Preliminary Results

System C Healthcare plc 12 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 IT implementation solutions for the UK healthcare sector announces its results for the year ended 31 May 2007. Highlights of the Year Financial highlights We are reporting our Financial Statements under International Financial Reporting Standards ("IFRS") and comparative results for the year ended 31st May 2006 have also been restated in accordance with IFRS. Year ended 31 May Audited Audited 2007 2006 £m £m Turnover 13.5 16.1 Profit from operations 0.6 0.1 Profit before tax 1.3 0.7 Cash generated from operations 2.1 0.5 Basic 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 in particular showing significant benefits from the changes we have made. We have a solid 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 plc Ian Denley, Chief Executive Jim Horsburgh, Chairman Andrew Coll, Finance Director Tel: 01622 691 616 Maitland Emma Burdett Richard Farnsworth Tel: 0207 379 5151 Collins Stewart Europe Limited Mark Connelly Stewart 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 halves of our financial year. In the first six months the slowdown in the National Programme for IT as a result of the withdrawal of Accenture from the North East and Eastern regions led to a scaling back of our Service Division deployments, which impacted the results for the six months ended 30 November 2006. Despite these challenging market conditions, we worked extremely hard to deliver effectively against our other contracts, whilst controlling our costs, tendering for new opportunities and reviewing acquisition targets which would enhance our earnings in the future. I am pleased to say that these efforts began to produce results in the second half of the year, giving us a solid platform from which to realise our strategic objectives going forward. People and the Board System C is principally a people business and I would like to thank all of our staff for their part in delivering a hands-on, practical and high quality service to our customers. It is primarily their efforts that helped us to deliver our results. I would also like to welcome the new colleagues that joined us through our acquisition of IQ Systems Services Ltd. I believe that there are great cultural synergies between our two companies and we are delighted to welcome them into the System C team. We recently announced that I have become Non-Executive Chairman of System C as my tenure as Executive Chairman came to an end. The requirement for the role of Executive Chairman has diminished in the last year, and this is a logical next step in the evolution of the business. In addition we announced the appointment of Dr John Forrest as the Deputy Chairman, and John remains our Senior Independent Director. Both John and I look forward to working with the Board to achieve further expansion of the System C Group. Dividends The Board is recommending a final dividend of 0.24p per share, which if approved by shareholders at the Annual General Meeting on 7 November 2007, will be paid on 9 November 2007 to those shareholders on the register at 5 October 2007. The total dividend of 0.36p per share represents an increase of 9% compared to the previous year. Corporate governance System C is committed to high standards of Corporate Governance. Although as an AIM listed company we are not required to comply with the Combined Code, we seek to 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 IT solutions provider, improving patient care via the effective application of IT products and services. Our vision is to use our expertise in the application of healthcare IT to contribute towards the evolution in public health and social care taking place both within and outside the UK. Outlook System C is recognised as an organisation of highly experienced IT professionals and also as one of the few solely dedicated to the healthcare sector. This gives us a distinct competitive advantage in a market with significant barriers to entry, and also considerable opportunity given the ongoing requirement for healthcare IT to support modernisation of healthcare services and the scale of healthcare spend in the UK and overseas. Our healthcare focus also gives rise to potential risk as we are exposed to changes within the healthcare IT procurement model and any downturn in healthcare IT spend. We believe that we have demonstrated our effectiveness at managing this risk and at adapting to the constant market changes. We have achieved 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 first quarter of our financial year, the Board is comfortable with the current level of market expectations. Chief Executive's Review System C generated revenues of £13.5m (2006: £16.1m) and a profit from operations of £0.6m (2006: £0.1m). Revenues fell by £2.6m compared with the prior year, primarily as a result of the withdrawal of one of our major clients, Accenture, from the National Programme for IT. Accenture withdrew officially from the National Programme in the North East and Eastern regions in January 2007, when CSC was awarded the contract to replace it. However, our revenue stream from Accenture had declined over the previous quarter and its departure had a major impact on System C as it was our largest client representing annual revenues of approximately £7m. However, through expansion and diversification of our customer base (detailed below), we sought to replace the loss of this client with new revenues.This combined with the tight management of our cost base, enabled us to increase our profit from operations by £0.5m compared to the prior year, and deliver a profit before tax of £1.3m (2006: £0.7m). Our cash generation continued to be strong with cash generated from operations of £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 in our business. We made a commitment to the continued development of our Products and Services, particularly against a backdrop of changes within the National