Rm Regulatory News (RM.)

27 Nov 2006 07:01

RM PLC27 November 2006 27 November 2006 RM announces preliminary results for year to 30 September 2006 RM the leading supplier of information and communications technology (ICT) andother services to education, announces results for the year to 30 September2006. Financial highlights: achieved planned profit growth• Profit before tax: up 26.2% to £14.5m (2005: £11.5m)• Profit before tax (before amortisation of acquisition related intangible assets and goodwill impairment*): up 4.3% to £14.6m (2005: £14.0m)• Diluted EPS: 11.5p (2005: 8.7p)• Dividends (proposed and paid): up 6.6% to 5.17p (2005: 4.85p)• Net cash inflow from operating activities: £24.2m (2005: £14.1m)• Net funds less deferred consideration: up £10.3m to £28.5m (2005:£18.2m) Operational highlights• Further increases in profit margin - even after increased investment in BSF• Four BSF project wins• Another year of increase in customer satisfaction score• Further progress in building a more robust business model *amortisation of acquisition related intangible assets in 2006 was £0.1m (2005:nil); goodwill impairment in 2006 was nil (2005: £2.5m) Commenting on the results, Tim Pearson, CEO of RM, said: "The work we have done to develop and improve RM's business has shown realbenefits this year. Despite market conditions, we have grown profit andcontinued our investment in the Group's long-term future. "The market environment that characterised the second half of 2006 looks set tocontinue in the current year. We will continue to invest in the longer termopportunity of BSF and our recent wins reinforce my confidence that we will be amajor ICT provider to this programme. BSF bid costs in 2007 are likely to besimilar to 2006. In 2007 we anticipate further benefit from education projects. "We have sharpened the focus of the Group on the growth opportunities availablein the wider education marketplace. Our combination of education focus,technical capability and scale, make us uniquely well-suited for providingproducts and services that help teachers to teach and learners to learn." - Ends - For further information, please contact: Tim Pearson, CEOMike Greig, Group Finance Director RM plc 08709 200200Phil Hemmings, Director of Corporate Affairs Andrew FenwickFiona Laffan Brunswick 020 7404 5959Mark Antelme A briefing to analysts will take place at 10.30am on Monday 27 November 2006 atBrunswick, 16 Lincoln's Inn Fields, London, WC2A 3ED. A live audio feed will beavailable to those analysts and shareholders unable to attend this meeting inperson. To access this facility: +44 (0) 1452 561 263. High resolution images are available for the media to view and download free of charge from www.vismedia.co.uk A copy of the presentation will be available at www.rm.com from 8.30am on 27 November 2006. Operations Strong performance in 2006 We achieved our planned level of profit growth in 2006, even after increasingour long-term investment in the Building Schools for the Future (BSF)initiative. Profit before tax and amortisation of acquisition related intangibleassets was £14.6m. This represents an increase of 4.3% over 2005's profit beforetax and goodwill impairment of £14.0m. After acquisition related intangibleamortisation of £0.1m in 2006 and goodwill impairment of £2.5m in 2005, profitbefore tax as shown in the income statement increased by 26.2% to £14.5m (2005:£11.5m). Operating costs (excluding amortisation of acquisition related intangible assetsand goodwill impairment) reduced to £58.3m (2005: £61.2m). This decrease wasachieved even after expensing an additional £2.0m of BSF bid costs (2006: £3.8m;2005: £1.8m) and reflects a rapid response to the first quarter's tough marketconditions and strong cost management. The Group's focus remains on achieving profit growth rather than increasedrevenue. Total Group revenue was almost identical to last year's at £262.3m(2005: £262.7m). Increased revenue from education projects and educationresources offset revenue reductions in hardware and in educational software. Our very strong cash performance continued. Net cash inflow from operatingactivities was £24.2m (2005: £14.1m). At 30 September 2006, cash and cashequivalents stood at £30.1m (2005: £22.9m). The Board is proposing a 6.6% increase in the final dividend per share to 4.05p(2005: 3.80p). Subject to approval at the AGM, this will be paid on 2 February2007 to shareholders on the register on 5 January 2007, making the full yeardividend per share 5.17p (2005: 4.85p). RM's externally reviewed customer satisfaction score increased further to 7.41(2005: 7.21). The Group's annual staff survey showed an increase in the overallemployee satisfaction score for the year to 73.2% (2005: 72.0%). Making progress across the Group Improvements in the Group's business model have allowed us to make very goodprogress, despite challenging conditions in our individual schools ICT business. A year ago we reported that head teachers in England were facing pressures, bothon their time and on their schools' budgets, as a result of the introduction ofnew pay arrangements for teachers. These pressures impacted RM through the firsthalf of the year. Our individual schools business was also affected by a declinein the amount of money schools spent on educational software as a result of thedecreasing effectiveness of Electronic Learning Credits (eLCs - governmentfunding intended for purchasing education software), which were meantto provide support for UK industry in the face of the BBC's entry into themarket. These revenue declines were offset by strong performance in other areas of theGroup's operations. Our portfolio of education projects has grown in number,revenue and profit, and our education resources business, centred on TTS, madeexcellent progress during the year. Four clear growth areas During the year we have sharpened the focus of the business, identifying fourclear areas of activity: • Systems and Infrastructure • Assessment and Data • Education Management Software • Education Resources (including education software) Systems and Infrastructure: Individual Schools RM Community Connect is the most widely used whole-school networking solution inUK schools. Most secondary and primary schools now have well-developed networkinstallations and the previously-described budget pressures have contributed amodest decrease in network sales. Looking ahead, we will introduce upgrades toCommunity Connect in 2007, which support both Windows Vista and 'thin-client'computing. Our differentiated PC strategy continues to work well. We increased theproportion of PCs sold from the RM One and RM Mobile One ranges, which allowedus to