Last checked at 28 Jul 2008 07:00
For immediate release
28 July 2008
MANPOWER SOFTWARE PLC
RECORD RESULTS FOR THE YEAR ENDED 31 MAY 2008
Manpower Software plc (AIM: MNS), the leading provider of workforce optimisation solutions, today announces its results for the year ended 31 May 2008.
Highlights
Revenue up 39% to £11.6m
Trading profit up 73% to £1.85m
Improved net operating margin of 16% (2007: 13%).
Cash balances at the year-end of £4.3m
23 new NHS Trusts became customers
Successful integration of Key Information Technology Systems Limited ("Key ITS")
Particularly strong growth in the Healthcare business
Directors confident of another successful year
Ian Bowles, Chief Executive Officer of Manpower Software, said:
"2008 has been a year of significant achievement for Manpower Software. We have strengthened, both financially and in market share, and established firm foundations for continuing growth in the NHS market. We are committed to improving the performance of all areas of the business still further. While the global economic outlook is uncertain, Manpower Software is well positioned to continue to deliver profitable growth. I remain confident in the company's future."
Enquiries:
Manpower Software plc
Ian Bowles, Chief Executive Officer 020 7389 9500
Simon Thorne, Chief Financial Officer
Numis Securities Limited
Nominated Adviser: Michael Meade, Brent Nabbs 020 7260 1000
Corporate Broking: James Black
CHAIRMAN'S STATEMENT
The last financial year has been a year of considerable success for Manpower Software, one in which we have further delivered on our strategy to be the leading supplier of workforce optimisation solutions in our chosen markets. Despite the economic downturn, Manpower Software has strengthened its position, both financially and in market share.
Results
Revenue in the financial year was £11.6m (2007: £8.3m), an increase over last year of 39%. Trading profit for the year, before adjustments for share-based payments and amortisation of intangible assets, was £1.85m (2007 £1.07m), an increase over last year of 73%. The resulting net operating margin was 16% (2007: 13%). Cash balances at the year-end increased to £4.3m (2007: £2.4m).
Significant Activity
In addition to the company's best ever financial results, a number of significant milestones were also achieved during the year.
23 new NHS Trusts became customers, up from 10 new signings in the previous year. Since the year-end, a further 7 contracts have been closed;
The acquisition of Key Information Technology Systems Limited ("Key ITS") established our position in the NHS temporary staffing solutions market and brought with it 90 new sites, each of which is a potential customer for MAPS Healthroster;
Three new partnership agreements were signed: ACS Healthcare Solutions (USA), PricewaterhouseCoopers (PwC) (UK) and Singapore Technologies Electronics Ltd (Singapore), thus expanding the company's capabilities in these markets.
We continue to combine a resolute focus on the four core financial and structural elements of a successful software business, with rapid commercial development:
linearity of licence revenue growth through consecutive periods
strong margins in services and support revenues
investments directed only in high productivity activities
diligent expense management
Linearity of licence revenue
Healthcare is now Manpower Software's largest market. During the year the company took on a further 23 new NHS Trust customers for its powerful e-rostering solution, thus providing a steady flow of licence revenue. In addition, Manpower Software has entered the current financial year (ending 31 May 2009) with a strong pipeline of further opportunities within the NHS. Since the year-end, a further 7 contracts have been closed.
Strong margins in service and support revenues
Revenues from services and support continued to form a substantial part of our business and grew by 29%, delivering strong operating margins across the financial year.
Investments in high productivity activities
Monitoring performance and using appropriate incentive structures throughout the company have helped to drive increased revenues and operating margins. The acquisition of Key Information Technology Systems Limited provides an additional source of recurring revenue, which will enable the company to consolidate its increasing presence in the NHS.
Diligent expense management
The company ensured that G&A expense was kept to a minimum and investments in sales and marketing, services and support, and R&D were each carefully managed. This complemented the effort to grow revenues and enabled the company to deliver improved operating margins across the business.
Achievements with each of these important structural aspects have ensured the company's profitability across all parts of its business, while also achieving exceptionally high levels of customer satisfaction.
