Sysgroup Regulatory News (SYS)

12 Sep 2007 07:02

System C Healthcare plc12 September 2007 System C Healthcare plc Preliminary Results for Year Ended 31 May 2007 System C Healthcare plc ("System C"), a leading independent provider of ITimplementation solutions for the UK healthcare sector announces its results forthe year ended 31 May 2007. Highlights of the Year Financial highlights We are reporting our Financial Statements under International FinancialReporting Standards ("IFRS") and comparative results for the year ended 31st May2006 have also been restated in accordance with IFRS. Year ended 31 May Audited Audited 2007 2006 £m £mTurnover 13.5 16.1Profit from operations 0.6 0.1Profit before tax 1.3 0.7Cash generated from operations 2.1 0.5Basic earnings per share 1.09p 1.27p Operating highlights • Annual revenues of £13.5m (2006: £16.1m).• Withdrawal of Accenture from the National Programme for IT impacted on Services Division revenue in the year (£10m compared to £12.6m in prior year)• Expansion and diversification of customer base with tight management of our costs increased our profit from operations to £0.6m (2006: £0.1m) and our profit before tax to £1.3m (2006: £0.7m)• Strong cash generation with net cash generated from operations of £2.1m (2006: £0.5m)• Net cash at bank of £10m (2006: £8.0m)• Successful operational delivery of our major contracts. We now have contracts with four out of the five Local Service Provider partners (LSPs) in the National Programme for IT (NPfIT)• Cost base reduced by over £2.5m (annualised savings) during the year• Recent contract wins include Isle of Man Government, NHS Connecting for Health, Diagnostic Treatment Centres and NHS Trusts with a total contract value for System C of over £13m over 5 years. These form the bedrock for future growth. Commenting on the results Jim Horsburgh, the Chairman said "This has been a tough year where much has changed in both our market environment and within our business. I am pleased by the way the group has responded to these difficult challenges, with the second half of the year inparticular showing significant benefits from the changes we have made. We have asolid platform from which to go forwards and although it is still early in the current financial year we are confident we will continue to meet expectations". For Further Information please contact System C Healthcare plcIan Denley, Chief ExecutiveJim Horsburgh, ChairmanAndrew Coll, Finance Director Tel: 01622 691 616 MaitlandEmma BurdettRichard Farnsworth Tel: 0207 379 5151 Collins Stewart Europe LimitedMark ConnellyStewart Wallace Tel: 0207 523 8350 Chairman's Statement Introduction and highlights System C has accomplished a great deal this year including: broadening its client base, securing new contract wins in excess of £13m over 5 years and enhancing its product range through a product development partnership with Microsoft. Subsequent to the year end the company also completed the acquisition of IQ Systems Services Ltd (IQ Systems). This acquisition extends our ability to secure work in the independent sector healthcare market. Although we achieved much, there were marked differences between the two halvesof our financial year. In the first six months the slowdown in the NationalProgramme for IT as a result of the withdrawal of Accenture from the North Eastand Eastern regions led to a scaling back of our Service Division deployments,which impacted the results for the six months ended 30 November 2006. Despitethese challenging market conditions, we worked extremely hard to delivereffectively against our other contracts, whilst controlling our costs, tenderingfor new opportunities and reviewing acquisition targets which would enhance ourearnings in the future. I am pleased to say that these efforts began to produceresults in the second half of the year, giving us a solid platform from which torealise our strategic objectives going forward. People and the Board System C is principally a people business and I would like to thank all of ourstaff for their part in delivering a hands-on, practical and high qualityservice to our customers. It is primarily their efforts that helped us todeliver our results. I would also like to welcome the new colleagues that joinedus through our acquisition of IQ Systems Services Ltd. I believe that there aregreat cultural synergies between our two companies and we are delighted towelcome them into the System C team. We recently announced that I have become Non-Executive Chairman of System C asmy tenure as Executive Chairman came to an end. The requirement for the role ofExecutive Chairman has diminished in the last year, and this is a logical nextstep in the evolution of the business. In addition we announced the appointmentof Dr John Forrest as the Deputy Chairman, and John remains our SeniorIndependent Director. Both John and I look forward to working with the Board toachieve further expansion of the System C Group. Dividends The Board is recommending a final dividend of 0.24p per share, which if approvedby shareholders at the Annual General Meeting on 7 November 2007, will be paidon 9 November 2007 to those shareholders on the register at 5 October 2007. Thetotal dividend of 0.36p per share represents an increase of 9% compared to theprevious year. Corporate governance System C is committed to high standards of Corporate Governance. Although as anAIM listed company we are not required to comply with the Combined Code, we seekto adopt the provisions of the Combined Code in order to meet best practice. Strategy System C's strategy remains unchanged: to be the UK's leading healthcare ITsolutions provider, improving patient care via the effective application of ITproducts and services. Our vision is to use our expertise in the application ofhealthcare IT to contribute towards the evolution in public health and socialcare taking place both within and outside the UK. Outlook System C is recognised as an organisation of highly experienced IT professionalsand also as one of the few solely dedicated to the healthcare sector. This givesus a distinct competitive advantage in a market with significant barriers toentry, and also considerable opportunity given the ongoing requirement forhealthcare IT to support modernisation of healthcare services and the scale ofhealthcare spend in the UK and overseas. Our healthcare focus also gives rise to potential risk as we are exposed tochanges within the healthcare IT procurement model and any downturn inhealthcare IT spend. We believe that we have demonstrated our effectiveness atmanaging this risk and at adapting to the constant market changes. We haveachieved this by focusing on delivery capability, broadening our client base,investing in product development and diversifying into the private sector. Although our market remains challenging and we are still only in the firstquarter of our financial year, the Board is comfortable with the current levelof market expectations. Chief Executive's Review System C generated revenues of £13.5m (2006: £16.1m) and a profit fromoperations of £0.6m (2006: £0.1m). Revenues fell by £2.6m compared with theprior year, primarily as a result of the withdrawal of one of our major clients,Accenture, from the National Programme for IT. Accenture withdrew officiallyfrom the National Programme in the North East and Eastern regions in January2007, when CSC was awarded the contract to replace it. However, our revenuestream from Accenture had declined over the previous quarter and its departurehad a major impact on System C as it was our largest client representing annualrevenues of approximately £7m. However, through expansion and diversification of our customer base (detailedbelow), we sought to replace the loss of this client with new revenues.Thiscombined with the tight management of our cost base, enabled us to increase ourprofit from operations by £0.5m compared to the prior year, and deliver a profitbefore tax of £1.3m (2006: £0.7m). Our cash generation continued to be strong with cash generated from operationsof £2.1m and with net cash increasing by £2.0m to £10m. Repositioning for growth Over the last year we have taken a number of actions to build long term value inour business. We made a commitment to the continued development of our Productsand Services, particularly against a backdrop of changes within the NationalProgramme for IT. We have achieved a number of key successes which havesignificantly repositioned the business for growth going forward. Thesesuccesses are discussed below. Securing