Team Internet Regulatory News (TIG)

3 Aug 2005 07:01

Innovation Group PLC03 August 2005 3 August 2005 THE INNOVATION GROUP PLC REPORT FOR THE NINE MONTHS ENDED 30 JUNE 2005 The Innovation Group ("TiG" or the "Group"), which specialises in providingtransformational business solutions for the global insurance community thatincorporate technology, outsourcing and supply chain management, today announcesits unaudited results for the nine months to 30 June 2005. Highlights for the nine months ended 30 June 2005: •Total turnover up 7% to £43.9m (2004: £41.0m); represented by Specialised Business Process Outsourcing (SBPO) £25.1m (2004: £18.0m), Technology Solutions Division (TSD) £18.8m (2004: £23.0m) •Recurring revenues up by 24% to £28.9m; representing 66% of Group revenue (2004: £22.5m, representing 55% of Group revenue) •Adjusted profit before tax* of £2.5m (2004: £4.7m) •Loss before tax of £8.1m (H1 2004: loss of £6.5m) •Operating cash inflow of £3.0m •Five year agreement announced with IBM •Significant technology win in the US with new client •Continued quarterly sequential growth in SBPO revenue and adjusted profit *Adjusted profit is the profit before tax after adding back the amortisation charge of £10.6m as analysed on page 5 Commenting on the results, Hassan Sadiq, Chief Executive, said: "Substantial progress has been made in transforming the business from a licencedependent software company to a one-stop specialist service provider and, withour reputation and pipeline activity also continuing to build, we are seeingsignificant improvement in our visible revenue streams with the growth inrecurring revenue. The Board remains confident with our mid to long-termstrategy and looks to the future with optimism." Enquiries: The Innovation Group plc 01489 898300Hassan Sadiq, Chief Executive Officer Paul Smolinski, Group Finance Director Robert W. Baird Limited 020 7488 1212Shaun Dobson Smithfield 020 7360 4900Sara Musgrave/Sarah Richardson Notes to Editors The Innovation Group plc is a specialist provider of transformational businesssolutions for the global insurance community that incorporate technology,outsourcing and supply chain management. Its solutions enable clients toimplement changes that increase profits and improve their ability to servecustomers efficiently. The Group's services are delivered through localoperations in the top four world's insurance markets and leverage a strongtalent and effective cost base through operations in South Africa and the Asiansubcontinent. Across the markets where the Group maintains clients and operations, itsofferings have proven their value in reducing costs and improving the customerexperience for our long term Tier One, Two and Three clients. These marketsrepresent more than $960 billion in Gross Written Premium and more than $650billion in claims expense that can be directly addressed with the Group'ssolution offerings. Examples of these long-term relationships include: ACSC,Allianz, Aviva, AXA, BMW, Continentale, Direct Line, Elders, Ford Motor Company,Jaguar, JVC, Norwich Union, Sanyo, Toshiba, Toyota, Sonpo24, Zenith and Zurich. Improvements in capital markets and the recognised need to dramatically improveprofitability of operations have increased interest across all segments.Industry analysts and market leaders recognise the significance that improvingefficiencies and lowering direct expenses have in positioning organisations tocompete in a shrinking global market and predict the sector to continue toincrease spending on solutions that achieve these goals. In particular, studiesby firms such as Datamonitor predict that insurers are going to increaseinvestment in technology and service solutions to improve efficiencies. Market Facts: Geographic 1. United States ($574,579); 2. Japan ($97,530); 3. GermanyRevenues ($94,073); 4. United Kingdom ($91,891); 5. France ($58,244); 7. Canada ($36,303); 11. Australia ($8,360); 28. South Africa ($3,000) (McKinsey, 2003 figures)(USD,Millions) Key Based on historical costs for the insurance industry, expenseRatios reductions could greatly exceed 10%, a figure that could yield a 25% improvement in the average ROE. (Conning Research, 2004) Market Controlling underwriting discipline will be increasingly technologyIssues driven, allowing non-life insurers to enforce and adjust underwriting philosophies more comprehensively and keep down combined ratios as premium growth weakens. (Datamonitor, 2005) Claims administration and payments cost insurers, on average, 80% of their annual revenue. (Gartner, 2004) Improving efficiency is the primary driver