23rd May 2006 07:02
Innovation Group PLC23 May 2006 Embargoed until 0700 hrs 23 May 2006 THE INNOVATION GROUP PLC INTERIM REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2006 The Innovation Group ("the Group"), which provides outsourcing services andsoftware solutions to insurance providers, today announces its unaudited interimresults for the six months to 31 March 2006. These results are the first reported under the International Financial ReportingStandards ("IFRS"); all numbers including comparatives are stated accordingly. The impact of IFRS on previously reported results was published on 22 Nov 2005 with the preliminary results. Highlights: •Total revenues up 34% (30% organically) to £38.5m (H1 2005: £28.8m) •Recurring revenues increased by 40% (35% organically) to £26.7m (H1 2005: £19.0m) representing 69% of Group revenues •Adjusted profit before tax of £5.2m* (H1 2005: £1.6m) •Profit before tax of £4.3m (H1 2005: £1.1m) •Five new software contracts secured generating revenues of £15m over 3 years •Outsourcing business grew revenues by 32% through new business from existing and new clients •Expanded product range in Germany through the acquisition of outsourcing business for £9.6m *Adjusted profit is profit before tax after adding back the amortisation charge of £0.4m and share based payments charge of £0.5m as analysed on page 6 Commenting on the results, Hassan Sadiq, Chief Executive, said: "We are pleased to present a strong set of results for the first six months of2006. The highlight is the strong organic growth in both outsourcing andsoftware. We look forward to the future with optimism as we continue toestablish our brand on an international basis." Enquiries: The Innovation Group plc 01489 898300Hassan Sadiq, Chief Executive Officer Paul Smolinski, Group Finance DirectorSmithfield 020 7360 4900Sara Musgrave/Tania Wild Notes to editors: At the Innovation Group, we provide outstanding depth into the insurance valuechain and leverage our software and outsourcing expertise to devise a solutiondesigned for maximum impact. Our clients-insurers, banks, retailers,manufacturers and government-have the flexibility to choose how to use oursolutions and offerings. From outsourcing to insourcing to licencing software inthe world's largest insurance markets, including North America, the U.K.,Germany, South Africa, Australia and Japan, our clients use our expertise togenerate positive change within their organisation and on their bottom-line. The Group's proposition is modular, offering a range of solutions from 'buildingblocks' for step change to complete solutions for radical transformation. Wework with clients to generate new products and support their sales, employingour call centres to convert prospects into policyholders, and our software toquote and manage these policies moving forward. In the event of an incident-beit home, auto or manufacturer warranty-our call centres, claims professionalsand software manage every step of the claims process to realise greaterefficiency, improved customer satisfaction, and higher profits. 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) • 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 SIX MONTHS ENDED 31 MARCH 2006 Chief Executive'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 for our clients. The Group is totally focused on this marketand delivers these two broad offerings through a single client-centricorganisation. We are a global business operating in the world's largest insurance markets witha strong proportion of our clients having international operations. Our 1300people across the world have extensive insurance experience and they are ablysupported by our partners. Half-Year Review Since the beginning of our financial year we have been operating as a single client-centric organisation. This has created an increased number of opportunities and commitments from both new and existing clients resulting in strong organic growth in the first half of the year. We are delighted with the progress of the business. Outsourcing continues to grow organically and software has performed well with five new software contracts secured during the period. These have underpinned our first half growth and confirm that our leading edge insurance software provides compelling value to the international insurance market. Visibility of both our one-off software licences and solution delivery revenues continues to be challenging due to the difficulty in forecasting the timing of closure on major software contracts. Our solution delivery revenues were impacted by some delays in contract closure, however our business is becoming better at managing this timing challenge. We have made good progress with our strategy of increasing recurring revenue and becoming less reliant on one-off licence sales as evidenced by the increase in licence rentals and continued excellent performance of our outsourcing business, where we added £5.7m of revenue as a result of increasing claims volumes from our existing client base and some new client wins. We continue to make progress with IBM including joint marketing and sales activities around the world. The relationship has helped in achieving some of the major contracts in the first half. Overall, we are pleased with the progress achieved in the first half. We continue to deliver value to our clients and this continues to be the backbone of our growth. Financial and Operating Review This is the first reporting period in which we have presented our results under IFRS. The impact of IFRS on previously reported results was published on 22 November 2005 with our preliminary results. Total revenues for the six months to 31 March 2006 increased by 34% (30% organically) to £38.5m (H1 2005: £28.8m); recurring revenues increased by 40% (35% organically) from £19.0m to £26.7m and represent 69% of Group revenues. Our outsourcing revenues grew by 40% (34% organically) to £22.9m (H1 2005: £16.4m) and our software revenues grew by 26% (23% organically) to £15.6m (H1 2005: £12.4m). Adjusted profit before tax was £5.2m (H1: 2005 £1.6m) after adding back the share based payments charge of £0.5m and amortisation of £0.4m. Reported profit before tax was £4.3m (H1 2005: £1.1m). Adjusted EPS was 0.96p (H1 2005:0.28p) and basic EPS was 0.76p (H1 2005: 0.16p). The Group continues to be cash generative and for the period under review operating cash inflow was £6.0m (H1 2005: £0m). The growth of our outsourcing business and the increased number of claims that we settle on behalf of our clients has also increased our cash balance. Consequently, approximately £3.3m of the inflow was attributable to an increase in amounts due to repairers and other third parties as well as funds held to settle future claims administered by the Group. Geographic Review South Africa, the template for our client-centric organisation, which provides many of the elements of the insurance value chain, grew by 50% (36% organically) with revenues of £15.5m (H1: £10.3m). The software acquisition of Websoft in July 2005 contributed £1.5m of revenues in the half year. We have been very successful in winning new business during the first half by extending the scope of work with existing clients and by winning new clients. In line with other businesses with South African reach, we continue to work on finding a partner to address the Black