Origination and reversal of temporary differences     (175 )     (2,143 )     298  
Adjustment for under provision in prior periods     -       -       (659 )
                   
Total deferred tax     (175 )     (2,143 )     (361 )
                   
Total tax expense     7,607       1,748       8,988  
 

NOTE 6 - EARNINGS PER SHARE

Basic earnings per share from continuing operations of $0.127 (2009: ($0.002)) for the period ended December 31, 2010 have been calculated based on the profit attributable to shareholders of $10,518,000 (2009: ($152,000)) using the weighted average number of ordinary shares in issue totalling 82.7M (2009: 81.7M) during the period.

Adjusted basic earnings per share of $0.182 (2009: $0.071) for the period ended December 31, 2010 are based on profit of $15,077,000 (2009: $5,758,000), being adjusted for the expenses as stated below using the weighted average number of ordinary shares in issue totalling 82.7M (2009: 81.7M) during the period. The Board considers that adjusted basic EPS better reflects the underlying performance of the Group.

Reconciliation of adjusted profit

    6 months to     6 months to     6 months to     6 months to     Year to     Year to

 

December 31, December 31, December 31, December 31, June 30, June 30,
2010 2010 2009 2009 2010 2010
$’000 $’000 $’000
EPS in EPS in EPS in
      $           $           $      
      unaudited     unaudited     unaudited     unaudited     audited     audited
                                     
Profit for the period attributable to the equity holders of the parent     0.128       10,618       0.013       1,083       0.093       7,616  
Earnings per share from discontinued operation     0.001       100       0.015       1,235       (0.005 )     (392 )
Earnings per share from continuing operations     0.127       10,518       (0.002 )     (152 )     0.098       8,008  
Amortisation of acquired intangible assets     0.020       1,657       0.037       2,981       0.056       4,628  
Restructuring costs     0.031       2,560       -       -       -       -  
Shared based payment expense     0.020       1,664      

0.031

 

   

2,571

 

   

0.053

 

   

4,395

 

Net financial income, expense and other income

   

(0.007

)    

(547

)    

0.011

 

   

887

 

   

(0.015

)

   

(1,255

)

Tax effect of above     (0.009 )     (775 )     (0.006 )     (529 )     (0.002 )     (178 )

Adjusted profit for the period attributable to the equity holders of the parent

    0.182       15,077       0.071       5,758       0.190       15,598  
 

Diluted earnings per share of $0.119 (2009: ($0.002)) for the period ended December 31, 2010 have been calculated based on the post tax profit attributable to equity holders of the parent of $10,518,000 (2009: ($152,000)) using 88.2M (2009: 82.0M) ordinary shares, the difference to the basic calculation representing the additional shares that would be issued on the conversion of all the dilutive potential ordinary shares.

Adjusted, diluted earnings per share of $0.171 (2009: $0.071) for the period ended December 31, 2010 have been calculated based on profit of $15,077,000 (2009: $5,758,000), being adjusted for the operating expenses as stated above using 88.2M (2009: 82.0M) ordinary shares.

Reconciliation of the denominator for EPS     6 months to     6 months to     Year to
      December 31, 2010     December 31, 2009     June 30, 2010
millions of shares                  
                   
Weighted average number of ordinary shares (excluding ESOP and Treasury shares)     82.7     81.7     82.0
Dilutive impact of share options     3.9     0.3     1.6
Dilutive impact on LTIPs     1.6     -     1.1
Total diluted shares     88.2     82.0     84.7
 

To calculate earnings per share for the discontinued operation (see Note 2), the weighted average number of ordinary shares for both basic and diluted amounts is as per the table above.

NOTE 7 - PROVISIONS

$’000     Restructuring     Onerous     Contingent     Others     Total
            lease     consideration            
                               
At July 1, 2009     3,762       269       698       1,519       6,248  
Reversed against income statement     -                   (360 )     (360 )
Utilised     (3,156 )     (115 )     -       (118 )     (3,389 )
Exchange differences     135       11       38       24       208  
At December 31, 2009 (unaudited)     741       165       736       1,065       2,707  
Arising during the year     2,486       449       -       55       2,990  
Reversed against income statement     (185 )     -       (578 )     360       (403 )
Utilised     (348 )     103       -       (1,097 )     (1,342 )
Exchange differences     (424 )     (97 )     (8 )     (132 )     (661 )
At June 30, 2010 (audited)     2,270       620       150       251       3,291  
Arising during the year     693       1,921       -       99       2,713  
Reversed against income statement     (31 )     -       -       -       (31 )
Utilised     (660 )     (435 )     -       (74 )     (1,169 )
Exchange differences     203       85       -       21       309  
At December 31, 2010 (unaudited)     2,475       2,191       150       297       5,113  
 

NOTE 8 - RELATED PARTY TRANSACTIONS

      6 months to     6 months to     Year to
$’000     December 31,     December 31,     June 30,
2010 2009 2010
      unaudited     unaudited     audited
                   
Sales to associated undertakings     -     993     3,908
Purchases from associated undertakings     -     148     1,162
 

The transactions set out above took place with Alos GmbH, Cologne, Germany, until disposal. Sales to and purchases from associates are at arm’s length.

Directors, interests in share options and LTIPs

Directors who are also executive officers of the company held 845,000 LTIP shares as of December 31, 2010, of which 200,000 LTIP shares were granted during the period ended December 31, 2010. Based upon performance criteria, shares become subject to release three years after their issuance. Market prices of the shares were between 146p and 240p at the grant dates.

Directors who are also executive officers of the company hold 1,950,000 share options as of December 31, 2010; no options were granted during the period. No share options lapsed during the period. The exercise periods end between 2011 and 2021 with exercise prices of the shares between 146p and 240p.

NOTE 9 - CONTINGENT LIABILITIES

There are no material pending or threatened lawsuits against the Group.

NOTE 10 - EVENTS AFTER THE BALANCE SHEET DATE

Other than those described in Note 2, there are no events after the balance sheet date to report.

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