Preliminary Results

19th Dec 2006 07:02

Innovation Group PLC19 December 2006 Embargoed until 0700 hrs 19 December 2006 THE INNOVATION GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2006 The Innovation Group ("the Group"), which provides outsourcing services andsoftware solutions to the world's insurance providers, today announces itsresults for the year to 30 September 2006. These results are the first reported under the International Financial ReportingStandards ("IFRS"); all numbers including comparatives are stated accordingly. Explanatory notes to the IFRS adjustments are set out in note 10 to the statements. Highlights: • Total revenues up 31% (23% organic) to £79.7m (2005: £60.9m) • Recurring revenue increased by 37% (25% organic) to £55.4m (2005: £40.5m) representing 70% (2005: 67%) of Group revenues • Adjusted profit before tax of £10.9m* (2005: £3.6m) • Profit before tax of £8.5m (2005: £1.9m) • 69% of adjusted profit attributable to outsourcing • Five acquisitions completed during the year, strengthening geographic reach and bringing further cross-selling opportunities. • Seven new software contracts and contract extensions signed during the year Post Period end: • Entry into US outsourcing market via acquisition of First Notice Systems, Inc. ("FNS") for £27.1m (US$ 51.6m) and Sureplan US for £3.5m (US$ 6.5m) • Entered travel insurance market via acquisition of Holmwoods and Back and Manson (South Africa) for £5.5m (ZAR 70.9m) • Rights Issue undertaken to raise approximately £37.9m (before expenses) • Two UK software contracts signed, one with a new client and the other representing successful cross-selling between the Group's outsourcing and software solutions client base *Adjusted profit before tax is profit before tax after adding back the amortisation charge of £1.3m, a share based payments charge of £0.9m and utilisation of pre-acquisition brought forward tax losses of £0.2m as analysed on page 11. Commenting on the results, Hassan Sadiq, Chief Executive, said: "I am delighted with The Innovation Group's performance in 2006. We increasedrevenue by 31% and 70% of our total revenue is now recurring. During the year webuilt the business through organic growth and via selective acquisitions,culminating in the recently announced acquisition of First Notice Systems,securing critical mass in the important US market. The current year has startedencouragingly with two UK software wins and several new outsourcing contracts.The Group is well positioned for 2007." Enquiries: The Innovation Group plc 01489 898300Hassan Sadiq, Chief Executive Officer Paul Smolinski, Group Finance Director Smithfield 020 7360 4900Sara Musgrave/Tania Wild Notes to editors: The Group provides outsourcing services and software solutions to insurers andother risk carriers through its international network of offices. The Group hasassembled a portfolio of important assets comprising a set of software-ledbusiness processes for the handling of the breadth of the administrativeprocesses of insurers and risk carriers, including ''back office'' functionssuch as claims management and sales. The Group's assets also include softwaretechnology for both policy and claims administration that can be both utilisedin connection with the Group's outsourcing operations and implemented on astand-alone basis. The Group provides its services on a ''non-branded'' basisand does not perform underwriting functions. The Group operates in two principal areas of activity, outsourcing and software,serving insurers and other risk carriers. Since January 2003, The Group hasshifted its focus from software development and licensing to software-enabledoutsourcing. Whilst software continues to be sold independently of outsourcingoperations, it also has an important role in enabling the Group's outsourcingactivities. The most significant expansion of the Group's outsourcing operations has been inSouth Africa where it is currently providing its broadest range of outsourcingsolutions. It has also developed outsourcing solutions in the United Kingdom,Germany and Australia. Following the acquisition of FNS, the Group plans tointroduce outsourcing services in North America. The Group also generatesrevenue from its software operations in each of the four regions it serves:Europe, South Africa, North America and Asia Pacific. The Group has offices in the United Kingdom, Continental Europe, South Africa,Japan, Australia and North America, employing over 1400 people (1,650 peopleincluding FNS). It delivers services for some of the largest insurancebusinesses in the world, including Aviva, Auto Club of Southern California, FordMotor Company of South Africa, Toyota (South Africa), Halifax General Insurance,The Insurance Australia Group, Jaguar Drive Plan (South Africa), AXA Insurance,Sonpo 24 Insurance (Japan) and Zurich (UK). Key market facts: • BPO Market to grow to $110 billion (£57.9 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 % compound annual growth rate by 2009. (Gartner 2005) • Due to the high systems maintenance costs of mature insurance organisations, only 30% 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% 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% are planning to address policy systems; 48% 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% of insurers are assessing this approach versus 22% of insurers that are simply renovating their existing system. This trend is being fuelled by the advancement in the vendor market and need to deploy solutions rapidly. (Gartner, 2005) RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2006 CHAIRMAN'S STATEMENT The Innovation Group provides software and outsourcing services to the insuranceindustry. Our vision is to provide technology and best practice for theadministration of policies and claims for the world's insurers and riskcarriers. The Group is totally focused on this market, and delivers its twobroad offerings through a single client-centric organisation. We are amultinational player operating in the world's largest insurance markets with astrong proportion of our clients being international in nature. Our 1,400 peopleacross the world have extensive insurance experience, and they are ablysupported by our partners. The Year in Review During 2006 we continued to make strong progress in all aspects of our business.We delivered significant growth in both revenue and profits and we had strongcash generation with an operating cash inflow of £10m. Recurring revenueincreased from £40.5m in 2005 to £55.4m in 2006 and is now 70% of total revenue.Organic revenue growth was 23% during the year and this was complemented byacquisition activity where we completed five acquisitions to further extend ourgeographic reach. Client satisfaction reflects the underlying strength of our business, and ourclient relationships continued to prosper during the year. We extended ouroutsourcing relationships with existing outsourcing clients and also won newclients which resulted in organic growth of 23%. In addition we also securedseven new software licences which help to secure our immediate future revenues. Since the year end we have undertaken the acquisition of First Notice Systems.This strategic acquisition provides the Group with an important entry into theinsurance outsourcing market in the USA. We are pleased that the strongmanagement team of First Notice Systems are joining the Group. In addition, EricWadsworth, the Group COO, is relocating to the USA to ensure the smoothintegration and success of the acquisition. Financial resultsRevenue for the year ended 30 September 2006 was £79.7m (2005: £60.9m);recurring revenue increased to £55.4m (2005: £40.5m) and now represents 70% oftotal Group revenue. Software and services revenue was £31.4m (2005: £25.9m) andoutsourcing revenue was £48.3m (2005 £35.0m). Adjusted profit* before tax for the year ended 30 September 2006 was £10.9m(2005: £3.6m) and profit before tax was £8.5m (2005: £1.9m), representingadjusted EPS of 1.77p (2005: 0.40p) and basic EPS of 1.28p (2005: 0.07p). Theaverage number of shares used to calculate EPS in both 2006 and 2005 have beenadjusted to reflect the shares issued during the rights issue completed on 13December 2006. Operating cash flow for the year ended September 2006 was £10.0m (2005: £7.2m). *Adjusted profit before tax is profit before tax after adding back the amortisation charge of £1.3m, a share based payments charge of £0.9m and utilisation of pre-acquisition brought forward tax losses of £0.2m as analysed on page 11. Organisation and employees I would like to pay tribute to the outstanding teamwork and commitment toclients displayed by our employees during the year. I would also like to extenda warm welcome to our new recruits and to partners' employees who are workingwith us