Interim Results

28th May 2002 Results for the Six Months Ended 31st March 2002 and Key Findings of Review of Strategy and Operations RM plc, the UK's leading supplier of ICT software, systems and services to education establishments, announces results for the six months ended 31st March 2002, and the key findings of a review of strategy and operations undertaken since February 2002. Results Results (before exceptional charges) are in line with revised expectations following the trading update made on 4th February 2002: * Turnover of Â£89.1million (2001: Â£113.7 million) * Strong cash generation with cash up Â£16 million on a year ago to Â£33.2 million (2001: Â£17.2 million) * Loss before tax, goodwill and exceptional items of Â£4.7 million (2001: Â£2.1 million profit) * Exceptional restructuring charge of Â£3.5 million covering redundancies and property * Intangible asset impairment of Â£5 million * Unchanged interim dividend of 0.95p (2001: 0.95p) Review of Strategy and Operations Following the February update, RM initiated a review of strategy and operations. Key findings include: * Schools ICT market has continued growth potential, but with volatility in spend profile and mix * RM has unrivalled customer relationships and a highly respected brand * RM remains the clear leader in ICT provision to UK schools * Business structure to focus on customer relationships * Product offer to remain broadly based with product development tightly focused on emerging educational market requirements * Recovery will be driven by tight management of the business rather than revenue growth. The Group has already implemented significant operational improvements: * Cost control initiatives * Moves to strengthen Board and senior management team * Recovery plan in place to return the Group to profits growth Commenting today, Tim Pearson, Chief Executive of RM said: 'Following a thorough review of strategy and operations we have put in place a strategy, and a medium-term recovery plan, that builds on the unrivalled strength of our customer relationships. 'Our results for the half year were in line with revised expectations following the trading update made on 4th February. Looking ahead, recovery is underway with a strong strategy in place, continued improvements in operational efficiency and a strengthened leadership team. The Board expects a return to profits growth next year.' - Ends - For further information, please contact: Tim Pearson, Chief Executive RM plc 08709 200200 Mike Greig, Finance Director Phil Hemmings, Director of Corporate Affairs and Investor Relations Andrew Fenwick Brunswick 020 7404 5959 Fiona Fong A briefing to analysts will take place at 9.30 am on Tuesday 28th May at 16 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: 020 8901 6934 to access this facility. An interview with Chief Executive, Tim Pearson, in video/audio and text will be available from 0700 on Tuesday 28th May on www.cantos.com Chairman's Statement The first half of 2002 has been a difficult time for RM plc. We entered the year with our cost base set for a year of turnover growth. However, as we reported in February, with the educational ICT market experiencing rapid changes and unprecedented volatility the Group now expects turnover for the year to decline by approximately 15%. In line with February's guidance, performance in the first half was significantly worse than our original plan and, given the seasonal nature of the Group's business, this has resulted in a first half loss before exceptional charges. In response, we have undertaken a thorough review of strategy and operations, made significant management changes and taken action to reduce costs. Results RM plc's results for the six months to 31st March 2002 are in line with revised expectations following the trading update made on 4th February 2002. Group turnover was Â£89.1 million (2001: Â£113.7 million), with the expected decrease in Learning Schools Programme revenues contributing Â£5.4 million of the reduction. Loss before tax, goodwill amortisation and exceptional items (described later) was Â£4.7 million, compared with a profit of Â£2.1 million last year. Diluted loss-per-share before goodwill amortisation and exceptional items was 3.5p (2001: earnings-per-share of 1.7p). The Group's cash position remains very strong - cash balances at 31st March 2002 were Â£33 million, with a net cash inflow from operating activities during the period of Â£12.2 million. The net funds