the Isle of Man contract In March 2007 the Company and its products and services were chosen by the Isleof Man Government Department of Health & Social Security (DHSS) to provide anisland-wide healthcare IT system and related services. System C will beinstalling software solutions at the Noble's hospital in Douglas and alsothroughout the Island's community services to provide a fully integratedClinical Care Support Service serving all care settings. The contract is the first Electronic Patient Record procurement for someconsiderable time and we are delighted to have won against a large andcompetitive field. System C has an excellent delivery record for these types ofsystems and we look forward to bringing real benefits to patients, cliniciansand all health service users on the Island. The contract with the DHSS is a three phase framework contract with an estimatedvalue of £7.5m over seven years. Securing a contract with NHS Connecting for Health (CfH) In May 2007 we signed a major new contract to provide experienced healthcare ITdeployment specialists to the Government's NHS Connecting for Health agency. Under a framework contract, System C provides specialist support to CfH'sCentral Deployment Support Team. This team is responsible for helping NHS Trustsimplement the National Programme for IT and for transferring knowledge andskills to Trust staff. A key factor in winning the contract was System C's experience working directlyfor NHS Trusts and with other suppliers across the country. The new contract isa flexible and cost effective performance-based framework agreement which allowsCfH to draw on our breadth of skills and specialist expertise to support thego-live process within the National Programme as and when required. Securing a contract for IT Services for Diagnostic Treatment Centres During the year System C has provided professional services to the InHealthNetcare joint venture, which has recently been awarded a contract by theGovernment to provide diagnostic services in and around London. These serviceswill be provided both in private healthcare units where there is identifiedspare capacity and in GP surgeries. In addition, mobile units will bringdiagnostics to patients at private hospitals, NHS hospitals and other sites suchas supermarkets. The aim is to give patients greater choice and faster access todiagnostic services, including X-Rays, MRI and ultrasound scans, endoscopy,phlebotomy and echocardiography. System C was responsible for deploying the IT systems (patient management,radiology, PACS and call centre management) underpinning these diagnosticservices. We supplied a range of services including programme management, designconsultancy, configuration and testing, reporting support and training. Thecontract marked System C's entry into the private healthcare market. Acquisition of IQ Systems In July 2007, we announced another significant strategic step into the privatehealthcare market with the acquisition of IQ Systems. IQ Systems is a leading supplier of patient management and clinical softwaresolutions for private treatment centres and hospitals. Its IQUtopia product ishighly regarded in the private healthcare marketplace and has been deployed at anumber of the most prestigious private sector treatment centres in the countryincluding Sussex Orthopaedic NHS Treatment Centre, Will Adams NHS TreatmentCentre (Gillingham), St Mary's NHS Treatment Centre (Portsmouth), Midlands NHSTreatment Centre (Burton) and Eccleshill NHS Treatment Centre (Bradford) amongstothers. IQUtopia complements System C's MedWay Patient Administration andElectronic Patient Record (EPR) software, which is typically deployed intolarger NHS Acute hospitals. The acquisition of IQ Systems subsequent to the year end accelerates System C'sexpansion into the private healthcare market as well as strengthening itsproduct portfolio. It has a number of major private healthcare customersincluding Mercury Healthcare (now part of Care UK), Centres of ClinicalExcellence (CCE) and Nations Healthcare (recently acquired by CCE). Product development We invested significantly in developing our software products in the last year,concentrating development resource and investment on the upgrade of our MedWayproduct suite to the Microsoft .NET platform. This initiative is part of a longterm investment plan to ensure that a modern, functionally rich andinteroperable PAS/EPR system will be ready to go to market by the time newopportunities such as the Additional Supply Capability and Capacity initiative(see below) mature in 2008/9. We believe that opportunities to sell this productexist both within the UK and in other geographical territories. We are seekingpartners to assist in our efforts to penetrate overseas markets. Continual change within our markets Healthcare provision in the UK is undergoing continued modernisation and change.Our main customers include NHS Trusts, Local Service Providers under theNational Programme for IT, NHS Connecting for Health and more recently privatesector providers to the health market. The year has seen considerable change within the National Programme for IT,commencing with the withdrawal of Accenture from the North East and Easternclusters, and the appointment of CSC to those clusters. Other recentdevelopments include the creation of the National Local Ownership Programme(NLOP) which moves responsibility for implementing the National Programme toStrategic Health Authorities. A major new initiative from the National Programme has been the creation of theAdditional Supply Capability and Capacity (ASCC) Framework Agreement. Theframework will cover an array of different systems and services, with anestimated value of £100m over a period of up to four years, and is likely tocommence early in 2008. We consider ourselves to be well placed to benefit fromthe additional product and service opportunities that the framework agreementwill provide. System C has the products, skills and expertise which will allow us to exploitthe opportunities arising from these changes and we will remain focused on theprovision of practical, hands-on delivery of IT products and services to thehealthcare sector. Our competitive strengths Our main competitive strengths include our flexibility and adaptability tochanging market conditions, our ability to secure new business, the expertise,dedication and experience of our people and our focus on the delivery of highquality IT products and services to the healthcare market. These competitive strengths form a substantial barrier to entry which we aim tocapitalise on further in the coming year. Key performance indicators (KPIs) The following KPIs are used by the Board to monitor and assess the business: Year ended 31 May 2007 2006 Average revenue per head £85,816 £82,042Gross margin 47% 49%Margin on profit from operations 4% 1% • Average revenue per head is defined as the total revenue in the year divided by the average monthly number of employees.• Gross margin is defined as gross profit divided by total revenue.• Margin on profit from operations is defined as the profit from operations divided by total revenue The Company focuses heavily on utilisation of staff within the business tomaximise the average revenue per head. Although total revenue has declined, theaverage revenue per head increased by approximately 5% reflecting increasedefficiencies across the Company. Gross margin has only slightly reduced to 47% despite pricing pressures in theServices Division due to an improvement in margins in the Products Division. As detailed in the Financial Review, tight cost containment led to an increasein the margin on profit from operations from less than 1% to over 4%. Business risks The Board continually identifies, reviews and where possible mitigates the risksthat may impact our business, prospects, people, financial results and shareprice. The key, high level risks to our business are described in the followingsections: Public sector spending/political changes There has been recent speculation that a tightening of public spending will leadto a reduction in UK Government investment in consulting and IT projects. Inaddition the appointment of a new Labour leader has resulted in speculation thatthe spending on large scale IT projects will be reduced. It is probably tooearly to identify with any certainty what the impact may be at this stage.However we firmly believe that technology is an essential enabler of moreeffective patient care. Investment in IT products, services and infrastructureis paramount in helping