4th Dec 2007 07:02
Innovation Group PLC04 December 2007 4 December 2007 THE INNOVATION GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2007 Successful transition to technology-led BPO The Innovation Group plc ("Innovation" or "the Group"), the leadingtechnology-led Business Process Outsourcing ("BPO") provider for the insurancesector, today announces its preliminary results for the 12 months ended 30September 2007. Financial Highlights 2007 change 2006Revenues £110.5m +39% £79.7mAdjusted profit before tax * £16.1m +47% £10.9mProfit before tax £10.4m +23% £8.5mAdjusted earnings per share 1.93p +18% 1.64pEarnings per share 1.17p -9% 1.28pDividend per share 0.3p - - Revenues at constant currency £110.5m +51% £73.2mAdjusted profit before tax at constant currency * £16.1m +63% £9.9m *Adjusted profit before tax is profit before tax after adding back theamortisation charge of £2.9m, impairment charge of £1.1m, a share based paymentscharge of £1.5m and utilisation of pre-acquisition brought forward tax losses of£0.2m as analysed on the face of the income statement. Performance Indicators 2007 2006Outsourcing revenues 68% 61%Recurring revenues 77% 70%Operating cash flow £15.2m £10.0m Milestones - Winning major BPO business- Progress with acquisition strategy o Synergies o Cross-selling o Effect on product range o Integration- Progress with IBM relationship Corporate Highlights - Successful rights issue for £37.9m- BEE credentials secured in South Africa- Board strengthened with key appointments o Paul Hemsley as CFO o Kurt Lauk and James Morley appointed as Non-Executive Directors- Proposed final dividend of 0.3 pence per share- Nobilas acquisition completed post year end Hassan Sadiq, Chief Executive Officer, commented, "We are very pleased with the company's performance over the year. Ouracquisition strategy continues to broaden our capability and add to our productportfolio, and we are confident in the cross-selling opportunities which lieahead. In addition, the increased weighting of outsourcing promotes a highlevel of recurring revenues. This, combined with the very strong pipeline,gives the Board confidence in the significant future growth of the business." For more information: The Innovation Group Tel: +44 (0) 1489 898300Hassan SadiqPaul Hemsley Financial Dynamics Tel: +44 (0) 20 7831 3113Ed Bridges / Juliet Clarke / Matt Dixon Notes to Editors The Innovation Group plc ("Innovation" or "the Group") provides BPO services andsoftware solutions to insurers and other risk carriers. The software solutionsare designed for the handling of policy and claims administrative processeswithin the insurance industry. The solutions can be utilised in connection withthe Group's BPO operations or implemented on a stand alone basis. Approximately77% of the Innovation Group's total revenues are now recurring with theremainder coming from the sale and support of its software solutions. The Groupprovides software and outsourcing services on a non-branded basis. The global BPO market is estimated to grow at 14% CAGR from 2007 to 2010according to IDC (May 2006) and outpace IT services. In North America, BPO isestimated to grow by an 8.8% compound annual growth rate to $100 billion by2009. Gartner 2005. Datamonitor, August 2006, has also said there has been a continued increase inthe propensity to outsource business processes in the insurance industry with47% of insurers using one or more BPO services in 2006 compared to 41% in 2005.Claims and policy administration BPO (Innovation's specialty) are the highestpriority business functions for BPO and among the fastest growing BPO areas. Innovation has over 220 global clients including Allstate, LeasePlan, The FordMotor Company, Aviva, AXA Insurance, Royal & Sun Alliance, Toyota (South Africa)and Zurich (UK). The Group processes more than 3 million claims per year with20% direct claims cost saving achieved. The software operates in 8 languages andthe Group has approximately 2300 people across offices in North America, the UK,Germany, South Africa, Australia, Japan, France, Spain, Netherlands and Belgium. www.innovation-group.com RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2007 CHAIRMAN'S STATEMENT The Innovation Group provides software and outsourcing services to the insuranceindustry. Our vision is to provide technology and best practice for theadministration of policies and claims for the world's insurers and riskcarriers. The Group is totally focused on this market and delivers its twobroad offerings through a single client-centric organisation. We are amultinational player operating in the world's largest insurance markets with astrong proportion of our clients being international in nature. Our 2,100people across the world have extensive insurance experience and they are ablysupported by our partners. The year in review During 2007 we continued to make strong progress in all aspects of our businessand have now completed the transition into a technology-led outsourcing companywith recurring revenue now 77% of the business. We delivered significant growthin both revenue and profits reaching our highest ever levels on both counts andwe had strong cash generation with an operating cash inflow of £15.2m. Client satisfaction is the underlying strength of our business and these clientrelationships continued to prosper during the year. We extended our outsourcingrelationships with existing clients and also won new clients, including ourlargest ever outsourcing transaction - a multi year agreement with Royal and SunAlliance. In addition, we secured three new recurring software licenceprojects, two in the UK and one overseas including one in partnership with IBM. In December 2006 we made the strategic acquisition of First Notice Systems ("FNS") which has provided the Group with an important entry into the insuranceoutsourcing market in the USA. The integration of FNS has been extremely smoothand has