15th May 2006 07:01
RM PLC15 May 2006 15th May 2006 RM plc: interim results for the six months to 31 March 2006 RM plc, the leading supplier of information and communications technology (ICT)and other services to education, announces strong results for the six months to31 March 2006. Good performance against a background of tough conditions in individual schoolsmarket • Revenue up 5% to £114.2 million (2005: £109.2 million) • Profit before tax £2.0 million (2005: £0.9 million loss) • Cash and cash equivalents £24.5 million, up £10.7 million from March 2005 • Dividend per share up 7% to 1.12p (2005: 1.05p) Improving business model • Increased contribution from successful delivery of long term projects • Additional education project wins • Broader range of products and services • Developing new areas of activity: assessment, data, education resources Customer success • Continued increase in customer satisfaction score: 7.34 in the period(2005 - full year: 7.21) • One of the World's Ten Best Web Support sites for 3rd consecutive year Commenting, Tim Pearson, CEO of RM, said: "In the first half of 2006 we've delivered increased revenue and strong cashgeneration against a background of difficult conditions in the individualschools market. It's a performance which clearly demonstrates that RM is a muchmore robust and diverse business than it was four years ago. "We've also made further progress with our BSF activity, signing the first - andso far only - contract to be awarded. Whilst the BSF programme has run moreslowly than anticipated, it remains an important long-term opportunity for us. "Looking at the year as a whole, the individual schools market has shownimprovement after the weak start to the financial year; our good first-halfperformance gives us more confidence in the outturn for 2006." - Ends - For further information, please contact: Tim Pearson, CEO RM plc 08709 200200 Mike Greig, Group Finance Director Phil Hemmings, Director of Corporate Affairs Andrew Fenwick Brunswick 020 7404 5959 Fiona Laffan Mark Antelme A briefing to analysts will take place at 9.30 am on Monday 15 May 2006 atBrunswick, 16 Lincoln's Inn Fields, London WC2A 3ED. A live audio feed will beavailable to analysts and shareholders who are unable to attend this meeting inperson. Please dial telephone number: +44 (0) 1452 561263 to access thisfacility. A copy of the presentation will be available on www.rm.com at 8.30 am. International Financial Reporting Standards This interim statement is the first that the Group has reported underInternational Financial Reporting Standards (IFRS). IFRS transition informationwas published in December 2005 for the year to 30 September 2005 and showed a£1.2 million increase in profit before tax and goodwill charges for that year.The comparative results included in this statement are restated under IFRS.Explanation of the transition and detailed reconciliations between IFRS and UKGAAP are included at the end of the Interim Report and Accounts. Results Revenue in the period was up 5% to £114.2 million (2005: £109.2 million); anincreased contribution from education projects more than offset the previouslyreported weakness in the individual schools market which affected the firstquarter of the year. Profit before tax was £2.0 million (2005: loss of £0.9 million), reflecting bothour prompt action to manage the Group's cost base in response to the weakness inthe individual schools market, and the benefit of those education projects whichhave now completed their start-up phases and are contributing profit as well asrevenue. Operating costs were slightly reduced at £29.3 million (2005: £29.4 millionexcluding goodwill impairment), despite the previously indicated increasedinvestment in the Building Schools for the Future (BSF) initiative. BSFexpenditure during the period was £2.0 million (2005: £0.4 million). RM continues to be a business which turns profits into cash; net cash inflowfrom operating activities during the period was £10.7 million (2005: net cash outflow of £2.1 million). Cash and cash equivalents stood at £24.5 million at the end of the period (30 September 2005:£22.9 million; 31 March 2005: £13.8 million). Investment in PFI projects is now complete and these projects are now cash-generative. The Board has declared an interim dividend of 1.12p per share (2005: 1.05p), anincrease of 7%, payable on 30 June 2006 to shareholders on the register at 2June 2006. Market context Education, more than any other public service investment area, was givenpriority in the March 2006 Budget: the Chancellor reiterated the government'scommitment to major capital expenditure for renewing English schools, throughboth the BSF programme and a separate initiative for primary schools. The scope for ICT to contribute to education and children's services continuesto widen, with policy makers increasingly seeing ICT as a core part of theireducation initiatives. For example, the Department for Education and Skills(DfES) is leading the government's Every Child Matters programme, which bringstogether all the ways in which central and local government supports childrenand will further drive the need for sophisticated ICT systems. A more resilient business model Over recent years the Group has grown from a single company focusing on theprovision of ICT products and services to individual schools, to a group ofcompanies offering a broad and diverse range of products and services to a wideeducation customer base. Our performance in the first half of 2006 demonstrateshow important this development has been: even in a period when, as previouslyreported, the individual schools market had been weak, we have been able todeliver a significantly improved result compared to last year. The Group is now delivering twelve major long-term education projects and wecontinue to identify further opportunities - both as part of the BSF programmeand beyond. Our education project success continued in the period with theselection of RM's Community Connect family of network software for the nextstage of Northern Ireland's C2K programme; this will put RM's intellectualproperty at the heart of the network C2K is providing for all primary andpost-primary schools in Northern Ireland. The Group has also developed positions in new markets and broadened itseducational and technical capabilities through carefully targeted acquisitions.Developments in the period include: * Further growth in the first half of 2006 from TTS (the specialist education resources business which we acquired in 2004), which, building on the success of the Bee-Bot programmable robot, is now developing an electronic learning products division; * The award in January 2006 of the DfES National Pupil Database - Achievement and Attainment Tables contract to an RM-led consortium offering a service