increase average selling prices during 2006. During the year we alsointroduced ecoquiet, a low-energy, low-noise, low-heat PC, which fits very wellwith the DfES' Sustainable Schools Strategy and the BSF programme. Systems and Infrastructure: Education Projects and BSF Our education projects portfolio has progressed well, contributing toeducational success for our customers and delivering high levels of technicalinnovation. Of particular note this year are SYeLP (the South YorkshireeLearning Programme) and Glow. SYeLP, a very ambitious economic regeneration programme, will reach conclusionduring FY2007. With the explicit aim of improving ICT skills in the SouthYorkshire region, SYeLP is very much an education project, rather than a managedinfrastructure service. The RM team involved has shown great tenacity andeducational understanding and our partnership with the four local authoritieshas beaten its target of achieving 18,000 new ICT qualifications, somethingwhich will genuinely improve life chances. Glow is another groundbreaking education project. When complete it will providea secure, personalised education intranet for all learners, teachers, parentsand carers in Scotland. Early stage functionality was demonstrated at theScottish Learning Festival in Glasgow in September and the service is in pilottrials with Local Authorities. We know of no other project of this ambition andscale being undertaken anywhere in the World and it positions RM as a leader inthe emerging market area of Education Enterprise Solutions and LearningPlatforms. The BSF programme has started more slowly than we anticipated. However, in thoseprojects that have identified their preferred suppliers, our progress has beenin line with our targets. During the year we were awarded the first BSFcontract, a £6.4m project in Solihull, and were preferred bidder forStoke-on-Trent City Council's BSF project. Since the close of the financial yearwe have been appointed preferred bidder for a further two BSF contracts: LeedsCity Council and Knowsley Metropolitan Borough Council. We reached the final shortlist on the large majority of BSF projects that wehave bid for during the year, and have been awarded the contract or appointedpreferred bidder in four out of twelve projects. As the BSF programme rolls outover the next ten to fifteen years, it will have a significant impact on theeducational ICT market in English secondary schools. The consortium nature ofmany BSF procurements means that decisions over ICT will not always be madeentirely on the basis of the quality of the ICT supplier. However, our progressso far - and our unrivalled track record in delivering complex,educationally-focused ICT projects - gives us confidence to continue investingin what is a major opportunity for RM. Assessment and Data Our Assessment and Data business is developing well. The innovative on-screen Key Stage 3 ICT test we are developing on behalf of theQCA was used by approximately half of the UK's secondary schools this year. Thistest received an eGovernment Excellence award in the UK eGovernment NationalAwards, and is widely viewed as a pathfinder for on-screen testing. We have alsoworked with a number of other examination boards to pilot on-screen tests,including developing a science GCSE test with AQA. Our large scale e-Marking pilots with Cambridge Assessment went well over thesummer and we have also provided e-Marking services for other examinationboards. With SCORIS, our e-Marking software system, we have developed a strongcapability in this area. In the future we anticipate that e-Marking will developinto a long-term contracted services business. The combination of RM's large project experience, and our Forvus subsidiary'sspecialist data analysis skills, means that the Group is well positioned torespond to the growing requirement for sophisticated, data-based schoolmanagement tools. An RM-led consortium was awarded the £16m English NationalPupil Database -Achievement and Attainment Tables contract in January 2006. Weare also delivering the RAISEonline searchable database of English schoolperformance data for Ofsted. Education Management Systems The launch in 2006 of IntegrisG2, a Web-delivered school management system,gives RM a technical lead over competing solutions. Integris uses a hosteddatabase model centred on Local Authorities, which means that individual schoolsare no longer required to maintain their own local database. We believe therewould be significant savings to the UK education service if all schools adoptedthis approach. Education Management Systems is also an international business for RM. Theacquisition of CAZ Software for £1.7m in July 2006 consolidates our position -and provides scale - in the Australian school management software market. Thecombination of our existing RM Asia Pacific business with CAZ Software, makes usthe clear market leader in Australia and provides opportunities for furthergrowth in the Pacific Rim. Education Resources TTS, the Group's specialist education resources business continues to expand.The range of products available from TTS has widened with the acquisition ofMusic Education Supplies Ltd (MES), a specialist music education supplier, andthe introduction of a special educational needs catalogue under the brandSpecialDirect.com. We have strengthened TTS' systems and infrastructure, as weindicated we would at the time of its acquisition. TTS Shopping, a new Webpresence developed in conjunction with the Group's central IS team, hasincreased the value of online orders significantly. Since year end, we have alsopurchased a new 45,000 square foot distribution centre in Nottinghamshire whichprovides scope for further growth. Education software in the UK has fared less well; sales fell year-on-year,reflecting more general problems in this market - in particular the decreasingeffectiveness of eLCs. We have also now begun to see the impact of the BBC jamservice. This service is being developed under an approval from the Departmentof Culture, Media and Sport which explicitly states it must be 'distinctive andcomplementary' from commercial products; it is unclear so far that BBC jam meetsthis condition. Our research and development investment in this business areadecreased. We are only choosing to invest further where there is a clear marketneed which is not threatened by the BBC's activities. Customer success There is no better way of securing the future of the business than making suretoday's customers are highly satisfied with the level of service they receive.Since Tim Pearson took over as CEO of RM in 2002, improving the satisfactionlevels of those customers who choose to work with us has been