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DRS Data & Research Services plc Annual Report and Accounts for the year ended 31 December 2009


SUMMARY

01 Summary

02 Financial and operational highlights

cURRent BUSineSS PRofile

03 Our business

10 Timeline

Annual Report and Accounts for the year ended 31 December 2009

DRS’ data recognition and processing products and services are used across the globe for examinations, elections, census, student registration and document processing.

GRoUP RePoRt And AccoUntS

12 Chairman’s statement

15 Business review

22 Board of directors and officers

24 Directors’ report

27 Corporate governance report

31 Corporate social responsibility report

33 Directors’ remuneration report

38 Statement of directors’ responsibilities

39 Report of the independant auditor

41 Consolidated income statement

42 Consolidated statement of financial position

43 Consolidated statement of changes in equity

44 Consolidated statement of cash flows

45 Notes to the financial statements

PARent coMPAnY AccoUntS

71 Parent company statement of financial position

72 Parent company statement of changes in equity

73 Parent company statement of cash flows

74 Notes to the parent company financial statements

81 Directors and advisers

SummARy


2009 marked the 40th anniversary of the founding of the Group by my predecessor, malcolm Brighton OBE, DL. For all of those 40 years, DRS has been a leader in innovative technologies, including particularly intelligent scanning and related systems and software.

The new AQA contract, signed in the opening weeks of 2010, is proof-positive of this long-standing innovative prowess and the Group’s ability to leverage that strength to win important business.

As the Group embarks on its 41st year, its resolve to strengthen yet further its innovative stance and its customer propositions is greater than ever.

Sir David Brown, Chairman

AbilityAgilityAdaptability

01

HiGHLiGHTS


£14.9 million

Turnover2008: £17.4 million

£0.9 million

Loss before tax2008: £2.5 million

2.28 pence

Loss per share2008: 9.46 pence

£2.4 million

Product development2008: £2.7 million

£2.9 million

Cash and cash equivalents2008: £2.8 million

£4.9 million

Gross profit2008: £5.9 million

Financial highlights

Operational highlights

Wolverhampton City Council contracts DRS to monitor Key Stage 4 and Post 16 students

e-Voting solution delivered for Nigeria Computer Society

Over 9 million AQA answer scripts were processed using e-marker® by 20,000 markers

PS960 scanner wins Product of the year

e-marker® piloted in the Caribbean

Sudan census successfully delivered and was awarded runner-up of Public Sector Project of the year

DRS Data & Research Services plc Annual Report and Accounts for the year ended 31 December 2009 03

OuR BuSiNESS

OuR BuSiNESS


expertise, solutions and technology

We have a profound knowledge of the data capture and recognition process and pass this on to our customers, helping them to adopt the most appropriate techniques and methodologies for the best results.

OuR BuSiNESS


Our markets

It is our unique combination of skills and expertise that enables us to deliver complete solutions designed to meet market and customer demands. Our strength stems from developing close partnerships with our customers and industry bodies, enabling us to fully understand their changing requirements and deliver solutions that meet those needs.

Education • Examination marking • Student registration • Education administration

Public Sector • Voter registration • Election count management • Census data capture and processing

Commercial • Business document recognition and processing

Revenue by sector

Commercial RevenueMedAmerica Inc •

Glaxo SmithKline•

Nutricia•

Tesco •

“We believe DocXP™ EOB product will help us to innovate and streamline our internal operations, ultimately these efforts will trickle down to our customers, enhancing the overall experience with MedAmerica.” – Nancy Templeton,

medAmerica Senior Director of Technology & Business integration

Education Assessment & Qualifications Alliance•

Caribbean Examinations Council•

Associated Board of the Royal • Schools of Music

Wolverhampton City Council•

“We are delighted to continue our long-standing partnership with DRS. This will ensure that we can keep delivering the best possible technological support to our assessments, to the ultimate benefit of all our learners.” – Andrew Bird,

AQA Deputy Director General

Public SectorUnited Nations Population • Fund Agency

East Ayrshire Council•

Nigerian Computer Society •

Glasgow City Council•

“This is the third time DRS’ e-Counting technologies have been successfully used in East Ayrshire. It allows us to produce a result more quickly than would have ever been the case with manual counting.”– Fiona Lees,

East Ayrshire Returning Officer


OuR BuSiNESS

Responding to customer and market needs

We respond to customer and market demands quickly and are known as the safe pair of hands when it comes to managing critical data capture projects.

OuR BuSiNESS


meeting market needs

With 40 years of successful customer implementations, we understand the individual and market issues our customers face, and that innovation and quality service delivery is what is demanded. This is DRS’ ethos; our customers rely on us having dependability running through our veins – and we do, proven and backed up by delivering every time - on time - first time.

Our education business continues to grow following the international launch of e-Marker®, which is now reaching the African continent, the Far East and the Caribbean. Our cyclical public sector business has seen its first electronic voting project delivered in Abuja and, despite the economic commercial downturn, we are seeing a slow upturn with an exciting large-scale project with MedAmerica to process its Explanation of Benefits statements.

Examinations

“The Council is constantly examining ways of leveraging the available technology to improve efficiency, and electronic marking certainly offers one solution. In this regard, CXC is pleased to work with DRS, an experienced electronic marking provider, on this pilot project.”

– Dr Didacus Jules,Registrar of the Caribbean Examinations Council (CXC)

Elections

“Our members are delighted that e-Voting can be a reality in the country, especially with the ease of use and the speed of the systems in handling elections for twelve different positions. I thank DRS immensely for its support in professionally conducting our 2009 election electronically and peacefully.”

– Professor Charles uwadia,President of the Nigerian Computer Society

OuR BuSiNESS


We pride ourselves on being able to adapt our approach and solutions to our customers’ needs

Every customer is different, it is the ability to recognise and respond to these differences and deliver solutions that fit all circumstances, no matter where in the world, that sets us apart from our competitors.

Location: US

Objective: To License DocXP™ to MedAmerica to process its Explanation of Benefits

Results: MedAmerica are now able to benefit from reductions in costs and improved document processing performance from medical insurance claims and other health related documents

Location: Carribean

Objective: Review examination processes and identify areas where efficiency gains can be made

Results: New marking processes trialled, additional functionality provided to support markers

Location: UK

Objective: To provide instant, accurate and consistent student lesson registration data across Whitburn Church of England School

Results: Full implementation in 56 classrooms and changing rooms, providing real-time information for parents

OuR BuSiNESS


“i thank DRS immensely for its support in professionally conducting our 2009 election electronically and peacefully.”

Professor Charles Uwadia,President of the Nigerian Computer Society

Location: Sudan

Objective: To securely and transparently process the critical census data collected by 90,000 enumerators around the country

Results: Working in partnership with the UNFPA, CBS, SSCCSE and the Sudanese government, results were successfully delivered within a few months

Location: Pakistan

Objective: To win the contract for the next population census in Pakistan – the 6th most populous country in the world

Results: Awarded contract by UNFPA

Location: UK

Objective: To win 4 year contract with ABRSM to improve music examination marking process

Results: Awarded contract


1969 • DocumentReadingServicesestablishedinLondon,operatingasasmallbureau

1971• BritishMarketResearchBureauTGIsurveycontractawarded

1972• FamilyPlanningAssociationcontractedDRStoprocesspatientvisitorrecords

1973• AmericanMarketResearchBureausurveycontractwon

1975 • MovedtoKilnFarm,MiltonKeynes

1978 • NamechangedtoDRSData&ResearchServicesLimited

1979 • WonfirstcontractinAfricafromNigerianbasedJointAdmissionsMatriculationBoardforprocessingMultipleChoiceQuestionnaires

1980• Startedsellingscanners

1985• ChangednametoDRSData&ResearchServicesplc• ContractedtoprocesstheKenyaNationalExaminationsCouncilexaminations

1991• LaunchedCD800atCeBITinHannover• FirstelectionundertakeninOslo

1994• FloatedonLondonStockExchange• BTECtestscoringcontractsuccessfullycompleted

1996• FirstvoterregistrationprojectundertakeninSierraLeone

1997 • CriticalvoterregistrationprojectssuccessfullyundertakeninKenyaandBosniaandHerzegovina

• ElectionssuccessfullyundertakeninOslo

1998 • LaunchedCD1200iscanner• OrganizationforSecurityandCo-operationinEuropecontractawardedforcomplexelectionsinBosniaandHerzegovina

• QCAcontractawardedforprocessingKeyStage2and3results

1999 • MajornationalGCSEandA-Levelmarkingcontractawarded

• SuccessfuldeliveryofboththeLondonMayoralandAssemblyelectionsandtheBosniaandHerzegovinaMunicipalelections

2000• Firstuseofe-CountinginfirstcombinedLondonMayoralandAssemblyelections

2001• SpecialcommendationreceivedfromtheChamberofCommercefortheZambianationalpopulationcensus

2002• Tanzanianationalpopulationcensusundertaken• AwardedQueensAwardforEnterprise–InternationalTrade

TimELiNE


2003• FirstnationalelectionundertakenintheMiddleEast• FirstevermultipleCouncilelectionundertakeninCountyDurham

2004• DRSlaunchedPhotoScribe®scanner• FirstPhotoScribe®scannerusedinAfricabytheCameroonGCEBoard

• AQAstartedusinge-Marker®toelectronicallymarkexaminations

• LondonMayoralandAssemblyElectionssuccessfullydeliveredwithe-Countingsolutionforsecondtime

2005• ContractedbytheEuropeanCommissionDevelopmentFundfortheNationalPlanningCommissionofNigeriatoprintcensusquestionnaires

2006 • e-Marker®highlycommendedatBETTAwardsforsupportinginstitutionalmanagement

• AcquiredPeladonSoftwareGroup• ChamberofCommerceconsistentperformanceinInternationalTradeawardwon

• Firstuseofe-Marker®inFrancehailedasuccessbyLaMaisondesExamens

• IntelliReg®launchedatBETT

2007 • Firstuseofe-CountingtechnologyinScotlanddeliveredaccurateresultsforcomplexcombinedScottishelections

• OmanNationalElectionsdeployedDRSe-Countingtechnologiesforthesecondtime

• DocXPTMreceivedindustryrecognitionatDMAwards• CityofDallasdeployedDocXP™topreventidentitytheft

2008 • IntelliReg®chosenbyBarnetCollegeforfirstevere-RegistrationdeploymentintheFurtherEducationsector

• Jansen,Johnston&RockwellEmergencyMedicineManagementServiceschoseDocXP™toprocessExplanationofBenefits

• HRAMedicalManagementchoseDocXP™toprocessExplanationofBenefits

• PS960scannerwonHardwareProductoftheYearattheDMAwards

• e-Marker®pilotedbyCentralnaKomisjaEgzaminacyjnainPoland

2009 • MalcolmBrightonOBE,DLsteppeddownasChairmanafter40years,andSirDavidBrownisappointed

• FivesignificantIntelliReg®customersbenefitfromreal-timestudentattendancedata

• e-Marker®trialledbytheCaribbeanExaminationsCouncil

• DocXP™chosenbyMedAmericatoprocessExplanationofBenefits

• CriticalSudancensussuccessfullycompleted• DRSe-VotingsolutiondeliveredinAbujafornon-statutoryelections

• Fouryeare-Marker®contractsignedwithAssociatedBoardofRoyalSchoolsofMusic

• Pakistancensuscontractawarded


Sir David BrownChairman

Results2009 was a difficult year for the Group, with turnover down 15% on the previous year at £14,901,000 (2008: £17,429,000) and a loss before tax of £915,000 (2008: £2,547,000).

The Group’s performance in its education markets has remained strong and profitable, although the full year revenue was 0.4% below 2008 at £13,315,000 (2008: £13,369,000). In particular e-Marker® sales were the highest ever at £8,155,000 (2008: £7,734,000) and alone accounted for 55% of DRS’ total revenue. Revenue from the Group’s more traditional education business, which includes UK student registration and the printing of forms for overseas education bodies, decreased by 8.4% to £5,160,000 (2008: £5,635,000). Overall, revenue from the education markets was 89% of total revenue.

However, the Group’s performance in its non- education markets declined quickly and significantly. Census and election revenue fell by 78% to £632,000 (2008: £2,871,000), partly because of the uneven nature of election and census business. The economic downturn affected our commercial markets, particularly in the United States where Peladon Software Inc did not make the progress which was expected.

Part of the Group’s response has been to reflect the rapidly changing balance in its market emphasis in an extensive programme of changes to its cost base. Major cost reductions have been implemented in the year, including the postponement of the intended move of the Group’s operational divisions to larger premises. The annualised value of these reductions to the Group’s cost base is more than £1,500,000.

The stringent cost-reduction programme, which had full effect in the second half year, taken together with the seasonality in the e-Marker® business, resulted in a profitable second half year and a reduction of £770,000 in the loss before tax reported at the half year.

Diligent control of expenditure and a determined approach to asset management has resulted in an increase in year-end cash holdings of £172,000 to £2,938,000, despite the trading loss.

The Directors do not recommend the payment of a dividend (2008: 0.30p per share).

EducationThe Group’s examinations and assessment business continues to grow with e-Marker® as our leading product

ChaiRman’S StatEmEnt


and service offering. Our major UK customer, AQA (Assessment and Qualifications Alliance), continues to expand its use of e-Marker® for processing GCSE and A-level examinations. More than 9 million AQA answer scripts were processed this year using e-Marker® compared to approximately 7.5 million in 2008.

Shortly after the close of the year to which this report relates, in January 2010, we were delighted to sign a further agreement with AQA which extends to October 2014. The potential turnover for the Group over this five-year contract is expected to exceed £40,000,000.

During the year we installed into several schools a new version of our IntelliReg® product. IntelliReg® offers a wall-mounted fingertip biometric method of registering pupil’s attendance at school. An entry-level solution for primary and small secondary schools has also been developed and supplied. This version reduces the price and complexity of installation by interfacing to a teacher’s laptop computer. Both versions integrate fully with schools’ information management systems and provide immediate on-line access to the data.

Education-related printing for the African market remains good business for DRS. We have long-standing trading relationships in countries such as Nigeria, Ghana and Zambia, where we provide high quality paper forms for machine processing of data. Most of these forms are for use in education and many countries use our range of scanners for reading the completed forms. During the year we secured significant scanner sales from both Nigeria and Zambia.

Census and ElectionsThe Group continues to be a supplier of census projects. Two major census projects in Malawi and Sudan, which were started in 2008, were completed successfully in the first half-year. We designed and printed the millions of specialised forms required for these projects in addition to capturing the census data using our PhotoScribe® scanners. The Group’s ability to deliver comprehensive

services dedicated to census-taking again proved to be reliable and efficient even in challenging geographical locations. In the second half of the year we won the contract to supply scanners and software for the Pakistan census for implemention during 2010 and 2011.

Our established range of census services was complemented in the year with the launch of a new product which uses GPS to capture positional information simply and cheaply as part of the census process. The product, called Cense®, is a hand-held device which can be used by enumerators, with minimal training, to capture the longitude and latitude of their location. The location, once transferred to census forms, can be processed with the other data and provide valuable extra information.

The Group delivered e-Counting services for two Scottish by-elections during the year, in Glasgow and East Ayrshire. The services included the supply of ballot papers and boxes, the scanning of all ballot papers and the e-Counting.

CommercialThe current economic pressures in the market for the Group’s commercial products and services contributed to a 20% decrease in commercial revenue to £954,000 (2008: £1,189,000). The proportion of commercial revenue attributable to DocXP™ fell to 57.4% (2008: 64.5%).

40 Years of innovation2009 marked the 40th anniversary of the founding of the Group by my predecessor as Chairman of the Board, Malcolm Brighton OBE, DL. When I was appointed Chairman in May, I said at the AGM that for all of those 40 years, DRS has been a leader in innovative technologies, including particularly intelligent scanning and related systems and software. It has been a leader in innovative service delivery in the UK and in several other parts of the world. Indeed, its educational, governmental and commercial customers regard service as DRS’ defining ethos.


It has been a leader in innovative quality practices too. I said that DRS’ customers need the Company to have total dependability running through its veins, and it has.