Directors and Senior Management
As announced on 22 May 2007, we are delighted that Ian Bowles has joined us as our new CEO. Ian has considerable experience in building global application software companies and has proven his ability to successfully execute ambitious operating plans. His skills will be vital as the company grows in both its existing and new markets.
Also, as announced on 30 June 2008, Allen Swann was appointed as Business Development Director and a member of the Board of Directors. Previously, as an adviser to the company, he focussed on building a substantial presence in the UK Healthcare Market. He will now provide strong business development leadership and execution skills across a wider spectrum of the company's activities.
International Financial Reporting Standards ("IFRS")
The company has prepared these results in accordance with the recognition and measurement principles of IFRS in issue and as adopted by the European Union. The adoption of IFRS does not result in any material changes to the Group's accounting practices, although the policy framework under IFRS has changed. There are no adjustments to the income statement as a consequence of the first time adoption of IFRS, and there are no material differences between the cash flow statement presented under IFRS and the cash flow statement presented under UK GAAP.
Outlook
The result for 2008 was excellent and the outlook for 2009 is for a further year of progress.
Across all sectors of the business, the following essential elements are in place to drive continued growth in 2009:
I would like to thank our customers for their business, enthusiastic use of our workforce optimisation solutions and unstinting support for our growth strategies. Finally, I would like to recognise and thank Manpower Software's employees for their unbounded commitment, energy and enthusiasm for the company's success.
Terry Osborne
CHAIRMAN
28 July 2008
CHIEF EXECUTIVE OFFICER'S STATEMENT
Operational Review
In the half-year report I suggested that the outlook for the company was positive, a view now confirmed by the year-end results.
In FY08, we made our first acquisition, signed three new partnership agreements and strengthened the team, attracting more talented and experienced individuals to the company. As our reputation grows, so we are receiving unsolicited job applications from people employed within the market sectors in which we operate, who are keen to join our team in a variety of roles. We have also received requests from sales led organisations who are keen to partner with us. We are able to be selective about the people we take on as employees and the companies with which we will work as partners in each case.
The management team remains committed to improving the performance of all areas of the business still further. In particular, we will continue to invest in and grow those areas of the business which showed the most positive momentum during FY08. The continued improvement in execution and a relentless expense management focus will enable us to continue the drive into FY09 and beyond.
Markets
Market conditions in our chosen sectors remain resilient and we believe we are partly shielded for a number of reasons as outlined in this business review.
Healthcare
At the half-year, our Healthcare business had become our fastest growing sector. By the end of the financial year, it had also become the largest in terms of revenue generation, accounting for 57% of our total revenue.
During the year the customer base of NHS Trusts increased from 15 to 38 across Acute, Primary Care and Mental Health Trusts. This still represents less than 10% of the addressable Acute, Mental Health and Primary Care market in the UK. We will continue to expand into the sector, both in the UK and overseas.
It is significant that the increase in customers during the year was more than double the total number of Healthcare customers secured over the previous three years. In all cases MAPS Healthroster was selected because of a combination of its unique functionality, the size of potential time and cost savings identified, its intuitive nature, and our growing track record for the delivery of a Trust-wide solution. As reported previously, two of our customers have been selected by the National Audit Office as examples of good practice in managing the use of temporary nursing staff. During the year we also gained as customers both the first Academic Teaching Trust to be created in the UK (Imperial College Healthcare NHS Trust) and an established ambulance service (Isle of Wight NHS Primary Care Trust).
We have successfully integrated MAPS Healthroster with the National Human Resources and Payroll System - NHS Electronic Staff Records ("ESR"). This means that Trusts using MAPS Healthroster can now pay staff electronically without the need for paper timesheets. This gives them significant time savings and dramatically increases the accuracy of payment records. Over 100,000 shifts are now being accurately processed each month using MAPS Healthroster.
We are also increasing our coverage in the NHS as we move from nurse rostering into all medical staff groups.
Our commitment to the NHS was further strengthened by the acquisition of Key Information Technology Systems Limited, the leading temporary staffing solutions provider. Having now merged the two customer bases, Manpower Software is represented in approximately 33% of all NHS trusts across the UK, a position we plan to build on in the current fiscal year.
