Final Results

25th November 2002 Results for the year ended 30th September 2002 RM plc, the UK's leading supplier of ICT software, systems and services to education establishments, announces results for the year ended 30th September 2002. Results in line with expectations and recovery programme underway * Turnover of £202.2m (2001: £241.9m) * Underlying turnover (excluding Learning Schools Programme) £182.9m (2001: £206.7m) * Profit before tax, goodwill and exceptional items of £5.0m (2001: £16.3m) * Excellent cash generation - inflow from operating activities of £25.0m (2001: £20.9m) * Net funds at year end £32.7m (2001: £27.1m) * Cost reduction targets met for H2 * Exceptional charges of £9.0m* * Unchanged total dividend of 4.15p per share * Returned £3.4m to shareholders during the year via share buy back * £8.5 million reported at interim stage; increase of £0.5 in property provision. Commenting today, Tim Pearson, Chief Executive of RM said: 'RM's recovery is underway. The impact of the strategic review is now becoming evident and I am pleased to be able to report results for the full year in line with expectations. Tight costs controls have had an immediate and significant effect. Our strong cash performance and the strength of our balance sheet stand us in good stead. 'As always at this point in the year, it is too early to give an indication of the full year outcome. However we've put in place a plan that recognises the changes in our market place and is intended to deliver an acceptable level of earnings growth. 'In the medium term, our customer relationships and our unrivalled experience of delivering high value products and services for schools position us well to benefit from the opportunities in the educational market.' - Ends - For further information, please contact: Tim Pearson, Chief Executive RM plc 08709 200200 Mike Greig, Finance Director Phil Hemmings, Director of Corporate Affairs & Investor Relations Andrew Fenwick Brunswick 020 7404 5959 Fiona Fong A briefing to analysts will take place at 9.30 am on Monday 25th November at The Lincoln Centre, 18 Lincoln's Inn Fields, London WC2A 3ED. A live audio feed will be available to analysts and shareholders who are unable to attend this meeting in person. Please dial telephone number: +44 (0) 20 8515 2319 to access this facility. A copy of the presentation will be available on www.rm.com at 9.30am. Introduction The year to 30th September 2002 has been difficult for the ICT sector as a whole and, particularly in the first half, for RM plc. However, The Group has met the revised plan set in February, and results for the year as a whole are slightly ahead of market expectations. The strategy RM has put in place, combined with a rigorous cost control programme, provide a solid platform for the Group's continued recovery. Results In line with the Board's expectations set out in the February trading update, Group turnover for the year was down 16% at £202.2 million (2001: £241.9 million.) Underlying turnover (excluding Learning Schools Programme which made its peak contribution last year and is now in its final year of funding) was down 11% to £182.9 million. Second half performance was markedly better than that in the first half, with second half turnover (excluding LSP) down by only 4% year-on-year. Gross profit percentage was 25.3% (2001: 25.7%) reflecting product mix changes. Laptop computers are now a larger proportion of the Group's PC sales and, as anticipated, curriculum software sales were affected by market uncertainty. Operating expenses (excluding exceptional charges and goodwill amortisation) for the year were £47.2 million. However, second half operating expenses were £22.2 million, compared with £25.0 million in the first half, reflecting the benefit of the Group's cost control programme. Profit before tax (before exceptional charges and goodwill amortisation) was £5.0 million (2001: £16.3 million.) After previously announced exceptional charges (relating to property, staff reductions and asset impairment) of £9.0 million (increased £0.5 million property provision), goodwill amortisation of £2.0 million and a tax credit of £1.1 million, the Group made a loss after tax of £4.8 million. Earnings per share (before exceptional charges and amortisation of goodwill) were 3.8p (2001: 12.3p) Demonstrating the underlying strength of RM's business, cashflow for the year was excellent with cash inflow from operating activities of £25.0 million. Even after returning £7.3 million to shareholders (through dividend and share buy backs) and acquisitions costing £5.7 million during the year, RM's net funds position at 30th September 2002 increased by £5.6 million to £32.7 million (2001: £27.1 million.) The Board is proposing an unchanged total dividend for the year of 4.15p per share. The final dividend of 3.2p will be paid on 7th February 2003 to shareholders on the register at 10th January 2003. Cost control Following the February