position at the end of the period was Â£26.3 million (2001: Â£14.9 million) following the purchase, for Â£5.6 million in cash and loan notes, of Softease (an educational software developer) and the electronic publishing assets of Helicon. The Board is proposing an unchanged Interim dividend per share of 0.95p payable on 5th July 2002 to shareholders on the register at 7th June 2002. Exceptional items Following the trading update in February the Board has taken action to bring costs in line with expected turnover: ninety-nine people have been made redundant; and a provision has been set aside against the costs of vacating 22,000 sq ft of property in Oxfordshire. The Group has taken a restructuring charge of Â£3.5 million: Â£2.1 million related to staff changes and redundancies; and Â£1.4 million related to property costs. These actions are expected to deliver annualised cost savings of approximately Â£4 million, commencing in the second half of this year with the full benefit being felt in the next financial year. During the Strategic Review it became clear that the 10-year strategic alliance agreement RM entered into with Computer Curriculum Corporation (CCC) in 1997 was unlikely to deliver the expected benefits in the years ahead. Since the agreement was signed the ownership and management of CCC has changed and, following significant product development delays, the Board's expectations of future products have reduced. The Group has taken a non-cash asset impairment charge of Â£5m to reduce the carrying value of the intangible asset relating to the CCC alliance to Â£0.4 million. After goodwill amortisation, exceptional items and taxation the loss for the period was Â£10.6 million (2001: Â£1.1 million profit) and loss-per-share was 11.3p. Board On 23rd January 2002 the Group announced that Tim Pearson was to succeed Richard Girling as Chief Executive. At the time of the February trading update this succession was accelerated, with Tim taking control immediately. Richard stood down from the Board today and I would like to thank him for his contribution to RM over more than twenty years. I would also like to welcome Tim to his new role, where he is already having considerable impact. Mark Burrell (Senior Non-Executive Director) also leaves the Board today having reached the end of his term and I would like to thank him for his input and ideas during his time with RM. The role of Senior Non-Executive Director will pass to Sherry Coutu, who has been a member of the Board since 1999. We are at an advanced stage in recruiting new Non-Executive Directors to support the Executive team. Review of strategy and operations On his appointment, Tim Pearson initiated a thorough review of strategy and operations. The brief for the review was to develop a strategy for RM that would maximise shareholder value and to set out the foundations for a new business plan that would deliver this strategy. As part of the review an external strategy consultancy was appointed to provide objective analysis and advice and to work with the Board in developing strategic options. Key findings of the review are: 1. The schools ICT market has ongoing - although reduced - growth potential but there is significant volatility in spend profile and mix due to increasing central government intervention. The educational ICT market is made up of a number of sub-segments (eg: PCs, broadband connections and teacher training), with funding coming from multiple sources (eg: schools' core budgets, central government funding and lottery funding). Over the last five years the market has grown significantly, with this growth resulting from a number of different initiatives. Up until the end of last year, RM had delivered smooth profit and turnover growth by successfully reacting to changes in both funding sources and product requirements. However, over the last twelve months, the market has moved rapidly with shifts in product demand and significant changes in government initiatives. RM has not responded quickly enough to these changes either in terms of targeted product plans or reductions to its cost base. 2. RM has unrivalled customer relationships and the UK's strongest distribution channel for education products, founded on understanding schools' ICT needs. The review has confirmed that the RM brand is highly respected in our target markets. The Group's relationships with schools are well developed, with approximately one third of schools identifying