28th Sep 2007 07:06
Lombard Risk Management PLC28 September 2007 Lombard Risk Management plc 28 September 2007 Lombard Risk Management plc ('Group' or 'Company') Final Results for the Year Ended 31 March 2007 Lombard Risk Management plc (AIM:LRM), a leading risk management, valuation andregulatory reporting software company, has today announced its results for theyear to 31 March 2007. Commenting on the results, John Wisbey, Chairman andChief Executive said "The year demonstrated considerable forward momentum in ourbusiness, with meaningful new contracts being concluded in all parts of theGroup". The Annual Report will be posted to shareholders before 9 a.m. on Wednesday, 3October 2007. Highlights - Year of significant advancement including: - Strong Revenue Growth owing to contract wins in all parts of the Group - Major growth in the capabilities of the Shanghai operation - Results for the 2007 financial year in line with market expectations - Loss before tax £2.27m (2006: Profit £3.22m including £5.97m gain on ValuSpread disposal) - Turnover up 48% to £6.94m (2006: £4.70m) Enquiries: Lombard Risk Management plc:John Wisbey, Chairman and CEOT: +44 (0)20 7384 5000E: [email protected] Noble & Company Ltd (Nominated Advisor) :Matthew Hall, DirectorTel: +44 (0)20 7763 2200 Summary The year demonstrated considerable forward momentum in our business, withmeaningful new contracts being concluded in all parts of the Group. In additionthe new business won during the period generated an appreciable forward orderbook and deferred revenue, much of which should be recognized in the year ending31 March 2008 ("FY2008"). There was considerable and growing demand for ourColline(R) collateral management software and for our STB-Reporter regulatoryreporting software product, while our Oberon(R) valuation and risk managementproduct also performed well. Revenues at £6.94m grew by 48% against the £4.70m recorded in the previous year.While the Group made an operating loss of £2.34m, it is particularly relevantthat the loss in the core software business (excluding Shanghai start up costsand goodwill amortisation) narrowed to £0.49m. Indeed, had it not been forimplementation delays on two contracts, largely due to regulatory delay, thesoftware business would nearly have broken even. This is a very appreciableturn-round from the previous year. Very good progress has been made with building up our software developmentcapability in Shanghai with corresponding cost savings in the UK. Ourinvestment in Shanghai places us very well to contain development costs goingforward, and to achieve greater cost synergies from acquisitions. We anticipate the past year's strong revenue growth will continue in FY2008,although revenue will be weighted towards the second half of the financial year.STB Systems should enjoy particularly strong growth from regulatory change,especially Basel II. Although costs will rise owing to the pressure to meet ourcustomers' regulatory deadlines, our ability to control costs with the Shanghaioperation makes it highly likely that the software businesses and the Group as awhole will break through to profitability in the second half of FY2008. We continue to explore accretive acquisition opportunities. The disposal of theIndependent Valuation subsidiary is now at an advanced stage, although as withall M & A transactions there is always an element of uncertainty until thetransaction is completed. Financial Revenues at £6.94m grew by 48% against the £4.70m recorded in the previous year. Cash and marketable securities at the end of the period were £0.69m. Lossbefore tax was £2.27m and was made up as follows : Continuing software businesses : (£0.49m) Independent valuation business (being spun out) : (£1.14m) Goodwill amortisation - STB Systems : (£0.19m) Writedown of IDOX investment (sold since year end) : (£0.16m) One off start up costs in Shanghai : (£0.33m) Final proceeds - ValuSpread disposal : £0.04m In line with previous years' accounting policies, all software development and R&D expenditure was expensed in full when incurred. Recurrent revenue has historically been a high proportion of revenues at LombardRisk. We have more than replaced the recurrent revenues lost with the sale ofValuSpread in 2005 with recurrent revenues from STB Systems, with the definitionof such revenue being that we continue to receive it unless we lose thecustomer. Recurrent annual revenues for the Group are running at over £4m. Inaddition, the revenue profile remains well dispersed, with no single client sitelast year accounting for more than 6% of total revenue. Valuation and Risk Management Software Products Oberon, the trading and risk management system, saw three significant contractwins in the period and remained our most profitable product. Oberon continuesto provide capital to support the development of other products. Work hascontinued to make Oberon a very open system using our OBI utility, and this workis now being carried out largely in our Shanghai operation. Functionally theproduct set has made good progress with new pricing models and support foradditional instruments such as inflation derivatives and equity variance swaps. Colline, our software for collateral management, enjoyed a very promising yearwith ten contract wins, some of them on a recurring revenue model rather than alicence model. We are hopeful that this trend will continue aided by the creditcrunch in financial markets, although the sales of Colline in the first fewmonths of the FY2008 financial year have been below our expectations. We haverecorded exceptionally high customer satisfaction levels from our Collineclients. Bank of New York, Northern Trust and LaCrosse Global Fund Services,part of the Cargill group, are among the North American names we have won.Raiffeisenbank in Austria, Landwirtschaftliche Rentenbank in Germany and BritishGas Trading Ltd (part of Centrica plc) are among the European names. We nowhave good client reference sites in our chosen target markets of banking, assetmanagement firms, hedge funds and energy companies. An ASP service for Collinehas also successfully gone live with three clients now using the service.Drivers for Colline's growth include the need for many entities to free upcredit lines and reduction of economic capital. We obtained a rating for theproduct in Risk Magazine for the second year. Regulatory and Compliance Software Products The Group's regulatory and compliance software business, STB Systems, hascontinued to make good progress with a growing pipeline ahead of the Basel IIregulatory changes and important