trading update we initiated immediate action to reduce the Group's cost base. The cost control programme we put in place has had a significant effect and strict cost control will remain a fundamental part of RM's culture. Operating costs in the second half of the year were £2.9 million lower than those in the first half. Our cost reduction programme was focused on staff reductions, rationalisation of premises and a much tighter non-staff cost regime. Staff numbers have decreased most significantly in administrative areas in order to allow appropriate investment in customer retention and satisfaction and business development to continue. Board Tim Pearson took over from Richard Girling as CEO in February 2002. The Board would like to thank Richard for his contribution to RM over more than 20 years. RM reported at the half year that we intended to strengthen the Board by recruiting further Non-Executive Directors and we are delighted that Sir Bryan Carsberg, John Windeler and Professor Tim Brighouse have now joined the Board. Each of them is a highly respected and innovative leader in his own field, and together they bring a depth and breadth of commercial, financial and educational experience to the Board that will help make RM a better company, to the benefit of all its stakeholders. As announced, Tim Brighouse has been appointed to the new position of London Schools Commissioner and will step down from the Board at the end of the year. We are pleased, however, that Tim has agreed to take on the unpaid role of Chairman of RM's Educational Advisory Council, ensuring that his unrivalled experience of driving improvements in schools will continue to be available to RM. The Education Advisory Council will provide the Group with expert educational knowledge and understanding, and will be invaluable in helping us develop products and services that deliver more educational value for our customers and in establishing RM as an important educational influence in our own right. Share Buy Back During the year RM purchased 4.96% of its issued share capital at a cost of £3.4 million. These purchases have had the effect of increasing earnings-per-share for the year for remaining shareholders. At an EGM on 6th November 2002 authorisation was granted for RM to buy back up to a further 10% of its shares. We will only buy back further shares if the Board believes that it is to the benefit of shareholders. Market Following the recent comprehensive spending review there is good visibility of total education funding growth for the next three years, and the UK's Government remains committed to a fundamental transformation of the education service. The future pattern of funding specifically for ICT is, however, less clear than it has been in recent years. With most schools having recently made substantial investments in ICT infrastructure, their focus is on making effective use of that infrastructure. There is also clear evidence that the changes to national teachers' pay arrangements are putting school budgets under pressure. Important ICT products for schools now include whole-class teaching technology and high-speed Internet connections as well as extensions to existing networks. As we reported in February, this led to changes in purchasing priorities in schools with growth in demand for broadband services, laptop computers and interactive white boards. There is also a clear need for high quality learning content to support the Government's transformation agenda. This is something that is recognised across the UK, with initiatives such as the DfES' Curriculum Online programme (originally announced last December) which is intended to provide additional funding for software purchases. However, the well-reported confusion in the marketplace resulting from the BBC's proposals has meant that this need did not turn into the previously anticipated level of business. An increasing amount of business in the educational market place is being transacted through large contracts and we are currently bidding for a number of major projects worth, in aggregate, £120 million. We have developed our capability for effectively addressing this kind of business during the year by putting in place a high-level strategic projects team. Review of strategy and operations As we entered 2002, it became clear that market demand was at odds with the Group's plan and that our cost base was too high for the level of business we were achieving. It was also clear that some areas of the business were not operating as effectively as they should. We initiated a wide-ranging review of strategy and operations in February with the aim of maximising shareholder value. The review confirmed that RM has good products, dedicated people and strong customer relationships, which together create a very strong customer franchise in UK schools. It also confirmed that the Group is one of the leading commercial providers to UK education as a whole and the clear