of IT spending in 2005, while business growth remains important. Automation and efficiency of processing, primarily in claims and underwriting, will be key projects in 2005. (Datamonitor, 2005) 20% of insurers will seriously consider business process outsourcing as a viable alternative. (Meta Group, 2004) RESULTS FOR THE NINE MONTHS ENDED 30 JUNE 2005 Chief Executive's Statement I am pleased to report the unaudited financial results for the Innovation Groupplc for the nine months ended 30 June 2005. We remain confident in our businessapproach of offering technology, outsourcing and supply chain management to theinsurance industry thereby enabling significant cost reduction and improvementof customer service. We anticipate that recurring revenue will become thedriving force behind long term revenue growth, whilst licence revenue willcontinue to be lumpy but strategically less important. Our confidence is reflected in the improving underlying trends in thegeographies in which we operate and the growth in the range of products ourclients are buying or requesting from us. This growth is likely to be augmentedby tactical acquisitions in the future. Financial and Operating Review Revenue for the nine months to 30 June 2005 was £43.9m (2004: £41.0m); recurringrevenues increased from £22.5m to £28.9m and now represent 66% of the Group'stotal revenue. Technology Solutions Division (TSD) turnover was £18.8m (2004:£23.0m), comprising £2.9m initial licence fee, £10.7m solution delivery, £1.4mUS public sector and £3.8m maintenance and other recurring. SpecialisedBusiness Process Outsourcing (SBPO) turnover was £25.1m (2004: £18.0m). Adjusted profit* was £2.5m (2004: £4.7m) and loss before tax was £8.1m (2004:loss of £6.5m), representing adjusted EPS of 0.47p (2004: 0.86p) and basic lossper share of 1.95p (2004: loss per share of 1.75p). Cash was £15.3m as at 30 June 2005 and operating cash inflow for the nine monthperiod was £3.0m. On 1 October 2004, the Group settled the final instalment of £1.0m payable onthe acquisition of InterX through the issue of approximately 3.7 million newordinary shares. The SBPO division again performed strongly with revenue up 39% (19% organically)to £25.1m in the first nine months of this year. Maxicare, acquired in August2004 by our South African operation, contributed £3.6m towards revenue. TSD revenue for the nine months ended 30 June 2005 was £18.8m (2004: £23m), withlicence turnover for the nine months of £2.9m (2004: £4.8m). This was lower thanexpected due to a planned licence sale not closing during the third quarter.However, these licence negotiations are ongoing and are expected to conclude inthe fourth quarter. Solution delivery run rate increased by £0.9m in the thirdquarter due to the new Policy contract signed in the second quarter. In March 2005, we announced a five-year global agreement with IBM to create aclient-focused delivery centre specifically targeted around the TiG Policy,Claims and Conversion products and this continues to gain momentum in differentterritories around the world.*Adjusted profit is the profit before tax after adding back the amortisationcharge of £10.6m as analysed on page 5. Geographic Review It is our strategy to have an integrated SBPO and Technology offering in each ofour major geographies. Momentum across our key geographies is growing, as is theselection of products we are offering our clients. South Africa, which is our most complete territory in terms of products offered,continues to perform well with new client wins and an increase in business withexisting clients. On 1 July 2005 we announced the acquisition of Websoft (Pty)Ltd for approximately £1.0m in cash. This acquisition allows the Group to offertechnology solutions alongside outsourcing and supply chain management in SouthAfrica and also provides the opportunity for cross selling, an importantcomponent of our strategy. We are making good progress in making the UK our next significant market interms of the range of product offerings as well as focussing our efforts onbuilding the pipeline and capability for an integrated SBPO and Technologyoffering. Revenue for our UK TSD business is lower than last year following thesuccessful completion of product deliveries, however due to the progress madewith the UK pipeline the outlook has been steadily improving. In addition, animportant pilot for Policy is progressing well and could generate a significantlicence fee and recurring revenues. In North America, the largest insurance market in the world, we have seenrevenue grow year on year. We are confident that our