a major focus forthe management team. Our first step was to introduce an externally reviewedcustomer satisfaction score and we're pleased that, in each year since, we haveseen that score increase. In 2006 we have widened our focus to include customersuccess; that is, helping our customers achieve success measured in their ownterms. We're proud that RM's current customers are pleased to work with us. However,schools with less recent experience of the Group have tended to take a lesspositive view, perhaps because they are not aware of how RM has changed inrecent years. Our increasing customer satisfaction score suggests that when wework with schools, we get things right for them. A priority for the year aheadis achieving this reputation with all potential customers. Prospects The Government places great importance on education and the Chancellor's 2006Budget speech suggested that this is likely to continue. Priorities include: therenewal of the school estate, with primary as well as secondary schoolsscheduled for redevelopment over the next decade; environmental andsustainability issues; moving towards a more modern, ICT-based assessmentsystem; and addressing the equality of ICT provision across all pupils. Compared with five years ago, longer-term projects mean that RM's business hasimproved visibility. However, we remain a seasonal business, with more than halfof our revenue and an even greater proportion of profits arising in the secondhalf of the year; as a consequence it is difficult to make any meaningfulcomment on performance for 2007 at this time. The market environment that characterised the second half of 2006 looks set tocontinue in the current year. We are continuing to invest in the longer termopportunity of BSF and bid costs in 2007 are likely to be at a similar level to2006. In 2007 we anticipate some further benefit from Education Projects. Looking further ahead, our recent BSF wins reinforce our confidence that RM willbe a major ICT provider to this initiative. We have sharpened the focus of theGroup on the growth opportunities available in the wider education marketplace.Our combination of education focus, technical capability and scale, make usuniquely well-suited for providing products and services that help teachers toteach and learners to learn. We look forward to providing even higher levels ofservice, to the benefit of all of our stakeholders during 2007. Finance Transition to International Financial Reporting Standards (IFRS) This is the first set of accounts that RM has presented under IFRS. The table below is provided for illustrative purposes to summarise the impact ofthe transition to IFRS from UK Generally Accepted Accounting Practice (GAAP).UK GAAP is as adopted in the 2005 financial statements; it has not been updatedfor subsequent changes in UK GAAP. Year to 30 September 2006 2005 £'000 unaudited IFRS profit before tax 14,544 11,528 Amortisation of acquisition related intangible assets 53 - Goodwill impairment - 2,469 IFRS profit before tax before amortisation of acquisition related intangible assets and goodwill impairment 14,597 13,997Pensions (1,233)* (1,260)Research & Development - - Share based payments (104) (14) Holiday pay accrual 30 122 Foreign exchange hedging investments 14 - 2005 UK GAAP profit before tax and goodwill charges 13,304 12,845 ____________________________________________________________________________ Goodwill charges (7,386)2005 UK GAAP profit before tax 5,459 _____ note: had the Group reported under UK GAAP in 2006 it would have recorded pensions and share based payment adjustments similar to those shown under IFRS *the 2006 pensions impact is calculated as the difference between the IFRS charge and an estimated SSAP 24 charge The table shows that for both 2005 and 2006 IFRS profit before tax (beforeamortisation of acquisition related intangible assets and goodwill impairment)under IFRS is over £1m greater than under 2005 UK GAAP. The largest contribution to this is the reduction in pension charge under IFRS.There were no research and development projects in either year which met thecriteria for capitalisation, so no research and development costs werecapitalised. RM is unusual in that the adoption of IFRS 2, share-based payments,led to an increase in profits. The principal reason for this is that the costsof the Group's co-investment plan were already charged to the profit and lossaccount under UK GAAP. The total charge for share based payments was £0.8m in2006 under IFRS. Revenue and profits Revenue for the year was £262.3m. This is almost identical to last year's£262.7m and masks substantial progress in improving the Group's business mix.There has been significant growth in infrastructure software and services andeducation software and services over the last five years. The most significantcontributor to this growth is the increase in revenue from large, long termcontracts. The Group operates in one primary segment: the supply of products and servicesto education. However, the following additional revenue and gross profitinformation by business activity is provided to aid investors in understandingthe business. FY2006 FY2005 Restated under IFRS Gross Gross Gross Gross Revenue Profit Profit Revenue Profit Profit £m m % £m £m % Infrastructure software & services 88.1 26.7 30.3 87.6 25.3 28.9 Education software & services 57.7 23.7 41.1 47.5 28.2 59.4 PC,distribution & education resources 116.5 20.7 17.8 127.6 20.8 16.3 _______________________________________________________________________________Total 262.3 71.1 27.1 262.7 74.3 28.3_______________________________________________________________________________ The major change from 2005 is in education software and services, where revenueincreased by £10.2m but gross profit declined by £4.5m. This is principally dueto revenue from the Glow project which, reflecting the early stage of theproject, was included at zero margin in accordance with the Group's accountingpolicies. There was also a significant reduction in higher margin curriculumsoftware revenues as a result of the decreasing effectiveness of eLCs asdescribed earlier in this Review. The decline in the education software andservices gross profit percentage from 59.4% to 41.1% in turn explains thedecline of 1.2 pp in the overall gross profit percentage to 27.1%. PC, distribution and education resources revenues were £116.5m, with increasedrevenue from TTS and decreased revenues from hardware. PC hardware nowrepresents less than 30% of the Group's total revenues and interactivewhiteboard revenues have reduced following the ending of a government scheme.The gross profit improvement to 17.8%, achieved against a