building on the work of Forvus (the data-analysis business which we acquired in 2003). In the area of assessment, we are pioneering some of the world's most innovativetechnology-based approaches. For the 2006 season over 60% of English secondaryschools have registered for the Key Stage 3 ICT test we are delivering on behalfof the Qualifications and Curriculum Authority (QCA). We will be performinglarge scale exam script processing for Cambridge Assessment this summer andSCORIS, our recently launched e-marking software application, is generatingsignificant interest from other examination bodies and authorities. Individual schools We reported, at the time of our preliminary results in November 2005, thatbudget pressures resulting from both the government's workforce remodellingprogramme and the introduction of teaching and learning responsibility paymentsfor teachers were causing weakness in the individual schools market. Thisweakness marked the first quarter of the year; however, since January, there hasbeen evidence of recovery, with overall sales in this business area returning tolevels similar to those of the previous year. Education software - mostly sold to individual schools - continues to presentchallenges. The launch of BBC jam (the BBC's digital curriculum product),combined with a reduction in the level of dedicated funds (electronic learningcredits), has resulted in schools spending less on software. We continue toconcentrate on developing software in areas that are less affected by the BBC'sactivities. Building Schools for the Future In February we announced that we had signed the first (and, at the date of thisstatement, the only) BSF contract to be awarded; a £6.4 million ICT contractwith Solihull Council. At this stage in the BSF programme it is too early to draw conclusions aboutRM's performance. Progress in Waves 1 and 2 of the programme has been slowerthan anticipated, with only three other procurements with ICT elements reachingpreferred bidder stage so far. Whilst we have achieved our aim of reaching theshortlist for every project for which we have bid, RM does not feature in thesuccessful consortia in these three projects. As we have previously stated, the consortium nature of the programme means thatthere is an element of lottery in BSF bidding. Our early experience has providedus with a great deal of insight about how to create even more compelling bids infuture, for both for the customer and the consortia with which we work. Weexpect that, as more contracts are awarded, we will significantly improve oursuccess rate. Operations Across the business our operational effectiveness continues to improve: customersatisfaction scores have increased further; order-to-shipment times arereducing; our support operation has been recognised, for the third consecutiveyear, as one of the World's Ten Best Web Support sites; and our educationprojects all continue to demonstrate innovative and effective educational use oftechnology. Customer success As has been the case since Tim Pearson took over as CEO, the customersatisfaction score is our most important non-financial measure. In the firsthalf of 2006 our aggregate customer satisfaction score increased again to 7.34,which compares with an aggregate score of 7.21 for 2005; this is the sixthconsecutive half-year in which we have achieved an improvement in this score. We have also made progress in measuring customer success - that is, the extentto which RM's products and services genuinely contribute in helping ourcustomers to achieve educational success. In the South Yorkshire eLearningProject, for example, we are on track to deliver the target of 18,000 level 2ICT qualifications. Outlook We believe that BSF continues to be an important opportunity for RM. However, itwill remain a significant net investment in 2007: the slower than anticipatedprogress of the programme means that there will be a smaller than previouslyexpected revenue and income contribution from BSF projects, but stillsignificant bid costs. Regular readers of RM's interim results statement will know that the first halfof our year is never a good indicator of the outcome for the year as a whole.RM's business has traditionally been seasonal in nature, with schools'purchasing patterns meaning that the majority of revenue and an even greaterproportion of profit occur in the second half of the year. This year, education projects are providing a greater proportion of Grouprevenues than previously and have contributed to strong first-half results.While it is always difficult to forecast the summer spending peak, theindividual schools market has shown improvement after the weak start to thefinancial year. Looking at the year as a whole, good first-half performancegives the Board more confidence in the outturn for 2006. In the longer term, the Group is actively investing in business areas wherethere is significant growth potential, with assessment, general educationresources, broader children's services, education enterprise systems andinternational software markets all being pursued. We believe that education -both in the UK and internationally - continues to offer significantopportunities and that RM is uniquely well placed to provide innovative productsand services that help teachers to teach and learners to learn. Consolidated income statement for the half-year ended 31 March 2006 £'000 Notes Half-year ended Year ended 31 March 31 March 30 September 2006 2005 2005 (restated) (restated) Revenue 2 114,185 109,211 262,707Cost of sales (83,719) (79,558) (188,444)Gross profit 30,466 29,653 74,263Selling and (16,159) (15,932) (33,940)distribution costs Research and (7,514) (7,452) (16,688)development expenses Administrative expenses (5,633) (6,048) (10,551)Other income and 3 - (1,247) (2,469)expense (29,306) (30,679) (63,648)Profit/(loss) from 1,160 (1,026) 10,615operations Investment income 893 496 1,359Finance costs (86) (374) (446)Profit/(loss) before 3 1,967 (904) 11,528tax Tax 4 (544) (94) (3,613)Profit/(loss) for the 1,423 (998) 7,915period Earnings per ordinary 5 share: Basic 1.6p (1.1)p 8.9pDiluted 1.6p (1.1)p 8.9p Proposed dividend per 6 share: Interim 1.12p 1.05p 1.05pFinal 3.80p All activities relate to continuing operations. The comparative figures have been restated to reflect the adoption ofInternational Financial Reporting Standards (IFRS). Reconciliations of theconsolidated income statement for the half-year ended 31 March 2005 and the yearended 30 September 2005 are shown in note 10. Consolidated statement of recognised income and expense for the half-year ended 31 March 2006 £'000 Note Half-year ended Year ended 31 March 31 March 30 September Exchange differences on translation of 40 13 44foreign operations Actuarial gains/(losses) on defined benefit 8 4,211 688 (2,300)pension schemes Tax on