exceeded all of our internal expectations. The acquisition was funded bya 2 for 5 Rights issue of 180,600,771 new Ordinary Shares to raise approximately£37.9m (before expenses). In addition, we made six smaller acquisitions tofurther extend the reach of the Group. In South Africa we secured our status as a Black Economic Empowered ("BEE")supplier within that country by introducing a qualifying equity partner which ismajority owned by an employee trust. Since the year end we completed the acquisition of Nobilas Claims and FleetSolutions Limited ("Nobilas"), the accident management business of Akzo Nobel,which expands our European footprint into France, Benelux and Spain and alsotakes us into the fleet management and leasing markets. This acquisition joinsour existing MotorCare operations to give us a truly pan-European offering. Financial results Revenue for the year ended 30 September 2007 was £110.5m (2006: £79.7m);recurring revenues increased from £55.4m to £85.0m and now represent 77% of thetotal revenue. Outsourcing revenue was £75.4m (2006: £48.3m) and software andservices revenue was £35.1m (2006: £31.3m). Adjusted profit* for the year ended 30 September 2007 was £16.1m (2006: £10.9m)and profit before tax was £10.4m (2006: £8.5m), representing adjusted EPS of1.93p (2006: 1.64p) and basic EPS of 1.17p (2006: 1.28p). Operating cash flow for the year ended 30 September 2007 was £15.2m (2006:£10.0m). The financial results for the year are impacted by the strength of Sterlingagainst, in particular, the US Dollar and the South African Rand. *Adjusted profit before tax is profit before tax after adding back theamortisation charge of £2.9m, impairment charge of £1.1m, a share based paymentscharge of £1.5m and utilisation of pre-acquisition brought forward tax losses of£0.2m as analysed on the face of the income statement. Organisation and employees I would like to pay tribute to the outstanding teamwork and commitment toclients displayed by our employees during the year. I would also like to extenda warm welcome to our new recruits and to partners' employees who are workingwith us on client engagements. During the year we increased our headcount from1,400 to 2,100 and with the integration of Nobilas this has increased to 2,300.Innovation continues to attract and retain some of the best people in theindustry and we recognise them as the foundation of our future success. The Board and corporate governance I am pleased to welcome Kurt Lauk and James Morley to the roster ofnon-executive directors. Kurt brings considerable global experience in both theautomotive and technology industries, whilst James has significant financial andoperational experience in the insurance industry. Chris Banks and David Thorpecontinue as non-executive directors and chairmen of the Audit and Remunerationcommittees respectively and I remain as non-executive chairman of the Board. Inline with best practice, I no longer sit on the Audit and RemunerationCommittees but continue to chair the Nomination Committee. Paul Smolinski resigned as Group Finance Director on 31 January 2007. JohnSidwell joined the Board as Group Finance Director on 19 March 2007 and resignedon 21 May 2007. Paul Hemsley, who had been interim Finance Director sinceDecember 2006, then joined the Board as Group Finance Director on 22 May 2007. With the exception of the Chairman's seat on the Audit and RemunerationCommittees until 5 May 2007 the Group has been in full compliance with theprovisions of the Combined Code throughout the year. Dividend policy As advised in our interim statement we have reviewed our dividend policy andhave decided to recommend a final dividend of 0.3 pence per share. Thisdividend will be proposed at the Annual General Meeting on 13 March 2008 and ifapproved paid on 28 March 2008. The record date is 29 February 2008. Outlook The Board is very pleased with the progress of the business and is encouraged bythe current high level of demand for its services across the globe. Thisdemand, supported by an encouraging pipeline of prospects and higher thanexpected levels of future recurring revenue, led the Group to revise upwards itsexpectations for 2008. We have robust recurring revenue models in both the outsourcing and softwaresegments. We have an extensive outsourcing client base and the pipelines remainhealthy in each geography. We anticipate growth to continue in 2008 through oursimple objective of delivering more benefits, to more clients, in more markets.Software licence sales still remain attractive and we have a better businessmodel through which to manage the volatility of software licence revenue. Ourfive year relationship with IBM gives us the platform to distribute our softwareproducts on a global basis. We made good progress with IBM in 2007 and weanticipate seeing further results from this partnership in the 2008 financialyear. In summary, the Group is well positioned as we enter 2008. We aim to continuethe momentum gained throughout 2007 and look forward to the future withoptimism. Geoff Squire, OBEChairman CHIEF EXECUTIVE'S STATEMENT We have had a record year in both revenue and adjusted profit in 2007 and inconstant currency terms our performance would have been even stronger. Throughboth organic growth and acquisitions in North America, Europe and Africa wecontinue to extend our global reach and our business delivered 39% (2006: 31%)year on year revenue growth. In constant currencies this growth would have been51%. Our customer base which exceeds 200 worldwide, before the post year-endNobilas acquisition, increasingly provides a revenue stream that is of arecurring nature and hence more predictable. We manage in excess of 3 milliontransactions across the world. Strategic update Our conversion to a technology-led Business Process Outsourcing group, foundedupon longer term contracts that provide a recurring revenue stream, is nowcomplete. As a technology business we