market leader for educational ICT. However, the review also showed that we were not fully exploiting the opportunities available to us and that a good deal of work would be required to make RM as efficient and effective as it needs to be in the future. To address this we put in place a three-stage recovery plan for the Group: * match RM's cost base to the revenues and margins realistically available from the UK educational ICT market * understand the real opportunities in educational ICT market and address them effectively, efficiently and in a more customer-driven manner; * identify education services opportunities to provide future growth for RM's business. Underpinning the recovery plan is our strong commitment to improve the levels of customer satisfaction RM delivers, and to become the most valued commercial partner for education establishments. Products and services Where we have identified new developments and opportunities in the education market - as was the case with LSP - RM has consistently delivered good business results. One of the key actions following the strategic review was to ensure that we systematically identify and respond to real customer needs. Product and service development during the year has been increasingly responsive to customers' emerging needs - though there remains further progress to be made. PC hardware continues to provide a profitable revenue stream for RM, with sales this year of over 120,000 PCs. In response to customer needs we have significantly enhanced our PC product offer. A wider laptop offer has helped us achieve a good performance in the DfES £100 million Laptop for Teachers initiative. With Intellidesk and our new small form-factor PC we have also introduced products that directly address the pressing space restrictions of most classrooms. Since the end of the year, RM has launched the RM Tablet PC - designed specifically for education - using Microsoft's Windows XP Tablet operating system. The Group was Microsoft's education partner at the Tablet PC launch, and the product - which is currently sold at a world-leading price point of £799 - has been enthusiastically received by customers. Our RM ClassBoard interactive white board range was introduced in February 2002 and RM is now one of the leading interactive white board providers. We have also introduced a new interactive white board software package - Easiteach Studio - which has been developed using software technology from the Group's Softease acquisition. The RM Community Connect product family continues to be the most widely used network infrastructure in UK schools. A major new generation - RM Community Connect 3 - was launched during the year and will be required by our customers as they migrate their networks to the latest generation of Microsoft technology. The most significant driver of this upgrade will be Microsoft Windows XP, and the move to this new desktop operating system is slower than originally anticipated. We will continue our R&D programme related to the Community Connect family to further develop its position as the leading network infrastructure platform in UK schools. The number of stations connected to Community Connect 2 and Community Connect 3 networks increased by 65,000 during the year. Broadband and Internet revenues performed extremely well with growth of 39% year-on-year. This business comprises both services provided to individual schools and large contracts, such as the South West Grid for Learning, which was renewed during the year. The Group continued investment during the year in a number of innovative education software products in areas where we had first mover advantage. RM MathsAlive now addresses the whole of Key Stage 3 and continues to generate more enthusiasm than any other product we have ever developed. The whole-class education service approach pioneered by MathsAlive has now been extended to primary school ICT teaching with the introduction of ICT Alive. Looking Ahead The DfES has recently launched its delayed Curriculum Online initiative, which will bring £50 million of dedicated funding into the market over the next twelve months - though we believe this will predominantly substitute existing funds. The Group's plan for the year has been set with the assumption of a continuation of reduced levels of demand for digital learning resources, which we believe is the most sensible approach given the uncertainty over the BBC's proposals. Future investments in educational content will only be made in areas where we have confidence that RM can generate a sustainable competitive advantage and where the Board believes it is unlikely that the BBC will enter. RM remains a strong leader in the provision of educational ICT infrastructure. RM Window Box and RM Community Connect remain the leading infrastructure product ranges in primary and secondary schools. Combined with our enhanced PC product range, other hardware developments and growing services