items taken directly to equity (1,283) 66 887Net income/(loss) recognised directly in 2,968 767 (1,369)equity Profit/(loss) for the period 1,423 (998) 7,915Total recognised income and expense for the 4,391 (231) 6,546period Consolidated balance sheetas at 31 March 2006 £'000 Notes Half-year ended Year ended 31 March 31 March 30 September 2006 2005 2005 (restated) (restated) Non-current assets Goodwill 20,771 23,437 22,221Other intangible 1,478 1,687 1,714assets Property, plant and 26,134 22,733 24,643equipment Deferred tax assets 5,504 6,485 7,108 53,887 54,342 55,686Current assets Inventories 9,555 11,984 11,867Trade and other 40,000 36,379 54,142receivables Cash and cash 24,503 13,849 22,942equivalents 74,058 62,212 88,951 Total assets 127,945 116,554 144,637 Current liabilities Trade and other (68,964) (58,740) (77,255)payables Tax liabilities (45) (267) (1,315) (69,009) (59,007) (78,570) Net current assets 5,049 3,205 10,381 Non-current liabilities Retirement benefit 8 (11,136) (13,720) (15,890)obligation Other payables due (6,721) (9,851) (9,759)after one year Long-term provisions (970) (2,264) (2,170) (18,827) (25,835) (27,819) Total liabilities (87,836) (84,842) (106,389) Net assets 40,109 31,712 38,248 Equity 9 Share capital 1,836 1,795 1,815Share premium 23,818 20,464 22,151account Own shares (654) (1,063) (1,632)Capital redemption 94 94 94reserve Hedging and 84 13 44translation reserve Retained earnings 14,931 10,409 15,776Total equity 40,109 31,712 38,248 The comparative figures have been restated to reflect the adoption ofInternational Financial Reporting Standards. Reconciliations of the consolidatedbalance sheet and shareholder's equity at 31 March 2005 and 30 September 2005are shown in note 10. Consolidated cash flow statementfor the half-year ended 31 March 2006 £'000 Notes Half-year ended Year ended 31 March 31 March 30 September 2006 2005 2005 (restated) (restated)Profit/(loss) from operations 1,160 (1,026) 10,615Adjustments for: Gain on derivatives 41 - -Depreciation of property, plant and 4,630 4,066 8,682equipment Impairment of goodwill - 1,247 2,469Gain/(loss) on disposal of property, 125 (112) (259)plant and equipment Decrease in provisions - (56) (150)Share-based payment charge 588 445 988Pension charge 885 916 1,730Operating cash flows before movements in 7,429 5,480 24,075working capital Decrease in inventories 2,312 2,491 2,608Decrease/(Increase) in receivables 14,260 15,890 (1,733)Decrease in payables (10,712) (22,771) (4,346)Cash generated by operations 13,289 1,090 20,604Tax paid (1,493) (1,468) (3,743)Pension contribution (1,504) (1,576) (3,400)Interest received 399 - 676Interest paid (10) (156) (36)Net cash inflow/ (outflow) from operating 10,681 (2,110) 14,101activities Investing activities Interest received 376 351 392Proceeds on disposal of property, plant 425 770 1,084and equipment Purchases of property, plant and (6,439) (8,906) (15,590)equipment Net cash used in investing activities (5,638) (7,785) (14,114) Financing activities Dividends paid 6 (3,399) (3,195) (4,127)Proceeds from share capital issue 797 51 766Purchase of own shares (516) - (569)Repayment of loan notes (367) (600) (600)Net cash used in financing activities (3,485) (3,744) (4,530) Net increase/(decrease) in cash and cash 1,558 (13,639) (4,543)equivalents Cash and cash equivalents at the 22,942 27,480 27,480beginning of period Effect of foreign exchange rate changes 3 8 5Cash and cash equivalents at the end of 7 24,503 13,849 22,942period The comparative figures have been restated to reflect the adoption ofInternational Financial Reporting Standards. Notes to the interim financial report 1. General information The information for the year ended 30 September 2005 does not constitutestatutory accounts as defined in section 240 of the Companies Act 1985. A copyof the statutory accounts for that year, prepared in accordance with UK GAAP,has been delivered to the Registrar of Companies. The auditors' report on thoseaccounts was unqualified and did not contain a statement under section 237(2) ofthe Companies Act 1985. In common with other European listed companies, RM plc is required to adoptInternational Financial Reporting Standards for its first consolidated financialstatements for periods beginning on or after 1 January 2005. For RM plc thisinterim financial report, for the half-year ending 31 March 2006, is the firstinterim report under IFRS and the first annual report under IFRS will be theannual report and accounts for the year ending 30 September 2006. The interimfinancial report is unaudited and has been prepared in accordance with theprinciples of IAS34 Interim financial reporting. The interim financial reporthas been prepared on the basis of the accounting policies set out in note 10. This interim report was approved by the Board of Directors on 12 May 2006. 2. Business segments The business operates in one primary segment, being the supply of products andservices to education. As in previous periods further analysis of revenue is given by businessactivity: £'000 Revenue Half-year ended Year ended 31 March 30 September 2006 2005 2005 Infrastructure software and services 39,910 37,886 87,595Education software and services 26,255 22,893 47,459Hardware and distribution 48,020 48,432 127,653 114,185 109,211 262,707 3. Profit/(loss) before tax As stated in note 1, these accounts are the first which the Group has preparedunder IFRS. Presenting the accounts under IFRS is estimated to have led to anincrease in profit before tax in the half-year ended 31 March 2006 of £733,000compared to the profit before tax and goodwill amortisation which would havebeen presented under UKGAAP as it stood at 30 September 2005, the date of thelast UKGAAP financial statements. Full reconciliations of UKGAAP to IFRS resultsfor the comparative periods are contained at the end of this interim report.Other income and expense relates to goodwill impairment charges in priorperiods. The main contributing factors during this half-year continue to be pensions,which accounts for £670,000 of the increase, the accrual for employees' unusedpaid holiday entitlements which reduced by £103,000 and additional charges forshare-based payments of £81,000. The adoption of IAS 32 and 39 Financial instruments has led to the recognitionof a £41,000 gain on open foreign exchange contracts in the half-year ended 31March 2006. Commercially effective hedges may continue to lead to incomestatement volatility in the future. The Group operates a number of executive and employee share schemes, includingco-investment and deferred bonus plans, share options and staff share schemes.The fair values of these schemes have been assessed using Black-Scholes andMonte-Carlo models, as appropriate to the scheme, at the date of grant. The fairvalues of the schemes are expensed over the period between grant and vesting. During the periods reported the Group has reviewed its research and developmentexpenditure against the criteria outlined in the Accounting Policies. Nomaterial expenditure is considered to have met the capitalisation criteria.Consequently capitalised research and development expenditure is nil (2005:nil). 