The new AQA contract, signed in the opening weeks of 2010, is proof-positive of this long-standing innovative prowess and the Group’s ability to leverage that strength to win important business.

As the Group embarks on its 41st year, its resolve to strengthen yet further its innovative stance and its customer propositions is greater than ever.

OutlookThe prospects for e-Marker® appear promising, both in the UK and internationally. In June we won a contract for a pilot project in the Caribbean which we expect to lead to a longer term contract in due course. The successful introduction of the innovative Long Form Answer process with AQA during the summer is likely to lead to new business with the awarding bodies for professional qualifications. The examinations which these awarding bodies conduct are based in part on essay-style answers and the cost of marking time is high. The latest version of e-Marker® offers benefits in both reducing costs and providing results more quickly.

Also, our existing customers in Africa are keen to implement e-Marker®. During recent years the communication infrastructure within a number of countries has grown enormously in coverage and capability, and high speed data communications and availability of the Internet now makes e-Marker® a viable solution for examination processing in these countries. A number of negotiations have taken place and our first pilot project, in Nigeria, has been won.

Sustaining the competitiveness of e-Marker® and its associated services is of central importance to the Group’s strategy for returning to profitability and growth, and we expect to continue to invest in e-Marker® accordingly.

To capitalise on our early successes with IntelliReg® we have established a partnership with leading suppliers of biometric systems into schools, including those engaged in the Building Schools for the Future programme. This will broaden our sales and marketing strategy and enable us to cover substantially more schools directly and build relationships with local authorities.

2010 and 2011 are expected to be major years for census activity internationally. DRS has already won the Pakistan census project and is shortlisted for other projects. Although competition is increasing significantly, we have an excellent reputation for delivery and are developing new features to enhance our solution. The GPS (Global Positioning System) Cense® device, which can improve the value of census data, will also increase the competitiveness of our census solutions.

The US market for DocXP™ remains difficult and, therefore, the prospects for Peladon Software Inc are uncertain.

In summary, the pattern of strong performance in the education markets and relatively weak performance in the non-education markets, which characterised 2009, is likely to continue into 2010. The strategic and operational management of the Group will take this pattern fully into account.

Looking further ahead, the Directors expect that the Group’s continuing, determined focus on building best-in-class customer relationships coupled with increasing product and service innovation, particularly in its education markets, will secure the Group’s return to sustainable profitability and provide a robust foundation for long-term growth.

Sir David BrownChairman

22 March 2010

ChaiRman’S StatEmEnt continued

Sustaining the competiveness of e-marker® and its associated services is of central importance to the Group’s strategy for returning to profitability and growth, and we expect to continue to invest in e-marker® accordingly.

BuSinESS REviEw


For 2009 there is a trading loss before tax of £915,000 (2008: £2,547,000). Loss per share was 2.28p (2008: 9.46p).

The balance sheet at 31 December 2009 remains strong with cash and cash equivalents of £2,938,000 (2008: £2,766,000).

2009 has been a demanding year, particularly for the Group’s non-education business. Consequently a broad cost-reduction programme was implemented during the year to reflect the downturn in revenue. However, DRS has continued to invest in its products and markets to ensure it is well placed to grow the business for the future. £2,389,000 was invested during the year (2008: £2,680,000) in development of the Group’s products.

Performance and positionThe overall sales for 2009 of £14,901,000 were down on the previous year (2008: £17,429,000).

The primary market for DRS is UK education where 73.0% of its sales were generated in 2009 and where e-Marker® is becoming increasingly important. Sales in non-UK education have remained good but non-education sales, particularly census and elections dropped by 78%. DocXP™ sales in the US have continued to be disappointing partly due to their heavy dependence on the American financial market.

A major cost-reduction programme was implemented during the year in response to the fall in revenue. The programme contributed to reducing the loss reported at the half year by £588,000 and has reduced the Group’s costs by an annualised value of more than £1,500,000. As part of the cost-reductions the intended move of the Group’s operational divisions to larger premises was postponed.

Tony LeeChief Executive Officer

2009

£000 %

2008

£000 %

UK Sales 11,426 76.7% 11,833 67.9%

Non-UK Sales 3,475 23.3% 5,596 32.1%

14,901 17,429


In 2005 DRS adopted IFRS accounting policies and provided segmental reporting for the first time. At that time the majority of the Group’s products and services fell into three groups; scanning equipment, print and software services. These business segments were directly correlated to internal functional departments and were the key elements of cost and revenue management within the business. However, in recent years the Group’s strategic direction has been increasingly to develop and sell products and services which use varying combinations of the Group’s resources in an integrated way. Therefore, reporting based on the historical segmentation is no longer appropriate.

highlights of the yearOur e-Marker® business has continued to grow throughout the year and now contributes to more than 50% of our revenue. Volumes of work with AQA (Assessment and Qualifications Alliance) increased to a new high of more than 9 million scripts being processed during the year by more than 20,000 markers. We also introduced a number of new customers to the benefits that using e-Marker® brings for processing examination scripts.

AQA has remained our major customer for e-Marker® and they have continued to increase both the percentage of their examinations that use our services for script marking as well as the number of subjects which are being processed by our CMI+ product. CMI+ enables paper scripts to be fully imaged and segmented into answer categories before being marked. This allows different answer types to be processed and marked by the most appropriate method thereby improving quality and efficiency. The process has also enabled us to start marking essays, known as LFAs (Long Form Answers), using e-Marker®. This was introduced very successfully during the year with two subjects.

New customers for e-Marker® were won during the year in the UK and Internationally. In the UK we were delighted that the Associated Board of the Royal Schools of Music signed

a four year contract for e-Marker®. Internationally, pilot work was carried out in the Caribbean, Asia and Africa.

We have been building on our very long heritage in the UK education market with sales of our IntelliReg® products. These products, for attendance monitoring of students, have been installed in both schools and colleges. In the tertiary sector more requirements are being placed on colleges to ensure that students remain on courses and regularly attend lectures, and our systems provide a convenient method to establish this without increasing the administrative burden on teaching staff. In schools the emphasis has been away from morning and afternoon registration towards lesson level monitoring. The Building Schools for the Future programme introduced by the government has given schools an opportunity to include IntelliReg® terminals into their new or refurbished buildings.

Sales of our DocXPTM range of products into financial applications have continued to be adversely affected by the poor economic climate both here and in the United States. However applications for DocXP™ in the healthcare market are more promising. At the end of the year, Peladon Software Inc signed two licence agreements in this marketplace, and interest in the use of our product to extract data from EOB (Explanation of Benefits) forms is still high. Many millions of EOB forms are processed manually in the United States and these forms have a highly complex structure of data. DocXP™ has been demonstrated to be able to extract this data automatically and increase the quality and performance of processing these forms.

Following our many years of completing census projects in Africa we were particularly pleased to win the contract to supply scanning technology and software for the Pakistan census. In 2007 and 2008 we had won three major census projects in Ethiopia, Sudan and Malawi and that reinforced DRS’ position as a major supplier to National Statistical Offices. The Pakistan contract has

BuSinESS REviEw continued


extended this position into a new territory and will widen our experience of the differing requirements for such projects around the world.

Research and developmentWe have continued to invest in our future with a focused programme of research and development which both supports and extends the DRS business. Total expenditure on all product development during 2009 was £2,389,000 (2008: £2,680,000). Other than the creation of new functionality in the e-Marker® product, all of this expenditure has been expensed through the Income Statement. Development costs expensed through the Income Statement during 2009, which include e-Marker® amortisation, are £2,179,000 (2008: £2,710,000).

e-Marker®

Continued development was undertaken in 2009 to enhance the user interface of e-Marker®. The user interface, known as the Marker Client, is fundamental to making our product easy to use and efficient. A number of sophisticated features have already been incorporated in the Marker Client, such as on-screen measurement of angles and distances in drawings and graphs, but the introduction of Long Form Answers (LFA) required the introduction of many new features to facilitate the manipulation and annotation of multiple page essays. The development process was combined with field testing of the product with markers to ensure that usability was at the forefront of the design. A key feature of the new design was on-screen annotation to allow marks and comments to be associated with the candidate answer text and enhance the quality of marking compared with paper-based marking.

Further development work was associated with the paper answer scripts used by candidates. For LFA questions these scripts allow free form answers to be written in any order. To maximise the benefits of e-Marker® the scripts need to be automatically segmented into individual answers so that they can be categorised and forwarded to the correct markers. To enable this, the answer scripts

have been specially designed to allow the question numbers to be read electronically and the beginning and end of answers detected by recognition software. This unique design and processing technology is the subject of a patent application.

e-Marker® development costs were first capitalised in 2005. In total £3,392,000 has been capitalised during the last five years. At 31 December 2009, the carrying value of the capitalised investment of £1,185,000 is justified by a revenue stream of £8,155,000 in 2009. e-Marker® revenue is expected to continue to increase throughout 2010 and 2011 with the introduction of the new LFA functionality.

CensusMuch of our census work over the years has been achieved by the use of OMR (Optical Mark Recognition) scanning of paper forms. This technology has been the cornerstone of DRS’ products and is particularly efficient, accurate and cost-effective when capturing very large volumes of data in diverse locations. OMR is still a major part of our business and recommended for many applications. In addition to OMR we have also been developing ICR (Intelligent Character Recognition) technologies which enable hand written text to be captured and extracted from paper forms. Although ICR can enable more complex data to be captured from smaller forms, it does require considerably more intervention and correction by operators after data capture to ensure quality.

During 2009 we have been developing products specifically designed for the census marketplace which combine the relative merits of OMR and ICR technologies to ensure these very large volume projects are able to capture and process the required data as efficiently and cost-effectively as possible. A key aspect to processing this type of data accurately is the handling of errors and exceptions. The detection and correction of errors and exceptions is vital to producing valid and reliable data and this is an area where DRS excels. Our census products have been built on the years of experience that we have and ensure successful projects.


We have also been developing our Cense® device for this market to enable exact geographical information to be collected at the same time as the household census data. When national census data is collected by many thousands of enumerators across a country it is very easy for mistakes to be made regarding the individual locations. The Cense® product is a very simple device to allow the enumerator to transcribe their GPS coordinates onto the census form. Once recorded it is scanned and captured with the rest of the census data and can be quickly and cheaply used to ensure the data has come from the correct location.

IntelliReg®

Development of our attendance monitoring products for schools has led to significant work in both biometric technology and school information management systems. The product builds on our many years of experience in this market where we have supplied paper-based registration systems to many secondary schools in the UK. Fingertip biometric detection is becoming accepted as one of the best methods for monitoring attendance in schools because it is absolute proof the student is present and does not require a card or other identification device which can be forgotten or lost. It addresses the growing need of schools to have immediate access to attendance information and to monitor attendance at every lesson. When combined with other requirements in the school such as cashless catering, door entry and library systems it provides one very powerful mechanism for a modern school to manage students and facilities efficiently. Our development work has integrated accurate and fast fingertip detection with the school’s existing management systems to provide real-time access to student data.

Liquidity and investmentsAt the end of 2009 the Group held £2,938,000 (2008: £2,766,000) in cash. It is the Group’s policy to take a very cautious approach to cash management.

In terms of treasury management, only short-term investments that do not put the capital at any risk are considered. The Group tries to maintain a high level of liquidity in order to have the funds to support the working capital requirements to be able to deliver large election and census contracts. DRS Data Services Limited has a £250,000 overdraft facility and a £250,000 credit line to cover operational performance bonds and guarantees that are not due to be reviewed until 2011. The mortgage facility of £2,250,000 held by DRS Data & Research Services plc was extended in January 2010 to March 2014 and in view of these arrangements the Directors believe the access to cash resources is adequate to meet the foreseeable needs of the business over the next 12 months.

Strategy and objectivesDRS objectives are to achieve accelerated revenue growth and create increased shareholder value.

The key elements of our strategy to support these objectives are to:

increase the percentage of revenue generated from •recurring business and expand the number of key customers;

reduce indirect cost as a percentage of sales;•

expand e-Marker• ® services into Africa and other overseas territories;

develop e-Marker• ® product to allow local service provision by overseas customers; and

market our census and election products to win a •significant number of projects from 2010 to 2012.

During the year in review no political donations were made by the Company.

BuSinESS REviEw continued


Key performance indicators (KPis)

2009 2008 2007

Financial

Sales growth pa (14.5%) (22.4%) 34.6%

Operating return on sales#1 (6.1%) 0.6% 7.6%

Top five customers#2 69.8% 66.5% 67.2%

Development expenditure#3 16.0% 15.4% 7.7%

Return on capital employed#4 (12.4%) (1.5%) 13.2%

Non-financial

Employees average length of service#5 5.93 5.25 5.16

Total energy consumed#6 2.20 2.40 –

#1 ratio of operating profit as a percentage of total Group sales (before amortisation of intangibles arising on Peladon acquisition and exceptional costs)

#2 ratio of revenue generated from five biggest customers as a percentage of total Group sales

#3 ratio of development expenditure as a percentage of total Group sales

#4 ratio of operating profit as a percentage of total assets less current liabilities (before exceptional costs)

#5 average length of service in years of permanent employees in the Group

#6 reflects the total usage of electricity and gas consumed by the Group in gigawatt hours

In 2009 the fall in non-education revenue had a significant adverse effect on the financial KPIs. Most of the Group’s operating costs are people related and the fall in revenue in the first half of the year led to DRS Data Services

Limited reducing its cost base. These cost savings along with the benefits of the examination marking work recognised in the third quarter made the second half year profitable. However the savings have not offset fully the first half year losses shown in these adverse KPI movements.

DRS recognises the importance of retaining and incentivising its employees. Retaining staff and ensuring the right mix of skills is maintained is especially important when the economy slows and trading conditions become more challenging. The purpose of monitoring the average length of service of our employees is to check we are retaining the experience required to sustain our competitive edge.

In general, increased focus is being placed on energy usage by society. During 2009, as part of a concerted effort to reduce costs, particular focus was placed on energy usage. By studying our energy usage during 2008, we were able to take a number of actions in quarter two 2009, that resulted in a 17% reduction in electricity and gas usage in the second half of the year and an annual saving of 8%.

It is the Group’s goal to achieve accelerated revenue growth and to increase the operating return on sales. The impact of sales concentration, new product development expenditure and return on capital employed are being monitored to enable a balanced approach to be taken.

Environmental and employeesThe Group employed an average of 217 employees throughout 2009 in the UK and a further eight individuals based in Peladon Software Inc in the US. Further information concerning environmental matters, our employees and social and community issues can be found in the Corporate Social Responsibility report on pages 31 to 32.


Risks and uncertaintiesThe Group is subject to risks and uncertainties relating to its future business which might affect the financial performance of the Group. The Board has implemented systems to identify risks, to assess them and to ensure that reasonable mitigation plans are in place. The Board is paying particular attention to the operational risks and uncertainties of current recessionary conditions in any of the Group’s markets and further details are provided under the heading ‘internal controls and risk management’ within the Corporate Governance Report on page 27 to 30.

The main risk issues that are specific to the business are set out below.

Information technologyThe Group is increasingly dependent on IT (Information Technology) systems, including Internet-based systems, for internal communication as well as communication with customers and suppliers. Any significant disruption of these systems, whether due to computer viruses or other outside incursions, could materially and adversely affect the Group’s operations.

Our business involves handling large databases containing high volumes of data to be accessed by thousands of users from their homes. We are therefore heavily dependent on the resilience of both the application software and the data-processing support services together with the service providers for sound network infrastructure. A serious failure in any of these areas could immediately and materially affect our business.

We continue to invest in reliable and fault-tolerant IT infrastructures to mitigate these risks.

Trading volumes A significant proportion of the Group’s business can comprise one-off large contracts providing tailored

solutions. The nature of these contracts requires each to be managed as a unique project with project teams required to address the specific complexities and commercial risks. Group sales have a tendency to be lumpy, dependent on when these contracts occur. The Group has a high proportion of fixed overheads and consequently these fluctuations in revenue can lead to significant variations in profitability.

Cautionary statementThis Business Review has been prepared solely to provide additional information to shareholders to access the Group’s strategies and the potential for those strategies to succeed. It should not be relied upon by any other party for any other purpose.