continue to develop innovative new products for useboth within our own outsourcing business and where required for licence sales,with implementation of both provided by our own dedicated solution deliveryresource. In servicing our customers we provide both pan-European and global capabilitieswhich are unrivalled. The FNS acquisition and our post year end Nobilasacquisition have significantly added to these capabilities. Market drivers The global insurance industry continues to face competitive and regulatorychallenges that require it to seek initiatives that reduce both their owntransaction processing costs and the costs of the underlying claim which are aconsiderable proportion of their premium income and their costs. Innovation iswell placed to provide a technology solution for high volume lower value claimsprocessing and supply chain management which is increasingly demanded on amulti-national basis. Operational review Innovation has now completed the transformation to a technology-led BusinessProcess Outsourcing provider reflected in the fact that 77% of revenues are nowrecurring. During 2007 we have signed several multi-million pound outsourcing contractswith blue-chip clients, including the Group's largest ever BPO deal with Royal &Sun Alliance. Our outsourcing segment now represents 68% of Group revenue(2006: 61%) and 71% (2006: 69%) of Group adjusted profit. This represents a yearon year revenue increase of £27.1m or 56%. Licences, software rental, maintenance, solution delivery and hosting revenueswere £35.1m (2006: £31.3m) up 12%. Our software segment now represents 32% ofGroup revenue (2006: 39%) and 29% (2006: 31%) of Group adjusted profit. In linewith our strategic shift to a recurring revenue model, there has been a 35%increase in our recurring software revenues to £9.6m (2006: £7.1m) and one-timelicence fees decreased by almost half to £3.7m. In North America we achieved revenue growth of 68% largely arising from theacquisition of FNS in late December 2006. These results reflect nine full monthsof FNS activity being revenues of £8.7m and profit before tax of £1.8m. Theintegration of FNS within Innovation's existing US activities is proceedingahead of plan. Our acquisition of 51% of Sureplan International Pty Limited inthe US in October 2006 was augmented in August 2007 by the purchase of theremaining 49%. Our solution delivery business has had an excellent yearreflecting the global expertise and professionalism of our technology focussedstaff. Our exclusive partnership with IBM for software sales resulted in oneUS-based software and solution delivery contract win during the year and weremain confident of further wins arising from this relationship, which has beenfurther strengthened by the establishment of an insurance centre of excellencewith IBM Bangalore, India. There was another strong performance from our well established and marketleading business in South Africa which achieved 10% revenue growth. In localcurrency terms the business performed in excess of its own target, growingrevenues 30% year on year. This is a credit to the new management team followingthe relocation of Eric Wadsworth to the US. Holmswood and Back and Manson PtyLimited, a travel insurance company in which we acquired a 61.86% stake inNovember 2006, contributed £1.4m to the profit before tax of the Group. In the UK we secured revenue growth of 36% and commenced the Group's largestever outsourcing contract with Royal & Sun Alliance worth £25m revenue over 5years. Through developing our existing property business model we have secured aleading UK market position ready for further expansion. MotorCare has performedwell and is suitably positioned to consolidate the UK operations acquired fromNobilas post year-end. We secured two major software contracts for theimplementation of Innovation products in the property and auto sectors which arein progress at the year end with delivery timed for 2008. There was one majorlicence extension recorded during the year. Revenue growth in Germany was 101% and the outsourcing property and motorbusiness continues to grow both organically and through integration of theacquisitions of Service Konzept and IFN, the parts supply business, that wasacquired in October 2006. Our motor division is well placed to consolidate theGerman operations acquired from Nobilas post year-end. Our Australian business performed to expectations with revenue growth of 41%integrating newly acquired Sureplan Australia Pty. We completed a major softwaresolution delivery project during the year. The Japanese business continues tosuffer from poor sales conversion. Going forward we aim to continue the momentum gained throughout 2007. Ourbusiness plan calls for further organic revenue growth augmented by selectedacquisitions. Following the Nobilas acquisition, as in 2007, we anticipate abias towards the second half of the year. Market risks and uncertainties As required by EU reporting requirements the Board monitors the risk factorsfacing the business. As with any company, risks may affect the Group, itsresults and the Board's ability to deliver strategy. The Board has reduced ormitigated certain risks during the year, specifically with reference to theminimisation of the dependence upon the timing of software milestones, projectdelivery and the regulatory challenges of BEE in South Africa. Key risks and uncertainties include: • On a global basis the Group needs to remain competitive• The Group is dependent upon the maintenance of service level agreements with insurance industry clients• The Group relies on its relationships with its supplier networks• The Group's software solutions must remain technologically competitive and the associated intellectual property must be properly protected• The Group is exposed to certain external risks including exchange translation risks (as approximately 75% of Innovation revenues are generated outside of the