Final Results

4th Dec 2009 07:00



4 December 2009

THE INNOVATION GROUP PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2009

The Innovation Group plc ("Innovation" or "the Group"), the leading provider of enterprise software, business process outsourcing ("BPO") and repair and service network management solutions to the global insurance, financial services, motor and fleet industries, today announces its annual financial report for the 12 months ended 30 September 2009. The results show a year of delivery despite difficult economic conditions.

Financial Highlights

	2009	2008
Revenues	£155.9m	£139.9m
Revenues at constant currency *	£155.9m	£152.7m
Adjusted profit before tax **	£11.3m	£10.1m
Loss before tax	£19.8m	£3.8m
Adjusted earnings per share	1.05p	0.52p
Basic loss per share	3.19p	1.06p

* Revenues at constant currency are calculated by applying the 2009 average exchange rates to the 2008 revenues.

** Adjusted profit is loss before tax after adding back amortisation on acquired intangible assets of £4.1m (2008: £3.4m), impairment of £21.5m (2008: £1.2m), share based payments charge of £2.8m (2008:£2.5m), exceptional costs £2.6m (2008:£6.3m) and utilisation of pre-acquisition brought forward tax losses £0.lm (2008:£0.5m) as analysed on the face of the income statement.

Performance Indicators

	2009	2008
Organic revenue growth *	10%	15%
Organic revenue growth at constant currency*	1%	13%
Outsourcing revenues	80%	77%
Operating cash inflow	£8.3m	£12.1m
Net cash at period end	£11.7m	£10.7m

* Organic growth is defined as revenue growth excluding the impact of acquisitions in the current year and adjusting for the full year impact of acquisitions in the prior year.

Corporate Highlights

Year end cash substantially ahead of expectations

£4.8m placing (net of costs) in May 2009 to strengthen capital base

Significant software licence sales offset downturn in claims volume

Rigorous cost reduction programme implemented - circa £6m p.a.

Project Enterprise implementation to time and budget

Innovation Insurer launched in April 2009

Significant outsourcing wins help underpin 2010 expectations

Andy Roberts, Executive Chairman, commented:

"Customer satisfaction has remained strong throughout the year resulting in good customer retention. We have experienced a high level of new customer wins throughout the year and maintain a strong pipeline of prospects as we enter the new year. This, combined with the culmination of our 'Project Enterprise' technology investment programme, gives the Board and executive management team confidence in our business prospects for the coming year." 

For further information please contact:

The Innovation Group Andy Roberts, Executive Chairman Jane Hall, Group Finance Director	Tel: +44 (0) 1489 898300
Financial Dynamics Ed Bridges / Juliet Clarke / Matt Dixon	Tel: +44 (0) 20 7831 3113

Notes to Editors 

Innovation Group plc (LSE: TIG.L) is a specialist provider of enterprise software, business process outsourcing and repair and service network management solutions. We serve the global property and casualty insurance, financial services, motor and fleet industries. Through our local contact centres, technology, process automation and repair and supply chain networks we deliver customer support accident management including repair, estimation and claims management services. 

Innovation has over 800 global clients including AXA Insurance, Main Street America Group, RSA, LeasePlan, The Ford Motor Company, Toyota and Zurich. The Group processes more than 4 million claims per year with 20% direct claims cost saving achieved. Our 2,300 people are located in United Kingdom, Australia, Belgium, Canada, France, Germany, India, Japan, Netherlands, Pakistan, South Africa, Spain and United States. 

www.innovation-group.com

Chairman's Statement 

When I took over as Chairman of Innovation Group in March 2009, it was clear that we would have to manage the impact on our businesses of the reduced economic activity resulting from the Global Financial crisis. The Board agreed to focus on the factors we could control in the short term, and so we set out three priorities; firstly, to grow our revenues by managing our sales mix, secondly, to match our costs to our volumes, and thirdly, deliver our technology investment programme on time and on budget. Given this environment, our financial performance has been creditable and has met expectations. 

The Group's revenues for the year were £155.9m, up 11% year on year. Adjusted profit before tax was £11.3m up from £10.1m in 2008. Adjusted profit in 2009 has been positively impacted by high margin one-off software licence sales of £8m in the second half of the year. It is expected one-off licence sales will return to normalised levels in 2010. Net cash at the year end was £11.7m (gross cash £36.5m) substantially ahead of expectations.

After conducting a detailed review of the business with the executive management team in all geographies, the Board believes that the strategy of the Group, which is to build a market leading company through the provision of first rate BPO and technology to its customers, is sound and the key to delivering significant value in the medium term is the execution of this strategy.

Our customers' needs and expectations are evolving. Their priorities include lowering cost of claims and operations and innovating in their marketplace. Increasingly, they want to work with us on a modular Software-as-a-Service (SaaS) basis. It gives me great pleasure to note that through our technology investment programme, the business is able and ready to give our customers all this and more. This technology programme, Project Enterprise has already been implemented in France, UK and Spain will follow shortly in the new year. The US will be implemented in Q2 with Germany, South Africa and Australia fully implemented by the end of the financial year. This gives us the platform to become a truly global operation and will provide significant margin benefits in 2011 and beyond. 