Programme for IT. We have achieved a number of key successes which have significantly repositioned the business for growth going forward. These successes are discussed below. Securing the Isle of Man contract In March 2007 the Company and its products and services were chosen by the Isle of Man Government Department of Health & Social Security (DHSS) to provide an island-wide healthcare IT system and related services. System C will be installing software solutions at the Noble's hospital in Douglas and also throughout the Island's community services to provide a fully integrated Clinical Care Support Service serving all care settings. The contract is the first Electronic Patient Record procurement for some considerable time and we are delighted to have won against a large and competitive field. System C has an excellent delivery record for these types of systems and we look forward to bringing real benefits to patients, clinicians and all health service users on the Island. The contract with the DHSS is a three phase framework contract with an estimated value 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 IT deployment specialists to the Government's NHS Connecting for Health agency. Under a framework contract, System C provides specialist support to CfH's Central Deployment Support Team. This team is responsible for helping NHS Trusts implement the National Programme for IT and for transferring knowledge and skills to Trust staff. A key factor in winning the contract was System C's experience working directly for NHS Trusts and with other suppliers across the country. The new contract is a flexible and cost effective performance-based framework agreement which allows CfH to draw on our breadth of skills and specialist expertise to support the go-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 InHealth Netcare joint venture, which has recently been awarded a contract by the Government to provide diagnostic services in and around London. These services will be provided both in private healthcare units where there is identified spare capacity and in GP surgeries. In addition, mobile units will bring diagnostics to patients at private hospitals, NHS hospitals and other sites such as supermarkets. The aim is to give patients greater choice and faster access to diagnostic 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 diagnostic services. We supplied a range of services including programme management, design consultancy, configuration and testing, reporting support and training. The contract 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 private healthcare market with the acquisition of IQ Systems. IQ Systems is a leading supplier of patient management and clinical software solutions for private treatment centres and hospitals. Its IQUtopia product is highly regarded in the private healthcare marketplace and has been deployed at a number of the most prestigious private sector treatment centres in the country including Sussex Orthopaedic NHS Treatment Centre, Will Adams NHS Treatment Centre (Gillingham), St Mary's NHS Treatment Centre (Portsmouth), Midlands NHS Treatment Centre (Burton) and Eccleshill NHS Treatment Centre (Bradford) amongst others. IQUtopia complements System C's MedWay Patient Administration and Electronic Patient Record (EPR) software, which is typically deployed into larger NHS Acute hospitals. The acquisition of IQ Systems subsequent to the year end accelerates System C's expansion into the private healthcare market as well as strengthening its product portfolio. It has a number of major private healthcare customers including Mercury Healthcare (now part of Care UK), Centres of Clinical Excellence (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 MedWay product suite to the Microsoft .NET platform. This initiative is part of a long term investment plan to ensure that a modern, functionally rich and interoperable PAS/EPR system will be ready to go to market by the time new opportunities such as the Additional Supply Capability and Capacity initiative (see below) mature in 2008/9. We believe that opportunities to sell this product exist both within the UK and in other geographical territories. We are seeking partners 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 the National Programme for IT, NHS Connecting for Health and more recently private sector 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 Eastern clusters, and the appointment of CSC to those clusters. Other recent developments include the creation of the National Local Ownership Programme (NLOP) which moves responsibility for implementing the National Programme to Strategic Health Authorities. A major new initiative from the National Programme has been the creation of the Additional Supply Capability and Capacity (ASCC) Framework Agreement. The framework will cover an array of different systems and services, with an estimated value of £100m over a period of up to four years, and is likely to commence early in 2008. We consider ourselves to be well placed to benefit from the additional product and service opportunities that the framework agreement will provide. System C has the products, skills and expertise which will allow us to exploit the opportunities arising from these changes and we will remain focused on the provision of practical, hands-on delivery of IT products and services to the healthcare sector. Our competitive strengths Our main competitive strengths include our flexibility and adaptability to changing market conditions, our ability to secure new business, the expertise, dedication and experience of our people and our focus on the delivery of high quality IT products and services to the healthcare market. These competitive strengths form a substantial barrier to entry which we aim to capitalise 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 £82,042 Gross 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 to maximise the average revenue per head. Although total