UK) or the financial failure of a major customer Black Economic Empowerment ("BEE") As previously announced, the Group completed the ZAR 132m (£9.6m) restructuringof its South African subsidiary passing a 25% equity stake in its South Africansubsidiary to Inthutuko Investments Limited (Inthutuko). Inthutuko is 78% ownedby Innovation employees in South Africa through an Employee Benefit Trust and22% by Jala Capital Investments Limited and was financed by a ZAR 132m (£9.6m)loan from Barclays Bank. This loan is guaranteed by The Innovation Group plc.With our improved BEE status in South Africa we are well placed to secure newcustomers from a strong pipeline in sectors that require BEE pre-qualificationas well as developing new business with existing customers. Hassan SadiqChief Executive Officer FINANCE DIRECTOR'S REVIEW Financial Overview I am delighted to present these 2007 results, my first since appointment to theBoard earlier this year, as not only does this represent a record year but itmarks the transition to a recurring revenue business model. Total revenues for the year are £110.5m (2006: £79.7m) up 39% of which 77%(2006: 70%) is of a recurring nature. Organic growth is 14% (2006: 23%).Adjusted profit of £16.1m (2006: £10.9m) is up by 47%. Profit before tax is£10.4m (2006: £8.5m) up 23%. On a constant currency basis, total revenues andadjusted profit would have increased by 51% and 63% respectively. Adjustedearnings per share is 1.93 pence (2006: 1.64 pence) and basic earnings per shareis 1.17 pence (2006: 1.28 pence). The Group has once again achieved a gross margin of 47% while adjusted margin isup 1% point to 15%. The performance was materially weighted towards the secondhalf of the year which generated adjusted profit of £10.0m (2006: £5.7m). Segment Information In the Outsourcing segment revenues are £75.4m (2006: £48.3m) up 56% reflectingthe impact of both acquisitions of £20.0m (2006: £4.8m) of which FNS was £8.7mand organic growth. Adjusted profit is £11.4m (2006: £7.5m) and represents 71%of Group adjusted profit. In our Software segment, revenues are £35.1m (2006: £31.3m) reflecting recurringsoftware rental, maintenance and hosting of £9.6m (2006: £7.1m) solutiondelivery of £21.8m (£17.4m) and one time licences of £3.7m (2006: £6.8m).Adjusted profit is £4.7m (2006: £3.4m) and represents 29% of Group adjustedprofit. Foreign Currencies The Group undertakes operations on a global basis and the results for the yearare subject to movements in exchange rates. The Group has a policy of nothedging translation movements that arise either positive or negative althoughall material transactions are hedged at the point they become more than likelyto occur. During the year the weakening of the South African Rand and US Dollaragainst the budgeted Sterling exchange rates, lowered adjusted profits byapproximately £0.8m. Taxation The Group tax charge of £2.3m (2006: £1.6m) increased primarily due to risingprofits in South Africa and Germany which cannot be offset against losses inother countries. The Group's effective tax rate being the tax charge, prior todeferred tax on acquisitions, expressed as a percentage of adjusted profit hasincreased to 20% (2006: 15%). The tax charge expressed as a percentage of pretax profits is 22% (2006: 19%). The Group continues to carry forward significanttax losses in the UK and US. Investment activity In December 2006 the Group acquired FNS from Concentra Services Inc for $51.5m(£28.2m) which was funded by the proceeds of a 2 for 5 rights issue which had a95% take up at 21p per share. Our 2007 results reflect nine months of activityfrom FNS, our US based first notice of loss business. In October 2006 a 51% controlling equity interest was acquired in SureplanInternational Pty Limited, a leading supplier of accident management services tothe leasing industry in the US, from LeasePlan NV for $6.5m (£3.3m) with theremaining 49% being acquired in August 2007 for $4.9m (£2.7m). In additionthere is contingent deferred consideration payable details of which are given innote 6.. The entire transaction was funded from debt of which £0.9m was repaidduring the year. In November 2006 we acquired 61.86% of Holmswood and Back and Manson PtyLimited, a supplier of travel insurance administration and insurance consultancyservices in South Africa, for a cash consideration of ZAR 64.0m (£4.5m). Thistransaction was financed from existing cash resources. In October 2006, the Group acquired 60% of IFN GmbH for a cash consideration of€0.15m (£0.1m). This company, which supplies motor vehicle parts, has beenrenamed Innovation Parts GmbH. In April 2007 we also acquired the remaining 75% stake in Conversant DataLimited for £3.1m. Conversant Data Limited is our insurance fraud investigationbusiness which is now being marketed as an outsourcing service within our UKbusiness. This transaction was financed by a combination of cash and new issueshares. Subsequent to the year end the Group acquired Nobilas from Akzo Nobel for €0.85m(£0.6m). (See note 10). Black Economic Empowerment In May 2007 the Group completed a restructuring of its South African subsidiarypassing a 25% stake in its South African Subsidiary to Inthutuko InvestmentsLimited, a company which is 77.8% owned by our South African employees throughan Employee Benefit Trust and 22.2% by Jala Capital. The purchase considerationof ZAR 132m was provided by a loan to Inthutuko, guaranteed by The InnovationGroup plc. In view of this, Inthutuko Investments Limited is 100% consolidatedinto the Group accounts as a special purpose entity in accordance with SIC 12. Cash flow Cash conversion was 95% (2006: 91%) of adjusted profit. Net cash, being cashbalances less debt, at the year end was £18.6m (2006: £9.0m). Operating cash of £15.2m (2006: £10.0m) reflects operating profits of £8.6m(2006: £7.4m) adjusted for depreciation, amortisation, impairment, share basedpayments and a working