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
--------- ---------
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