revenue has declined, the average revenue per head increased by approximately 5% reflecting increased efficiencies across the Company. Gross margin has only slightly reduced to 47% despite pricing pressures in the Services Division due to an improvement in margins in the Products Division. As detailed in the Financial Review, tight cost containment led to an increase in 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 risks that may impact our business, prospects, people, financial results and share price. The key, high level risks to our business are described in the following sections: Public sector spending/political changes There has been recent speculation that a tightening of public spending will lead to a reduction in UK Government investment in consulting and IT projects. In addition the appointment of a new Labour leader has resulted in speculation that the spending on large scale IT projects will be reduced. It is probably too early to identify with any certainty what the impact may be at this stage. However we firmly believe that technology is an essential enabler of more effective patient care. Investment in IT products, services and infrastructure is paramount in helping the NHS to achieve its strategic objectives as well as the detailed targets against which it is constantly monitored. Market procurement The National Programme for IT remains the Government's main vehicle for the delivery of transformational IT to the healthcare sector. The Programme has undergone significant change since its inception, and there remains speculation as to whether this current procurement model will be subject to change in the future. We remain committed to the success of the National Programme, and work closely with the LSPs, NHS Connecting for Health, NHS Trusts and Strategic Health Authorities to achieve its objectives. One potential change to the current procurement model could be the opening up of the market to greater competition to augment the National Programme as indicated in 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 a broader based supply community" which will "complement and support the work already underway under the NPfIT". We believe that we are well positioned given our reputation and delivery capability to benefit significantly in the medium to long 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 in the past we have been reliant on several core customers and in 2005/6 we set out to expand our customer base. We have achieved success in broadening our client base as illustrated above and we will continue to focus on securing new business within the NHS as well as through the expansion of the private sector, strengthening the capabilities and experience of our senior team in order to achieve this. Staff retention Over the past year we have noted increased competition to attract the best people with the relevant IT Healthcare experience. We are addressing these risks to the business by offering a wide range of remuneration benefits, investment in training and development combined with a focus on the individual and their career development. These efforts contributed towards the Company's reaccreditation to the highly regarded Investors in People scheme in May 2007. Delivery Over many years System C has built a strong reputation for the successful delivery of IT products and services to the healthcare sector. Our products and services operate in intense, life-critical environments and any failure to meet contracted commitments and/or client expectations could damage our reputation and impact on our financial results/position. To mitigate this risk, we monitor our performance continuously against contracted commitments and expectations, and deploy a wide range of experienced technical specialists and Programme Directors to evaluate performance. We appoint a Project Board for any high risk projects with a combination of resources as appropriate from technical, delivery, finance and commercial expertise. Client concentration A large proportion of our revenue has historically been generated from our top five clients, and the loss of a major client such as Accenture last year can have a negative impact on revenue. As demonstrated this year we focused substantial efforts on winning new clients and diversifying our customer base in order to mitigate this risk going forward. Accreditation Much of our work relies on maintaining accreditations to international standards such as the ISO9001/TickIT Quality Assurance standard. System C employs a full-time Quality Manager to ensure adherence to Quality Standards, to monitor progress against improvement initiatives and to monitor customer satisfaction. The Company has been ISO accredited since 1999 and was recertificated in December 2006. Acquisitions We recognise that selected acquisitions will play a key role in future growth of the business, as illustrated by the recent acquisition of IQ Systems. There are inherent risks in acquiring businesses and we have appointed an Integration Director from within the business to ensure that IQ Systems is successfully integrated with System C and that its strategic objectives and targets are achieved. The future We are always keen to improve performance each year. Whilst this year's results were below the expectations we had at the start of the year, we recognise that this was against a backdrop of considerable uncertainty. We remained focused throughout, responding to rapidly changing market conditions, managing costs whilst seeking to grow the business by securing new contracts, investing in new products and identifying appropriate acquisition targets. As a result System C has a strong platform to build future growth and we remain positive that there will be a healthy demand for our products and services in the future. Financial Review Year ended 31 May 2007 2006 Audited Audited £m £m Products 3.5 3.5 Services 10.0 12.6 -------- -------- Total revenue 13.5 16.1 Gross profit 6.4 7.9 Operating costs (5.8) (7.8) Profit from operations 0.6 0.1 Net financial income 0.7 0.6 -------- -------- Profit before tax 1.3 0.7 Tax (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 International Financial Reporting Standards (IFRS), a year earlier than required by the AIM Rules. 