The Business Review contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

Current trading and outlookWe were very pleased in January 2010 to sign a new agreement with AQA to supply e Marker® services. The contract has a potential value over its five-year term of more than £40,000,000. DRS has worked with AQA over the past five years to establish e-Marker® as the primary means of processing and aiding the marking of their GCSE and A-level examinations. AQA is the largest awarding body for these examinations in the UK.

The expansion of our production facilities that was planned for 2009 was postponed as part of our cost reduction programme. Several alternative plans are being considered for 2010 to meet our future production needs while minimising the cost to the business.


An uncertain market for our election products has been created in the United States by the acquisition of Premier Elections by ES&S who now have a majority of the US election market. We gained Federal approval for our scanners to be used in US elections during 2009 and were hopeful that Premier Elections would sell a number of our PhotoScribe® products. We are currently unsure of the impact the acquisition will have on this market.

Sales of our DocXP™ products in the United States are still below expectations due to the economic situation and our dependence on the financial and banking markets. The healthcare market is more optimistic but we do not expect there to be a significant upturn in near future.

Interest in our IntelliReg® products has been high at the start of 2010 in both the school and college markets. The BETT Education Technology show was particularly encouraging in January with much interest in our ‘Best of Class’ partnership with four other leading suppliers of schools systems. However we are mindful of the difficult financial situation that most academic institutions are coping with and also the uncertain nature of future funding with a General Election in 2010. Although a number of Building Schools for the Future projects are already running, a potential change in government could affect new projects.

The prospects for census projects this year and next are good as many countries endeavour to collect statistical data around the end of a decade. The Pakistan census is now expected to be run in October 2010 and combined with our experience from previous census projects is proving a good reference for winning other projects. A number of voter registration projects in Africa are also looking promising and we are now focusing on extending our services to electronic counting and voting in these same areas.

Our long-term strategic objective to increase recurring revenue and lessen our dependence on single projects, has been a strong focus for 2009 and remains so for 2010. The expansion and diversity of our e-Marker® business is pivotal to this strategy and with current revenues from e-Marker® contributing more than 50% of our total we believe we have made significant progress with this plan. We expect the education sector to continue to be the main element of our business with e-Marker® growing both in the UK and international markets.

International interest for e-Marker® has been particularly strong during 2009 and we are working with a number of new customers and new prospects. We believe our very long-term working relationship in Africa will provide an ideal position to supply e-Marker® services to countries in west, east and southern Africa.

Action taken during 2009 has improved the efficiency of the Group and we have continued to develop world leading products and services. When this is considered with the resilience of our education business and our strong customer relationships we expect to be able to increase revenue and return to profitability.

Tony LeeChief Executive Officer

22 March 2010

BOaRD OF DiRECtORS anD OFFiCERS


Sir David Brown non-Executive Chairman

Sir David Brown was appointed to the Board of DRS as a non-Executive Director and Deputy Chairman in August 2008 and became Chairman in May 2009. He graduated in electrical engineering in 1972 and worked for Motorola from 1991 to 2008 first as Director of UK Operations and later as Chairman of Motorola Limited. He is currently senior independent Director of Ceres Power Holdings plc and a non-Executive Director of Domino Printing Sciences plc. Sir David is a Fellow of the Royal Academy of Engineering, an Honorary Fellow of the Institution of Engineering and Technology, an Honorary Fellow of the Chartered Quality Institute and a Companion of the Chartered Management Institute. He was President of the Institution of Electrical Engineers, President of the Chartered Quality Institute, President of the Federation of the Electronics Industry and President of the Association for Science Education. He was knighted in 2001 for Services to British Industry.

Tony Lee BSc, MPhil Chief Executive Officer

Tony Lee joined the Company in March 1997 as Technical Director, having previously been European Technical Director for Dolch Computer Systems. He has worked in the electronics and computer industry for more than thirty years. In the late 1980s he was Head of Research and Development for Epson and was involved in a number of international projects developing printing, communications, image scanning and recognition technologies. He was appointed to the Board in September 1997 and appointed Chief Executive Officer in March 2001.

Mark Tebbutt ACMA Finance Director

Mark Tebbutt qualified as a Chartered Management Accountant in 1984. He gained a broad operational knowledge of financial management with Bass and Grand Met before joining Misys as the Financial Director for two of its subsidiaries. Thereafter, he held an operational role for six years in Stanley Works and joined DRS in 2001 as Head of Finance. Mark was appointed Finance Director in March 2002.

Malcolm Brighton OBE,DL

Malcolm Brighton was Managing Director of DRS from the Company’s establishment until 2001 then served as the Company’s Chairman until his retirement in May 2009.


Ann Limb PhD, MA non-Executive Director

Ann Limb was appointed to the Board of DRS as a non-Executive Director in May 2003. A modern linguist and teacher by profession, she worked extensively in further education for 25 years, spending over half her career as Principal and Chief Executive, firstly at Milton Keynes College and then Cambridge Regional College. Between 2001 and 2004 Ann was Group Chief Executive of the University for Industry, the government’s national e-learning and e-services flagship responsible for the operation of learndirect and UK on-line. Ann is currently Chair of the Homes and Communities Milton Keynes Partnership Board and the Legal Deposit Advisory Committee within the Department of Culture Media and Sport. She is a non-Executive Director of Milton Keynes Hospital NHS Foundation Trust and advises a number of charities and public bodies. She is founder and Chair of the Helena Kennedy Foundation for Social Justice.

Rt. Hon. Lord Kinnock of Bedwellty non-Executive Director

Lord Kinnock was appointed as a non-Executive Director of DRS in March 2005. An Industrial Relations and History graduate, he taught industrial and trade union studies before being elected Member of Parliament for Bedwellty and Islwyn in 1970. In 1979 he was appointed Labour’s Chief Opposition Spokesperson on Education and was elected Leader of the Labour Party in 1983, a position he held until 1992. He was appointed to the European Commission in 1995, with the Transport portfolio to 1999 and then as Vice President 1999-2004. He was appointed to the Peerage in January 2005 and was Chairman of the British Council from 2004 to 2009.

Chris Batterham FCA, MA Senior Independent non-Executive Director

Chris Batterham was appointed as a non-Executive Director in September 2005. Chris qualified as a Chartered Accountant with Arthur Andersen. He was Finance Director of Unipalm plc, the first Internet company to IPO and stayed with the company for five years following its takeover by UUnet. More recently, he was CFO of Searchspace Group until 2005 and is currently a non-Executive Director of SDL plc, The Risk Advisory Group Limited, Iomart plc, Betfair Limited and Office2Office plc. He is chairman of Eckoh plc. He has also served on the Boards of Staffware plc, DBS Management plc and The Invesco Techmark Enterprise Trust plc. Chris brings a wealth of experience in the strategic development of companies within the IT sector.

Sally Hopwood BSc Company Secretary

After studying economics and history at the London School of Economics and Political Science, Sally retrained as a solicitor, qualifying in 1990. She joined Argos as Company Solicitor in 1992 and since leaving Argos in 1998, has held various corporate and commercial legal roles, working in

both private practice and in-house in the banking and retailing sectors. She joined DRS in 2005 as Legal and Contracts Manager and was appointed Company Secretary of the UK subsidiary companies in 2006 and Company Secretary for the DRS Group in December 2007.

DiRECtORS’ REPORt


The Directors present their report together with the audited Group and Company financial statements for the year ended 31 December 2009.

Principal activities The principal activities of the Group are the provision of data capture services, the manufacture and sale of optical and image scanning equipment and complementary services.

Peladon Software Inc is a company registered under Californian law in San Diego. There are no further branches of the Group outside the United Kingdom.

Business ReviewThe Business Review forms part of the Directors’ Report and is presented separately on pages 15 to 21. It includes a review of the business during the year, likely future developments and the Group’s activities in Research and Development.

Financial risk managementDetails of the Group’s financial risk management objectives and policies are given in Note 3 to the financial statements.

Key operational risks/uncertaintiesKey operational risks and uncertainties have been covered in the Business Review.

Financial and non-financial KPisThe KPIs of relevance to the Business have been covered in the Business Review.

Results and dividends2009 results show a £915,000 loss before tax, compared to a loss before tax of £2,547,000 in 2008.

The Directors do not recommend a final dividend for 2009.

the Board of DirectorsThe current members of the Board, together with biographical details of each Director are set out on pages 22 to 23.

All the Directors (except Malcolm Brighton) served throughout the year.

Malcolm Brighton stepped down from the Board at the 2009 AGM and Sir David Brown was appointed the new Chairman.

Details of Directors’ service contracts and a statement of the interests of the Directors and their families in the ordinary shares of the Company is given in the Directors’ Remuneration Report on pages 33 to 37.

No Director had any material interest in any contractual agreement subsisting during or at the end of the year which is or may be significant to the Group.

A person who is willing to act as a Director may be appointed by the Board. The individual shall first have been nominated by the Nomination Committee. The appointment may be either to fill a vacancy or as an addition to the existing Board. The appointment shall continue until the next Annual General Meeting when the individual may be put forward for re-appointment by ordinary resolution of the members.

Retirement and re-election of DirectorsIn accordance with Article 98 of the Articles of Association, each Director retires from office at the next annual general meeting unless he or she was appointed or re-appointed at either of the last two annual general meetings before that meeting.

Mark Tebbutt retires by rotation and, being eligible, offers himself for re-appointment at the 2010 Annual General Meeting.

takeover directive disclosuresThe Company’s share capital is as follows:

Ordinary shares of 5p each At 31 December 2009 and 2008

Number £000

Authorised 46,000,000 2,300

Allotted, issued, called up and fully paid 34,621,600 1,731

All shares have equal rights and there are no restrictions on the transfer of securities in the Company or on the voting rights.

There are no securities that carry special rights with regard to control of the Company.

Employees are able to exercise voting rights over their beneficial shareholdings within the Company’s employees’ share scheme.

The Directors’ authority to issue the Company’s shares is set out below in the section relating to the Annual General Meeting on page 25.

The Directors currently do not have the authority to purchase the Company’s shares without first obtaining the specific approval of its members.

Details of substantial shareholdings:

At the date of this report the Company has been notified of the following shareholdings of 3% or more in the issued share of the Company:


Ordinary shares of 5p each

Percentage holding

Malcolm Brighton (Chairman until 11 May 2009) 7,079,697 20.45%

S D Stewart 2,000,000 5.78%

G Brighton 2,000,000 5.78%

J A Brighton 2,000,000 5.78%

Mark Brighton 2,000,000 5.78%

DRS Data & Research Services plc – Treasury shares 1,930,000 5.57%

J S Rockliff 1,300,000 3.75%

J P MacArthur 1,139,400 3.29%

A statement setting out the interest in shares in the Company of each Director and their connected persons as at 31 December 2009 is provided in the Directors’ Remuneration Report.

articles of associationThe Articles of Association may be amended by special resolution of the shareholders.

Significant agreementsThe agreement with Assessment and Qualifications Alliance (AQA) relating to e-Marker® services which became effective on 1 October 2005 remained in force throughout the year under review. It contained provisions allowing AQA rights of termination following a successful takeover of DRS Data Services Limited by certain rival companies. In January 2010 a further contract with AQA was agreed. Details are provided in the Business Review.

There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid.

Creditor payment policyThe Group’s normal practice is to agree terms and conditions with all suppliers before business takes place. Payment is then made on these terms subject to satisfactory performance by the supplier. Trade creditors at the year end represented 34 days (2008: 21 days) of average supplies for the year.

treasury sharesThe Company continues to hold 1,930,000 ordinary shares of 5p purchased between 3 June and 15 July 2004 for a total consideration of £1,166,000 as treasury shares. This represents 5.57% of the Company’s called up share capital.

annual General meetingThe Annual General Meeting of the Company will be held on Tuesday 25 May 2010 at 3.00pm at the Registered Office, 1 Danbury Court, Linford Wood, Milton Keynes MK14 6LR.

Renewal of authority to allotThe Directors’ current authority to allot relevant shares pursuant to Section 551 of the Companies Act 2006 will expire on 10 August 2010 or at the 2010 Annual General Meeting, if earlier. Resolution 5, as set out in the Notice of the Annual General Meeting, will be proposed as an Ordinary Resolution to authorise the Directors to allot Ordinary shares in the capital of the Company up to an aggregate nominal amount of £1,154,052. The authority (unless previously varied, revoked or renewed) will expire 15 months after the date of passing of the resolution or, if earlwier at the 2011 Annual General Meeting.

Disapplication of pre-emption rightsThe current authority for Directors to allot equity securities for cash without first being required to offer such securities to existing shareholders in proportion to their existing holdings expires on the 10 August 2010 or at the 2010 Annual General Meeting, if earlier. Resolution 6, as set out in the Notice of Annual General Meeting, will be proposed as a Special Resolution to renew the authority of the Directors under Section 570 of the Companies Act 2006 to allot shares for cash otherwise than on a pre-emptive basis. The number of shares which may be allotted will be limited to an aggregate nominal value of £86,554 (representing 5% of the issued share capital of the Company). The authority (unless previously varied, revoked or re-worked) will expire 15 months after the date of passing of the resolution or, if earlier at the 2011 Annual General Meeting.

Although there is no present intention of issuing any shares (other than pursuant to the Company’s share option schemes), the Directors consider it is desirable to maintain the flexibility afforded by these provisions.

Purchase of own sharesCurrently shareholder approval is needed for the Company to purchase its own shares. Resolution 7 as set out in the Notice of the Annual General Meeting, will propose as a Special Resolution to authorise the Company to make purchases of its Ordinary shares up to a maximum of 10% of the current issued share capital of the Company. The authority (unless previously varied, revoked or renewed) will expire 18 months after the date of passing of the resolution or, if earlier, at the 2011 Annual General Meeting.


DiRECtORS’ REPORt continued

Directors’ powers to issue redeemable sharesPursuant to the Articles of Association, the Company may issue redeemable shares. Resolution 9 as set out in the Notice of the Annual General Meeting will be proposed as a Special Resolution to authorise the Directors to determine the terms, conditions and manner of redemption of such shares.

Going concernIn considering going concern, the Directors have reviewed the Group’s future cash requirements and earning projections. The Directors believe these forecasts have been prepared on a prudent basis and have also considered the impact of a range of potential changes to trading performance. The Directors have concluded that the Group should be able to operate within its current facilities and comply with its banking covenants for the foreseeable future and therefore believe it is appropriate to prepare the financial statements of the Group on a going concern basis. This is supported by the Group’s liquidity position as set out in the Business Review on page 18.

auditorThe auditor, Grant Thornton UK LLP, has indicated its willingness to continue in office and a resolution re-appointing it as auditor will be proposed at the 2010 AGM.

BY ORDER OF THE BOARD

Sally HopwoodCompany Secretary

22 March 2010


CORPORatE GOvERnanCE REPORt

Disclosure statementThe Company is required by LR9.8.6 of the Listing Rules and the Combined Code on Corporate Governance (“the Code”), to make a disclosure statement on corporate governance in its annual report.

The Board is committed to high standards of corporate governance.

It is accountable to the Company’s shareholders for good governance and regularly reviews its procedures to take account of the principles of the Code. The Code, revised by the Financial Reporting Council in June 2008, sets out the standards of good governance practice for the Company and is publicly available on the Financial Reporting Council’s website.

The following statement sets out how the Company has applied the Main Principles set out in Section 1 of the Code.

Compliance with the Combined Code on corporate governanceThe Board considers that the Company fully complied with the Main Principles of the Code throughout the accounting period ended 31 December 2009 other than in respect of the following items:

A.3 Malcolm Brighton served on the Board as non-Executive Chairman until 11 May 2009. Malcolm Brighton was not considered by the Board to be independent within the meaning provided in the Code.

A.4.6 When Sir David Brown was appointed Chairman, a job specification was not prepared by the Nomination Committee and the position was not advertised externally. Sir David Brown had been appointed a non-Executive Director and Deputy Chairman in 2008 with a view to his appointment as Chairman on Malcolm Brighton’s retirement. Further details of the appointment are provided on page 28.

A.6 The annual evaluation of the Board’s performance was commenced in 2009 and completed early in 2010.