Our objective in 2010 is to make our loss making operations profitable and to improve margins in our profitable businesses so that all operations become cash generative. We will adjust our organisational strategy as necessary to achieve this.

In this context, the Board has identified a number of areas of the Business where additional funds can be deployed to improve margins through adjustments to payment profiles, to improve regional efficiencies, to acquire bolt-on technology and to enable the repayment of expensive debt in South Africa. In addition further working capital will allow us to undertake larger scale commerical opportunities. To this end, the Board is recommending a fund raising, details of which will be announced separately. In view of these opportunities and consistent with our view at the interim stage, the Board continues to believe it is more prudent to retain working capital to facilitate growth and complete our technology investments and therefore has decided not to recommend a dividend payment for the 2009 financial year. 

In January 2009, Geoff Squire stepped down as Chairman and in March I was appointed to succeed him. The Board wishes him well and thanks him for his significant contribution to the work of the Board through his term as Chairman. 

Jane Hall was appointed Group Finance Director in August following a period as Acting Group Finance Director. 

Following eight years with Innovation Group, Hassan Sadiq resigned from the role of Chief Executive Officer in November 2009. The Board would like to thank Hassan for his contribution to the development of the Group so far. The Group has commenced an external recruitment process and I have taken on the role of Executive Chairman pending his replacement.

It is our firm base of service excellence that underpins the Group's future growth potential. We now operate directly in 13 countries world-wide working in multiple languages. This year, our BPO business processed well over 4 million incidents, accidents, and assessments for our customers whilst our software continues to be used by customers across the globe. In addition, we were successful in adding numerous new customers around the world and grew our business volumes with many of our current customers as they selected new products and services from our portfolio. I would like to take this opportunity to thank our 2,300 employees who have risen to the challenges of a difficult year.

Customer satisfaction has remained strong throughout the year resulting in good retention. We will continue to expand this base through delivering large scale wins. This, together with the strengthening of our management team which we have initiated, the rollout of Enterprise across all regions and the cost saving programme already implemented gives us confidence for the Group's future prospects. 

Andrew RobertsExecutive Chairman

Operational and Financial Review

Introduction

This year can be characterised as one of stabilisation, following a period of transformation within our business. Despite the direct impact from the worldwide slowdown in economic activity, the Board and Executive team have operated with a clear focus on improving shareholder value and we are pleased to report that our business is in a good position to grow from its current base.

The global recession has impacted us directly as economic activity has led to fewer new car sales and fewer car journeys, resulting in fewer policies and incidents upon which our business largely depends for its transactional business process revenues. In some regions, the impact on revenue was in excess of 10%. Apart from the recession, we have also been affected by unusual weather patterns that have further reduced expected claim levels, particularly in Germany, UK and US.

In this context, our customers, whether they are global insurers, fleet and lease management companies or finance and motor companies, have focused on cost savings. As a result, our technology and service offerings, aimed at improving operational efficiency and effectiveness, have experienced good demand from the market, evidenced by a highly satisfactory level of new customer wins and account growth during the year.

Our business model has also proved its flexibility with the sale of software licences off-setting reduction in BPO volumes, and also by enabling us to 'right size' the business during the year without impacting on customer service levels, which we are pleased to note remained high throughout the period. 

Financial Overview

Group Revenues for the year have risen 11% to £155.9m (2008: £139.9m) with organic growth at 10% (2008: 15%). Adjusted profit is £11.3m (2008: £10.1m) an increase of 12% and adjusted earnings per share is 1.05 pence (2008: 0.52 pence). The loss before tax is £19.8m (2008: £3.8m) with a basic loss per share of 3.19 pence (2008: 1.06 pence).

BPO outsourcing revenue, comprising primarily motor (including the sale of motor parts in Germany) and property increased by 16% to £125.0m and represents 80% of total revenue (2008: 77%). Revenue from motor is £95.4m and represents 76% of total outsourcing revenue (2008: 73%). Software revenue decreased by 5% to £30.9m (2008: £32.5m) and comprises one-time licence fees, implementation revenue and recurring software fees. One-time licence fees increased to £10.0m from £6.6m in 2008 to cover the decrease in BPO volumes experienced throughout the year and help the Group achieve its expectations. We expect the level of income from this source to reduce to more normal levels in 2010.

The Group undertakes operations on a global basis and results for the year are subject to movements in exchange rates. The Group has a policy of not hedging translation movements that arise either positive or negative, although material transactions are hedged at the point they become more than likely to occur. During 2009 the Group has benefited from the strengthening, against sterling, of all major currencies, in particular the Euro, South African Rand and US dollar. Therefore, revenue growth at constant currency is 2% with organic growth at constant currency 1%. 

Gross margin was 38% (2008: 42%) whilst adjusted margin remained at 7%. The decrease in gross margin is primarily due to depressed margins in the US throughout the year as volumes continue to ramp slower than expected and the significant reduction in outsourcing volumes across all regions particularly during the second half of the year when the Group continued to carry excess capacity. This excess processing capacity has now been addressed as part of the global cost reduction programme with significant costs being removed.

Adjusted profit of £11.3m (2008: £10.1m) comprises loss before tax of £19.8m (2008: £3.8m) after adding back amortisation on acquired intangible assets of £4.1m (2008: £3.4m), impairment of £21.5m (2008: £1.2m), a share based payments charge of £2.8m (2008: £2.5m), utilisation of pre-acquisition tax losses of £0.1m (2008: £0.5m) and exceptional costs as detailed below of £2.6m (2008: £6.3m).