good momentum willcontinue, underpinned by the two recent wins of Policy and Claims systems (theClaims win includes an element of recurring revenue). In Germany, where we have an outsourcing and supply chain management operation,the business continues to grow. As anticipated, the growth was achieved throughan increase in the volume of transactions within our existing client base. Ourclients represent approximately 30% of the German motor insurance industry andthere is still significant opportunity to further extend sales to our existingclient base since we currently only have approximately 5% penetration. We arecurrently investigating opportunities to expand the service offering intoneighbouring European countries as well as to look for opportunities to increaseour product portfolio in Germany itself as we have done with the other regions. The Australian SBPO revenue has increased relative to the same period last yearand we have extended new product offerings such as warranty administration intothe Australian market. The next stage of development is to combine the TSD andSBPO businesses which should result in increased recurring revenues benefitingthe mid to long term. Revenue in the Australian technology business has fallencompared to last year, however the pilot work with a new client is continuingand we are hopeful that this will result in a full roll out, now likely to be inearly 2006. In Asia Pacific we are working with IBM to distribute our technology products inJapan and the Asian market. Operating environment Demand for outsourcing, supply chain and technology solutions remains buoyantaround the world. We have invested approximately £2m in the first nine months ofthis year to improve our ability to service clients and to build our pipelinefor Technology sales. Some of this investment is of a one off nature, such astraining the IBM insurance salesforce and our joint venture investment into theAsian subcontinent with NetSol. Other investment has been necessary to meet therequirements associated with an increased level of sales enquiries coupled witha more demanding contracting and due diligence process, where we have respondedby raising our investment in the pre-sales effort. EGM and future reporting requirements Following the approval of the resolutions at the Group's EGM on 29 June 2005, weare now seeking to finalise the capital reduction process to restructure thebalance sheet. This will restore the Company's distributable reserves and thusenable the Group to be in a position to pay dividends at some future date. The Prospectus Directive, issued on 1 July 2005, has removed the requirement forcompanies such as TiG, who listed under chapter 25 of the old Listing Rules toreport to shareholders on a quarterly basis. We therefore give notice that goingforward, with effect from our next financial year commencing 1 October 2005, wewill report to shareholders at the half year and full year, as is the case withthe majority of UK Listed companies. The next set of results released followingthe preliminary results for the year ended 30 September 2005 will therefore befor the half year ended 31 March 2006. From 1 October 2005 we will adopt the International Financial ReportingStandards (IFRS) and we are currently assessing the impact of IFRS on ourbusiness. As with most companies within our industry segment the mostsignificant areas of consideration are associated with differences in theaccounting for share based payments, goodwill and development expenditure. Wewill make a further announcement at or around the time of the preliminaryresults in November 2005. Outlook Licence revenue in the current financial year is still disproportionatelyimportant to the Group's overall result. In the short term, achievement of fullyear results in line with expectations will be dependent on the successfulsigning of two or three licences. One of these, relating to an ongoing pilot, isexpected to be particularly significant. We remain confident that we willsuccessfully sign the contracts, however we must also exercise a degree ofcaution as to the exact timing of the sales and the degree to which revenue willbe recognised in the current year. Overall, we are making good progress in achieving our goal of transforming thebusiness from a licence dependent software company to a one-stop specialistservice provider. The IBM relationship enhances the Group's credibility withclients and offers significant revenue possibilities, whilst pipeline activitycontinues to build and we are seeing significant improvement in our visiblerevenue streams with the growth