the NHS to achieve its strategic objectives as well asthe detailed targets against which it is constantly monitored. Market procurement The National Programme for IT remains the Government's main vehicle for thedelivery of transformational IT to the healthcare sector. The Programme hasundergone significant change since its inception, and there remains speculationas to whether this current procurement model will be subject to change in thefuture. We remain committed to the success of the National Programme, and work closelywith the LSPs, NHS Connecting for Health, NHS Trusts and Strategic HealthAuthorities to achieve its objectives. One potential change to the current procurement model could be the opening up ofthe market to greater competition to augment the National Programme as indicatedin the tender for the ASCC catalogue. The ASCC Memorandum of Understanding,published in April 2007, states that ASCC will provide the NHS with "access to abroader based supply community" which will "complement and support the workalready underway under the NPfIT". We believe that we are well positioned givenour reputation and delivery capability to benefit significantly in the medium tolong term from a broadening of direct suppliers to the NHS. Ability to secure new business The key to growth is the ability to secure new business. We recognise that inthe past we have been reliant on several core customers and in 2005/6 we set outto expand our customer base. We have achieved success in broadening our clientbase as illustrated above and we will continue to focus on securing new businesswithin the NHS as well as through the expansion of the private sector,strengthening the capabilities and experience of our senior team in order toachieve this. Staff retention Over the past year we have noted increased competition to attract the bestpeople with the relevant IT Healthcare experience. We are addressing these risksto the business by offering a wide range of remuneration benefits, investment intraining and development combined with a focus on the individual and theircareer development. These efforts contributed towards the Company'sreaccreditation to the highly regarded Investors in People scheme in May 2007. Delivery Over many years System C has built a strong reputation for the successfuldelivery of IT products and services to the healthcare sector. Our products andservices operate in intense, life-critical environments and any failure to meetcontracted commitments and/or client expectations could damage our reputationand impact on our financial results/position. To mitigate this risk, we monitor our performance continuously againstcontracted commitments and expectations, and deploy a wide range of experiencedtechnical specialists and Programme Directors to evaluate performance. Weappoint a Project Board for any high risk projects with a combination ofresources as appropriate from technical, delivery, finance and commercialexpertise. Client concentration A large proportion of our revenue has historically been generated from our topfive clients, and the loss of a major client such as Accenture last year canhave a negative impact on revenue. As demonstrated this year we focusedsubstantial efforts on winning new clients and diversifying our customer base inorder to mitigate this risk going forward. Accreditation Much of our work relies on maintaining accreditations to international standardssuch as the ISO9001/TickIT Quality Assurance standard. System C employs afull-time Quality Manager to ensure adherence to Quality Standards, to monitorprogress against improvement initiatives and to monitor customer satisfaction.The Company has been ISO accredited since 1999 and was recertificated inDecember 2006. Acquisitions We recognise that selected acquisitions will play a key role in future growth ofthe business, as illustrated by the recent acquisition of IQ Systems. There areinherent risks in acquiring businesses and we have appointed an IntegrationDirector from within the business to ensure that IQ Systems is successfullyintegrated with System C and that its strategic objectives and targets areachieved. The future We are always keen to improve performance each year. Whilst this year's resultswere below the expectations we had at the start of the year, we recognise thatthis was against a backdrop of considerable uncertainty. We remained focused throughout, responding to rapidly changing marketconditions, managing costs whilst seeking to grow the business by securing newcontracts, investing in new products and identifying appropriate acquisitiontargets. As a result System C has a strong platform to build future growth and we remainpositive that there will be a healthy demand for our products and services inthe future. Financial Review Year ended 31 May 2007 2006 Audited Audited £m £mProducts 3.5 3.5Services 10.0 12.6 -------- --------Total revenue 13.5 16.1 Gross profit 6.4 7.9Operating costs (5.8) (7.8)Profit from operations 0.6 0.1Net financial income 0.7 0.6 -------- --------Profit before tax 1.3 0.7Tax (0.4) 0.4 -------- --------Profit after tax 0.9 1.1 -------- -------- Basic EPS 1.09p 1.27p The Company has prepared these financial statements under InternationalFinancial Reporting Standards (IFRS), a year earlier than required by the AIMRules. System C is ideally structured to address two separate areas of market demand: • Products Division - where the Company contracts directly to provide products and associated deliverables directly to NHS hospitals and Trusts. • Services Division - where the Company delivers to either LSP customers or on behalf of other organisations whose end customer is either the NHS or other clinical organisations. Both are supported by a central development and support capability, whichprovides our people with both logistical and technical support. Revenue The majority of revenues continued to be generated by our Services Division withrevenue in the year ended 31 May 2007 of £10m. The loss of business from thewithdrawal by Accenture from the National Programme had a major impact aspreviously it represented over 40% of our annual revenue. We rapidly diversifiedto secure work with new clients in order to successfully mitigate a proportionof this loss of revenue, and consequently Services revenues increased to £5.3min the second half of the year compared to £4.7m in the first six months. Although our Product revenues were flat year on year, this principally relatedto the timing of product deployments. We have secured a major new contract forthe deployment of our MedWay EPR system to the Isle of Man and anticipatefurther growth in our Product revenues in future years and envisage these torepresent an increasing proportion of total revenues. Gross margins Gross profit margins were slightly reduced to 47% (2006: 49%) due to downwardprice pressures in the Services Division. Operating costs Year ended 31 May 2007 2006 £m £m Selling and marketing costs 0.5 0.7Research and development costs 1.0 1.0Administration and general overheads 4.3 6.1 -------- --------Total operating costs 5.8 7.8 Administration and general overhead costs in the year of £4.3m (2006: £6.1m)included £0.1m (2006: £0.2m) in respect of costs expensed as a result ofredundancies. Overall, total operating costs in the year decreased by £2.0m incomparison to the prior year. This significant cost reduction enabled us toachieve higher profit from operations of £0.6m (2006: £0.1m) despite reducedrevenues. The cost containment principally related to non fee-earning headcountreduction and the removal of non-core expenditure. Net financial income Year ended 31 May 2007 2006 £m £mInterest receivable on customer contracts 0.3 0.3Interest payable on financing loans taken out to fund fixedassets on customer contracts (0.1) (0.1) -------- --------Net interest on customer contract assets 0.2 0.2Net bank interest 0.5 0.4 -------- --------Net financial income 0.7 0.6 Interest receivable on customer contracts relates mainly to our long-termcontracts where an element of the charge includes a recovery for finance costs.Offsetting this income is the interest on financing loans taken out to fund thecontract assets. Net bank interest has increased by £0.1m principally due to interest generatedby our cash balance. Taxation In the year ended 31 May 2006 a tax credit of £0.4m was recognised principallydue to the availability of schedule 23 tax credits. No such credit was availablein the current year and thus a tax charge of £0.4m has been incurred. At the end of the year the Company had £0.9m