Our NHS customers are generating strong referenceable results and more Trusts are evaluating our rostering and temporary staffing solutions under contract. We have increased further the resources allocated to the healthcare sector to take continuing advantage of the momentum in the market for MAPS Health Suite.
We anticipate that the increasing spotlight on improving productivity throughout the NHS, controlling temporary staff spend and improving patient care, allied with the company's increased geographical expansion throughout the UK and the completion of current pilots, will lead to continued growth in sales.
Defence
We have a long-standing and vital relationship with the Defence market, which remains a key strategic sector for the Company. Over the past year Manpower Software has enjoyed considerable success with the British Army, the RAF, Royal Fleet Auxiliary ("RFA") and the Defence Medical Services ("DMS"). The RFA have worked closely with the company to exploit the utility of the MAPS Defence Suite products, thereby enabling their applicability to other defence customers. DMS are managing medical personnel from all three services within their MAPS implementation.
In NATO use of the MAPS Defence Suite was extended when the NATO Special Forces Coordination Centre became the latest MAPS user. More generally, the Allied Nations are now able to receive access to the MAPS Force Generation Management Tool. It is planned to interface this application to a wide range of NATO IT systems, enhancing its usefulness to the NATO nations still further.
In Asia Pacific, we concluded an effective trial of Whole Ship Coordination with the Royal Australian Navy.
Over the coming year the Defence Sector will focus on expansion within the UK MOD, Europe, North America and the Asia Pacific region where defence spending remains robust.
Maritime
The company continues to supply some of the world's foremost maritime organisations in shipping, offshore engineering, cruise and ferry. As a result, we will bring to market a new application "Onboard" during the current fiscal year. "Onboard", developed in conjunction with one of the world's leading container shipping companies, where it is being deployed before being made available to the broader shipping market, will provide vessel masters with an application for managing crew, itinerary and accounts. The new application can be deployed stand-alone or integrated with MAPS Maritime Suite.
At the same time, we have identified the Offshore oil and gas sector as a potential new source of revenue to grow our maritime revenues and client base during the course of the next two years.
Partnerships
Our partner strategy produced positive results during FY08. In our Healthcare sector, PricewaterhouseCoopers in the UK and ACS Healthcare Solutions in the USA became official partners of Manpower Software. Both partners have begun introducing Manpower Software into their respective client-lists for the MAPS Healthroster application. In Defence, through Singapore Technologies Electronics we have supplied a prototype of MAPS Defence Suite to the Singapore Ministry of Defence. We anticipate that these partnerships will deliver significant benefits to the company over the coming years. We will continue to select important partnerships to deliver our MAPS software suites into new geographical territories.
Client Services
Client Services continues to be a fast growing and profitable part of our business. We expect continued growth in the current fiscal year as there is a strong pipeline of work to be delivered across all three market sectors.
Within Healthcare there are now 712 wards in 44 Trusts using MAPS Healthroster, a 100% increase over last year. The Defence sector has installations within all three Front Line Commands of the British Armed Forces (Army, Navy and Air Force), where there are approximately 3,500 users of MAPS Defence Suite. Other worldwide installations include NATO (Belgium) and the Royal Australian Navy (Canberra, Australia). The MAPS Maritime Suite is being used by twelve different brands to manage the workforce planning of over 100,000 personnel operating on over 500 vessels throughout the world.
At the same time as managing the expansion of our client base, we have maintained high levels of client satisfaction with regards to our staff, products and effective approach to implementation.
Research & Development
The MAPS software platform continues to provide the foundation for our product portfolio, with MAPS Health Suite, MAPS Defence Suite and MAPS Maritime Suite customised and branded for their particular market sector. In each core sector, enhanced releases of the MAPS software platform have been developed, with an increasing focus on delivering functionality to users via the web. The R&D organisation once again renewed its IS9001 TickIT accreditation and its Microsoft Gold Partner status. We continue to invest in both product development and delivering tools to enable successful applications development and deployment.