contract wins in other countries. Somesignificant contracts were signed with banks for UK and non-UK regulatoryreporting, while UK regulatory changes gave us good opportunities in the UK withnew deals signed with several securities firms. Basel II is the most importantdriver for our growth in this area over the next year, with many existingclients needing upgrades. STB Systems has good penetration of the UK banking market with approximately 150of 350 banks in the UK using the STB-Reporter product for regulatory reportingto the FSA. We believe that the high average level of customer satisfactionoffers an excellent opportunity for the Group to expand its business with manyof these clients. The Group's ability to offer global solutions has been greatly enhanced throughit now having regulatory offerings available or under production for severalEMEA and Asian countries as well as the United States. In addition, the AMLproduct STB-Detector has seen good revenue growth in several countries, butparticularly in the United States. Outside the UK, the STB Systems subsidiarieshave all been re-named as Lombard Risk International. The STB product brandingis being retained. In this way the profile of Lombard Risk is raised withoutlosing the worldwide reputation of the STB name. Independent Valuation and Risk Services The Group's Independent Valuation business, which from 2005 has operated as aseparate subsidiary, is progressing well with a significant contract with alarge international banking group, as well as other clients especially in thefield of structured credit valuations. There are a number of other goodopportunities in prospect. The Board believes there is a clear and importantopportunity, in conjunction with partners, to position this business to providean industry solution for independent valuations. This transition will require ahigh level of additional investment and the Board believes it is prudent andappropriate that the Independent Valuation subsidiary attracts third partyinvestors to assist with the funding of this further expansion rather than forthe Group itself to fund all that investment. A number of interested partieswere identified, and the Group is now at an advanced stage of discussions withone of these. Personnel The last year has seen a significant build up in our Shanghai operation, with aheadcount there now of around 45. We have been very pleased with the quality ofthe people that we have recruited so far. Although costs rose in the first halfof the year owing to the establishment of our Shanghai operation and an initialduplication of costs between London and Shanghai, it has been possible to makesome consequent reductions in costs in London, and the outlook for costs is nowa very favourable one of cost containment as a progressive migration of softwaredevelopment and other functions to Shanghai takes place. Investments Lombard Risk disposed in May 2007 of its remaining £0.4m stake in its formersubsidiary IDOX plc. Over time that investment has realized over £4m forLombard Risk based on a total investment of £1.1m. The residual stake had ahigher book value than the disposal amount, and we decided to make anappropriate write-down of £0.16m in the accounts, so that there will be nofurther P&L effect in the FY2008 accounts. Prospects The Board believes that the high level of recurrent revenues of the businessoverall and the product positioning of Lombard Risk provides a strong foundationfor growth of the Group's software revenues. The Board is especially optimisticabout the prospects for STB-Reporter in the period of Basel II. The Board isconfident that market demand in our focus areas of regulation, collateralmanagement, derivatives and compliance will continue to grow. Moreover if thecurrent liquidity crisis in the banking sector does affect technology spending,the Board believes that the core growth areas of regulatory reporting andcollateral management software are unlikely to be adversely affected; indeed wehave seen a pick up in enquiries about collateral management since the beginningof the sub-prime crisis. Backed up by the fast revenue growth experienced inFY2007 including deals done for which much of the revenue has not yet beenrecognized, and the very significant opportunity with existing clients fromBasel II, the Board is very positive on revenue growth and profitability for thesecond half of FY2008 and over the next few years - subject to the Board'snormal caveat that there will inevitably be some volatility of earnings arisingfrom the exact timing of the Group's larger software licence deals. The Shanghai operation should allow revenues to grow much faster than costs fromnow on. The Board believes that Shanghai's re-emergence as a major financialcentre also presents Lombard Risk with significant local revenue opportunitiesover coming years in addition to the cost benefits of offshore development. Theability to develop software efficiently and at a reasonable cost in Shanghaiwill also allow us to achieve greater cost synergies from future acquisitionsthan would otherwise have been the case. I would like to thank all my colleagues, as well as our advisors, for their hardwork and support. John Wisbey Chairman & CEO 2007 2006 Note £ £ Turnover 2 6,942,181 4,701,573External charges (118,014) (102,379)Gross profit 6,824,167 4,599,194 Staff costs 3 (6,289,967) (5,135,015)Other operating charges (2,872,359) (2,218,190) (9,162,326) (7,353,205)Operating loss - Before exceptional items and goodwill amortisation (1,986,349) (2,624,028) - Goodwill amortisation (187,664) (108,514) - Revaluation of current asset investment (164,146) - - Exceptional staff costs 3 - (21,469) - Total operating loss 4 (2,338,159) (2,754,011) Profit on disposal of business 44,800 5,971,447Dividend received from current asset investment 2,797 -Interest receivable 5 26,007 43,296Interest (payable) 6 (2,346) (38,114)(Loss) / profit on ordinary activities before taxation (2,266,901) 3,222,618 Tax on (loss) / profit on ordinary activities 7 (2,790) - (Loss) / profit for the year transferred (from) / to reserves 22 (2,269,691) 3,222,618 (Loss) / earnings per shareBasic (pence) 9 (1.71) 2.60Diluted (pence) 9 (1.71) 2.50 All operations are continuing. The accompanying accounting policies and notes form an integral part of theseaccounts. 