on client engagements. During the year we increased our headcount from1,262 to 1,403, and with the integration of post year end acquisitions this willincrease to approximately 1,800. The Innovation Group continues to attract andretain some of the best people in the industry and we recognise them as thefoundation of our future success. The Board There have been no Board changes since the approval of the last financialstatements. Chris Banks and David Thorpe continue as non-executive directors andchairmen of the audit and remuneration committees respectively, and I remain asnon executive chairman of the Board. In October 2006 the Group announced that Paul Smolinski would be stepping downfrom his position as Group Finance Director in early 2007 to pursue interestsmore in line with his personal ambitions. Paul has made a considerablecontribution to the Group during the past four and a half years, and I wouldlike to take this opportunity to thank him and to wish him well for the future. Outlook The Group is well positioned as we enter 2007. The proportion of recurringrevenue has again increased, and we have clear visibility of the milestoneswhich drive the timing of our software licence revenues in the second half ofthe year. We have an extensive outsourcing client base and the pipelines remain healthy ineach geography. We are particularly excited about our entry into outsourcing inthe US. We anticipate organic growth to continue in 2007 through our simpleobjective of delivering more benefits to more clients in more markets. Software licence sales still remain attractive although they are difficult topredict. Our five year relationship with IBM gives us the platform to distributeour software products on a global basis and we anticipate seeing further resultsfrom this partnership in the 2007 financial year. In summary, we aim to continue the momentum gained throughout 2006. Our businessplan calls for further organic revenue growth augmented by selectedacquisitions. In addition, we plan to improve productivity further over the fullyear and we look forward to the future with optimism. Geoff Squire, OBEChairman CHIEF EXECUTIVE'S STATEMENT We have had an excellent year in 2006 with good momentum going into 2007.Revenue has grown by 23% organically, increasing to 31% including theacquisitions during the year. Recurring revenue, which gives us visibility andpredictability, reached 70% of total revenue as dependence on one-off licencescontinued to reduce. Adjusted profits have increased from £3.6m in 2005 to£10.9m in 2006 and 69% of these profits are derived from outsourcing. We havehad seven significant new licence deals, including extensions, often withsupport from our partner IBM. The majority of our growth in 2006 has come fromexisting clients as we extend our products and services to them. Our client baseis made up of over 120 major brands. The five acquisitions completed during theyear have strengthened our geographic reach and will bring further cross sellingopportunities. We also continue to generate cash, which we have used this yearto help fund these acquisitions. In summary the success in 2006 helps underpinthe future for our Group. Strategic update 2006 has been our first year of operating as a single client-centricorganisation, aiming to offer outsourcing and software capabilities in each ofour geographic markets and I am delighted with the progress that has been made. We have assembled a wide portfolio of important assets comprising high qualitysoftware technology for both policy and claims administration, and a set ofbusiness processes for the handling of many aspects of back office functions forinsurers and risk carriers. We offer these assets either as a software andservice implementation project, or as an outsourced service. This choice enablesour clients to embark on lower risk, lower cost transformations and providesthem with the opportunity to gain a high impact return on investment. Our focusis now to make these services available to a wider client audience. Market drivers The global insurance industry is in a state of transition, driven principally bytechnology and the growth of the internet and regulatory change. It is facingincreased underwriting risks, a highly competitive landscape, complicated saleschannels and demanding customers. These combined factors have led to the need toreduce costs and become operationally efficient and are fuelling the demand forthe outsourcing of business processes (including claims handling) by insurancecompanies. We are experiencing buoyant market conditions. Clients are looking for vendorswho can offer transformational solutions through the use of software andoutsourcing. We have seen this trend increase in recent years and see growingopportunities. Market risks Under the new EU reporting requirements, the Board is obliged to comment on therisk factors facing the business. As with any business, risks may affect theGroup, its results and the Board's ability to deliver on its strategy. One of the key risk factors faced by the Group is the timing of softwaremilestones and project delivery relative to the Group's financial calendar. Thisrisk has reduced over the last year because of our growing proportion ofrecurring revenue, but the timing and recognition of licence revenue isdifficult to predict and during 2007 we have contractual licence milestoneswhich will weight the licence revenue recognition to the second half of theyear. Another main risk area is our clients' strategy and in particular any changes intheir approach to technology or outsourcing. By concentrating on service levelagreements and ensuring we provide excellent value we are doing our best tominimise this risk. The Group's footprint within certain territories compared to competitors canalso be a risk. Our acquisitions during the year and the acquisitions in the USpost year end have further extended our scale and geographic reach, therebyimproving our competitive position. The Group's results are exposed to foreign exchange rate volatility asapproximately 75% of our revenue is denominated in foreign currencies. The Group's South African operation faces unique regulatory challenges with theBlack Economic Empowerment rules. However, we are looking at solutions whichwill help us address these issues to further extend our product range and takeadvantage of the unique opportunities available in this part of the world. Geographic review South Africa, which provides many of the elements of the insurance value chainon an outsourced basis, saw revenue growth of 35% (all organic) with revenue of£31.1m for the year ended 30 September 2006 (2005: £23.1m). The market in SouthAfrica is buoyant. In Europe, revenue has grown by 72% (46% organically) to £28.1m (2005: £16.3m). In the UK, we have a software business servicing tier one clients as well asclaims outsourcing for motor and household. UK revenues have grown by 50% (49%organically) to £20.2m (2005: £13.5m). During the year a major client extendedthe use of a Policy licence and entered into an agreement to use the Group'sPolicy Services software. Interest in the Group's offerings continue to increaseand subsequent to the year end two significant new software deals were signed aswell as three new outsourcing contracts which help to underpin our expectationsfor 2007. There was significant growth in outsourcing in the UK (on thehousehold side) as we continued to extend business with existing clients. In Germany, we have seen revenue growth of 182% (organically 35%) in 2006 to£7.9m (2005: £2.8m). During 2006 we have transformed the business from a singlerevenue stream (motor) through acquisition and internal investment in a multipleservice provider to the insurance and fleet industry. The acquisition of ServiceKonzept has already delivered two significant clients as a result ofcross-selling and we have extended the product range of Service Konzept sinceacquisition. In North America, the largest insurance market in the world, revenue hasdecreased by 9% (all organic) to £15.3m (2005: £16.7m) in 2006. This reductionis due to the discontinued public sector business which contributed £1.8m ofrevenue in 2005.. All revenue is currently software related. In the US we have established our brand over the last three years throughinvestment in our software in order to improve our capability in the US market.This has helped us during 2006, as a North American client has started toimplement both the Group's Policy and Claims systems. We also continue to workclosely with IBM on targeting tier one and tier two insurance companies. The enhanced credibility arising from these initiatives has given us theconfidence to enter into the outsourcing market in North America, resulting inthe recent acquisitions of First Notice Systems (FNS) and Sureplan