capabilities, they position us well for continued success in this area. Cost control and increasing efficiency and effectiveness have been the key focus areas over the last nine months. During this year we will increasingly turn our attention to the Group's third strategic aim of returning growth to the business. RM is a leading commercial supplier to UK educational establishments. We have a direct relationship with our customers, and have well-developed skills in working with schools to deliver complex, strategically-important, high-value products and services. This positions us well for growth driven by the provision of other sophisticated, and not necessarily ICT-related, educational services. Prospects As is always the case at this point in RM's year, it is too early to give an indication of the outcome for 2003. However, performance in the second half of 2002 was very much in line with management's plan and markedly better than that in the first half. We reinforced our market-leading position and released a significant number of strategically important new products that demonstrate education vision and effectiveness. RM has a highly seasonal business, with the majority of revenue arising in the second half and gross profit margins materially higher in the second half than in the first. The current year will benefit from a full year of cost reductions and, as a result, we expect a significant decrease in the first half loss. For the year as a whole, we expect turnover to be broadly flat. There will be significant reduction in turnover from LSP, but we expect this to be offset by growth elsewhere including some contribution from our strategic projects activity. We have put in place a business plan that recognises the significant changes in RM's market environment and still delivers an acceptable level of earnings growth. Looking further ahead it is clear that education, and increasing private sector involvement in education, remain important government priorities. RM is a leading commercial provider to education in the UK and we intend to capitalise on the opportunities our skills, products, services and market position will offer us. Consolidated Profit and Loss Account For the year ended 30th September 2002 Before exceptional Non items & exceptional goodwill Exceptional goodwill Total amortisation items amortisation 2002 2001 Note £000 £000 £000 £000 £000 Turnover Existing operations 201,210 - - 201,210 241,916 Acquisitions 948 - - 948 - _______________________________________________________ Total Turnover 202,158 - - 202,158 241,916 Cost of sales (150,914) - - (150,914) (179,837) _______________________________________________________ Gross Profit 51,244 - - 51,244 62,079 Operating expenses: Selling & distribution (26,457) - - (26,457) (26,906) Research & development (13,836) - - (13,836) (11,646) Administration 2 (6,892) (8,968) (1,988) (17,848) (8,712) _______________________________________________________ (47,185) (8,968) (1,988) (58,141) (47,264) Operating (Loss)/Profit 2 4,059 (8,968) (1,988) (6,897) 14,815 __________________________________________________________________________________________ Operating (loss)/profit analysed between: Existing operations 3,766 (8,968) (1,158) (6,360) 14,815 Acquisitions 293 - (830) (537) - _______________________________________________________ Total operating (loss)/ 4,059 (8,968) (1,988) (6,897) 14,815 profit __________________________________________________________________________________________ Net interest receivable 983 - - 983 392 _______________________________________________________ (Loss)/Profit on ordinary activities before Taxation 5,042 (8,968) (1,988) (5,914) 15,207 ============================== Tax credit/(charge) on (loss)/profit on ordinary activities 3 1,095 (4,551) ___________________ (Loss)/Profit on ordinary activities after Taxation (4,819) 10,656 Dividends paid and 4 (3,767) (3,911) proposed ___________________ Retained (Loss)/Profit (8,586) 6,745 ___________________ (Loss)/Earnings per 5 ordinary share: Basic (5.1p) 11.4p Diluted (5.1p) 11.2p Diluted - before amortisation of goodwill and exceptional items 3.8p 12.3p Consolidated Balance Sheet As at 30th September 2002 2002 2001 Note £000 £000 FIXED ASSETS Intangible fixed assets 6 7,141 9,430 Tangible fixed assets 20,199 25,299 __________________________________________________________________________ 27,340 34,729 CURRENT ASSETS Stocks 9,954 10,972 Debtors 43,041 53,665 Investments - short term cash 20,157 8,095 deposits Cash at bank and in hand 18,968 21,070 __________________________________________________________________________ 92,120 93,802 CREDITORS Amounts falling due within one year (70,327) (67,975) __________________________________________________________________________ NET CURRENT ASSETS 21,793 25,827 __________________________________________________________________________ TOTAL ASSETS LESS CURRENT LIABILITIES 49,133 60,556 CREDITORS Amounts falling due