2007 2006 Note £ £ Fixed assetsIntangible assets 10 3,445,016 3,712,680Tangible assets 11 237,380 344,387 3,682,396 4,057,067 Current assetsDebtors due within one year 15 1,313,979 1,126,024Debtors due after one year 16 132,445 77,898Investment 13 407,212 571,358Cash at bank and in hand 26 284,328 1,723,035 2,137,964 3,498,315 Creditors: amounts falling due within one year 17 (1,145,931) (1,650,331) Net current assets 992,033 1,847,984 Total assets less current liabilities 4,674,429 5,905,051 Creditors: amounts falling due after one year 18 - (24,686) Accruals and deferred income 19 (2,903,075) (2,302,390) Net assets 1,771,354 3,577,975 Capital and reservesCalled up share capital 21 1,103,510 1,082,510Share premium account 22 2,415,110 2,415,110Revaluation reserve 22 - 170,957Other reserves 22 1,593,099 1,151,029Profit and loss account 22 (3,340,365) (1,241,631) Shareholders' funds 23 1,771,354 3,577,975 The financial statements were approved by the board on 27th September 2007 andsigned on its behalf by: John Wisbey Chairman & CEO The accompanying accounting policies and notes form an integral part of theseaccounts. 2007 2006 Note £ £ Fixed assetsTangible assets 11 156,742 326,564Investments in subsidiaries 12 11,911,165 9,814,334 12,067,907 10,140,898 Current assetsDebtors due within one year 15 3,250,741 126,509Debtors due after one year 16 1,354 -Investment 13 407,212 571,358Cash at bank and in hand 3,906 117,137 3,663,213 815,004 Creditors: Amounts falling due within one year 17 (6,478,946) (673,833) Net current liabilities (2,815,733) 141,171 Total assets less current liabilities 9,252,174 10,282,069 Creditors: amounts falling due after one year 18 - (24,686) Accruals and deferred income 19 (102,493) (146,829) Net assets 9,149,681 10,110,554 Capital and reservesCalled up share capital 21 1,103,510 1,082,510Share premium 22 2,415,110 2,415,110Revaluation reserve 22 - 170,957Other reserves 22 7,113,315 6,944,543Profit and loss account 22 (1,482,254) (502,566) Shareholders' funds 9,149,681 10,110,554 The financial statements were approved by the board on 27th September 2007 andsigned on its behalf by: John Wisbey Chairman & CEO The accompanying accounting policies and notes form an integral part of theseaccounts. 2007 2006 Note £ £ Net cash outflow from operating activities 24 (1,315,491) (2,580,974) Returns on investments & servicing of financeInterest received 26,007 43,296Interest paid (2,346) (35,976)Finance lease interest - (2,138)Dividend received 2,797 -Net cash inflow from returns on investments and servicing of finance 26,458 5,182 Acquisitions and disposalsPurchase of subsidiary - (1,382,033)Net cash balances acquired within purchased subsidiary - 31,002Disposal of ValuSpread business 14 79,044 5,596,554Net cash inflow from acquisitions and disposals 79,044 4,245,523 Capital expenditure & financial investmentPayments to acquire tangible fixed assets 11 (191,839) (259,604)Net cash outflow from capital expenditure and financial investment (191,839) (259,604) FinancingCapital element of finance leases (36,879) (14,511)Net cash outflow from financing (36,879) (14,511) (Decrease) / increase in cash 25 (1,438,707) 1,395,616 2007 2006 £ £(Loss) / profit for the year (2,269,691) 3,222,618Currency differences on foreign currency net investments (4,196) (38,286) Total (losses) / profits recognised since last financial statements (2,273,887) 3,184,332 1 ACCOUNTING POLICIES (a) Basis of preparation The financial statements have been prepared in accordance with applicable UnitedKingdom accounting standards and under the historical cost convention except forthe valuation of investments held as current assets. The principal accounting policies of the Group are set out below and haveremained unchanged from the previous period, except for the adoption of FRS20(see notes 3 and 27). (b) Going concern The Accounts have, as in previous years, been prepared on a Going Concern basis.The Directors have formally considered this issue in the light of the operatinglosses and operating cash outflows in the period. The Directors have reviewed forecasts and are satisfied that the Group willcontinue to operate within its available facilities (see note 33). The directorshave taken into account the level and quality of billings achieved by STBSystems from August 2007 onwards reflecting, in part, the major changes inbanking regulations known as Basel II. The Directors expect that this level ofbillings by STB Systems will continue at comparable levels until at least themiddle of 2008, with resultant net cash inflows during the next 12 months. TheGroup has announced previously that it intends to spin out one of itsbusinesses, and this process is now at an advanced stage. While there isinevitable uncertainty about the final outcome of any M&A transaction until itis completed, the Directors are also satisfied that the Group will have accessto sufficient funding should that disposal not take place as contemplated. (c) Basis of consolidation The Group accounts consolidate the financial statements of the Company and itssubsidiary undertakings (see Note 12). (d) Turnover Turnover represents the invoiced amount of goods sold and services providedduring the year, stated net of Value Added Tax. Turnover and pre-tax profit arewholly attributable to the principal activities. The recognition of revenue depends on the type of income. Licence income For long term projects which do notinclude the up-front delivery of immediately usable software, revenue isrecognised on both the consultancy and initial licence elements in line with theestimated percentage of completion of the project. That part of licence andmaintenance revenue invoiced simultaneously with the initial licence butconsidered to relate to the period when the licence is deemed to be live isdeferred in its entirety until the live date, following which it is released toprofit in equal daily instalments over the duration of the relevant licence ormaintenance. For other projects which do include the up-front delivery ofimmediately usable software, revenue is recognised in accordance with theinvoicing schedule. For non-refundable licences of over one years durationrevenue is recognised at invoicing date, for those licences under 1 year revenueis recognised immediately. Customisation income Recognised once the customisation has takenplace. Maintenance income Recognised evenly over the term of themaintenance contract. Rental income Recognised evenly over the term of therental contract. Data subscription income Recognised evenly over the term of the datacontract. Training income Recognised when the relevant courses arerun. (e) Depreciation Depreciation is provided using the following rates and bases so as to write offthe cost or valuation of tangible fixed assets over their useful lives in theGroup's business: - Computer software 50% to 100% straight