of tax value losses recognised onthe balance sheet as a deferred tax asset to offset against future CorporationTax liabilities (2006: £1.2m). Dividends Interim dividends of 0.12p per share were declared and paid during the year. TheBoard proposes a final dividend of 0.24p per share bringing the total for theyear to 0.36p per share. Earnings per share Year ended 31 May 2007 2006Basic earnings per share 1.09p 1.27pDiluted earnings per share 1.08p 1.25p Although profit before tax grew year on year by £0.6m, the basic earnings pershare declined compared to 2006 as in the prior year System C benefited from anet tax credit of £0.4m due to the availability of research and development taxcredits and Schedule 23 tax credits. Cash flow Year ended 31 May 2007 2006 £m £mCash generated from operations 2.1 0.5Net financial income 0.7 0.6Capital expenditure (0.5) (0.2) -------- --------Net cash inflow before financing activities 2.3 0.9Financing1 (1.3) 7.4Net cash inflow 1.0 8.3 Note 1: Net float proceeds of £7.4m received in 2006. The Company has continued to generate strong cash flow with high cash conversionratios being maintained. Balance sheet As at 31 May 2007 2006 £m £mNon-current assets excluding long term portion of accrued 1.9 2.4incomeTrade receivables- net 2.9 2.6Accrued income - Current and non-current 4.0 4.4Other receivables 0.3 0.4Cash 10.6 9.6Liabilities (excluding borrowings and provisions) (3.2) (2.5)Borrowings and provisions (0.6) (1.6) -------- --------Net assets 15.9 15.3 Note: The balance sheet above is simplified for the purposes of highlighting keyareas. The Company has a strong balance sheet with net assets of over £15.9m includinga cash balance of £10.6m. Trade receivables increased as activities began to accelerate in the latter partof the year. The balance sheet includes total accrued income of £4.0m whichrepresents a mixture of Services income in May (which is invoiced after the yearend) and accrued revenue in respect of long-term contracts. Revenue accruedreflects the value of work delivered by the Company and is then invoiced as amonthly payment over the life of the contract in accordance with pre-agreedterms. Liabilities (excluding borrowings and provisions) increased marginally dueprincipally to an increase in the tax and VAT liability (as revenues increasedin the latter months of the year), as well as a rise in deferred income. Borrowings and provisions decreased principally as a result of the capital loanrepayments made in the year. Income Statement Note Year Ended Year Ended 31 May 31 May 2007 2006 £ £ Revenue 2,3 13,473,135 16,080,264Cost of sales (7,060,643) (8,145,932) ----------- ----------Gross profit 6,412,492 7,934,332 Selling and marketing costs (486,898) (708,592)Research and development costs (1,045,009) (1,000,378)Administration and general overheads (4,257,437) (6,096,520) ----------- ----------Profit from operations 623,148 128,842 Financial income 802,792 713,348Financial expense (92,401) (181,166) ----------- ----------Profit before taxation 4 1,333,539 661,024 Taxation 5 (384,056) 411,262 ----------- ----------Profit for the financial year 949,483 1,072,286 ----------- ---------- Earnings per ordinary share Pence Pence- Basic 6 1.09 1.27- Diluted 6 1.08 1.25 ----------- ---------- The results above relate entirely to continuing operations. Balance Sheet At 31 May At 31 May 2007 2006 £ £ASSETSNon-current assetsProperty, plant and equipment 673,446 1,021,429Intangible assets 350,549 161,332Deferred income tax asset 926,964 1,205,163Trade and other receivables 773,502 1,503,328 ----------- ---------- 2,724,461 3,891,252Current assetsTrade and other receivables 6,491,741 5,952,038Cash and cash equivalents 10,574,133 9,547,985 ----------- ---------- 17,065,874 15,500,023 ----------- ----------TOTAL ASSETS 19,790,335 19,391,275 LIABILITIESCurrent liabilitiesTrade and other payables (3,153,151) (2,516,434)Current tax liability (92,209) -Borrowings (528,122) (992,366) ----------- ---------- (3,773,482) (3,508,800)Non-current liabilitiesBorrowings - (528,122)Provisions (102,340) (81,407) ----------- ---------- (102,340) (609,529) ----------- ----------TOTAL LIABILITIES (3,875,822) (4,118,329) ----------- ----------NET ASSETS 15,914,513 15,272,946 ----------- ---------- SHAREHOLDERS' EQUITYShare capital 894,810 892,765Share premium account 9,757,163 9,731,885Capital redemption reserve 3,127,023 3,127,023Own shares held in trust (1,235,381) (1,235,381)Retained earnings 3,370,898 2,756,654 ----------- ----------TOTAL EQUITY 15,914,513 15,272,946 ----------- ---------- Statement of Changes in Shareholders' Equity Attributable to equity shareholders' Own Share Capital shares Share premium redemption held in Special Retained Total capital account reserve trust reserve earnings equity £ £ £ £ £ £ £ As at 1 June 2005 414,684 - 134 - 1,308,496 511,624 2,234,938Profit for thefinancial year - - - - - 1,072,286 1,072,286Share-basedpayments charge - - - - - 74,667 74,667Deferred tax - - - - - (114,954) (114,954)Issue of new shares 478,081 - - - - - 478,081Premium on 1pordinary shares issued - 10,906,750 - - - - 10,906,750Issue costs - (1,354,461) - - - - (1,354,461)Conversion of £1 convertible participatingpreference shares - - 3,126,889 - - - 3,126,889Premium arising onsettlement of accrued dividend - 179,596 - - - - 179,596Employee benefits trust - - (1,235,381) - - (1,235,381)Release of specialreserve - - - (1,308,496) 1,308,496 -Dividends - - - - (95,465) (95,465) ------- -------- -------- -------- -------- ------- --------As at 31 May 2006 892,765 9,731,885 3,127,023 (1,235,381) - 2,756,654 15,272,946Profit for thefinancial year - - - - - 949,483 949,483Share-basedpayments credit - - - - - (52,580) (52,580)Deferred tax - - - - - 13,648 13,648Issue of new shares 2,045 - - - - - 2,045Premium on issue of newshares - 25,278 - - - - 25,278Dividends - - - - - (296,307) (296,307) ------- -------- -------- -------- -------- ------- --------As at 31 May 2007 894,810 9,757,163 3,127,023 (1,235,381) - 3,370,898 15,914,513 ------- -------- -------- -------- -------- ------- -------- Cash Flow Statement Year ended Year ended 31 May 31 May 2007 2006 £ £Cash flows from operating activitiesCash generated from operations 2,109,886 461,853Financial expense (92,401) (169,046)Income tax paid - (1,357) ---------- ---------Net cash generated by operating activities 2,017,485 291,450 Cash flows from investing activitiesPurchases of property, plant and equipment (227,116) (54,299)Capitalised development costs (299,353) (102,011)Financial income 796,482 716,010 ---------- ---------Net cash generated from investing activities 270,013 559,700 Cash flows from financing activitiesRepayment of borrowings (992,366) (933,163)Issue of equity share capital 27,323 11,175,825Issue costs - (1,354,461)Payments to acquire own shares held in trust - (1,235,381)Redemption of preference shares - (71,000)Dividends paid (296,307) (95,465) ---------- ---------Net cash (used in)/generated from financing activities (1,261,350) 7,486,355 ---------- ---------Net increase in cash and cash equivalents 1,026,148 8,337,505 Cash and cash equivalents at beginning of year 9,547,985 1,210,480 ---------- ---------Cash and cash equivalents at end of year 10,574,133 9,547,985 ---------- --------- Notes to the Cash Flow Statement Cash flows from operating activities Year ended Year ended 31 May 31 May 2007 2006 £ £ Profit for the financial year 949,483 1,072,286Taxation 384,056 (411,262)Financial income (802,792) (713,348)Financial expense 92,401 181,166 ---------- ---------Profit from operations 623,148 128,842Share-based payments (credit)/charge (52,580) 74,667Depreciation of property plant and equipment 575,099 920,882Amortisation of intangible assets 110,136 115,242Loss on disposal of property plant and equipment - 854Decrease in trade and other receivables 196,433 38,424Increase/(decrease) in trade and other payables 636,717 (664,570)Net movement on provisions 20,936 (152,488) ---------- ---------Cash generated from operations 2,109,889 461,853 ---------- --------- Notes to the Financial Statements 1 Basis of Preparation and Financial Statements The Board of Directors approved these preliminary audited results on 11thSeptember 2007. The financial information set out above is abridged and does not constitute theCompany's statutory financial statements for the years ended 31 May 2007 or 31May 2006. Statutory financial statements for the year ended 31 May 2006 havebeen reported on by the Company's auditors and delivered to the Registrar ofCompanies. The