D.1 The Principle states the responsibility of the Board as a whole for dialogue with shareholders. In the Company the responsibility of communicating with the major shareholder and institutional investors during the year under review rested with the Chief Executive Officer and the Finance Director. It is the Company’s policy to make the Directors available at the shareholders’ request.

Board of DirectorsThe Board of Directors provides leadership to the Company and is responsible for directing the employees

of the Company in accordance with good corporate governance practices in order to promote the success of the Company.

Malcolm Brighton retired as Chairman on 11 May 2009 and Sir David Brown was duly appointed as Chairman on the same day and is considered by the Board to be independent. The role of Chairman has no executive responsibilities.

At 31 December 2009, and at the date of this report, the Board comprises:

Sir David Brown, non-Executive Chairman•

Tony Lee, Chief Executive Officer•

Mark Tebbutt, Finance Director•

Chris Batterham, non-Executive Director•

Ann Limb, non-Executive Director•

Lord Kinnock of Bedwellty, non-Executive Director•

The Board considers all the non-Executive Directors as independent under the Code. The names and biographical details of the current Directors are given on pages 22 to 23.

The roles of the Chairman and Chief Executive Officer are separated and their responsibilities are clearly established, set out in writing and are agreed by the Board. The Chairman is responsible for the leadership and workings of the Board and ensuring its effectiveness and setting its agenda. The Chief Executive Officer is responsible for the running of the business and the implementation of the Board strategy and policy.

The non-Executive Directors possess broad business and commercial experience with the independent and objective judgement in markets that DRS operates in and, as part of their role as members of the Board, they constructively challenge and help deliver proposals on strategy. They satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are appropriate.

The Board provides effective leadership and prudent control of the Company and its subsidiary companies ensuring that the decision making process cannot be dominated by any individual or by a small group of individuals.

The Board has a schedule of matters reserved for its decision. It is responsible for determining overall Group strategy, establishing policies and objectives, ensuring that necessary financial and human resources are in place to enable these objectives to be met and reviewing management performance.

CORPORatE GOvERnanCE REPORt continued


The Board provides leadership of the Group within the framework of prudent and effective controls which enable risk to be assessed and managed and it ensures that obligations to shareholders and others are understood and met. All Directors take decisions objectively and in the interests of the Company.

In accordance with the requirements of the Companies Act 2006 (“the Act”), all Directors are required to disclose all matters to the Board that may involve that Director breaching his duty to avoid conflicts of interest.

The Company’s Articles of Association include arrangements for Board authorisation to be granted in certain circumstances and in accordance with the provisions of the Act.

Chris Batterham is appointed Senior Independent Director. He is available for the Company’s shareholders to contact with matters of concern and he is also the contact for arrangements by which Group employees may, in confidence, raise concerns about possible wrong-doing in financial reporting or other matters (so called ‘whistle-blowing’ procedures) and is responsible for ensuring that arrangements allow proportionate and independent investigation of such matters and for appropriate follow up action.

The Board meets as regularly as necessary in order to discharge its duties effectively. During 2009 the Board met ten times and the Directors’ attendance record is set out on page 29 of this report. In addition, the Chairman and non-Executive Directors met without Executive Directors being present.

In September, the Board met to discuss Group strategy and performance. Due to Malcolm Brighton’s retirement as Chairman and Sir David Brown’s appointment, the Board decided that the Chairman’s performance would not undergo evaluation during the year but would be evaluated in the opening months of 2010.The Senior Independent Director is responsible for leading that evaluation. Separate evaluations of the performance of the Remuneration and Audit Committees were commenced and were completed by the year end.

The Board is supplied with appropriate, timely and clear information to enable it to discharge its duties. In addition, all Directors have access to advice from the Company Secretary and independent professionals at the Company’s expense. Appropriate insurance cover is maintained in respect of legal action against any of the Company’s Directors.

Board CommitteesThe Board has established three main Committees; the Nomination, Remuneration and Audit Committees. The terms of reference of each Committee are reviewed annually by the Board and are available upon request

from the Company Secretary, or from the Group’s website. The Committee chairmen will attend the Annual General Meeting and shall respond to shareholders’ questions on their Committee’s activities. The Secretary of the Board Committees is the Company Secretary, Sally Hopwood.

nomination CommitteeThis Committee meets as required to propose to the Board in the first instance, the appointment of new Executive and non-Executive Directors. The Committee is delegated authority by the Board to thoroughly review the skills, knowledge and experience requirements and the job descriptions for specific appointments. The members of the Nomination Committee are Tony Lee, Chris Batterham, Ann Limb, Lord Kinnock and Sir David Brown, who chairs the Committee.

Candidates are assessed and interviewed by the Nomination Committee and a recommendation is made to the Board. The decision to appoint a candidate is made by the Board itself.

The Nomination Committee met twice during 2009. The Committee met initially in January to consider the appointment of Mr Denton van Niekerk as Sales and Marketing Director for DRS Data Services Limited. It then met in May in order to consider the appointment of Sir David Brown as Chairman. Before recommending the Chairman’s appointment to the Board, the Committee reviewed the balance and effectiveness of the Board and also considered the likely time commitments to the role. The significant contribution made by Sir David Brown since his appointment as Deputy Chairman was taken into account and it was not thought necessary to involve external advisers in this appointment.

Remuneration CommitteeThe Committee is chaired by Ann Limb. The other members of the Committee are Chris Batterham, Lord Kinnock and Sir David Brown.

The Remuneration Committee is responsible for determining the remuneration of the Chairman and the Executive Directors and for recommending and monitoring the level and structure of remuneration for senior management.

The Committee met six times in 2009. Further details are provided later in this report.

The Directors’ Remuneration Report set out on pages 33 to 37 provides more information on the Remuneration Committee and the Company’s remuneration policy for Executive and non-Executive Directors.

The Board determines the fees of the non-Executive Directors within the limits set out in the Articles of Association.


audit CommitteeThe Committee is chaired by Chris Batterham who has significant, recent and relevant financial experience as required by the Code. The other members of the Committee are Sir David Brown, Ann Limb and Lord Kinnock. Tony Lee and Mark Tebbutt attend Audit Committee meetings when invited.

The Committee’s duties include reviewing the effectiveness of the Group’s external auditor, reviewing half yearly and annual financial statements before they are presented to the Board, focusing on financial reporting, accounting policies and compliance. The Committee considers areas of management judgement and estimates, and the effectiveness of internal control procedures is being reviewed annually. The Audit Committee also reviews the Company’s whistle-blowing arrangements by which its employees may raise concerns about financial reporting and other matters. In 2009, the Committee also reviewed the Company anti-fraud policy and recommended its implementation to the Board.

The Committee reviews the nature and extent of all services supplied by the external auditor to ensure independence is not impaired and makes recommendations to the Board on the external auditor’s remuneration and terms of engagement. The Audit Committee is responsible for overseeing the appointment and removal of the external auditor.

The Committee met six times in 2009. The Company’s external auditor, Grant Thornton UK LLP, is invited to attend meetings of the Committee at least twice a year. The external auditor continues to operate procedures to safeguard against the possibility that its objectivity and independence could be compromised and those procedures are examined by the Committee annually prior to appointment. Grant Thornton UK LLP provides a report annually to the Audit Committee confirming its independence and the scope of its non-audit services.

The Audit Committee has considered the need for an internal audit function but has decided the size of the Group does not justify it at present. However, it will keep the decision under annual review.

attendance at meetingsThe following table details the number of Board and Committee Meetings held during the year ended 31 December 2009 and the attendance record of each Director.

Board Audit Remuneration Nomination

Number of meetings held in year 10 6 6 2

C M Batterham* 10 6 5 2

M Brighton*‡ 3 3† 4† 2

Sir David M Brown* 10 6 6 2

Lord N G Kinnock* 9 4 5 1

A C Lee 10 6† 6† 2

A G Limb* 10 6 6 2

A M Tebbutt 10 6† 2† 1†

* non-Executive Director† attendance by invitation (for all or part of meeting)‡ retired from the Company 11 May 2009

Relations with shareholdersThe Board is committed to ensuring that there is effective communication with all interest groups and that an active dialogue with shareholders is always maintained. The Group’s website provides our stakeholders with regulatory news announcements, press releases and the Annual Report and Accounts which are available for download together with information of a more general nature regarding the Group’s business activities. The website address is www.drs.co.uk.

The Chief Executive Officer and Finance Director meet every year with the Company’s major institutional shareholders. Since 11 May 2009 major shareholders, fund managers and analysts have been given an opportunity to meet with the Chairman on a more regular basis or with the Senior Independent Director, if they so require.

Additionally, all non-Executive Directors are willing to meet with institutional shareholders to discuss any concerns they may have. From time to time, the Board receives independent feedback from analysts and institutional shareholders.


All the Company’s Directors attend the Annual General Meeting which takes place at the Company’s registered office. A separate circular has been provided with this Report which contains the Notice of Annual General Meeting and details of the business to be considered at the meeting. A copy of the Notice is also published on the Company’s website. The Annual General Meeting is used to communicate with private investors and institutional shareholders alike and all are encouraged to participate. Shareholders are invited to ask questions and are able to meet the Directors informally. Separate resolutions are proposed on each issue so that they can be given proper consideration and there is a resolution to receive the Annual Report and Accounts. Abstentions as well as votes for and against every resolution are counted. The Company reports on the number of proxy votes and will indicate the level of proxies lodged on each resolution before it has been dealt with by a show of hands. This information is supplied to shareholders attending the Annual General Meeting and is published on the Company’s website following the meeting.

internal control and risk managementThe Board has overall responsibility for implementing, maintaining and reviewing a robust system of internal controls which cover all aspects of the business.

In designing the system, the Directors have considered the principal risks and exposures further referred to in the Business Review on page 20 which has been reviewed by the Audit Committee which has also taken into account developments occurring since the end of the year.

The system manages the risk of failure to achieve business objectives but does not eliminate such risk. The Directors believe it provides reasonable but not absolute assurance of:

no material misstatement or losses;•

no unauthorised use of the Company’s assets; and•

the maintenance of proper accounting records.•

The key features of the internal control, financial reporting system and risk management system are:

a clearly defined management system with defined •levels of responsibility and delegation of authority;

authorisation limits set at appropriate levels;•

a comprehensive forecasting and budgeting system;•

monthly financial management reports comparing •actual results against monthly forecasts;

individual tender and project review procedures to •support the bidding process prior to contract award;

implementation of an anti-fraud policy to provide •a confidential method of reporting relevant suspected activities; and

regular review and reporting of health and safety and •environment matters.

Financial riskInternal financial controls are based upon a budgetary process which involves senior managers working with the Executive Directors to prepare an annual budget that is in line with corporate objectives set out in the three year plan. Senior managers’ performance is then monitored against the agreed financial targets in management accounts that are prepared on a monthly basis. The overall approach is supported by detailed internal financial controls operated on a day-to-day basis on all aspects of the business. Proper accounting records are maintained and the reliability of management information, compliance with appropriate legislation and regulation and the identification and control of business risks are continually assessed.

The Board conducted a review of the Group’s system of internal controls during 2009. It considers that there is an on-going process in place within the Company for identifying, understanding, evaluating and managing significant risks facing the Group. The process remained in place at the date of approval of this report. It is effective at managing the risk of failure to achieve business objectives, and provides reasonable (though not absolute) assurances against material misstatement or loss.

Furthermore, the Board is satisfied that material action is taken promptly to remedy significant weaknesses which may be identified.

Details of the financial risk management objectives and policies of the Group, and exposures to financial risks are given in Note 3 to the financial statements.

Risk of conflictsThe Directors have been made aware of the statutory duty to avoid any situation in which they have or may have a possible conflict with the interests of the Company. This duty is not infringed in cases where such a conflict situation has been authorised in advance by other Board members in accordance with the Company’s constitution. The Articles of Association contain appropriate provisions for the authorisation of conflict situations. All Directors have notified the Board of all situations which may give rise to potential conflict with the interests of the Company and refresh this information regularly.



22 March 2010

CORPORatE GOvERnanCE REPORt continued


CORPORatE SOCiaL RESPOnSiBiLitY REPORt

introduction

Though 2009 was a difficult trading year, the Board retains the belief that sound management of environmental, governance and social issues should be a cornerstone of the Group’s development.

For DRS the most significant issues continue to be:

Relationships with customers and suppliers;•

Relationships with our staff; and•

How the Group’s activities impact on our environment •and contribute to our community.

These issues continue to be monitored and reported on internally following methods established by the Capability Maturity Model, introduced to support the development of the Company’s processes in 2007.

Our suppliers and customers The Company has retained its accreditation to the three ISO standards it achieved in 2007 and 2008. Our staff are now familiar with the aims and objectives of these standards and they contribute significantly to the way in which business is undertaken:

ISO 27001 (in which re-accreditation was secured •in 2009) upholding the confidentiality, integrity and availability of information;

ISO 14001 through which policies and objectives have •been implemented to meet our legal requirements and to assess any significant environmental impacts of the business; and

ISO 9001 which is helping the business to focus upon •meeting our customers’ stated requirements.

An independent audit of the operational performance of DRS was conducted with regard to the ISO 14001 accreditation. The audit was conducted in January 2009 and concluded that DRS had exercised a sufficient level of environmental management throughout 2008 to continue with ISO 14001 accreditation.

In 2009 the order acceptance and capacity processes were implemented throughout the business, supporting our approach to customers by providing improvements to the quotation, invoicing and sales recording systems we operate and ensuring an efficient, high quality customer response is delivered every time. Implementation of a new end-to-end sales process began in 2009 and is continuing.

Our working relationships with suppliers and customers remain a focus and both debtor and creditor days have continued to improve throughout the year.

The development of competencies and skill sets of our employees were reviewed during the year under the competencies and skills project.

Our employeesThe Board is committed to ensuring that the highest possible health and safety and welfare standards are delivered consistently throughout the business to its employees, its customers and the general public. The Group will take all steps necessary and work within its power to meet this responsibility by regularly reviewing, amending and improving all relevant policies and procedures, meeting its obligations and exceeding best practice standards wherever possible.

Staff are introduced to the Company Heath and Safety at Work policy when employment commences and undertake regular reminder training paying particular attention to the priority and maintenance of safe plant and equipment and the safe handling, transportation and storage of substances and equipment which are in use.

During 2009 Health and Safety matters have received more regular consideration as Health and Safety Committee recommendations and findings are now reported bi-monthly. The minutes of the Committee meetings are available to all our staff through the Company’s intranet site.

An on-going programme of fire safety training is provided through which all employees are trained to take reasonable measures to protect their own safety and that of their colleagues and visitors.

A programme of management training and development was introduced in 2008 and continues year on year. In 2009 it emphasised the importance of the development of communication skills throughout the management team.

A number of DRS’ information systems and software specialists have gained the Microsoft Certified Professional Qualification. Their continued training and certification to this qualification enables new skill sets to be learned and increases their professional development and helps DRS retain its status as a Microsoft Certified Partner (Gold Status).

DRS remains committed to the Investors in People standard and in 2009 again achieved accreditation. It has been awarded this standard annually since 1999.

Employees are encouraged to participate in the Company’s various sports and social clubs including golf, badminton, netball and music. A golf tournament is held annually and is open to all staff. The Company has a netball team, the ‘DRS Dragons’, which competes in a local business league.


CORPORatE SOCiaL RESPOnSiBiLitY REPORt continued

Environmental policyDRS is aware of its impact on the environment. It is the Group’s policy to support and encourage environmentally sound business operations. DRS works hard to minimise its impact by:

meeting all statutory obligations placed upon us;•

pursuing environmentally responsible working practices •to reduce the business environmental load;

recycling of waste products and the safe disposal of •non-recyclable materials;

using environmentally friendly materials in production •where we can; and

working with responsible organisations. We closely •evaluate the environmental credentials of potential suppliers who are now required to complete an environmental questionnaire prior to undertaking any business.

The environmental ‘Green Team’ which was formed in 2007 meets regularly to consider environmental matters across the business looking at initiatives that can be undertaken to protect the environment. Environmental assessments are conducted on key projects, the findings of which are made available for the Board’s consideration.