lineComputer hardware 50% straight lineFixtures, fittings and equipment 25% straight line (f) Goodwill Purchased goodwill representing the excess of the fair value of theconsideration given over the fair values of identifiable net assets acquired, iscapitalised and amortised on a straight line basis over a period of 20 years.The depreciation period of 20 years is based on the fact that the acquisitionshave provided the Group with a market position in the regulatory and complianceindustry which is expected to be capable of exploitation for more than 20 years. Goodwill is reviewed for impairment at the end of the first full financialyear after acquisition and in other periods if events or changes incircumstances indicate that carrying values may not be recoverable. (g) Valuation of investments Investments held as current assets are stated at cost or directors' valuationless any provision for a permanent diminution in value. (h) Foreign exchange Company: Transactions in foreign currencies are recorded at the rate ruling atthe date of the transaction. Monetary assets and liabilities denominated inforeign currencies are retranslated at the rate of exchange ruling at thebalance sheet date. All differences are taken to the profit and loss account.Group: The assets and liabilities of the subsidiary undertakings are translatedat the rate of exchange ruling at the balance sheet date. The profit and lossaccount is translated at the average rate of exchange. The exchange differencesarising on the retranslation of subsidiary undertakings are, together withdifferences arising on the translation of long term intra-group funding loanswhich are not intended to be repaid in the foreseeable future, taken directly toreserves. All other differences are taken to the profit and loss account. (i) Deferred taxation Deferred tax is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents that result in an obligation to pay more, or a right to pay less, tax inthe future have occurred at the balance sheet date. Deferred tax assets arerecognised when it is more likely than not that they will be recovered.Deferred tax is measured using rates of tax that have been enacted orsubstantively enacted by the balance sheet date. (j) Leased assets Assets held under finance leases and hire purchase contracts are capitalised inthe balance sheet and depreciated over their estimated useful economic lives.The interest element of leasing payments represents a constant proportion of thecapital balance outstanding and is charged to the profit and loss account overthe period of the lease. All other leases are regarded as operating leases andthe payments made under them are charged to the profit and loss account on astraight line basis over the lease term. (k) Basis of consolidation The consolidated financial statements include the financial statements of theCompany and its subsidiary undertakings made up to 31 March. The acquisitionmethod of accounting has been adopted. Under this method, the results ofsubsidiary undertakings acquired or disposed of in the year are included in theconsolidated profit & loss account from the date of acquisition or up to thedate of disposal. All of the subsidiary's assets and liabilities existing atthe date of acquisition are recorded at their fair values reflecting theircondition at that date. Profits or losses on intra-group transactions areeliminated in full. Goodwill arising on consolidation was written off toreserves prior to 1 April 1999. Goodwill arising after this date is capitalisedand amortised over its useful economic life. (l) Pension costs The Group operates a number of defined contribution pension schemes. The assetsof the schemes are held separately from those of the Group in independentlyadministered funds. The amount charged to the profit and loss accountrepresents the contributions payable to the schemes in respect of the accountingperiod. (m) Research and development Research and development expenditure is charged to the profit and loss accountin the year in which it is incurred. (n) Share options issued to employees The charge to profit and loss account (and the corresponding credit to reserves)arising under FRS20 is spread over the period during which share options vest.The charge is calculated using a binomial model and takes into account estimatesof the volatility of the underlying shares and of staff turnover. 2 SEGMENTAL ANALYSIS Turnover is derived solely from the sale of software and associated services tothe finance and banking sector. Analysis of turnover by geographical destination 2007 2006 £ £ United Kingdom 3,030,738 1,831,057Rest of Europe, Middle East and Africa 1,212,148 1,122,433The Americas 1,719,446 1,286,385Asia Pacific 979,849 461,698 6,942,181 4,701,573 3 DIRECTORS AND EMPLOYEES 2007 2006 £ £Directors:Emoluments 540,805 564,763Pension costs 7,560 1,260 548,365 566,023 Highest paid director:Aggregate emoluments 178,500 289,113 Michael Thomas is the only director accruing benefits under a money purchasepension scheme. There were no pension contributions made in respect of thehighest paid director. See summary of emoluments within the Directors' Report. The Group The Company 2007 2006 2007 2006 £ £ £ £Staff costs including directors:Wages and salaries 5,375,002 4,537,341 630,096 425,111Social security costs 753,369 504,705 129,265 45,497Pension costs 114,330 71,500 4,740 228Share based payments charge (note 27) 47,266 - 47,266Total staff costs - ongoing 6,289,967 5,113,546 811,367 470,836Exceptional staff costs - 21,469 - - 6,289,967 5,135,015 811,367 470,836 The average monthly number of employees(excluding directors) during the yearwas: 2007 2006 2007 2006 Number Number Number NumberOffice and administration 14 12 8 6Operational 85 67 - - 99 79 8 6 4 OPERATING LOSS 2007 2006 £ £This is stated after charging / (crediting):Depreciation - Finance lease 104 12,343 - Other 299,385 217,432Amortisation 187,664 108,514Auditors' remuneration - Audit 27,458 40,144 - Tax services 37,316 14,200 - Other* 50,036 79,925Foreign exchange 88,045 (27,696)Operating leases - land and buildings 439,889 508,101 * Other services include the fees for the audits of subsidiary undertakings anddue diligence during corporate activity. An amount of £29,535 was paid inrespect of the acquisition of STB Systems Ltd and was capitalised in the year to31 March 2006. 5 INTEREST RECEIVABLE 2007 2006 £ £Interest on bank deposits 8,858 42,077Other interest receivable 17,149 1,219 26,007 43,296 6 INTEREST PAYABLE 2007 2006 £ £Bank loans and overdrafts repayable in less than 5 years 48 1,917Other interest payable 2,298 36,197 2,346 38,114 Other interest includes £Nil (2006: £20,473) payable in the year to 31 March2007 in respect of exceptional costs (see note 14). 