22nd Nov 2005 07:01
Innovation Group PLC22 November 2005 22 November 2005 THE INNOVATION GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2005 The Innovation Group ("the Group"), which provides outsourcing services andsoftware solutions to insurance providers, today announces its results for theyear ended 30 September 2005. Highlights: •Total turnover up 5% to £61.0m (2004: £58.1m); represented by outsourcing (SBPO) £35.0m (2004: £25.2m), software (TSD) £26.0m (2004: £32.9m) •Recurring revenues up by 31% to £40.5m; representing 67% of Group revenue (2004: £30.9m, representing 53% of Group revenue) •Continued quarterly growth in outsourcing revenue •Adjusted profit before tax* of £3.0m (2004: £7.5m) •Loss before tax of £11.3m (2004: loss of £7.3m) •Operating cash inflow of £8.9m (2004: £6.6m) •Five year agreement announced with IBM •Strategic reorganisation undertaken •Continued progress in repositioning the Group towards a strong recurring revenue model *Adjusted profit is the profit before tax after adding back the amortisation charge of £14.3m and a loss on disposal of operations of £0.1m as analysed on page 10. Commenting on the results, Hassan Sadiq, Chief Executive, said: "Our strategy to migrate the business model is proving successful with recurringrevenue now the driving force behind long term revenue and profit growth. We arenow focused on building a single client-facing organisation capable ofdelivering an integrated outsourcing and software offering within each of ourkey geographies." Enquiries: The Innovation Group plc 01489 898300Hassan Sadiq, Chief Executive Officer Paul Smolinski, Group Finance Director Bridgewell Securities Limited 020 7003 3131Shaun Dobson Smithfield 020 7360 4900Sara Musgrave/Sarah Richardson Notes to editors: The Innovation Group enables clients to improve results from policy and claimsvalue chains by better management through the use of focused outsourcingservices and targeted software solutions. These offerings provide our clients -be they insurers, banks, retailers, manufacturers or governments - a virtualsupport network that compliments their insurance capabilities for the customersthey serve. Innovation Group offerings are available in the world's largestinsurance markets - North America, the U.K., Germany, South Africa, Australiaand Japan. The Innovation Group's proposition is modular, offering a range of solutionsfrom 'building blocks' for step change to complete solutions for radicaltransformation. We work with clients to generate new products and support theirsales - employing our call centres to convert prospects into policyholders, andour software to quote and manage these policies moving forward. In the event ofan incident - be it home, auto or manufacturer warranty - our call centres,claims professionals and software manage every step of the claims process toensure that efficiency, customer satisfaction, and cost containment areachieved. We provide outstanding depth into the insurance value chain and leverage oursoftware and outsourcing expertise to devise a solution designed for maximumimpact. Our global clients have the flexibility to choose how to use oursolutions and offerings. From outsourcing to insourcing to licensing software,our clients use our expertise to generate maximum impact within theirorganisation. Key market facts: • BPO Market to grow to $110 Billion in North America by 2009. The growth of the BPO market continues to outpace other IT services. In North America, BPO will grow by an 8.8 per cent compound annual growth rate by 2009 - Gartner 2005 • Inflexible information systems will complicate global financial institutions' compliance with new regulatory requirements such as Sarbanes-Oxley and the EU's developing Solvency II proposal. • Due to the high systems maintenance costs of mature insurance organisations, only 30 per cent of IT budgets are available for developing new systems and technologies to improve business support. (Gartner, 2005) • Two of the top five priorities of these insurers are regulatory compliance and cost containment. (Forrester Research, 2005) • 79 per cent of insurers polled are planning to or are currently executing system consolidation in the next 12 months to address critical issues. (Forrester Research, 2005) • Of those planning system consolidation, 55 per cent are planning to address policy systems; 48 per cent are expected to address claims systems. (Forrester Research, 2005) • Claims system replacement is more prevalent in the US P&C insurance industry. Research shows that 35 per cent of insurers are assessing this approach versus 22 per cent of insurers that are simply renovating their existing system. This trend is being fuelled by the advancement in the vendor market and need to deploy solutions rapidly. (Gartner, 2005) RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2005 CHAIRMAN'S STATEMENT The Innovation Group provides outsourcing services and software solutions toimprove policy and claims management for the world's insurance market. Ourvision is to enable efficiencies to improve revenue generation, customer serviceand profitability. The Group is totally focused on this market and deliversthese two broad offerings through a single client-centric organisation. We are a global player operating in the world's largest insurance markets with astrong proportion of our clients being international in nature. Our 1200 peopleacross the world have extensive insurance experience and they are ably supportedby our partners. The year in review During 2005 we made strong underlying progress in our business. We enjoyedrobust cash generation with an operating cash inflow of £8.9m. Our strategy tomigrate the business model continues to be successful, with recurring revenue upfrom £30.9m in 2004 to £40.5m in 2005. 67% of our total revenue is nowrecurring, allowing us improved visibility and reduced reliance on unpredictablelicence sales over time. However, during this financial year, licence revenuewas still disproportionately important to the Group's overall financial resultand consequently the year was adversely impacted by a disappointing level of upfront licence sales. The outsourcing business continued to perform well with over 25 new or extendedrelationships formed during the year. Outsourcing has developed well in thegeographies of Australia, Germany and the United Kingdom and we look to findopportunities for them to emulate South Africa as a major profit and growthcontributor. We delivered our major Policy software system to CSAA in the USA,and also won a new client for each of our Policy and Claims softwareapplications. We continue to invest in our software partnership with IBM andannounced a new five year strategic partnership with them in March 2005. During the year we continued our M&A activity with the acquisition of Websoft inSouth Africa and the disposal of our small Public Sector consulting business inthe USA to further intensify our focus on the insurance market. Financial results As we set out in our trading statement at the end of September 2005approximately £7.5m of licence income which was expected in the fourth quarterwas not concluded. One of the transactions was particularly significant but itis now more likely that the deal will be split into smaller components. Our revenue for the year ended 30 September 2005 was £61.0m (2004: £58.1m);recurring revenues increased from £30.9m to £40.5m and now represent 67% of theGroup's total revenue. Software (TSD) turnover was £26.0m (2004: £32.9m) and outsourcing (SBPO) turnover was £35.0m (2004: £25.2m). Adjusted profit* was £3.0m (2004: £7.5m) and loss before tax was £11.3m (2004:loss of £7.3m), representing adjusted EPS of 0.33p (2004: 1.49p) and basic lossper share of 2.94p (2004: loss per share of 1.98p). *Adjusted profit is the profit before tax after adding back the amortisationcharge of £14.3m and a loss on disposal of operations of £0.1m as analysed onpage 10. Organisation and employees Until now the Group has operated as two divisions, Technology Solutions Division(TSD) and Specialised Business Process Outsourcing (SBPO), each with its ownChief Operating Officer (COO). This was an important strategy for developing achoice of offerings for our clients. As we move to the next stage of ourdevelopment, we have created a single client-facing organisation which willdeliver an integrated outsourcing and software offering in each of the majorterritories. Eric Wadsworth, who was COO of SBPO, will focus on developing theregions globally as COO for the Group. Ed Ossie, previously COO of TSD, willconcentrate his efforts on developing the IBM relationship to further the globaldistribution of our software as well as leading the marketing of the company toincrease brand awareness. I would like to pay tribute to the outstanding teamwork and commitment toclients displayed by our people. I would also like to extend a warm welcome toour new recruits and to partners' employees, who are working with us on clientengagements. I would like to thank all employees for their invaluablecontribution to the progress made during the year. The Group continues toattract and retain some of the best people in the industry and we recognise themas the foundation of our future success. The Board and Corporate Governance In line with the changes to executive management, we are also streamlining theBoard. Hassan Sadiq, Chief Executive Officer and Paul Smolinski, Group FinanceDirector will continue as the executive directors of the Group. Ed Ossie, EricWadsworth and Steve Scott move from the PLC board to the operating board, and Iwould like to take this opportunity on behalf of the shareholders to thank themfor their tireless contribution to the PLC Board, and will look forward to theirongoing contribution as members of the Group's executive management team. Chris Banks and David Thorpe continue as non-executive directors and chairmen ofthe Audit and Remuneration Committees respectively, and I remain asnon-executive Chairman of the Board. This ratio of executive directors tonon-executive directors (2:3) is now in line with best practice corporategovernance for a company of The Innovation Group's size. The Group has been in full compliance with the provisions of the Combined Codethroughout the year. EGM and future reporting requirements Following the approval of the resolutions at the Group's EGM on 29 June 2005, wehave finalised the capital reduction and restructured the Company's balancesheet. This has restored the Company's distributable reserves and thus enablesthe Group to be in a position to pay dividends when it is appropriate to do so. The Prospectus Directive, issued on 1 July 2005, has removed the requirement forcompanies such as The Innovation Group, which listed under chapter 25 of the oldListing Rules, to report to shareholders on a quarterly basis. We will thereforebe reporting to shareholders at the half year and full year, as is the case withthe vast majority of UK Listed companies. The next set of results releasedfollowing these preliminary results for the year ended 30 September 2005 willtherefore be for the half year ended 31 March 2006. Outlook The Group is in a much stronger position as we enter 2006. The level ofrecurring revenue has increased, reducing our reliance on upfront licence feesand underpinning planned growth in the coming years. We now have an extensive outsourcing client base and the pipelines remainhealthy in each geography. We anticipate organic growth to continue in 2006through our simple objective of delivering more benefits to more clients in moremarkets. Software licence sales still remain attractive and we now have a better businessmodel through which to manage the volatility of software licence revenue. Thesoftware pipeline is healthy, particularly in North America where we have putmost focus, and there are a number of opportunities which are reaching thelatter stages of the sales cycle. Our five year relationship with IBM gives usthe platform to distribute our software products on a global basis and weanticipate seeing some results from this investment in the 2006 financial year. In summary, we aim to continue the momentum gained throughout 2005. Our businessplan calls for further organic revenue growth augmented by selectedacquisitions. In addition, we plan for Group operating margins to improve overthe coming year and we look forward to the future with optimism. Geoff Squire, OBEChairman CHIEF EXECUTIVE'S STATEMENT During 2005 we continued to strengthen the visibility and predictability of ourrevenue and to generate a robust cash flow. Recurring revenue is now the drivingforce behind long term revenue and profit growth, and our dependence on thelumpy flow of up front licence transactions will continue to diminish. Ourcommitment to quality service is paramount, and our satisfied clients arewilling to share their positive views on our company, people and products. Thiscontinues to increase our momentum in the markets that we serve. We have conducted a strategic reorganisation, designed to better structure thebusiness into a single client-facing entity capable of offering an integratedoutsourcing and software capability in each of our geographies. This moveenforces our transformation to a specialist provider to the insurance industry. Strategic update Market drivers We operate within a rapidly transforming global insurance market drivenprincipally by deregulation, new technology and the need to improve efficiencywithin client organisations. Each market varies in the rate of change and isdependent on culture, market dynamics and deregulation. Industry transformationis inspiring new entrants, such as banks, supermarkets, car manufacturers andothers to add insurance to their portfolio of services, and this in turn enablesus to widen our target market. These market drivers are forcing the remainder of the industry to change toremain competitive. One of the major inhibitors to undergoing the necessarychange, however, is the software in use, as most systems were implemented a fewdecades ago. However, technology alone is not the answer. There are a host of other crucialcomponents with which software must be integrated for a favourable return oninvestment. For example, when The Innovation Group clients entrust us withmanaging a part or all of the process through our outsourcing service, we areable to deliver not only the pioneering software but also those other elements,such as retraining integration and expertise in both technology and insurance,that will ensure success. Vision The Group's vision is to help the insurance industry to provide a better serviceto policyholders by implementing leading edge practices and technology for theadministration of policies and the handling of claims. Products We have assembled a wide portfolio of important assets comprising high qualitysoftware technology for both policy and claims administration, and a set ofbusiness processes for the handling of many aspects of back office functions forinsurers and risk carriers. We offer these assets either as a software andservice implementation