themselves as regular and loyal purchasers and a further one third purchasing from RM occasionally. RM is significantly larger (in terms of sales) than its nearest competitor in the educational ICT market, with strong market share and the leading position in each market sub-segment. The Group is also the leading commercial supplier (by value) to schools in general. Building on these findings the Board has agreed a four-point strategy: * Leverage the key strategic advantage of customer relationships, and structure the company to take best advantage of it; * Address expected volatility by remaining broadly based (by product) and becoming more flexible; * Drive performance through targeted initiatives and tight cost control; * Set the cost base to deliver acceptable profitability even with modest market growth and significant BBC impact. RM will focus on its channel and customer relationship strengths and be a broadly based supplier of products and services to schools. For the moment RM will concentrate on ICT products, with the immediate recovery plan not requiring any significant product diversification. Operational developments Since taking over in February, Tim Pearson has made six significant changes to RM's senior operational team, including new directors in sales, marketing and services. He has also introduced the new role of Strategic Projects director, focusing on large project orders. The changes have sharpened the Group's operational focus and position us well to address future opportunities in the increasingly volatile market. The Board is also exploring ways to further align the interests of the Group's Executives with those of shareholders and, if appropriate, will be seeking shareholder approval for new incentive schemes in due course. As part of the Group's cost control measures it has been necessary to reduce staff numbers. The staff reductions were concentrated on de-layering RM's operations and increasing efficiencies in general and administration areas. Redundancies are always painful, and particularly so in a company that has always placed a strong emphasis on the quality and commitment of its people. However, combined with the implementation of strict discretionary cost controls, the redundancies mean that RM can now face the future with a cost base that is better matched to likely revenues. As reported in February, the release of RM Community Connect 3 was delayed in order to complete additional testing and achieve the very highest levels of customer satisfaction. Shipments of Community Connect 3 commenced on 13th May 2002 and, with Â£5 million of orders so far, the product is performing well. The product is a major (once in five years) strategic upgrade for our customers and is expected to generate significant additional business for the Group's other product ranges. The BBC's Digital Curriculum proposals continue to pose problems for the education software industry and the education community. The BBC has submitted its request for new service approval to the Department of Culture and Media and Sport, and a public consultation started on 23rd May 2002 with a closing date of 5th July 2002. RM is strongly opposed to these proposals. The Board firmly believes they will damage choice, innovation and diversity in the digital learning resources market to the detriment of schools, who will be faced with a monopoly supplier. Along with 17 other educational software publishers, RM has sought leave to apply for a judicial review of the BBC's current activities. Expectations The first six months of RM's year is never a good indicator of performance for the full year. Nonetheless, the seasonal nature of RM's business (with higher revenues in the second half of the year) combined with the impact of the cost reduction programme, give the Board confidence that the pre-exceptional outcome for the full year will be in line with expectations. Looking further ahead, a number of factors will impact the next financial year as the Group executes its recovery plan. There will be the further expected decline in contribution from Learning Schools Programme, with government funding for this initiative ending in March 2003. The Group will, however, benefit from a full year of cost reductions. The Board expects to see a return to profits growth next year, albeit with little change in turnover from the current year. RM's strong relationships with schools position it well to grasp the opportunities the education market