US. In Asia Pacific, revenue grew by 7% (organically -6%) to £5.1m (2005: £4.8m). Wesaw good growth in Australia with outsourcing revenue increasing by 12% andsoftware increasing by 25% year on year. Japan has declined as one of ourclients has completed its implementation. In 2006 we had two significantsoftware wins in Australia. The most significant win was to provide the softwarefor one of the leading direct insurers in Australia and will be worthapproximately £4.5m over 5 years. The outsourcing operation continues to gainmomentum and the acquisition of Sureplan Australia enables us to expand ourofferings to the leasing and fleet sectors. Sureplan's largest client signed acontract extension at the end of the financial year providing revenues throughto the end of the financial year 2009. Summary We aim to continue to build our recurring revenue base which will furtherincrease visibility within the business. We have made a good start to our 2007financial year with two UK software wins as well as several new outsourcingcontracts. Organic growth remains an important focus as we continue tocross-sell our products into different geographies and in particular expand theoutsourcing service across North America, following the acquisition of SureplanUS and completion of FNS which is expected imminently. Our relationship with IBMalso remains a focus as we concentrate on a select number of potential jointtargets. We will continue to look to selectively consolidate smaller players who can addcapability into existing regions and niche operators who can provide newproducts to enhance the current portfolio. Hassan SadiqChief Executive FINANCE DIRECTOR'S REVIEW Results Total revenue for the year grew by 31% to £79.7m (2005: £60.9m). The increasecomprised growth of 38% in our recurring outsourcing revenue (2006: £48.3m,2005: £35.0m), alongside growth of 20% in software revenues (2006: £31.4m, 2005:£25.9m). The underlying revenue performance of the Group improved over the year with thesecond half-year period being stronger than the first, continuing the trendshown last year. Revenue in the first six months of the year was £38.5m (H12005: £28.8m) and increased to £41.2m (H2 2005: £32.2m) in the second sixmonths. This growth was driven by increased levels of outsourcing revenues (H12006: £22.9m, H2 2006: £25.4m). Software revenue remained consistent throughoutthe year (H1 2006: £15.6m, H2 2006: £15.7m). This resulted in adjusted profit*for the Group of £5.2m and £5.7m in the first and second halves of the yearrespectively. For the year as a whole, profit before tax was £8.5m (2005: £1.9m). Adjustedprofit* was £10.9m (2005: £3.6m). Within this there was, as anticipated,continued improvement in the outsourcing division, which recorded an adjustedprofit of £7.5m (2005: £4.7m). The improvement in software profitability, anadjusted profit for the year of £3.4m (2005: adjusted loss of £1.1m), reflectedthe improved level of licence sales year on year. Adjusted EPS was 1.77p (2005:0.40p) and basic earnings per share was 1.28p (2005: 0.07p). *Adjusted profit before tax is profit before tax after adding back theamortisation charge of £1.3m, a share based payments charge of £0.9m andutilisation of pre-acquisition brought forward tax losses of £0.2m as analysedon page 11. References to adjusted profit reflect the Directors' view that thisis an important measure for their own and shareholders' assessment of theGroup's underlying performance. Costs The Group's gross margin has improved from 44.6% in 2005 to 47.4% in 2006, dueto a change in the overall sales mix. Cost of sales has increased for both the software and outsourcing divisions, inline with revenue growth. Administrative expenses for 2006 of £30.4m increased from £26.1m in 2005. £1.7mwas attributable to additional operating costs from acquisitions and £1.3m ofthe increase was due to the amortisation of acquired intangibles. The balance of£1.3m is broadly due to increased staff numbers and growth in our existing Groupcompanies. Taxation The Group tax charge of £1.6m (2005: £1.4m) arose primarily due to profits beinggenerated in locations (principally South Africa and Germany) that cannot beoffset against losses in other countries. The Group continues to carry forwardsignificant tax losses in the UK and US to offset against profits arising inthese countries. Cash flow and financing The Group continues to be cash generative and at an operating level generated acash inflow of £10.0m (2005: £7.2m). As a Group we had set positive cash inflowas one of our key objectives and this result reflects the underlying strength ofour business. The continued growth of our outsourcing business and the highervolume of claims that we settle on behalf of our clients also increased our cashbalance across the year. Consequently, approximately £3.8m of the inflow wasattributable to an increase in amounts due to repairers and other third partiesand funds held to settle future claims administered by the Group. The year-end cash balance of £19.0m included approximately £8.8m of cash (2005:£5.0m) representing amounts due to repairers and funds held to settle futureclaims. Cash held and available for use within the business in our South Africanoperation continues to be subject to government imposed exchange controls,however this does not adversely affect us either on a day to day basis, or inany of our strategic plans. Cash held in South Africa (excluding amounts held tosettle future claims) as at 30 September 2006 totalled approximately £4.3m(2005: £2.6m). The Group's debt of £11.0m (2005: £5.8m) at the year end primarily relates to£4.3m borrowed as a mortgage on our properties in Whiteley, UK, and a £5.7m(€8.1m) bank loan that was obtained for the acquisition of ServiceKonzept AG,due to be repaid in full by December 2009. Accordingly at year end the Group held net funds of £8.0m compared to £14.0m in2005. Excluding amounts due to repairers and funds held to settle future claimsreferred to above, the Group ended the year with a cash neutral balance sheet.Investment activity During 2006 we continued to consolidate smaller players and add capability intoexisting regions via strategic and tactical acquisitions to further expand ouroutsourcing service. In January 2006 we acquired Service Konzept AG in Germany for considerationcomprising a combination of cash and shares totalling €14m (approximately £9.7m)which includes £4.1m contingent on the co-founders remaining with the businessfor three years following acquisition. Service Konzept is a leading independentsupplier of damage assessment services to the household insurance industry inGermany. Service Konzept has contributed approximately £4.0m to outsourcingrevenues in the financial year since acquisition. On the same day, the Groupalso acquired 100% of the share capital of CMC Deutschland Limited for a totalcost of £0.1m. CMC Deutschland provides outsourcing services for the leasingmarket. Both of these acquisitions complement our existing Motor outsourcingpresence in Germany. In May 2006, we also acquired the trade and assets of Sureplan Australia Pty forAU$7.75m (approximately £3.3m). Sureplan is a provider of outsourced accidentand risk management solutions to the automotive and leasing and self insuredfleet sectors in Australia. This acquisition further strengthened Australia'soutsourcing offering and widened its client base. In June 2006, we acquired Prophit Share Limited for £0.6m in shares. ProphitShare is a specialist in claims leakage business intelligence for the insuranceindustry. With this acquisition we have acquired claims leakage experts inaddition to the management information tool. In July 2006, we acquired AMK Associates Limited, a specialist in providingservice, maintenance and repair data to the motor fleet industry. Considerationwas £0.6m in cash and a further £1.4m in deferred consideration dependent on theprofits of the acquired business for the year ended 30 September 2007. Post period end investment activity In October 2006, we acquired Sureplan International Pty Limited, an Australianholding company which owns a 51% controlling interest in Sureplan USA Inc.,which is a supplier of outsourced claims management services to the vehicleleasing industry in the US. This acquisition was for a cash consideration ofUS$6.5m (approximately £3.5m) and deferred consideration, capped at a maximumvalue of US$7.5m (approximately £4m), dependent on future profit targets beingachieved. The acquisition was financed via existing cash resources and a loanfrom Royal Bank of Scotland of £3.0m. This acquisition enables us to establishan outsourcing capability for motor insurance in the US, thereby extending ourpresence beyond the (Group's) existing provision of Policy and Claims software. In November 2006, we acquired 68.72% of