Acquisitions
During the year, Manpower Software successfully completed its first acquisition, that of Key Information Technology Systems Limited ("Key ITS"). The staff of Key ITS are now contributing to the development of the enlarged organisation and its product offerings.
While we remain focused on strong organic growth, further acquisition opportunities are being considered against well defined criteria that support our strategic objectives.
Outlook
The opportunity for increasing sales in our Healthcare business, in both the UK and overseas markets, supported by the Defence and Maritime market sectors, will maintain our growth momentum. We will continue to attract and retain the very best talent as we deliver against our objective of providing an increasing return on investment for our shareholders, customers and partners. While the global economic outlook is uncertain, Manpower Software is well positioned to continue to deliver profitable growth. I remain confident in the company's future.
Ian Bowles
CHIEF EXECUTIVE OFFICER
28 July 2008
CONSOLIDATED INCOME STATEMENT
| Year to 31 May | Year to 31 May | ||||
| 2008 | 2007 | ||||
| £'000 | £'000 | ||||
| Note | |||||
| Revenue | 11,578 | 8,306 | |||
| Selling and operational expenses | (7,700) | (5,680) | |||
| Gross profit | 3,878 | 2,626 | |||
| Administrative expenses | (2,028) | (1,556) | |||
| Profit before amortisation, share-based payment, interest and tax | 1,850 | 1,070 | |||
| Amortisation of intangible assets | (50) | - | |||
| Share-based payment | (104) | (75) | |||
| Total administrative expenses | (2,182) | (1,631) | |||
| Operating profit | 1,696 | 995 | |||
| Finance income | 132 | 19 | |||
| Finance charge | - | (4) | |||
| Net finance income | 132 | 15 | |||
| Profit for the period before taxation | 1,828 | 1,010 | |||
| Tax on profit for the period | (44) | - | |||
| Profit for the period | 1,784 | 1,010 | |||
| Earnings per share | 4 | ||||
| Basic (pence per share) | 4.0p | 2.3p | |||
| Diluted (pence per share) | 3.8p | 2.2p | |||
CONSOLIDATED BALANCE SHEET
| 31 May | 31 May | |||
| 2008 | 2007 | |||
| £'000 | £'000 | |||
| Non-current assets | ||||
| Intangible assets | 795 | - | ||
| Property, plant and equipment | 521 | 153 | ||
| Trade and other receivables | 102 | 102 | ||
| Total non-current assets | 1,418 | 255 | ||
| Current assets | ||||
| Trade and other receivables | 2,566 | 1,636 | ||
| Cash and cash equivalents | 4,317 | 2,410 | ||
| Total current assets | 6,883 | 4,046 | ||
| Total assets | 8,301 | 4,301 | ||
| Equity and liabilities | ||||
| Equity | ||||
| Share capital | 2,235 | 2,227 | ||
| Share premium account | 6,493 | 6,465 | ||
| Shares to be issued | 159 | - | ||
| Share-based payment reserve | 314 | 210 | ||
| Foreign exchange reserve | 63 | 75 | ||
| Retained earnings | (5,099) | (6,883) | ||
| Total equity | 4,165 | 2,094 | ||
| Non-current liabilities | ||||
| Borrowings | 196 | - | ||
| Total non-current liabilities | 196 | - | ||
| Current liabilities | ||||
| Trade and other payables | 3,893 | 2,207 | ||
| Corporation tax | 47 | - | ||
| Total current liabilities | 3,940 | 2,207 | ||
| Total liabilities | 4,136 | 2,207 | ||
| Total equity and liabilities | 8,301 | 4,301 | ||
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
| Share capital | Share premium | Shares to be issued | Share-based payment reserve | Foreign exchange reserve | Retained earnings | Total equity | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| At 1 June 2006 | 2,223 | 6,456 | - | 135 | - | (7,893) | 921 |
| Exchange differences on opening reserves | 75 | 75 | |||||
| Net income recognised directly in equity | 75 | 75 | |||||
| Result for the period | 1,010 | 1,010 | |||||
| Total recognised income and expense | 75 | 1,010 | 1,085 | ||||
| Issue of shares | 4 | 9 | 13 | ||||
| Associated costs | - | ||||||
| Equity settled share options | 75 | 75 | |||||
| At 31 May 2007 | 2,227 | 6,465 | - | 210 | 75 | (6,883) | 2,094 |
| Exchange differences on opening reserves | (12) | (12) | |||||