Economic Empowerment (BEE) rules legislated by the South African government. The overall market in South Africa remains buoyant. Europe consists mainly of our German and UK operations. German revenues grew by 126% (45% organically) to £2.9m (H1 2005: £1.3m). In January 2006 we acquired Servicekonzept AG for £9.6m in cash and shares and this contributed £1.0m of revenue and is performing well. In line with the Group's strategy to expand its product offering, we are now able to offer outsourcing services for both motor and household insurance as Servicekonzept is the leading supplier of damage assessment services to the household industry in Germany. The pipeline in Germany remains strong, and we continue to grow by increasing the volume through our existing clients. The UK business grew organic revenues by 37% to £10.1m (H1 2005: £7.5m) and progressed very well in the first half of the year both in terms of improved pipeline and prospects. In December we announced that an existing client had extended the use of a Policy licence and had entered into an agreement to use the Group's new Policy Services software. Approximately £1.5m of the initial £1.75m fee has been recognised in the first half of the year and, dependent on future usage, further payments may be due in future financial years. In North America, the largest insurance market in the world, organic revenues grew by 26% to £7.9m (H1 2005: £6.2m excluding the £1m contribution in 2005 from the disposed public sector business). All revenue in the US is software related and there have been two significant contract wins in North America totalling approximately £6.1m over a three year period. Of the initial licence fees, £1m was recognised in the first half of the year and £1m is due to be recognised in the second half of the year (£0.5m being milestone dependent). In order to increase our presence in North America, we will continue to increase our investment in product development, client delivery capabilities and sales and marketing. We are confident that these investments will place the Group in a better position to capitalise further on the opportunities in North America. In Asia Pacific, revenue reduced by 15% to £2.1m (H1 2005: £2.4m), however we signed two important software contracts during the period. The most significant win was in March to provide the software for one of the leading direct insurers in Australia and is worth approximately £4.5m over 5 years. We had anticipated this deal being closed in the first quarter and so had an adverse impact of £0.6m on solution delivery revenues. The Asia Pacific region continues to experience stronger interest in software solutions compared to previous years and the pipeline for outsourcing remains good, with several new client wins in the first half. Acquisitions We are pleased with our acquisition of Servicekonzept, noted above, and its subsequent performance. In January 2006 the Group invested £1m to acquire a 25% stake in Conversant Limited, a business which specialises in tackling fraud through technology. We continue to look to consolidate smaller competitors and add capability in our existing regions via strategic and tactical acquisitions to further expand our outsourcing offering. Outlook Software enabled outsourcing, delivery of software as a service and recurring licence revenue models are industry trends which are continuing to win favour with clients. We will continue to rebalance our revenue streams by seeking agreements which are recurring in nature with less upfront licence payments. We aim to continue to grow outsourcing by adding new business from existing and new clients, as well as expanding the product range in each of the geographies. Operating as one client-centric organisation has improved awareness of the Group's overall capabilities to both existing and prospective clients. Enquiries from our existing client base are exceeding our expectations and the pipeline remains healthy. This momentum gives us confidence that we can generate good growth in future years. In summary, we look forward to the future with optimism as we continue to establish our brand on an international basis. It is becoming clear that the Innovation Group is well placed to capitalise on the current buoyancy in an exciting global market. The Innovation Group plcUnaudited Income StatementFor the six months ended 31 March 2006 Unaudited Unaudited Unaudited ----------- ---------- ---------- 6 months to 6 months to Year to 31 March 31 March 30 September 2006 2005 2005 Note £'000 £'000 £'000 Revenue 2 38,543 28,772 60,916Cost of sales (20,942) (15,274) (33,736) ---------- ---------- ----------Gross profit 17,601 13,498 27,180 Operating expenses 3 (13,525) (12,310) (25,792) ---------- ---------- ----------Operating profit 4,076 1,188 1,388 Finance costs (270) (464) (567)Finance income 583 345 729Loss on disposal of continuingoperations - - (54)Share of (loss)/profit ofassociate (96) 9 42 ---------- ---------- ----------Profit before tax 2 4,293 1,078 1,538 UK income tax expense (217) - (265)Overseas income tax expense (467) (293) (1,369) ---------- ---------- ---------- 4 (684) (293) (1,634) ---------- ---------- ----------Profit/(loss) for the period 3,609 785 (96) ========== ========== ==========Attributable to:Equity holders of the parent 3,370 700 (298)Minority interests 239 85 202 ----------- ---------- ---------- 3,609 785 (96) =========== ========== ========== -------------------------------------------------------------------------------Adjusted profit: Profit before tax 4,293 1,078 1,538Amortisation 388 - 94Share based payments 507 501 1,239Loss on disposal of continuingoperations - - 54 ----------- ---------- ----------Adjusted profit for the period 2 5,188 1,579 2,925 =========== ========== ========== -------------------------------------------------------------------------------Earnings per share (pence)Basic 5 0.76 0.16 (0.07)Diluted 5 0.75 0.16 (0.07)Adjusted 5 0.96 0.28 0.25Adjusted diluted 5 0.94 0.27 0.24 All amounts relate to continuing operations. No dividends have been paid or proposed in respect of any of the above periods. The Innovation Group plcUnaudited Balance SheetAs at 31 March 2006 Unaudited Unaudited Unaudited ----------- ---------- ---------- 31 March 31 March 30 September 2006 2005 2005 Note £'000 £'000 £'000ASSETSNon current assetsProperty, plant and equipment 11,053 11,192 11,086Intangible assets 6 36,366 25,110 25,782Investments accounted for usingthe equity method 1,032 11 92Financial assets 63 181 180Deferred tax assets 865 242 893 ---------- ---------- --------- 49,379 36,736 38,033Current assetsInventories - 186 -Trade and other receivables 7 11,630 10,297 12,655Prepayments 938 660 1,002Cash and short-term deposits a 23,971 13,724 19,756 ---------- ---------- ---------- 36,539 24,867 33,413 ---------- ---------- ----------TOTAL ASSETS 85,918 61,603 71,446 ========== ========== ==========EQUITY AND LIABILITIESAttributable to equity holders ofthe parentEquity share capital 8,982 8,771 8,793Share premium 2,649 482,923 75Foreign currency translation 670 (735) 627Retained earnings 32,328 (454,322) 28,451 ---------- ---------- ---------- 44,629 36,637 37,946Minority interests 646 290 407 ---------- ---------- ----------TOTAL EQUITY 45,275 36,927 38,353 Non current liabilitiesTrade and other payables 8 501 790 400Deferred income 1,886 1,732 1,830Interest