in recurring revenue. These should in turn leadto improved operating margins and reduce the importance of one-off licenceincome in future years. Our immediate focus is on selling more products and services to our currentclients, whilst maintaining and building our reputation in delivering highquality products at fair prices to drive this process. Hassan SadiqChief Executive3 August 2005 The Innovation Group plcFinancial HighlightsFor the nine months ended 30 June 2005 Unaudited Audited Note Year to 9 months ended 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Turnover 43,921 40,962 58,051 Adjusted profit before tax a 2,527 4,690 7,525 Loss before tax (8,066) (6,469) (7,349) Adjusted earnings per share (pence) 6 0.47 0.86 1.49 Basic and diluted loss per share(pence) 6 (1.95) (1.75) (1.98)Adjusted diluted earnings pershare (pence) 6 0.46 0.84 1.46 Note: a Adjusted profit before tax is calculated as: Note Year to 9 months ended 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Loss before tax (8,066) (6,469) (7,349)Add back/(exclude):Amortisation 10,593 11,204 14,621Exceptional items 3 - 868 868Profit on disposal of operations - (1,013) (1,340)Amounts written off investments - 100 725 ---------- ---------- ---------Adjusted profit before tax 2,527 4,690 7,525 ========== ========== ========= References to adjusted profit and earnings per share reflect the Directors' viewthat this is an important measure for their own, and shareholders', assessmentof the Group's underlying performance. The Innovation Group plcUnaudited Profit and Loss AccountFor the nine months ended 30 June 2005 Unaudited Unaudited Audited ----------- ---------- ---------- 9 months 9 months Year to to to 30 June 30 June 30 September 2005 2004 2004 Note £'000 £'000 £'000 TURNOVER 2 43,921 40,962 58,051Cost of sales (23,694) (18,512) (25,520) ----------- ---------- ---------- Gross profit 20,227 22,450 32,531Administrative expenses- amortisation (10,593) (11,204) (14,621)- exceptional items 3 - (868) (868)- other (17,823) (17,693) (24,825) ----------- ---------- ---------- (28,416) (29,765) (40,314) ----------- ---------- ---------- OPERATING LOSS (8,189) (7,315) (7,783) Share of operatingprofit/(loss) of associateundertaking 41 (33) (54)Profit on disposal ofoperations 4 - 1,013 1,340Amounts written off 3 - (100) (725)investments Net interest 82 (34) (127) ----------- ---------- ---------- LOSS ON ORDINARY ACTIVITIESBEFORE TAXATION (8,066) (6,469) (7,349) ----------- ---------- ----------Loss on ordinary activitiesbefore taxation (8,066) (6,469) (7,349)Amortisation 10,593 11,204 14,621Exceptional items 3 - 868 868Profit on disposal ofoperations - (1,013) (1,340)Amounts written off - 100 725investments ----------- ---------- ---------- Adjusted profit 2,527 4,690 7,525 =========== ========== ========== Tax on loss on ordinaryactivities 5 (379) (934) (1,129) ----------- ---------- ---------- LOSS ON ORDINARY ACTIVITIESAFTER TAXATION (8,445) (7,403) (8,478)Equity minority interests (98) (97) (14) ----------- ---------- ---------- RETAINED LOSS FOR THE PERIOD (8,543) (7,500) (8,492) =========== ========== ========== Adjusted earnings perordinary share (pence) 6 0.47 0.86 1.49Basic and diluted loss perordinary share (pence) 6 (1.95) (1.75) (1.98)Adjusted diluted earnings perordinary share (pence) 6 0.46 0.84 1.46 All amounts relate to continuing operations. The Innovation Group plcUnaudited Balance SheetAs at 30 June 2005 Unaudited Unaudited Audited ----------- ---------- ---------- 30 June 30 June 30 September 2005 2004 2004 Note £'000 £'000 £'000FIXED ASSETSIntangible assets 14,635 23,197 23,521Tangible assets 11,030 11,738 11,656Investments 222 1,077 91 ----------- ---------- ---------- 25,887 36,012 35,268CURRENT ASSETSStocks 190 153 172Debtors 7 12,254 11,909 10,563Investments - 433 -Cash at bank and in hand 15,343 13,649 15,789 ----------- ---------- ---------- 27,787 26,144 26,524 CREDITORS: amounts falling due withinone yearConvertible loan notes - (1,075) -Other creditors 8 (18,330) (16,670) (17,334) ----------- ---------- ---------- (18,330) (17,745) (17,334) NET CURRENT ASSETS 9,457 8,399 9,190 ----------- ---------- ---------- ----------- ---------- ---------- TOTAL ASSETS LESS CURRENT LIABILITIES 35,344 44,411 44,458 CREDITORS: amounts falling dueafter more than one yearConvertible loan notes (1,189) - (1,101)Other creditors 9 (5,625) (6,646) (5,996) ----------- ---------- ---------- (6,814) (6,646) (7,097) PROVISIONS FOR LIABILITIES AND CHARGES (826) (1,155) (1,058) EQUITY MINORITY INTERESTS (141) (166) (74) ----------- ---------- ---------- NET