project, or as an outsourced service, and this choiceenables our clients to embark on lower risk, lower cost transformations and theopportunity to gain a high impact return on investment. Our focus is now to makethese assets available to a wider client audience. RoadmapOur strategy is to develop a single client-facing organisation, which willdeliver an integrated outsourcing and software offering in each of the majorterritories. This organisation will enable us to benefit from our considerablesuccesses and to leverage them for the benefit of clients and markets across theworld. We are the market leader in insurance outsourcing in South Africa and we aim toextend these outsourcing services to our global operations. This involvesexpanding the range of categories we provide in other territories beyond ourtraditional market of motor to include household claims administrationactivities, warranty administration and the administration of public sectorclaims. We will then follow our successful business model for launching theseproducts which is a staged process whereby we establish a reputation forourselves in relation to each piece of the value chain in turn and underpin theoutsourcing service with our own software. We will continue to build on our software successes in the United States byaiming to add more clients and increasing our visibility in the markets in whichwe operate. We will continue to invest in our new five year relationship with IBM, believingthat this is the most effective way to reach the largest insurers and to broadenthe distribution of our software. To facilitate this we are fully dedicating EdOssie, one of our most senior executives, to ensuring the success of thispartnership. We strongly believe that if we follow this course, we will achieve our simpleobjective of delivering more benefits to more clients in more markets. Geographic review South Africa, which provides many of the elements of the insurance value chainon an outsourced basis, has revenue growth of 65% (31% organically) with revenueof £23.1m for the year ended 30 September 2005. The technology acquisition ofWebsoft announced on 1 July 2005 contributed £0.5m to revenue in the year. Wecontinue to explore the possibility of a partnership to address the BlackEconomic Empowerment (BEE) rules legislated by the South African government. Weare discussing with potential partners to help us address these issues and helpus further extend our product range and take advantage of the uniqueopportunities that are available in this part of the world. In Europe, we have a solid revenue base of £16.4m (2004: £27.2m). We have madesignificant progress in integrating our outsourcing and technology offerings inthe UK. We have a software business servicing tier one clients as well as claimsoutsourcing for motor and household. UK revenues are £13.6m (2004: £25.3m).Revenue for our UK technology business is substantially lower than last year dueto the successful completion of product implementation projects and the absenceof a significant up-front licence this year. However, the UK pipeline has beensteadily improving. An important pilot for policy software was completedsuccessfully and although negotiations are continuing for the licencing of thesoftware and it is now more likely that the deal will be split into smallercomponents. In Germany, where we perform claims outsourcing for motor insurance,we have seen revenue growth of 47% in 2005 to £2.8m (2004: £1.9m) as a result ofan increase in the volumes from existing clients. All of the revenue in Germanyis recurring and transactional. We are looking to extend the product range inGermany and also to use the country as a base to further extend into CentralEurope. In North America, the largest insurance market in the world, revenue has grownby 31% to £16.7m (2004: £12.7m) in 2005. All revenue is software related. Thepipeline is healthy and is underpinned by the two wins in 2005 of our Policy andClaims systems. In addition, work continues on the new Policy engagementreferred to in our trading statement in September 2005, although the licenceelement is still under negotiation. We continue to work closely with IBM on tier1 and tier 2 insurance companies. Our pipelines in North America have continuedto grow due to an increased level of sales enquiries. During 2006 we willcontinue to carefully qualify all sales opportunities and be selective in whichwe pursue as we are now seeing a more demanding contract and due diligenceprocess from our clients. We continue to explore the opportunities foroutsourcing in North America as we believe this represents a significantopportunity for the Group. In Asia Pacific, the revenue has grown by 14% to £4.8m (2004: £4.2m). Ouractivities comprise outsourcing for motor claims and warranty administration inAustralia and software sales in both Japan and Australia. Outsourcing revenuehas increased relative to the same period last year and we have launched thewarranty administration product into the Australian market. Revenue in theAustralian technology business has fallen compared to last year, however thepilot work with a new client is continuing and we are hopeful that this willresult in a full roll out, now forecast to be in early 2006. We are also workingwith IBM to distribute our technology products in Japan and the Asian market. Summary In summary, we aim to grow organically by adding more products and services toour existing substantial client base. This will be underpinned by our strongerpipeline and our targeting of top tier insurers through our relationship withIBM. The existing client relationships, of which we have over 90, are thebackbone to our future growth. Where appropriate we will also look to consolidate smaller players and addcapability into existing regions via strategic and tactical acquisitions tofurther expand our outsourcing service offering. Hassan SadiqChief Executive FINANCE DIRECTOR'S REVIEW Results Total revenue for the year grew by 5% to £61.0m (2004: £58.1m). Within this,there was growth of 39% in our recurring outsourcing revenue (up from £25.2m to£35.0m), tempered by a decrease of 21% in software revenues (reduced from £32.9to £26.0m), primarily as a result of lower licence sales (down by £5.6m to£3.3m). Maxicare, which administers warranty claims for brown and white goods inSouth Africa and was acquired by the Group in August 2004, contributed £4.8m(2004: £0.3m) to outsourcing revenue in 2005. The underlying revenue performance of the Group improved over the year with thesecond half-year period being stronger than the first. Revenue in the first sixmonths of the year was £28.8m and increased to £32.2m in the second six months.Of this growth software revenue grew from £12.4m to £13.6m led by increasedimplementation (up from £6.6m to £8.5m) and outsourcing revenue grew from £16.4mto £18.6m. Licence sales reduced from £2.4m in the first half of the year to£0.9m in the second half. This resulted in adjusted profit* for the Group of£2.0m and £1.0m in the first and second halves of the year respectively. For the year as a whole, the loss before tax was £11.3m (2004: £7.3m) after anamortisation charge of £14.3m (2004: £14.6m) and a loss on disposal ofoperations of £0.1m (2004: profit of £1.3m). Adjusted profit* was £3.0m (2004:£7.5m). Within this there was, as anticipated, a substantial increase inoutsourcing profitability, which recorded an adjusted profit of £4.2m (2004:£0.2m). The decline in software profitability, an adjusted loss for the year of£1.2m (2004: adjusted profit of £7.3m) reflected