| Net income recognised directly in equity | (12) | (12) | |||||
| Result for the period | 1,784 | 1,831 | |||||
| Total recognised income and expense | (12) | 1,784 | 1,819 | ||||
| Issue of shares | 8 | 28 | 159 | 195 | |||
| Associated costs | - | ||||||
| Equity settled share options | 104 | 104 | |||||
| At 31 May 2008 | 2,235 | 6,493 | 159 | 314 | 63 | (5,099) | 4,165 |
CONSOLIDATED CASHFLOW STATEMENT
| Year to | Year to | |||
| 31 May | 31 May | |||
| 2008 | 2007 | |||
| £'000 | £'000 | |||
| Cash flow from operating activities | ||||
| Profit for the period | 1,784 | 1,010 | ||
| Adjustments for: | ||||
| Finance charges | (132) | (14) | ||
| Income tax | 44 | - | ||
| Depreciation | 99 | 82 | ||
| Amortisation | 50 | - | ||
| Share-based payment | 104 | 75 | ||
| Decrease / (increase) in trade and other receivables | (614) | 481 | ||
| Increase in trade and other payables | 957 | 465 | ||
| Net cash generated from operations | 2,292 | 2,099 | ||
| Interest expense | - | (4) | ||
| Income tax refunded | 3 | - | ||
| Net cash generated by operating activities | 2,295 | 2,095 | ||
| Cash flows from investing activities | ||||
| Interest received | 132 | 18 | ||
| Investment to acquire subsidiary (net) | (386) | - | ||
| Payments for property, plant and equipment | (154) | (149) | ||
| Net cash used in investing activities | (408) | (131) | ||
| Cash flows from financing activities | ||||
| Repayment of borrowings | (4) | - | ||
| Proceeds from the issue of equity shares | 36 | 13 | ||
| Issue costs | - | - | ||
| Net cash generated by financing activities | 32 | 13 | ||
| Net increase in cash and cash equivalents | 1,919 | 1,977 | ||
| Foreign exchange differences | (11) | 77 | ||
| Cash and cash equivalents at the start of the period | 2,409 | 355 | ||
| Cash and cash equivalents at the end of the period | 4,317 | 2,409 | ||
NOTES TO THE PRELIMINARY ANNOUNCEMENT
For the year to 31 May 2008
The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in section 240 of the Companies Act 1985.
The consolidated balance sheet at 31 May 2008 and the consolidated income statement, consolidated statement of changes in equity, consolidated cash flow statement and associated notes for the year then ended have been extracted from the Group's 2008 statutory financial statements upon which the auditors opinion is unqualified and does not include any statement under Section 237 of the Companies Act 1985.
Those financial statements have not yet been delivered to the registrar of companies.
The financial information contained in this report does not constitute full statutory accounts within the meaning of Section 240 of the Companies Act 1985. The figures are extracted from the audited financial statements for the year ended 31 May 2008 which will be filed with the Registrar of Companies, sent to shareholders and will be available on the Company's website at www.manpowersoftware.com in due course.
The consolidated financial statements are for the year ended 31 May 2008. It has been prepared
in compliance with International Financial Reporting Standards (IFRS) and International Financial
Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union as at
31 May 2008.
In the current year the Group has adopted International Financial Reporting Standards for the first time
and has applied IFRS 1 'First time adoption of IFRS' from the transition date of 1 June 2006. Full details of the changes required to present the accounts under IFRS are given in the full financial statement.
Consolidation
Subsidiaries are all entities over which the group has the power to govern the financial and operating policies generally accompanying a shareholding of over one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated on the date control ceases.
The group uses the purchase method of accounting for the acquisition of a subsidiary. The cost of an acquisition is measured by the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired the difference is recognised directly in the income statement.