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, which provides our people with both logistical and technical support. Revenue The majority of revenues continued to be generated by our Services Division with revenue in the year ended 31 May 2007 of £10m. The loss of business from the withdrawal by Accenture from the National Programme had a major impact as previously it represented over 40% of our annual revenue. We rapidly diversified to secure work with new clients in order to successfully mitigate a proportion of this loss of revenue, and consequently Services revenues increased to £5.3m in 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 related to the timing of product deployments. We have secured a major new contract for the deployment of our MedWay EPR system to the Isle of Man and anticipate further growth in our Product revenues in future years and envisage these to represent an increasing proportion of total revenues. Gross margins Gross profit margins were slightly reduced to 47% (2006: 49%) due to downward price pressures in the Services Division. Operating costs Year ended 31 May 2007 2006 £m £m Selling and marketing costs 0.5 0.7 Research and development costs 1.0 1.0 Administration 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 of redundancies. Overall, total operating costs in the year decreased by £2.0m in comparison to the prior year. This significant cost reduction enabled us to achieve higher profit from operations of £0.6m (2006: £0.1m) despite reduced revenues. The cost containment principally related to non fee-earning headcount reduction and the removal of non-core expenditure. Net financial income Year ended 31 May 2007 2006 £m £m Interest receivable on customer contracts 0.3 0.3 Interest payable on financing loans taken out to fund fixed assets on customer contracts (0.1) (0.1) -------- -------- Net interest on customer contract assets 0.2 0.2 Net bank interest 0.5 0.4 -------- -------- Net financial income 0.7 0.6 Interest receivable on customer contracts relates mainly to our long-term contracts 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 the contract assets. Net bank interest has increased by £0.1m principally due to interest generated by our cash balance. Taxation In the year ended 31 May 2006 a tax credit of £0.4m was recognised principally due to the availability of schedule 23 tax credits. No such credit was available in 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 on the balance sheet as a deferred tax asset to offset against future Corporation Tax liabilities (2006: £1.2m). Dividends Interim dividends of 0.12p per share were declared and paid during the year. The Board proposes a final dividend of 0.24p per share bringing the total for the year to 0.36p per share. Earnings per share Year ended 31 May 2007 2006 Basic earnings per share 1.09p 1.27p Diluted earnings per share 1.08p 1.25p Although profit before tax grew year on year by £0.6m, the basic earnings per share declined compared to 2006 as in the prior year System C benefited from a net tax credit of £0.4m due to the availability of research and development tax credits and Schedule 23 tax credits. Cash flow Year ended 31 May 2007 2006 £m £m Cash generated from operations 2.1 0.5 Net financial income 0.7 0.6 Capital expenditure (0.5) (0.2) -------- -------- Net cash inflow before financing activities 2.3 0.9 Financing1 (1.3) 7.4 Net 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 conversion ratios being maintained. Balance sheet As at 31 May 2007 2006 £m £m Non-current assets excluding long term portion of accrued 1.9 2.4 income Trade receivables- net 2.9 2.6 Accrued income - Current and non-current 4.0 4.4 Other receivables 0.3 0.4 Cash 10.6 9.6 Liabilities (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 key areas. The Company has a strong balance sheet with net assets of over £15.9m including a cash balance of £10.6m. Trade receivables increased as activities began to accelerate in the latter part of the year. The balance sheet includes total accrued income of £4.0m which represents a mixture of Services income in May (which is invoiced after the year end) and accrued revenue in respect of long-term contracts. Revenue accrued reflects the value of work delivered by the Company and is then invoiced as a monthly payment over the life of the contract in accordance with pre-agreed terms. Liabilities (excluding borrowings and provisions) increased marginally due principally to an increase in the tax and VAT liability (as revenues increased in 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 loan repayments made in the year. Income Statement Note Year Ended Year Ended 31 May 31 May 2007 2006 £ £ Revenue 2,3 13,473,135 16,080,264 Cost 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 802,792 713,348 Financial 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 £ £ ASSETS Non-current assets Property, plant and equipment 673,446 1,021,429 Intangible assets 350,549 161,332 Deferred income tax asset 926,964 1,205,163 Trade and other receivables 773,502 1,503,328 ----------- ---------- 2,724,461 3,891,252 Current assets Trade and other receivables 6,491,741 5,952,038 Cash and cash equivalents 10,574,133 9,547,985 ----------- ---------- 17,065,874 15,500,023 ----------- ---------- TOTAL ASSETS 19,790,335 19,391,275 LIABILITIES Current liabilities Trade 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 liabilities Borrowings - (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' EQUITY Share capital 894,810 892,765 Share premium account 9,757,163 9,731,885 Capital redemption reserve 3,127,023 3,127,023 Own 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 2,234,938 Profit for the