An energy awareness initiative was undertaken during 2009 which succeeded in reducing energy use throughout the organisation by 8% compared to 2008.

A Company-wide ‘Ideas Site’ was launched in 2009 to allow DRS staff the opportunity to submit ideas for business improvement to the Executive Management Team. Many of the ideas submitted have been implemented and have resulted in further reductions in the consumption of energy. KPIs have also been extended to track utility usage and show reduction in consumption as a direct result of these staff suggestions.

Recycling of paper, plastics, cardboard, polythene and chemical waste is always undertaken. Recycling of waste pallets was introduced in 2009. DRS continues to participate in ‘Paper Planet’, a local initiative whereby trees are planted by us at a local beauty spot to offset the environmental impact of the business.

Component parts are also recycled wherever possible. At the end of life of products supplied, customers are expected to return them to DRS for disposal or recycling in accordance with the Waste and Electronic Equipment Directive and the Batteries and Accumulators (Placing on the Market) Regulations 2008 (SI 2008/2164).

DRS also operates in accordance with the requirements of the European Directive 2002/95/EC (RoHS Directive) ensuring its products comply, where required, with the restrictions on the use of certain hazardous substances.

Our communityThe Linford Wood Forum is a meeting of representatives from businesses with premises in the neighbourhood of the Company’s head office. DRS is represented at these meetings where issues discussed include traffic management, local security, the sharing of good practices and information regarding common service providers. The Forum is recognised by Milton Keynes Council.

Every year the ‘DRS bike challenge’ is organised and in 2009 employees again participated in the Oxford to Cambridge cycle ride, collecting for the chosen charity The British Heart Foundation.

DRS continued its support of the Milton Keynes Community Foundation in 2009, a local charitable enterprise supporting local good causes. In total, the Group made charitable donations in the year amounting to £4,990 (2008: £9,860).

Having sponsored the Milton Keynes City Orchestra for more than 20 years it was decided in 2009 that the Board would look at other local community projects to support. This work is currently continuing with a view to implementing a new plan for support in future years.



22 March 2010


DiRECtORS’ REmunERatiOn REPORt

This report has been prepared by the Remuneration Committee and has been approved and adopted by the Board. It is intended to inform shareholders of the Company’s policy on Directors’ remuneration, as recommended by the Remuneration Committee. It has been prepared in accordance with the provisions of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the Listing Rules and the Revised Combined Code on Corporate Governance (“the Code”). An ordinary resolution will be put to the shareholders at the Annual General Meeting on 25 May 2010 inviting them to consider and approve this report.

unaudited informationRemuneration CommitteeThe Remuneration Committee is a Board Committee and comprises three independent non-Executive Directors and the Board Chairman who was considered independent when appointed as Chairman.

The following Directors were members of the Committee for the year ended 31 December 2009:

A G Limb (Committee chairman)D M BrownC M BatterhamN G Kinnock

The Committee held six meetings during the year. Further details are shown on page 29.

None of the Remuneration Committee members have any personal financial interests (other than as shareholders), no potential conflicts of interest arising from cross-directorships, or any day-to-day involvement in running the business. During his chairmanship of the Company, Malcolm Brighton was invited to attend the Committee’s Meetings. The Chief Executive Officer also attends meetings at the invitation of the Committee, but is not present when his own remuneration is discussed.

The Secretary of the Committee is Sally Hopwood, the Company Secretary.

The Terms of Reference of the Committee are available on the Company’s website.

AdvisersDuring the year, the Committee appointed Pricewaterhouse Coopers LLP (“PwC”) to provide advice on Executive Directors’ remuneration and benefits packages. PwC provided no other advice to the Company. In 2010 PwC were replaced as advisers to the Committee by BDO LLP.

Remuneration policyThe Remuneration Committee is responsible for determining the policy on remuneration for Executive Directors and other senior executives and, based on

this policy, it determines the individual remuneration and benefits package for each of the Executive Directors and the Chairman (who is not present when his own remuneration is discussed). The Committee is responsible for approving all awards and option grants under the Group’s discretionary share incentive plans.

The Remuneration Committee’s policy on Executive Directors’ remuneration has been that packages are competitive and are designed to attract, motivate and retain high calibre executives. Its aim is also to maintain an appropriate balance between the elements of remuneration that are fixed (such as basic salary, benefits in kind and pensions) and the performance-related elements such as bonuses and incentives. The Directors’ remuneration and share interests are set out in full in pages 35 to 37.

When setting remuneration, the Committee considers the conditions in the Group as a whole, the position of DRS relative to other companies and what such companies are paying, though comparisons are treated cautiously to avoid unjustified remuneration escalation.

The key features of the remuneration policy are as follows:

base salaries will be kept at conservative levels in order •to minimise fixed costs and the attendant impact on the Company’s earnings;

the annual bonus will be structured with the specific •aim of targeting annual revenue and profit growth over the next three years;

the Company’s Value Creation Plan will target •exceptional growth in shareholder value as measured by the increase in the share price from 20 May 2009;

executives are offered a competitive package of •total compensation commensurate with comparable packages available in similar companies;

the interests of the Executive Directors and senior •executives are closely aligned with those of the Company’s shareholders through the provision of share incentives;

a significant proportion of potential total reward will be •conditional on short- and long-term performance; and

executive reward is linked to the satisfaction of clear •and targeted objectives which are the main drivers of shareholder value.

DiRECtORS’ REmunERatiOn REPORt continued


Basic salary, fees and benefitsThe Remuneration Committee determines the basic salary of each Executive Director in January each year having regard to:

market comparable data;•

individual responsibilities;•

individual and corporate performance; and•

pay and conditions throughout the Company.•

The Remuneration Committee has kept basic salaries at conservative levels to reflect the current stage of development of the Company and the current economic environment.

In addition the Company provides benefits comprising a company car fully funded for business mileage, or a cash allowance in lieu of company car, settlement by the Company of professional fees in respect of personal tax affairs, private healthcare arrangements, life assurance cover and permanent health insurance. These benefits are in line with those provided by companies of a similar size to the Company.

Performance related cash bonusThe Remuneration Committee, in awarding annual bonuses, considers the Group’s financial performance during the year in respect of turnover, profitability, Earnings per Share (EPS) and an assessment of the individual Executive Director’s performance targets.

An annual bonus scheme was adopted in May 2009 with a maximum potential value equal to 75% of individual salary. Of that bonus 80% is linked to stretching revenue and profit targets which support the Company’s new business strategy. The remaining 20% is linked to individual performance measures.

In January in each year, the Remuneration Committee reviews personal achievements against the targets set for the previous year and sets new targets for the coming year.

Long-term equity based incentive plansThe Remuneration Committee’s policy has been to approve share options to Executive Directors and key senior executives that relate to the Group’s growth in EPS, in order to align the interests of Directors more closely with those of shareholders.

In November 2005, at an Extraordinary General Meeting, the shareholders approved a Long Term Incentive Plan (LTIP) for Executive Directors and key senior executives. Awards under the scheme are based on the Company’s EPS and Total Shareholder Return (TSR) performance being at least at the median compared to the companies

constituting the FTSE All Share Software & Computer Services Index.

The Remuneration Committee sought shareholder approval at the 2009 AGM for the introduction of a new equity incentive, the Value Creation Plan (VCP). Following approval by shareholders of the VCP, this has become the primary equity incentive vehicle to retain and incentivise key executives in the Company and align their interests with those of shareholders.

Under the VCP, key executives are granted a one-off award of units (“VCP Units”) from an agreed number. These VCP Units have no value on grant but give a participant an opportunity to acquire Company shares with a value equivalent to 10% of the total value created for shareholders over a three year measurement period beginning on 20 May 2009.

However, these VCP Units will only pay out if the closing price of the Company’s shares at the measurement date (being an average share price over a 30 day period) is greater than 35p.

If this threshold price is achieved, the VCP Units convert into VCP Awards (nil-cost options) equivalent and limited to 10% of the increase in share value since the Units were granted. 50% of the VCP Awards will then be exercisable immediately and 50% will be exercisable after one year – all VCP Awards lapse seven years after grant (if not exercised before then).

In February 2005 HM Revenue & Customs approved a Share Incentive Plan (SIP) for all employees of the Company including the Executive Directors. The SIP allows participants to invest up to £125 per month by way of salary deduction in the Company’s shares. For every two partnership shares purchased by the participant prior to July 2009, one additional matching share was gifted by the Company. The scheme is operated in accordance with HM Revenue & Customs rules.

PensionsEach of the Executive Directors is a member of one of the Company’s money purchase pension schemes. Pension arrangements for each Executive Director provide for a pension on retirement at the age of 65 based on a contribution by the Company of a sum equivalent to 20% of basic salary.

Base salary is the only component of remuneration which is pensionable. There is no requirement for an individual Director to contribute to his pension scheme. The Chief Executive Officer’s dependants are eligible for Dependant’s Pension. Each of the Executive Directors is entitled to the payment of a lump sum equivalent to four times basic salary in the event of death in service.


Directors’ contractsThe Executive Directors have rolling contracts with an entitlement to not less than six months’ notice. The contracts date from the date of appointment to the Board as set out in Directors’ interests below. There is no defined provision for compensation payable upon early termination of the contract. Neither of the Executive Directors has been appointed as a non-Executive Director or chairman of any FTSE 100 company.

Non-Executive Directors’ fees are determined by the Board within the limits set down in the Articles of Association and reflect the time commitment and responsibilities of the role. The non-Executive Directors each have letters of appointment, which refer to the re-election requirements under the Articles of Association. Each appointment is for three years and either party may terminate the appointment on three months’ notice at any time. Malcolm Brighton’s letter of appointment contained similar provisions. Contractually he was not entitled to receive any form of compensation payment when he retired from the business in May 2009 and no such payment was made to him. Sir David Brown’s appointment is for three years from 11 May 2009 and either party may terminate the appointment on six months’ notice at any time.

If a non-Executive Director’s appointment is terminated early there is no provision for compensation. The Company may, at its discretion, terminate Sir David Brown’s appointment with immediate effect by paying him a sum equal to six months’ fees. Copies of the letters of appointment will be available for inspection at the AGM.

Non-Executive Director’s fees are determined by the Board and the Chairman’s fees are determined by the Remuneration Committee in January of each year, having regard to individual responsibilities, performance and comparative information.

Mark Tebbutt will be proposed for re-appointment to the Board at the Annual General Meeting.

Directors’ interestsThe beneficial interests of Directors (including their spouses’ holdings) in the Ordinary shares of the Company as recorded in the register maintained by the Company were as follows:

Ordinary Shares of 5p

Date of Appointment to

Board

As at 22 March

2010

As at 31 December

2009

As at 1 January

2009

C M Batterham (non-Executive Director) 01.09.2005 40,000 40,000 40,000

M Brighton OBE (Chairman: retired 11/05/09) 16.09.1969 9,079,697 9,079,697 9,079,697

Sir David Brown (Chairman: appointed 11/05/09) 01.08.2008 – – –

Lord N G Kinnock (non-Executive Director) 16.05.2005 29,408 29,408 –

A C Lee (Executive Director) 15.09.1997 145,466 142,627 129,457

A G Limb (non-Executive Director) 20.05.2003 50,205 50,205 50,205

A M Tebbutt (Executive Director) 25.03.2002 524,019 521,180 508,010

DiRECtORS’ REmunERatiOn REPORt continued


Performance graphsThe graph below compares the Company’s total shareholder return performance against the FTSE All Share Software & Computer Services index. The FTSE All Share Software & Computer Services index is considered the most appropriate for comparison purposes.

The graph shows the change in hypothetical value of £100 invested in the Company’s Ordinary shares on 1 January 2005 compared with the change in hypothetical value of £100 invested in the FTSE All Share Software & Computer Services index.

DRS Data & Research Services PLC – Total Return on Investment

audited informationDirectors’ remunerationThe salary, fees, annual bonus and other benefits of individual Directors are as follows:

Money Purchase Pension Contributions

Salary and Fees

£000

Annual Performance

Related Bonus

£000 %

Benefits

£000

Total 2009

£000

Total 2008

£000

2009

£000

2008

£000

Executive

A C Lee (CEO) 110 – – 13 123 122 22 22

A M Tebbutt 99 – – 12 111 110 20 20

209 – – 25 234 232 42 42

Non–Executive

C M Batterham 25 – – – 25 25 – –

Sir David Brown1 42 – – – 42 12 – –

M Brighton2 14 – – – 14 32 – –

Lord N G Kinnock 25 – – – 25 25 – –

A G Limb 25 – – – 25 25 – –

131 – – – 131 119 –

Total 340 – – 25 365 351 42 42

1 Chairman appointed 11/05/09 2 Chairman retired 11/05/09

The Board decided that no annual bonuses should be paid for 2009.

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.0

01 January 2005 DRS Data & Research Services PLC FTSE ALL SHARE S/W & COMP SVS 31 December 2009


Equity incentives Following shareholder approval of the VCP at the AGM on 11 May 2009, the Remuneration Committee granted units under the VCP to the Executive Directors. Details of the VCP are set out earlier in this report.

For previous financial years the Remuneration Committee approved a grant of options to the Executive Directors under the terms of the DRS 2005 Long Term Incentive Plan (LTIP) and the DRS Data & Research Services plc Enterprise Management Incentive (EMI) Scheme.

The performance criteria for options granted both under the LTIP and the EMI Scheme is based on:

EPS in the last reported financial year on the third anniversary of grant; and •

TSR over these three years being at least at the median compared to the companies constituting the FTSE All Share •Software & Computer Services index.

The extent to which the option will be exercisable is based on a sliding scale dependent upon the EPS reported in the 2010 audited annual accounts being greater than 3.0p per share. 25% will be exercisable if the EPS equals 3.0p and 100% will be exercisable if the EPS is 6.0p per share, with pro-rata award between these levels.

In any financial year a participant may not be awarded options over Ordinary shares with an aggregate value of more than their basic salary calculated by reference to the market value of the Ordinary shares at the time of the grant.

Directors’ share optionsDetails of Directors’ share options are given below.

Scheme

Options granted to

01.01.09Granted in

year Lapsed

Exercised during

year

Options held at

31.12.09Exercise

priceExercisable

dateExpiry

date

A C Lee RSS 100,000 – – – 100,000 18.0p 10.09.03 10.09.10

A C Lee LTIP 196,419 – 196,419 – – NIL 28.03.09 28.03.16

A C Lee EMI 80,000 – – – 80,000 NIL 13.04.10 13.04.17

A C Lee LTIP 133,180 – – – 133,180 NIL 13.04.10 13.04.17

A C Lee EMI 144,578 – – – 144,578 NIL 12.03.11 12.03.18

A C Lee LTIP 248,386 – – – 248,386 NIL 12.03.11 12.03.18

A M Tebbutt LTIP 113,716 – 113,716 – – NIL 28.03.09 28.03.16

A M Tebbutt EMI 80,000 – – – 80,000 NIL 13.04.10 13.04.17

A M Tebbutt LTIP 73,600 – – – 73,600 NIL 13.04.10 13.04.17

A M Tebbutt EMI 144,578 – – – 144,578 NIL 12.03.11 12.03.18

A M Tebbutt LTIP 138,564 – – – 138,564 NIL 12.03.11 12.03.18

The following units were granted to Executives under the VCP approved by shareholders in May 2009:

A C Lee 300A M Tebbutt 200

The total number of units allocated to Executives Directors and other senior executives under the VCP is 1,000. Further details of the operation of the VCP are contained in the unaudited section of this report.

The market price of the Company’s shares at 31 December 2009 was 12.0p (2008: 11.0p) and the high and low values during the year were 16.5p and 10p respectively.


Ann LimbChairman of Remuneration Committee

22 March 2010


The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors prepare financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). The Group financial statements are required by law to give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. The Company financial statements are required by law to give true and fair view of the state of affairs of the Company. In preparing these financial statements, the Directors are required to:

select suitable accounting policies and then apply them •consistently;

make judgments and estimates that are reasonable •and prudent;

state whether applicable IFRSs have been followed, •subject to any material departures disclosed and explained in the financial statements; and

prepare the financial statements on the going concern •basis unless it is inappropriate to presume that the Company and Group will continue in business.