7 TAX ON PROFIT / (LOSS) ON ORDINARY ACTIVITIES The £2,790 tax charge for the year (2006: £Nil) arises because of overseassubsidiaries' corporation tax charge. The Group has received to date R&D tax credits of £570,008 relating to financialyears ended 31 March 2002 and 2003. As for all companies that have receivedthese credits, the amounts are subject to potential future HM Revenue & Customsclawback. During the year ended 31 March 2007 no tax losses (2006: £2,120,986)were surrendered in exchange for the research and development tax credit. The tax assessed for the period is the standard rate of corporation tax in theUK of 30% (2006: 30%). The differences are explained as follows: 2007 2006 £ £(Loss) / profit on ordinary activities before tax (2,266,901) 3,222,618 (Loss) / profit on ordinary activities multiplied by standard rate of corporation tax (680,070) 966,785in the UK of 30% Effect of:Capital allowances for the period in excess of depreciation 33,413 (6,928)Other short term timing differences - 6,245Increase / (utilisation) of tax losses 597,147 (1,003,222)Expenses not deductible for tax purposes 53,510 37,120Effect of overseas tax rate differences (1,210) -Current tax charge for the period 2,790 - The directors have not recognised the deferred tax amount of £1,746,127 (2006:£1,448,173) arising primarily on trading losses carried forward. 8 LOSS FOR THE FINANCIAL YEAR The parent Company has taken advantage of Section 230 of the Companies Act 1985and has not included its own profit and loss account in these financialstatements. The parent Company's loss for the year was £1,150,645 (2006: profit£1,253,647). 9 (LOSS) / EARNINGS PER SHARE The earnings per ordinary share is calculated by reference to the profitattributable to ordinary shareholders divided by the weighted average number ofshares in issue during each period, as follows: 2007 2006(Loss) / profit for the year (£2,269,691) £3,222,618 Weighted average number of ordinary shares in issue 132,675,884 123,840,622(Loss) / earnings per share - basic (pence) (1.71) 2.60 Dilutive effect of share options and deferred contingent earn-out shares - 5,000,000Diluted weighted average number of ordinary shares 132,675,884 128,840,622(loss) / earnings per share - diluted (pence) (1.71) 2.50 There is no dilutive effect of share options in either 2007 or 2006 as theaverage price of the Company's shares was below the strike price of the optionsin issue (see note 21). The dilution in 2006 relates to the deferredconsideration for the acquisition of STB Systems Ltd (see notes 21). 10 INTANGIBLE FIXED ASSETS Purchased GoodwillThe Group £CostAt 1 April 2006 3,821,194Adjustment in respect of final consideration for STB Systems group (see note 12) (80,000)At 31 March 2007 3,741,194 AmortisationAt 1 April 2006 108,514Provided in the year 187,664At 31 March 2007 296,178 NBV at 31 March 2007 3,445,016NBV at 31 March 2006 3,712,680 11 TANGIBLE FIXED ASSETS Computer Software Fixtures, Total hardware fittings and equipmentThe Group £ £ £ £Cost at 1 April 2006 726,711 402,971 431,982 1,561,664Additions 134,561 29,550 27,728 191,839Adjustment of acquired assets, previously reported net 79,544 - 48,390 127,934Disposals (148,173) (212,742) - (360,915)Foreign exchange effect (1,281) - 4,434 3,153At 31 March 2007 791,362 219,779 512,534 1,523,675 Depreciation at 1 April 2006 536,008 356,209 325,060 1,217,277Adjustment of acquired assets, previously reported net 79,544 - 48,390 127,934Charge 188,722 61,851 48,916 299,489Disposals (148,173) (212,742) - (360,915)Foreign exchange effect (2,344) - 4,854 2,510At 31 March 2007 653,757 205,318 427,220 1,286,295 NBV at 31 March 2007 137,605 14,461 85,314 237,380NBV at 31 March 2006 190,703 46,762 106,922 344,387 Computer Software Fixtures, Total hardware fittings and equipmentThe Company £ £ £ £Cost at 1 April 2006 703,126 402,971 415,764 1,521,861Additions 115,426 29,550 24,327 169,303Disposals (121,861) (212,742) (340) (334,943)Transfers to subsidiary (66,645) (5,534) (27,430) (99,609)At 31 March 2007 630,046 214,245 412,321 1,256,612 Depreciation at 1 April 2006 520,220 356,209 318,868 1,195,297Charge 175,172 61,851 41,340 278,363Disposals (121,861) (212,742) (340) (334,943)Transfers to subsidiary (28,634) (3,404) (6,809) (38,847)At 31 March 2007 544,897 201,914 353,059 1,099,870 NBV at 31 March 2007 85,149 12,331 59,262 156,742NBV at 31 March 2006 182,906 46,762 96,896 326,564 12 INVESTMENTS IN SUBSIDIARIESThe Company 2007 2006Investments in subsidiaries £ £Opening balance at 1 April 9,814,334 7,000,000Acquisition of subsidiary - 3,014,334New investment in subsidiaries 2,176,831 -Write down in value of investment - (200,000)Adjustment in respect of final consideration for STB Systems group (see note 21) (80,000) -Closing balance at 31 March 11,911,165 9,814,334 At 31 March 2007 the undertakings in which the Group held more than 20% of theallotted share capital were as follows: Proportion of ordinary share capital held By Parent (%) By Group (%) Country of Business incorporationLombard Risk Systems Ltd 100 100 UK SoftwareSTB Systems Ltd 100 100 UK SoftwareLombard Risk International Ltd - 100 China SoftwareIndependent Valuation and Risk Services Ltd 100 100 UK ValuationLombard Risk Systems Inc. - 100 USA SoftwareLombard Risk International (USA) Inc, - 100 USA Software formerly STB Systems Inc.Lombard Risk International (Hong Kong) Ltd, - 100 Hong Kong Software formerly STB Systems (Asia Pacific) LtdLombard Risk International (Singapore) Ltd, - 100 Singapore Software formerly STB Systems Solutions Pte LtdLombard Risk Consultants Ltd 100 100 UK TrainingLombard Risk Systems (Pty) Ltd - 100 South Africa DormantLombard Risk Systems (Asia Pacific) Ltd - 100 Hong Kong DormantSwapval Ltd 100 100 UK Dormant All of the subsidiary undertakings have been included in the consolidation. The consideration in deferred contingent earn-out shares was dependent on thedirectors of STB Systems Ltd meeting revenue and profit targets during theperiods from 1 June 2005 to both 30 September 2005 and 31 March 2006 and wassubject to a maximum payout of £1,000,000 in ordinary shares in the Company.The first earn out consideration was met and a total of £500,000 was paid inshares. Of the remaining £500,000, shares to the value of £420,000 were issuedin September 2006 (see note 21) and the balance of £80,000 was released,resulting in a corresponding adjustment to the goodwill figure as shown above.The results of STB Systems Ltd have been consolidated with effect from 1September 2005. The Company's investment in its subsidiaries was valued by the directors duringthe year ended 31 March 2006 and a write down of £200,000 was agreed. Thehistorical cost of the relevant subsidiaries is £3,522,199. The directorsexpect the group to return to profitability. 