Inter-company transactions, balances and unrealised gains and losses on transactions between group companies are eliminated.
Investments
Investments held as non-current assets comprise investments in subsidiary undertakings and are stated at cost less any provision for any impairment.
Revenue recognition
Revenue is the fair value of the total amount receivable by the group for supplies of products and services which are provided in the normal course of business. VAT or similar local taxes and trade discounts are excluded.
The group licenses software under non-cancellable licence agreements and provides services which include installation, consulting, training and product support. Licence fee revenues are generally recognised when a non-cancellable licence agreement has been signed, there are no uncertainties surrounding product acceptance, there are no significant vendor obligations, the fees are fixed and determinable and collection is considered probable. Where licence fees are attributable to contracts extending over more than one period, revenue is taken based upon the stage of completion when the outcome of the contract can be foreseen with reasonable certainty and after allowing for costs to completion.
Where appropriate, the group allocates a portion of contracted fees to post-contract activities covered under the contract, which may include installation assistance, training services and first year maintenance.
Revenues for training or consulting services are recognised as the services are performed. Revenues from support agreements are recognised rateably over the support period.
Segmental reporting
A business segment is a group of assets and operations engaged in production that is subject to risks and returns that are different from those of other business segments. A geographical segment is also a group of assets and operations engaged in production but in a particular economic environment that is different from those of other economic environments.
The group's primary reporting analysis is by business stream. The group's principal activities are:
a) the provision of software under a licence agreement; and
b) the provision of services such as installation, consulting, training and product support.
The group's secondary reporting analysis is geographical. As the activities of the group are predominantly all within the UK, the directors do not provide additional analysis.
Foreign currency translation
Items included in the financial statements of each of the group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The company's functional currency and the group's presentational currency is Sterling.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at reporting period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet;
income and expenses for each income statement are translated at actual rates, the average exchange rate is an acceptable approximation; and
on consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to a separate component of equity.
Intangible assets
Internally generated intangibles
An internally generated intangible asset arising from the development of software is recognised only if all of the following conditions are met:
it is probable that the asset will create future economic benefits;
the development costs can be measured reliably;
the technical feasibility of completing the intangible asset can be demonstrated;
there is the intention to complete the asset and use or sell it;
there is the ability to use or sell the asset; and
adequate technical, financial and other resources to complete the development and to use or sell the asset are available.
Intangible assets are amortised over their estimated useful lives, which is between 3-6 years. Where no intangible asset can be recognised, development expenditure is charged to the income statement in the period in which it is incurred.
Research expenditure is recognised as an expense in the period in which it is incurred.
Intangibles acquired as part of a business combination
In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the group. Where an intangible asset might be separable, but only together with a related tangible or intangible asset, the group of assets is recognised as a single asset separately from goodwill where the individual fair values of the assets in the group are not reliably measurable. Where the individual fair value of the complementary assets are reliably measurable, the group recognises them as a single asset provided the individual assets have similar useful lives.
Subsequent to initial recognition, intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is provided to write off the cost of each intangible asset over its useful economic life.
Goodwill
Goodwill arising from business combinations is the difference between the fair value of the consideration paid and the fair value of the assets acquired and liabilities and contingent liabilities assumed. It is recognised initially as an intangible asset at cost and is subject to impairment testing on an annual basis or more frequently if circumstances indicate that the asset may have been impaired. Details of impairment testing are described in the accounting policies.
Property, plant and equipment
Property, plant and equipment are recorded at cost net of accumulated depreciation and any provision for impairment. Depreciation is provided using the straight line method to write off the cost of the asset less any residual value over its useful economic life as follows:
Computer equipment 33%
Short leasehold improvements 25%
Other assets 25%
Impairment
The group's goodwill, other intangible assets and property, plant and equipment are subject to impairment testing.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Goodwill is allocated to those cash generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the group at which management controls the related cash flows.
Individual assets or cash generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which the assets or cash generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment losses recognised for cash generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist.