capital decrease. Investment expenditure of £42.7m (2006:£11.6m) included £43.8m (2006: £12.1m) of acquisitions principally £29.4m forFNS, fixed assets of £3.2m (2006: £1.4m) and net investment income of £1.8m(2006: £1.2m). Financing cash inflows of £45.3m (2006: £4.1m) included £37.1m(2006: £0.1m) of proceeds from the issue of shares, new debt of £14.8m (2006:£8.1m) including £9.6m in respect of the BEE loan, and repayments of borrowingsof £4.9m (2006: £3.4m). Overall cash and cash equivalents increased by £17.8m(2006: £2.4m) and after reflecting opening cash of £19.0m (2006: £19.8m),adjusted for the effect of exchange rates, resulted in closing cash of £39.8m. Included in closing cash of £39.8m (2006: £19.0m) is £7.9m (2006: £8.8m) ofbalances held in Innovation bank accounts on behalf of customers for which thereis a corresponding balance sheet liability generally for the settlement of thetransaction cost on behalf of those customers. International Financial Reporting Standards ("IFRS") The Group has completed its transition to IFRS. During 2007, to reflect changes in the overall business model, contractinitiation costs for long term outsourcing contracts may be incurred at thecommencement of the contract and where material these are being deferred andexpensed over the contract term. Included in current assets is an amount of£0.2m (2006: Nil). In 2007 we commenced a global project to upgrade Innovation claims technologywithin our own outsourcing businesses. These costs have been capitalised asinternally generated software and will be amortised over the useful life whenavailable for use. Included in intangible fixed assets is an amount of £0.5m(2006: Nil). We have not capitalised any development expenditure in 2007 as it did not meetthe criteria under IAS 38. We will review all new development projects in 2008and where amounts qualify these will be capitalised. Paul HemsleyGroup Finance Director The Innovation Group plcConsolidated Income StatementFor the year ended 30 September 2007 2007 2006 Note £'000 £'000 Revenue 2 110,466 79,651Cost of sales (58,662) (41,892) Gross profit 51,804 37,759 Administrative expenses (43,206) (30,389) Operating profit 8,598 7,370 Finance income 2,090 1,160Finance costs (1,240) (632)Share of profit of associate 953 568 Profit before tax 2 10,401 8,466 UK income tax expense 178 (129)Overseas income tax expense (2,510) (1,513) Total tax expense 3 (2,332) (1,642) Profit for the year 8,069 6,824 Attributable to:Equity holders of the parent 7,161 6,407Minority interests 908 417 8,069 6,824 Adjusted profit: Profit before tax 10,401 8,466Amortisation of intangible assets 2,877 1,295Impairment of investments * 1,119 -Share based payments 1,464 928Utilisation of pre-acquisition brought forward tax losses 191 258 Adjusted profit for the year 2 16,052 10,947 Earnings per share (pence)Basic 4 1.17 1.28Diluted 4 1.14 1.25Adjusted 4 1.93 1.64Adjusted diluted 4 1.90 1.61 All amounts relate to continuing operations. * net of associated loans. Dividends paid or authorised are shown in the consolidated statement of changesin equity. The Innovation Group plcBalance SheetAt 30 September 2007 30 September 30 September 2007 2006 Note £'000 £'000ASSETSNon current assetsProperty, plant and equipment 13,045 10,497Goodwill 70,575 33,372Other intangible assets 16,886 7,114Investments accounted for using the equity method 1,609 2,146Financial assets 301 32Deferred tax assets 730 746 103,146 53,907Current assetsTrade and other receivables 7 28,197 20,548Prepayments 2,344 1,451Other financial assets 245 685Cash and cash equivalents 39,826 18,999 70,612 41,683 TOTAL ASSETS 2 173,758 95,590 EQUITY AND LIABILITIESAttributable to equity holders of the parentEquity share capital 12,877 9,030Share premium 36,034 2,706Merger reserve 2,121 561Foreign currency translation (290) (2,523)Put option reserve (2,225) -Retained earnings 45,052 36,427 93,569 46,201Minority interests 1,527 795 TOTAL EQUITY 95,096 46,996 Non current liabilitiesTrade and other payables 8 1,719 1,000Deferred income 5,841 1,419Interest bearing loans and borrowings 9 17,876 7,624Deferred tax liabilities 4,996 2,174Provisions 486 550 30,918 12,767Current liabilitiesTrade and other payables 8 20,952 17,346Deferred income 15,978 12,141Interest bearing loans and borrowings 9 5,066 3,373Income tax payable 3,321 2,732Provisions 2,427 235 47,744 35,827 TOTAL LIABILITIES 2 78,662 48,594 TOTAL EQUITY AND LIABILITES 173,758 95,590 The results were approved by the Board of Directors on 3 December 2007. The Innovation Group plcConsolidated statement of changes in shareholders equityAt 30 September 2007 Attributable to equity holders of the parent Put Issued Share Merger Retained Translation Option Minority Total capital premium reserve earnings reserves reserve Total interest equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 October 2005 8,793 75 - 29,092 642 - 38,602 407 39,009Currency translationdifferences on foreigncurrency intangibles - - - - (1,405) - (1,405) (29) (1,434) Currency translationdifferences on net investmentsincluding loans to foreignsubsidiaries - - - - (1,760) - (1,760) - (1,760) Total income andexpense for the yearrecognised directlyin equity - - - - (3,165) - (3,165) (29) (3,194) Profit for the year - - - 6,407 - - 6,407 417 6,824 Total income andexpense for the year - - - 6,407 (3,165) - 3,242 388 3,630 Issue of share capital 237 2,631 561 - - - 3,429 - 3,429Share based payments - - - 928 - - 928 - 928 At 30 September 2006 9,030 2,706 561 36,427 (2,523) - 46,201 795 46,996 Currency translationdifferences on foreigncurrency intangibles - - - - 1,313 - 1,313 - 1,313 Currency translationdifferences on net investmentsincluding loans to foreignsubsidiaries - - - - 920 - 920 (22) 898Total income andexpense for the yearrecognised directlyin equity - - - - 2,233 - 2,233 (22) 2,211 Profit for the year - - - 7,161 - 7,161 908 8,069 Total income andexpense for the