bearing loans andborrowings 9 9,207 4,632 4,603Deferred tax liabilities 1,527 - -Provisions 869 1,235 884 ---------- ---------- ---------- 13,990 8,389 7,717Current liabilitiesTrade and other payables 8 11,708 8,759 12,013Deferred income 10,142 5,270 10,104Interest bearing loans andborrowings 9 2,956 1,069 1,230Income tax payable 1,847 1,189 2,029 ---------- ---------- ---------- 26,653 16,287 25,376 ---------- ---------- ----------TOTAL LIABILITIES 40,643 24,676 33,093 ---------- ---------- ----------TOTAL EQUITY AND LIABILITES 85,918 61,603 71,446 ========== ========== ========== a Cash and short-term deposits include £8,345,000 (31 March 2005: £3,189,000; 30September 2005: £5,010,000) representing amounts due to repairers and funds heldto settle future maintenance claims as part of the normal administration of theoutsourcing businesses. An equal amount representing the liability to the thirdparties involved is included as part of the Group's current and non currentliabilities. The interim results were approved by the Board of Directors on 22 May 2006. The Innovation Group plcUnaudited consolidated statement of changes in shareholders equityAs at 31 March 2006 Attributable to equity holders of the parent -------------------------------------------- Issued Share Shares Retained Other Total Minority Total capital premium to be earnings reserves interest equity issued £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1October 8,697 481,997 1,000 (455,523) - 36,171 74 36,2452004 Profit forthe - - - 700 - 700 85 785periodCurrencytranslationdifferences - - - - (735) (735) - (735)Issue ofshare 74 926 (1,000) - - - - -capitalShare basedpayments - - - 501 - 501 - 501Minorityinterestacquiredwith - - - - - - 131 131subsidiary ------ ------- ------ ------- ------- ------ ------- -------At 31 March2005 8,771 482,923 - (454,322) (735) 36,637 290 36,927 Profit forthe - - - (998) - (998) 117 (881)periodCurrencytranslationdifferences - - - - 1,362 1,362 1,362Issue ofshare 22 185 - - - 207 - 207capitalCapitalreduction - (483,033) - 483,033 - - - -Share basedpayments - - - 738 738 - 738 ------ ------- ------ ------- ------- ------ ------- -------At 30September 8,793 75 - 28,451 627 37,946 407 38,3532005 Profit forthe - - - 3,370 - 3,370 239 3,609periodCurrencytranslationdifferences - - - - 43 43 - 43Issue ofshare 189 2,574 - - - 2,763 - 2,763capitalShare basedpayments - - - 507 - 507 - 507 ------ ------- ------ ------- ------- ------ ------- -------At 31 March2006 8,982 2,649 - 32,328 670 44,629 646 45,275 ====== ======= ====== ======= ======= ====== ======= ======= The Innovation Group plcUnaudited Cash Flow StatementFor the six months ended 31 March 2006 Unaudited Unaudited Unaudited ---------- ---------- ---------- 6 months to 6 months to Year to 31 March 31 March 30 September 2006 2005 2005 £'000 £'000 £'000 Cash flows from operating activitiesOperating profit 4,076 1,188 1,388Adjustments to reconcile groupoperating profit to net cash inflowsfrom operating activitiesDepreciation of property, plantand equipment 1,048 893 2,013Profit on disposal of property,plant and equipment - (2) (6)Amortisation of intangibleassets 388 - 94Share based payments 507 501 1,239(Increase)/decrease ininventories - (17) 172Decrease/(increase) inreceivables 1,397 (317) (2,574)(Decrease)/increase in payables (478) (1,296) 6,490Income taxes paid (958) (971) (1,579) ---------- ---------- ----------Net cash flows from operatingactivities 5,980 (21) 7,237 Cash flows from investing activitiesSale of property, plant andequipment - 56 56Purchases of property, plant andequipment (588) (459) (807)Purchase of subsidiaryundertakings (7,443) (1,039) (2,187)Sale of subsidiary undertakings - - 172Cash acquired with subsidiaries 1,261 - 415Net cash disposed of withsubsidiaries - - (15)Purchase of associatedundertaking (979) (25) -Purchase of fixed assetinvestments - - (72)Sale of fixed asset investment 55 - -Interest received 550 345 726 ---------- ---------- ----------Net cash flows used in investingactivities (7,144) (1,122) (1,712) Cash flows from financing activitiesInterest paid (165) (223) (516)Repayment of borrowings (828) (313) (800)New bank loans 6,848 - -Repayment of capital element offinance leases (257) (242) (557)Proceeds from issue of shares 21 - 206 ---------- ---------- ----------Net cash flows used in financingactivities 5,619 (778) (1,667) Net increase/(decrease) in cashand cash 4,455 (1,921) 3,858EquivalentsCash and cash equivalents atbeginning of period 19,756 15,789 15,789Effect of exchange rates on cashand cash equivalents (240) (144) 109 ---------- ---------- ----------Cash and cash equivalents at theperiod end 23,971 13,724 19,756 ========== ========== ========== The Innovation Group plcNotes to the Unaudited ResultsFor the six months ended 31 March 2006 1. ACCOUNTING POLICIES Basis of preparation The Group has previously prepared its financial statements under UK generallyaccepted accounting principles ("UK GAAP"). For the period ended 31 March 2006,the Group is required to prepare its consolidated accounts in accordance withInternational Financial Reporting Standards ("IFRS") as adopted by the EuropeanUnion. The Group is required to apply all relevant standards and accounting policiesthat are in force at the first reporting date. However as some of these policiesare still subject to change, the Directors have made assumptions about theaccounting policies expected to be applied when the first annual IFRS financialstatements are prepared for the year ended 30 September 2006. These accountingpolicies are therefore subject to changes due to interpretation, new standardsand guidance. The full set of accounting policies is detailed below. An explanation of how thetransition to IFRSs has affected the reported financial results is provided innote 10. The interim financial information does not constitute statutory accounts withinthe meaning of section 240 of the Companies Act 1985. The financial informationincluded for the year ended 30 September 2005 has been extracted from thefinancial statements for that year, as restated for IFRS. The financialstatements in respect of the year ended 30 September 2005 were prepared under UKGAAP and have been delivered to the Registrar. The auditors' report on thosefinancial statements was unqualified and did not contain a statement under s237(2) or (3). The financial information contained in this report is unaudited but has beenreviewed by Ernst & Young LLP. Basis of consolidation The group financial statements consolidate the financial statements of TheInnovation Group Plc and the entities it controls drawn up to 31 March 2006. Subsidiaries are consolidated from the date of their acquisition, being the dateon which the Group obtains control and continue to be consolidated until thedate that such control ceases. Control comprises the power to govern thefinancial and operating policies of the investee so as to obtain benefit fromits activities and is achieved through direct or indirect ownership of votingrights; currently exercisable or convertible potential voting rights; or by wayof contractual agreement. The financial statements of subsidiaries are preparedfor the same reporting year as the parent company, using consistent accountingpolicies. All inter-company balances and transactions, including unrealisedprofits arising from them, are eliminated. The