the decrease in licence salesyear on year. Adjusted EPS was 0.33p (2004: 1.49p) and basic loss per share was2.94p (2004: 1.98p). *Adjusted profit is the profit before tax after adding back the amortisationcharge of £14.3m and a loss on disposal of operations of £0.1m as analysed onpage 10. Costs Administrative costs for 2005 of £24.3m remained at broadly the same level as2004. However, cost of sales increased for both the software and outsourcingdivisions. The former has risen despite implementation delivery being flat yearon year. This was due to the solution delivery revenue being lower than plannedfollowing the delay in a US policy project early in the year and increasedinvestment in the IBM relationship and in our offshore capabilities. Inoutsourcing, cost of sales have increased in line with the revenue growth. Taxation The Group tax charge of £1.4m (2004: £1.1m) arose, despite a loss before tax,primarily due to the goodwill amortisation charge being non-deductible for taxpurposes. The charge is also higher than would normally be expected for a UKbased company as profits earned in certain countries (principally South Africa)cannot be offset against losses in other countries. The tax rate increased inthe final quarter as a result of licence sales not materialising. These licencesales would have been in countries with available tax losses. The Groupcontinues to have significant tax losses in the UK and USA to offset againstfuture profits arising in these countries. Cash flow and financing The Group continues to be cash generative and at an operating level generated acash inflow of £8.9m (2004: £6.6m). As a Group we had set positive cash inflowas one of our key objectives and this result reflects the underlying strength ofour business. Cash inflow was significantly ahead of adjusted profit due to anincrease in deferred income across both the software and outsourcing divisions,which increased from £6.4m in 2004 to £11.9m in 2005. The growth of ouroutsourcing business and the increased number of claims that we settle on behalfof our clients also increased our cash balance across the year. Consequently,approximately £1.4m of the inflow was attributable to an increase in amounts dueto repairers and other third parties and funds held to settle future claimsadministered by the Group. Our net funds position is positive at £13.8m compared to £9.4m in 2004. TheGroup's only significant debt at the year end being the £3.8m borrowed as amortgage on our properties in Whiteley, UK, and a £1.2m convertible loan noteredeemable in December 2007. Our year-end cash balance of £19.6m included approximately £5.0m of cash (2004:£3.6m) representing amounts due to repairers and funds held to settle futureclaims. In addition, approximately £1.0m was held as advance payments from aclient for subsidence claims in the UK. Cash held and available for use within the business in our South Africanoperation continues to be subject to government imposed exchange controls,however this does not adversely affect us either on a day to day basis, or inany of our strategic plans. Cash held in South Africa (excluding amounts held tosettle future claims) as at 30 September 2005 totalled approximately £2.6m(2004: £1.1m). Non core businesses In March 2005, we ceased trading in our Chartoak car-rental business. Chartoakhad made a loss of £0.3m for the six month period to March 2005 and was our lastremaining non-core outsourcing business. In September 2005, we sold the assetsand certain liabilities of the US public sector business to a new company formedby the existing managers, in return for a two year loan note for approximately£0.1m. In the year to 30 September 2005, the public sector business contributed£1.8m to revenue and was approximately break-even. Investment activity On 1 October 2004 the Group settled the final instalment of deferredconsideration on the acquisition of InterX by issuing £1.0m in shares(approximately 3.7 million shares).During the year the Group has also concluded a number of tactical acquisitionactivities to eliminate minority interests in subsidiaries or expand productranges in geographies.In December 2004 the Group acquired the remaining 30% of its South Africansubsidiary Statsure at a cost of £0.35m. During the year, the Group alsoacquired a further 49% of InFront (which performs buildings subsidenceadministration in the UK) for up to £1.5m in cash depending on its futureresults. Of the £1.5m, £0.7m was paid during the year to 30 September 2005 and afurther £0.5m was paid in October 2005. This acquisition brings the Group'stotal shareholding in InFront to 84%. On 1 July 2005 we acquired Websoft for approximately £1.0m in cash, which allowsthe Group to offer software solutions alongside outsourcing in South Africa. Foreign Exchange Approximately 80% of the Group's turnover is generated outside the UK and isdenominated in currencies other than sterling. The Group, therefore, hasexposure to translation risk when the accounts of overseas subsidiaries areconverted into sterling. The Group does not hedge against this translation risk. The Group is mostaffected by movements in the US Dollar and South African Rand relative toSterling, however the combined effect of these on the Group's trading results inthe year has again been broadly neutral. Finance activities During December 2004, we concluded our audit and tax tender process whichresulted in Ernst & Young LLP being appointed in time for them to report on ourfirst quarter results. We have worked hard to rationalise the Group's legalentities, liquidate holding and non-trading companies that are no longerrequired and increase the efficiency of the financial processes. These factorshave resulted in decreased audit fees for 2005 and will reduce statutorycompliance costs in overseas territories going forward. We also continued our corporate governance led initiatives implemented by thefinance team. This included the second year of internal audit, which includedthe appointment of Deloitte & Touche as internal auditors for South Africa. Anaccounting polices manual has been issued and has been adopted throughout theGroup. Capital reduction and communication with shareholders Following an extraordinary general meeting on 29 June 2005 The Innovation Groupplc petitioned the High Court of Justice to cancel its share premium account.Permission was granted on 23 August 2005 and as a result £483,033,000 wascancelled and transferred to retained earnings. With the Prospectus Directive coming into force on 1 July 2005 we will bereporting to shareholders for the financial year ended 30 September 2006 at thehalf year and at the full year as is the case for most UK Listed companies. International Financial Reporting Standards (IFRS) The Group is required to report its results in accordance with IFRS from 1October 2005. We will therefore be reporting our interim results for the sixmonths to March 31 2006 under IFRS, together with the restated comparatives. Theunaudited provisional reconciliations and notes on pages 21 to 26 set out themain differences between UK GAAP and IFRS as at, and for the comparative yearended, 30 September 2005. The Group has utilised the following exemptions available on first time adoptionof IFRS: • the Group has elected not to apply the provisions of IFRS 2, 'Share Based Payments' to options granted after 7 November 2002, which had not vested at 1 January 2005; • the Group has elected not to retrospectively apply the provisions of IFRS 3, 'Business Combinations', to acquisitions that occurred prior