financial year - - - - - 1,072,286 1,072,286 Share-based payments charge - - - - - 74,667 74,667 Deferred tax - - - - - (114,954) (114,954) Issue of new shares 478,081 - - - - - 478,081 Premium on 1p ordinary shares issued - 10,906,750 - - - - 10,906,750 Issue costs - (1,354,461) - - - - (1,354,461) Conversion of £1 convertible participating preference shares - - 3,126,889 - - - 3,126,889 Premium arising on settlement of accrued dividend - 179,596 - - - - 179,596 Employee benefits trust - - (1,235,381) - - (1,235,381) Release of special reserve - - - (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 15,272,946 Profit for the financial year - - - - - 949,483 949,483 Share-based payments credit - - - - - (52,580) (52,580) Deferred tax - - - - - 13,648 13,648 Issue of new shares 2,045 - - - - - 2,045 Premium on issue of new shares - 25,278 - - - - 25,278 Dividends - - - - - (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 activities Cash generated from operations 2,109,886 461,853 Financial 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 activities Purchases 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 activities Repayment of borrowings (992,366) (933,163) Issue of equity share capital 27,323 11,175,825 Issue 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 1,072,286 Taxation 384,056 (411,262) Financial income (802,792) (713,348) Financial expense 92,401 181,166 ---------- --------- Profit from operations 623,148 128,842 Share-based payments (credit)/charge (52,580) 74,667 Depreciation of property plant and equipment 575,099 920,882 Amortisation of intangible assets 110,136 115,242 Loss on disposal of property plant and equipment - 854 Decrease in trade and other receivables 196,433 38,424 Increase/(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 11th September 2007. The financial information set out above is abridged and does not constitute the Company's statutory financial statements for the years ended 31 May 2007 or 31 May 2006. Statutory financial statements for the year ended 31 May 2006 have been reported on by the Company's auditors and delivered to the Registrar of Companies. The statutory financial statements for the year ended 31 May 2007 will be posted no later than 7 October 2007 to shareholders and once approved will be delivered to the Registrar of Companies following the Annual General Meeting on 7 November 2007. The report for the year ended 31 May 2006 was unqualified. Copies of the Annual Report and Financial Statements for the year ended 31 May 2007 will be available in due course from the Company Secretary, System C Healthcare plc, Brenchley House, Week Street, Maidstone, ME14 1RF. 2 Principal accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. Unless otherwise stated, these policies have been applied to all years presented. a) Basis of preparation The financial information for the year ended 31 May 2007 has been prepared in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and also as issued by the International Accounting Standards Board, International Financial Reporting Interpretations Committee (IFRIC) interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. System C Healthcare PLC's financial statements were prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP) until 31 May 2006. In preparing the Company's financial statements for the year ended 31 May 2007, management has amended certain accounting and valuation methods previously applied in the UK GAAP financial statements to comply with IFRS. The comparative figures in respect of the year ended 31 May 2006 have been restated to reflect these adjustments, except as described in the accounting policies. Exemptions taken under IFRS1 "First Time Adoption of International Financial Reporting Standards" are set out in Note 24. Reconciliations and descriptions of the effect of the transition from UK GAAP to IFRS on shareholders' equity and the Company's income and cash flows are provided in Note 24. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, events or actions, the actual results ultimately may differ from those estimates. b) Revenue recognition Revenue is measured at the fair value of consideration received or receivable and represents amounts receivable for goods and services provided to third parties in the normal course of business during the period, net of value added tax 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 statement as the system modules are installed. Typically the sale will match the project implementation timescale in accordance with specified contract milestones. Revenue from the related implementation is recognised in the income statement proportionally over the implementation period as those services are provided. Revenue from maintenance, support and other services is recognised over the contracted term of supply. Hardware revenue is recognised in line with, and approximates to, the depreciation charge on such assets, as capitalised within property, plant and equipment and disclosed as contract assets. Revenue from healthcare consultancy services is recognised when the service is delivered and approved by the client. Revenue which has been recognised by the Company but has not been invoiced as at the period end is included within accrued income. Invoices raised in advance of the provision of goods/services to customers are recorded in the balance sheet as deferred income and included within trade receivables. 