4. Tax Corporation tax for the interim period is charged at 27.6% (2005 interim:27.4%), representing the best estimate of the weighted average annualcorporation tax rate expected for the full financial year. The effective taxrate has been calculated excluding the impact of goodwill charges from profitbefore tax in order to provide a more meaningful analysis: £'000 Half-year ended Year ended 31 March 31 March 30 September 2006 2005 2005 Profit/(loss) before 1,967 (904) 11,528tax Goodwill charges - 1,247 2,469Profit before tax and 1,967 343 13,997goodwill charges Tax (544) (94) (3,613)Effective rate 27.6% 27.4% 25.8% 5. Earnings per ordinary share The calculation of the basic and diluted earnings per ordinary share is based onthe following data: Half-year ended Half-year ended Year ended 31 March 2006 31 March 2005 30 September 2005 Profit Number Pence Loss Number Pence Profit Number Pence after of per after of per after of per tax shares share tax shares share tax shares share £'000 '000 £'000 '000 £'000 '000 Basic 1,423 90,820 1.6 (998) 88,751 (1.1) 7,915 88,924 8.9earnings per ordinary share Effect of - 560 - - 953 - - 434 -dilutive potential ordinary shares: share options Diluted 1,423 91,379 1.6 (998) 89,704 (1.1) 7,915 89,358 8.9earnings per ordinary share 6. Dividends Amounts recognised as distributions to equity holders in the period: £'000 Half-year Year ended ended 31 31 30 March March September 2006 2005 2005 Interim dividend for the half-year ended 31 March 2005 - - 932of 1.05p per share Final dividend for the year ended 30 September 2005 of 3,399 3,195 3,1953.80p (2004: 3.60p) per share 3,399 3,195 4,127 The proposed interim dividend was approved by the Board on 12 May 2006 and hasnot been included as a liability as at 31 March 2006: £'000 Half-year ended 31 31 March March 2006 2005 Proposed interim dividend for the half-year ended 31 March 2006 of 1,022 9321.12p (2005: 1.05p) per share 7. Notes to the cash flow statement Cash and cash equivalents (which are presented as a single class of assets onthe face of the balance sheet) comprise cash at bank and other short-term highlyliquid investments with a maturity of three months or less. Net funds £'000 Year ended Cash flow Non-cash Half-year ended 30 September movements 31 March 2005 2006 Cash and cash equivalents 22,942 1,558 3 24,503Loan notes due within one (1,099) 367 (1,200) (1,932)year Net funds 21,843 1,925 (1,197) 22,571Issuable loan notes (1,200) - 1,200 -Deferred consideration (2,450) - 1,450 (1,000) 18,193 1,925 1,453 21,571 In the half-year ended 31 March 2006 the re-estimation of deferred considerationoutstanding resulted in a reduction of £1.5m to deferred consideration and acorresponding reduction in goodwill. 8. Employee benefits - defined benefit pension scheme In the half-years ended 31 March 2005 and 2006 the deficit on the Group'sdefined benefit pension scheme has been rolled forward from the respective prioryear end. The roll forward includes actual investment returns for the periodsand market derived discount rates on liabilities of 5.05% at 31 March 2006 and30 September 2005 (5.48% at 31 March 2005). No other assumptions, includingmortality and salary inflation, have been updated at the half-years. The nexttriennial valuation of the scheme will take place as at 31 May 2006. 9. Reconciliation of shareholders' equity £'000 Half-year ended Year ended 31 March 30 September 2006 2005 2005 Equity brought forward 38,248 34,644 34,644Profit/(loss) for the period 1,423 (998) 7,915Dividends paid (3,399) (3,195) (4,127)Exchange differences on translation of foreign 40 13 44operations Actuarial gains/(losses) on retirement benefit 4,211 688 (2,300)schemes Tax (charge)/credit on items taken directly to (1,283) 66 887equity Share-based payment transactions 588 445 988Movement in other reserves 281 49 197Equity carried forward 40,109 31,712 38,248 10. Explanation of transition to IFRS The year ending 30 September 2006 is the first year for which the Group ispresenting its financial statements under IFRS. The last financial statementsunder UK GAAP were for the year ended 30 September 2005. A restatement underIFRS of the accounts for the year ended 30 September 2005 was published inDecember 2005 and the date of transition to IFRS was 1 October 2004. Thefollowing information is presented below relating to the transition: i) IFRS accounting policies ii) Explanation of impact of transition to IFRS a. IFRS adoption choices b. Explanation of impact iii) Reconciliations a. Profit for the half-year ended 31 March 2005 and the year ended 30September 2005 b. Consolidated balance sheets and shareholders' equity at 1 October2004, 31 March 2005 and 30 September 2005 The reconciliations have been provided to enable comparison of the published 31March 2006 interim figures with those published in the corresponding period ofthe previous financial year. i) IFRS accounting policies The accounting policies are drawn up in accordance with those InternationalAccounting Standards (IAS) and IFRS issued by the International AccountingStandards Board (IASB) that are expected to be adopted by the European Union andavailable for use when the annual report and accounts for the year ended 30September 2006 are prepared. However the accounting policies may need to beupdated for interpretations issued by the International Financial ReportingInterpretations Committee, new standards issued by the IASB, or continuingevolution of interpretation of existing IAS and IFRS therefore the impact ofreporting under IFRS might change. The IFRS accounting policies adopted by theGroup are listed below. Basis of preparation The financial statements have been prepared on the historical cost basis exceptfor certain financial instruments, share-based payments and pension assets andliabilities which are measured at fair value. The preparation of financialstatements, in conformity with generally accepted accounting principles,requires the use of estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Although these estimates are based on thedirectors' best knowledge of current events and actions, actual resultsultimately may differ from those estimates. Consolidation The Group financial statements incorporate the financial statements of theCompany and all the subsidiaries for the periods during which they were membersof the Group. Inter-company balances between Group businesses are eliminated on consolidation.On acquisition, assets and liabilities of subsidiaries