to the Group's transition date of 1 October 2004. Therefore, business combinations prior to this date have not been restated; and • the Group has elected to apply the provisions of IAS 21, 'The effects of changes in foreign exchange rates', prospectively from the date of transition of 1 October 2004. The effect of this being that the Group has taken advantage of the one-off exemption available to reset cumulative exchange differences on net investment in foreign operations to zero at the date of transition. As with most companies within our industry segment the most significant areas ofconsideration are associated with differences in accounting for share basedpayments, goodwill and development expenditure. We are not currently proposingto capitalise any historic development expenditure. Details of the maindifferences are given on pages 21 to 26. Paul SmolinskiGroup Finance Director The Innovation Group plcFinancial Highlights 2005 2004 Note £'000 £'000 Turnover 60,916 58,051 Adjusted profit before tax a 3,005 7,525 Loss before tax (11,344) (7,349) Adjusted earnings per share (pence) 6 0.33 1.49Basic and diluted loss per share (pence) 6 (2.94) (1.98)Adjusted diluted earnings per share (pence) 6 0.32 1.46 Note: a Adjusted profit before tax is calculated as: 2005 2004 Note £'000 £'000 Loss before tax (11,344) (7,349)Add back/(exclude):Amortisation 14,295 14,621Exceptional items 3 - 868Loss/(profit) on disposal of operations 54 (1,340)Amounts written off investments - 725 ---------- ---------Adjusted profit before tax 3,005 7,525 ========== ========= References to adjusted profit and adjusted earnings per share reflect theDirectors' view that this is an important measure for their own, andshareholders', assessment of the Group's underlying performance. The Innovation Group plcConsolidated Profit and Loss AccountFor the year ended 30 September 2005 2005 2004 Note £'000 £'000 TURNOVER 2 60,916 58,051Cost of sales (33,725) (25,520) ---------- ----------Gross profit 27,191 32,531Administrative expenses- amortisation (14,295) (14,621)- exceptional items 3 - (868)- other (24,328) (24,825) ---------- ---------- (38,623) (40,314) ---------- ---------- OPERATING LOSS (11,432) (7,783) Share of operating profit/(loss) ofassociated 42 (54)undertakings(Loss)/profit on disposal of 4 (54) 1,340operationsAmounts written off investments 3 - (725) Net interest 100 (127) ---------- ---------- LOSS ON ORDINARY ACTIVITIES BEFORE (11,344) (7,349)TAXATION Loss on ordinary activities (11,344) (7,349)before taxationAmortisation 14,295 14,621Exceptional items 3 - 868Loss/(profit) on disposal of 54 (1,340)operationsAmounts written off investments - 725 ---------- ---------- Adjusted profit 3,005 7,525 ========== ========== Tax on loss on ordinary 5 (1,369) (1,129)activities ---------- ---------- LOSS ON ORDINARY ACTIVITIES AFTER (12,713) (8,478)TAXATIONEquity minority interests (202) (14) ---------- ---------- RETAINED LOSS FOR THE YEAR (12,915) (8,492) ========== ========== Adjusted earnings per ordinary 6 0.33 1.49share (pence)Basic and diluted loss perordinary share 6 (2.94) (1.98)(pence)Adjusted diluted earnings perordinary share 6 0.32 1.46(pence) All amounts relate tocontinuing operations. The Innovation Group plcConsolidated Balance SheetAs at 30 September 2005 2005 2004 Note £'000 £'000 FIXED ASSETSIntangible assets 11,877 23,521Tangible assets 11,086 11,656Investments 272 91 ---------- ---------- 23,235 35,268 CURRENT ASSETSStocks - 172Debtors 7 14,550 10,563Investments 153 -Cash at bank and in hand 19,603 15,789 ---------- ---------- 34,306 26,524 CREDITORS: amounts falling due within one yearOther creditors 8 (25,213) (17,334) ---------- ---------- NET CURRENT ASSETS 9,093 9,190 ---------- ---------- ---------- ---------- TOTAL ASSETS LESS CURRENT LIABILITIES 32,328 44,458 CREDITORS: amounts falling dueafter more than one yearConvertible loan notes (1,249) (1,101)Other creditors 9 (5,640) (5,996) ---------- ---------- (6,889) (7,097) PROVISIONS FOR LIABILITIES AND (884) (1,058)CHARGES EQUITY MINORITY INTERESTS (407) (74) ---------- ---------- NET ASSETS 24,148 36,229 ========== ========== CAPITAL AND RESERVESCalled up share capital 10 8,793 8,697Shares to be issued - 1,000Share premium account 11 75 481,997Profit and loss account 11 15,280 (455,465) ---------- ---------- EQUITY SHAREHOLDERS' FUNDS 24,148 36,229 ========== ========== The Innovation Group plcStatement of total recognised gains and lossesAs at 30 September 2005 2005 2004 £'000 £'000 Loss for the financial year (12,915) (8,492)Currency translation differences 627 1,414 ---------- ---------- Total recognised gains and losses relating tothe year (12,288) (7,078) ========== ========== Reconciliation of movement in shareholders' funds 2005 2004 £'000 £'000 Loss for the financial year (12,915) (8,492)Currency translation differences 627 1,414Issue of shares 1,207 7,520Shares to be issued (1,000) (736) ---------- ---------- Net reduction in shareholders' funds (12,081) (294) Opening shareholders' funds as previouslyreported 36,229 36,523 ---------- ---------- Closing shareholders' funds 24,148 36,229 ========== ========== The Innovation Group plcConsolidated Cash Flow StatementFor the year ended 30 September 2005 2005 2004 Note £'000 £'000 Net cash inflow from operating 12 8,925 6,611activities Returns on investments and servicing of financeInterest received 726 653Interest paid (268) (753)Interest element of finance lease rentalpayments (248) (165) ---------- ---------- Net cash inflow/(outflow) from returns oninvestments and servicing of finance 210 (265) TaxationTax paid (1,579) (2,067) Capital expenditure and financialinvestmentPurchase of tangible fixed assets (807) (847)Sale of tangible fixed assets 56 97Purchase of fixed asset investments (72) (503)Loans - 92 ---------- ---------- (823) (1,161) Acquisition and disposalsPayments to acquire subsidiary undertakings (2,187) (4,652)Cash acquired with subsidiary undertakings 415 195Sale of subsidiary undertakings 172 1,059Sale of associated undertakings - 1,143Net cash disposed of with subsidiary (15) (25) ---------- ---------- (1,615) (2,280)Management of liquid resourcesNet (purchase)/sale of current asset (153) 1,700investments ---------- ---------- Net cash inflow before financing 4,965 2,538 FinancingIssue of share capital 206 4,768Repayment of borrowings (800) (2,353)Capital element of finance lease rentals (557) (323) ---------- ---------- Net cash (outflow)/inflow from financing (1,151) 2,092 ---------- ---------- Increase in cash 13 3,814 4,630 ========== ========== The Innovation Group plcNotes to the preliminary statementsFor the year ended 30 September 2005 1. BASIS OF PREPARATION The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 30 September 2005 or 2004, but is derivedfrom those accounts and prepared on the same basis as set out in the 2004statutory accounts. Statutory accounts for 2004 have been delivered to theRegistrar of Companies, and those for 2005 will be delivered following theCompany's annual general meeting. Auditors have reported on the 2004 accounts;their reports were unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. 