challenging hardwaremarket, reflects the increased contribution from education resources and thesuccess of the Group's differentiated PC hardware products. Operating costs £m FY2006 FY2005 Restated under IFRS____________________________________________________________________________Selling and distribution 33.2 33.9Research and development 14.9 16.7Administration 10.2 10.6____________________________________________________________________________Operating costs before amortisation of acquisition related intangible assets and goodwill impairment 58.3 61.2 Amortisation of acquisition related intangible assets 0.05 - Goodwill impairment - 2.5____________________________________________________________________________Total 58.4 63.7____________________________________________________________________________ A year ago, with individual schools facing significant budget issues, theGroup's expenditure plans were revised downwards from the original budget.Operating costs (excluding amortisation of acquisition related intangibleassets) reduced to £58.3m (£2.9m below the previous year's figure excludinggoodwill charges). Expenditure on bidding for BSF contracts increased by £2.0m to £3.8m (2005:£1.8m). Despite this increase, total selling and distribution costs decreased by£0.7m to £33.2m (2005: £33.9m), reflecting reductions in sales and marketingexpenditure in our individual schools and further and higher educationbusinesses, and in bidding for non-BSF projects. Further increases in Web-basedsales helped contribute to more cost effective selling and distribution. Research and development charged to the income statement reduced by £1.8m to£14.9m in response to market conditions, particularly in the area of educationalsoftware. The Group also continued R&D activities related to projects including,in particular, the Glow Project. As they are project related, the costs of thesedevelopments are included in cost of sales. The amortisation of acquisition related intangible assets in the year arose fromthe acquisitions of CAZ Software and MES. IFRS requires that separatelyidentifiable intangible assets be capitalised and then amortised. Manyinvestment analysts believe that profit before such amortisation charges gives abetter guide to business performance; accordingly we have provided figures forprofit before tax and operating costs excluding these charges in addition toreporting profit before tax. Investment income of £1.9m (2005: £1.4m) includes £0.9m of income from the saleof finance lease debt arising from the provision of leases to customers (2005:£0.7m). This element is included within cash flows from operating activities inthe consolidated cash flow statement. The finance cost has fallen because the interest on the pension scheme liabilityhas been outweighed by higher than expected asset returns. Profit margins Profit before tax (before amortisation of acquisition related intangible assets,goodwill charges and 2002's exceptional item) as a percentage of revenue hasrisen to 5.6% in 2006 from 2.5% in 2002. Of the increase of 0.7pp from the 4.9%that was originally reported under UK GAAP in 2005, 0.4pp relates to thetransition to IFRS and 0.3pp to underlying improvement. The cost of bidding for BSF contracts was equivalent to 1.4% of revenue in 2006.The three recent BSF contract wins will not contribute to profit before 2008 andconsequently BSF will remain an investment in 2007. Cashflow The Group continued its record of excellent cash generation in 2006. Thisreflects the continuing focus on turning profits into cash, together withexcellent working capital management. Net cash flow from operating activities was excellent at £24.2m, an increase of£10.1m over 2005 (£14.1m). The majority of the improvement arose from movementsin working capital of £8.3m. Operating cash flow, before movements in workingcapital, was £25.3m (2005: £24.1m). Cash and cash equivalents increased by £7.2m to £30.1m (2005: £22.9m). Net fundsless deferred consideration increased by £10.3m to £28.5m (2005: £18.2m). £m 30 Sep 30 Sep 2006 2005Cash & cash equivalents 30.1 22.9Issued loan notes (0.9) (1.1)___________________________________________________________Net funds 29.2 21.8Issuable loan notes - (1.2)Deferred cash consideration (0.7) (2.4)___________________________________________________________Net funds less deferred consideration 28.5 18.2___________________________________________________________ During the year the deferred contingent consideration relating to the 2003acquisition of Forvus was finalised at £0.7m. This resulted in a £1.7m reductionin deferred consideration and a corresponding reduction in goodwill. The Group's core business remains seasonal, as a result of peak demand fromschools over the summer months. As a consequence of strong cash generation,average cash balances across the year were £18.4m in 2006 up from £8.0m in 2005,and the minimum cash balance was £7.3m in 2006 compared to borrowings of £nil in2005. Balance sheet Capital expenditure on property, plant and equipment was £8.9m, £3.5m of whichrelated to the Glow project, £1.6m to PFI contracts and £3.8m to other capitalexpenditure. Depreciation was £9.1m and, after taking into account disposals andthe transfer of the TTS building to assets held for resale (£1.1m), property,plant and equipment decreased by £2.1m to £22.5m (2005: £24.6m). Other intangible assets increased by £1.7m due to the acquisition of softwareassets (£0.8m), and assets arising on acquisition (£1.4m). Within working capital; inventories decreased by £1.1m to £10.8m reflectingeffective stock control, trade and other receivables decreased by £2.8m to£51.4m as a result of a reduction in long term contract balances and trade andother payables increased by £1.6m to £78.9m. The IAS 19 pension scheme deficit of £18.7m and related deferred tax asset of£5.6m are included in retirement benefit obligation and deferred tax assetsrespectively. The net deficit is £13.1m (2005: £11.1m). Further details aboutthe Group's pension scheme deficit are given in the Pensions section below. Tax The Group measures its tax rate as percentage of profit before amortisation ofacquisition related intangible assets and goodwill impairment. On this basis theGroup's tax rate in 2006 was 27.8% compared with 27.1% in 2005. These rates arebelow the standard UK corporation tax rate as the Group benefits from enhancedtax deductions on qualifying research and development projects. IFRS fundamentally changes the calculation of deferred tax. In addition, someelements of tax previously accounted for in profit and loss account are nowincluded in the Statement of Recognised Income and Expense (SORIE). Inparticular, IFRS