The impairment charge of £21.5m noted above includes £20.0m relating to a write down of the carrying value of goodwill attributable to the US outsourcing business. The Board believe the US outsourcing business will generate profits in the future but based on sensitised cash flows, have reduced the goodwill carrying value this year.

 

In the year to 30 September 2009 a further exceptional restructuring cost of £2.6m has been taken. As noted in our period-end Trading Update on 12 October 2009, this is a one-off cost designed to re-size the businesses to the current level of claims volume being experienced. The programme has achieved annualised savings going forward of approximately £6.0m and has been financed out of operating cash.

Included within adjusted profit is a foreign exchange gain of £1.8m (2008: gain £0.8m). This gain arose on retranslation of  trading inter company balances due to the significant movement between the US dollar and Canadian dollar in the first half and the recycling of the foreign exchange generated following the partial repayments of the Group's net investment in Canada.

Taxation

The Group tax charge is £2.2m (2008: £1.3m). The Group's effective tax rate, being the tax charge prior to deferred tax on IFRS acquired intangibles of £0.6m (2008: £0.8m), expressed as a percentage of adjusted profit is 25%. This is within the range of 22% to 27% forecast at the start of the year. The Group continues to carry forward significant tax losses in certain UK and US entities. 

Cash Flow

The Group ended the year with net cash of £11.7m (2008: £10.7m) substantially ahead of expectations, with gross cash of £36.5m (2008: £34.7m). The operating cash inflow of £8.3m (2008: £12.1m) reflects the normalisation of timing differences in working capital and taxation payments carried forward from the last quarter of 2008, as described in the 2008 Finance Director's Review

Investment expenditure, net of interest received of £1.1m (2008: £2.0m) was £9.2m (2008: £8.2m). This includes net fixed asset additions of £10.1m of which £6.5m (2008: £4.3m) is the capitalisation of costs relating to Project Enterprise as described in more detail below.

Financing cash outflow of £1.2m (2008: £9.2m) includes interest paid of £2.0m (2008: £2.1m), net repayment of borrowings of £2.9m (2008: £4.0m), dividends paid to shareholders and minority interests of £1.1m (2008: £3.2m) and net proceeds from a share placing undertaken in May 2009 of £4.8m (2008: nil).

Overall cash and cash equivalents increased by £1.8m (2008: decrease £5.1m) and after reflecting opening cash of £34.7m (2008: £39.8m), including the effect of exchange rates of £3.9m, resulted in closing cash of £36.5m. Included within gross cash is £7.9m of cash available for use in our South African business which continues to be subject to the normal government imposed exchange controls for that country.

Geographic Performance 

At the half year the Group changed its segmental reporting to reflect the way the business is structured and managed.

Our European business achieved revenue growth of 24% to £87.4m. (2008: £70.4m). This increase is a combination of organic growth from new contract wins and acquired growth from the Nobilas and National Service Network acquisitions in 2008, generating revenue in new territories across France, Spain and Benelux, plus the positive impact of the Euro exchange rate. Adjusted profit for Europe is £11.2m (2008: £6.5m) with UK, Germany and Rest of Europe contributing £5.2m (2008: £3.6m), £5.8m (2008: £5.2m) and £0.2m (2008: loss £2.3m) respectively.

The first half of 2009 saw significant challenges for our South African business due to decreased levels of economic activity in a market which is particularly dependent upon consumer spending. Overall revenues for the year fell by 11% to £30.6m (2008: £34.2m) although recent months have shown a stabilisation of the economy. Adjusted profit is £4.3m down from £6.0m in 2008.

Revenue in North America has increased by 9% to £28.9m (2008: £26.4m). The performance in 2008 included a contribution of £6.6m from Canada which has not been repeated this year due to a contract dispute with Allstate Insurance Company of Canada. Revenue growth in the US for the year to 30 September 2009 was 43% mainly from the ramp of volumes in the motor outsourcing sector established in 2008. Adjusted loss for the Region is £2.1m (2008: loss £1.2m) being a loss of £0.9m attributable to the US business (2008: £3.6m) and a loss in Canada of £1.2m (2008: profit £2.4m). The loss in Canada in 2009 has been driven primarily by the loss of revenue from the Allstate contract, legal fees attributable to the Allstate litigation, office costs and overhead staff costs. As a result of the cost reduction programme in the last quarter of 2009 the majority of these costs will not repeat in 2010.

Revenue in Asia Pacific remained relatively constant at £9.0m (2008: £8.8m). Adjusted profit has fallen to £0.5m compared to £1.5m in 2008. This decrease is due primarily to a change in revenue mix away from higher margin software sales.

Allstate Litigation 

The Company and its subsidiary Innovation Group (Canada) Limited were served with legal proceedings by Allstate Insurance Company of Canada ("Allstate") on 24 December 2008. The proceedings relate to the design, development and implementation of customised policy software for Allstate's new policy management system by the Canadian business and allege, inter alia, that Innovation failed to deliver the software to the specification or within the timescales agreed with Allstate. The claim is for $75m (Canadian) (approximately £43.5m) and costs. The Group served a defence and counterclaim on 21 April 2009 seeking damages of $31m (Canadian) (approximately £18m) for wrongful repudiation of contract and monies owing for work done. A reply and defence to counterclaim was served by Allstate on 11 September 2009. As previously announced, the Company considers the litigation to be speculative in the extreme and without foundation. The Company will continue to defend the claim vigorously.