statutory financial statements for the year ended 31 May 2007 will be postedno later than 7 October 2007 to shareholders and once approved will be deliveredto the Registrar of Companies following the Annual General Meeting on 7 November2007. The report for the year ended 31 May 2006 was unqualified. Copies of the Annual Report and Financial Statements for the year ended 31 May2007 will be available in due course from the Company Secretary, System CHealthcare plc, Brenchley House, Week Street, Maidstone, ME14 1RF. 2 Principal accounting policies The principal accounting policies adopted in the preparation of these financialstatements are set out below. Unless otherwise stated, these policies have beenapplied to all years presented. a) Basis of preparation The financial information for the year ended 31 May 2007 has been prepared inaccordance with International Accounting Standards (IAS) and InternationalFinancial Reporting Standards (IFRS) as adopted by the European Union (EU) andalso as issued by the International Accounting Standards Board, InternationalFinancial Reporting Interpretations Committee (IFRIC) interpretations and withthose parts of the Companies Act 1985 applicable to companies reporting underIFRS. System C Healthcare PLC's financial statements were prepared in accordance withUK Generally Accepted Accounting Principles (UK GAAP) until 31 May 2006. Inpreparing the Company's financial statements for the year ended 31 May 2007,management has amended certain accounting and valuation methods previouslyapplied in the UK GAAP financial statements to comply with IFRS. The comparativefigures in respect of the year ended 31 May 2006 have been restated to reflectthese adjustments, except as described in the accounting policies. Exemptionstaken under IFRS1 "First Time Adoption of International Financial ReportingStandards" are set out in Note 24. Reconciliations and descriptions of the effect of the transition from UK GAAP toIFRS on shareholders' equity and the Company's income and cash flows areprovided in Note 24. The preparation of financial statements in conformity with generally acceptedaccounting principles requires the use of estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Although these estimates are based on management's bestknowledge of the amount, events or actions, the actual results ultimately maydiffer from those estimates. b) Revenue recognition Revenue is measured at the fair value of consideration received or receivableand represents amounts receivable for goods and services provided to thirdparties in the normal course of business during the period, net of value addedtax and discounts and results from the principal activity of the Company. Each element of revenue (described below) is recognised only when: • Delivery of goods or provision of services has occurred;• There are no significant vendor obligations remaining; and• Collection of the amount due from the customer is reasonably assured. Revenue from the sale of software licences is recognised in the income statementas the system modules are installed. Typically the sale will match the projectimplementation timescale in accordance with specified contract milestones. Revenue from the related implementation is recognised in the income statementproportionally over the implementation period as those services are provided. Revenue from maintenance, support and other services is recognised over thecontracted term of supply. Hardware revenue is recognised in line with, and approximates to, thedepreciation charge on such assets, as capitalised within property, plant andequipment and disclosed as contract assets. Revenue from healthcare consultancy services is recognised when the service isdelivered and approved by the client. Revenue which has been recognised by the Company but has not been invoiced as atthe period end is included within accrued income. Invoices raised in advance of the provision of goods/services to customers arerecorded in the balance sheet as deferred income and included within tradereceivables. Such amounts are recognised in the income statement as those goods/services are provided to the customer. c) Interest receivable on contracts An element of the amounts invoiced to certain customers in respect of contractsto supply Electronic Patient Records (EPR) systems and other ancillary items isdisclosed within financial income. Such amounts are based on the Company's netinvestment in the contracts taking into account payments received from thecustomer to date. d) Employee benefits Pension obligations The Company operates a stakeholder pension scheme and the assets of the schemeare held separately from those of the Company in an independently administeredfund. In addition to this the Company contributes to the personal pension plansof certain employees. The Company has no further obligations once thecontributions have been paid. The pension cost charge for the period is reflected in the income statement andrepresents contributions payable to the defined contribution pension scheme plusamounts payable by the Company to the personal pension plans of certainemployees based on a percentage of basic salary. Any shortfall or excess in the contributions payable by the Company in relationto the pension cost charge for the year are included in accruals or prepaymentsas appropriate. Profit sharing and bonus plans The Company recognises a liability and an expense for bonuses/profit sharingonly where there is a contractual obligation or where there is a constructiveobligation arising from past practice or other events that existed at thebalance sheet date. Termination benefits Termination benefits are payable when employment is terminated by the Companybefore an individual's normal retirement date, or whenever an employee acceptsvoluntary redundancy in exchange for those benefits. The Company recognisestermination benefits when it is demonstrably committed to either: terminatingthe employment of current employees according to a detailed formal plan withoutpossibility for withdrawal; or providing termination benefits as a result of anoffer made to encourage voluntary redundancy. Benefits falling due more than oneyear after the balance sheet date are discounted to their present value. Share-based payments The Company operates both equity settled and cash settled share option schemes. For equity settled share options, the services received from employees aremeasured by reference to the fair value of the share options. The fair value iscalculated at grant date and recognised in the income statement, together with acorresponding increase in shareholders' equity, on a straight line basis overthe vesting period, based on an estimate of the number of options that willeventually vest. Vesting conditions, other than market conditions, are not takeninto account when estimating the fair value. For cash settled arrangements, the services received from employees are measuredat the fair value of the liability and recognised in the income statement on astraight line basis over the vesting period. The fair value of the liability ismeasured at each balance sheet date and at the date of settlement with changesin fair value recognised in the income statement. IFRS 2 "Share-based payment" has been applied to equity settled share-basedpayment arrangements granted after 7 November 2002 that had not unconditionallyvested with employees by the date of the Company's transition to IFRS and to allcash settled awards. The proceeds received, net of any directly attributable transaction costs, arecredited to share capital (nominal value) and share premium when the options areexercised. e) Own shares held in trust The Company's shares owned by The System C Healthcare PLC Employee BenefitsTrust are presented as a reduction of shareholders' equity. f)Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call withbanks, other short-term highly liquid investments with original maturities ofthree months or less, and bank overdrafts. Bank overdrafts or loans where there is no right of set-off are shown withinborrowings in current or non-current liabilities on the balance sheet asappropriate. g) Property, plant and equipment All property, plant and equipment (PPE) is shown at original cost lessaccumulated depreciation and any accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition ofthe items. Depreciation on assets is calculated using the straight-line method to allocatethe cost of each asset less its residual value, if any, over its estimateduseful life, as follows: • Leasehold