ASSETS 27,563 36,444 36,229 =========== ========== ========== CAPITAL AND RESERVESCalled up share capital 10 8,771 8,697 8,697Shares to be issued - - 1,000Share premium account 482,923 482,053 481,997Profit and loss account deficit (464,131) (454,306) (455,465) ----------- ---------- ---------- EQUITY SHAREHOLDERS' FUNDS 27,563 36,444 36,229 =========== ========== ========== The interim results were approved by the Board of Directors on 3 August 2005. The Innovation Group plcStatement of total recognised gains and lossesAs at 30 June 2005 Unaudited Unaudited Audited ---------- ---------- ---------- 9 months to 9 months to Year to 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Loss for the financial period (8,543) (7,500) (8,492)Currency translationdifferences (123) 1,581 1,414 ---------- ---------- ---------- Total recognised gains andlosses relating to the period (8,666) (5,919) (7,078) ========== ========== ========== Reconciliation of movement in shareholders' funds Unaudited Unaudited Audited ---------- ---------- ---------- 9 months to 9 months to Year to 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Loss for the financial period (8,543) (7,500) (8,492)Currency translation differences (123) 1,581 1,414Issue of shares 1,000 7,576 7,520Shares to be issued (1,000) (1,736) (736) ---------- ---------- ---------- Net reduction in shareholders'funds (8,666) (79) (294) Opening shareholders' funds aspreviously reported 36,229 36,523 36,523 ---------- ---------- ---------- Closing shareholders' funds 27,563 36,444 36,229 ========== ========== ========== The Innovation Group plcUnaudited Cash Flow StatementFor the nine months ended 30 June 2005 Unaudited Unaudited Audited ----------- ---------- ---------- 9 months 9 months Year to to to 30 June 30 June 30 September 2005 2004 2004 Note £'000 £'000 £'000 Net cash inflow from operating 11 2,961 799 6,611activities Returns on investments and servicing offinanceInterest received 496 414 653Interest paid (207) (509) (753)Interest element of financelease rental payments (127) (105) (165) ----------- ---------- ---------- Net cash inflow/(outflow) fromreturns on investments andservicing of finance 162 (200) (265) TaxationTax paid (1,065) (1,323) (2,067) Capital expenditure and financialinvestmentPurchase of tangible fixed assets (708) (514) (847)Sale of tangible fixed assets 61 - 97Purchase of fixed asset investments - (500) (503)Loans - 91 92 ----------- ---------- ---------- (647) (923) (1,161) Acquisition and disposalsPayments to acquire subsidiaryundertakings (1,179) (1,269) (4,652)Cash acquired with subsidiaryundertakings 132 - 195Sale of subsidiary undertakings - 750 1,059Sale of associated undertakings - 1,143 1,143Purchase of associate undertakings (25) - -Net cash disposed of with subsidiary - (25) (25) ----------- ---------- ---------- (1,072) 599 (2,280)Management of liquid resourcesNet sale of current asset investments - 1,288 1,700 ----------- ---------- ---------- Net cash inflow before financing 339 240 2,538 FinancingIssue of share capital - 4,824 4,768Repayment of borrowings (490) (2,228) (2,353)Capital element of financelease rentals (295) (285) (323) ----------- ---------- ---------- Net cash (outflow)/inflow fromfinancing (785) 2,311 2,092 ----------- ---------- ---------- (Decrease)/increase in cashless bank overdraft 12 (446) 2,551 4,630 =========== ========== ========== The Innovation Group plcNotes to the Unaudited ResultsFor the nine months ended 30 June 2005 1. BASIS OF PREPARATION The interim financial information of The Innovation Group Plc is for the ninemonth period to 30 June 2005 and has been prepared in accordance with theaccounting policies set out in the audited financial statements for the yearended 30 September 2004. The results for the year ended 30 September 2004 havebeen extracted from the audited financial statements for that year. The auditedfinancial statements have been filed with the Registrar of Companies and theauditors' report on those accounts was unqualified. The unaudited profit andloss account for the nine month period to, and the unaudited balance sheet as at30 June 2005 and its comparative period to 30 June 2004, do not amount to fullaccounts within the meaning of section 240 of the Companies Act 1985 and havenot been delivered to the Registrar of Companies. 