Risks and Uncertainties

While we are confident about our future prospects, significant risks and uncertainties exist that we need to mitigate and manage. Given our reliance on transaction based revenues, any continuation or worsening of the global economy will impact on performance. As in this year, we believe our business model contains the ability to 'flex' both up and down to respond to changes in business volumes. 

A list of some of the main risk areas, not all of which are within the Directors' control, is given below:

the economic environment and continued uncertainty which may adversely affect revenues and profits

the financial or operational failure of key customers

on a global basis the Group's footprint within certain territories compared to competitors 

the ability to deliver services in accordance with SLAs in order to protect and develop the Group's reputation

reliance on relationships with supplier networks

software solutions must remain technologically competitive and these must be properly protected

exposure to certain external risks including exchange translation risks as approximately 75% of Group revenues are generated outside of the UK

Other factors may also affect the Group.

New Business

Demand for our technology and services continues to grow with a strong pipeline across all regions. The Group secured a high level of new contracts during 2009, which is clear evidence that we are becoming the 'partner-of-choice' for customers looking for best-in-class processing software to improve their efficiency and customer service.

Key outsourcing wins include a three year contract with a large German Insurance Group expected to generate revenue of approximately £2.7m per annum and a three year contract with a leading European fleet management services company estimated to be worth £3.0m. The Group has also secured a new contract with a leading European car manufacturer for accident management in the US, expected to generate revenues of approximately £1.0m over the contract term. The value of all outsourcing contracts is dependent upon the volume of incidents.

Significant software wins include a contract to provide a large UK insurer with our mobile claims solution expected to generate revenue of £4.0m, much of this arising in 2009, and a contract for software licence and conversion services with one of the largest UK retail banks estimated to be worth over £3.7m. The Group has also secured a three year hosting contract in the UK worth £3.6m over the period and extended our relationship with a US-based Farm Bureau for approximately £1.8m for the Group's Innovation Insurer™ (Insurer) software.

Technology Investment Programme

In April 2009 we successfully launched Innovation Insurer™, our latest-generation Services Oriented Architecture (SOA) product, developed over the last few years and now being implemented for customers across Europe, United States and Asia. Insurer delivers comprehensive functionality to manage policy, claims and analytics on a single platform allowing the customer to choose an end-to-end application or stand alone components. Insurer's capabilities extend beyond traditional insurance processing, offering wireless adjusting, integrated telematics, in-vehicle crash detection and vehicle and asset tracking. Sales of Insurer and other specialist technology products were strong during the year, helping to offset the economy driven decline in outsourcing revenues.

This technology, which we have sold during the year on a licence basis to a number of clients since launch, is underpinned by Project Enterprise, which promises to transform the cost profile and service flexibility we are able to offer our BPO clients. Moreover, we have delivered this capability on-time and within budget, which is a testament to the abilities of our developers who have operated as a global virtual team. 

Project Enterprise remains on track for roll-out across all regions. It has been implemented in France, will be implemented in the UK and Spain early in the new calendar year and fully rolled out to all other regions by September 2010. Enterprise will allow the Group to offer a modular service offering covering the complete range of policy administration, first notice of loss, full claims processing, analytics and fraud detection and, most importantly, usage based processing. This last point is important as the market moves towards Software-as-a-Service and 'click-based' service provision, trends that we are fully able and ready to support. In addition, Innovation Insurer and Project Enterprise will give our clients access to advanced features such as telematics-based crash detection, asset tracking, emissions monitoring and pay-as-you-go models.

In addition to the benefits it brings to customers, Project Enterprise gives the Group significant internal efficiencies which in turn are expected to lead to margin improvement. Benefits include a common global standard for our outsourcing business with seamless end-to-end processing as well as the ability to better manage capacity globally and rapidly deploy capability to meet the needs of customers, regardless of territory.

In 2009 the Group capitalised a further £6.5m of costs for this programme bringing the total cost to date to £11.4m. The current carrying value of the asset is £10.7m. The Group expects to capitalise a further £3.0m in 2010 as the roll out completes. Amortisation of the product commenced in the second half of the current year with a charge of £0.7m. Amortisation of the regional implementations will begin in each region as the product is available for use. The expected useful life, for amortisation purposes, is set at five years. Amortisation in 2010 is expected to be in the region of £2.0m.

We believe that with this technology leadership we will be able to up-sell and cross-sell our BPO services to our existing clients, and through our partnership with IBM and Symbility, develop new markets and customers. These developments give us confidence that we can grow strongly and profitably over the coming periods.