The Directors are responsible for keeping adequate accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In so far as each of the Directors is aware:

there is no relevant audit information of which the •Company’s auditor is unaware; and

the Directors have taken all steps that they ought to •have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

To the best of our knowledge:

the financial statements, prepared in accordance with •the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

the Directors’ report includes a fair review of the •development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


A C Lee A M TebbuttChief Executive Officer Finance Director

StatEmEnt OF DiRECtORS’ RESPOnSiBiLitiES


REPORt OF thE inDEPEnDEnt auDitOR to the members of DRS Data & Research Services plc

We have audited the financial statements of DRS Data & Research Services plc for the year ended 31 December 2009 which comprise the consolidated and Parent Company statement of financial position, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated and Parent Company statements of changes in equity, the consolidated and Parent Company statements of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditorAs explained more fully in the Statement of Director’ Responsibilities set out on page 38, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.

Scope of the audit of the financial statementsA description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/UKP

Opinion on financial statementsIn our opinion:

the financial statements give a true and fair view of •the state of the Group’s and of the Parent Company’s affairs as at 31 December 2009 and of the Group’s loss for the year then ended;

the Group financial statements have been properly •prepared in accordance with IFRS as adopted by the European Union;

the Parent Company financial statements have been •properly prepared in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

the financial statements have been prepared in •accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

Separate opinion in relation to iFRSsAs explained in Note 1.2 to the Group financial statements, the Group in addition to complying with its legal obligation to comply with IFRSs as adopted by the European Union, has also complied with IFRSs as issued by the International Accounting Standards Board (IASB).

In our opinion the Group financial statements comply with IFRSs as issued by the IASB.

Opinion on other matters prescribed by the Companies act 2006In our opinion:

the part of the Directors’ Remuneration Report to be •audited has been properly prepared in accordance with the Companies Act 2006;

the information given in the Directors’ Report for •the financial year for which the financial statements are prepared is consistent with the financial statements; and

the information given in the Corporate Governance •Report set out on pages 27 to 30 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.

matters on which we are required to report by exceptionWe have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:

adequate accounting records have not been kept by •the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

the Parent Company financial statements and the part •of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or

REPORt OF thE inDEPEnDEnt auDitOR to the members of DRS Data & Research Services plc continued


certain disclosures of Directors’ remuneration specified •by law are not made;

we have not received all the information and •explanations we require for our audit; or

a Corporate Governance Statement has not been •prepared by the Company.

Under the Listing Rules, we are required to review:

the Directors’ Report, set out on page 26, in relation to •going concern; and

the part of the Corporate Governance Statement •relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review.

Malcolm A GomersallSenior Statutory Auditorfor and on behalf of Grant Thornton UK LLP

Statutory Auditor, Chartered AccountantsCentral Milton Keynes

22 March 2010

Consolidated inCome statement for the year ended 31 December 2009

dRs data & Research services plc Annual Report and Accounts for the year ended 31 December 2009 41

Notes

Total 2009

£000

Total 2008

£000

Revenue 5 14,901 17,429

Cost of sales (10,026) (11,560)

Gross profit 4,875 5,869

Other operating income 7 72 763

Selling and marketing costs (1,766) (1,903)

Administrative expenses (3,696) (7,004)

Finance costs 9 (400) (272)

Loss before income tax 5 (915) (2,547)

Tax credit/(charge) 11 194 (445)

Loss for the period 10 (721) (2,992)

Consolidated statement of comprehensive income

Loss for the period (721) (2,992)

Other comprehensive income

– exchange difference on translation of foreign operations 248 (70)

Total comprehensive loss for the period (473) (3,062)

Loss per share for loss attributable to the equity holders of the Company during the year (expressed in pence per share)

– basic 24 (2.28p) (9.46p)

– diluted 24 (2.28p) (9.46p)

Consolidated statement of finanCial position at 31 December 2009

dRs data & Research services plc Annual Report and Accounts for the year ended 31 December 200942

Notes

2009

£000

2008

£000

ASSETS

Non–current assets

Property, plant and equipment 12 3,098 3,511

Intangible assets 13 1,321 1,174

Goodwill 14 – –

Deferred income tax assets 20 211 6

4,630 4,691

Current assets

Inventories 15 1,020 1,421

Trade and other receivables 16 1,887 2,557

Current income tax receivable 159 –

Cash and cash equivalents 17 2,938 2,766

6,004 6,744

Total assets 10,634 11,435

EQUITY

Capital and reserves attributable to the Company’s equity holders

Share capital 18 1,731 1,731

Share premium account 19 5,377 5,377

Capital redemption reserve 19 115 115

Treasury shares 18 (1,166) (1,166)

Own shares reserve 19 (319) (319)

Translation reserve 19 (131) (379)

Retained earnings (651) 68

Total equity 4,956 5,427

LIABILITIES

Non–current liabilities

Borrowings 22 2,250 2,250

Deferred income tax liabilities 20 181 34

2,431 2,284

Current liabilities

Trade and other payables 21 3,247 3,549

Current income tax liabilities – 175

3,247 3,724

Total liabilities 5,678 6,008

Total equity and liabilities 10,634 11,435

The financial statements were approved by the Board of Directors on 22 March 2010 and signed on its behalf by:


Consolidated statement of Changes in equity


Share

capital

£000

Share premium account

£000

Capital redemption

reserve

£000

Treasury shares

£000

Own shares

reserve

£000

Retained earnings

£000

Translation reserve

£000

Total

£000

At 1 January 2008 1,731 5,377 115 (1,166) (335) 3,387 (269) 8,840

Dividend – – – – – (285) – (285)

Employee share-based compensation – – – – – (26) – (26)

Own shares vesting – – – – 16 (16) – –

Transactions with owners – – – – 16 (327) – (311)

Loss for the period – – – – – (2,992) – (2,992)

Other comprehensive income:

Currency translation adjustment – – – – – – (70) (70)

Deferred tax on items relating to equity – – – – – – (40) (40)

Total comprehensive income for the period – – – – – (2,992) (110) (3,102)

At 31 December 2008 1,731 5,377 115 (1,166) (319) 68 (379) 5,427

At 1 January 2009 1,731 5,377 115 (1,166) (319) 68 (379) 5,427

Employee share-based compensation – – – – – 2 – 2

Own shares vesting – – – – – – – –

Transactions with owners – – – – – 2 – 2

Loss for the period – – – – – (721) – (721)


Currency translation adjustment – – – – – – 248 248

Deferred tax on items relating to equity – – – – – – – –

Total comprehensive income for the period – – – – – (721) 248 (473)

At 31 December 2009 1,731 5,377 115 (1,166) (319) (651) (131) 4,956

Consolidated statement of Cash flows for the year ended 31 December 2009


Note

2009

£000

2008

£000

Cash flows from operating activities

Cash generated from operations 26 1,515 887

Interest paid (133) (138)

Income tax paid (198) (538)

Net cash generated in operating activities 1,184 211

Cash flows from investing activities

Purchases of property, plant and equipment (PPE) (110) (221)

Proceeds from sale of PPE 23 47

Purchase of intangible assets (938) (747)

Interest received 23 156

Net cash used in investing activities (1,002) (765)

Cash flows from financing activities

Dividends paid to Group’s shareholders – (285)

Net cash used in financial activities – (285)

Net increase/(decrease) in cash and cash equivalents 182 (839)

Cash and cash equivalents at beginning of period 2,766 3,558

Exchange (losses)/gains on cash (10) 47

Cash and cash equivalents at end of period 27 2,938 2,766

notes to the finanCial statements for the year ended 31 December 2009


1 general information1.1 Nature of operationsDRS Data & Research Services plc is a public limited company with a full listing on the London Stock Exchange incorporated and domiciled in England. The address of the registered office is 1 Danbury Court, Linford Wood, Milton Keynes.

1.2 Accounting conventionThe financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union and as developed and published by the International Accounting Standards Board (IASB).

Standards and interpretations not yet effectiveNew standards and interpretations currently in issue but not effective for accounting periods commencing on 1 January 2009 are:

IFRS 9 Financial Instruments (effective 1 January 2013)•

IAS 24 (Revised 2009) Related Party Disclosures •(effective 1 January 2011)

IAS 27 Consolidated and Separate Financial •Statements (Revised 2008) (effective 1 July 2009)

Amendment to IAS 39 Financial Instruments: •Recognition and Measurement – Eligible Hedged Items (effective 1 July 2009)

Group Cash–settled Share–based Payment •Transactions – Amendment to IFRS 2 (effective 1 January 2010)

Improvements to IFRSs 2009 (various effective dates, •earliest of which is 1 July 2009, but mostly 2010)

IFRS 3 Business Combinations (Revised 2008) •(effective 1 July 2009)

IFRIC 17 Distributions of Non–cash Assets to Owners •(effective 1 July 2009)

IFRIC 18 Transfers of Assets from Customers (effective •prospectively for transfers on or after 1 July 2009)

IFRIC 19 Extinguishing Financial Liabilities with Equity •Instruments (effective 1 July 2010)

Prepayments of a Minimum Funding Requirement – •Amendments to IFRIC 14 (effective 1 January 2011)

Amendment to IFRS 1 Additional Exemptions for •First–time Adopters (effective 1 January 2010)

Amendment to IAS 32 Classification of Rights Issues •(effective 1 February 2010)

The Group has adopted the following new interpretations, revisions and amendments to IFRS issued by the International Accounting Standards Board, which are relevant to and effective for the Group’s financial statements for the annual period beginning 1 January 2009:

IFRS 8 – Operating Segments •

IAS 1 – Presentation of Financial Statements •(revised 2007)

Amendments to IFRS 7 Financial Instruments: •Disclosures – improving disclosures about financial instruments

Significant effects on current, prior or future periods arising from the first time application of these new requirements in respect of presentation, recognition and measurement are described in Note 2.6. An overview of standards, amendments and interpretations to IFRSs issued but not yet effective is given in note 1.2.

The other standards and interpretations are not expected to have any significant impact on the Group’s financial statements, in their periods of initial application.

2 summary of significant accounting policies 2.1 Basis of preparationThese financial statements are for the year ended 31 December 2009 and are presented in pounds sterling rounded to the nearest thousand. They are prepared on a going concern basis. In considering going concern, the Directors have reviewed the Group’s future cash requirements and earnings projections. The Directors believe these forecasts have been prepared on a prudent basis and have also considered the impact of a range of potential changes to trading performance. The Directors have concluded that the Group should be able to operate within its current facilities and comply with its banking covenants for the foreseeable future and therefore believe it is appropriate to prepare the financial statements of the Group on a going concern basis. This is supported by the Group’s liquidity position at the year end.

The principal accounting policies of the Group are set out below and have been consistently applied to all years presented in these financial statements.

The principal accounting policies have remained unchanged from the previous year.

It should be noted that accounting estimates and assumptions are used in preparation of the financial statements. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates.

notes to finanCial statements continued


2 summary of significant accounting policies continued IAS 1 Presentation of Financial Statements (Revised 2007) requires presentation of a comparative balance sheet as at the beginning of the first comparative period, in some circumstances. Management considers that this is not necessary this year because the 2007 balance sheet is the same as previously published.

In preparing these accounts:

(a) the following areas were considered to involve significant judgement:

when sales of services are recognised in the •accounting period in which the work on the services is performed and the obligations have been satisfied in accordance with the customers’ agreed requirements.

value of intangibles being covered by the future •potential income that is expected to be derived from their use relating to internally generated software and research and development costs.

recognition of deferred tax on trading losses •in assessing if they will be recovered by future trading profits.

carrying value of work in progress assumes •that work will be completed in accordance with contractual expectations.

(b) the following areas were considered to involve significant estimates:

inventory provisions reflect future sales estimates •over the useful life of the product. See Note 15.

the three Kiln Farm leases referred to in •Note 28 expire on 30 November 2010 and a dilapidations provision has been created to meet the lease obligations.

2.2 Basis of consolidationThe consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (ie discount on acquisition) is credited to profit and loss in the period of acquisition.

The results of subsidiaries acquired during the year are included in the consolidated income statement from the effective date of acquisition.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.

All intra–Group transactions, balances, income and expenses are eliminated on consolidation.

2.3 Revenue recognitionRevenue is the total amount receivable by the Group for goods supplied and services provided net of VAT and trade discounts.

Sales of goods are recognised when the Group has delivered products to the customer and collectability of the related receivables is reasonably assured.

Sales of services are recognised in the accounting period in which the work on the services is performed and the obligations have been satisfied in accordance with the customers’ agreed requirements.

Rental income is recognised on a straight–line basis over the period of the lease.

In the case of long-term service contracts, revenue is recognised to the extent that the Group has obtained the right to consideration and is primarily the proportion of total contract value that costs incurred to date bear the total expected contract costs in accordance with appropriate accounting standards. The calculated profit on a contract is recognised in proportion to the recognised revenue.

2.4 Leases(a) The Group is the lessee

Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

(b) The Group is the lessorScanning equipment leased to third parties under operating leases is included in property, plant and equipment in the balance sheet. It is depreciated over its expected useful life. Rental income is recognised on a straight-line basis over the lease term.

2.5 DividendsUnder IFRS proposed dividends do not meet the definition of a liability until such time as they have been approved by shareholders at the Annual General Meeting. Therefore, DRS does not recognise a liability in any period for dividends that have been proposed but will not be approved until after the balance sheet date.


2.6 Segment reportingSegmental information is provided for each operating segment whose results are regularly reviewed by the Chief Executive Officer to make decisions concerning the assessment of performance or allocation of resources and where there is discrete financial information available.

2.7 Foreign currency translation The consolidated financial statements are presented in sterling, which is also the functional currency of the Parent Company.

Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from the re–measurement of monetary items at year–end exchange rates are recognised in profit or loss.

In the Group’s financial statements all assets, liabilities and transactions for Group entities with a functional currency other than the sterling (the Group’s presentation currency) are translated into sterling upon consolidation. The functional currency of the entities in the Group has remained unchanged during the reporting period.

On consolidation, assets and liabilities have been translated into sterling at the closing rate at the reporting date. Income and expenses have been translated into the Group’s presentation currency at the average rate over the reporting period. Exchange differences are charged/credited to other comprehensive income and recognised in the currency translation reserve in equity. On disposal of a foreign operation the cumulative translation differences recognised in equity are reclassified to profit or loss and recognised as part of the gain or loss on disposal. Goodwill and fair value adjustments arising on the acquisition of a foreign entity have been treated as assets and liabilities of the foreign entity and translated into sterling at the closing rate.

2.8 Property, plant and equipmentLand and buildings relate to the Group’s Head Office at Linford Wood, Milton Keynes. All property, plant and equipment is shown at cost less depreciation, except for land which is shown at cost. Cost includes expenditure that is directly attributable to the acquisition of the item.

Depreciation is provided on a straight–line basis to allocate the cost of each asset less its estimated residual value over its estimated useful life, as follows:

Freehold buildings 50 yearsComputer equipment 3 yearsFixtures and fittings 5 yearsPlant and machinery 3-10 yearsRental machines 3 yearsMotor vehicles 5 years

Items of property, plant and equipment are subject to review for impairment where indications of impairment exist. Any impairment is charged to the income statement as it arises.

2.9 Intangible assets(a) Computer softwareAcquired computer software licences are capitalised on the basis of the costs incurred to acquire and to bring into use the specific software. These costs are amortised over three years, being the estimated useful life of the software.

Costs associated with maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Company, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

Computer software that has been capitalised is amortised on a straight–line basis over three years from the date it is put to operational use.

(b) Research and developmentResearch expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Development costs that have a finite useful life and that have been capitalised are amortised from the commencement of their use on a straight–line basis over the period of their expected benefit, not exceeding three years.

(c) Intangible assets acquired in business combination(i) Unpatented technology – relates to unpatented

software and software products developed which are protected, so far as is practicable, by trade secret law and confidentiality agreements

(ii) Know–how – relates to technical and market orientated knowledge and experience within the management whose support is secured by service agreements Intangible assets are recognised at fair value at the time of acquisition and amortised over their useful life of between three and six years.