Holmwoods and Back and Manson (SouthAfrica) (Pty) Ltd (''HBM''), a supplier of travel insurance administration andinsurance consulting services in South Africa, for a cash consideration of ZAR70.9m (approximately £5.5m), which was met from the Group's existing cashresources. In addition, there exists a put option, exercisable at the discretionof a minority shareholder by no later than 31 October 2009, for the Group toacquire an additional 30.58% of HBM from such minority shareholder on the samevaluation basis as the present transaction, limited to a maximum additionalconsideration of ZAR 66.15m (approximately £4.6m). This acquisition enables usto extend our outsourcing product range to travel claims. On 2 November 2006 the Group announced the proposed acquisition of First NoticeSystems, Inc., a leading provider of claim reporting outsourcing services andsoftware to the property and casualty insurance market in the US for US$51.6m(approximately £27.1m). This acquisition is a key component of the Group'sstrategy for achieving the objective of building an outsourced business in theUS. FNS also gives us critical mass in the US outsourcing market and its broadinsurance client base will give us significant opportunities to market and sellthe Group's products and services. The acquisition is expected to be completedon 22 December 2006. The acquisition of FNS was funded by way of a 2 for 5 Rights Issue of180,600,771 new Ordinary Shares at 21 pence per share, to raise approximately£37.9m (before expenses). The rights issue was successfully completed on 13December 2006 with a 95% take-up. Foreign Exchange Approximately 75% of the Group's revenue is generated outside the UK and isdenominated in currencies other than sterling. The Group, therefore, hasexposure to translation risk when the accounts of overseas subsidiaries areconverted into sterling. The Group does not hedge against this translation risk.The Group is most affected by movements in the US Dollar, the South African Randand the Euro relative to Sterling. In previous years, the combined effect ofthese on the Group's trading results has been broadly neutral; however thisyear, the impact of the movement in the South African Rand in particular hasreduced revenues and profits by approximately £1.4m and £0.2m respectively. International Financial Reporting Standards (IFRS) This set of full year results is the first that the Group has been required toreport in accordance with IFRS. As a result of this, we have restated thecomparative figures for the year ended 30 September 2005 and reconciliationsthat set out the main differences between the amounts previously presented underUKGAAP and the amounts presented under IFRS are shown on pages 30 to 33. The Group has utilised the following exemptions available on first time adoptionof IFRS: • the Group has elected not to apply the provisions of IFRS 2, 'Share Based Payments' to options granted on or before 7 November 2002, which had not vested at 1 January 2005; • the Group has elected not to retrospectively apply the provisions of IFRS 3, 'Business Combinations', to acquisitions that occurred prior to the Group's transition date of 1 October 2004. Therefore, business combinations prior to this date have not been restated; • the Group has applied the exemption in IFRS 1 "First Time Adoption" to reset cumulative exchange differences on net investment in foreign operations to zero at the date of transition; and As with most companies within our industry, the most significant areas ofconsideration are associated with differences in accounting for share basedpayments, development expenditure and acquisitions, particularly goodwill andintangible assets. We have not capitalised any historic development expenditure.Details of the main differences are given on pages 30 to 33. Paul SmolinskiGroup Finance Director The Innovation Group plcConsolidated Income StatementFor the year ended 30 September 2006 2006 2005 Note £'000 £'000 Revenue 2 79,651 60,916Cost of sales (41,892) (33,736) ---------- ---------- Gross profit 37,759 27,180 Administrative expenses 3 (30,389) (26,057) ---------- ---------- Operating profit 7,370 1,123 Loss on disposal of continuing operations - (54)Finance income 1,160 729Finance costs (632) (567)Share of profit of associate 568 683 ---------- ---------- Profit before tax 2 8,466 1,914 UK income tax expense (129) -Overseas income tax expense (1,513) (1,369) ---------- ---------- 4 (1,642) (1,369) ---------- ---------- Profit for the year 6,824 545 ========== ========== Attributable to:Equity holders of the parent 6,407 343Minority interests 417 202 ---------- ---------- 6,824 545 ========== ========== ------------------------------------------------------------------------------------ Adjusted profit: Profit before tax 8,466 1,914Amortisation of intangible assets 1,295 94Share based payments 928 1,239Loss on disposal of continuing - 54operationsUtilisation of pre-acquisitionbrought 258 265forward tax losses ---------- ----------Adjusted profit for the year 2 10,947 3,566 ========== ========== ------------------------------------------------------------------------------------ Earnings per share (pence)Basic 5 1.28 0.07Diluted 5 1.25 0.07Adjusted 5 1.77 0.40Adjusted diluted 5 1.74 0.40 All amounts relate tocontinuing operations. No dividends have been paid or proposed in respect of any of the above years. The Innovation Group plcBalance SheetAs at 30 September 2006 30 September 30 September 2006 2005 Note £'000 £'000ASSETSNon current assetsProperty, plant and equipment 10,497 11,086Goodwill 33,372 25,443Other intangible assets 7,114 339Investments accounted for using theequity method 2,146 770Financial assets 32 158Deferred tax assets 746 893 ---------- ---------- 53,907 38,689Current assetsTrade and other receivables 7 20,548 12,655Prepayments 1,451 1,002Other financial assets 685 -Cash and cash equivalents 18,999 19,756 ---------- ---------- 41,683 33,413 ---------- ---------- TOTAL ASSETS 2 95,590 72,102 ========== ========== EQUITY AND LIABILITIESAttributable to equity holders of theparentEquity share capital 9,030 8,793Share premium 2,706 75Merger reserve 561 -Foreign currency translation (2,523) 642Retained earnings 36,427 29,092 ---------- ---------- 46,201 38,602Minority interests 795 407 ---------- ---------- TOTAL EQUITY 46,996 39,009 Non current liabilitiesTrade and other payables 8 1,000 400Deferred income 1,419 1,830Interest bearing loans andborrowings 9 7,624 4,603Deferred tax liabilities 2,174 -Provisions 550 724 ---------- ---------- 12,767 7,557Current liabilitiesTrade and other payables 8 17,346 12,013Deferred income 12,141 10,104Interest bearing loans andborrowings 9 3,373 1,230Income tax payable 2,732 2,029Provisions 235 160 ---------- ---------- 35,827 25,536 ---------- ---------- TOTAL LIABILITIES 2 48,594 33,093 ---------- ---------- TOTAL EQUITY AND LIABILITES 95,590 72,102 ========== ========== The results were approved by the Board of Directors on 18 December 2006. The Innovation Group plcConsolidated statement of changes in shareholders equityAs at 30 September 2006 Attributable to equity holders of the parent -------------------------------------------- Issued Share Merger Shares to Retained Translation Minority Total capital premium reserve be issued earnings reserves Total interest equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 October 2004 8,697 481,997 - 1,000 (455,523) - 36,171 74 36,245 Currencytranslation differences onforeigncurrencyintangibles - - - - - 475 475 - 475 Currencytranslation differences on netinvestmentsincludingloans to foreignsubsidiaries - - - - - 167 167 - 167 -------------------------------------------------------------------------------------------Total incomeand expense for the year - - - - - 642 642 - 642recogniseddirectlyin equity Profit for theyear - - - - 343 - 343 202 545 -------------------------------------------------------------------------------------------Total incomeand expense for the year - - - - 343 642 985 202 1,187 Issue of sharecapital 96 1,111 - (1,000) - - 207 - 207 Share basedpayments - - - - 1,239 - 1,239 - 1,239 Minorityinterestacquired with subsidiary - - - - - - - 131 131 Capitalreduction - (483,033) - - 483,033 - - - - ------------------------------------------------------------------------------------------- At 30 September2005 8,793 75 - - 29,092 642 38,602 407 39,009 Currencytranslation differences onforeigncurrencyintangibles - - - - - (1,405) - (29) (1,434) Currencytranslation differences on netinvestmentsincludingloans to foreignsubsidiaries - - - - - (1,760) - - (1,760) -------------------------------------------------------------------------------------------Total incomeand expense for the year recogniseddirectlyin equity - - - - - (3,165) (3,165) (29) (3,194) Profit for