Jane HallGroup Finance Director

The Innovation Group plc

Consolidated Income Statement

For the year ended 30 September 2009

		2009		2008
	Note	£'000		£'000
Revenue	2	155,865		139,859
Cost of sales		(96,348)		(81,356)
Gross profit		59,517		58,503
Administrative expenses excluding exceptional costs		(76,689)		(56,505)
Exceptional costs	3	(2,622)		(6,246)
Administrative expenses		(79,311)		(62,751)
Operating loss		(19,794)		(4,248)
Finance income		1,711		2,166
Finance costs		(1,973)		(2,271)
Share of profit of associate		234		570
Loss before tax		(19,822)		(3,783)
UK income tax (expense)/credit		(235)		2,174
Overseas income tax expense		(1,990)		(3,462)
Total tax expense	4	(2,225)		(1,288)
Loss for the year		(22,047)		(5,071)
Attributable to:
Equity holders of the parent		(22,308)		(6,831)
Minority interests		261		1,760
		(22,047)		(5,071)
Adjusted profit:
Loss before tax		(19,822)		(3,783)
Amortisation of acquired intangible assets		4,074		3,403
Exceptional costs		2,622		6,246
Impairment of goodwill and investments		21,470		1,228
Share based payments		2,829		2,520
Utilisation of pre-acquisition brought forward tax losses		98		451
Adjusted profit for the year	2	11,271		10,065
Earnings per share (pence)
Basic	5	(3.19)		(1.06)
Diluted	5	(3.19)		(1.06)
Adjusted	5	1.05		0.52
Adjusted diluted	5	1.03		0.51
All amounts relate to continuing operations.

Dividends paid or authorised are shown in the consolidated statement of changes in equity.

The Innovation Group plc

Balance Sheet

At 30 September 2009

		30 September		30 September
		2009		2008
	Note	£'000		£'000
ASSETS
Non current assets
Property, plant and equipment		14,396		14,069
Goodwill		66,946		77,846
Other intangible assets		24,133		19,558
Investments accounted for using the equity method		2,081		1,641
Financial assets		491		530
Deferred tax assets		1,943		2,316
		109,990		115,960
Current assets
Trade and other receivables	7	52,688		44,072
Prepayments		3,198		3,292
Other financial assets		174		262
Cash and cash equivalents		36,519		34,749
		92,579		82,375
TOTAL ASSETS		202,569		198,335
EQUITY AND LIABILITIES
Attributable to equity holders of the parent
Equity share capital		14,284		13,000
Share premium		41,187		37,717
Merger reserve		2,121		2,121
Foreign currency translation		6,677		447
Put option reserve		-		(2,225)
Unrealised gains and losses		(774)		-
Retained earnings		19,133		37,834
		82,628		88,894
Minority interests		2,163		2,422
TOTAL EQUITY		84,791		91,316
Non current liabilities
Trade and other payables	8	231		266
Deferred income		1,661		1,320
Interest bearing loans and borrowings	9	16,844		16,127
Derivative financial instruments		774		-
Deferred tax liabilities		3,820		4,223
Provisions		397		1,033
		23,727		22,969
Current liabilities
Trade and other payables	8	72,018		58,680
Deferred income		10,773		9,849
Interest bearing loans and borrowings	9	7,969		7,925
Income tax payable		407		2,881
Provisions		2,884		4,715
		94,051		84,050
TOTAL LIABILITIES		117,778		107,019
TOTAL EQUITY AND LIABILITES		202,569		198,335

The results were approved by the Board of Directors on 3 December 2009.

The Innovation Group plc

Consolidated statement of changes in shareholders equity

At 30 September 2009

	Attributable to equity holders of the parent
	Issued Capital	Share premium	Merger reserve	Retained earnings	Unrealised gains and losses	Translation reserves	Put Option reserve	Total	Minority interest	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 October 2007	12,877	36,034	2,121	45,052	-	(290)	(2,225)	93,569	1,527	95,096
Total income and expense for the year recognised directly in equity	-	-	-	-	-	737	-	737	(180)	557
Loss for the year	-	-	-	(6,831)	-	-	-	(6,831)	1,760	(5,071)
Total income and expense for the year	-	-	-	(6,831)	-	737	-	(6,094)	1,580	(4,514)
Dividends (note 6)	-	-	-	(2,907)	-	-	-	(2,907)	(685)	(3,592)
Issue of share capital	123	1,683	-	-	-	-	-	1,806	-	1,806
Share based payments	-	-	-	2,520	-	-	-	2,520	-	2,520
At 30 September 2008	13,000	37,717	2,121	37,834	-	447	(2,225)	88,894	2,422	91,316
Total income and expense for the year recognised directly in equity	-	-	-	-	(774)	6,188	-	5,414	427	5,841
Loss for the year	-	-	-	(22,308) *	-	-	-	(22,308)	261	(22,047)
Total income and expense for the year	-	-	-	(22,308)	(774)	6,188	-	(16,894)	688	(16,206)
Dividends (note 6)	-	-	-	(325)	-	-	-	(325)	(727)	(1,052)
Issue of share capital	1,284	3,470	-	-	-	-	-	4,754	-	4,754
Share based payments	-	-	-	2,829	-	-	-	2,829	-	2,829
De-recognition of minority Interest	-	-	-	178	-	42	-	220	(220)	-
Cancellation of put option	-	-	-	925	-	-	2,225	3,150	-	3,150
At 30 September 2009	14,284	41,187	2,121	19,133	(774)	6,677	-	82,628	2,163	84,791