2. ANALYSIS OF TURNOVER, LOSS BEFORE TAX AND NET ASSETS Turnover can be analysed into the following categories: 2005 2004 £'000 £'000SoftwareLicence fees 3,348 8,979Solution delivery 15,231 15,242Maintenance and other recurring 5,611 5,760US public sector 1,797 2,938 ---------- ---------- 25,987 32,919Outsourcing 34,929 25,132 ---------- ---------- Total turnover 60,916 58,051 ========== ========== The results for the year ended 30 September 2005 with comparatives can beanalysed as follows. Software Outsourcing Total -------- -------- -------- -------- -------- -------- 2005 2004 2005 2004 2005 2004 £'000 £'000 £'000 £'000 £'000 £'000 Turnover 25,987 32,919 34,929 25,132 60,916 58,051 -------- -------- -------- -------- -------- -------- EBITA before R&D,central andexceptional costs 3,635 14,638 4,242 914 7,877 15,552R&D (2,719) (3,658) - (216) (2,719) (3,874)Central costs (1,836) (3,177) (459) (795) (2,295) (3,972)Net interest (300) (490) 400 363 100 (127)Share ofoperatingprofit/(loss) ofassociates - - 42 (54) 42 (54) -------- -------- -------- -------- -------- --------Adjusted(loss)/profit (1,220) 7,313 4,225 212 3,005 7,525(Loss)/profit ondisposal ofcontinuingoperations (100) - 46 1,340 (54) 1,340Amounts writtenoff investments - (429) - (296) - (725)Exceptional costs - - - (868) - (868)Amortisation (7,505) (8,811) (6,790) (5,810) (14,295) (14,621) -------- -------- -------- -------- -------- -------- Loss on ordinaryactivities beforetaxation (8,825) (1,927) (2,519) (5,422) (11,344) (7,349) ======== ======== ======== ======== ======== ======== The reference to EBITA before R&D, central and exceptional costs in the tableabove reflects the Directors' view that this is an important measure for theirown and shareholders' assessment of the Group's underlying performance bydivision. Reconciling items between this figure and loss on ordinary activities beforetaxation are shown in the table above. The analysis of net assets/(liabilities) by division was as follows: 2005 2004 £'000 £'000 Software 28,946 39,061Outsourcing (4,798) (2,832) ---------- ---------- 24,148 36,229 ========== ========== The geographical analysis by location is as set out below: Turnover Loss before taxation Net Assets/(liabilities) 2005 2004 2005 2004 2005 2004 £'000 £'000 £'000 £'000 £'000 £'000 Europe, MiddleEast and Africa 39,408 41,185 (9,660) (5,046) (37,348) (23,384)Americas 16,706 12,700 (1,037) (1,258) 67,911 65,472Asia Pacific 4,802 4,166 (647) (1,045) (6,415) (5,859) ------- ------- ------- ------- ------- ------- 60,916 58,051 (11,344) (7,349) 24,148 36,229 ======= ======= ======= ======= ======= ======= During the year the most significant currencies, other than sterling, were theUS $ and South African Rand. The average exchange rates used to convert resultsin to sterling were US$1.85:£1 (2004: US$1.79:£1) and SA Rand 11.49:£1 (2004: SARand 11.87:£1). 3. EXCEPTIONAL ITEMS Year to 30 September 2004 Administrative expenses Exceptional administrative expenses incurred in the year to 30 September 2004totalled £868,000 and relate to the settlement of a legal action and associatedcosts. The Group is seeking to recover these costs from third parties. Amounts written off investments Amounts written off investments in the year to 30 September 2004 totalled£725,000 and relate to the impairment of an investment in an associatedundertaking and other fixed asset investments. 4. PROFIT ON DISPOSAL OF OPERATIONS Year to 30 September 2005 The disposal of the Group's subsidiary, MiNett Data Management (Pty) Limited for£172,000 in cash was completed on 1 August 2005. The Group's share of net assetson disposal was £123,000. The profit on disposal, which was determined includingattributable goodwill of £3,000 was £46,000. On 30 September 2005 the group disposed of the trade and certain assets in itsUS public sector business, The Innovation Group/MTW Inc resulting in a loss ondisposal of £100,000. Year to 30 September 2004 The disposal of the Group's subsidiary, Intelligent Business Solutions Limited("IBS") for £788,000 in cash, net of costs, was completed on 31 March 2004. TheGroup's share of net assets on disposal was £209,000. The profit on disposal,which was determined including attributable goodwill of £124,000, was £455,000. The disposal of the Group's 50 per cent. share in its associate Mead &McGrouther (Proprietary) Limited for £1,143,000 in cash was completed on 21November 2003. The Group's share of net liabilities on disposal was £160,000.The profit on disposal, which was determined including attributable goodwill of£689,000, was £614,000. In August 2004 the Group received deferred consideration totalling £271,000 inrespect of the sale of its French Outsourcing business disposed of in 2003 thathad not previously been recognised due to uncertainty about its recoverabilityprior to receipt. 5. TAXATION There is a tax charge for the year of £1,369,000 (2004: £1,129,000). This chargeprimarily arises due to profits in overseas jurisdictions, most notably SouthAfrica and Germany, which cannot be offset by losses in other jurisdictions. 6. EARNINGS PER SHARE 2005 2004 pence pence Basic and diluted loss per share (2.94) (1.98)Adjustments- amortisation 3.26 3.40- exceptional items - 0.21- profit on disposal of continuing operations 0.01 (0.31)- amounts written off investments - 0.17 ---------- ---------- Adjusted earnings per share 0.33 1.49Adjustment for dilutive potential ordinary shares (0.01) (0.03) ---------- ---------- Adjusted diluted earnings per share 0.32 1.46 ========== ========== Earnings per share is calculated as follows: Number of shares (thousand)Average number of shares in issue used to calculate basicand diluted loss and adjusted earnings per share 438,667 429,587Dilutive potential ordinary shares- add share options 9,398 8,298 ---------- ---------- Shares used to calculate adjusted diluted earnings pershare 448,065 437,885 ========== ========== Basic and diluted earnings (£'000)Basic and diluted loss for the year (12,915) (8,492)- add amortisation 14,295 14,621- add exceptional items - 868- less profit on disposal of operations 54 (1,340)- add amounts written off investments - 725 ---------- ---------- Adjusted and adjusted diluted earnings for the year 1,434 6,382 ========== ========== References to adjusted profit and earnings per share and diluted adjustedearnings per share reflect the Directors' view that these are important measuresfor their own, and shareholders', assessment of the Group's underlyingperformance. FRS 14 requires presentation of diluted EPS when a company could becalled upon to issue shares that would decrease net profit or increase net lossper share. For a loss making company with outstanding share options, net lossper share would only be increased by the exercise of out-of-the-money options. 7. DEBTORS 2005 2004 £'000 £'000 Trade debtors 8,819 7,372Deferred taxation 893 247Other debtors 840 616Prepayments 1,002 709Accrued income 2,996 1,619 ---------- ---------- 14,550 10,563 ========== ========== All amounts are due within one year. 8. CREDITORS: amounts falling due within one year 2005 2004 £'000 £'000 Other loans 800 800Obligations under finance leases and hire purchaseagreements 430 362Trade creditors 2,059 2,471Taxation and social security 1,665 1,559Corporation tax 2,029 1,889Accruals 4,042 4,170Deferred income 10,104 4,598Other creditors 4,084 1,485 ---------- ---------- 25,213 17,334 ========== ========== 9. CREDITORS: amounts falling due after more than one year 2005 2004 £'000 £'000 Other loans 3,000 3,800Obligations under finance leases and hire purchase 526 318agreementsDeferred income 1,830 1,752Other creditors 284 126 ---------- ---------- 5,640 5,996 ========== ========== 10. SHARE CAPITAL The number of allotted, called up and fully paid ordinary shares of 2 pence eachas at 30 September 2005 was 439,641,679 (30 September 2004: 434,859,585). 