after more than one year (5,943) (6,506) PROVISION FOR LIABILITIES AND CHARGES (2,131) (1,026) __________________________________________________________________________ NET ASSETS 41,059 53,024 __________________________________________________________________________ CAPITAL AND RESERVES Called-up share capital 7 1,794 1,887 Share premium account 7 20,349 20,340 Capital redemption reserve 7 94 - Profit and loss account 7 18,822 30,797 __________________________________________________________________________ EQUITY SHAREHOLDERS' FUNDS 53,024 __________________________________________________________________________ Consolidated Cash Flow Statement As at 30th September 2002 Note 2002 2001 £000 £000 NET CASH INFLOW FROM OPERATING ACTIVITIES 8 25,019 20,913 Returns on investments and servicing of 983 392 finance Taxation (4,209) (1,545) Capital expenditure and financial investment (3,506) (7,272) Acquisitions and disposals (499) - Equity dividends paid (3,916) (3,419) ________________________________________________________________________________ NET CASH INFLOW BEFORE USE OF LIQUID RESOURCES AND FINANCING 13,872 9,069 Management of liquid resources (12,062) 4,106 Financing (3,903) 919 ________________________________________________________________________________ (DECREASE)/INCREASE IN CASH IN THE YEAR (2,093) 14,094 _________________________________________________________________________________ Reconciliation of Net Cash Flow to Movement in Net Funds For the year ended 30th September 2002 2001 £000 £000 (DECREASE)/INCREASE IN CASH IN THE YEAR (2,093) 14,094 Capital element of finance lease payments 11 21 Cash inflow/(outflow) from change in liquid resources 12,062 (4,106) Settlement of loan notes 522 212 _____________________________________________________________________________ Change in net cash resulting from cash flows 10,502 10,221 Issue of loan notes (4,898) - Exchange translation (9) (5) _____________________________________________________________________________ MOVEMENT IN NET FUNDS IN THE YEAR 5,595 10,216 _____________________________________________________________________________ Net funds brought forward 27,068 16,852 _____________________________________________________________________________ NET FUNDS CARRIED FORWARD 32,663 27,068 _____________________________________________________________________________ Notes to the Preliminary Announcement 1. Report and Accounts 2002 & AGM 2003 The financial information set out in this preliminary results announcement has been prepared on a basis that is consistent with the statutory accounts for the year ended 30 September 2001 with the exception that FRS 19 'Deferred Taxation' has been adopted from 1 October 2001. The effect of adopting FRS 19 has not resulted in a prior year adjustment. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 30 September 2002 or 30 September 2001 but is derived from those accounts. Statutory accounts for the year ended 30 September 2001 contained an unqualified audit report and did not contain statements under section 237 (2) or (3) of the Companies Act 1985 and have been delivered to the Registrar of Companies. The Company will hold its Annual General Meeting on 29 January 2003, following which the statutory accounts for the year ended 30 September 2002 will be posted and delivered to the Registrar of Companies. The Auditors have reported on these accounts and their report was unqualified and did not contain statements under section 237 (2) or (3) of the Companies Act 1985. 2. Exceptional administration The exceptional administration cost incurred in the year to 30 September 2002 was the result of the following: (a) During the year the Director's critically reviewed the organisation's cost base in light of the lower turnover and in conjunction with a thorough review of strategy. Steps have been taken to reduce it, which include employee redundancies and rationalisation of facilities. An exceptional charge of £3,968,000 has been included in the profit and loss account in respect of the costs of executing this reorganisation. £2,068,000 relates to restructuring and redundancy costs and £1,900,000 relates to rationalisation of facilities. The estimated cost of rationalising the facilities has increased by £500,000 since the interim announcement, as a result of a further downturn in the commercial property market. (b) At the interim stage of the year the Directors performed an impairment review of the carrying value of the licence held as an intangible fixed asset. The licence relates to the rights to manufacture and distribute certain software products and was acquired in 1997. Having due regard to the recent and forecast performance, developments in the competitive market place and other influencing factors, the Directors considered that it was appropriate to charge £5,000,000, as a provision for impairment, to the profit and loss account within administration costs. The total of the exceptional items is £8,968,000. The net effect after taxation is £6,360,000. 