Leases
Finance leases are recognised as being those that transfer substantially all the risks and rewards of ownership. Assets held under finance leases are capitalised and the outstanding future lease obligations are shown in payables at the present value of the lease payments. They are depreciated over the term of the lease or their useful economic lives, whichever is the shorter. The interest element (finance charge) of lease payments is charged to the income statement over the period of the lease.
All other leases are regarded as operating leases and the payments made under them are charged to the income statement in the period in which they are incurred. The company does not act as a lessor.
Financial assets
Financial assets consist of cash and financial instruments. Financial instruments consist of trade and other receivables. Financial assets are assigned to their different categories by management on initial recognition, depending on the purpose for which the investment was acquired. The designation of financial assets is re-evaluated at every reporting date at which a choice of classification or accounting treatment is available.
Derecognition of financial instruments occurs when the rights to receive cash flows from the investments expire, or are transferred, and substantially all of the risks and rewards of ownership have been transferred. An assessment for impairment is undertaken at least at each balance sheet date, whether or not there is objective evidence that a financial asset or a group of financial assets is impaired.
Financial liabilities
The group's financial liabilities include trade and other payables and borrowings (bank overdraft).
Financial liabilities are recognised when the group becomes a party to the contractual agreements of the instrument. All interest related charges are recognised as an expense in the income statement.
Trade payables are recognised initially at their nominal value and subsequently measured at amortised costs less settlement payments.
Income taxes
Current income tax assets and liabilities comprise those obligations to fiscal authorities in the countries in which the group carries out its operations. They are calculated according to the tax rates and tax laws applicable to the fiscal period and the country to which they relate. All changes to current tax liabilities are recognised as a component of tax expense in the income statement.
Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amount of assets and liabilities in the consolidated financial statements with their respective tax bases.
Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand as well as short term bank deposits.
Share-based employee compensation
The group operates equity settled share-based compensation plans for remuneration of its employees.
All employee services received in exchange for the grant of any share-based compensation are measured at their fair values. These are indirectly determined by reference to the share option awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. profitability or sales growth targets).
All share-based compensation is ultimately recognised as an expense in the income statement with a corresponding credit to additional paid in capital, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of shares options expected to vest. Non market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to expenses recognised in prior periods is made if fewer share options ultimately are exercised than originally estimated.
Upon exercise of share options, the proceeds received, net of any directly attributable transaction costs, up to the nominal value of the shares issued are reallocated to share capital with any excess being recorded as additional share premium.
Equity
Equity comprises the following:
"Issued capital" represents the nominal value of equity shares.
"Share premium" represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue.
"Shares to be issued" represents both the nominal value and premium of shares still to be issued at the balance sheet date.
"Share-based payment reserve" represents equity-settled share-based employee and non-employee remuneration until such share options are exercised.
"Retained earnings" represents retained profits and losses.
Use of accounting estimates and judgements
Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management's best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the financial statements and the key areas are summarised below.
Judgements in applying accounting policies:
The acquisition of Key Information Technology Systems Limited has required the directors to make judgements regarding the value of the net assets that have been acquired. Specifically, to value the amount of future service revenues that are likely to flow from the current customer base.
The directors have judged that a litigation arising against Key Information Technology Systems Limited after its acquisition by the company, in respect of an event occurring prior to the acquisition is fully indemnified in the sale and purchase agreement and, therefore, they have not made a provision to cover any possible resulting loss.
The directors have decided that, due to the uncertainty of quantifying probable future profitability, they will not recognise a deferred tax asset in these accounts.
Sources of estimation uncertainty:
Depreciation rates are based on estimates of the useful lives and residual values of the assets involved.
Estimates are required as to asset carrying values and impairment charges.
The estimation of share-based payment costs requires the selection of an appropriate valuation model and consideration as to the inputs necessary for the valuation model chosen. The group has made estimates as to the volatility of its own shares, the probable life of options granted and the time of exercise of those options. The model used by the group is a Black-Scholes valuation model.