11. CAPITAL REDUCTION Following an extraordinary general meeting on 29 June 2005 the Innovation Groupplc petitioned The High Court of Justice to cancel its share premium account.Permission was granted on 23 August 2005 and as a result £483,033,000 wascancelled and transferred to retained earnings. The reserves created cannot bedistributed until all creditors existing at 23 August 2005 have been settled. 12. RECONCILIATION OF OPERATING LOSS TO NET CASH INFLOW FROMOPERATING ACTIVITIES 2005 2004 £'000 £'000 Operating loss (11,432) (7,783)Exceptional items - 868 ---------- ---------- Operating loss before exceptional items (11,432) (6,915)Depreciation and amortisation charges 16,308 16,698Profit on disposal of fixed assets (6) (18)Decrease in stocks 172 7(Increase)/decrease in debtors (2,574) 642Increase/(decrease) in creditors 6,457 (2,077) ---------- ---------- 8,925 8,337Cash outflow arising from exceptional costs - (1,726) ---------- ---------- Net cash inflow from operating activities 8,925 6,611 ========== ========== 13. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS 2005 2004 £'000 £'000 Increase in cash in the year 3,814 4,630Cash outflow from decrease in debtand lease 1,357 2,989financingCash (outflow)/inflow from movementin liquid 153 (1,700)resources ---------- ---------- Change in net funds resulting from 5,324 5,919cash flowsForeign exchange (35) 154Loans, loan notes, and finance (947) (465)leasesTransfer to fixed asset investments - (21) ---------- ---------- Movement in net funds in the year 4,342 5,587Net funds at start of year 9,408 3,821 ---------- ---------- Net funds at end of year 13,750 9,408 ========== ========== Cash at bank and in hand includes £5,010,000 (2004: £3,659,000) representingamounts due to repairers and funds held to settle future maintenance claims aspart of the normal administration of the outsourcing businesses. An amountrepresenting the liability to the third parties involved is included as part ofthe Group's current and long term liabilities. Cash held and available for use within the business in our South Africanoperation of £2,600,000 (2004: £1,100,000) continues to be subject to governmentimposed exchange controls, however this does not adversely affect the Groupeither on a day to day basis, or in any strategic plans. 14. LITIGATION In common with other businesses operating in the IT sector, particularly thosethat have acquired a significant number of companies on a global basis, theGroup is subject to, or instigates, complaints which may or may not lead tolitigation. The quarterly results to 31 December 2004 referred to one case inparticular relating to a former officer of a company acquired by the Group in2001, who had lodged a substantial claim against the former legal owner and TiGfor loss of profit on options over consideration shares, resulting from theseshares being subject to customary transfer restrictions. The claim was concludedat trial during the quarter ended 31 March 2005 with the outcome that the Groupwas successful in its defence on all counts. An appeals process is in progress,however the Group has been advised that this too should be concludedsuccessfully in TiG's favour. Legal costs associated with the claim have beenprovided for in full. 15. ADDITIONAL COPIES OF THE STATEMENT Copies of this statement are available from The Innovation Group plc, YarmouthHouse, 1300 Parkway, Solent Business Park, Whiteley, PO15 7AE. The Innovation Group plc Implementation of International Financial Reporting Standards (unaudited) In line with all other Listed companies in the European Union, the Group isrequired to report its results in accordance with International FinancialReporting Standards adopted for use in the European Union ("IFRS") with effectfrom the start of its new financial year commencing 1 October 2005. TheInnovation Group plc will therefore be reporting its interim results for the sixmonths to 31 March 2006 and its full year accounts for the year ending 30September 2006 under IFRS, together with the restated comparatives. The unaudited provisional reconciliations set out on pages 22 to 26 belowidentify the main differences between UK GAAP and IFRS as at, and for the IFRScomparative year ended 30 September 2005. These unaudited provisional reconciliations have been prepared on the basis ofall IFRSs issued at the date of this report which are expected to be effectiveat the time of the reporting of the interim and final financial statements forthe year ended 30 September 2006. However, the IFRSs are the subject of ongoingreview and endorsement by the European Commission and therefore may be subjectto change. The Innovation Group plc Provisional reconciliation of the consolidated balance sheet from UK GAAP toIFRS As at 30 September 2004 -------- -------- -------- -------- UK GAAP IFRS IFRS IFRS Adjs £'000 £'000 Notes £'000 -------- -------- -------- -------- ASSETSNon current assetsProperty plant and equipment 11,656 - 11,656Intangible assets 23,521 - 23,521Other financial assets 91 - 91Deferred taxation - 247 247 -------- -------- -------- -------- 35,268 247 35,515 Current assetsInventories 172 - 172Trade and other receivables 9,607 - 9,607Prepayments 709 - 709Deferred taxation 247 (247) -Cash and short term deposits 15,789 - 15,789 -------- -------- -------- -------- 26,524 (247) 26,277 -------- -------- -------- -------- TOTAL ASSETS 61,792 - 61,792 ======== ======== ======== ======== EQUITY AND LIABILITIESEquity attributable to equity holders ofthe parentIssued capital 8,697 - 8,697Share premium 481,997 - 481,997Shares to be issued 1,000 - 4 1,000Retained earnings (455,465) (58) 2,3,4 (455,523) -------- -------- -------- -------- 36,229 (58) 36,171Minority interests 74 - 74 -------- -------- -------- -------- TOTAL EQUITY 36,303 (58) 36,245 Non current liabilitiesTrade and other payables 1,878 212 4 2,090Interest bearing loans and borrowings 5,219 (206) 4 5,013Provisions 1,058 - 1,058 -------- -------- -------- -------- 8,155 6 8,161 Current liabilitiesTrade and other payables 14,283 52 2 14,335Interest bearing loans and borrowings 1,162 - 1,162Income tax payable 1,889 - 1,889 -------- -------- -------- -------- 17,334 52 17,386 -------- -------- -------- -------- TOTAL LIABILITIES 25,489 58 25,547 ======== ======== ======== ======== TOTAL EQUITY AND LIABILITIES 61,792 - 61,792 ======== ======== ======== ======== The Innovation Group plc Provisional reconciliation of the consolidated balance sheet from UK GAAP toIFRS As at 30 September 2005 -------- -------- -------- -------- UK IFRS IFRS IFRS GAAP Adjs £'000 £'000 Notes £'000 -------- -------- -------- --------ASSETSNon current assetsProperty plant and equipment 11,086 - 11,086Intangible assets 11,877 13,905 5, 6 25,782Investments in associates - using theequity 92 - 92methodOther financial assets 180 - 180Deferred taxation - 893 893 -------- -------- -------- -------- 23,235 14,798 38,033 Current assetsInventories - - -Trade and other receivables 12,655 - 12,655Prepayments 1,002 - 1,002Deferred taxation 893 (893) -Investments 153 (153) -Cash and short term deposits 19,603 153 19,756 -------- -------- -------- -------- 34,306 (893) 33,413 -------- -------- -------- -------- TOTAL ASSETS 57,541 13,905 71,446 ======== ======== ======== ======== EQUITY AND LIABILITIESEquity attributable to equity holders ofthe parentIssued capital 8,793 - 8,793Share premium 75 - 75Shares to be issued - - -Foreign currency translation - 627 3 627Retained earnings 15,280 13,171 28,451 -------- -------- -------- -------- 24,148 13,798 37,946Minority interests 407 - 407 -------- -------- -------- -------- TOTAL EQUITY 24,555 13,798 