13 INVESTMENT 2007 2006The Company and Group £ £Current asset investment 407,212 571,358 The current asset investment relates to the Company's shareholding in IDOX plc,an AIM listed UK company. The stock exchange value of the holding at 31 March2007 was £448,000 (2006: £731,002). The value recorded at 31 March 2007represents the net sale proceeds received when this investment was sold in May2007. The difference between the previous book value and the net salesproceeds, £164,146, is shown in the 2007 profit and loss account under therubric 'revaluation of current asset investment'. 14 DISPOSAL OF VALUSPREAD Following the disposal of the ValuSpread business to Fitch Ratings Ltd on 26August 2005, as per the terms of the agreement, £278,044 of the outstandingbalance was paid during October 2005, with a final payment of £79,044 paid inApril 2006. 15 DEBTORS DUE WITHIN ONE YEAR The Group The Company 2007 2006 2007 2006 £ £ £ £Trade debtors 1,107,034 789,470 - -Other debtors 167,363 151,450 3,187,401 78,395Prepayments and accrued income 39,582 185,104 63,340 48,114 1,313,979 1,126,024 3,250,741 126,509 16 DEBTORS DUE AFTER ONE YEAR The Group The Company 2007 2006 2007 2006 £ £ £ £Other debtors 132,445 77,898 1,354 - 17 CREDITORS DUE WITHIN ONE YEAR The Group The Company 2007 2006 2007 2006 £ £ £ £Trade creditors 290,675 267,424 159,616 137,685Other taxes and social security costs 347,747 277,495 (10,978) -Other creditors 457,509 1,093,219 6,280,308 536,148Shareholder loan (see note 31) 50,000 - 50,000 -Finance lease - 12,193 - - 1,145,931 1,650,331 6,478,946 673,833 18 CREDITORS DUE AFTER ONE YEAR The Group The Company 2007 2006 2007 2006 £ £ £ £Finance lease - 24,686 - 24,686 19 ACCRUALS AND DEFERRED INCOME The Group The Company 2007 2006 2007 2006 £ £ £ £Accruals 393,862 302,394 102,493 146,829Deferred Income 2,509,213 1,999,996 - - 2,903,075 2,302,390 102,493 146,829 20 FINANCIAL RISK MANAGEMENT The Group's multi-national operations expose it to financial risks that includemarket risk, credit risk, operational risk and liquidity risk. The directorsreview and agree policies for managing each of these risks and they aresummarised below. These policies have remained unchanged from previous years. Market risk Market risk for the Group encompasses all those market risk factors that impactthe value of the Group's assets and liabilities and the expected value in basecurrency of the Group's revenues and costs. The main risk factors are pricerisk on financial assets including equities, currency risk, inflation risk, andinterest rate risk. The company's policies for managing these are as follows: i) Price risk on financial assets Where the Group owns quoted investments, their price may go up or down. Suchmovements may be due either to specific issues affecting the investment ormovements in the stock market as a whole or in the stock market sector relevantto the investment. Movements in the market as a whole could be hedged by equityderivatives such as index futures or options or CFDs . Since equity investmentis not a large activity for the Group, no use has been made of equityderivatives. In future years the Group will, under IFRS, need to review the value of acquiredassets annually for any impairment in value as there is no longer an annualamortisation charge. While the most likely source of such impairment is thecommercial performance of acquired businesses, there is also a risk that thevaluation of businesses as a whole may have been adversely affected by changesin valuation of comparable businesses, and that impairment could result fromsuch overall market change rather than from underperformance by the acquiredbusiness. The Group does not intend to attempt any hedging of changes in marketvaluations as the Board believes that shareholders investing in the Company doso intending to take this type of risk. ii) Currency risk The Group is exposed to translational and transactional foreign exchange risk.Overall the firm has receivables in US Dollars and in Euros in excess of itspayables in those currencies, and has payables in Chinese Yuan, Hong KongDollars and Singapore Dollars in excess of its revenues in those currencies.Although through its own software the Group has access to sophisticated modelsfor the management of foreign exchange risk, there has been no use of foreignexchange derivatives to manage this position on the basis that historically theoverall effect on the group's P&L has not been large enough to warrant thisactivity. In relation to translation risk, as far as possible the assets heldin the foreign currency are matched to expenses in the same currency. iii) Inflation risk The Group has exposure to the inflationary effect of operating in countries inwhich it operates, offset by its ability to raise prices in those countries inwhich it sells. The Group's cost base is mainly exposed to the inflation ratesand changes in payroll taxes in the United Kingdom, the United States and China.The inflation rate for salaries in specialized parts of the financial sectorin a financial centre such as London, New York or Shanghai is often differentfrom the relevant country's overall rate of wage inflation. Most of the Group'ssoftware contracts give the Group the ability to raise prices on a formulalinked to the inflation rate of the currency of the contract. No specifichedging of inflation risk has been carried out. iv) Interest rate risk Interest rate risk arises primarily on the investment of the Group's cashbalances or on its borrowings and to a much lesser extent the present value ofthe Group's receivables. The Group finances its operations through a mixture ofretained cash reserves, and floating rate loans. When the Group is a netdepositor of funds, the Group stands to gain if interest rates rise and to loseif interest rates fall, ignoring any possible positive or negative correlationeffects with business demand for the firm's products or inflationary pressureson the firm's cost base that might arise from changes in interest rates. Whenthe Group is a net borrower of funds, the opposite is the case. Althoughthrough its own Oberon software the Group has access to sophisticated models forthe management of interest rate risk, there has been no use of interest