I commented at the end of RM’s last financial year that the Government's National Grid for Learning (NGfL) initiative would have a significant impact on the Group’s markets. To prepare for this the Board authorised additional investment in product development and in sales and marketing. This investment has already delivered benefits for RM and has successfully positioned the Group to take advantage of any future market growth. In total, operating costs were up 20% at £26.5 million (1997: £22.1 million) with R&D expenditure up 21% and selling and distribution expenditure up 23%.

This increase in operating costs reflects both the additional investment mentioned above and RM’s increasing focus on software and services. Software and services revenues grew by 43% and the higher margins offered by these businesses enabled overall gross margin to increase 23% to £36.0 million (1997: £29.3 million). Gross margin percentage rose to 27.5% (1997: 26.6%).

The Group continues to be strongly cash generative. Cash balances at year-end were up at £17.0 million (1997: £10.8 million) after the planned £2.5 million payment to CCC (the US developers and publishers of SuccessMaker ®^*) as part of RM's strategic investment in learning software.

Markets
The Government's increased financial support for educational IT has had a significant effect on RM's markets. An additional £100 million of matched funding is being made available as part of the NGfL initiative during the Government financial year 1998/99. This funding was allocated as part of the Department for Education and Employment's (DfEE) Standards Fund grant and is provided 50% by Central Government and 50% by Local Education Authorities.

The NGfL is making a significant contribution to the modernisation of education in the UK and is acting as a catalyst for schools adopting newer technologies such as the Internet and learning software. The initial focus for NGfL funding has been primary schools and this has resulted in RM's primary school revenues increasing by 60%. The Group has increased its lead in this enlarged market and the number of schools that consider RM as their strategic partner has grown.

The Government's focus on educational IT has led to a growth in projects centrally co-ordinated by Local Education Authorities. RM has been successful at competing in this new area of business and has achieved significant successes in South Lanarkshire and Dudley. Dudley Metropolitan Borough Council’s Learning Grid is particularly important as it is a "pathfinder" Private Finance Initiative project and is seen as one potential model for the continued development of the NGfL. As announced in October 1998, a consortium led by RM was awarded preferred bidder status for this £43 million, ten-year project after intense competition.

Details of the Government’s initiative to provide training in the use of IT in the curriculum for all of the UK’s serving teachers have become clear during the year. A total of £230 million has been allocated over the life of the current Parliament to fund this initiative and prospective training providers will have to be accredited by the New Opportunities Fund (a distributing body for National Lottery funds). RM intends to participate in this market and has entered into partnership with the Open University and LEAs to deliver training. The authorisation process will be complete by February 1999 and funding is expected to become available in the Government financial year starting in April 1999. During 1999, this will be an investment activity for the Group.

Products and Services
During the year RM has continued to develop its product and service portfolio in response to the increasing complexity and sophistication of its customers’ needs. IT is now a mission-critical part of the infrastructure of many schools, with a growing number of them examining the possibility of outsourcing some or all of their IT requirements. RM’s position as an end-to-end systems integrator, with specific education expertise, means the Group is well placed to benefit from this trend.

RM's market-leading primary school and secondary school products have been further developed and provide an unbeatable foundation for schools preparing for the NGfL. RM Connect, the most widely used multimedia curriculum delivery system in secondary schools, has been enhanced with Internet and intranet facilities. For primary schools, which have traditionally purchased standalone computers, RM’s range has been extended to include network solutions with RM SchoolShare and the RM Primary Network.

As reported earlier, RM’s focus on software and services continued to increase during the year.

RM’s software activities have developed rapidly with highlights being the launch of RM Primary Maths Learning Software and the release of a new version of the Group’s premium Internet content service - Living Library. Both of these products were recently awarded Millennium Product status by the Design Council. The provision of Internet content has been particularly successful, with orders in excess of £1 million during the year.

The Group's managed service capability has developed rapidly. This is an important future growth area for RM with the DfEE encouraging schools to consider this approach. RM won the first PFI managed services contract in the FE sector at Tynemouth College in the first half of the year and the Dudley project involves delivering a totally managed IT infrastructure over ten years.

Dividend
A five-for-one sub-division of shares took place in June 1998 with the objective of increasing the marketability of the Group’s shares.

The Board is recommending an increase in the final dividend of 25% to 1.8p per share (1997: 1.44p, adjusted for the five-for-one share split). This brings the full year dividend to 2.34p (1997: 1.9p, again adjusted for the five-for-one share split). The dividend is payable on 3 February 1999 to shareholders on the register on 4 December 1998.

Prospects
Over the last year, RM has responded vigorously and successfully to the Government's increased commitment to educational IT. Looking ahead, the Government has confirmed its commitment with announcements of further NGfL funding. In England and Wales, £105 million has been made available in 1999/2000 and £450 million over the two years 2000/2002. In Scotland £62 million has been made available over three years. In total, the additional funding for educational IT over the life of the current Parliament will be in excess of £700 million.

UK schools currently spend less than 1% of their budget on IT. The Board believes that the NGfL, combined with the Government’s plans to create an IT-literate teaching force, will significantly increase this proportion and bring continued opportunities for RM’s products and services. In addition, the growing worldwide commitment to educational IT is creating international demand for the type of products RM supplies.

The Board has approved further increases in investment to ensure RM retains it leadership in the UK and to allow the Group to explore the international potential of its products.

It is too early in RM’s annual business cycle to give an indication of the likely outcome for 1999, particularly given the seasonal nature of the Group’s business. Nonetheless, the progress made during the year has positioned RM well to take advantage of growth in its markets and the Board is determined that the Group will continue to provide leadership and vision for the educational use of IT.

Finally, as always, it is RM’s staff who have allowed the Group to respond so effectively to market conditions. On behalf of the Board I would like to thank them all for their efforts in what has been an extremely demanding year.

John Leighfield
Chairman

November 1998

^*The SuccessMaker trademark is owned, and is licensed to RM, by Computer Curriculum Corporation.

A printed copy of this Annual Report and Accounts will be sent directly to shareholders after the posting date. Copies may be obtained after the posting date from the registered office of the Company at:

New Mill House, 183 Milton Park
Abingdon, Oxfordshire, OX14 4SE