2.10 GoodwillGoodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary controlled entity at the date of acquisition.

Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed.



2 summary of significant accounting policies continued 2.11 InventoriesInventories are valued at the lower of cost and net realisable value. Cost is determined using the first–in, first–out method. The cost of finished goods and work–in–progress comprises raw materials, direct labour, other direct costs and, where appropriate, a proportion of attributable production overheads. Net realisable value is the estimated selling price in the ordinary course of business reduced by the costs to complete and applicable selling expenses.

2.12 Trade and other receivablesTrade and other receivables are initially recognised at fair value and subsequently carried at amortised cost. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cashflows. Movements in the provision are recognised in the income statement.

2.13 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short–term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

2.14 Share capitalShare capital comprises Ordinary shares with a nominal value of 5p each.

Where the Company purchases treasury shares or where shares are held in a restricted share scheme trust, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, re–issued or disposed of. Where such shares are subsequently sold or re–issued any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.

2.15 Accounting for income taxesThe tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or equity.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

The Group’s and subsidiaries’ liability for current tax is calculated by using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Changes in deferred tax assets or liabilities are recognised as a component of tax income or expense in profit or loss, except where they relate to items that are recognised in other comprehensive income or directly in equity, in which case the related deferred tax is also recognised in other comprehensive income or equity, respectively.

Deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.

R&D tax credit claims are recognised following formal confirmation of acceptance by HMRC or where previous precedence is established.

2.16 Employee benefits(a) Pension obligationsThe Parent Company operates defined contribution pension schemes under which employees of the UK based subsidiaries may participate. The Group has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. The contributions to the pension schemes are charged to the income statement as they accrue, thereby matching the cost of the Group’s pension obligations to the period of employment to which they relate.

(b) Bonus plans and profit sharingThe Group recognises a liability and expense for bonuses and profit sharing. Managers may be entitled to a bonus based on a formula that takes into consideration revenue, EPS, residual income in relation to the employee’s responsibilities and an assessment of the individual’s performance which includes non


financial criteria. Employees who do not participate in the bonus scheme are entitled to participate in a profit sharing scheme based on the profitability of the subsidiary that employs them. The cost of providing these schemes is accrued against profits in the period in which the bonus is earned.

(c) Share–based employee remunerationAll share–based payment arrangements granted after the 7 November 2002 and not vested by the 1 January 2005 are recognised in the financial statements. The Group operates equity–settled share–based remuneration plans for remuneration of certain of its employees.

All employee services received in exchange for the grant of any share–based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value of the share options or shares awarded. Their value is appraised at the grant date and excludes the impact of any non–market vesting conditions (for example, profitability and sales growth targets).

All share–based remuneration is ultimately recognised as an expense in the income statement with a corresponding credit to shareholders’ funds. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options or shares expected to vest. Non–market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates.

Upon exercise of share options fulfilled by the issue of new shares, the proceeds received, net of any directly attributable transaction costs up to the nominal value of the shares issued, are allocated to share capital with any excess being recorded as share premium. Options or share grants fulfilled from shares held by employee share trusts are credited to their own share reserve.

2.17 Financial liabilities and equity Financial liabilities include borrowings, trade and other payables and derivative financial instruments.

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities.

Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group

becomes a party to the contractual provisions of the instrument. All financial liabilities are recorded initially at fair value, net of direct issue costs.

Financial liabilities are recorded at amortised cost using the effective interest method, with interest related charges recognised as an expense in finance cost in the income statement. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the income statement on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

All derivative financial instruments that are not designated as effective hedging instruments are accounted for at fair value through profit and loss.

A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged or cancelled or expires.

Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity.

2.18 Exceptional items Exceptional items are those items that arise outside the normal course of business, are of significant size or unusual nature and are not expected to recur.

3 financial risk management3.1 Financial risk factorsThe Group’s activities expose it to a variety of financial risks. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

(a) Market risk(i) Currency risk

The Group operates internationally and is subject to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the euro. The Group does not hedge any transactions, and foreign exchange differences on retranslation of foreign assets and liabilities are recognised in the income statement.

Wherever possible the Group looks to negotiate its sales contracts in the respective functional currencies. Occasionally DRS Data Services Limited uses either US dollars or euros, but the amounts involved during 2009 and 2008 were not material.



3 financial risk management continued(ii) Interest rate risk

The Group finances its operations through a mixture of shareholders’ funds and bank loans. The Company’s exposure to interest rate fluctuations on its borrowings is managed by the use of capped floating facilities. The borrowing requirements have been negotiated separately from the interest rate collar. The Group mixes the duration of its deposits to reduce the impact of interest rate fluctuations.

Whilst the base rate remains below 4.92%, an increase of 1% in the base rate will not affect the cash amount of interest payable by the Group in respect of the mortgage because of the floor on the collar, but interest payable recorded in the income statement will reduce by approximately £20,000 due to the movement in fair value of the collar. For every 1% increase in the base rate above 4.92% interest payable will increase by £22,500 and so will interest payable through the income statement. On the Group’s year end cash holding, a 1% increase in interest rates would increase interest receivable by £28,000.

For 2008, an increase of 1% in the base rate above 4.92% there would have been an increase on interest payable by £22,500. Where the base rate remained below 4.92%, the amount of interest payable would have remained constant. On the year end cash holding a 1% increase in interest rates would have increased interest receivable by £25,000.

(b) Credit riskThe Group has no significant concentrations of credit risk. Where appropriate, sales to overseas customers are usually underwritten using letters of credit unless the customer makes a significant up front payment. A summary of all customers with indebtedness greater than £100,000 is prepared on a monthly basis for the Directors and senior managers to review.

(c) Liquidity riskThe Group takes a prudent approach to managing liquidity risk to ensure sufficient cash is available to meet foreseeable needs and to safely finance the successful completion of large scale contracts, thereby minimising liquidity risk issues.

All £3,247,000 (2008: £3,724,000) of the liabilities are payable within one year except for the mortgage of £2,250,000, which is due to expire on 24 March 2014. Repayment of principal shall be in 12 instalments of £56,400 payable quarterly commencing 30 June 2011 followed by a final bullet payment of the remaining balance on 24 March 2014.

3.2 Capital managementThe Group’s capital management objectives are:

to ensure the Group’s ability to continue as a going •concern; and

to maintain adequate liquidity to finance working capital •requirements.

DRS retains a high level of cash and cash equivalents (See Note 2.13) to be able to have sufficient funds to finance the working capital requirements of large contracts. It takes a cautious approach to investing this capital to minimise the Group’s exposure to capital loss. The policy is consistent with the approach of previous years and explains the relatively large value of cash and cash equivalents held at the year end (see Note 17).

Capital for the reporting period under review is summarised as follows:

31 December 2009

£000

31 December 2008

£000


Cash and cash equivalents 2,938 2,766

Capital 7,894 8,193


Borrowings 2,250 2,250

Overall financing 7,206 7,677

Capital to overall financing ratio 1.10 1.07

4 segment informationThe principal activities of the Group continue to be the provision of data capture services, the manufacture, sale and support of optical and image scanning equipment, design and printing of documentation used for data capture and associated software and bureau services. Approximately half the Group’s revenue relates to products and services, and the other half relates to providing tailored data capture solutions. The companies in the Group are organised functionally, with each function of the business specialising in its own area of expertise. Project managers look to the functional areas to provide the appropriate tailored mix of products and services to fulfil each specific contract. In turn the functional areas are supported by indirect cost centre departments such as Research and Development and Information Systems.

In 2005 DRS adopted IFRS accounting policies and provided segmental reporting for the first time.


At that time the majority of the Company’s products and services fell into three groups; scanning equipment, print, and software services. These business segments were directly correlated to internal functional departments and were the key elements of cost and revenue management within the business.

In the period since 1 January 2006, the Group has taken a strategic decision to develop and sell products and services which integrate multi–functional skills and technologies. These market solutions use varying combinations of the Group’s resources and are controlled by cross-Company project management. Consequently management of the business is now centred on revenue markets and project cost control and therefore the correlation between functional costs and revenue has been reduced significantly. Although the Group considers that it only has one operating segment, it reviews revenue according to various segments and the revenue split is disclosed below.

The delivery of market focused solutions results in a ‘many to many’ relationship between department costs and revenue streams. The individual standard costs of each type of supply are carefully controlled, but due to the effect sales mix has on recovery rates, reporting the relative profitability of the revenue streams would not be consistent with management processes within the Company.

Recognising the manner in which management currently reviews the business, the revenue for 2008 has been restated in the new format for comparison purposes.

The revenue analysis for the year ended 31 December 2009 is as follows:

Education revenue Non–education revenue

Examination & assessment

£000

Other

£000

Commercial

£000

Census & elections

£000

Total

£000

Region

UK 9,169 1,703 510 44 11,426

Africa 2,272 (3) 26 399 2,694

Rest of world 137 37 418 189 781

Total 11,578 1,737 954 632 14,901

Revenue arising from specific products and related services thereon:

e Marker® 8,155

DocXP™ 548

e-Counting 255

IntelliReg® 59

Revenue of £14,678,000 was generated from UK operations and the remaining £223,000 was generated in the US.

DRS’ largest customer generated revenue of £7,987,000 in 2009 (2008: £7,476,000) and is shown under e-Marker® within UK examinations and assessment.



4 segment information continuedThe revenue analysis for the year ended 31 December 2008 is as follows:

Education revenue Non–education revenue

Examination & assessment

£000

Other

£000

Commercial

£000

Census & elections

£000

Total

£000

Region

UK 8,904 2,346 513 70 11, 833

Africa 1,901 55 62 2,439 4,457

Rest of world 130 33 614 362 1,139

Total 10,935 2,434 1,189 2,871 17,429

Revenue arising from specific products and related services thereon:

e Marker® 7,734

DocXP™ 767

e–Counting 741

IntelliReg® 153

Revenue of £17,077,000 was generated from UK operations and the remaining £352,000 was generated in the US.

5 Revenue and loss before taxThe significant categories of revenue recognised during the period are:

2009

£000

2008

£000

Sale of goods 4,008 5,890

Rendering of services including operating lease income (Note 6) 10,893 11,539

14,901 17,429

Loss on ordinary activities before taxation is stated after:

2009

£000

2008

£000

Auditor’s remuneration:

Audit services 4 4

Non–audit services 67 65

Depreciation 521 630

Amortisation 791 988

Impairment charge on goodwill and intangibles – 2,429

Hire of plant and machinery and operating expenses 254 342

R&D expense 2,179 2,710

Share–based payment charge 2 (26)


Auditor’s remuneration relating to non–audit services comprises:

2009

£000

2008

£000

Non–audit services:

– audit of subsidiary companies accounts pursuant to legislation 35 34

– other compliance and reporting services 30 30

– advice on implementation of IFRS 2 1

67 65

6 operating lease incomeOperating lease income relates to the leasing of CD230 and CD360 scanners into UK schools. All of the machines are on a standard agreement which can be terminated on its anniversary date by the customer provided they give three months notice prior to the anniversary date of their intention to terminate the contract. The minimum future lease income at 31 December 2009 is £72,000 and is all recoverable within one year. Of this amount, £9,000 is invoiced and included in the trade receivables balance as at 31 December 2009.

7 other operating income

2009

£000

2008

£000

Interest income

– bank interest 23 156

– fair value measurement of collar arrangement 40 –

Profit on foreign exchange (realised and unrealised) 9 607

72 763

The profit on foreign exchange gains relates to exchange rate differences on US dollar and euro transactions.

8 directors and employee benefit expenseStaff costs during the year were:

2009

£000

2008

£000

Wages and salaries 7,303 6,785

Social security costs 763 761

Share options granted to Directors and employees 2 (26)

Pension costs – defined contribution plans 392 340

8,460 7,860

The average number of employees of the Group during the year was:

2009 2008

Scanning equipment 45 51

Print 26 31

Software and services 144 119

215 201



8 directors and employee benefit expense continuedRemuneration in respect of Directors was as follows:

2009

£000

2008

£000

Emoluments 365 351

Pension contributions to money purchase pension schemes 42 42

407 393

Key management remuneration:

2009

£000

2008

£000

Short–term employee benefits 234 232

Post–employment benefits 42 42

Share–based payments – (16)

276 258

The Executive Directors are considered to be the key management personnel of the Group. Further details on Directors’ remuneration and share options are set out in the Directors’ Remuneration Report.

9 finance costs

31 December 2009

£000

31 December 2008

£000

Interest expense:

– bank borrowings (133) (138)

– fair value measurement of collar arrangement – (134)

– loss on foreign exchange (realised and unrealised) (267) –

(400) (272)

The loss on foreign exchange relates to exchange rate differences on US dollar and euro transactions.

10 exceptional items

Year ended 31 December

2009

£000

Year ended 31 December

2008

£000

Loss before exceptional items and tax (915) (118)

Exceptional items – impairment charge – (2,429)

Loss before tax (915) (2,547)

Tax credit/(charge) before exceptional items 194 (274)

Exceptional items – deferred tax charge – (171)

Tax credit/(charge) 194 (445)



The Peladon Software Inc business has continued to underperform during 2009 and the discounted cashflow calculation applied to the carrying value of the investment in the 2008 accounts is still considered appropriate.

The exceptional items in the income statements represented:

impairment charge of £2,429,000 as above which was charged to administrative expenses•

deferred tax charge of £171,000 represented by:•

− write off of deferred tax asset of £318,000 relating to unused tax losses in Peladon Software Inc as future utilisation is no longer considered probable.

− release of deferred tax provision of £147,000 related to carrying value of know–how and unpatented intangibles following their impairment.

11 income tax expense

31 December 2009

£000

31 December 2008

£000

Current tax – domestic 28 262

Adjustment in respect of previous period (164) 2

Total current tax (136) 264

Deferred tax (Note 20) (58) 181

(194) 445

Domestic income tax is calculated at 28% (2008: 28.5%) of the estimated assessable profit for the year.

The (credit)/charge for the year can be reconciled to the loss per the income statement as follows:

2009

£000

2008

£000

Loss before tax (915) (2,547)

Tax at domestic income tax rate of 28% (2008: 28.5%) (256) (726)

Tax effect of expenses that are not deductible in determining taxable loss 17 39

Goodwill impairment – 544

Tax losses not recognised 205 531

Deferred tax on industrial building allowances (5) 144

Charegeable gains 3 –

Effect of marginal rate (5) –

Effect of overseas tax rates (64) (62)

Effect of change in tax rates – (8)

Adjustment in respect of previous periods (89) (17)

Tax (credit)/expense (194) 445

In December 2009, R&D tax claims were submitted for 2007 and 2008 in respect of development work on e–Marker® software. These claims have not been included in the 2009 tax charge pending formal confirmation of acceptance by HMRC.



12 property, plant and equipment

Total

£000

Freehold land &

buildings

£000

Computer equipment

£000

Fixtures & fittings

£000

Plant & machinery

£000

Rental machines

£000

Motor vehicles

£000

At 1 January 2008

Cost 10,436 2,900 1,852 2,308 2,722 648 6

Accumulated depreciation (6,515) (160) (1,481) (1,916) (2,321) (635) (2)

Net book amount 3,921 2,740 371 392 401 13 4

For the year ended 31 December 2008

Opening net amount at 1 January 2008 3,921 2,740 371 392 401 13 4

Additions 221 – 130 10 73 8 –

Disposals (4) – (1) (2) (1) – –

Depreciation charge (630) (40) (185) (174) (217) (12) (2)

Exchange adjustment 3 – 1 2 – – –

Closing net book amount at 31 December 2008 3,511 2,700 316 228 256 9 2

At 31 December 2008

Cost 10,520 2,900 1,888 2,300 2,791 635 6


Net book amount 3,511 2,700 316 228 256 9 2


Opening net amount at 1 January 2009 3,511 2,700 316 228 256 9 2

Additions 110 – 44 6 54 6 –

Depreciation charge (521) (40) (179) (131) (162) (7) (2)

Exchange adjustment (2) – (1) (1) – – –

Closing net book amount at 31 December 2009 3,098 2,660 180 102 148 8 –

At 31 December 2009

Cost 10,612 2,900 1,926 2,305 2,845 630 6


Net book amount 3,098 2,660 180 102 148 8 –

During February 2010, in accordance with extending the mortgage on Linford Wood, a commercial valuation of the property based on tenanted occupancy calculated the current market value at £2,100,000. It is considered inappropriate to reflect the £560,000 shortfall to the carrying value in the accounts as it is regarded as a short-term temporal difference caused by exceptional market conditions that is unlikely to be realised as the Group has no intention to move out of its head office in the foreseeable future.