* includes £591,000 of foreign exchange gain on settlement of net investment in subsidiary recycled to the income statement

The Innovation Group plc

Consolidated Cash Flow Statement

For the year ended 30 September 2009

	Year to		Year to
	30 September		30 September
	2009		2008
	£'000		£'000
Cash flows from operating activities
Group operating loss	(19,794)		(4,248)
Adjustments to reconcile group operating loss to net cash inflows from operating activities
Depreciation of property, plant and equipment	3,623		2,979
(Loss)/profit on disposal of property, plant and equipment	(50)		28
Amortisation of intangible assets	5,000		3,602
Impairment of goodwill and financial assets	21,470		1,228
Share based payments	2,829		2,520
Share of profit from associate	234		570
Utilisation of pre-acquisition brought forward tax losses	98		451
Increase in receivables	(2,766)		(2,854)
Increase in payables	2,411		12,245
Income taxes paid	(4,744)		(4,397)
Net cash flows from operating activities	8,311		12,124
Cash flows from investing activities
Sale of property, plant and equipment	68		72
Purchases of tangible and intangible assets	(10,148)		(7,562)
Payment of deferred consideration	-		(7,642)
Payment of contingent consideration	(200)		-
Cash acquired with subsidiaries	-		5,168
Purchase of fixed asset investments	(66)		(240)
Interest received	1,120		2,024
Net cash flows from investing activities	(9,226)		(8,180)
Cash flows from financing activities
Interest paid	(1,973)		(2,098)
Dividend paid to minorities	(804)		(283)
Dividends paid to shareholders	(325)		(2,907)
Repayment of borrowings	(1,804)		(17,416)
New bank loans	-		14,000
Repayment of capital element of finance leases	(1,084)		(568)
Proceeds from issue of shares	4,754		37
Net cash flows from financing activities	(1,236)		(9,235)
Net decrease in cash and cash equivalents	(2,151)		(5,291)
Cash and cash equivalents at beginning of year	34,749		39,826
Effect of exchange rates on cash and cash equivalents	3,921		214
Cash and cash equivalents at the year end	36,519		34,749

Cash held and available for use within the business in our South African operation of £7,875,000 (2008: £4,903,000) continues to be subject to the normal government imposed exchange controls for that country.

The Innovation Group plc

Notes to the Results

For the year ended 30 September 2009

1. BASIS OF PREPARATION

The Annual Financial Report announcement was approved by the Board of Directors on 3 December 2009.

The financial information set out in this Annual Financial Report announcement for the year ended 30 September 2009 does not constitute the group's statutory accounts as defined by s435 of the Companies Act has been extracted from the 2009 statutory accounts on which an unqualified audit report has been made by the auditors, and which did not contain an emphasis of matter paragraph nor a statement under section 498(2) or (3) of CA 2006.  The financial information included in the annual report announcement for the prior year ended 30 September 2008 has been extracted from the 2008 stat accounts on which an unqualified audit report has been made by the auditors, and which did not contain an emphasis of matter paragraph nor a statement under section 237(2) or (3) of CA 1985. 

The Group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). The accounting policies have been consistently applied to all periods presented.

The audited financial statements for the year ended 30 September 2008 have been delivered to the Registrar of Companies. The Annual Report for the year ended 30 September 2009 has been placed in the UKLA Document Viewing Facility and will be mailed to shareholders in January 2010 and will be delivered to the Registrar of Companies following the Annual General Meeting which will be held in March 2010 at the Company's office at Yarmouth House, 1300 Parkway, Solent Business Park, Whiteley, Hampshire, PO15 7AE.

The Annual Report for the year ended 30 September 2009 is available on the Group's website; www.innovation-group.com

2. SEGMENT INFORMATION 

The Group has adopted IFRS 8 Operating Segments in the current year. The Group is organised into regional business units and a central cost centre. The Group has six reportable operating segments which are separately disclosed together with a central cost centre which includes unallocated corporate costs and expense development costs. Operating segments have been aggregated where the aggregation criteria has been met. More specifically, Asia Pacific includes Australia and Japan, the rest of Europe includes France, Spain and Benelux and North America includes the US and Canada.

Management monitors the operating results of its business units separately for the purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on adjusted profit which is the Group's internal principal measure of profit.  Segment revenue excludes transactions between business segments. Segment adjusted profit as reflected below, includes royalty charges made by the UK segment to: Asia Pacific £1.2m, (2008: £0.9m) and North America £1.8m (2008: £1.2m). Management do not monitor the balance sheets of its business units separately for the purposes of making decisions and therefore segmental assets, additions to non-current assets and segmental liabilities have not been disclosed. Non current assets in the segmental disclosure comprise investments, intangible assets and property, plant and equipment.

The Group's revenues are derived from the following products and services:

- Motor Business Process Outsourcing (BPO) and networks

- Property Business Process Outsourcing (BPO) and networks

- Other Business Process Outsourcing (BPO) and networks

- Software 

Information regarding the Group's six operating segments and its central cost centre is reported below. Amounts reported for the prior year have been restated to conform to the requirements of IFRS 8. During 2009 the Group implemented a transfer pricing process for re-allocating group management costs. This process recharges specific group management costs from the central cost centre to the regional business units. As this process was not in place during the prior year, the group management costs are wholly included within the central cost centre and not re-allocated to the regional business units for the year to 30 September 2008.  Central costs of £1.8m in 2009 have been allocated as follows: UK £0.5m, Germany £0.1m, Rest of Europe £0.1m, South Africa £0.3m, North America £0.7m and Asia Pacific £0.1m.