2. ANALYSIS OF TURNOVER, LOSS BEFORE TAX AND NET ASSETS Turnover can be analysed into the following categories: Unaudited Unaudited Audited ---------- ---------- ---------- 9 months to 9 months to Year to 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000Technology Solutions DivisionLicence fees 2,914 4,777 8,979Solution delivery 10,741 11,295 15,242Maintenance and other recurring 3,771 4,544 5,760US public sector 1,415 2,368 2,938 ---------- ---------- ---------- 18,841 22,984 32,919Specialised Business Process 25,080 17,978 25,132Outsourcing ---------- ---------- ---------- Total turnover 43,921 40,962 58,051 ========== ========== ========== The results for the nine months ended 30 June 2005 with comparatives can beanalysed as follows. Unaudited Technology SBPO Total Solutions 9 months 9 months 9 months 9 months 9 months 9 months to to to to to to 30 June 30 June 30 June 30 June 30 June 30 June 2005 2004 2005 2004 2004 £'000 £'000 £'000 £'000 2005 £'000 £'000Turnover 18,841 22,984 25,080 17,978 43,921 40,962 -------- -------- -------- -------- -------- --------EBITA beforeR&D, centraland exceptionalcosts 3,562 10,498 2,636 334 6,198 10,832R&D (2,080) (2,846) - (173) (2,080) (3,019)Central (1,371) (2,445) (343) (611) (1,714) (3,056)costsNet interest (233) (396) 315 362 82 (34)Share ofoperatingprofit/(loss)of associate - - 41 (33) 41 (33) -------- -------- -------- -------- -------- --------Adjusted(loss)/profit (122) 4,811 2,649 (121) 2,527 4,690Profit ondisposal ofcontinuingoperations - - - 1,013 - 1,013Amountswritten offinvestments - (100) - - - (100)Exceptionalcosts - - - (868) - (868)Amortisation (5,603) (6,533) (4,990) (4,671) (10,593) (11,204) -------- -------- -------- -------- -------- -------- Loss onordinaryactivitiesbeforetaxation (5,725) (1,822) (2,341) (4,647) (8,066) (6,469) ======== ======== ======== ======== ======== ======== The reference to EBITA before R&D, central and exceptional costs in the tableabove reflect the Directors' view that this is an important measure for theirown and shareholders' assessment of the Group's underlying performance bydivision. Reconciling items between this figure and loss on ordinary activities beforetaxation are shown in the table above. The analysis of net assets/(liabilities) by division was as follows: Net assets Unaudited Unaudited Audited ---------- ---------- ---------- 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000Technology Solutions Division 31,879 40,856 39,061SBPO (4,316) (4,412) (2,832) ---------- ---------- ---------- 27,563 36,444 36,229 ========== ========== ========== The geographical analysis by location is as set out below: Turnover Profit/(Loss) before taxation Unaudited Unaudited Audited Unaudited Unaudited Audited -------- -------- -------- -------- 9 months 9 months Year to 9 months 9 months Year to to to to to 30 June 30 June 30 Sept 30 June 30 June 30 Sept 2004 2004 2005 £'000 2004 2005 £'000 2004 £'000 £'000 £'000 £'000 -------- -------- -------- -------- -------- -------- Europe, MiddleEast and Africa 29,053 27,689 41,185 (8,396) (4,579) (5,046)Americas 11,602 9,473 12,700 538 (892) (1,258)Asia Pacific 3,266 3,800 4,166 (208) (998) (1,045) -------- -------- -------- -------- -------- -------- 43,921 40,962 58,051 (8,066) (6,469) (7,349) ======== ======== ======== ======== ======== ======== Net assets Unaudited Unaudited Audited ---------- ---------- ---------- 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Europe, Middle East and Africa (33,081) (18,933) (23,384)Americas 67,047 60,356 65,472Asia Pacific (6,403) (4,979) (5,859) ---------- ---------- ---------- 27,563 36,444 36,229 ========== ========== ========== During the period the most significant currencies, other than sterling, were theUS $ and South African Rand. The average exchange rates used to convert resultsin to sterling were US$1.87:£1 (nine months ended 30 June 2004: US$1.79:£1) andSA Rand 11.48:£1 (nine months ended 30 June 2004: SA Rand 11.91:£1). 3. EXCEPTIONAL ITEMS Year to 30 September 2004 Administrative expenses Exceptional administrative expenses incurred in the year to 30 September 2004totalled £868,000 and relate to the settlement of a legal action and associatedcosts. The Group is seeking to recover these costs from third parties. Amounts written off investments Amounts written off investments in the year to 30 September 2004 totalled£725,000 and relate to the impairment of an investment in an associatedundertaking and other fixed asset investments. 