requires any tax deduction on share schemes in excess of thatrelating to the standard IFRS 2 income statement charge to be passed through theSORIE. Pensions The triennial valuation of the Group's defined benefit pension scheme, which hasbeen closed to new members for four years, showed a deficit of £12.7m as at 31May 2006. This is only slightly improved on the previous valuation (31 May 2003:£12.9m) because the effect of deficit recovery payments was offset by otherchanges, in particular improved longevity assumptions. The Group has adopted thelatest available mortality tables, PA92 medium cohort for both the triennial andthe IAS 19 valuations. The triennial valuation produced a smaller deficit thanthe IAS 19 deficit of £18.7m which is included on the balance sheet. This isprincipally as a result of the different approaches and rates used to discountthe liabilities of the scheme. The Group has taken the following actions to address the deficit: • The £1.3m pa additional annual cash contributions agreed with the scheme Trustees in 2003 will continue.• The savings from a salary sacrifice scheme for pension contributions implemented in 2006 will be paid into the scheme. The additional annual cash contributions have consequently increased to £1.7m pa.• The Group will make an exceptional cash contribution of £3.5m during calendar year 2007• Active members retiring at 60 are required to compensate the Group for the higher cost of providing this benefit by sacrificing an additional 3.1% of salary.• Future increases in current service costs will be passed on to members.• The Group is consulting with active members of the scheme over the introduction of one of the following options: a. Introduction of a 5.0% per annum cap on pensionable salary increases. As well as reducing the risk to the Group of future salary increases, this would provide an immediate reduction in liabilities of £3.5m. In compensation the contributions of active members would be reduced by 1.2% or 1.5%, depending on retirement age; b. Additional salary sacrifices averaging approximately 5.5% to compensate the Group for the benefit foregone of option A, reflecting that the Group will be required to commit extra resources to funding the deficit. The combined effect of these actions is anticipated to be a much acceleratedclosure of the deficit, combined with no increase in the income statement chargeand use of some cash resources. The consultation will conclude in January 2007,with changes implemented in February 2007. Preliminary Announcement Consolidated income statementfor the year ended 30 September 2006 £'000 2006 2005 (restated) Notes Revenue 262,310 262,707Cost of sales (191,177) (188,444)__________________________________________________________________________Gross profit 71,133 74,263__________________________________________________________________________Selling and distribution costs (33,166) (33,940)Research and development expenses (14,918) (16,688)Administrative expenses (10,193) (10,551)Amortisation of acquisition related intangible assets (53) - Other expenses - (2,469)__________________________________________________________________________ (58,330) (63,648)__________________________________________________________________________Profit from operations 12,803 10,615Investment income 1,876 1,359Finance costs (135) (446)__________________________________________________________________________Profit before tax 14,544 11,528Tax 3 (4,055) (3,790)__________________________________________________________________________Profit for the period attributable to equity holders of the parent 10,489 7,738 __________________________________________________________________________ Earnings per ordinary share: 4 Basic 11.6p 8.7pDiluted 11.5p 8.7p Paid and proposed dividends per share: 5 Interim 1.12p 1.05pFinal 4.05p 3.80p All activities relate to continuing operations.The comparative figures have been restated to reflect the adoption ofInternational Financial Reporting Standards (IFRS). Consolidated statement of recognised income and expensefor the year ended 30 September 2006 £'000 2006 2005 Note Exchange differences on translation of foreign operations (48) 44 Actuarial gains and losses on defined benefit pension scheme 13 (3,914) (2,300)Tax on items taken directly to equity 3 1,287 1,064__________________________________________________________________________ Net loss recognised directly in equity (2,675) (1,192)__________________________________________________________________________ Profit for the year 10,489 7,738__________________________________________________________________________ Total recognised income and expense for the year attributable to equity holders of the parent 7,814 6,546__________________________________________________________________________ Consolidated balance sheetas at 30 September 2006 £'000 2006 2005 (restated) Notes Non-current assets Goodwill 6 22,332 22,221Other intangible assets 7 3,462 1,714Property, plant and equipment 22,483 24,643Deferred tax assets 3 7,394 7,108__________________________________________________________________________ 55,671 55,686Current assets Inventories 10,815 11,867Trade and other receivables 8 51,361 54,142Cash and cash equivalents 30,092 22,942__________________________________________________________________________ 92,268 88,951 Non-current assets held for sale 10 1,094 -__________________________________________________________________________ Total assets 149,033 144,637 Current liabilities Trade and other payables 9 (78,871) (77,255)Tax liabilities 9 (1,416) (1,315)__________________________________________________________________________ (80,287) (78,570)__________________________________________________________________________ Net current assets 11,981 10,381__________________________________________________________________________ Non-current liabilities Retirement benefit obligation 13 (18,707) (15,890)Deferred tax liabilities 3 (234) -Other payables 9 (6,793) (9,759)Provisions (737) (2,170)__________________________________________________________________________ (26,471) (27,819)__________________________________________________________________________ Total liabilities (106,758) (106,389)__________________________________________________________________________ Net assets 42,275 38,248__________________________________________________________________________ Equity attributable to equity holders of the parent Share capital 1,836 1,815Share premium account 23,877 22,151Own shares (954) (1,632)Capital redemption reserve 94 94Translation reserve (4) 44Retained earnings 17,426 15,776__________________________________________________________________________ Total equity 11 42,275 38,248__________________________________________________________________________ The comparative figures have been restated to reflect the adoption of IFRS. Consolidated cash flow statementfor the year ended 30 September 2006 £'000 2006 2005 (restated) Profit from operations 12,803 10,615Adjustments for: Gain on derivatives (14) -Depreciation of property, plant and equipment 9,071 7,636Amortisation of acquisition related intangible assets 53 - Amortisation of other intangible assets 342 1,070Impairment of goodwill - 2,469Loss/(Gain) on disposal of property, plant and equipment 77 (259) Decrease in provisions (233) (150)Share-based payment charge 803 988Pension charge 2,358 1,730__________________________________________________________________________ Operating cash flows before movements in working capital 25,260 24,099 Decrease in inventories 1,211 2,608Decrease/(Increase) in receivables 3,035 (1,733)Increase/(Decrease) in payables 585 (4,370)__________________________________________________________________________ Cash generated by operations 30,091 20,604Tax paid (3,110) (3,743)Pension contribution (3,554) (3,400)Income on sale of finance lease debt 854 676Interest paid (36) (36)__________________________________________________________________________ Net cash inflow from operating activities 24,245 14,101 Investing activities Interest received 784 392Proceeds on disposal of property, plant and equipment 743 1,084 Purchases of property, plant and equipment (8,903) (14,859)Purchases of other intangible assets (803) (731)Acquisition of subsidiaries, net of cash acquired (2,281) -__________________________________________________________________________ Net cash used in investing activities (10,460) (14,114) Financing activities Dividends paid (4,473) (4,127)Proceeds from share capital issue, net of share issue costs 831 766 Repayment of borrowings assumed in acquisitions (322) -Purchase of own shares (816) (569)Share buy backs (65) -Repayment of loan notes (1,790) (600)__________________________________________________________________________ Net cash used in financing activities (6,635) (4,530)__________________________________________________________________________ Net increase/(decrease) in cash and cash equivalents 7,150 (4,543)__________________________________________________________________________ Cash and cash equivalents at the beginning of year 22,942 27,480Effect of foreign exchange rate changes - 5__________________________________________________________________________ Cash and cash equivalents at the end of year 30,092 22,942__________________________________________________________________________ The comparative figures have been restated to reflect the adoption of IFRS. Notes to the report and accounts 1. Preliminary results The preliminary results for the year to 30 September 2006 have been prepared inaccordance with International Financial Reporting Standards (IFRS) as adopted bythe European Union and applied in accordance with the Companies Act1985. However, this announcement does not contain sufficient information tocomply with IFRS. The Group expects to publish full financial statements thatcomply with IFRS in December 2006 which will be delivered before the Company'sAnnual General Meeting in January 2007. This is the first year in which the Group has prepared its financial statementsunder IFRS and the comparative information for the year to 30 September 2005,which was originally prepared under UK Generally Accepted Accounting Practice(UK GAAP), has been restated to comply with IFRS. An explanation of thetransition to IFRS and the reconciliations from the previously published UK GAAPfinancial statements to IFRS were contained in the interim financial statementspublished on 12 May 2006. This Preliminary Announcement does not constitute the Group's statutory accountsfor the years ended 30 September 2006 or 30 September 2005, but is derived fromthose accounts. Statutory accounts for the year to 30 September 2005, whichwere prepared in accordance with UK GAAP, have been delivered to the Registrarof Companies. The auditors have reported on these accounts; their reports wereunqualified and did not contain statements under s237 (2) or (3) of theCompanies Act 1985. This Preliminary Announcement was approved by the Board of Directors on 24November 2006. 2. Business segments The business operates in one primary segment, being the supply of products andservices to education. The Group operates primarily in the UK, with no other geographical segment beingmaterial for disclosure. 3. Tax a) Analysis of tax charged in income statement £'000 2006 2005 Current taxation UK corporation tax at 30% (2005: 30%) based on the profit for the year 3,448 3,581 Adjustment in respect of prior years 94 (155)__________________________________________________________________________Total current tax 3,542 3,426 Deferred taxation Temporary differences 461 47Adjustment in respect of prior years 52 317__________________________________________________________________________Total deferred tax 513 364__________________________________________________________________________ Total income statement tax charge 4,055 3,790__________________________________________________________________________ In addition to the amount charged to the income statement £1,287,000 (2005:£1,064,000) of tax has been credited to equity through the statement ofrecognised income and expense. The credit comprises a tax credit on the equitycomponent of share-based payments of £113,000 (2005: £ 374,000) and a tax crediton actuarial gains and losses of £1,174,000 (2005: £690,000). Further analysis of the Group's deferred tax assets and liabilities is shownbelow. b) Factors affecting the tax charge for the period The difference between the total tax shown above and the amount calculated byapplying the standard rate of UK corporation tax to the profit on ordinaryactivities before tax is as follows: £'000 2006 2005 Profit on ordinary activities before tax 14,544 11,528 Tax at 30% thereon: 4,363 3,458 Effects of: - goodwill charges not deductible for tax purposes - 740- other expenses not deductible for tax purposes 56 92- other temporary timing differences 125 (202)- research and development tax credit (625) (600)- effect of overseas (profits)/losses (10) 140- prior period adjustments 146 162__________________________________________________________________________Tax 4,055 3,790__________________________________________________________________________ The Group's effective tax rate of 27.8% (2005: 27.1%) has been calculatedexcluding the impact of goodwill charges and acquisition