year - - - 7,161 2,233 - 9,394 886 10,280 Dividends (note 5) - - - - - - - (562) (562)Fair value of put option - - - - - (2,225) (2,225) - (2,225)Issue of share capital 3,847 35,674 1,560 - - - 41,081 - 41,081Share issue costs - (2,346) - - - - (2,346) - (2,346)Share based payments - - - 1,464 - - 1,464 - 1,464 Minority interest acquiredwith subsidiary - - - - - - - 408 408 At 30 September 2007 12,877 36,034 2,121 45,052 (290) (2,225) 93,569 1,527 95,096 The Innovation Group plcConsolidated Cash Flow StatementFor the year ended 30 September 2007 Year to Year to 30 September 30 September 2007 2006 £'000 £'000 Cash flows from operating activitiesGroup operating profit 8,598 7,370Adjustments to reconcile group operating profit to net cashinflows from operating activitiesDepreciation of property, plant and equipment 2,124 2,167(Loss)/profit on disposal of property, plant and equipment (25) 6Amortisation of intangible assets 3,033 1,295Impairment charges * 1,119 111Share based payments 1,464 928Utilisation of pre-acquisition brought forward tax losses 191 258Increase in receivables (6,463) (9,020)Increase in payables 7,899 8,256Income taxes paid (2,750) (1,393) Net cash flows from operating activities 15,190 9,978 Cash flows from investing activitiesSale of property, plant and equipment 369 -Purchases of property, plant and equipment (3,166) (1,365)Payment of deferred consideration (1,430) -Purchase of subsidiary undertakings (41,854) (11,027)Cash acquired with subsidiaries 1,725 626Purchase of associated undertaking (519) (1,079)Purchase of fixed asset investments (254) -Sale of fixed asset investment - 55Sale of current asset investment 685 -Interest received 1,792 1,160 Net cash flows from investing activities (42,652) (11,630) Cash flows from financing activitiesInterest paid (1,206) (780)Dividend paid (523) -Repayment of borrowings (4,026) (3,106)New bank loans 14,794 8,148Repayment of capital element of finance leases (853) (269)Proceeds from issue of shares 37,112 87 Net cash flows from financing activities 45,298 4,080 Net increase in cash and cash equivalents 17,836 2,428 Cash and cash equivalents at beginning of year 18,999 19,756Effect of exchange rates on cash and cash equivalents 2,991 (3,185) Cash and cash equivalents at the year end 39,826 18,999 * net of associated loans as disclosed on the face of the Income Statement. Cash and cash equivalents include £7,873,000 (2006: £8,821,000) representingamounts due to repairers and funds held to settle future maintenance claims aspart of the normal administration of the outsourcing businesses. An equalamount representing the liability to the third parties involved is included aspart of the Group's current and long term liabilities. Cash held and available for use within the business in our South Africanoperation of £4,853,000 (2006: £4,293,000) continues to be subject to the normalgovernment imposed exchange controls for that country. The Innovation Group plcNotes to the ResultsFor the year ended 30 September 2007 1. BASIS OF PREPARATION The preliminary announcement was approved by the Board of Directors on 3December 2007. The financial information set out in this announcement does not constitute theGroup's financial statements as defined by s240 of the Companies Act 1985 forthe years ended 30 September 2007 or 2006. The results for the years ended 30September 2007 and 2006 are extracted from the audited accounts of TheInnovation Group plc, on which the auditors have issued an unqualified opinionwhich did not contain a statement under s237 (2) or (3) of the Companies Act1985. The Group's consolidated financial statements have been prepared in accordancewith International Financial Reporting Standards ("IFRS") as adopted by theEuropean Union ("EU"). The accounting policies have been consistently applied toall periods presented. The audited financial statements for the year ended 30 September 2006 have beendelivered to the Registrar of Companies. The Annual Report for the year ended 30September 2007 will be mailed to shareholders in January 2008 and will bedelivered to the Registrar of Companies following the Annual General Meetingwhich will be held in March 2008 at the Company's office at Yarmouth House, 1300Parkway, Solent Business Park, Whiteley, Hampshire, PO15 7AE. 2. SEGMENT INFORMATION The Group operates within into two primary reporting segments, namelyOutsourcing and Software. These are the Group's primary reporting format forsegment information. Secondary segment information is reported geographically. Primary basis - business segments Year ended 30 September 2007 Outsourcing Software Total £'000 £'000 £'000 External segment revenue 75,411 35,055 110,466 Segment results 4,459 4,139 8,598 Finance revenue 1,507 583 2,090Finance costs (625) (615) (1,240)Share of profit of associate 953 - 953 Profit before tax 6,294 4,107 10,401Tax expense (2,332) Profit after tax (before minority interest) 8,069 Adjusted profitProfit before tax 6,294 4,107 10,401Amortisation of intangible assets 2,789 88 2,877Impairment of investments 1,119 - 1,119Share based payments 987 477 1,464Utilisation of pre-acquisition brought forward tax losses 191 - 191 11,380 4,672 16,052 Assets and liabilitiesSegment assets 112,008 58,864 170,872Unallocated assets 2,886 173,758 Segment liabilities 34,426 12,977 47,403Unallocated liabilities 31,259 78,662 Other segment informationCapital expenditure:Property, plant and equipment 3,084 1,970 5,054Intangible fixed assets 44,821 4,758 49,579Depreciation 879 1,245 2,124Amortisation 2,939 94 3,033 Central costs have been allocated on a 80:20 basis between outsourcing andsoftware (2006:50% software, 50% outsourcing). The change in the allocation for2007 reflects the increasing activity in outsourcing. Unallocated assets comprise fixed asset and current asset investments anddeferred tax assets. Unallocated liabilities include interest bearing loans andborrowings and taxation