ratederivatives to manage this position on the basis that the amounts are not largeenough to warrant this activity. The policy of the Group is to monitor exposureto interest rate risk and take into account potential movements in interestrates as well as liquidity considerations when selecting methods of financing. Credit risk Most of the Group's business is with banks, asset management firms and otherhigh quality companies, and the Group's bad debt experience over 15 years hasbeen negligible. The Group consequently has not considered taking out creditinsurance and is not likely to do so in the foreseeable future. Deposits areplaced with high quality banks. Although through its own Firmament software the Group has access tosophisticated models for the management of credit spreads and creditderivatives, there has been no use of credit derivatives to mitigatecounterparty risk, and no such use is contemplated. Operational risk The Group has numerous operational risks, ranging from control over bankaccounts to its processes for delivering and supporting software to a requiredlevel of quality and on a timely basis, and retention and recruitment of keypersonnel. A key risk, as for any company, is the reputation risk that mightarise from poor execution or non delivery or late delivery of a high profileproject or breach of client confidentiality for sensitive data. Further risksmay arise where late delivery of software or untimely delivery of relatedservices causes a client to miss regulatory deadlines. There are times, forexample during the current Basel 2 regulatory changes, where such risks can behigher than others. A detailed operational risk review is outside the scope ofthis report, but the Board attaches importance to maintaining appropriateinternal controls to identify and limit these risks. Liquidity risk The Group seeks to manage financial risk by ensuring that sufficient liquidityis available to meet foreseeable needs and by investing cash assets safely aswell as profitably. At 31 March 2007 the Group had no financial liabilitiesother than short term creditors and accruals. Some adjustments have been madeto the Group's processes as a result of the opening of the Shanghai operationsince China remains a country with exchange controls, meaning that liquiditycannot be redeployed as quickly there as in other countries in which the Groupoperates. 21 SHARE CAPITAL 2007 2006 £ £Authorised714,034,085 ordinary shares of 0.5p each 3,570,170 3,570,170 Allotted, called up and fully paid134,735,610 ordinary shares of 0.5p each (2006: 130,535,610) 673,679 652,679429,829,575 deferred shares of 0.1p each 429,831 429,831 1,103,510 1,082,510 The deferred shares carry no rights to receive dividends or to participate inany profits of the Company. The shareholders are not entitled to attend anymeetings of the Company or have any rights to participate in any return ofcapital (except on a winding up). The deferred shares are not transferableother than with the consent of all the Directors of the Company. Movements in issued share capital in the year On 26 September 2006, a total of 4,200,000 new ordinary 0.5p shares were issuedto the vendors of STB Systems Limited, as the final tranche of earn-outconsideration in respect of the acquisition of STB Systems Limited. Thedifference between the final total consideration £420,000 and the relevantshares' nominal value of £21,000, £399,000, has been credited to the mergerreserve. The new ordinary shares rank pari passu with the existing ordinaryshares of the Company and represented 3.22 per cent of the enlarged issued sharecapital of the Company at that time. The new shares started trading on 26September 2006 on the AIM Market of the London Stock Exchange. Share Options As at 24 April 2006 and 1 December 2006 4,540,000 new share options at a strikeprice of 9p each were issued under the Company's 2004 EMI scheme to Groupemployees. Additionally as at 24 April 2006, 955,555 options were issued underthe 2004 unapproved scheme at the same strike price and a further 444,445options were issued under this scheme at a strike price of 11p. See note 27 forthe charge under FRS20 relating to these options. Granted Exercised Lapsed At end Exercise Exercise Exercise during year of year price (p) date from date toAt start of year1997 Revenue Approved Share Option Scheme36,504 - - (36,504) - 26.92 May-04 May-06282,048 - - (282,048) - 26.92 Jul-04 Jul-0626,052 - - (26,052) - 26.92 Feb-05 Feb-07180,492 - - (24,180) 156,312 26.92 Jun-05 Jun-0726,052 - - (26,052) - 26.92 Aug-05 Aug-07 1997 Unapproved Share Option Scheme118,326 - - (118,326) - 26.92 Jan-05 Jan-07295,308 - - (295,308) - 26.92 Jan-05 Jan-07156,000 - - - 156,000 26.92 Aug-05 Aug-07 2004 EMI Scheme -4,706,110 - - (1,500,000) 3,206,110 9.00 Mar-06 Mar-112,111,112 - - - 2,111,112 11.00 Mar-06 Mar-11- 2,520,000 - 2,520,000 9.00 Apr-08 Apr-13- 2,020,000 - (40,000) 1,980,000 9.00 Dec-08 Dec-13 2004 Unapproved Scheme -1,720,555 - - - 1,720,555 9.00 Dec-06 Dec-111,722,223 - - - 1,722,223 11.00 Dec-06 Dec-11- 955,555 - (20,000) 935,555 9.00 Apr-08 Apr-13- 444,445 - - 444,445 11.00 Apr-08 Apr-1311,380,782 5,940,000 - (2,368,470) 14,952,312 22 MOVEMENT IN RESERVES Share premium Revaluation Other Profit and reserve reserves lossThe Group £ £ £ £As at 1 April 2006 2,415,110 170,957 1,151,029 (1,241,631)Loss for the year - - - (2,269,691)Premium on 4,200,000 new ordinary shares (see note 21) - - 399,000 -Transfer on impairment of current asset investment - (170,957) - 170,957Share based payment charge (see note 27) - - 47,266 -Other reserves arising from foreign exchange movements - - (4,196) -As at 31 March 2007 2,415,110 - 1,593,099 (3,340,365) Other reserves relate to negative goodwill arising on the acquisition of subsidiary undertakings prior to 1 April1997, merger reserves and net foreign exchange movements in connection with overseas subsidiaries. Share premium Revaluation Other Profit and reserve reserves lossThe Company £ £ £ £As at 1 April 2006 2,415,110 170,957 6,944,543 (502,566)Loss for the year - - - (1,150,645)Premium on 4,200,000 new ordinary shares (see note 21) - - 399,000 -Transfer on impairment of current asset investment - (170,957) - 170,957Share based payment charge (see note 27) - - 47,266 -Foreign exchange reserve - - (277,494) -As at 31 March 2007 2,415,110 - 7,113,315 (1,482,254) Other reserves relate to valuation of subsidiary undertakings acquired prior to 1 April 1997, merger reserves andexchange differences on loans to fund overseas subsidiaries. 