results and cash flows relating to a business are included in theconsolidated income statement and the consolidated cash flow statement from thedate of acquisition or up to the date of disposal. Minority interests represent the portion of profit or loss and net assets insubsidiaries that is not held by the Group and is presented separately withinequity in the consolidated balance sheet, separate from parent shareholders'equity. Interests in associates The Groups interests in associates, being those entities over which it hassignificant influence and which are not subsidiaries, are accounted for usingthe equity method of accounting. Under the equity method, the investment in an associate is carried in thebalance sheet at cost plus post-acquisition changes in the Group's share of netassets of the associate, less distributions received and less any impairment inthe value of individual investments. The Group income statement reflects theshare of the associate's results after tax. Any goodwill arising on the acquisition of an associate, representing the excessof the cost of the investment compared to the Group's share of the net fairvalue of the associate's identifiable assets, liabilities and contingentliabilities, is included in the carrying amount of the associate and is notamortised. To the extent that the net fair value of the associate's identifiableassets, liabilities and contingent liabilities is greater than the cost of theinvestment, a gain is recognised and added to the Group's share of theassociate's profit or loss in the period in which the investment is acquired. Revenue The Group derives its revenues from the sale of software licences, solutiondelivery implementation services, maintenance and post contract customer supportservices ("PCS services"), licence rental fees, and fees for transactionsprocessed on behalf of clients. New solution sales often involve software licences being sold together with PCSand/or implementation services. Where the commercial substance of such acombination is that the individual components operate independently of eachother and fair values are attributable to each of the components, each are thenrecognised in accordance with their respective policies described below. Where it is not possible to attribute reliable fair values to two or morecomponents these are viewed as a combination and revenue is recognised on thecombined revenue streams in proportion to the Group's right to receivingconsideration on the combination at the balance sheet date. For example, whensoftware licences are sold together with implementation services and the fairvalue of either element is not determinable, both software licence and theimplementation services are recognised using the percentage of completion methodwith provisions for estimated losses on uncompleted contracts being recorded inthe period in which such losses become probable based on the current contractcost estimates. When software licences are sold together with PCS services andthe fair value of either revenue stream is not determinable, the licence incomeis recognised over the period of the PCS services. The revenue recognition policies for separately identifiable revenue streams areas follows: Initial licence fees - revenues are recognised when persuasive evidence of anarrangement exists, delivery has occurred, the licence fee is fixed ordeterminable, the collection of the fee is reasonably assured, no significantobligations with regard to installation or implementation of the softwareremain, and customer acceptance, when applicable, has been obtained. Maintenance and other PCS services - revenues are recognised rateably over theexplicit, or an implicit, PCS services term. Solution delivery implementation services - revenues are billed on atime-and-materials basis and are recognised as the related services areperformed. However, if the consulting agreement is a fixed-fee arrangement,revenue may be recognised using the percentage of completion method as therelated services are performed, or recognised in stages on achievement ofmilestones. Provisions for estimated losses on uncompleted contracts arerecorded in the period in which such losses become probable based on the currentcontract cost estimates. Fees earned by the outsourcing division - The Group receives payments either asprincipal or agent. Receipts typically comprise one or more of the followingelements: administrative fees, fees for which the Group provides an additionalservice or where the Group receives funds in relation to claims it has assumedthe risk for settling. Revenue is normally recorded on a net basis and comprises fees for admin andother services. Where the Group has assumed the risk of settling claims onbehalf of the client, revenue is recorded on a gross basis and includes theelement of income relating to that cost. Revenues are recognised in line with the performance of the related services orreferred work, including where appropriate, an assessment of accrued income. Where the fee includes an amount for subsequent servicing, for example theadministering of a vehicle warranty plan, an amount is deferred and recognisedas revenue over the period during which the service is performed. The deferredelement is calculated so as to cover the expected costs of the services underthe agreement, together with a reasonable profit on those services. In the small number of contracts where the Group has entered in to 'risk andreward' contracts, revenues are recognised when both the fee has becomedeterminable, and collectability is probable. Individual contracts are assessedon a case by case basis with any forecast losses being provided for in full assoon as they are anticipated. Research and development Research expenditure is charged to income in the year in which it is incurred. Expenditure incurred in the development of software and hardware products, andtheir related intellectual property rights, is capitalised as an intangibleasset only when: • technical feasibility has been demonstrated; • adequate technical, financial and other resources exist to complete the development, which the Group intends to complete and use; • future economic benefits expected to arise are deemed probable; and • the costs can be reliably measured. Development costs not meeting these criteria are expensed in the incomestatement as incurred. Capitalised development costs are amortised on astraight-line basis over their useful economic lives once the related softwareand hardware products are available to use. Business combinations and goodwill Business combinations are accounted for using the purchase method. Any excess ofthe cost of the business combination over the Group's interest in the net fairvalue of the identifiable assets, liabilities and contingent liabilities isrecognised in the balance sheet as goodwill and is not amortised. To the extentthat the net fair value of the acquired entity's identifiable assets,liabilities and contingent liabilities is greater than the cost of theinvestment, a gain is recognised immediately in the income statement. The cost of acquisition is measured as the fair value of the assets or equityinstruments issued and liabilities incurred or assumed at the date of exchange,plus cost directly attributed to the acquisition. The Group has elected not to apply IFRS 3 retrospectively to businesscombinations that took