theyear - - - - 6,407 - 6,407 417 6,824 -------------------------------------------------------------------------------------------Total incomeand expense for the year - - - - 6,407 (3,165) 3,242 388 3,630 Issue of sharecapital 237 2,631 561 - - - 3,429 - 3,429 Share basedpayments - - - - 928 - 928 - 928 ------------------------------------------------------------------------------------------- 9,030 2,706 561 - 36,427 (2,523) 46,201 795 46,996 =========================================================================================== Following an extraordinary general meeting on 29 June 2005, The Innovation Groupplc petitioned The High Court of Justice to cancel its share premium account.Permission was granted on 23 August 2005 and as a result £483,033,000 wascancelled and transferred to retained earnings. The reserves created cannot bedistributed until all creditors existingat 23 August 2005 have been settled. The Innovation Group plcConsolidated Cash Flow StatementFor the year ended 30 September 2006 Year to Year to 30 30 September September 2006 2005 £'000 £'000 Cash flows from operating activitiesOperating profit 7,370 1,123Adjustments to reconcile group operating profitto net cash inflows from operating activitiesDepreciation of property, plant andequipment 2,167 2,013(Loss)/profit on disposal ofproperty, plant and equipment 6 (6)Amortisation of intangible assets 1,295 94Impairment charges 111 -Share based payments 928 1,239Utilisation of pre-acquisitionbrought forward tax losses 258 265Decrease in inventories - 172Increase in receivables (9,020) (2,574)Increase in payables 8,256 6,490Income taxes paid (1,393) (1,579) ---------- ---------- Net cash flows from operatingactivities 9,978 7,237 Cash flows from investing activitiesSale of property, plant andequipment - 56Purchases of property, plant andequipment (1,365) (807)Purchase of subsidiary undertakings (11,027) (2,187)Sale of subsidiary undertakings - 172Cash acquired with subsidiaries 626 415Net cash disposed of withsubsidiaries - (15)Purchase of associated undertaking (1,079) -Purchase of fixed asset investments - (72)Sale of fixed asset investment 55 -Interest received 1,160 726 ---------- ---------- Net cash flows from investingactivities (11,630) (1,712) Cash flows from financing activitiesInterest paid (780) (516)Repayment of borrowings (3,106) (800)New bank loans 8,148 -Repayment of capital element offinance leases (269) (557)Proceeds from issue of shares 87 206 ---------- ---------- Net cash flows used in financingactivities 4,080 (1,667) Net increase in cash and cashequivalents 2,428 3,858 Cash and cash equivalents atbeginning of year 19,756 15,789Effect of exchange rates on cash andcash equivalents (3,185) 109 ---------- ---------- Cash and cash equivalents at theyear end 18,999 19,756 ========== ========== Cash and cash equivalents include £8,821,000 (2005: £5,010,000) representingamounts due to repairers and funds held to settle future maintenance claims aspart of the normal administration of the outsourcing businesses. An equalamount representing the liability to the third parties involved is included aspart of the Group's current and long term liabilities. Cash held and available for use within the business in our South Africanoperation of £4,293,000 (2005: £2,600,000) continues to be subject to the normalgovernment imposed exchange controls for that country. The Innovation Group plcNotes to the ResultsFor the year ended 30 September 2006 1. ACCOUNTING POLICIES Basis of preparation The Group has previously prepared its financial statements under UK GenerallyAccepted Accounting Practice ("UK GAAP"). For the year ended 30 September 2006,the Group is required to prepare its consolidated accounts in accordance withIFRS as adopted by the European Union. The Group is required to apply all relevant standards and accounting policiesthat are in force at the first reporting date. The full set of accountingpolicies is detailed below. An explanation of how the transition to IFRS hasaffected the previously reported financial results is provided in note 10. The Group financial statements are presented in sterling and all values arerounded to the nearest thousand pounds (£'000s), except where otherwiseindicated. Basis of consolidation The Group financial statements consolidate the financial statements of TheInnovation Group Plc and the entities it controls drawn up to 30 September 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 and losses 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 Group's 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 anassociate is carried in the balance sheet at cost plus post-acquisition changesin the Group's share of net assets of the associate, less distributions receivedand less any impairment in the value of individual investments. The Group incomestatement reflects the share 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. Critical accounting estimates and judgements In preparing the consolidated financial statements, management has had to makejudgements, estimates and assumptions that affect the reported amounts of assetsand liabilities, income and expenses. The critical judgements and key sources ofestimation uncertainty that have been made in preparing the consolidatedfinancial statements are detailed below and in specific accounting policy notes.These judgements involve assumptions or estimates in respect of future eventswhich can vary from what is anticipated. Unearned premium reserves The assumption is made that future service and maintenance claims will follow asimilar pattern to that of historical experience. A claims curve is derived fromthe claims experience of the Group and is based on expired contracts. Themajority of the contracts issued are 12, 24, 36, 48 and 60 months in length.Contracts with different term lengths are assessed alongside contracts with thenext longest term in order to calculate their unearned premium. Revenue isrecognised according to its position on the curve. Costs are recognised asincurred. The claims curves are assessed on an annual basis by management andupdated for any significant changes in the trend of claims. Deferred income in the outsourcing division Based on historic experience management estimate that administration fees willbe earned on a straight line basis over the period of each contract. This isbecause these fees are driven by the number of claims over the course of acontract, rather than the monetary value of these claims. The number of claimsover the course of a contract is a more stable number to estimate and, as such,experience suggests that release on a straight line basis is appropriate. Intangible assets In accordance with IFRS 3 "Business Combinations" goodwill arising on theacquisition of subsidiaries is capitalised and included within intangibleassets. IFRS 3 also requires the identification of other intangible assetsacquired. Although the techniques used to value these assets are in line withinternationally used models, they do require the use of estimates which maydiffer from actual outcomes. Income taxes In recognising income taxes and liabilities, management makes estimates of thelikely outcome of decisions by tax authorities on transactions and events whosetreatment for tax purposes is uncertain. Where the final outcome of such mattersis different, or expected to be different, from previous assessments made bymanagement, a change in the carrying value of income tax assets and liabilitieswill be recorded in the period in which such determination is made. 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 foradministrative and other services. Where the Group has assumed the risk ofsettling claims on behalf of the client, revenue is recorded on a gross basisand includes the element 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. On-risk contractsIn a small number of cases the Group has entered into 'risk and reward'contracts. The Group receives premiums in advance for on-risk contracts. The premium issplit between administration fees paid in advance and a fund portion, which isused to cover the future claims that relate to the contract. In the case of service and maintenance plans the administration fees received inadvance are deferred and recognised on a straight line basis over the period ofthe relevant service contract. The fund portion is also deferred, but isrecognised over the period of the contract based on a claims curve derived frompast claims experience. In the case of subsidence claims the administration fee is recognised over theperiod of the claim and the fund portion is deferred in a 'repairer reserve' inthe balance sheet in order to meet future repair costs. Any anticipated excesscosts are accrued immediately. If there are any reserves remaining at theconclusion of a contract, these are released to the income statement. 