creditors. Primary basis - business segments Year ended 30 September 2006 Outsourcing Software Total £'000 £'000 £'000 External segment revenue 48,327 31,324 79,651 Segment results 5,030 2,340 7,370 Finance revenue 875 285 1,160Finance costs (261) (371) (632)Share of profit of associate 568 - 568 Profit before tax 6,212 2,254 8,466Tax expense (1,642) Profit after tax (before minority interest) 6,824 Adjusted profitProfit before tax 6,212 2,254 8,466Amortisation of intangible assets 925 370 1,295Share based payments 113 815 928Utilisation of pre-acquisition brought forward tax losses 258 - 258 7,508 3,439 10,947 Assets and liabilitiesSegment assets 55,619 36,362 91,981Unallocated assets 3,609 95,590 Segment liabilities 19,803 12,888 32,691Unallocated liabilities 15,903 48,594 Other segment informationCapital expenditure:Property, plant and equipment 901 826 1,727Intangible fixed assets 16,853 852 17,705Depreciation 1,035 1,132 2,167Amortisation 925 370 1,295 Unallocated assets comprise fixed asset investments and deferred tax assets.Unallocated liabilities include interest bearing loans and borrowings andtaxation creditors. Secondary format - geographical segments The following table presents an analysis of revenue and an analysis of thecarrying amount of segment assets and capital expenditure by the geographicalarea in which those assets are located. Revenue by origin and destination 2007 2006 £'000 £'000 Africa 34,165 31,140Europe 43,427 28,107Americas 25,596 15,256Asia Pacific 7,278 5,148 110,466 79,651 Segment assets 2007 2006 £'000 £'000 Africa 29,668 21,171Europe 77,810 53,391Americas 55,940 9,469Asia Pacific 7,454 7,950 170,872 91,981Unallocated assets 2,886 3,609 173,758 95,590 Capital expenditure - property, plant and equipment 2007 2006 £'000 £'000 Africa 1,545 787Europe 1,879 672Americas 1,369 97Asia Pacific 261 171 5,054 1,727 Capital expenditure - intangibles and goodwill 2007 2006 £'000 £'000 Africa 4,521 -Europe 6,099 14,242Americas 38,569 -Asia Pacific 390 3,463 49,579 17,705 The following table provides disclosure of the Group's revenue analysed by thetype of service. All revenue relates to services Revenue by type of service 2007 2006 £'000 £'000 Outsourcing 75,411 48,327 SoftwareLicence 3,669 6,774Solution delivery 21,797 17,431Licence rental 3,642 2,965Maintenance 2,529 1,754Hosting and bureau services 3,418 2,400 35,055 31,324 Total revenue 110,466 79,651 3. TAXATION 2007 2006 £'000 £'000Current tax expenseUK corporation tax (178) 138Foreign tax 3,090 1,886 Current tax on income in the year 2,912 2,024Adjustments in respect of prior periods 141 (46) Total current tax 3,053 1,978 Deferred taxationOrigination and reversal of timing differences (721) (336) Total tax charge 2,332 1,642 2007 2006 £'000 £'000Reconciliation of total tax charge Group profit before tax 10,401 8,466 Income tax using UK corporation tax rate of 30% (2005: 30%) 3,120 2,540Tax effects of:Permanent differences 42 (398)Non-taxable income (571) (146)Rate differences on overseas earnings 557 32Current year tax losses, no deferred tax recognised 1,141 550Decelerated capital allowances (allowances disclaimed) 212 27Utilisation of brought forward tax losses (2,607) (1,241)Share based payments 438 278 Total income tax expense 2,332 1,642 4. EARNINGS PER SHARE 2007 2006 pence pence Basic earnings per share 1.17 1.28Adjustment for dilutive potential ordinary shares- add share options (0.03) (0.03) Diluted earnings per share 1.14 1.25 Basic earnings per share 1.17 1.28 Adjustments- amortisation 0.48 0.26- impairment of assets 0.18 -- share based payments 0.24 0.18- utilisation of pre-acquisition brought forward tax losses 0.03 0.05 - tax effect of the above (0.17) (0.13) Adjusted basic earnings per share 1.93 1.64 Adjustment for dilutive potential ordinary shares (0.03) (0.03) Adjusted diluted earnings per share 1.90 1.61 Earnings per share is calculated as follows: 2007 2006Number of shares (thousand)Average number of shares in issue used to calculate basic andadjusted basic earnings per share 612,449 500,283Dilutive potential ordinary shares- add share options 12,632 10,375 Shares used to calculate diluted and adjusted diluted earnings per 625,081 510,658share Basic and diluted earnings (£'000)Basic and diluted earnings for the year 7,161 6,407- add amortisation 2,876 1,295- add impairment of assets 1,119 -- add share based payments 1,464 928- add utilisation of pre-acquisition brought forward tax losses 191 258 - less tax effect of the above (1,054) (647) Adjusted and adjusted diluted earnings for the year 11,757 8,241 The average number of shares for the year ended 30 September 2006 has beenadjusted to reflect the shares issued during the rights issue completed on 13December 2006. At 30 September 2007 there were 643,837,477 shares in issue (2006: 451,501,928). 5. DIVIDENDS 2007 2006 £'000 £'000Declared and paid during the year:Equity dividends on ordinary shares paid to minority shareholders:Holmswood and Back and Manson- Final dividend for 2007: 4,500 South African Rand per share (2006: nil) 148 - Approved by shareholders at the subsidiaries' AGMTiG - Netsol Pvt Limited: 33.26 Pakistan Rupees per share (2006: nil) 414 - The dividends disclosed above were made by Group subsidiaries in which there isa minority interest. 