place before 1 October 2004. As a result goodwillrecognised on any business combinations that took place prior to 1 October 2004is recorded at its carrying amount under UK GAAP and is not amortised but issubject to an annual impairment review. After initial recognition, goodwill is stated at cost less any accumulatedimpairment losses, with the carrying value being reviewed for impairment, atleast annually and whenever events or changes in circumstances indicate that thecarrying value may be impaired. For the purpose of impairment testing, goodwill is allocated to the relatedcash-generating units monitored by management, usually at business segment levelor statutory company level as the case may be. The carrying amount of goodwill allocated to a cash-generating unit is takeninto account when determining the gain or loss on disposal of the unit, or of anoperation within it. Intangible assets Intangible assets acquired separately are measured on initial recognition atcost. The cost of intangible assets acquired in a business combination is fairvalue as at the date of acquisition. Following initial recognition, intangibleassets are carried at cost less any accumulated amortisation and any accumulatedimpairment losses. Internally generated intangible assets, excluding capitalised development costs,are not capitalised and expenditure is charged against profits in the year inwhich the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite orindefinite. Intangible assets with finite lives are amortised over the usefuleconomic life and assessed for impairment whenever there is an indication thatthe intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset witha finite useful life is reviewed at least at each financial year-end. Changes inthe expected useful life or the expected pattern of consumption of futureeconomic benefits embodied in the asset are accounted for by changing theamortisation period or method, as appropriate, and treated as changes inaccounting estimates and adjustments are reflected prospectively. Theamortisation expense on intangible assets with finite lives is recognised in theincome statement in the expense category consistent with the function of theintangible asset. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciationand accumulated impairment losses. Such cost includes costs directlyattributable to making the asset capable of operating as intended. Depreciation is not provided on freehold land. On other assets it is calculatedto write off their cost less estimated residual value, based on pricesprevailing at the balance sheet date, in equal annual instalments over theestimated useful economic lives of the assets. These are as follows: Freehold property 50 yearsProperty improvements 10 - 15 yearsFixtures and fittings 4 - 15 yearsMotor vehicles 4 year 5 yearsComputer systems 5 yearsComp Computer equipment 2 - 3 years The carrying values of property, plant and equipment are reviewed for impairmentwhen events or changes in circumstances indicate the carrying value may not berecoverable. Impairment of assets The Group assesses at each reporting date whether there is an indication that anasset may be impaired. If any such indication exists, or when annual impairmenttesting for an asset is required, the Group makes an estimate of the asset'srecoverable amount. An asset's recoverable amount is the higher of an asset's orcash-generating unit's fair value less costs to sell and its value in use and isdetermined for an individual asset, unless the asset does not generate cashinflows that are largely independent of those from other assets or groups ofassets. Where the carrying amount of an asset exceeds its recoverable amount,the asset is considered impaired and is written down to its recoverable amount.In assessing value in use, the estimated future cash flows are discounted totheir present value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset.Impairment losses of continuing operations are recognised in the incomestatement in those expense categories consistent with the function of theimpaired asset. An assessment is made at each reporting date as to whether there is anyindication that previously recognised impairment losses may no longer exist ormay have decreased. If such indication exists, the recoverable amount isestimated. A previously recognised impairment loss is reversed only if there hasbeen a change in the estimates used to determine the asset's recoverable amountsince the last impairment loss was recognised. If that is the case the carryingamount of the asset is increased to its recoverable amount. That increasedamount cannot exceed the carrying amount that would have been determined, net ofdepreciation, had no impairment loss been recognised for the asset in prioryears. Such reversal is recognised in profit or loss unless the asset is carriedat revalued amount, in which case the reversal is treated as a revaluationincrease. After such a reversal the depreciation charge is adjusted in futureperiods to allocate the asset's revised carrying amount, less any residualvalue, on a systematic basis over its remaining useful life. Share based payments The Group has taken exemption of the transitional provisions of IFRS 2 inrespect of equity settled awards so as to apply IFRS 2 only to those equitysettled awards granted after 7 November 2002 and which vest on or after 1January 2005. The cost of equity-settled transactions with employees is measured by referenceto the fair value at the date at which they are granted and is recognised as anexpense over the vesting period, which ends on the date on which the relevantemployees become fully entitled to the award. Fair value is determined by usingan appropriate pricing model. In valuing equity-settled transactions, no accountis taken of any vesting conditions, other than conditions linked to the price ofthe shares of the company (market conditions). No expense is recognised for awards that do not ultimately vest, except forawards where vesting is conditional upon a market condition, which are treatedas vesting irrespective of whether or not the market condition is satisfied,provided that all other performance conditions are satisfied. At each balance sheet date before vesting, the cumulative expense is calculated,representing the extent to which the vesting period has expired and management'sbest estimate of the achievement or otherwise of non-market conditions and thenumber of equity instruments that will ultimately vest or in the case of aninstrument subject to a market condition, be treated as vesting as describedabove. The movement in cumulative expense since the previous balance sheet dateis recognised in the income statement, with a corresponding entry in equity. Where the terms of an equity-settled award are modified or a new award isdesignated as replacing a cancelled or settled award, the cost based on theoriginal award terms continues to be recognised over the original vestingperiod. In addition, an expense is recognised over the remainder of the newvesting period for the incremental fair value of any modification, based on thedifference between the fair value of the original award and the fair value ofthe modified award, both as measured on the date of the modification. Noreduction is recognised if this difference is negative. Where an equity-settled award is cancelled, it is treated as