improvements Over the term of lease• Fixtures and fittings 15 per cent straight-line• Plant and equipment 25 per cent straight-line• Computer equipment 25 per cent straight-line• Contract assets 25 per cent straight-line (included in cost of sales) Assets utilised in arrangements similar to Private Finance Initiatives andsimilar contracts are included within property, plant and equipment as theCompany primarily bears the risks and rewards of any variation in profit/lossesarising from such assets. h) Leases Leases of property, plant and equipment where the Company has substantially allthe risks and rewards of ownership are classified as finance leases. Financeleases are capitalised at the lease's inception at the lower of the fair valueof the leased asset and the present value of the minimum lease payments. Eachlease payment is allocated between the liability and finance expenses so as toachieve a constant rate on the finance balance outstanding. The correspondingrental obligations, net of finance expenses, are included within borrowings.Property, plant and equipment acquired under finance leases is depreciated overthe shorter of the asset's useful life and the lease term. Leases where the lessor retains substantially all the risks and rewards ofownership are classified as operating leases. Payments made under operatingleases (net of any incentives received from the lessor) are charged to theincome statement on a straight-line basis over the period of the lease. i) Impairment of non-current assets In accordance with IAS 36 "Impairment of assets" a review for impairment ofnon-current assets is carried out if events or changes in circumstances indicatethat the carrying amount of such an asset may not be recoverable. Impairmentreviews comprise a comparison of the carrying amount of the asset with itsrecoverable amount (the higher of net realisable value and value in use). To theextent that the carrying amount exceeds the recoverable amount, the asset isimpaired and an impairment loss is recognised in the income statement. j) Intangible assets The Company accounts for its intangible assets in accordance with IAS 38"Intangible assets". Acquired computer software licences are capitalised on the basis of the costsincurred to acquire and bring into use the specific software. These costs areamortised over their estimated useful lives which typically do not exceed fouryears. Costs associated with developing and maintaining computer software programmesare recognised as an expense in the income statement as incurred. Research expenditure is recognised as an expense in the income statement in theperiod in which it is incurred. Costs incurred on development projects (relating to the design and testing ofnew or improved software products) are recognised as intangible assets from thepoint it is probable that the project will be a success, considering itscommercial and technological feasibility, and costs can be measured reliably.Software development costs primarily comprise employee costs and are amortisedover the expected period over which the Company is expected to benefit from thecapitalised asset and typically range between three and five years. Development costs that have initially been recognised as an expense in theincome statement (as IAS 38 criteria are not met), but where subsequently theIAS 38 criteria are deemed to have been satisfied, are not then recognised as anasset in a subsequent period. k) Taxation including deferred tax Corporation tax, where payable, is provided on taxable profits at the currentrate. Deferred tax is provided on all temporary differences at the balance sheet datebetween the tax bases of assets and liabilities and their carrying amounts forfinancial reporting purposes. Deferred tax assets are recognised for all deductible temporary differences,carry-forward of unused tax assets and unused tax losses, to the extent that itis probable that taxable profit will be available against which the deductibletemporary differences, and the carry-forward of unused tax assets and unused taxlosses can be utilised. The carrying amount of deferred income tax assets isreviewed at each balance sheet date and reduced to the extent that it is nolonger probable that sufficient taxable profit will be available to allow all orpart of the deferred income tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that areexpected to apply to the year when the asset is realised or the liability issettled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted at the balance sheet date. Tax relating to itemsrecognised directly in equity is recognised in equity and not in the incomestatement. Deferred tax balances are not subject to discounting. l) Provisions In accordance with IAS 37 "Provisions, contingent liabilities and contingentassets", provisions for liabilities are recognised when the Company has apresent legal or constructive obligation as a result of past events, and it isconsidered more likely than not that an outflow of resources will be required tosettle that obligation, and the amount can be reliably estimated. The expenserelating to any provision is presented in the income statement net of anyreimbursement. Provisions are measured at the present value of the directors' best estimate ofthe expenditure required to settle the present obligation at the balance sheetdate and discounted where the effect is considered material. m) Dividend distributions Interim dividends in respect of equity shares are recognised in the financialstatements in the period in which they are paid. Final dividends in respect of equity shares are recognised in the financialstatements in the period that the dividends are formally approved by theCompany's members. In accordance with IAS 32 "Financial instruments: Presentation" dividends onnon-equity shares are disclosed within financial expense in the incomestatement. n) Financial instruments Borrowings and borrowing costs All borrowings are initially stated at the fair value of the considerationreceived after deduction of issue costs. Issue costs together with other financecosts such as premiums on redemption are charged to the income statement overthe term of the borrowings and represent a constant proportion of the balance ofcapital repayments outstanding. Accrued finance costs attributable to borrowingsare included in accrued charges within current liabilities, unless the financecost is only repayable on redemption in which case the accrued finance costs areincluded within the carrying value of borrowings. Trade receivables Trade receivables are recognised initially at fair value and subsequentlymeasured at amortised cost using the effective interest method less provisionfor impairment. A provision for impairment is established when there isobjective evidence that the Company will not be able to collect all amounts dueaccording to the original terms of the receivables. Any changes in the amount ofthe provision is recognised in the income statement during the year. Trade payables Trade payables are recognised initially at fair value and subsequently measuredat amortised cost using the effective interest method. o) Share capital and share premium Ordinary shares issued are shown as share capital at nominal value. The premiumreceived on the issue of shares in excess of the nominal value is credited tothe share premium account and included within shareholders' equity. p) Segmental reporting A business segment is considered to be a group of assets and operations engagedin providing products or services that are subject to risks and returns that aredifferent to those of other business segments. A geographical segment is engagedin providing products or services within a particular economic environment thatis subject to risks and returns that are different to that in other economicenvironments. q) Key areas of judgement The Company makes estimates and assumptions concerning the future. The resultingaccounting estimates will by definition, seldom equal the related actualresults. The estimates and assumptions that may have an element of risk causingan adjustment to the carrying amounts of assets and liabilities within the nextyear include those that relate to the capitalisation of development costs andthe components of the Company's calculation for share-based payments. 