are measured at theirfair values at the date of acquisition with any excess of the cost ofacquisition over this value being capitalised as goodwill. Investment in subsidiaries In the Company accounts investments in subsidiaries are stated at cost less anyprovision for impairment where appropriate. Revenue Revenue represents amounts receivable for goods supplied and services providedto third-parties net of VAT and other sales-related taxes. Revenue from the sale of goods and services is recognised upon transfer to thecustomer of the significant risks and rewards of ownership. This is generallywhen goods are despatched to, or services performed for, customers. Revenue onhardware and perpetual software licences is recognised on shipment providingthere are no unfulfilled obligations that are essential to the functionality ofthe delivered product. If such obligations exist, revenue is recognised as theyare fulfilled. Revenue from term licences is spread over the period of thelicence, reflecting the Group's obligation to support the relevant softwareproducts or update their content over the term of the licence. Revenue fromcontracts for maintenance, support and annually and other periodicallycontracted products and services is recognised on a pro-rata basis over thecontract period. Revenue from installation, consultancy and other services isrecognised when the service has been provided. Appropriate provisions for returns, trade discounts and other allowances arededucted from revenue. Revenue on long-term contracts is recognised while contracts are in progress.Revenue is recognised proportionally to the stage of completion of the contract,based on the fair value of goods and services provided to date. Long-term contracts Profit on long-term contracts is recognised when the outcome of the contract canbe assessed with reasonable certainty. Thereafter profit is recognised basedupon the expected outcome of the contract and the turnover recognised at thebalance sheet date as a proportion of total contract turnover. If the outcome of a long-term contract cannot be assessed with reasonablecertainty no profit is recognised. Any expected loss, on a contract as a whole,is recognised as soon as it is foreseen. The loss is calculated using adiscounted cash flow model utilising a discount rate that reflects an estimateof the markets' assessment of the time value of money and the risks specific tothe liability. Any unwinding of the discount is included in the income statementas other finance costs. The balance of total cost incurred on work carried out, net of any amountsrecognised in cost of sales, is taken to the balance sheet, within trade andother receivables, as long-term contract balances. Where the cumulative fair value of goods and services provided exceeds amountsinvoiced the balance is included within trade and other receivables as amountsrecoverable on contracts. Where amounts invoiced exceed the fair value of goodsand services provided the excess is first set off against long-term contractbalances and then included in deferred income within trade and other payables. Pre-contract costs are expensed until the awarding of the contract to the Groupis considered to be probable which is not before the Group has been appointedsole preferred bidder. Once probability has been established and the contract isexpected to be awarded within a reasonable timescale and pre-contract costs areexpected to be recovered from the contract's net cash flows, then pre-contractcosts are recognised as an asset and accounted for as long-term contract costs. Property, plant and equipment Property, plant and equipment assets are stated at cost, less depreciation andprovision for impairment where appropriate. Property, plant and equipment are depreciated by equal annual instalments towrite down the assets to their estimated disposal value at the end of theiruseful lives as follows: Leasehold building Up to 25 years improvements Plant & equipment 4 - 10 years Computers 2 - 4 years Vehicles 2 - 4 years Assets purchased specifically for the delivery of long-term contracts arewritten off evenly over an appropriate period in accordance with the terms ofthe contract. Computer units produced by the Group which are used for the purposes ofadministration, research and development and customer demonstrations arecapitalised and carried at cost less accumulated depreciation. Intangible assets All intangible assets, except goodwill, are stated at cost less accumulatedamortisation and any accumulated impairment losses. Goodwill is not amortisedand is stated at cost less any accumulated impairment losses. Goodwill Goodwill represents the amount by which the fair value of the cost of a businesscombination exceeds the fair value of net assets acquired. For businesscombinations occurring before 1 October 2004, the Group's transition date toIFRS, goodwill is carried at the value at this date. Goodwill is not amortised. The recoverable amount of goodwill is tested for impairment annually or whenevents or changes in circumstance indicate that it might be impaired. Impairmentcharges are deducted from the carrying value. Research and development costs Research and development costs associated with the development of softwareproducts or enhancements and their related intellectual property rights areexpensed as incurred until all of the following criteria can be demonstrated, inwhich case they are capitalised as an intangible asset: a. the technical feasibility of completing the intangible asset so thatit will be available for use or sale. b. an intention to complete the intangible asset and use or sell it. c. ability to use or sell the intangible asset. d. how the intangible asset will generate probable future economicbenefits. Among other things, the entity can demonstrate the existence of amarket for the output of the intangible asset or the intangible asset itself or,if it is to be used internally, the usefulness of the intangible asset. e. the availability of adequate technical, financial and other resourcesto complete the development and to use or sell the intangible asset. f. an ability to measure reliably the expenditure attributable to theintangible asset during its development. The technological feasibility for the Group's software products is reachedshortly before the products are released to manufacturing, and late in thedevelopment cycle. Capitalised development costs are amortised over on astraight-line basis over their useful lives, once the product is available foruse. Useful lives are assessed on a project-by-project basis. Other intangible assets Intangible assets purchased separately, such as software licences that do notform an integral part of hardware and the costs of internally generated softwarefor the Group's use, are capitalised at cost and amortised over