4 EARNINGS PER SHARE
| 31 May | 31 May | |
| 2008 | 2007 | |
| £'000 | £'000 | |
| Profit for the year | 1,784 | 1,010 |
| Earnings per share | ||
| Basic (pence per share) | 4.0p | 2.3p |
| Diluted (pence per share) | 3.8p | 2.2p |
| Weighted average number of shares | Number of shares | Number of shares |
| Shares in issue at opening | 44,539,813 | 44,463,086 |
| Shares issued during the period | 162,812 | 76,727 |
| Shares at closing | 44,702,625 | 44,539,813 |
| Weighted average shares for basic earnings per share | 44,621,541 | 44,539,813 |
| Effect of dilutive potential ordinary shares | 2,859,416 | 1,304,372 |
| Weighted average shares for diluted earnings per share | 47,480,957 | 45,844,185 |
Adjusted earnings per ordinary share
An adjusted earnings per share has been calculated in addition to the post tax earnings per share which eliminates the effects of share-based payment, goodwill, amortisation of intangibles and restructuring costs attributable to acquisitions. It has been calculated to allow shareholders to gain a clearer understanding of the trading performance of the group. The basis of the calculation of the basic and adjusted profit per share is set out below:
| 2008 | 2007 | |
| £'000 | £'000 | |
| Profit for the year attributable to shareholders | 1,784 | 1,010 |
| Amortisation of intangibles | 50 | - |
| Share-based payment | 104 | 75 |
| Adjusted profit for the year attributable to shareholders | 1,938 | 1,085 |
| Basic adjusted earnings per share | 4.3p | 2.4p |
| Diluted adjusted earnings per share | 4.1p | 2.4p |
5 BUSINESS COMBINATION
On 4 April 2008 the Group acquired 100% of the issued share capital of Key Information Technology Systems Ltd ("Key ITS") for a maximum consideration of £828,000. The consideration is to be settled as follows: (a) an initial payment in cash of £375,000, of which £30,000 has been retained against confirmation of the value of the net assets at completion. The value attributed by the directors is disputed by the sellers so therefore is an estimate; and (b) contingent consideration to be paid in shares up to a maximum value of £453,000 should certain targets for the renewal of customer support contracts be met.
Subsequent to the acquisition of Key Information Technology Systems Limited this company is being sued by a competitor company based on a dispute of an agreement entered into prior to the acquisition date. The likelihood of litigation arising was not made known to the directors prior to the acquisition date. As a result the costs incurred in defending the litigation will be subject to the terms of the sale and purchase agreement between the company and the seller of Key Information Technology Systems Limited which include a full indemnity in respect of the claim arising. As a result the directors do not consider that any provision in respect of the litigation is required.
The sellers of Key ITS have indemnified the company that, should the net assets of Key ITS at the date of the transaction when valued under UK GAAP be below £29,395, the consideration will be reduced by the amount of the shortfall. The Directors have included in these accounts a net liability acquired at the date of the transaction amounting to £295,014. Therefore, subject to final agreement of the net assets acquired, the maximum consideration payable will be £503,591 plus allowable costs of £46,155 giving a total consideration for the purposes of the acquisition of £549,746.
The net assets acquired and the resultant fair value adjustments are shown below:
| 2008 | 2008 | 2008 | |
| £'000 | £'000 | £'000 | |
| Book value | Fair value adjustment | Fair value | |
| Cash with subsidiary | 5 | - | 5 |
| Intangibles - identified at acquisition ** (see note 14) | - | 845 | 845 |
| Property, plant and equipment | 28 | - | 28 |
| Long leasehold property | 285 | - | 285 |
| Receivables | 315 | - | 315 |
| Trade payables and other payables | (928) | - | (928) |
| Net assets | (295) | 845 | 550 |
| Goodwill on this acquisition | - | ||
| Consideration | 550 | ||
| Consideration satisfied by: | |||
| Shares to be issued | 159 | ||
| Cash | 345 | ||
| Professional fees paid | 46 | ||
| 550 |
*\* The intangibles identified at acquisition comprised those contractual relationships which, in future periods from 2009 to 2013, would generate service revenues. The Group has estimated the attrition rate for the service revenues and amortisation is provided in line with this attrition rate.