continues to offer. Recovery is under way with a strong strategy in place, continued improvements in operational efficiency and effectiveness and a strengthened leadership team. John Leighfield 27th May 2002 CONSOLIDATED PROFIT AND LOSS ACCOUNT Half year ended Year ended 31 March 31 March 30 September Â£000 2002 2001 2001 Turnover Existing operations 88,503 113,716 241,916 Acquisitions 630 - - Total Turnover 89,133 113,716 241,916 Cost of sales (69,351) (88,307) (179,837) Gross Profit 19,782 25,409 62,079 Operating expenses: Selling & distribution (14,548) (13,886) (26,906) Research & development (6,557) (6,013) (11,646) Administration before exceptional (4,849) items Exceptional administration (8,468) Total administration (13,317) (3,867) (8,712) (34,422) (23,766) (47,264) Operating (Loss)/Profit (14,640) 1,643 14,815 Operating (loss)/profit analysed between: Existing operations before (5,447) 2,166 15,860 exceptional items Exceptional administration (8,468) - - Amortisation of goodwill - (546) (523) (1,045) existing operations Operating (loss)/profit for (14,461) 1,643 14,815 existing operations Acquisitions 198 - - Amortisation of goodwill - (377) - - acquisitions Operating loss for acquisitions (179) - - Total operating (loss)/profit (14,640) 1,643 14,815 Net interest receivable/(payable) 509 (107) 392 (Loss)/Profit on Ordinary (14,131) 1,536 15,207 Activities before Taxation (Loss)/Profit on ordinary activities before taxation analysed between: (Loss)/Profit on ordinary (4,740) 2,059 16,252 activities before taxation, amortisation of goodwill and exceptional items Exceptional administration (8,468) - - (Loss)/Profit on ordinary (13,208) 2,059 16,252 activities before taxation and amortisation of goodwill Amortisation of goodwill (923) (523) (1,045) (14,131) 1,536 15,207 Tax credit/(charge) on (loss)/ 3,488 (412) (4,551) profit on ordinary activities (Loss)/Profit on Ordinary (10,643) 1,124 10,656 Activities after Taxation Dividends paid and proposed (897) (891) (3,911) Retained (Loss)/Profit (11,540) 233 6,745 (Loss)/Earnings per ordinary share: Basic (11.3p) 1.2p 11.4p Diluted (11.2p) 1.2p 11.2p Diluted - before amortisation of (10.3p) 1.7p 12.3p goodwill Diluted - before amortisation of (3.5p) 1.7p 12.3p goodwill and exceptional administration CONSOLIDATED BALANCE SHEET As at As at As at 31 March 31 March 30 September Â£000 2002 2001 2001 Fixed Assets Intangible fixed assets 8,235 10,447 9,430 Tangible fixed assets 23,603 26,236 25,299 31,838 36,683 34,729 Current Assets Stocks 8,712 8,751 10,972 Debtors 41,302 51,761 53,665 Investments - short term cash deposits 9,236 10,000 8,095 Cash at bank and in hand 23,927 7,217 21,070 83,177 77,729 93,802 Creditors Amounts falling due within one year (63,340) (62,598) (67,975) Net Current Assets 19,837 15,131 25,827 Total Assets Less Current Liabilities 51,675 51,814 60,556 Creditors Amounts falling due after more than one (4,942) (4,589) (6,506) year Provisions for Liabilities and Charges (5,261) (1,601) (1,026) Net Assets 41,472 45,624 53,024 Capital and Reserves Called up share capital 1,888 1,878 1,887 Share premium account 20,349 17,888 20,340 Profit and loss account 19,235 25,858 30,797 Equity Shareholders' Funds 41,472 45,624 53,024 CONSOLIDATED CASH FLOW STATEMENT Half year ended Year ended 31 March 31 March 30 September Â£000 2002 2001 2001 Net Cash Inflow From Operating 12,212 4,605 20,913 Activities Returns on investments and servicing 509 (107) 392 of finance Taxation (2,701) (149) (1,545) Capital expenditure and financial (2,460) (3,990) (7,272) investment Acquisitions and disposals (498) - - Equity dividends paid (3,020) (2,528) (3,419) Net Cash Inflow/(Outflow) before use 4,042 (2,169) 9,069 of Liquid Resources and Financing Management of liquid resources (1,141) 2,201 4,106 Financing (22) 208 919 Increase in Cash in the Period 2,879 240 14,094 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Increase in Cash in the Period 2,879 240 14,094 Capital element of finance lease 5 - 21 payments Cash inflow/(outflow) from change in 1,141 (2,201) (4,106) liquid resources Settlement of loan notes - 55 212 Change in net cash resulting from cash 4,025 (1,906) 10,221 flows New finance leases - (2) - Issue of loan notes (4,764) - - Exchange translation (22) (4) (5) Movement in Net Funds in the Period (761) (1,912) 10,216 Net funds brought forward 27,068 16,852 16,852 Net Funds Carried Forward 26,307 14,940 27,068 NOTES TO THE INTERIM STATEMENTS 1. Basis of Preparation The financial information contained in this statement does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. The unaudited consolidated profit and loss account and balance sheet for the half years ended 31 March 2001 and 31 March 2002 have been prepared on a basis 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 is not material on the Group. The accounts for the year ended 30 September 2001 received an unqualified auditor's report and have been filed with the Registrar of Companies. 