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. 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 in the functional currency ofthe acquiring entity. Goodwill is not amortised but is subject to an annualimpairment review. 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 costs directly attributed to the acquisition. After initial recognition,goodwill is stated at cost less any accumulated impairment losses, with thecarrying value being reviewed for impairment, at least annually and wheneverevents or changes in circumstances indicate that the carrying value may beimpaired. Impairment losses are never reversed. 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 goodwillallocated to a cash-generating unit is taken into account when determining thegain or loss on disposal of the unit, or of an operation 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 are reviewed at least at each financial year end. Changesin the 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. The useful economic lives of the intangible assets are asfollows: Software licences 5 yearsCustomer relationships 5 yearsCustomer lists 2 yearsTrade names 5 yearsIntellectual property 5 years Property, plant and equipment Property, plant and equipment are 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 yearsComputer systems 5 yearsComputer equipment 2 - 3 years The useful economic lives and residual values assigned to property, plant andequipment are assessed on an annual basis. The carrying values of property,plant and equipment are reviewed for impairment when events or changes incircumstances indicate the carrying value may not be recoverable. 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 the income statement. Pensions The Group contributes to group personal pension schemes for its staff accordingto individual's contract terms. Contributions payable by the group to theseschemes are charged to the income statement in the period to which they relate.All such schemes are defined contribution arrangements, the assets of which areheld separately from the Group. Share based payments The Group has taken advantage of the exemption in the transitional provisions ofIFRS 2 in respect of equity settled awards so as to apply IFRS 2 only to thoseequity settled 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. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprises cash at bank and shortterm deposits with an original maturity of three months or less. For thepurposes of the consolidated cash flow statement, cash and cash equivalentsconsists of cash and cash equivalents, as previously defined, net of outstandingbank overdrafts. Investments Investments in unquoted equity investments which do not have a reliable marketvalue are stated at cost less provision for any impairment in value. Forinvestments where there is an actively traded market the investment is stated atfair value, determined by reference to a quoted market bid price at the close ofbusiness on the balance sheet date. 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 to foreign subsidiaries which form part of the netinvestment. These are taken directly to equity until the date of disposal of thenet investment, 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 applied the exemption in IFRS 1 "First Time Adoption" to resetcumulative exchange differences on net investment in foreign operations to zeroat the date of transition. During the year the most significant currencies, other than sterling, were theUS dollar, South African rand and the euro. The average annual exchange ratesused to convert results into sterling were US$ 1.80:£1 (2005: US$ 1.85:£1), SARand 11.99:£1 (2005: SA Rand 11.49:£1) and Euro 1.46:£1 (2005: Euro 1.45: £1) Taxation The charge for current taxation is based on the results for the year as adjustedfor items which are non-assessable or disallowed, based on tax rates that areenacted 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 not accounted for if itarises from initial recognition of an asset or liability in a transaction otherthan a business combination that at the time of the transaction affects neitheraccounting nor taxable profit or loss. Where deferred tax assets are recognisedsubsequent to an acquisition, such as when the benefit of the acquiree's incometax loss carry forwards have since been realised, the deferred tax income isrecognised in taxation and a corresponding reduction is made to goodwill, whichis recognised as an operating expense. The carrying amount of the deferred taxasset is reviewed at each balance sheet date. In the United Kingdom, the Group is entitled to a tax deduction for amountstreated as remuneration on exercise of certain employee share options. Asexplained under "Share based payment" above, a remuneration expense is recordedin the Group's income statement over the period from the grant date to thevesting date of the relevant options. As there is a temporary difference betweenthe accounting and tax bases, a deferred tax asset may be recorded. The deferredtax asset arising on share option awards is calculated as the estimated amountof tax deduction to be obtained in the future (based on the Group's share priceat the balance sheet date) pro-rated to the extent that the services of theemployee have been rendered over the vesting period. If this amount exceeds thecumulative amount of the remuneration expense at the statutory rate, the excessis recorded directly in equity, against retained earnings. Similarly, currenttax relief in excess of the cumulative amount of the remuneration expense at thestatutory rate is also recorded in retained earnings. No remuneration charge isrecorded in respect of options granted before 7 November 2002 which have notvested by 1 January 2005. Nevertheless, tax deductions have arisen and willcontinue to arise on these options. The tax effects arising in relation to theseoptions are recorded directly in equity against retained earnings. No deferredtax asset is recognised with respect to this where there is no certainty oftaxable profits being generated in appropriate locations that the deferred taxasset could be utilised against. 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 offinancial assets 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. 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 not classified in the above categories. Afterinitial recognition available-for-sale financial assets are measured at fairvalue with gains and losses being recognised in a separate component of equityuntil the investment is derecognised or until the investment is determined to beimpaired at which time the cumulative gain or loss previously reported in equityis 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. Borrowing costs are recognised as anexpense when incurred. 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, within finance costs. On redemption the loan is repaid at par and any derivative element is releasedthrough the income statement. New standards and interpretations not applied During the year, the IASB and IFRIC have issued the following standards andinterpretations with an effective date after the date of these financialstatements: International Accounting Standards (IAS / IFRS) Effective dateIFRS 7 Financial Instruments: Disclosures 1 January 2007IFRS 8 Operating Segments 1 January 2009IAS 1 Amendment - Presentation of Financial Statements: 1 January 2007 Capital Disclosures International Financial Reporting Interpretations Committee(IFRIC)IFRIC 4 Determining whether an arrangement contains a lease 1 January 2006IFRIC 5 Rights to Interests arising from Decommissioning, 1 January 2006 Restoration and Environmental Rehabilitation FundsIFRIC 6 Liabilities arising from participating in a Specific 1 December 2005 Market - Waste Electrical and Electronic EquipmentIFRIC 7 Applying the restatement approach under IAS 29 1 March 2006 Financial Reporting in Hyperinflationary EconomiesIFRIC 8 Scope of IFRS 2 1 May 2006IFRIC 9 Reassessment of Embedded Derivatives 1 June 2006IFRIC 10 Interim Financial Reporting and Impairment 1 November 2006IFRIC 11 Group and Treasury Share Transactions 1 March 2007IFRIC 12 Service Concession Arrangements 1 January 2008 The Directors do not anticipate that the adoption of these standards andinterpretations will have a material impact on the Group's financial statementsin the period of initial application. Upon adoption of IFRS 7, the Group will have to disclose additional informationabout its financial instruments, their significance and the nature and extent ofrisks that they give rise to. More specifically the Group will need to disclosethe fair value of its financial instruments and its risk exposure in greaterdetail. There will be no effect on reported income or net assets. IAS 32 and 39 were adopted as at 1 October 2005, although the Group has nottaken advantage of the transitional arrangements of IFRS 7 not to restate thecomparative amounts. 