if it had vested onthe date of cancellation, and any cost not yet recognised in the incomestatement for the award is expensed immediately. Any compensation paid up to thefair value of the award at the cancellation or settlement date is deducted fromequity, with any excess over fair value being treated as an expense in theincome statement. Investments Investments held as fixed assets are stated at cost less provision for anyimpairment in value. Inventories Inventories, which comprise consumables, are stated at the lower of cost and netrealisable value. Leases and hire purchase contracts Assets acquired under leases and hire purchase contracts are capitalised anddisclosed under property, plant and equipment at their estimated fair value, or,if lower, the present value of the minimum lease payments on the inception ofeach lease or contract and depreciated over their estimated useful lives. Thecapital element of the future payments is treated as a liability and the totalfinance charge is allocated over the period of the lease or contract in such away as to give a constant charge on the outstanding liability. Operating lease rentals payable or receivable are charged or credited to theincome statement over the lease term. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchangeruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies are translated using the rate of exchangeruling at the balance sheet date and the gains or losses on translation areincluded in the income statement with the exception of differences on foreigncurrency borrowings that provide a hedge against a net investment in a foreignentity. These are taken directly to equity until the date of disposal of the netinvestment, at which time they are recognised in the consolidated incomestatement. The assets and liabilities of foreign operations are translated into sterling atthe rate of exchange ruling at the balance sheet date. Income and expenses aretranslated at average exchange rates for the year, where this represents areasonable approximation of actual exchange rates at the date of transactions.The resulting exchange differences are taken directly to a separate component ofequity. On disposal of a foreign entity, the deferred cumulative amountrecognised in equity relating to that particular foreign operation is recognisedin the income statement. The Group has elected to apply the provisions of IAS 21, 'The effects of changesin foreign exchange rates', prospectively from the date of transition of 1October 2004. The effect of this being that the Group has taken advantage of theone-off exemption available to reset cumulative exchange differences on netinvestment in foreign operations to zero at the date of transition. During the period the most significant currencies, other than sterling, were theUS dollar and South African rand. The average exchange rates used to convertresults into sterling were US$ 1.74:£1 (six months ended 31 March 2005: US$1.89:£1) and SA Rand 11.10:£1 (six months ended 31 March 2005: SA Rand 11.23:£1). Taxation The charge for current taxation is based on the results for the period asadjusted for items which are non-assessable or disallowed, based on tax ratesthat are enacted or substantively enacted at the balance sheet date. Deferred taxation is accounted for using the balance sheet liability method inrespect of temporary differences arising from differences between the carryingamount of assets and liabilities in the financial statements and thecorresponding tax bases used in computation of taxable profit. Deferred tax liabilities or assets are recognised on all temporary differencesexcept in respect of investments in subsidiaries and associates where the Groupis able to control the reversal of the temporary difference and it is probablethat it will not reverse in the foreseeable future. The deferred tax is notaccounted for if it arises from initial recognition of goodwill or an asset orliability in a transaction, other than a business combination, that at the timeof the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets on temporary differences arising on investments insubsidiaries or associates are recognised only to the extent that it is probablethe temporary difference will reverse in the foreseeable future; and taxableprofits will be available against which the temporary difference can beutilised. Deferred tax assets are recognised either to the extent that it is probable thatfuture taxable profit will be available against which the temporary differenceor unused deferred tax asset can be utilised, or in the case of deferred tax onappropriate tax credits will arise. Their carrying amount is reviewed at eachbalance sheet date on the same basis. Deferred tax is measured on an undiscounted basis at the tax rates that areexpected to apply in the periods in which the asset or liability is settled.This is based upon tax rates and laws enacted or substantively enacted at thebalance sheet date. Financial assets Financial assets in the scope of IAS 39 are classified as either financialassets at fair value through profit or loss, loans and receivables andheld-to-maturity investments, as appropriate. When financial assets arerecognised initially, they are measured at fair value, plus, in the case ofinvestments not at fair value through profit or loss, directly attributabletransaction costs. The Group determines the classification of its financialassets after initial recognition and, where allowed and appropriate,re-evaluates this designation at each financial year-end. Financial assets at fair value through profit or lossFinancial assets classified as held for trading are included in the category'financial assets at fair value through profit or loss'. Financial assets areclassified as held for trading if they are acquired for the purpose of sellingin the near term. Derivatives are also classified as held for trading unlessthey are designated and effective hedging instruments. Gains or losses oninvestments held for trading are recognised in income. Held-to-maturity investmentsNon-derivative financial assets with fixed or determinable payments and fixedmaturity are classified as held-to-maturity when the Group has the positiveintention and ability to hold to maturity. Held for maturity investments arecarried at amortised cost. Investments intended to be held for an undefinedperiod are not included in this classification. Loans and receivablesLoans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. Such assets arecarried at amortised cost using the effective interest method. Gains and lossesare recognised in income when the loans and receivables are derecognised orimpaired, as well as through the amortisation process. Available-for-sale financial assetsAvailable-for-sale financial assets are those non-derivative financial assetsthat are designated as such or are not classified in any of the precedingcategories. At initial recognition available-for sale financial assets aremeasured at fair value with gains or losses being recognised as a separatecomponent of equity until the investment is derecognised or until the investmentis determined to be impaired at which time the cumulative gain or losspreviously reported in equity is included in the income statement. Loans and borrowings All loans and borrowings are initially recognised at the fair value of theconsideration received less