3 Segmental information The Company's primary format for segmental reporting is business segment. As thebusiness only operates in the UK the Company does not have a secondary reportingformat. The Company's sole activity is the design, development and implementation ofcomputer hardware and software. The directors consider it appropriate to analysethe results and financial position of the Company in three distinct segments asthis reflects how the business is managed: • The Products segment relates to business where the Company contracts directly with local NHS Trusts and other clinical organisations;• The Services segment relates to the business where the Company is subcontracted to perform work on behalf of other organisations where the end customer is also either the NHS or other clinical organisations;• Development and Shared Services relates to the Company's central research and development activities and support services provided to the Products and Services segments. The profit/(loss) before taxation of each segment includes any revenue andexpenses directly attributable to or able to be allocated to each such segmenton a reasonable basis. Segment assets and liabilities are those assets and liabilities directlyattributable or which can be allocated to each such segment on a reasonablebasis. Year ended 31 May 2007 Development and Products Services shared services Total £ £ £ £ Revenue 3,487,502 9,985,633 - 13,473,135 Profit/(loss) from operations 1,359,097 4,124,834 (4,860,783) 623,148 -------- -------- --------- ---------Net interest 229,902 - 480,489 710,391 -------- -------- --------- ---------Profit/(loss) before taxation 1,588,999 4,124,834 (4,380,294) 1,333,539 -------- -------- --------- --------- Total assets 4,442,408 3,023,969 12,323,958 19,790,335Total liabilities (1,694,066) (269,046) (1,912,710) (3,875,822) -------- -------- --------- ---------Net assets 2,748,342 2,754,923 10,411,248 15,914,513 -------- -------- --------- --------- Other segmental disclosures:Capital expenditure - PPE 224,185 - 2,931 227,116Capital expenditure -Intangible assets 60,611 - 238,742 299,353Depreciation of tangibleassets 373,377 - 201,722 575,099Amortisation of intangibleassets 86,928 - 23,208 110,136Impairment of tradereceivables (12,983) - - (12,983)Share-based payments credit - - (52,580) (52,580) -------- -------- --------- --------- Year ended 31 May 2006 Development and Products Services shared services Total £ £ £ £ Revenue 3,470,423 12,609,841 - 16,080,264 -------- -------- --------- --------- Profit/(loss) from operations 486,947 4,742,420 (5,100,525) 128,842 -------- --------- --------- ---------Net interest 147,731 - 384,451 532,182 -------- --------- --------- ---------Profit before taxation 634,678 4,742,420 (4,716,074) 661,024 -------- --------- --------- --------- Total assets 5,073,885 2,061,488 12,255,902 19,391,275Total liabilities (2,304,608) (63,143) (1,750,578) (4,118,329) -------- --------- --------- ---------Net assets 2,769,277 1,998,345 10,505,324 15,272,946 -------- --------- --------- --------- Other segmental disclosures:Capital expenditure - PPE 15,952 - 38,347 54,299Capital expenditure -Intangible assets 102,011 - - 102,011Depreciation of tangible assets 729,981 - 190,901 920,882Amortisation of intangible assets 87,350 - 27,892 115,242Impairment of trade receivables 13,478 - - 13,478Share-based payments charge - - 74,667 74,667 -------- --------- --------- --------- 4 Profit before taxation The following items have been included in arriving at profit before taxation: Year ended Year ended 31 May 31 May 2007 2006 £ £ Staff costs excluding share-based payments ) 8,523,766 9,211,801Share-based payments (credit)/charge (52,580) 74,667Research and development expenditure 1,045,009 1,000,378Depreciation of property, plant and equipment:- Contract assets 373,377 702,113- Other assets 201,722 218,769Loss on disposal of property, plant and equipment - 854Amortisation of intangible assets:- Development costs 79,686 59,482- Software 30,450 55,760Operating lease rentals:- Land and buildings 190,300 168,423- Motor vehicles and other leases 77,730 87,894 ------------ ----------- In addition to the research and development expenditure disclosed above,£299,353 was capitalised in respect of software development in accordance withIAS 38 (2006: £102,011). 5 Taxation (a) Analysis of tax charge/(credit) in the year Year ended Year ended 31 May 31 May 2007 2006 £ £Current tax:United Kingdom corporation tax at 30% 92,209 -Adjustments in respect of previous years - (3,439) ------------ -----------Total current tax charge/(credit) 92,209 (3,439) Deferred tax: ------------ -----------Current year 300,518 (162,131) ------------ -----------Adjustments in respect of previous years (8,671) (245,692) ------------ -----------Total deferred tax charge/(credit) 291,847 (407,823) ------------ -----------Total tax charge/(credit) to the income statement 384,056 (411,262) ------------ ----------- Tax on items credited/(charged) to equity:Deferred tax (credit)/debit on share-based payments (13,648) 114,954 ------------ ----------- (b) Factors affecting the current tax charge for the year The total tax charge/(credit) for the year differs from the standard rate of UKCorporation Tax of 30% (2006: 30%) as explained below: Year ended Year ended 31 May 31 May 2007 2006 £ £ Profit before tax 1,333,539 661,024Profit before tax multiplied by standard rate of UKCorporation Tax of 30% 400,062 198,307 ----------- ----------- Effects of:- Permanent differences 71,184 65,415- Rate differences on current tax (53,385) -- Tax benefit of research and developmentexpenditure - (60,051)- Tax difference arising on treatment of shareoptions (25,134) (365,802)- Adjustments in respect of previous years - Current tax - (3,439)- Adjustments in respect of prior years - Deferred tax (8,671) (245,692) ----------- -----------Total tax charge/(credit) 384,056 (411,262) ----------- ----------- 6 Earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year, excluding those that are held in the employee sharetrust , which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares that have satisfied the appropriate criteria as at 31 May 2007. Areconciliation between the weighted average number of shares used in thecalculations of basic and diluted earnings per share is set out below: Year ended 31 May 2007 Year ended 31 May 2006 Weighted Weighted average number Per share average number Per share Earnings of shares amount Earnings of shares amount £ Number Pence £ Number Pence Basic EPSEarningsattributableto ordinaryshareholders 949,483 87,148,360 1.09 1,072,286 84,408,217 1.27 ------- -------- ------- -------- -------- ------- Effect ofdilutiveshares 451,949 1,474,710 ------- --------- ------- -------- --------- -------Diluted EPS 949,483 87,600,309 1.08 1,072,286 85,882,927 1.25 ------- --------- ------- -------- --------- ------- 7 Post balance sheet events On 2 July 2007, the Company acquired an interest in the entire issued sharecapital of IQ Systems Services Limited, an entity registered in England andWales and engaged in the provision of patient management and clinical softwaresolutions. The consideration consisted of £800,000 paid on completion with a maximumpotential further consideration £1,360,000 payable if certain performancecriteria are met within two years from the date of acquisition. Further detailsin respect of the net assets acquired in connection with the purchase of IQSystems Services Limited will be given in the Company's next financialstatements. Following the 2007 Budget, the Chancellor announced that as of 1 April 2008 therate of corporation tax would be cut from 30% to 28%. This change wasincorporated into the Finance Bill 2007 which was approved on 26 June 2007 andwill impact on the future Corporation Tax charges and the value of deferred taxfor the Company. 