23 RECONCILIATION OF MOVEMENT IN CONSOLIDATED SHAREHOLDERS' FUNDS / (DEFICIT) 2007 2006 £ £(Loss) / profit for the financial year (2,269,691) 3,222,618Other reserves arising from foreign exchange movements (4,196) (38,286)Issue of 0.5p new ordinary shares (see note 21) 21,000 61,635Share based payment charge (see note 27) 47,266 -Premium on new ordinary shares (see note 21) 399,000 1,070,667 (1,806,621) 4,316,634Shareholders' funds / (deficit) at 1 April 3,577,975 (738,659)Shareholders' funds at 31 March 1,771,354 3,577,975 24 NET CASH OUTFLOW FROM OPERATING ACTIVITIES 2007 2006 £ £Operating loss (2,338,159) (2,754,011)Depreciation 299,489 229,775Goodwill amortisation 187,664 108,514Share based payment charge (see note 27) 47,266 -Write down of current asset investment 164,146 -(Increase) / decrease in debtors (242,502) 442,661Increase / (decrease) in creditors 57,388 (1,012,573)Increase in deferred income 509,217 404,660Net cash outflow from operating activities (1,315,491) (2,580,974) 25 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS 2007 2006 £ £(Decrease) / increase in cash in the year (1,438,707) 1,395,616Cash outflow from finance leases 36,879 14,511Change in net funds resulting from cashflows (1,401,828) 1,410,127Net funds at 1 April 1,686,156 276,029Net funds at 31 March 284,328 1,686,156 26 ANALYSIS OF CHANGES IN NET FUNDS 1 Apr 06 Cash flow Non cash 31 Mar 07 movements £ £ £ £Cash at bank and in hand 1,723,035 (1,438,707) - 284,328Finance leases (36,879) 36,879 - - 1,686,156 (1,401,828) - 284,328 27 EMPLOYEE SHARE OPTIONS CHARGE For share options that had not vested by 31 March 2006 (as detailed in note 21),FRS20 requires that a charge be calculated representing the cost to the Group ofthose options. In accordance with the accounting policy stated under note 1(n) above, thevolatility of the Company's shares for the relevant period has been estimated at30%, giving rise to a charge to the profit and loss account for the year to 31March 2007 of £47,266, with the same amount being credited to reserves (2006:not applicable), see also notes 21 and 22. Equity-settled share-based payments The company has a share option scheme for all employees. Options are granted toemployees based on the discretion of the directors to reward performance. Theexercise period is usually 5 years. The options are settled in equity onceexercised. If the options remain unexercised after a period of 5 years from thedate of grant, the options expire. Options are forfeited if the employee leavesthe company. The fair value of the options were calculated using a numerical binomial modelassuming the inputs shown below: Grant date 24/04/2006 24/04/2006 24/04/2006 01/12/2006 Share price at grant 6.75 6.75 6.75 7.75Exercise price 9 9 11 9Contractual life (years) 5 5 5 5Staff turnover 50% 50% 50% 50%Risk free rate Discount curve used for UK on the day of valuationExpected volatility 30% 30% 30% 30%Expected dividend yield - - - - Fair value of option 2.18 2.2 1.75 2.89 Details of the number of share options and the weighted average exercise price(WAEP) outstanding during the year are as follows: 2007 2007 WAEP Number Outstanding at beginning of the year 0Granted during the year 5,940,000 9.15pExercised during the year -Forfeited during the year (20,000) 9.00pOutstanding at end of the year 5,920,000 9.15pExercisable at the year end Nil The share options outstanding at the end of the year have the following exerciseprices. Expiry Date Exercise price 2007 Number 24/04/2013 9p 3,455,55524/04/2013 11p 444,55501/12/2013 9p 2,020,000 5,920,110 The weighted average share price during the period was 9.15p and nil optionswere exercised during the year. 28 COMMITMENTS The Group had annual commitments under non-cancellable operating leases inrespect of land and buildings as follows: 2007 2006 £ £On leases which expire in 1 year or less 11,158 508,101On leases which expire in 1 to 2 years 113,164 -On leases which expire in 3 to 5 years 354,299 -Total 478,621 508,101 Neither the Group nor the Company had any material capital commitments at 31March 2007 or 31 March 2006. 29 CONTINGENT LIABILITIES The Company has agreed to provide continuing financial support to the followingGroup companies: Lombard Risk Consultants Ltd, Lombard Risk Systems Inc andLombard Risk International Ltd. 30 PENSIONS A Group company contributes to a defined contribution pension scheme on behalfof a limited number of employees of that subsidiary. The assets of the schemeare administered by trustees in a fund independent of the Company. Otherdefined contribution pension schemes to which the Group makes contributions onbehalf of employees are of the stakeholder variety, again totally independent ofthe Company. 31 RELATED PARTIES TRANSACTIONS John Wisbey had guaranteed the Group's overdraft facility from Singer &Friedlander. The facility and the guarantee expired on 31 December 2005. Acommission of 3.5% p.a. was payable by the Company to John Wisbey in respect ofthe guarantee and commission paid on this guarantee amounted to £Nil (2006:£13,125). In February 2007 John Wisbey advanced £50,000 to the Company as a short-terminterest-free loan. This amount was repaid during May 2007. 32 CONTROLLING RELATED PARTIES The only group of undertakings for which group accounts have been drawn up isthat headed by Lombard Risk Management plc. The Chairman and Chief Executive,John Wisbey, is the majority holder of ordinary shares and is thereforeconsidered to be the ultimate controlling related party of the Group. 33 POST BALANCE SHEET EVENTS In May 2007 the Company disposed of its entire shareholding in IDOX plc, an AIMlisted UK company, for £407,212. The company has entered into a loan with John Wisbey, Chairman and ChiefExecutive Officer, for £620,000 (the 'Loan'). These funds have been used torepay the Company's existing bank borrowings in full and to provide the Companywith additional working capital. The Loan, which initially bears interest atAlliance & Leicester base rate plus 2.25% and is subject to review on 31 October2007, is repayable by 29 February 2008, although is repayable earlier in certaincircumstances or at the Company's option. It is expected that the loan will berepaid by the end of February 2008 out of the Company's operating cash flow. In addition to this Loan John Wisbey has provided a guarantee of a short termdemand bank facility entered into by the Company in July 2007, presently notdrawn, with National Westminster Bank plc in the amount of £250,000. Thecompany is currently in discussions with the bank to extend the period of thisarrangement. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Lombard Risk Management