2. SEGMENT INFORMATION The Group operates within into two primary reporting segments, namelyOutsourcing and Software. These are the Group's primary reporting format forsegment information. Secondary segment information is reported geographically. Primary basis - business segments Year ended 30 September 2006 Outsourcing Software Total £'000 £'000 £'000 External segment revenue 48,327 31,324 79,651 ========= ======== =======Segment results 5,030 2,340 7,370 Finance income 875 285 1,160Finance costs (261) (371) (632)Share of profit of associate 568 - 568 ---------- --------- --------Profit before tax 6,212 2,254 8,466Tax expense (1,642) --------Profit after tax (before minority interest) 6,824 ======== --------------------------------------------------------------------------------Adjusted profitProfit before tax 6,212 2,254 8,466Amortisation of intangible assets 925 370 1,295Share based payments 113 815 928Utilisation of pre-acquisition broughtforward tax losses 258 - 258 ---------- --------- -------- 7,508 3,439 10,947 ========== ========= ========--------------------------------------------------------------------------------Assets and liabilitiesSegment assets 55,619 36,362 91,981Unallocated assets 3,609 95,590 Segment liabilities 19,803 12,888 32,691Unallocated liabilities 15,903 48,594 Other segment informationCapital expenditure:Property, plant and equipment 901 826 1,727Intangible fixed assets 16,853 852 17,705Depreciation 1,035 1,132 2,167Amortisation 925 370 1,295 Central costs have been allocated on a 50:50 basis between the software andoutsourcing (2005:70% software, 30% outsourcing). The change in the allocationfor 2006 reflects the increasing activity in outsourcing. Unallocated assets comprise fixed asset and current asset investments anddeferred tax assets. Unallocated liabilities include interest bearing loans andborrowings and taxation creditors. Primary basis - business segments Year ended 30 September 2005 Outsourcing Software Total £'000 £'000 £'000 External segment revenue 34,929 25,987 60,916 ======== ======== =======Segment results 3,253 (2,130) 1,123 Finance income 567 162 729Finance costs (167) (400) (567)Loss on disposal of continuing operations 46 (100) (54)Share of profit of associate 683 - 683 Profit/(loss) before tax 4,382 (2,468) 1,914Tax expense (1,369) Profit after tax (before minority interest) 545 --------------------------------------------------------------------------------Adjusted profitProfit/(loss) before tax 4,382 (2,468) 1,914Amortisation of intangible assets - 94 94Share based payments 112 1,127 1,239Loss on disposal of continuing operations (46) 100 54Utilisation of pre-acquisition broughtforward tax losses 265 - 265 -------- -------- ------- 4,713 (1,147) 3,566 ======== ======== =======-------------------------------------------------------------------------------- Assets and liabilitiesSegment assets 30,143 40,138 70,281Unallocated assets 1,821 -------- 72,102 ======== Segment liabilities 13,520 11,539 25,059Unallocated liabilities 8,034 -------- 33,093 ========Other segment informationCapital expenditure:Property, plant and equipment 1,091 506 1,597Intangible fixed assets 1,882 419 2,301Depreciation 834 1,179 2,013Amortisation - 94 94 ======= ======= ======= Unallocated assets comprise fixed asset investments and deferred tax assets.Unallocated liabilities include interest bearing loans and borrowings andtaxation creditors. Secondary format - geographical segments The following table presents an analysis of revenue and an analysis of thecarrying amount of segment assets and capital expenditure by the geographicalarea in which those assets are located. Revenue by origin and destination 2006 2005 £'000 £'000 Africa 31,140 23,096Europe 28,107 16,312Americas 15,256 16,706Asia Pacific 5,148 4,802 -------- -------- 79,651 60,916 ======== ======== Segment assets 2006 2005 £'000 £'000 Africa 21,171 17,170Europe 53,391 35,686Americas 9,469 13,885Asia Pacific 7,950 3,540 -------- -------- 91,981 70,281Unallocated assets 3,609 1,821 -------- -------- 95,590 72,102 ======== ======== Capital expenditure - property, plant and equipment 2006 2005 £'000 £'000 Africa 787 847Europe 672 432Americas 97 126Asia Pacific 171 192 -------- -------- 1,727 1,597 ======== ========= Capital expenditure - intangibles and goodwill 2006 2005 £'000 £'000 Europe 14,242 1,557Asia Pacific 3,463 15Africa - 729 -------- -------- 17,705 2,301 ======== ======== The following table provides disclosure of the Group's revenue analysed by the type of service. All revenue relates to services Revenue by type of service 2006 2005 £'000 £'000SoftwareLicence 6,774 3,348Solution delivery 17,431 15,231Licence rental 2,965 2,178Maintenance 1,754 1,638Hosting and bureau services 2,400 1,795Public sector - 1,797 -------- -------- 31,324 25,987Outsourcing 48,327 34,929 -------- --------Total revenue 79,651 60,916 ======== ========3. ADMINISTRATIVE EXPENSES Included within administrative expenses for the year ended 30 September 2006 isa credit of £508,000 relating to the re-cycling of foreign exchange balancesresulting from the liquidation of a foreign subsidiary. 4. TAXATION 2006 2005 £'000 £'000Current tax expenseUK corporation tax 138 -Foreign tax 1,886 1,770 ---------- ---------- Current tax on income in the year 2,024 1,770Adjustments in respect of prior periods (46) (57) ---------- ---------- Total current tax 1,978 1,713 Deferred taxationOrigination and reversal of timingdifferences (336) (344) ---------- ----------Total tax charge 1,642 1,369 ========== ========== 2006 2005 £'000 £'000Reconciliation of total tax chargeGroup profit before tax 8,466 1,914 Income tax using UK corporation tax rate of 30% (2005: 30%) 2,540 574Tax effects of:Permanent differences (398) 219Non-taxable income (146) (665)Rate differences on overseas earnings 32 (57)Current year tax losses, no deferred tax recognised 550 1,596Other differences - (35)Utilisation of brought forward tax losses (1,214) (635)Share based payments 278 372 ---------- ----------Total income tax expense 1,642 1,369 ========== ========== 5. EARNINGS PER SHARE 2006 2005 pence pence Basic earnings per share 1.28 0.07Adjustment for dilutive potential ordinary shares- add share options (0.03) - ---------- ----------Diluted earnings per share 1.25 0.07 ========== ========== Basic earnings per share 1.28 0.07Adjustments- amortisation 0.26 0.02- share based payments 0.18 0.24- loss on disposal of continuing operations - 0.01- utilisation of pre-acquisition brought forward tax losses 0.05 0.06 ---------- ----------Adjusted basic earnings per share 1.77 0.40 Adjustment for dilutive potential ordinary shares (0.03) - ---------- ----------Adjusted diluted earnings per share 1.74 0.40 ========== ========== Earnings per share is calculated as follows: 2006 2005Number of shares (thousand)Average number of shares in issue used to calculate basicand adjusted basic earnings per share 500,283 491,000Dilutive potential ordinary shares- add share options 10,375 9,005 ---------- ----------Shares used to calculate diluted and adjusted dilutedearnings per share 510,658 500,005 ========== ==========Basic and diluted earnings (£'000)Basic and diluted earnings for the year 6,407 343- add amortisation 1,295 94- add share based payments 928 1,239- add loss on disposal of continuing operations - 54- add utilisation of pre-acquisition brought forward taxlosses 258 265 ---------- ----------Adjusted and adjusted diluted earnings for the year 8,888 1,995 ========== ========== The average number of shares in both 2006 and 2005 have been adjusted to reflectthe shares issued during the rights issue completed on 13 December 2006. 