8 First time adoption of International Financial Reporting Standards (IFRS) (a) Application of IFRS 1 The Company has applied IFRS 1 "First Time Adoption of International FinancialReporting Standards" for its initial implementation of IFRS. The Company's dateof transition to IFRS is 1 June 2005 and comparative information in thefinancial statements has been restated to reflect the Company's adoption of IFRSexcept where otherwise required or permitted by IFRS 1. IFRS 1 requires an entity to comply with each IFRS effective at the reportingdate for its first financial statements prepared under IFRS. As a general rule,IFRS 1 requires such standards to be applied retrospectively. However, thestandard permits several optional exemptions from full retrospectiveapplication. (b) Main impacts of adopting International Financial Reporting Standards Outlined below are those International Financial Reporting Standards which havean impact on the financial statements of the Company. Details of the adjustmentsare set out in the reconciliations between IFRS and UK GAAP as set out furtherbelow: IFRS 2 "Share-based payments" Under IFRS, equity settled share-based payment transactions are measured at fairvalue at the grant date and charged to the income statement over the vestingperiod of the award with a corresponding increase in equity. In the case of cashsettled share-based payment transactions, the fair value of the award isrecognised in the income statement over the vesting period and is remeasured ateach balance sheet date with the corresponding entry being to liabilities. IAS 12 "Income taxes" This standard requires entities to provide for deferred taxation based ontemporary differences between the carrying amount of assets and liabilities andtheir tax base. Accordingly the Company has made additional provision fordeferred taxation in respect of share-based payments and capitalised developmentcosts. IAS 32 "Financial instruments: Presentation" Under UK GAAP the Company's £1 redeemable preference shares and £1 convertiblepreference shares were disclosed as part of shareholders' equity. IAS 32 requires the classification of financial instruments between equity andliabilities according to their substance rather than their strict legal form.This standard also requires that interest and dividends on financial instrumentsbe treated in a manner that is consistent with the treatment adopted for theunderlying instrument. IAS 38 "Intangible assets" Under UK GAAP, development costs were expensed to the income statement asincurred. IAS 38 requires development costs to be capitalised once certain criteria havebeen met. The Company has recognised development costs as intangible assets onceit is probable that the product will generate future economic benefits, it istechnically feasible and the costs can be measured reliably. All otherdevelopment costs are expensed to the income statement as incurred. This standard also requires software to be disclosed as intangible assets ratherthan as property, plant and equipment as permitted by UK GAAP. IAS 1 "Presentation of financial statements" UK GAAP permitted the non-current portion of assets to be presented withincurrent assets on the face of the balance sheet, with separate disclosure of thenon-current element given in the Notes to the financial statements. IAS requires that the non-current portion of such assets is disclosed separatelyon the face of the balance sheet. Accordingly the Company has reclassified thenon-current element of its accrued income balance. The adoption of IFRS has not impacted on the previously reported net cash flowsof the Company. (c) Reconciliation of Income Statement: UK GAAP to IFRS Year ended 31 May 2006 Effect of UK GAAP IFRS IFRS £ £ £ Revenue 16,080,264 - 16,080,264Cost of sales (8,086,450) (59,482) (8,145,932) --------- --------- ----------Gross profit 7,993,814 (59,482) 7,934,332 Selling and marketing costs (708,592) - (708,592)Research and development costs (1,102,389) 102,011 (1,000,378)Administration and general overheads (6,021,853) (74,667) (6,096,520) --------- --------- ----------Profit from operations 160,980 (32,138) 128,842 Financial income 713,348 - 713,348Financial expense (169,046) (12,120) (181,166) --------- --------- ----------Profit before taxation 705,282 (44,258) 661,024 Taxation 422,533 (11,271) 411,262 --------- --------- ----------Profit for the year after taxation 1,127,815 (55,529) 1,072,286 --------- --------- ---------- (d) IFRS Income Statement adjustments Year ended 31 May 2006 £ Profit for the period under UK GAAP 1,127,815Share-based payments charge (74,667)Capitalisation of development costs 102,011Amortisation of development costs (59,482)Preference dividend reclassified to financial expense (12,120)Deferred taxation (11,271) ----------Profit for the period under IFRS 1,072,286 ---------- (e) Reconciliation of Balance Sheet: UK GAAP to IFRS At 1 June 2005 At 31 May 2006 Effect of Effect of GAAP IFRS IFRS GAAP IFRS IFRS £ £ £ £ £ £ASSETSNon-current assetsProperty, plant and equipment 2,017,883 (123,606) 1,894,277 1,089,277 (67,848) 1,021,429Intangible assets - 174,563 174,563 - 161,332 161,332Deferred tax asset 812,005 100,289 912,294 1,231,099 (25,936) 1,205,163Trade and other receivables - 1,932,372 1,932,372 - 1,503,328 1,503,328 -------- -------- -------- ------- ------- ------- 2,829,888 2,083,618 4,913,506 2,320,376 1,570,876 3,891,252Current assetsTrade and other receivables 7,506,816 (1,932,372) 5,574,444 7,455,366 (1,503,328) 5,952,038Cash and cash equivalents 1,223,242 - 1,223,242 9,547,985 - 9,547,985 -------- -------- -------- ------- -------- ------- 8,730,058 (1,932,372) 6,797,686 17,003,351 (1,503,328) 15,500,023LIABILITIESCurrent liabilities (3,376,913) - (3,376,913) (2,516,434) - (2,516,434)Current income tax liability (4,796) - (4,796) - - -Borrowings (933,163) - (933,163) (992,366) - (992,366) -------- -------- -------- -------- -------- -------- (4,314,872) - (4,314,872) (3,508,800) - (3,508,800)Non-current liabilitiesBorrowings (1,520,488) (3,406,999) (4,927,487) (528,122) - (528,122)Provisions (233,895) - (233,895) (81,407) - (81,407) (1,754,383) (3,406,999) (5,161,382) (609,529) - (609,529) -------- -------- -------- -------- -------- --------NET ASSETS 5,490,691 (3,255,753) 2,234,938 15,205,398 67,548 15,272,946 -------- -------- -------- -------- -------- -------- SHAREHOLDERS' EQUITYShare capital 3,821,683 (3,406,999) 414,684 892,765 - 892,765Share premium account - - - 9,731,885 - 9,731,885Capital redemption reserve 134 - 134 3,127,023 - 3,127,023Own shares held in trust - - - (1,235,381) - (1,235,381)Special reserve 1,308,496 - 1,308,496 - - -Retained earnings 360,378 151,246 511,624 2,689,106 67,548 2,756,654 -------- -------- -------- -------- -------- --------TOTAL EQUITY 5,490,691 (3,255,753) 2,234,938 15,205,398 67,548 15,272,946 -------- -------- -------- -------- -------- -------- (f) IFRS Balance Sheet adjustments At 1 June At 31 May 2005 2006 £ £ Property plant and equipment under UK GAAP 2,017,883 1,089,277Transfer of software to intangible assets (123,606) (67,848) --------- ---------Property plant and equipment under IFRS 1,894,277 1,021,429 --------- --------- At 1 June At 31 May 2005 2006 £ £ Intangible assets under UK GAAP - -Transfer of software from property, plant andequipment 123,606 67,848Capitalisation of development costs 50,957 93,484 --------- ---------Intangible assets under IFRS 174,563 161,332 --------- --------- At 1 June At 31 May 2005 2006 £ £ Deferred tax asset under UK GAAP 812,005 1,231,099Deferred tax on share options 115,576 2,111Deferred tax on capitalised development costs (15,287) (28,047) --------- ---------Deferred income tax asset under IFRS 912,294 1,205,163 --------- --------- At 1 June At 31 May 2005 2006 £ £ Transfer of software from property, plant andequipment 123,606 67,848Capitalisation of development costs 50,957 93,484 --------- ---------Intangible assets under IFRS 174,563 161,332 --------- --------- At 1 June At 31 May 2005 2006 £ £ Non-current trade and other receivables under UK GAAP - -Transfer of long term element of accrued income 1,932,372 1,503,328 --------- ---------Non-current trade and other receivables under IFRS 1,932,372 1,503,328 --------- --------- At 1 June At 31 May 2005 2006 £ £ Current trade and other receivables under UK GAAP 7,506,816 7,455,366Transfer of long term element of accrued income (1,932,372) 1,503,328 --------- ---------Current trade and other receivables under IFRS 5,574,444 5,952,038 --------- --------- At 1 June At 31 May 2005 2006 £ £ Non-current borrowings under UK GAAP 1,520,488 528,122Transfer of £1 redeemable preference shares from equity 71,000 -Transfer of £1 convertible preference shares from equity 3,335,999 - --------- ---------Non-current borrowings under IFRS 4,927,487 528,122 --------- --------- At 1 June At 31 May 2005 2006 £ £ Share capital under UK GAAP 3,821,683 892,765Transfer of £1 redeemable preference shares to borrowings (71,000) -Transfer of £1 convertible preference shares to borrowings (3,335,999) - --------- ---------Share capital under IFRS 414,684 892,765 --------- --------- At 1 June At 31 May 2005 2006 £ £ Retained earnings under UK GAAP 360,378 2,689,106Capitalisation of development costs (after amortisation) 50,957 93,484Deferred taxation 100,289 (25,936) --------- ---------Retained earnings under IFRS 511,624 2,756,654 --------- --------- This information is provided by RNS The company news service from the London Stock Exchange