related intangibleamortisation from profit before tax in order to provide a more meaningfulanalysis: £'000 2006 2005 Profit before tax 14,544 11,528Goodwill charges and amortisation of acquisition related intangible assets 53 2,469 __________________________________________________________________________Profit before tax and goodwill charges and amortisation of acquisition related intangible assets 14,597 13,997 Tax charge on profit before goodwill charges and amortisation of acquisition related intangible assets 4,055 3,790 __________________________________________________________________________Effective rate 27.8% 27.1%Tax credit on other recognised income and expense (1,287) (1,064)__________________________________________________________________________Tax charge on total recognised income and expense 2,768 2,726__________________________________________________________________________ Deferred taxThe following are the major deferred tax assets and liabilities recognised bythe Group and movements thereon during the current and prior reporting period. £'000 Accelerated Retirement Short-term Acquisition Total tax benefit Share-based timing related depreciation obligations payment differences intangible assets At 1 October 2004 536 4,455 814 781 - 6,586(Credit)/charge to income (272) (378) 277 9 - (364) Charge to equity - 690 197 - - 887Exchange differences - - - (1) - (1)_______________________________________________________________________________________________At 1 October 2005 264 4,767 1,288 789 - 7,108(Credit)/charge to income (106) (331) (137) 61 - (513) Charge/(charge) to equity - 1,174 (256) - - 918 Acquisition of subsidiaries - - - - (353) (353) _______________________________________________________________________________________________At 30 September 2006 158 5,610 895 850 (353) 7,160_______________________________________________________________________________________________ Certain deferred tax assets and liabilities have been offset above. Thefollowing analysis shows the deferred tax balances before offset, as shown inthe balance sheet: £'000 2006 2005 Deferred tax assets 7,394 7,108 Deferred tax liabilities (234) - _______________________ 7,160 7,108 _______________________ 4. Earnings per ordinary share The calculation of the Group basic and diluted earnings per ordinary share isbased on the following data: 2006 2005 Weighted Pence Weighted Pence Profit average per Profit average per after number share after number share tax of tax of £'000 shares £'000 shares '000 '000 Basic earnings per ordinary share 10,489 90,755 11.6 7,738 88,924 8.7 Effect of dilutive potential ordinary shares: share options 560 (0.1) - 434 - ______________________________________________________________________________Diluted earnings per ordinary share 10,489 91,315 11.5 7,738 89,358 8.7 Effect of amortisation of acquisition related intangible assets and goodwill charges 53 - - 2,469 - 2.7 ______________________________________________________________________________Diluted earnings per ordinary share excluding amortisation of acquisition related intangible assets and goodwill charges 10,542 91,315 11.5 10,207 89,358 11.4 ______________________________________________________________________________ Earnings per share figures are also reported before amortisation of acquiredintangibles and goodwill charges because this is considered a more consistentmeasure of underlying performance. 5. Dividends Amounts recognised as distributions to equity holders in the year: £'000 2006 2005 Final dividend for the year ended 30 September 2005 of 3.80p (2004: 3.60p) per share 3,399 3,195 Interim dividend for the year ended 30 September 2006 of 1.12 p (2005: 1.05p) per share 1,022 932 _____________ 4,421 4,127 _____________ The proposed final dividend was approved by the Board on 24 November 2006 and issubject to approval by shareholders at the Annual General Meeting and has notbeen included as a liability as at 30 September 2006: £'000 2006 2005 Proposed final dividend for the year ended 30 September 2006 of 4.05p (2005: 3.80p) per share 3,688 3,399 _____________ 6. Goodwill Goodwill increased by £0.1 million in the year due to goodwill arising on theacquisitions of Caz Software Pty Ltd (£1.2 million) and Music Education SuppliesLtd (£0.6 million) offset by a reduction amounting to £1.7 million in thedeferred consideration arising on the 2003 acquisition of Sir (UK) Ltd (tradingas Forvus). 7. Other intangible assets Other intangible assets increased by £1.8 million due to additions in the yearof £0.8 million and amounts acquired on subsidiary acquisitions of £1.4 millionoffset by an amortisation charge for the year of £0.4 million, including theamortisation of acquisition related intangibles of £0.05 million. 8. Other financial assets Trade and other receivables £'000 2006 2005Current Trade receivables 41,863 43,364Long-term contract balances 5,490 6,967Other receivables 725 524Prepayments and accrued income 3,283 3,287 __________________ 51,361 54,142 __________________ 9. Other financial liabilities Trade and other payables£'000 2006 2005 Current Trade payables 20,544 20,753Other taxation and social security 9,682 8,452Other payables - deferred consideration 703 -Other payables - other 1,624 1,814Accruals 24,527 19,221Amounts due from long term contract customers 43 4,075Deferred income 20,864 21,841Loan notes 884 1,099 __________________ 78,871 77,255 __________________ Tax liabilities 1,416 1,315 Non-current Employee benefits - other 60 -Other payables - deferred consideration - 2,450Deferred income: - due after one year but within two years 5,334 4,979- due after two years but within five years 1,399 2,330 __________________ 6,793 9,759 __________________ 10. Non-current assets held for sale The Group's subsidiary TTS Group Ltd is in the process of moving buildings. Itsprevious offices and warehouse facilities are being actively marketed and it isexpected that these premises will be sold in the near future. The building isheld at £1.1 million representing its net book value prior to being reclassifiedand this is lower than the estimated fair value. 