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 contracts to supply Electronic Patient Records (EPR) systems and other ancillary items is disclosed within financial income. Such amounts are based on the Company's net investment in the contracts taking into account payments received from the customer to date. d) Employee benefits Pension obligations The Company operates a stakeholder pension scheme and the assets of the scheme are held separately from those of the Company in an independently administered fund. In addition to this the Company contributes to the personal pension plans of certain employees. The Company has no further obligations once the contributions have been paid. The pension cost charge for the period is reflected in the income statement and represents contributions payable to the defined contribution pension scheme plus amounts payable by the Company to the personal pension plans of certain employees based on a percentage of basic salary. Any shortfall or excess in the contributions payable by the Company in relation to the pension cost charge for the year are included in accruals or prepayments as appropriate. Profit sharing and bonus plans The Company recognises a liability and an expense for bonuses/profit sharing only where there is a contractual obligation or where there is a constructive obligation arising from past practice or other events that existed at the balance sheet date. Termination benefits Termination benefits are payable when employment is terminated by the Company before an individual's normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for those benefits. The Company recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility for withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than one year 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 are measured by reference to the fair value of the share options. The fair value is calculated at grant date and recognised in the income statement, together with a corresponding increase in shareholders' equity, on a straight line basis over the vesting period, based on an estimate of the number of options that will eventually vest. Vesting conditions, other than market conditions, are not taken into account when estimating the fair value. For cash settled arrangements, the services received from employees are measured at the fair value of the liability and recognised in the income statement on a straight line basis over the vesting period. The fair value of the liability is measured at each balance sheet date and at the date of settlement with changes in fair value recognised in the income statement. IFRS 2 "Share-based payment" has been applied to equity settled share-based payment arrangements granted after 7 November 2002 that had not unconditionally vested with employees by the date of the Company's transition to IFRS and to all cash settled awards. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised. e) Own shares held in trust The Company's shares owned by The System C Healthcare PLC Employee Benefits Trust 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 with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts or loans where there is no right of set-off are shown within borrowings in current or non-current liabilities on the balance sheet as appropriate. g) Property, plant and equipment All property, plant and equipment (PPE) is shown at original cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation on assets is calculated using the straight-line method to allocate the cost of each asset less its residual value, if any, over its estimated useful 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 and similar contracts are included within property, plant and equipment as the Company primarily bears the risks and rewards of any variation in profit/losses arising from such assets. h) Leases Leases of property, plant and equipment where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease's inception at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance expenses so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance expenses, are included within borrowings. Property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset's useful life and the lease term. Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income 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 of non-current assets is carried out if events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Impairment reviews comprise a comparison of the carrying amount of the asset with its recoverable amount (the higher of net realisable value and value in use). To the extent that the carrying amount exceeds the recoverable amount, the asset is impaired 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 costs incurred to acquire and bring into use the specific software. These costs are amortised over their estimated useful lives which typically do not exceed four years. Costs associated with developing and maintaining computer software programmes are recognised as an expense in the income statement as incurred. Research expenditure is recognised as an expense in the income statement in the period in which it is incurred. Costs incurred on development projects (relating to the design and testing of new or improved software products) are recognised as intangible assets from the point it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Software development costs primarily comprise employee costs and are amortised over the expected period over which the Company is expected to benefit from the capitalised asset and typically range between three and five years. Development costs that have initially been recognised as an expense in the income statement (as IAS 38 criteria are not met), but where subsequently the IAS 38 criteria are deemed to have been satisfied, are not then recognised as an asset in a subsequent period. k) Taxation including deferred tax Corporation tax, where payable, is provided on taxable profits at the current rate. Deferred tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial 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 it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Deferred tax balances are not subject to discounting. l) Provisions In accordance with IAS 37 "Provisions, contingent liabilities and contingent assets", provisions for liabilities are recognised when the Company has a present legal or constructive obligation as a result of past events, and it is considered more likely than not that