directly attributable transaction costs. Afterinitial recognition, interest-bearing loans and borrowings are subsequentlymeasured at amortised cost using the effective interest method. Gains and lossesare recognised in net profit or loss when the liabilities are derecognised aswell as through the amortisation process. Convertible loan The component of the convertible loan that exhibits characteristics of aliability is recognised as a liability in the balance sheet, net of transactioncosts. On issuance of the convertible loan, the fair value of the liabilitycomponent is determined using a market rate for an equivalent non-convertiblebond and this amount is carried as a long term liability on the amortised costbasis until extinguished on conversion or redemption. Where applicable the remainder of the proceeds is allocated either to theconversion option that is recognised and included in shareholders' equity or thefair value of the derivative element that is recognised in the balance sheet,where it meets the definition of a financial liability. Any movement in thederivative element is recorded in the income statement. 2. SEGMENT INFORMATION The Group is organised into two primary reporting segments, namely outsourcingand software. These are the Group's primary reporting format for segmentinformation. Secondary segment information is reported geographically. Revenue by business segment Unaudited Unaudited Unaudited 6 months to 6 months to Year to 31 March 31 March 30 September 2006 2005 2005 £'000 £'000 £'000SoftwareLicence fees 3,271 2,352 3,348Solution delivery 8,651 6,598 15,231Maintenance and other recurring 3,732 2,517 5,611US public sector - 946 1,797 ---------- ---------- ---------- 15,654 12,413 25,987 Outsourcing 22,889 16,359 34,929 ---------- ---------- ----------Total revenue 38,543 28,772 60,916 ========== ========== ========== Profit/(loss) before tax and Unaudited Unaudited Unauditedadjusted profit /(loss) by 6 months to 6 months to Year tobusiness segment 31 March 31 March 30 September 2006 2005 2005Software £'000 £'000 £'000 Segment profit/(loss) 1,832 (104) (2,137)Amortisation 203 - 94Share based payments 456 426 1,115 ---------- ---------- ----------Adjusted segmental profit/(loss) for the period 2,491 322 (928) ========== ========== ========== Outsourcing Segment profit 2,244 1,292 3,525Amortisation 185 - -Share based payments 51 75 124 ---------- ---------- ----------Adjusted segmental profit for the period 2,480 1,367 3,649 ========== ========== ========== Operating profit 4,076 1,188 1,388Non-segmental adjustments:- net finance income/(costs) 313 (119) 162- share of associates (loss)/profit (96) 9 42- loss on disposal of continuingoperations - - (54) ---------- ---------- ---------- Profit before tax 4,293 1,078 1,538Amortisation 388 - 94Share based payments 507 501 1,239Loss on disposal of continuing operations - - 54 ---------- ---------- ----------Adjusted profit for the period 5,188 1,579 2,925 ---------- ---------- ---------- The table below provides additional disclosure of revenue by geographicalmarket: Revenue by origin and destination Unaudited Unaudited Unaudited 6 months to 6 months to Year to 31 March 31 March 30 September 2006 2005 2005 £'000 £'000 £'000 Africa 15,481 10,344 23,096Europe 13,106 8,746 16,312Americas 7,894 7,248 16,706Asia Pacific 2,062 2,434 4,802 ---------- ---------- ----------Total revenue 38,543 28,772 60,916 ========== ========== ========== 3. OPERATING EXPENSES Included within operating expenses for the six months ended 31 March 2006 is acredit of £508,000 relating to the re-cycling of foreign exchange balancesresulting from the liquidation of a foreign subsidiary. 4. TAXATION The effective tax rate for the six months ended 31 March 2006 has beencalculated at 13%. The anticipated effective tax rate for the group for the yearending 30 September 2006 is expected to be 15% (six months ended 31 March 2005:20%, year to 30 September 2005: 55%) and will be dependant on the location oftrading profits in the remainder of this year. Unaudited Unaudited Unaudited 6 months to 6 months to Year to 31 March 31 March 30 September 2006 2005 2005 £'000 £'000 £'000Current taxationUK taxation 217 - 265Overseas taxation 718 547 1,770Adjustments in respect of prior (324) (256) (57)periods ---------- ---------- ----------Total current tax 611 291 1,978 Deferred taxationOrigination andreversal of timing differences 73 2 (344) ---------- ---------- ----------Total tax charge 684 293 1,634 ========== ========== ========== 5. EARNINGS PER SHARE Unaudited Unaudited Unaudited 6 months to 6 months to Year to 31 March 31 March 30 September 2006 2005 2005 pence pence pence Basic earnings/(loss) per share 0.76 0.16 (0.07)Adjustment for dilutive potential ordinary shares - add share options (0.01) - - ---------- ---------- ----------Diluted earnings/(loss) per share 0.75 0.16 (0.07) ========== ========== ========== Basic earnings/(loss per share) 0.76 0.16 (0.07)Adjustments- amortisation 0.09 - 0.02- share based payments 0.11 0.12 0.29- loss on disposal of continuingoperations - - 0.01 ---------- ---------- ----------Adjusted basic earnings per share 0.96 0.28 0.25 Adjustment for dilutive potentialordinary shares (0.02) (0.01) (0.01) ---------- ---------- ----------Adjusted diluted earnings per share 0.94 0.27 0.24 ========== ========== ========== Earnings per share is calculated as follows: Number of shares (thousand)Average number of shares in issue used to calculate basic and adjusted basic earnings/(loss) per share 443,304 438,560 438,667Dilutive potential ordinary shares- add share options 9,509 9,152 9,005 ---------- ---------- ----------Shares used to calculate diluted and adjusted diluted earnings per share 452,813 447,712 447,672 ========== ========== ========== Basic and diluted earnings (£'000)Basic and diluted earnings/(loss) for the period 3,370 700 (298) - add amortisation 388 - 94- add share based payments 507 501 1,239- add loss on disposal of continuing operations - - 54 ---------- ---------- ----------Adjusted and adjusted diluted earnings for the period 4,265 1,201 1,089 ========== ========== ========== 6. INTANGIBLE ASSETS On 1 January 2006 the Group acquired 100% of Servicekonzept AG at a cost of£9,786,000. This resulted in the creation of provisional goodwill and separatelyidentifiable intangible assets of £6,839,000 and £3,817,000 respectively. During the period Servicekonzept contributed £1,044,000 to revenue and £277,000to profit before tax. 7. TRADE AND OTHER RECEIVABLES Unaudited Unaudited Unaudited 31 March 31 March 30 September 2006 2005 2005 £'000 £'000 £'000 Trade receivables 7,077 7,274 8,819Other debtors 1,248 962 840Accrued income 3,305 2,061 2,996 ---------- ---------- ---------- 11,630 10,297 12,655 ========== ========== ========== 8. TRADE AND OTHER PAYABLES Unaudited Unaudited Unaudited 31 March 31 March 30 September 2006 2005 2005 £'000 £'000 £'000 CurrentTrade payables 2,534 2,102 2,037Other payables 4,299 2,561 4,269Accruals 3,695 3,077 4,042Social security and other taxes 1,180 1,019 1,665 ---------- ---------- ---------- 11,708 8,759 12,013 ========== ========== ==========Non currentOther payables 501 790 400 ========== ========== ========== 9. INTEREST BEARING LOANS AND BORROWINGS Unaudited Unaudited Unaudited 31 March 31 March 30 September 2006 2005 2005 £'000 £'000 £'000 CurrentBank loans and overdrafts 