11. Reconciliation of shareholder's equity and reserves £'000 Share Share Own Capital Hedging Retained Total capital premium shares redemption and earnings equity account reserve translation reserves Group At 1 October 2004 1,794 20,349 (1,063) 94 - 13,470 34,644Profit for the year 7,738 7,738Exchange differences 44 44on translation of foreign operations Actuarial gains and (2,300) (2,300)losses on defined benefit scheme Tax credit on items 1,064 1,064taken directly to equity Purchase of shares (569) (569)Transfer in respect 1,057 (1,057) -of issue of shares to employee trusts Share-based payment 988 988transactions Dividends paid (4,127) (4,127)Share issues 21 745 766__________________________________________________________________________________________At 1 October 2005 1,815 22,151 (1,632) 94 44 15,776 38,248Profit for the year 10,489 10,489Exchange differences (48) (48)on translation of foreign operations Actuarial gains and (3,914) (3,914)losses on defined benefit scheme Tax credit on items 1,287 1,287taken directly to equity Purchase of shares (816) (816)Repurchase of shares (65) (65)Transfer in respect 916 (916) -of issue of shares to employee trusts Share-based payment 1,494 (1,613) (119)awards exercised in year Share-based payment 803 803transactions Dividends paid (4,421) (4,421)Share issues 21 810 831__________________________________________________________________________________________At 30 September 2006 1,836 23,877 (954) 94 (4) 17,426 42,275__________________________________________________________________________________________ 12. Net funds £'000 2005 Cash flow Non-cash movements 2006 Cash and cash equivalents 22,942 7,150 - 30,092 ____________________________________________________________________________Loan notes due (1,099) 590 (375) (884)Net funds 21,843 7,740 (375) 29,208Issuable loan notes (1,200) 1,200 - -Deferred consideration (Note 6) (2,450) - 1,747 (703)____________________________________________________________________________ 18,193 8,940 1,372 28,505____________________________________________________________________________ 13. Retirement benefit schemes Defined contribution schemes The Group operates or contributes to a number of defined contribution schemesfor the benefit of qualifying employees in its subsidiary companies. The assetsof these schemes are held separately from those of the Group. The total costcharged to income of £2.0 million (2005: £0.4 million) represents contributionspayable to these schemes by the Group at rates specified in employmentcontracts. As at 30 September 2006 £0.2 million (2005: £ 0.1 million) due inrespect of the current reporting period had not been paid over to the schemes. Defined benefit scheme The Group operates one defined benefit pension scheme, the Research Machines plc1988 Pension Scheme. The scheme provides benefit to qualifying employees andformer employees of Research Machines plc, 3T Productions Ltd and Softease Ltd,but was closed to new members with effect from 1 January 2003. Under the schemeemployees are entitled to retirement benefits of 1/60th of final salary for eachqualifying year on attainment of retirement age of 60 or 65 years and additionalbenefits based on the value of individual accounts. No other post-retirementbenefits are provided. The scheme is a funded scheme. The assets of the scheme are held separately from those of the Group in atrustee-administered fund. The most recent actuarial valuation of plan assets and the present value of thedefined benefit obligation were carried out for statutory funding purposes at 31May 2006 by a qualified independent actuary. The valuation of plan assets wasupdated to 30 September 2006 and liabilities rolled forward to this date underIAS 19. The present value of the defined benefit obligation and the relatedcurrent service cost was measured using the projected unit credit method. The triennial valuation for statutory funding purposes showed a deficit of £12.7million as at 31 May 2006 (31 May 2003: £12.9m). The cost of future provisionwas revised to 21.4% for Normal Retirement Age 60 (2003: 20.4%) and 15.3% forNormal Retirement Age 65 (2003: 13.1%) Actions taken by the Group in response to the triennial valuation are describedin the Business Review. The potential impacts of these actions have not beenreflected within the results below: IAS 19 valuationKey assumptions used: 2006 2005Rate of increase in salaries 3.80% 3.80%Rate of increase of pensions in payment 2.70% 2.70%Rate of increase of pensions in deferment 2.70% 2.70%Discount rate 5.05% 5.05%Inflation assumption 2.70% 2.70% Mortality assumptions have been updated to the PA92 medium cohort tables (2005:PMA92 and PFA92 mortality tables for pensioners and the same tables with an ageadjustment of 4 years for non-pensioners). The impact of this change was toincrease the deficit by £4.3 million which in terms of weighted average lifeexpectancy in years is as follows: 2006 2005 Male Female Male FemalePensioner member age 65 21.8 24.7 16.9 19.9 (current life expectancy) Non-pensioner member age 45 23.0 25.8 20.3 23.3 (life expectancy at 65) Defined benefit pension scheme charges recognised in income are as follows: £'000 2006 2005 Current service cost, recognised within operating profit 2,358 1,730 Interest cost 3,744 3,320___________________________________________________________Expected return on scheme assets (3,645) (2,910)Cost recognised within finance cost 99 410 _________________ 2,457 2,140 _________________ The increased current service cost reflects the introduction of the salarysacrifice scheme discussed in the Business Review. This has the impact ofincreasing the Group's cost of providing the defined benefit pension but isoffset by lower salary costs and National Insurance savings. Amounts recognised directly in equity in respect of the defined benefit pensionscheme are as follows: £'000 2006 2005 Actuarial gains and losses (2,101) (2,300)Experience gains and losses (1,813) - _________________ (3,914) (2,300) _________________ The actual return on scheme assets was £6.6 million (2005: £8.8 million). The amount included within the balance sheet arising from the Group'sobligations in respect of its defined benefit scheme, and the expected rate ofreturn on scheme assets are as follows: £'000 2006 2005 Equities 6.90% 47,241 6.80% 42,330Bonds 4.40% 19,634 4.30% 14,200________________________________________________________________________Total fair value of scheme assets 66,875 56,530 Present value of defined benefit obligations (85,582) (72,420) ________________________________________________________________________Deficit in scheme and liability recognised in balance sheet (18,707) (15,890) Related deferred tax asset 5,612 4,767 ________________________________________________________________________Net pension deficit (13,095) (11,123)________________________________________________________________________ The expected return on scheme assets is based upon the expected out-performanceof equities over government bonds over the long term. The bond rate is based onthe addition of a risk loading to the long term risk free rate of return. This information is provided by RNS The company news service from the London Stock Exchange