2. Acquisitions Softease Limited was acquired for a maximum consideration of Â£4,900,000 on 21 October 2001 to be satisfied by the issue of loan notes of which a maximum of Â£ 1,900,000 is deferred and payable over 18 months, conditional upon certain financial targets being met. The assets of Helicon Publishing Limited were acquired on 12 February for Â£700,000. 3. Exceptional Administration (a) The Directors have critically reviewed the organisation's cost base in light of the lower turnover and the review of the strategy and have taken steps, which include employee redundancies and rationalisation of facilities, to reduce it. An exceptional charge of Â£3,468,000 has been included in the profit and loss account in respect of the costs of executing this reorganisation. Â£2,068,000 relates to restructuring and redundancy costs and Â£ 1,400,000 relates to rationalisation of facilities. (b) The Directors have 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 consider that a carrying value as at 31 March 2002 of Â£362,000 is appropriate. Â£5,000,000 has been charged to the profit and loss account and is included within administration costs. 4. Tax Charge on Profit on Ordinary Activities The tax charge for the half year ended 31 March 2002 has been provided at the estimated effective rate for the full year. 5. Dividend The proposed interim dividend of 0.95p per ordinary share (2001: 0.95p) will be paid on 5 July 2002 to shareholders on the register on 7 June 2002. 6. (Loss)/Earnings per Share (Loss)/Earnings per share for the half year ended 31 March 2002 are based on a loss of Â£10,643,000 (2001: earnings of Â£1,124,000). Basic (loss)/earnings per share is based on 94,377,184 ordinary shares (2001: 93,744,041), being the weighted average number of ordinary shares in issue during the half year ended 31 March 2002. The diluted (loss)/earnings per share is based on a weighted average of 94,607,543 (2001: 95,758,223) ordinary shares issued and issuable. A reconciliation of basic (loss)/earnings per share with diluted (loss)/ earnings per share is as follows: Half year ended 31 Half year ended 31 March March 2002 2001 Loss No. of Pence Profit No. of Pence after Shares per after Shares per tax share tax share Â£000 ('000) Â£000 ('000) Basic (loss)/earnings per (10,643) 94,377 (11.3) 1,124 93,744 1.2 share Impact of share options - 231 0.1 - 2,014 - Diluted (loss)/earnings (10,643) 94,608 (11.2) 1,124 95,758 1.2 per share Supplementary (loss)/earnings per share before amortisation of goodwill and exceptional administration: Diluted (loss)/earnings (10,643) 94,608 (11.2) 1,124 95,758 1.2 per share Effect of amortisation of 923 - 0.9 523 - 0.5 goodwill Diluted (loss)/earnings (9,720) 94,608 (10.3) 1,647 95,758 1.7 per share before amortisation of goodwill Effect of exceptional 6,402 - 6.8 - - - administration Diluted (loss)/earnings (3,318) 94,608 (3.5) 1,647 95,758 1.7 per share before amortisation of goodwill and exceptional administration 7. Reserves and Reconciliation of Movements in Shareholders' Funds Half year ended 31 March 2002 Share Profit Total Share Premium and Loss Shareholders' Â£000 Capital Account Account Funds Beginning of the period 1,887 20,340 30,797 53,024 Retained loss for the period - - (11,540) (11,540) Share issues 1 9 - 10 Other - - (22) (22) End of the period 1,888 20,349 19,235 41,472 8. Reconciliation of Operating (Loss)/Profit to Operating Cash Flows Half year ended Year ended 31 March 31 March 30 September Â£000 2002 2001 2001 Operating (loss)/profit (14,640) 1,643 14,815 Depreciation charge 4,360 3,915 8,127 Amortisation of intangible 6,418 1,018 2,035 assets (including exceptional write down) Profit on disposal of fixed (135) (68) (61) assets Decrease in stock 2,271 12,066 9,845 Decrease in debtors 12,465 15,994 14,089 Increase/(Decrease) in 1,473 (29,963) (27,937) creditors Net cash inflow from 12,212 4,605 20,913 operating activities

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