6. INTANGIBLE ASSETS On 1 January 2006 the Group acquired 100% of the share capital of ServiceKonzept AG for a total consideration, including acquisition costs, of £9,711,000(€14,159,000). This resulted in the creation of goodwill and separatelyidentifiable intangible assets of £6,046,000 and £4,773,000 respectively.Service Konzept AG provides outsourcing services for household insurance. Fromthe date of acquisition Service Konzept AG contributed £3,936,000 to revenue and£1,214,000 to profit before tax. On 30 May 2006 the company changed its name toInnovation Group Property AG. On 1 January 2006 the Group acquired 100% of the share capital of CMCDeutschland GmbH for a total cash consideration of £60,000 (€88,000). Thisresulted in a goodwill balance of £40,000. The company provides outsourcingservices for vehicle leasing. From the date of acquisition CMC Deutschland GmbHcontributed £157,000 to revenue and £28,000 to profit before tax. On 30 May 2006the company changed its name to Innovation Group Leasing GmbH. On 31 May 2006 the Group acquired the trading assets of Sureplan Australia PtyLimited for a total cash consideration, including acquisition costs, of£3,293,000 (AUD $8,098,000). This resulted in the creation of goodwill andseparately identifiable intangible assets of £1,749,000 and £1,666,000respectively. Sureplan Australia Pty Limited is a provider of outsourcedaccident and risk management solutions to the automotive leasing andself-insured fleet sector. From the date of acquisition Sureplan Australia PtyLimited contributed £617,000 to revenue and £50,000 to profit before tax. On 1 June 2006 the Group acquired 100% of the share capital of Prophit ShareLimited for a total consideration of £600,000. The consideration was settledentirely by the issue of new shares. This resulted in the creation of goodwilland separately identifiable intangible assets of £337,000 and £467,000respectively. Prophit Share Limited is a specialist in claims leakage businessintelligence. On the date of acquisition the trade and assets of Prophit ShareLimited were transferred to another Group company, The Innovation Group (EMEA)Limited. It is therefore not possible to measure trading performance sinceacquisition. On 15 July 2006 the Group acquired 100% of the share capital of AMK AssociatesLimited for a total consideration, including acquisition costs, of £2,035,000.This resulted in the creation of goodwill and separately identifiable intangibleassets of £1,442,000 and £1,137,000 respectively. AMK Associates Limitedprovides service and maintenance data to the motor industry. From the date ofacquisition AMK Associates Limited has contributed £96,000 to revenue and£38,000 to profit. 7. TRADE AND OTHER RECEIVABLES 2006 2005 £'000 £'000 Trade receivables 14,509 8,819Other debtors 1,877 840Accrued income 4,162 2,996 ---------- ---------- 20,548 12,655 ========== ==========All amounts are due within one year. 8. TRADE AND OTHER PAYABLES 2006 2005 £'000 £'000CurrentTrade payables 2,942 2,037Other payables 7,378 4,269Accruals 5,208 4,042Social security and other taxes 1,818 1,665 ---------- ---------- 17,346 12,013 ========== ========== Non currentOther payables 1,000 400 ========== ========== 9. INTEREST BEARING LOANS AND BORROWINGS 2006 2005 £'000 £'000CurrentBank loans and overdrafts 1,730 -Other loans 1,148 800Obligations under finance leases and hire purchase 495 430agreements ---------- ---------- 3,373 1,230 ========== ========== Non currentBank loans and overdrafts 3,962 -Other loans 3,152 3,000Convertible loan notes - 1,077Obligations under finance leases and hire purchase 510 526agreements ---------- ---------- 7,624 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 balance sheet date (30 September 2005), (see note 10b). Reconciliationsof the Group's profit for year ended 30 September 2005 are also required (seenote 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 theyear ended 30 September 2005 these short-term investments amounted to £153,000. 10a. Effect of IFRS adoption on profit/(loss) for the prior financial year Year to 30 September 2005 Note £'000 Loss for the period as previously reported (12,713)under UK GAAP UK GAAP adjustment - Share of profit from A 641associate IFRS adjustmentsShare based payments B (1,239)Employee benefits C (111)Financial instruments E 62Goodwill and intangible assets F 14,170Income taxes G (265) ---------Profit for the year reported under IFRS 545 10b. Effect of IFRS adoption on equity 1 October 30 September 2004 2005 Note £'000 £'000 Total equity reported under UK GAAP 36,229 24,148 UK GAAP adjustment - Investments accounted forusing the equity method A - 656 IFRS adjustmentsShare based payments B - -Employee benefits C (52) (163)Foreign exchange rates D - -Financial instruments E (6) 56Goodwill and intangible assets F - 13,905Income taxes G - - -------- ---------Total equity reported under IFRS 36,171 38,602 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 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 the amounts previously presented under UK GAAP andthe amounts presented under IFRS for the year ended 30 September 2005 aredetailed below. A. UK GAAP adjustment - Investments accounted for using the equity method The Group owns 100% of the rights associated with a cell captive structure,which itself is part of Guardrisk Insurance Company Limited (registered in SouthAfrica). The cell meets the definition of a "Special Purpose Entity" (SPE) inaccordance with SIC 12 under IFRS and an associate under UK GAAP. In previousyears the investment has been treated as a fixed asset investment held at costin the balance sheet. The UK GAAP results for the year ended 30 September 2005 have been restated toreflect this change. The Group's share of net profit has been brought into theincome statement with the investment accounted for using the equity method inthe balance sheet. The above treatment has resulted in an increase in share of profit fromassociate of £641,000, an increase in investments accounted for using the equitymethod of £656,000 and a reduction in translation reserves of £15,000 for theyear ended 30 September 2005. SIC 12 requires a SPE to be consolidated in full where the relationshipindicates control exists. Despite the 100% shareholding, management believe thatthe Group does not control the cell. The Group is however able to exercisesignificant influence due to the following: • ability to participate in the dividend policy • material transactions between the Group and the cell • the Group provides essential technical information Due to the exercise of significant influence the cell has been also accountedfor as an associate using the equity method under IFRS. B. 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 year to 30September 2005 was £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 C. Employee benefits (IAS 19) The Group has complied with the provision of IAS 19 and has accrued holiday payfor all staff from the date of transition. A charge of £111,000 has beenrecorded in the IFRS income statement for the year to 30 September 2005,representing the movement on holidays accrued, but not taken, at the balancesheet date. D. 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. E. 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. F. 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. G. 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 charge of £265,000 has been recorded in the IFRS income statementfor the year ended 30 September 2005 for the utilisation of £882,000 of taxlosses by InFront Solutions Limited. The corresponding entry has been madeagainst 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. H. 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. 11. POST BALANCE SHEET EVENTS On 25 October 2006 the Group acquired 100% of the share capital of SureplanInternational Pty Ltd for a cash consideration of approx. £3,500,000(US$6,500,000). A further payment to a maximum of approx. £4,000,000(US$7,500,000) has been deferred and is payable upon achieving a specifiedpercentage of net profit before tax for the year ending 30 September 2009.Sureplan International Pty Ltd owns a 51% controlling interest in Sureplan USAInc., which supplies outsourced claims management services to the vehicleleasing industry in the United States of America. On 1 November 2006 the Group acquired 68.72% of the share capital of Holmswoodand Back and Manson (South Africa) (Pty) Ltd for a total cash consideration ofapprox. £5,450,000 (ZAR 70,900,000). Holmswood and Back and Manson (South Africa) (Pty) Ltd, through its subsidiary is the leading provider of travel insuranceadministration and insurance consulting services in South Africa. On 2 November 2006 the Group announced the proposed acquisition of First NoticeSystems, Inc., a leading provider of claim reporting outsourcing services andsoftware to the property and casualty insurance market in the US. The total cashconsideration of approx. £27,100,000 (US$51,550,000) was funded entirely by therights issue detailed below. This acquisition is expected to complete on 22December 2006. On 13 December 2006, the parent company of the Group, The Innovation Group plc,completed a rights issue. This rights issue was undertaken on the basis of 2 newordinary shares for every pre-existing 5 ordinary shares. The total number ofnew shares issued as part of the rights issue was 180,600,771 at a price of 21pence per share. This increased the number of issued shares in the company from451,501,928 to 632,102,699. The rights issue raised approximately £37.9m (beforeexpenses). This information is provided by RNS The company news service from the London Stock Exchange

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