38,353 Non current liabilitiesTrade and other payables 2,114 116 4 2,230Interest bearing loans and borrowings 4,775 (172) 4 4,603Provisions 884 - 884 -------- -------- -------- -------- 7,773 (56) 7,717 Current liabilitiesTrade and other payables 21,954 163 2 22,117Interest bearing loans and borrowings 1,230 - 1,230Income tax payable 2,029 - 2,029 -------- -------- -------- -------- 25,213 163 25,376 -------- -------- -------- -------- TOTAL LIABILITIES 32,986 107 33,093 ======== ======== ======== ======== TOTAL EQUITY AND LIABILITIES 57,541 13,905 71,446 ======== ======== ======== ======== The Innovation Group plc Provisional reconciliation of the consolidated income statement from UK GAAP toIFRS For the year ended 30 September 2005 -------- -------- -------- -------- UK GAAP IFRS IFRS IFRS Adjs £'000 £'000 Notes £'000 -------- -------- -------- -------- Revenue - continuing operations 60,916 60,916Cost of sales (33,725) (11) 2 (33,736) -------- -------- -------- -------- Gross profit 27,191 (11) 27,180 Administrative expenses (38,623) 12,831 (25,792) 14,170 5 (1,239) 1 (100) 2 -------- -------- -------- -------- (Loss)/profit from continuing operationsbefore tax and finance costs (11,432) 12,820 1,388 Finance costs (629) 62 4 (567)Finance income 729 - 729Loss on disposal of continuing (54) - (54)operationsShare of profit of associate 42 - 42 -------- -------- -------- -------- (Loss)/profit before tax (11,344) 12,882 1,538 Income tax expense (1,369) (265) 6 (1,634) -------- -------- -------- -------- Loss for the year (12,713) 12,617 (96) ======== ======== ======== ======== Attributable to:Equity holders of the parent (12,915) 12,617 (298)Minority interests 202 - 202 -------- -------- -------- -------- (12,713) 12,617 (96) ======== ======== ======== ======== The Innovation Group plcNotes to the IFRS reconciliationsFor the year ended 30 September 2005 Transitional arrangements upon first time adoption of IFRS (IFRS 1) The Group has utilised the following exemptions available on first time adoptionof IFRS: • the Group has elected not to apply the provisions of IFRS 2, 'Share Based Payments' to options granted on or before 7 November 2002; • the Group has elected not to retrospectively apply the provisions of IFRS 3, 'Business Combinations', to acquisitions that occurred prior to the Group's transition date of 1 October 2004. Therefore, business combinations prior to this date have not been restated; and • the Group has elected to apply the provisions of IAS 21, 'The effects of changes in foreign exchange rates', prospectively from the date of transition of 1 October 2004. The effect of this being that the Group has taken advantage of the one-off exemption available to reset cumulative exchange differences on net investment in foreign operations to zero at the date of transition. Explanatory notes to the provisional IFRS adjustments The primary statements have been presented in a format consistent with IFRS. Thematerial adjustments between UK GAAP and IFRS are explained as follows: 1. SHARE BASED PAYMENTS (IFRS 2) In accordance with IFRS 2 the Group has recognised a charge to incomerepresenting the fair value of outstanding employee share options and optionsunder the 'Performance Share Plan' granted since 7 November 2002 and which veston or after 1 January 2005. This charge has been spread according to the vestingperiod of the option. As a result, £949,000 has been charged to periods prior to30 September 2004. The charge to the IFRS income statement in the year to 30September 2005 is £1,239,000. In calculating the fair value of these options the Group has used the followingvariables: Expected option life 2-4 years depending on vesting periodVolatility 42%-131% depending on date of grantRisk free rate 3.5%-4.75% depending on date of grant The charge will be amended in future periods to take account of the expiry ofoptions as beneficiaries leave. 2. EMPLOYEE BENEFITS (IAS 19) The Group has complied with the provision of IAS 19 and has accrued holiday payfor all staff from the date of transition. A charge of £111,000 has beenrecorded in the IFRS income statement for the year to 30 September 2005,representing the movement on holidays accrued, but not taken, from 30 September2004 (accrued - £52,000) to 30 September 2005 (accrued - £163,000). This chargeis reflected in cost of sales (£11,000) and administrative expenses (£100,000). 3. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (IAS 21) The Group has taken advantage of the one-off exemption available to resetcumulative exchange differences on net investment in foreign operations to zeroat the date of transition. Cumulative exchange differences on net investment in foreign operations from 1October 2004 are now shown in a separate foreign exchange reserve. 4. FINANCIAL INSTRUMENTS (IAS 32 and IAS 39) The Group has separated the convertible loan notes into two components inaccordance with IAS 32. In calculating the value of the two components the Grouphas assumed the comparable debt only interest rate to be 16%. The fair value ofthe derivative element of the loans has been reflected in the balance sheet. Anymovement in the derivative element has been recorded in the income statement. 5. GOODWILL AND INTANGIBLE ASSETS (IAS 36 and IFRS 3) IAS 36 prohibits the amortisation of goodwill. Goodwill is only written downwhen an annual impairment test suggests the carrying value is overstated. Thegoodwill amortisation charge for the year to 30 September 2005 of £14,264,000under UK GAAP has been reversed under IFRS. An impairment test has been carriedout at 30 September 2005 and no impairment is deemed necessary. An amortisation charge of £94,000 has been recorded in the IFRS income statementrepresenting amortisation on separately identifiable intangible assets acquiredas part of the acquisition of Websoft (Pty) Limited on 1 July 2005. 6. INCOME TAXES (IAS 12) In accordance with IAS 12 the Group has considered the current and future taxconsequences of the carrying amounts of all assets and liabilities. As a result,an additional tax charge of £265,000 has been recorded in the IFRS incomestatement for the year ended 30 September 2005 for the utilisation of £882,000of tax losses by InFront Solutions Limited. The corresponding entry has beenmade against the goodwill capitalised in the year resulting from the Group'sincreased shareholding in that company. The effects of tax deductions for share-based payment under Schedule 23 have notbeen recognised as a deferred tax asset as it cannot be shown that there will besufficient taxable profits in future periods against which these deductions canbe offset. 7. RESEARCH AND DEVELOPMENT (IAS 38) Under UK GAAP the Group has previously expensed all research and developmentcosts. IAS 38 now requires the Group to capitalise and amortise developmentcosts, providing certain criteria are met. Following a review of development expenditure incurred prior to 30 September2005 it has been concluded that no costs qualify for capitalisation. The primaryreasons for this are that: • a significant element of development costs are funded by clients; • a large proportion of development is enhancement of base products; • commercial feasibility can often only be concluded at the end of the development project. The Group will continue to review development expenditure incurred post 1October 2005, although it is not envisaged that a significant amount will becapitalised during the year. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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