4. PROFIT ON DISPOSAL OF OPERATIONS Year to 30 September 2004 The disposal of the Group's subsidiary, Intelligent Business Solutions Limited("IBS") for £788,000 in cash, net of costs, was completed on 31 March 2004. TheGroup's share of net assets on disposal was £209,000. The profit on disposal,which was determined including attributable goodwill of £124,000, was £455,000. The disposal of the Group's 50 per cent. share in its associate Mead &McGrouther (Proprietary) Limited for £1,143,000 in cash was completed on 21November 2003. The Group's share of net liabilities on disposal was £160,000.The profit on disposal, which was determined including attributable goodwill of£689,000, was £614,000. In August 2004 the Group received deferred consideration totalling £271,000 inrespect of the sale of its French SBPO business disposed of in 2003 that had notpreviously been recognised due to uncertainty about its recoverability prior toreceipt. 5. TAXATION The effective tax rate for the group based on the results before amortisationfor the nine months ended 30 June 2005 is 15% (June 2004: 20%; September 2004:20%). 6. EARNINGS PER SHARE Unaudited Unaudited Audited ---------- ---------- ---------- 9 months to 9 months to Year to 30 June 30 June 30 September 2005 2004 2004 pence pence pence Basic and diluted loss per share (1.95) (1.75) (1.98)Adjustments- amortisation 2.42 2.62 3.40- exceptional items - 0.20 0.21- profit on disposal of continuingoperations - (0.23) (0.31)- amounts written off investments - 0.02 0.17 ---------- ---------- ---------- Adjusted earnings per share 0.47 0.86 1.49Adjustment for dilutive potentialordinary shares (0.01) (0.02) (0.03) ---------- ---------- ---------- Adjusted diluted earnings per share 0.46 0.84 1.46 ========== ========== ========== Earnings per share is calculated as follows: Number of shares (thousand)Average number of shares in issue used tocalculate basic and diluted loss and adjustedearnings per share 438,560 427,818 429,587Dilutive potential ordinary shares- add share options 10,575 8,631 8,298 ---------- ---------- ---------- Shares used to calculate adjusted dilutedearnings per share 449,135 436,449 437,885 ========== ========== ========== Basic and diluted earnings (£'000)Basic and diluted loss for the period (8,543) (7,500) (8,492)- add amortisation 10,593 11,204 14,621- add exceptional items - 868 868- less profit on disposal of operations - (1,013) (1,340)- add amounts written off investments - 100 725 ---------- ---------- ---------- Adjusted and adjusted diluted earnings for theperiod 2,050 3,659 6,382 ========== ========== ========== References to adjusted profit and earnings per share and diluted adjustedearnings per share reflect the Directors' view that these are important measuresfor their own, and shareholders', assessment of the Group's underlyingperformance. FRS 14 requires presentation of diluted EPS when a company could becalled upon to issue shares that would decrease net profit or increase net lossper share. For a loss making company with outstanding share options, net lossper share would only be increased by the exercise of out-of-the-money options. 7. DEBTORS Unaudited Unaudited Audited ---------- ---------- ---------- 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Trade debtors 9,246 9,125 8,242Deferred taxation 304 - 247Other debtors 677 917 616Prepayments 811 1,072 709Accrued income 1,216 795 749 ---------- ---------- ---------- 12,254 11,909 10,563 ========== ========== ========== All amounts are due within one year. 8. CREDITORS: amounts falling due within one year Unaudited Unaudited Audited ---------- ---------- ---------- 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Bank loans and overdrafts 36 - -Other loans 800 118 800Obligations under finance leases andhire 248 364 362purchase agreementsTrade creditors 2,247 2,152 2,471Taxation and social security 1,111 1,519 1,559Corporation tax 1,234 2,244 1,889Accruals and deferred income 9,482 7,085 8,768Other creditors 3,172 3,188 1,485 ---------- ---------- ---------- 18,330 16,670 17,334 ========== ========== ========== 9. CREDITORS: amounts falling due after more than one year Unaudited Unaudited Audited ---------- ---------- ---------- 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Bank loans and overdrafts 74 - -Other loans 3,200 4,607 3,800Obligations under finance leases andhire 243 354 318purchase agreementsAccruals and deferred income 1,702 1,685 1,752Other creditors 406 - 126 ---------- ---------- ---------- 5,625 6,646 5,996 ========== ========== ========== 10. SHARE CAPITAL The number of allotted, called up and fully paid ordinary shares of 2 pence eachas at 30 June 2005 was 438,559,862 (30 June 2004: 434,853,288; 30 September2004: 434,859,585). 