6. INTANGIBLE ASSETS On 22 December 2006 Group acquired 100% of the share capital of First NoticeSystems Inc ("FNS") for a total cash consideration of £29,390,000 ($54,205,000).The acquisition was funded entirely by a 2 for 5 rights issue completed on 13December 2006. This resulted in the creation of goodwill and separatelyidentifiable intangible assets of £21,260,000 and £9,528,000 respectively. FNSis a leading provider of claim reporting outsourcing services and software tothe property and casualty insurance markets in the US. From the date ofacquisition the company has contributed £1,801,000 to the profit before tax ofthe group and £8,671,000 to its revenues. The company has subsequently beenrenamed Innovation First Notice Inc. On 25 October 2006 the Group gained control of Sureplan International PtyLimited by acquiring 51% of the share capital. The remaining 49% was acquiredon 31 August 2007. The total cash consideration paid was £6,245,000 (USD$11,861,000). In addition to the cash consideration already paid there exists adeferred consideration payment based on performance of both the US Auto sectorand entire US business in the year to 30 September 2009. The deferredconsideration is a maximum of $7,500,000 (£3,750,000). Deferred considerationhas been calculated using latest 2009 forecasts for the purpose of inclusion inthese financial statements and at the year end has been calculated as £1,190,000which is held within trade and other payables greater than one year. Thisresulted in the creation of goodwill and separately identifiable intangibleassets of £6,809,000 and £889,000 respectively. Sureplan International PtyLimited is a provider of outsourced accident and risk management solutions tothe automotive leasing and self-insured fleet sector in the US. From the dateof acquisition the company has contributed £494,000 to the profit before tax ofthe group and £2,847,000 to its revenues. On 1 November 2006 the Group acquired 61.86% of the share capital of Holmswoodand Back and Manson Pty Limited for a total cash consideration, includingacquisition costs, of £4,256,000 (ZAR 64,185,000). In addition there exists aput option, exercisable at the discretion of a minority shareholder by no laterthan 1 November 2009, for the Group to acquire an additional 30.58% from suchminority shareholder on the same valuation basis as the original transaction.This put option has been valued at fair value in the balance sheet at the yearend and is included in current provisions. This resulted in the creation ofgoodwill and separately identifiable intangible assets of £2,963,000 and£1,557,000 respectively. Holmswood and Back and Manson is a leading supplier oftravel insurance administration and consulting services in South Africa. Fromthe date of acquisition the company has contributed £1,369,000 to the profitbefore tax of the group and £3,277,000 to its revenues. On 5 April 2007 the Group acquired the remaining 75% of the share capital ofConversant Data Limited for a total consideration of £4,424,000. Theconsideration was a combination of cash (£1,572,000) and shares (£1,661,000).Since January 2006 the Group had owned 25% of this company and had previouslyaccounted for its results as an associate using the equity method. This resultedin the creation of goodwill and separately identifiable intangible assets of£4,280,000 and £472,000 respectively. Conversant Data Limited is a leadingprovider of anti-fraud services to the insurance market. From the date ofacquisition the company has contributed a loss of £527,000 to the profit beforetax of the group and £767,000 to its revenues. From 1 August 2007 the trade andassets of Conversant Data Limited have been transferred to another Groupcompany, the Innovation Group (EMEA) Limited. On 1 October 2006 the Group acquired 60% of the share capital of IFN GmbH for atotal cash consideration of £101,000 (€149,000). This resulted in the creationof goodwill and separately identifiable intangible assets of £347,000 and£152,000 respectively. IFN GmbH provides parts to the motor industry. From thedate of acquisition the company has contributed £156,000 to the profit beforetax of the group and £4,425,000 to its revenues. The company has subsequentlybeen renamed to Innovation Parts GmbH. On 5 April 2007 the Group acquired 90.25% of the share capital of AddressologyLimited for a total cash consideration of £20,000. This resulted in the creationof goodwill and separately identifiable intangible assets of £70,000 and£182,000 respectively. Addressology is a provider of insurance risk modellingfocusing on subsidence and flood. From the date of acquisition the company hascontributed a loss of £88,000 to the profit before tax of the group and £16,000to its revenues. In addition to the above acquisitions, a 51% shareholding of Motorconsult PtyLimited was acquired as part of the AMK Associates Limited acquisition in July2006. However, at 30 September 2006 the net liabilities of this entity, whichare not material to the Group, were not recorded in the Group financialstatements. There was no separate consideration for this acquisition. Thisresulted in the creation of goodwill of £383,000. Motorconsult Pty Limitedprovides service and maintenance data to the motor industry. From 1 October 2006the company has contributed a loss of £201,000 to the profit before tax of thegroup and £258,000 to its revenues. 7. TRADE AND OTHER RECEIVABLES 2007 2006 £'000 £'000 Trade receivables 16,795 14,509Other debtors 3,146 1,877Accrued income 8,256 4,162 28,197 20,548 All amounts are due within one year. 8. TRADE AND OTHER PAYABLES 2007 2006 £'000 £'000CurrentTrade payables 5,662 2,942Other payables 5,303 7,378Accruals 7,382 5,208Proposed dividend 448 -Social security and other taxes 2,157 1,818 20,952 17,346 Non currentOther payables 1,719 1,000 9. INTEREST BEARING LOANS AND BORROWINGS 2007 2006 £'000 £'000CurrentBank loans and overdrafts 3,293 1,730Other loans 1,148 1,148Obligations under finance leases and hire purchase agreements 625 495 5,066 3,373 Non currentBank loans and overdrafts 14,820 3,962Other loans 2,004 3,152Obligations under finance leases and hire purchase agreements 1,052 510 17,876 7,624 10. POST BALANCE SHEET EVENTS On 28 November 2007 the Group received shareholder approval at an ExtraordinaryGeneral Meeting for the acquisition of Nobilas Claims and Fleet Solutions for acash consideration of €850,000 (approx. £600,000). This acquisition wascompeted on 3 December 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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