3. Tax The tax credit for the year represents a rate of 28% of the loss before amortisation of goodwill (2001: 28%). With effect from 1 April 2002, the government introduced a scheme that gives an enhanced tax deduction for qualifying research and development expenditure. The tax credit of £1,095,000 (2001: charge £4,551,000) comprises a current tax charge of £865,000 (2001: £5,126,000) and a deferred tax credit £1,960,000 (2001: credit £575,000). 4. Dividends per share The Directors have recommended the payment of a final dividend of 3.2p per share (2001: 3.2p) bringing the total dividend for the year to 4.15p per share (2001: 4.15p). The final dividend is payable on 7 February 2003 to shareholders on the register on 10 January 2003. 5. Earnings per share Basic earnings per ordinary share for the year ended 30 September 2002 is based on 93,765,066 ordinary shares, being the weighted average number of ordinary shares in issue during the year. The diluted earnings per ordinary share for the year ended 30 September 2002 takes account of share options in issue and is based on a weighted average number of 93,775,934 ordinary shares issued and issuable. 6. Acquisitions Softease Limited was acquired for a consideration of £4,898,000 on 19 October 2001 which was satisfied by the issue of loan notes, of which £4,497,000 was deferred and was payable over the following 2 years. £4,635,000 of goodwill arising on this acquisition is being amortised to the profit and loss account on a straight-line basis over 5 years. The assets of Helicon Publishing Limited were acquired on 12 February for £695,000. 7. Reconciliation of movements in shareholders funds 2002 2001 Share Capital Profit Total Total Share Premium Redemption And Loss Shareholder's Shareholder's Capital Account Reserve Account Funds Funds £000 £000 £000 £000 £000 £000 Beginning of 1,887 20,340 - 30,797 53,024 45,132 the year (Loss)/Profit - - - (8,586) (8,586) 6,745 for the year Share issues 1 9 - - 10 1,152 Share (94) - 94 (3,380) (3,380) - repurchase Other movements - - - (9) (9) (5) __________________________________________________________________________ End of year 1,794 20,349 94 18,822 41,059 53,024 __________________________________________________________________________ The Company has exercised the authority that it was granted at the last AGM to buy back up to 5% of the issued share capital. An EGM of the shareholders of RM plc on 6 November 2002 granted the Company the authority to repurchase a further 10% of its issued share capital. 8. Net cash flow from operating activities 2002 2001 £000 £000 Operating (loss)/profit (6,897) 14,815 Depreciation charge 8,805 8,127 Exceptional amortisation of intangible 5,000 - fixed assets Normal amortisation of intangible fixed 2,619 2,035 assets Profit on sale of fixed assets (130) (61) Decrease in stocks 1,029 9,845 Decrease in debtors 11,660 14,089 Increase/(decrease) in creditors 2,933 (27,937) ________ ________ Net cash inflow from operating activities 25,019 20,913 ________ ________ 9. Pension scheme The Accounting Standards Board has extended the transitional arrangements for the implementation of FRS 17 'Retirement Benefits '. The Group has continued to account for the profit and loss cost of its deferred benefit pension scheme under SSAP 24 whilst disclosing FRS 17 information in the notes to the accounts. The FRS 17 valuation as at 30 September 2002 identified that there was a deficit of £16.9 million (£11.8 million after tax) compared to a deficit of £7.5m (£5.3 million after tax) at 30 September 2001. This increase in the deficit reflects the poor performance of equity markets during the year, as well as an increase in liabilities as a result of a reduction in the discount rate used to value them. 30 September 2002 marked a particularly low point for equity markets; the deficit would have been materially lower had the valuation taken place at, for example, 31 October. During the year the cost of benefits was reduced by increasing the normal retirement age for future service from 60 to 65 and increasing employee contributions by 1%. Following the year end, the scheme has been closed to new members and further benefit changes implemented to save £0.25 million per annum. As a result of these changes it is anticipated current contribution levels will recover the deficit by 2012, and that the profit and loss charge for 2003 will be no higher than the £3.1 million recorded in 2002. Copies of the Annual Report and Accounts may be obtained after the posting date of 20 December 2002 from the registered office of the Company at: New Mill House, 183 Milton Park, Abingdon, Oxfordshire OX14 4SE. A copy of this announcement is available at RM's internet site: http://www.rm.com and a copy of the Annual Report and Accounts will be available at the same site from 23 December 2002.

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