an outflow of resources will be required to settle that obligation, and the amount can be reliably estimated. The expense relating to any provision is presented in the income statement net of any reimbursement. Provisions are measured at the present value of the directors' best estimate of the expenditure required to settle the present obligation at the balance sheet date and discounted where the effect is considered material. m) Dividend distributions Interim dividends in respect of equity shares are recognised in the financial statements in the period in which they are paid. Final dividends in respect of equity shares are recognised in the financial statements in the period that the dividends are formally approved by the Company's members. In accordance with IAS 32 "Financial instruments: Presentation" dividends on non-equity shares are disclosed within financial expense in the income statement. n) Financial instruments Borrowings and borrowing costs All borrowings are initially stated at the fair value of the consideration received after deduction of issue costs. Issue costs together with other finance costs such as premiums on redemption are charged to the income statement over the term of the borrowings and represent a constant proportion of the balance of capital repayments outstanding. Accrued finance costs attributable to borrowings are included in accrued charges within current liabilities, unless the finance cost is only repayable on redemption in which case the accrued finance costs are included within the carrying value of borrowings. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. A provision for impairment is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Any changes in the amount of the provision is recognised in the income statement during the year. Trade payables Trade payables are recognised initially at fair value and subsequently measured at 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 premium received on the issue of shares in excess of the nominal value is credited to the share premium account and included within shareholders' equity. p) Segmental reporting A business segment is considered to be a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different to that in other economic environments. q) Key areas of judgement The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will by definition, seldom equal the related actual results. The estimates and assumptions that may have an element of risk causing an adjustment to the carrying amounts of assets and liabilities within the next year include those that relate to the capitalisation of development costs and the 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 the business only operates in the UK the Company does not have a secondary reporting format. The Company's sole activity is the design, development and implementation of computer hardware and software. The directors consider it appropriate to analyse the results and financial position of the Company in three distinct segments as this 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 and expenses directly attributable to or able to be allocated to each such segment on a reasonable basis. Segment assets and liabilities are those assets and liabilities directly attributable or which can be allocated to each such segment on a reasonable basis. 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 19,790,335 Total 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 - 2,931 227,116 Capital expenditure - Intangible assets 60,611 - 238,742 299,353 Depreciation of tangible assets 373,377 - 201,722 575,099 Amortisation of intangible assets 86,928 - 23,208 110,136 Impairment of trade receivables (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 19,391,275 Total 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 54,299 Capital expenditure - Intangible assets 102,011 - - 102,011 Depreciation of tangible assets 729,981 - 190,901 920,882 Amortisation of intangible assets 87,350 - 27,892 115,242 Impairment of trade receivables 13,478 - - 13,478 Share-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 9,211,801 Share-based payments (credit)/charge (52,580) 74,667 Research and development expenditure 1,045,009 1,000,378 Depreciation of property, plant and equipment: - Contract assets 373,377 702,113 - Other assets 201,722 218,769 Loss on disposal of property, plant and equipment - 854 Amortisation of intangible assets: - Development costs 79,686 59,482 - Software 30,450 55,760 Operating 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 with IAS 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 UK Corporation Tax of 30% (2006: 30%) as explained below: Year ended Year ended 31 May 31 May 2007 2006 £ £ Profit before tax 1,333,539 661,024 Profit before tax multiplied by standard rate of UK Corporation 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 development expenditure - (60,051) - Tax difference arising on treatment of share options (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 to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those that are held in the employee share trust , which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares that have satisfied the appropriate criteria as at 31 May 2007. Areconciliation between the weighted average number of shares used in the calculations 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 EPS Earnings attributable to ordinary shareholders 949,483 87,148,360 1.09 1,072,286 84,408,217 1.27 ------- -------- ------- -------- -------- ------- Effect of dilutive shares 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 share capital of IQ Systems Services Limited, an entity registered in England and Wales and engaged in the provision of patient management and clinical software solutions. The consideration consisted of £800,000 paid on completion with a maximum potential further consideration £1,360,000 payable if certain performance criteria are met within two years from