their usefullives of 2-4 years. For business combinations occurring after 1 October 2004, net assets acquiredincludes an assessment of the value of separately identifiable intangible fixedassets, in addition to other assets, liabilities and contingent liabilitiespurchased. These are amortised over their useful lives. The carrying values of intangible assets with finite lives are reviewed forimpairment when events or changes in circumstance indicate the carrying valuemay be impaired. If any such indication exists, the recoverable amount of theasset is estimated in order to determine the extent of impairment loss. Where itis not possible to estimate the recoverable amount of an individual asset, theGroup estimates the recoverable amount of the cash-generating unit to which itbelongs. Derivative financial instruments Derivative financial instruments are initially recorded at cost and then forreporting purposes remeasured to fair value at subsequent balance sheet dates.Changes in the fair value of derivative financial instruments that aredesignated and effective as cash flow hedges of forecast transactions arerecognised directly in equity. Amounts deferred in this way are recognised inthe income statement in the same period in which the hedged firm commitments orforecasted transactions are recognised in the income statement. Changes in the fair value of derivative financial instruments that do notqualify for hedge accounting are recognised in the income statement as theyarise. Hedge accounting is discontinued when the hedging instrument expires oris sold, terminated or exercised, or no longer qualifies for hedge accounting.At that point in time, any cumulative gain or loss, on the hedging instrumentrecognised in equity, is retained there until the forecasted transaction occurs.If a hedged transaction is no longer expected to occur, the net cumulative gainor loss recognised in equity is transferred to the income statement for theperiod. Inventories Finished goods and work-in-progress are valued at factory cost, includingappropriate labour costs and other overheads. Raw materials and bought infinished goods are valued at purchase price. All inventories are reduced to netrealisable value where lower than cost. Provision is made for obsolete, slowmoving and defective items where appropriate. Share-based payments The Group operates a number of executive and employee share schemes. For allgrants of share-based payments, the fair value as at the date of grant iscalculated using a pricing model and the corresponding expense is recognisedover the vesting period. At vesting the cumulative expense is adjusted to takeinto account the number of awards actually vesting. Employee benefits The Group has both defined benefit and defined contribution pension schemes. Forthe defined benefit plan, based on the advice of a qualified independent actuaryand using the projected unit method, the employers' portion of past and currentservice cost is charged to operating profit, with the interest cost, net ofexpected return on assets in the plan, reported as a financing item. Actuarialgains or losses are recognised directly in equity such that the balance sheetreflects the scheme's surplus or deficit as at the balance sheet date. Contributions to defined contribution plans are charged to operating profit asthey become payable. An accrual is maintained for paid holiday entitlements which have been accruedby employees during a period but not taken during that period. Employee share trusts Employee share trusts, which hold ordinary shares of the Company in connectionwith certain share schemes, are consolidated into the financial statements wherethe Company controls the trust. Any consideration paid or received by the trustsfor the purchase of the Company's own shares is shown as a movement inshareholders' equity. Leasing commitments Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the Group. All otherleases are classified as operating leases. Assets held under finance leases arecapitalised as fixed assets and depreciated accordingly. The capital element offuture lease payments is included in borrowings and interest is charged toincome before taxation on a reducing balance basis over the term of the lease.Hire purchase transactions are dealt with similarly, except that assets aredepreciated over their useful lives. Rentals under operating leases are charged on a straight-line basis over thelease term. Taxation Current tax, including UK corporation tax and foreign tax, is provided atamounts expected to be paid (or recovered) using the tax rates and laws thathave been enacted or substantially enacted by 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 taxliabilities are recognised for all taxable temporary differences except inrespect of investments in subsidiaries where the Group is able to control thereversal of the temporary difference and it is probable that the temporarydifference will not reverse in the foreseeable future. Deferred tax assets are recognised to the extent that it is probable that futuretaxable profit will be available against which the temporary difference can beutilised. Their carrying amount is reviewed at each balance sheet date on thesame basis. Deferred tax is measured on an undiscounted basis, and at the taxrates that are expected to apply in the periods in which the asset or liabilityis settled. It is recognised in the income statement except when it relates toitems credited or charged directly to equity, in which case the deferred tax isalso dealt with in equity. Deferred tax assets and liabilities are offset whenthey relate to income taxes levied by the same taxation authority and when theGroup intends to settle its current tax assets and liabilities on a net basis. Foreign currencies Balance sheet items of overseas companies are translated into Sterling at theyear-end rates of exchange. Income statement items and the cash flows ofoverseas subsidiary undertakings are translated at the average rates for theyear. Exchange differences on the translation of overseas opening net assets atclosing rates of exchange and the differences arising between the translation ofprofits at average and closing exchange rates are recorded as movements in thecurrency translation reserve. Transactions denominated in foreign currencies are translated into thefunctional currency of the Group entity at rates prevailing at the dates of theindividual transactions. Foreign currency monetary assets and liabilities aretranslated at the rates prevailing at the balance sheet date. Exchange gains andlosses arising are charged or credited to the income statement within operatingcosts. Dividends Dividends are recognised as a liability in the period in which the shareholders'right to receive payment has been established. ii) Explanation of impact of