11. RECONCILIATION OF OPERATING LOSS TO NET CASH INFLOW FROM OPERATING ACTIVITIES Unaudited Unaudited Audited ----------- ---------- ---------- 9 months to 9 months Year to to 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 Operating loss (8,189) (7,315) (7,783)Exceptional items - 868 868 ----------- ---------- ---------- Operating loss beforeexceptional items (8,189) (6,447) (6,915)Depreciation and amortisationcharges 11,950 12,759 16,698Profit/(loss) on disposal offixed assets (2) 1 (18)(Increase)/decrease in stocks (17) 21 7(Increase)/decrease in debtors (1,395) (979) 642Increase/(decrease) increditors 614 (3,099) (2,077) ----------- ---------- ---------- 2,961 2,256 8,337Cash outflow arising fromexceptional costs - (1,457) (1,726) ----------- ---------- ----------Net cash inflow from operatingactivities 2,961 799 6,611 =========== ========== ========== 12. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Unaudited Unaudited Audited ----------- ---------- ---------- 9 months to 9 months to Year to 30 June 30 June 30 September 2005 2004 2004 £'000 £'000 £'000 (Decrease)/increase in cash inthe period (446) 2,551 4,630Cash outflow from decrease indebt and lease financing 785 2,828 2,989Cash inflow from movement inliquid resources - (1,288) (1,700) ----------- ---------- ---------- Change in net funds resultingfrom cash flows 339 4,091 5,919Foreign exchange (6) 88 154Loans, loan notes, and financeleases (188) (436) (465)Transfer to fixed assetinvestments - - (21) ----------- ---------- ---------- Movement in net funds in theperiod 145 3,743 5,587Net funds at start of period 9,408 3,821 3,821 ----------- ---------- ----------Net funds at end of period 9,553 7,564 9,408 =========== ========== ========== Cash at bank and in hand includes £3,532,000 (30 June 2004: £2,759,000; 30September 2004: £3,659,000) representing amounts due to repairers and funds heldto settle future maintenance claims as part of the normal administration of theSBPO businesses. An amount representing the liability to the third partiesinvolved is included as part of the Group's current and long term liabilities. 13. LITIGATION In common with other businesses operating in the IT sector, particularly thosethat have acquired a significant number of companies on a global basis, theGroup is subject to, or instigates, complaints which may or may not lead tolitigation. Our quarterly results to 31 December 2004 referred to one case inparticular relating to a former officer of a company acquired by the Group in2001, who had lodged a substantial claim against the former legal owner and TiGfor loss of profit on options over consideration shares, resulting from theseshares being subject to customary transfer restrictions. The claim was concludedat trial during the quarter ended 31 March 2005 with the outcome that the Groupwas successful in its defence on all counts. An appeals process is in progress,however the Group has been advised that this too should be concludedsuccessfully in TiG's favour. Legal costs associated with the claim have beenprovided for in full. 14. ADDITIONAL COPIES OF THE STATEMENT Copies of this statement are available from The Innovation Group plc, YarmouthHouse, 1300 Parkway, Solent Business Park, Whiteley, PO15 7AE. INDEPENDENT REVIEW REPORT TO THE INNOVATION GROUP PLC Introduction We have been instructed by the company to review the financial information forthe nine months ended 30 June 2005, which comprises the Profit and Loss Account,Balance Sheet, Cash Flow Statement, Statement of Total Recognised Gains andLosses, Reconciliation of Shareholders' Funds and the related notes 1 to 14. Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. This report is made solely to the company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than the company, for our work,for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4'Review of interim financial information' issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of making enquiriesof management and applying analytical procedures to the financial informationand underlying financial data, and based thereon, assessing whether theaccounting policies and presentation have been consistently applied, unlessotherwise disclosed. A review excludes audit procedures such as tests ofcontrols and verification of assets, liabilities and transactions. It issubstantially less in scope than an audit performed in accordance with UnitedKingdom Auditing Standards and therefore provides a lower level of assurancethan an audit. Accordingly we do not express an audit opinion on the financialinformation. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the nine monthsended 30 June 2005. Ernst & Young LLPApex PlazaReadingRG1 1YE 3 August 2005 This information is provided by RNS The company news service from the London Stock Exchange