John Leighfield Chairman

Results
In RM’s last financial year additional government funding, which did not become available until April 1998, led to an increase in the seasonal bias of the Group’s business in favour of the second half. This year there has been a return to RM’s more usual first half pattern and, as a result, year-on-year comparisons for this period show unusually high growth.

RM’s turnover for the period increased 41% to £71.1 million (1998: £50.5 million) and profit before tax was £2.5 million (up £1.9 million on £0.6 million in 1998). Turnover from RM’s software and services businesses increased by 60%.

Gross profit increased by 42% to £17.8 million and gross profit margin increased to 25.1% (1998: 24.9%), reflecting the continued growth in the higher margin software and services areas of the business. Fully diluted earnings per share were 1.9p (1998: 0.5p after adjustment for a five-for-one share split).

RM continues to invest in order to secure long-term growth in its chosen markets. Research and development expenditure increased 24% to £3.3 million and selling and distribution expenditure was up 34% to £9.0 million. The total increase in operating costs was 27%.

Cash balances at the end of the half year were £16.6 million (March 1998: £8.3 million). This figure is after an initial investment of £1.7 million (out of an expected peak investment of £9 million in late 1999) to finance the Group’s PFI contract in Dudley.

Markets
The recently published RM G7 Report 1998 provides strong evidence that IT is being adopted – worldwide – as a transforming force in education. In the UK, schools are committing an increasing proportion of their delegated budgets to IT purchasing. At the same time the government has committed additional funding - outside of schools’ normal budgets - of more than £1 billion during the life of the current parliament (1997 – 2002). The end of RM’s half year coincided with the end of the first full year of one element of this additional funding – the Department for Education and Employment’s (DfEE) Standards Fund grant for the National Grid for Learning (NGfL).

Primary schools saw the majority of NGfL investment. RM’s turnover from primary schools increased by 140% with the Group maintaining its share of a significantly enlarged market. In secondary schools, where the impact of the NGfL was less marked, growth was driven by a general increase in individual schools’ ICT spend. RM’s turnover from secondary schools was up 25% and the number of schools using the Group’s RM Connect™ product increased.

The contract to provide the Dudley Grid for Learning (DGfL) – the largest single contract in RM’s history – was signed in January. This PFI project, worth £43 million over ten years, involves RM providing a managed service to 43,000 pupils and 2,000 teachers in 105 schools in the Dudley Metropolitan Borough. Large projects such as the DGfL are an increasingly important factor in RM’s markets. In response to this the Group has significantly developed its abilities to bid for and implement this kind of business.

In March the Group’s Management Solutions division was awarded a contract to provide schools management software to all schools in Western Australia. The business was won against significant international competition and demonstrates the quality and international relevance of RM’s software products. This contract, worth £4 million over 4 years, will be serviced by a newly formed, wholly owned subsidiary - RM Australasia Pty Ltd.

Products and Services
RM’s software revenues increased by 67% during the period.

The Group’s core schools products RM Window Box® and RM Connect, which continue to be the defining products in primary and secondary classrooms, were improved during the first half. RM Window Box 8 was launched in January at BETT ’99 - the annual education technology exhibition - and features an improved range of software, including Internet publishing capabilities. RM Connect was enhanced with a range of add-on modules including RM Personal Information Connection (which allows staff and pupils to access a school network from home) and RM Tutor (which gives teachers remote control capabilities for any computer on a network).

The development of the NGfL, combined with the wide understanding that the Internet delivers real educational benefits, has led to a strong demand for RM’s Internet products. The Group’s Internet for Learning (IfL) connections service continues to be the market leader with a 210% increase in revenue over last year. IfL now provides network-wide connections for 4,000 schools – an increase of 900% compared with the 400 accounts last year. Living Library®, RM’s subscription Internet content product, has also developed with the release of the Millennium Edition in February 1999. Living Library has been chosen by many schools and local education authorities as part of their NGfL provision.

RM’s portfolio of learning software products continues to develop and RM Maths Learning System has now been extended to cover level four of the primary maths curriculum. Learning software will make a major contribution to the Group’s future success although the high level of market activity in other areas during the first half – in particular the NGfL – has contributed to lower sales for this type of product during the period.

As part of the announcement of NGfL funding in November 1998, the government also launched the Managed Services Challenge. This calls upon industry to provide innovative managed service products designed to allow schools to take advantage of IT without a significant technical management burden. The DfEE called upon suppliers to submit potential managed services for evaluation and qualifying products will receive government endorsement. RM has been selected to go to the final stage of this evaluation. The Group is already actively managing over 1,300 desktops and is well placed to benefit from any growth in managed services.

The Learning Schools Programme, the Group’s joint venture with the Open University (OU) to provide IT training for teachers under the government’s lottery funded initiative, has progressed well. In February 1999, the RM and OU consortium was the only bidder to receive approval from the New Opportunities fund to provide training for all subjects in all four UK home countries.

Dividend
The Board is proposing an interim dividend of 0.66p (1998: 0.54p after adjustment for the five-for-one share split) payable on 2 July 1999 to shareholders on the register on 7 June 1999.

Prospects
1999 has started strongly with good progress in each of RM’s core markets. The Group has responded to the opportunities presented by the first full year of additional funding for the NGfL and has maintained its leadership position in the newly enlarged market.

Looking ahead, RM continues to invest to secure its long-term market position. Both The Learning Schools Programme and the Group’s activities to address the increased demand for major managed service projects – such as the Dudley Grid for Learning – are important investments for the future.

As in previous years, the results for the first six months of the year are not a good indicator of the full year’s outcome. This year the effect of NGfL funding makes year-on-year comparisons particularly difficult. Nonetheless, the very successful first half positions the Group well to achieve good results for the full year.

John Leighfield
Chairman

May 1999

A printed copy of this Interim Report 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