The Group's revenues are attributed to business units based on customer location. The total external revenue attributable to all countries other than the UK was £116.4m (2008: £102.5m).

Year ended 30 September 2009

	UK	Germany	Rest of Europe	South Africa	North America	Asia Pacific	Central Costs**	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Segment revenue:
Motor BPO & networks ***	14,007	33,885	7,729	24,535	10,834	6,418	-	97,408
Property BPO & networks	9,845	6,329	-	-	1,125	-	-	17,299
Other BPO & networks	1,274	-	-	4,238	4,774	-	-	10,286
Software ***	14,350	-	-	1,807	12,161	2,554	-	30,872
Total external revenue	39,476	40,214	7,729	30,580	28,894	8,972	-	155,865
Segment result:
EBITDA*	6,323	6,106	190	4,995	(1,206)	630	(1,288)	15,750
Depreciation	(449)	(145)	(135)	(671)	(835)	(137)	(1,251)	(3,623)
Net finance income / (costs)	8	42	10	(222)	(46)	15	(69)	(262)
Share of profit of associate	-	-	-	234	-	-	-	234
Amortisation non-acquired intangibles	(714)	(189)	-	-	-	(23)	-	(926)
Utilisation of pre-acquisition brought forward tax losses	-	-	98	-	-	-	-	98
Adjusted profit / (loss)	5,168	5,814	163	4,336	(2,087)	485	(2,608)	11,271
EBITDA %	16%	15%	2%	16%	(4)%	7%	-	10%
Non current assets	52,912	22,067	19,555	2,921	9,497	1,095	-	108,047

* EBITDA is shown before both share based payments costs and exceptional items

**  Central costs include unallocated corporate costs, expense development costs and transfer pricing royalties.

*** Included within Motor BPO & networks and Software are amounts relating to the sale of goods (motor parts and software licences) of £17,403,000 and £10,012,000 respectively. 

Year ended 30 September 2008

	UK	Germany	Rest of Europe	South Africa	North America	Asia Pacific	Central Costs**	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Segment revenue:
Motor BPO & networks ***	8,728	22,947	4,069	29,095	7,109	5,722	-	77,670
Property BPO & networks	13,508	6,012	-	-	1,005	-	-	20,525
Other BPO & networks	1,365	-	-	3,845	4,028	-	-	9,238
Software ***	13,774	-	-	1,299	14,302	3,051	-	32,426
Total external revenue	37,375	28,959	4,069	34,239	26,444	8,773	-	139,859
Segment result:
EBITDA*	4,208	5,557	(2,246)	6,055	(626)	1,515	(2,136)	12,327
Depreciation	(1,060)	(99)	(122)	(510)	(633)	(109)	(446)	(2,979)
Net finance income / (costs)	7	(149)	60	(78)	57	100	(102)	(105)
Share of profit of associate	-	-	-	570	-	-	-	570
Amortisation non-acquired intangibles	(58)	(124)	(1)	-	-	-	(16)	(199)
Utilisation of pre-acquisition brought forward tax losses	451	-	-	-	-	-	-	451
Adjusted profit / (loss)	3,548	5,185	(2,309)	6,037	(1,202)	1,506	(2,700)	10,065
EBITDA %	11%	19%	(55)%	18%	(2)%	17%	-	9%
Non current assets	46,679	38,461	15,870	2,950	8,734	950	-	113,644

* EBITDA is shown before both share based payments costs and exceptional items

**  Central costs include unallocated corporate costs, expense development costs and transfer pricing royalties.

*** Included within Motor BPO & networks and Software are amounts relating to the sale of goods (motor parts and software licences) of £10,880,000 and £6,567,000 respectively. 

3. EXCEPTIONAL COSTS

	2009		2008
	£'000		£'000
Nobilas restructuring costs	-		2,572
Other restructuring costs	2,571		3,028
Poland closure costs	51		646
	2,622		6,246

A global cost reduction programme was undertaken during the last quarter of 2009 in response to the reduced claims volumes experienced by the Group due to external economic factors. The cost shown above are the costs incurred in implementing the cost reduction plan and relate mainly to employee redundancy costs and office closure costs.

In 2008, following the acquisition of Nobilas Claims and Fleet Solutions a restructuring process was undertaken to bring the business in line with the structure, control and processes of the Group. In addition a global restructuring programme was undertaken in September 2008 in order to streamline the business to achieve greater operational and financial efficiencies. The costs in 2008 relate mainly to redundancy costs and a provision for restructuring an off-shore facility in South Africa.