the date of acquisition. Further details in respect of the net assets acquired in connection with the purchase of IQ Systems Services Limited will be given in the Company's next financial statements. Following the 2007 Budget, the Chancellor announced that as of 1 April 2008 the rate of corporation tax would be cut from 30% to 28%. This change was incorporated into the Finance Bill 2007 which was approved on 26 June 2007 and will impact on the future Corporation Tax charges and the value of deferred tax for 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 Financial Reporting Standards" for its initial implementation of IFRS. The Company's date of transition to IFRS is 1 June 2005 and comparative information in the financial statements has been restated to reflect the Company's adoption of IFRS except where otherwise required or permitted by IFRS 1. IFRS 1 requires an entity to comply with each IFRS effective at the reporting date for its first financial statements prepared under IFRS. As a general rule, IFRS 1 requires such standards to be applied retrospectively. However, the standard permits several optional exemptions from full retrospective application. (b) Main impacts of adopting International Financial Reporting Standards Outlined below are those International Financial Reporting Standards which have an impact on the financial statements of the Company. Details of the adjustments are set out in the reconciliations between IFRS and UK GAAP as set out further below: IFRS 2 "Share-based payments" Under IFRS, equity settled share-based payment transactions are measured at fair value at the grant date and charged to the income statement over the vesting period of the award with a corresponding increase in equity. In the case of cash settled share-based payment transactions, the fair value of the award is recognised in the income statement over the vesting period and is remeasured at each balance sheet date with the corresponding entry being to liabilities. IAS 12 "Income taxes" This standard requires entities to provide for deferred taxation based on temporary differences between the carrying amount of assets and liabilities and their tax base. Accordingly the Company has made additional provision for deferred taxation in respect of share-based payments and capitalised development costs. IAS 32 "Financial instruments: Presentation" Under UK GAAP the Company's £1 redeemable preference shares and £1 convertible preference shares were disclosed as part of shareholders' equity. IAS 32 requires the classification of financial instruments between equity and liabilities according to their substance rather than their strict legal form. This standard also requires that interest and dividends on financial instruments be treated in a manner that is consistent with the treatment adopted for the underlying instrument. IAS 38 "Intangible assets" Under UK GAAP, development costs were expensed to the income statement as incurred. IAS 38 requires development costs to be capitalised once certain criteria have been met. The Company has recognised development costs as intangible assets once it is probable that the product will generate future economic benefits, it is technically feasible and the costs can be measured reliably. All other development costs are expensed to the income statement as incurred. This standard also requires software to be disclosed as intangible assets rather than 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 within current assets on the face of the balance sheet, with separate disclosure of the non-current element given in the Notes to the financial statements. IAS requires that the non-current portion of such assets is disclosed separately on the face of the balance sheet. Accordingly the Company has reclassified the non-current element of its accrued income balance. The adoption of IFRS has not impacted on the previously reported net cash flows of 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 - 16,080,264 Cost 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 - 713,348 Financial 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 1,127,815 Share-based payments charge (74,667) Capitalisation of development costs 102,011 Amortisation 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 £ £ £ £ £ £ ASSETS Non-current assets Property, plant and equipment 2,017,883 (123,606) 1,894,277 1,089,277 (67,848) 1,021,429 Intangible assets - 174,563 174,563 - 161,332 161,332 Deferred tax asset 812,005 100,289 912,294 1,231,099 (25,936) 1,205,163 Trade 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 3,891,252 Current assets Trade and other receivables 7,506,816 (1,932,372) 5,574,444 7,455,366 (1,503,328) 5,952,038 Cash 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) 15,500,023 LIABILITIES Current 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 liabilities Borrowings (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' EQUITY Share capital 3,821,683 (3,406,999) 414,684 892,765 - 892,765 Share premium account - - - 9,731,885 - 9,731,885 Capital redemption reserve 134 - 134 3,127,023 - 3,127,023 Own 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 1,089,277 Transfer 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 and equipment 123,606 67,848 Capitalisation 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 1,231,099 Deferred tax on share options 115,576 2,111 Deferred 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 and equipment 123,606 67,848 Capitalisation 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 7,455,366 Transfer 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 1,520,488 528,122 Transfer 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 3,821,683 892,765 Transfer 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 2,689,106 Capitalisation of development costs (after amortisation) 50,957 93,484 Deferred 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 MGBG

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