transition to IFRS a) IFRS adoption choices The rules for the first time adoption of IFRS are set out in IFRS 1 'First timeadoption of International Financial Reporting Standards'. In accordance withthis standard the accounting policies of the Group have been set out below andhave been applied retrospectively in determining the opening balance sheet underIFRS. IFRS 1 allows a number of exemptions to assist with the transition toIFRS. Where exemptions have been taken by the Group they are noted below. Business combinations The Group has taken advantage of the IFRS 1 option to apply IFRS 3 'Businesscombinations' only prospectively from the date of transition to IFRS. Thealternative was to restate all previous business combinations. As a result allprior business combination accounting is retained without change at thetransition date. The net amount of goodwill under UK GAAP at 1 October 2004 isadopted as the opening balance for goodwill at that date and amortisationpreviously charged under UK GAAP post-transition is removed for IFRSrestatements. Share-based payment Charges for share-based payments under IFRS have been recognised only for issuesthat were made after 7 November 2002 and had not vested at the transition dateas prescribed by IFRS 2. Employee benefits - defined benefit pension The Group has elected to recognise all cumulative actuarial gains and lossesfrom employee benefit schemes at the date of transition. For subsequent periodsIAS 19 'Employee benefits' permits a number of options for the recognition ofactuarial gains and losses. The Group's chosen policy is to adopt the 16December 2004 amendment to IAS 19 and recognise any variations in fullimmediately in the statement of recognised income and expense. Financial instruments The Group has elected to apply IAS 39, 'Financial Instruments: Recognition andMeasurement' and IAS 32 'Financial Instruments: Disclosure and Presentation'from 1 October 2005. After this date, where hedge accounting cannot be appliedunder IAS 39, changes in the market value of financial instruments will be takento the income statement. No transitional adjustments were required to the 2004or 2005 UK GAAP financial statements due to the chosen adoption date of IAS 32and IAS 39. Cumulative translation differences The Group has deemed the cumulative translation differences for foreignoperations to be zero at the date of transition. Any gains and losses onsubsequent disposals of foreign operations will exclude translation differencesarising prior to the transition date. b) Explanation of impact In addition to the transition reconciliations the following explanations of thetransition adjustments are provided: Share-based payments Equity instruments granted to employees, including share options, co-investmentplan, staff share scheme and deferred bonus result in fair value based charge tothe income statement. The charge is dependent upon share price at grant,performance conditions, quantity of shares/options granted, historic share pricevolatility, leavers and exercise experience. Under UK GAAP share options werenot expensed. Under UK GAAP a charge was made for the co-investment plan,deferred bonus and staff share schemes based on the intrinsic value at grant. Employee benefits - defined benefit pension The balance sheet reflects the pension scheme's surplus or deficit at thebalance sheet date. The employers' portion of current and past service cost ischarged to operating profit with the interest cost, net of expected return onscheme assets included within finance costs. Actuarial gains and losses arefully recognised in equity through the statement of recognised income andexpense. Under UK GAAP regular pension cost was charged to operating profit at asubstantially level percentage of current and future payrolls with variationsbeing charged over the average remaining working lives of employees. The netamount of pension scheme assets and liabilities was not carried on the balancesheet under UK GAAP. Employee benefits - holiday pay A liability is recorded for employees' entitlement to paid holiday not taken atthe balance sheet date. No equivalent liability was held under UK GAAP. Goodwill Goodwill is carried at its book value at the transition date of 1 October 2004less any amounts provided subsequently for impairment. Goodwill is not amortisedbut reviewed at least annually for impairment. Under UK GAAP, goodwill was carried at cost less accumulated amortisation andprovisions for impairment. Amortisation was provided at rates to write off thecost of goodwill over five years. As reported in the Group's December 2005 presentation on the transition to IFRS,in the year ended 30 September 2005 the goodwill relating to the acquisition ofSentinel Products Ltd was impaired by £1.2m. This impairment followed a reviewof the carrying value of goodwill compared to the present value of cash flowsexpected to arise from the business. The value is similar in magnitude to the UKGAAP amortisation charge for the year ended 30 September 2005. Dividends Dividends are not accrued until shareholders' rights to the payment areestablished. Under UK GAAP dividends were treated as an adjusting post balancesheet event and recorded in the result for the period. Taxation Deferred tax is provided on temporary differences that are expected to berecovered, using a balance sheet liability method. Under UK GAAP deferred taxwas provided using a profit and loss based method. Intangible assets Where the Group has capitalised expenditure on self-developed softwareapplications which are used within the Group these have been reclassified asintangible assets. Under UK GAAP these assets were held within tangible fixedassets. Research and development expenditure must be capitalised when it meets certaincriteria, as outlined in the Accounting Policies. During the periods reportedthe Group has reviewed its research and development expenditure against thesecriteria and no material expenditure has met the capitalisation criteria.Consequently there is no capitalised research and development expenditure. Long-term contract balances Long-term contract balances have been reclassified as trade and otherreceivables. Under UK GAAP these assets had been held within inventory aslong-term contract balances. Detailed analysis of the full-year reconciling items was presented on 15December 2005 and can be found on the Group's Web site: www.rm.com/investors. iii) Reconciliation statements Reconciliation of loss for the half-year ended 31 March 2005 £'000 UK GAAP Share-based Defined Holiday Goodwill Impact of IFRS payment benefit pay IFRS pension transition Revenue 109,211 109,211Cost of sales (79,856) (14) 254 58 298 (79,558)Gross profit 29,355 (14) 254 58 298 29,653 Selling and distribution (16,095) 7 128 28 163 (15,932)costs Research and (7,523) 3 56 12 71 (7,452)development expenses Administrative (6,332) 12 223 49 284 (6,048)expenses excluding goodwill charges Goodwill charges (4,533) 3,286 3,286 (1,247) Operating (34,483) 22 407 89 3,286 3,804 (30,679)expenses (Loss)/Profit (595) 8 661 147 816 221from operations before goodwill charges Goodwill charges (4,533) 3,286 3,286 (1,247) Loss from (5,128) 8 661 147 3,286 4,102 (1,026)operations Investment 496 496income Finance costs (156) (218) (218) (374) (Loss)/Profit (255) 8 443 147 598 343before tax before goodwill charges Goodwill charges (4,533) 3,286 3,286 (1,247) Loss before tax (4,788) 8 443 147 3,286 3,884 (904) Tax 71 12 (133) (44) (165) (94) Loss for the (4,717) 20 310 103 3,286 3,719 (998)period Basic EPS (5.3)p - 0.3p 0.1p 3.7p 4.1p (1.1)pDiluted EPS (5.3)p - 0.3p 0.1p 3.7p 4.1p (1.1)p Reconciliation of profit for the year ended 30 September 2005 £'000 UK GAAP Share-based Defined Holiday Goodwill Impact of IFRS payment benefit pay IFRS pension transition Revenue 262,707 262,707 Cost of sales (188,999) (47) 648 (46) 555 (188,444) Gross profit 73,708 (47) 648 (46) 555 74,263Selling and (34,224) (14) 322 (24) 284 (33,940)distribution costs Research and (16,812) (6) 140 (10) 124 (16,688)development expenses Administrative (11,150) 81 560 (42) 599 (10,551)expenses before goodwill charges Goodwill (7,386) 4,917 4,917 (2,469)charges Operating (69,572) 61 1,022 (76) 4,917 5,924 (63,648)expenses Profit from 11,522 14 1,670 (122) 1,562 13,084operations before goodwill charges Goodwill (7,386) 4,917 4,917 (2,469)charges Profit from 4,136 14 1,670 (122) 4,917 6,479 10,615operations Investment 1,359 1,359income Finance costs (36) (410) (410) (446) Profit before 12,845 14 1,260 (122) 1,152 13,997tax before goodwill charges Goodwill (7,386) 4,917 4,917 (2,469)charges Profit before 5,459 14 1,260 (122) 4,917 6,069 11,528tax Tax (3,455) 183 (378) 37 (158) (3,613) Profit for the 2,004 197 882 (85) 4,917 5,911 7,915period Basic EPS 2.3p 0.2p 1.0p (0.1)p 5.5p 6.6p 8.9p Diluted EPS 2.2p 0.2p 1.0p (0.1)p 5.5p 6.6p 8.9p Reconciliation of consolidated balance sheet and shareholders' equity at 1October 2004 (IFRS transition date) £'000 UK GAAP Share-based Dividends Defined Holiday Other Impact of IFRS payment benefit pay IFRS pension transition Non-current assets Goodwill 24,737 24,737 Other 1,882 1,882 1,882intangible assets Property 20,202 (1,882) (1,882) 18,320plant and equipment Deferred 1,310 549 4,455 272 5,276 6,586tax assets 46,249 549 4,455 272 - 5,276 51,525Current assets Inventories 16,492 (2,017) (2,017) 14,475 Trade and 50,228 1,775 1,775 52,003other receivables Cash and 27,480 27,480cash equivalents 94,200 (242) (242) 93,958Total 140,449 549 4,455 272 (242) 5,034 145,483assets Current liabilities Trade and (84,663) 1,328 3,195 (906) 242 3,859 (80,804)other payables Tax (1,779) (1,779)liabilities (86,442) 1,328 3,195 (906) 242 3,859 (82,583) Net current 7,758 1,328 3,195 (906) - 3,617 11,375assets Non-current liabilities Retirement - (14,850) (14,850) (14,850)benefit obligation Other (11,086) (11,086)payables due after one year Long-term (2,320) (2,320)provisions (13,406) (14,850) (14,850) (28,256) Total (99,848) 1,328 3,195 (14,850) (906) 242 (10,991) (110,839)liabilities Net assets 40,601 1,877 3,195 (10,395) (634) - (5,957) 34,644 Equity Called up 1,794 1,794equity share capital Share 20,349 20,349premium account Own shares (1,010) (53) (53) (1,063) Capital 94 94redemption reserve Hedging and - -translation reserve Accumulated 19,374 1,930 3,195 (10,395) (634) (5,904) 13,470profit 40,601 1,877 3,195 (10,395) (634) - (5,957) 34,644 Reconciliation of consolidated balance sheet and shareholders' equity at 31March 2005 £'000 UK GAAP Share- Dividends Defined Holiday Goodwill Other Impact of IFRS based benefit pay IFRS payment pension transition Non-current assets Goodwill 20,151 3,286 3,286 23,437 Other - 1,687 1,687 1,687intangible assets Property plant 24,420 (1,687) (1,687) 22,733and equipment Deferred tax 1,310 832 4,116 227 5,175 6,485assets 45,881 832 4,116 227 3,286 8,461 54,342Current assets Inventories 17,928 (5,944) (5,944) 11,984 Trade and other 30,435 5,944 5,944 36,379receivables Cash and cash 13,849 - 13,849equivalents 62,212 - 62,212Total assets 108,093 832 4,116 227 3,286 8,461 116,554 Current liabilities Trade and other (60,695) 1,781 932 (758) 1,955 (58,740)payables Tax liabilities (267) - (267) (60,962) 1,781 932 (758) 1,955 (59,007) Net current 1,250 1,781 932 (758) 1,955 3,205assets Non-current liabilities Retirement - (13,720) (13,720) (13,720)benefit obligation Other payables (9,851) (9,851)due after one year Long-term (2,264) (2,264)provisions (12,115) (13,720) (13,720) (25,835)Total (73,077) 1,781 932 (13,720) (758) (12,895) (84,842)liabilities Net assets 35,016 2,613 932 (9,604) (531) 3,286 (3,304) 31,712 Equity Called up 1,795 1,795equity share capital Share premium 20,464 20,464account Own shares (996) (67) (67) (1,063) Capital 94 94redemption reserve Hedging and - 13 13 13translation reserve Accumulated 13,659 2,680 932 (9,604) (531) 3,286 (13) (3,120) 10,409profit Total equity 35,016 2,613 932 (9,604) (531) 3,286 - (3,304) 31,712 Reconciliation of consolidated balance sheet and shareholders' equity at 30September 2005 £'000 UK GAAP Share- Dividends Defined Holiday Goodwill Other Impact of IFRS based benefit pay IFRS payment pension transition Non-current assets Goodwill 17,304 4,917 4,917 22,221Other 1,714 1,714 1,714intangible assets Property 26,357 (1,714) (1,714) 24,643plant and equipment Deferred 1,105 928 4,767 308 6,003 7,108tax assets 44,766 928 4,767 308 4,917 - 10,920 55,686 Current assets Inventories 17,658 (5,791) (5,791) 11,867 Trade and 48,351 5,791 5,791 54,142other receivables Cash and 22,942 22,942cash equivalents 88,951 - - 88,951Total 133,717 928 4,767 308 4,917 - 10,920 144,637assets Current liabilities Trade and (81,958) 2,331 3,399 (1,027) 4,703 (77,255)other payables Tax (1,315) (1,315)liabilities (83,273) 2,331 3,399 (1,027) 4,703 (78,570) Net current 5,678 2,331 3,399 (1,027) - 4,703 10,381assets Non-current liabilities Retirement - (15,890) (15,890) (15,890)benefit obligation Other (9,759) (9,759)payables due after one year Long-term (2,170) (2,170)provisions (11,929) (15,890) (15,890) (27,819) Total (95,202) 2,331 3,399 (15,890) (1,027) (11,187) (106,390)liabilities Net assets 38,515 3,259 3,399 (11,123) (719) 4,917 (267) 38,248Equity Called up 1,815 1,815equity share capital Share 22,151 22,151premium account Own shares (1,386) (246) (246) (1,632) Capital 94 94redemption reserve Hedging and - 44 44 44translation reserve Accumulated 15,841 3,505 3,399 (11,123) (719) 4,917 (44) (65) 15,776profit Total 38,515 3,259 3,399 (11,123) (719) 4,917 - (267) 38,248equity This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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