4. TAXATION

	2009		2008
	£'000		£'000
Current tax expense
UK corporation tax	-		(19)
Foreign tax	2,078		3,938
Current tax on income in the year	2,078		3,919
Adjustments in respect of prior years	19		(232)
Total current tax	2,097		3,687
Deferred taxation
Origination and reversal of UK temporary differences	425		(689)
Previously unrecognised tax losses and other temporary differences	(190)		(1,466)
Origination and reversal of temporary differences	(107)		(244)
Total deferred tax charge/(credit)	128		(2,399)
Total income tax in the income statement	2,225		1,288
	2009 £'000		2008 £'000
Reconciliation of total tax charge
Group loss before tax	(19,822)		(3,783)
Income tax using UK corporation tax rate of 28% (2008: 29%)	(5,550)		(1,097)
Tax effects of:
Permanent differences	461		541
Goodwill impairment	6,825		356
Non-taxable income	(388)		(168)
Rate differences on overseas earnings	(547)		(62)
Current year tax losses, no deferred tax recognised	1,769		2,427
Previously unrecognised tax losses and other temporary differences	315		(1,466)
Temporary differences	597		1,181
Utilisation of brought forward tax losses	(2,089)		(1,129)
Adjustments in respect of prior years	41		-
Share based payments	791		705
Total income tax expense	2,225		1,288

5. EARNINGS PER SHARE

	2009		2008
	pence		pence
Basic earnings per share	(3.19)		(1.06)
Adjustment for dilutive potential ordinary shares	-		-
Diluted earnings per share	(3.19)		(1.06)
Basic earnings per share	(3.19)		(1.06)
Adjustments
- amortisation	0.58		0.53
- impairment of assets	3.07		0.19
- exceptional costs	0.40		0.96
- share based payments	0.39		0.39
- utilisation of pre-acquisition brought forward tax losses	0.01		0.07
- tax effect of the above	(0.21)		(0.56)
Adjusted basic earnings per share	1.05		0.52
Adjustment for dilutive potential ordinary shares	(0.02)		(0.01)
Adjusted diluted earnings per share	1.03		0.51
Number of shares (thousand)	2009		2008
Average number of shares in issue used to calculate basic, diluted and  adjusted basic earnings per share	698,659		646,847
Dilutive potential ordinary shares
- add share options	13,506		18,339
Shares used to calculate diluted and adjusted diluted earnings per share	712,165		665,186
Basic and diluted earnings (£'000)	2009		2008
Basic and diluted earnings for the year	(22,308)		(6,831)
- add amortisation	4,074		3,403
- add impairment of assets	21,470		1,228
- add share based payments	2,829		2,520
- exceptional costs	2,622		6,246
- add utilisation of pre-acquisition brought forward tax losses	98		451
- less tax effect of the above	(1,439)		(3,605)
Adjusted and adjusted diluted earnings for the year	7,346		3,412

At 30 September 2009 there were 714,167,456 shares in issue (2008: 650,018,142).

6. DIVIDENDS

	2009 £'000		2008 £'000
Declared and paid during the year
The Innovation Group PLC
Equity dividends on ordinary shares
Final dividend of 0.05p per share for 2008 (2007: 0.3p per share)	325		1,932
Interim dividend of nil pence per share for 2009 (2008: 0.15p per share)	-		975
	325		2,907
Equity dividends on ordinary shares paid to minority shareholders:
Travest Investments (PTY) Limited
Interim dividend for 2009: 45,150 South African Rand per share (2008: 76,000 Rand per share)	126		197
Final dividend for 2009: 69,660 South African Rand per share (2008: 105,545 Rand per share)	194		274
Travel Insurance Consultancy (Pty) Limited
Interim dividend for 2009: 26,250 South African Rand per share (2008: 45,000 Rand per share)	54		86
Final dividend for 2009: 40,500 South African Rand per share (2008: 67,500 Rand per share)	83		128
Netsol Innovation (private) Limited
Final dividend for 2008: 22.435 Pakistan Rupees per share  (2007: nil)	270		-
	727		685

7. TRADE AND OTHER RECEIVABLES

	2009		2008
	£'000		£'000
Trade receivables	36,555		30,309
Other debtors	3,945		2,821
Accrued income	12,188		10,942
	52,688		44,072

8. TRADE AND OTHER PAYABLES

	2009		2008
	£'000		£'000
Current
Trade payables	35,058		27,982
Other payables	21,691		17,418
Accruals	10,417		9,512
Proposed dividend	320		397
Social security and other taxes	4,532		3,371
	72,018		58,680
Non current
Other payables	231		266

9. INTEREST BEARING LOANS AND BORROWINGS

	2009		2008
	£'000		£'000
Current
Bank loans	7,042		7,011
Obligations under finance leases and hire purchase agreements	927		914
	7,969		7,925
Non current
Bank loans	15,877		15,394
Obligations under finance leases and hire purchase agreements	967		733
	16,844		16,127

Statement of Directors' Responsibilities 

The 2009 Annual Report contains a responsibility statement in compliance with DTR4.1.12 signed on behalf of the board by the Company Secretary. This states that on 3 December 2009, the date of approval of the 2009 Annual Report, each of the directors (whose names and functions are listed below) confirms that, to the best of each person's knowledge and belief

the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

the Chairman's Review, Operational and Financial Review and Directors' report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties faced by the Group.

Andrew Roberts	Executive Chairman
Chris Banks	Non-Executive Director
David Thorpe	Non-Executive Director
Kurt Lauk	Non-Executive Director
James Morley	Non-Executive Director
Jane Hall	Group Finance Director and Company Secretary

ENDFR FSEEEDSUSELE

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