1,735 27 -Other loans 800 800 800Obligations under finance leases andhire purchase agreements 421 242 430 ---------- ---------- ---------- 2,956 1,069 1,230 ========== ========== ========== Non currentBank loans and overdrafts 4,771 59 -Other loans 2,600 3,400 3,000Convertible loan notes 1,181 933 1,077Obligations under finance leases andhire purchase agreements 655 240 526 ---------- ---------- ---------- 9,207 4,632 4,603 ========== ========== ========== 10. EXPLANATION OF TRANSITION TO IFRS In accordance with IFRS 1 "First-time Adoption of International FinancialReporting Standards" the group is required to present reconciliations of itsequity at the date of transition to IFRS (1 October 2004), at the previousyear's interim date (31 March 2005), and at the date of the most recent annualfinancial statements (30 September 2005) (see note 10b). Reconciliations of theGroup's profit for the period ended 31 March 2005 and the year ended 30September 2005 are also required (see note 10a). There was no material effect on the underlying cash generation and expendituresof the Group, however there were some presentational changes on the adoption ofIAS 7 "Cash Flow Statements". Under IFRS, short-term investments are shown ascash and cash equivalents. These were previously excluded under UK GAAP. For thesix months ended 31 March 2006 these short-term investments amounted to £805,000(six months ended 31 March 2005: £nil, year to 30 September 2005: £155,000) 10a. Effect of IFRS adoption on profit/(loss) for the prior periods Unaudited Unaudited 6 months to Year to 31 March 30 September 2005 2005 Note £'000 £'000 Loss for the period reported under UK GAAP (5,322) (12,713) Share based payments A (501) (1,239)Employee benefits B (155) (111)Financial instruments D (195) 62Goodwill and intangible assets E 6,958 14,170Income taxes F - (265) ---------- ----------Profit/(loss) for the period reported under 785 (96)IFRS ========== ========== 10b. Effect of IFRS adoption on equity Unaudited Unaudited Unaudited 1 October 31 March 30 September 2004 2005 2005 Note £'000 £'000 £'000 Total equity reported under UK 36,229 30,087 24,148GAAP Share based payments A - - -Employee benefits B (52) (207) (163)Foreign exchange rates C - - -Financial instruments D (6) (201) 56Goodwill and intangible assets E - 6,958 13,905Income taxes F - - - ----------- ---------- ----------Total equity reported under IFRS 36,171 36,637 37,946 =========== ========== ========== 10c. Explanatory notes to the IFRS adjustments Transitional arrangements upon first time adoption of IFRS (IFRS 1) IFRS 1 "First-time Adoption of International Financial Reporting Standards" setsout the transition rules, which must be applied, when IFRS is adopted for thefirst time. The standard sets out certain mandatory exemptions to retrospectiveapplication and certain optional exemptions. The most significant optionalexemptions available and taken by the Group are as follows: • 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. The primary statements have been presented in a format consistent with IFRS. Thematerial adjustments between UK GAAP and IFRS for the six month period to 31March 2006 and the year ended 30 September 2005 are detailed below. A. 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' issued 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 six months to31 March 2006 is £507,000 (six months to 31 March 2005 £501,000; year to 30September 2005 £1,239,000). In calculating the fair value of these options the Group has used the Hull Whitetrinomial model using the following variables: 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 B. 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 £27,000 has been recordedin the IFRS income statement for the six months to 31 March 2006 (six months to31 March 2005 £155,000; year to 30 September 2005 £111,000), representing themovement on holidays accrued, but not taken, at the balance sheet date. C. 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. D. 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, theGroup has assumed the comparable debt only interest rate to be 16%. The fairvalue of the derivative element of the loans has been reflected in the balancesheet. Any movement in the derivative element has been recorded in the incomestatement. All adjustments have been made retrospectively. E. 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 to 30 September 2005 of £14,170,000 under UK GAAPhas been reversed under IFRS.An amortisation charge of £94,000 has been recorded in the IFRS income statementto 30 September 2005 representing amortisation on separately identifiableintangible assets acquired as part of the acquisition of Websoft (Pty) Limitedon 1 July 2005. F. 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. G. Research and development (IAS 38 - Intangible Assets) Research expenditure is charged to income in the year in which it is incurred. Expenditure incurred in the development of software and hardware products, andtheir related intellectual property rights, is capitalised as an intangibleasset only when: • technical feasibility has been demonstrated; • adequate technical, financial and other resources exist to complete the development, which the Group intends to complete and use; • future economic benefits expected to arise are deemed probable;and • the costs can be reliably measured. Development costs not meeting these criteria are expensed in the incomestatement as incurred. Capitalised development costs are amortised on astraight-line basis over their useful economic lives once the related softwareand hardware products are available to use. INDEPENDENT REVIEW REPORT TO THE INNOVATION GROUP PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 31 March 2006 which comprises the Consolidated IncomeStatement, Consolidated Balance Sheet, Consolidated Cash Flow Statement,Consolidated Statement of Changes in Equity, and the related notes 1 to 10. Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. This report is made solely to the company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than the company, for our work,for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 1, the nextannual financial statements of the group will be prepared in accordance withthose IFRSs adopted for use by the European Union. This interim report has beenprepared in accordance with the requirements of IFRS 1, "First Time Adoption ofInternational Financial Reporting Standards" relevant to interim reports. The accounting policies are consistent with those that the directors intend touse in the next financial statements. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4'Review of interim financial information' issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of making enquiriesof group management and applying analytical procedures to the financialinformation and underlying financial data, and based thereon, assessing whetherthe accounting policies have been applied. A review excludes audit proceduressuch as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with International Standards on Auditing (UK and Ireland) andtherefore provides a lower level of assurance than an audit. Accordingly we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 March 2006. Ernst & Young LLPReadingRG1 1YE22 May 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Team Internet