Bank borrowings are secured on Linford Wood land and buildings to the value of £2,250,000 (2008: £2,250,000). See Note 22.


13 intangible assets

Total

£000

Computer software

£000

Development expenditure

£000

Unpatented technology

£000

Know–how

£000

At 1 January 2008

Cost 3,769 772 1,937 307 753

Accumulated amortisation (1,932) (546) (930) (202) (254)

Net book amount 1,837 226 1,007 105 499


Opening net amount at 1 January 2008 1,837 226 1,007 105 499

Exchange adjustments 140 – – 3 137

Additions 747 169 578 – –

Disposals (38) (38) – – –

Amortisation charge (988) (157) (611) (97) (123)

Impairment charge (see Note 10) (524) – – (11) (513)

Closing net book amount at 31 December 2008 1,174 200 974 – –

At 31 December 2008

Cost 4,801 889 2,515 398 999

Accumulated amortisation and impairment (3,627) (689) (1,541) (398) (999)

Net book amount 1,174 200 974 – –


Opening net amount at 1 January 2009 1,174 200 974 – –

Exchange adjustments – – – – –

Additions 938 61 877 – –

Amortisation charge (791) (125) (666) – –

Closing net book amount at 31 December 2008 1,321 136 1,185 – –

At 31 December 2009

Cost 5,739 950 3,392 398 999

Accumulated amortisation and impairment (4,418) (814) (2,207) (398) (999)

Net book amount 1,321 136 1,185 – –

Computer software relates to the third party software licences purchased by the Group to be used in the normal course of its business and is amortised over three years from the time of purchase. A check is carried out at the end of each year to ensure that all the software is still in use within the business.

The capitalised development expenditure covers the cost of designing and writing the core e–Marker® software used to mark examination scripts electronically within the education marketplace. This expenditure is amortised over the thirty-six months following the month in which it is incurred. The software is in use twenty-four hours a day and its functional performance is continually monitored to ensure there is no impairment.



13 intangible assets continuedThe assets making up the closing net book value will be amortised as follows:

Total

£000

Computer software

£000

Development expenditure

£000

Future amortisation of assets by year

– 2010 695 85 610

– 2011 464 46 418

– 2012 162 5 157

Net book amount at 31 December 2009 1,321 136 1,185

All intangible amortisation is charged to cost of sales within the income statement. The impairment provision is charged to exceptional administrative expenses.

Unpatented technology and know–how relate to assets acquired on the acquisition of the Peladon Software Group in 2006.

14 goodwill

2009

£000

2008

£000

At 1 January

Cost 1,905 1,560

Accumulated amortisation and impairment (1,905) –

Net book amount – 1,560

Opening net amount at 1 January – 1,560

Exchange adjustments – 345

Impairment charge – (1,905)

Closing net book amount at 31 December – –

At 31 December

Cost 1,905 1,905

Accumulated amortisation and impairment (1,905) (1,905)

Net book amount – –

The goodwill relates to the acquisition of the Peladon Software Group in January 2006 and was based on an assumption that the future profitability of the two companies acquired would remain at least similar to the original justification provided to DRS management in the acquisition negotiations. The impairment charge is explained in Note 10.

15 inventories

31 December 2009

£000

31 December 2008

£000

Raw materials 755 918

Work in progress 52 64

Finished goods 213 439

1,020 1,421


Provisions held against the manufacturing inventory have been created in the past when the Group over orders on raw materials used in the manufacture of its scanning machines. However, from the start of 2004 obsolescence provisions have been increased to cover the risk of holding scanning machines and materials that are obsolete or do not comply with the requirements of the Restrictions of Hazardous Substances (RoHS) legislation that came into force from July 2006.

31 December 2009

£000

Movement during year

£000

31 December 2008

£000

Movement during year

£000

31 December 2007

£000

Inventory provision

PS900 scanners 401 (298) 699 (242) 941

IntelliReg® 199 199 – – –

Other scanners 193 11 182 (136) 318

Print 26 (4) 30 21 9

Total 819 (92) 911 (357) 1,268

Related carrying value

PS900 scanners 628 665 881

IntelliReg® – 107 2

Other scanners 208 467 347

Manufacturing inventory 836 1,239 1,230

Print inventory 180 182 216

Third Party Software licenses 4 – –

Total 1,020 1,421 1,446

The provision created on PS900 scanning machines reflects the potential risk of holding these scanners in light of future technical obsolescence.

A decision has been taken to move to a second generation of the IntelliReg® product and as a result the inventory holding of the original version of the product has been fully provided for.

The cost of inventories recognised as an expense and included in ‘cost of sales’ amounted to £1,223,000 (2008: £1,301,000).



16 trade and other receivables

31 December 2009

£000

31 December 2008

£000

Loans and receivables

Trade receivables 901 1,374

Less provision for impairment of receivables (9) (42)

Trade receivables – net 892 1,332

Amounts recoverable on contracts 386 645

Prepayments and accrued income 609 580

1,887 2,557

There is no material difference between the fair value and the carrying value of these assets.

The maximum credit risk exposure at the balance sheet date equates to the fair value of trade receivables. There is no concentration of credit risk, further details are set out in Note 3.1.

Standard payment terms on credit sales are 30 days nett. With the exception of the UK education market, DRS is not always in a position to enforce contractual payment terms. This is taken into account when determining the provision for impairment of trade receivables.

The trade receivables ageing analysis is as follows:

Past due

Total trade receivables

£000

Current

£000

0 – 29 days

£000

30 – 59 days

£000

60 – 89 days

£000

90 – 119 days

£000

120+ days

£000

31 December 2009 892 497 176 90 8 33 88

31 December 2008 1,332 919 268 97 40 8 –

The Group recognised a recovery against the impairment of its trade receivables during the year of £17,000 (2008: £209,000).

The trade receivables provision movement is included in ‘Administrative expenses’ in the income statement and a breakdown is as follows:

2009

£000

2008

£000

Opening amount at 1 January 42 357

Exchange adjustments – 41

Provision utilised (16) (147)

Decrease in provision to income statement (17) (209)

Closing amount at 31 December 9 42


17 Cash and cash equivalents

31 December 2009

£000

31 December 2008

£000

Cash at bank and in hand 167 279

Short–term bank deposits 2,771 2,487

2,938 2,766

The effective interest rate on short-term bank deposits was 0.76% (2008: 1.74%). These deposits have an average maturity of 2 days (2008: 19 days).

Cash and bank overdrafts include the following for the purposes of the cashflow statement:

31 December 2009

£000

31 December 2008

£000

Cash and cash equivalents 2,938 2,766

Bank overdrafts – –

2,938 2,766

The Group’s approach to managing liquidity and currency risks is set out in Note 3.1.

The tables below show the extent to which the Group has monetary assets in currencies other than sterling.

2009 US dollars

£000

2009 euro

£000

2008 US dollars

£000

2008 euro

£000

Sterling equivalent 64 39 67 126

18 share capital

Number of shares

Ordinary shares

Treasury shares Total

At 1 January 2008 34,621,600 34,621,600 (1,930,000) 32,691,600

Balance at 31 December 2008 34,621,600 34,621,600 (1,930,000) 32,691,600

Balance at 31 December 2009 34,621,600 34,621,600 (1,930,000) 32,691,600

Ordinary shares of 5p each At 31 December 2009 and 2008

Number £000

Authorised 46,000,000 2,300

Allotted, issued, called up and fully paid 34,621,600 1,731

The Company acquired 1,930,000 of its own shares through purchase between 3 June and 15 July 2004. The price of these shares ranged between 60p and 59p. The total amount paid to acquire these shares, net of income tax, was £1,166,000 and has been deducted from shareholders’ equity. The shares are held as treasury shares. The Company has the right to re–issue these shares at a later date. All issued shares are fully paid.



19 other reserves

Share premium

£000

Capital redemption

£000

Own share reserve

£000

Translation reserve

£000

Total Group

£000

As at 1 January 2008 5,377 115 (335) (269) 4,888

Exchange rate differences – – – (110) (110)

Own shares vesting – – 16 – 16

Balance at 31 December 2008 5,377 115 (319) (379) 4,794

Exchange rate differences – – – 248 248

Balance at 31 December 2009 5,377 115 (319) (131) 5,042

The Own Share Reserve represents the cost of shares purchased under the Restricted Share Scheme, less those unconditionally vested in employees. At 31 December 2009, 1,020,529 (2008: 1,020,529) shares with a market value of £122,463 (2008: £112,258) were held. Of these 150,000 (2008: 150,000) had been conditionally gifted to employees and a further 100,000 (2008: 100,000) are vested to a Director at an option price of 18p. The Scheme authorises the Trustees to purchase up to 5% of the issued share capital, funded by loans from the Company. Shares so acquired are conditionally gifted to employees and used to fufil performance related options to Directors and senior managers at the discretion of the Board.

The translation reserve represents the foreign exchange differences arising from the retranslation of the opening net investment in the US subsidiary and the retranslation of the goodwill and fair value adjustments arising on its acquisition, which are treated on consolidation as though they were assets and liabilities of the subsidiary.

20 deferred income tax

31 December 2009

£000

31 December 2008

£000

Analysis for financial reporting purposes

Deferred tax liabilities 181 34

Deferred tax assets (211) (6)

(30) 28

The deferred tax asset is calculated assuming unused tax losses will be utilised over the next four years. This has resulted in £863,000 of unused tax losses for Peladon Software Inc for which no deferred tax asset is recognised in the balance sheet.

The movement in the year in the Group’s net deferred tax position was as follows:

31 December 2009

£000

31 December 2008

£000

At 1 January 28 (193)

(Credit)/charge to income for the year (58) 181

Charge to equity for the year – 40

At 31 December (30) 28


The following are the major deferred tax liabilities and assets recognised by the Company and the movements thereon during the period:

Revaluation of property

£000

Accelerated tax depreciation

£000

General provision

£000

Total

£000

At 1 January 2009 18 16 (6) 28

Charge to income for the year (1) (61) 4 (58)

Charge to equity for the year – – – –

At 31 December 2009 17 (45) (2) (30)

21 trade and other payables

31 December 2009

£000

31 December 2008

£000

Financial liabilities measured at amortised cost

Trade payables 829 676

Deferred income 691 917

Social security and other taxes 289 284

Accrued expenses 1,346 1,538

3,155 3,415

Derivative financial instrument

Fair value of interest rate collar (see Note 22) 92 134

3,247 3,549

Fair value of interest rate collar equates to carrying value.

Trade payables are contractually due within 30 days and are financial liabilities at amortised cost. The interest collar liability is at fair value through profit and loss. All other items are outside the scope of IAS 39.

22 Borrowings

31 December 2009

£000

31 December 2008

£000

Non–current

Bank borrowings – secured loan 2,250 2,250

Total borrowings 2,250 2,250

In March 2006 the Parent Company borrowed £2,250,000 secured by a fixed charge against the freehold land and buildings at a variable rate of 0.85% over base rate, which was due to be repaid on 28 March 2011. During January 2010, a three year extension to 24 March 2014 was agreed and the interest rate thereon was immediately increased to 3.5% over base rate. Repayment of the principal shall be in 12 instalments of £56,400 payable quarterly commencing 30 June 2011 followed by a final bullet payment of the remaining balance on 24 March 2014.

In September 2006, a collar arrangement in respect of the £2,250,000 was entered into for the period up to 28 March 2011. Interest is payable on the balance at a rate equal to the average base rate for that month payable at the end of each quarterly interest period, and is capped at 6.50% with a floor of 4.92%. The fair market value of the collar at 31 December 2009 was £92,000 (2008: £134,000). In 2008 the full value of the collar has been treated as a charge to interest paid and is shown in Note 9. The reduction in value during 2009 is shown as a credit to interest income in Note 7.

In June 2009 the overdraft facility for DRS Data Services Limited was reduced from £1,000,000 to £250,000. It remains secured against inventory and debtors. Interest is charged at a variable rate of 5.0% over base rate.



23 financial assets and liabilitiesCategories of financial assets and liabilities.

The carrying amounts presented in the statement of financial position to the following categories of assets and liabilities are:

Note

31 December 2009

£000

31 December 2008

£000

Financial assets

Loans and other receivables

– Trade and other receivables 16 1,887 2,557

– Cash and cash equivalents 17 2,938 2,766

4,825 5,323

Financial liabilities

Financial liabilities designated at fair value through profit or loss:

– Non–current borrowings 22 (2,250) (2,250)

Financial liabilities measured at amortised cost:

Current

– Trade and other payables 21 3,155 3,415

Derivatives designated as cash flow hedging instruments (carried at fair value)

– Derivative financial instruments 21 92 134

The Group adopted the amendments to IFRS 7 Improving Disclosures about Financial Instruments effective from 1 January 2009. These amendments require the Group to present certain information about financial instruments measured at fair value in the statement of financial position.

Financial assets and liabilities are measured at fair value in the statement of financial position in accordance with the fair value hierarchy. This hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;•

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either •directly (ie as prices) or indirectly (ie derived from prices); and

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).•

The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The only financial liability affected is the derivative in respect of the interest rate collar described in Note 22 which is classified as Level 2.

24 earnings per shareThe calculation of basic earnings per share is based on the earnings attributable to Ordinary shareholders divided by the weighted average number of shares in issue during the year. Shares held in employee share trusts are treated as cancelled for the purposes of this calculation.

The calculation of diluted earnings per share is based on the basic earnings per share, adjusted to allow for the issue of shares and the post tax effect of dividends and/or interest, on the assumed conversion of all dilutive options and other dilutive potential Ordinary shares.


Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:

Basic earnings per share

31 December 2009

31 December 2008

Earnings attributable to Ordinary shareholders being loss for the period (721,000) (2,992,000)

Weighted average number of shares 31,671,071 31,618,858

Basic loss per Ordinary share (2.28p) (9.46p)

Diluted earnings per share

31 December 2009

31 December 2008

Basic earnings per share

Earnings attributable to Ordinary shareholders being loss for the period (721,000) (2,992,000)

Weighted average number of shares

Basic 31,671,071 31,618,858

Dilutive effect of:

– shares in restricted share scheme – –

– options under unapproved share option scheme – –

– options under the Enterprise Management Incentive scheme – –

– options under LTIP option scheme – –

Diluted 31,671,071 31,618,868

Diluted loss per Ordinary share (2.28p) (9.46p)

25 dividends per share

2009

Pence/share

2008

Pence/share

2009

£000

2008

£000

Amounts recognised as distributions to equity holders in the year:

Final dividend for the year ended 31 December 2007 – 0.60 – 190

Interim dividend for the year ended 31 December 2008 – 0.30 – 95

The Directors do not recommend a final dividend.



26 Cash generated from operations

31 December 2009

£000

31 December 2008

£000


Adjustments for:

– income tax (Note 11) (194) 445

– depreciation of property, plant and equipment (Note 12) 521 630

– amortisation of intangible assets (Note 13) 791 988

– impairment charge (Note 10) – 2,429

– share–based payment credit in respect of EBT – (32)

– share–based payment charge in respect of LTIP shares 2 6

– profit on sale of property, plant & equipment and intangibles (23) (5)

– exchange losses/(gains) put through income statement 260 (607)

– interest income (Note 7) (23) (156)

– interest expense (Note 9) 133 138

Changes in working capital (excluding the effects of acquisition and exchange differences on consolidation):

– inventories 401 25

– trade and other receivables 670 240

– trade and other payables (302) (222)

Cash generated from operations 1,515 887

In the statement of cashflow, proceeds from sale of property, plant & equipment and intangibles comprise:

31 December 2009

£000

31 December 2008

£000

Net book amount – 42

Profit on sale of property, plant and equipment and intangibles 23 5

Proceeds from sale of property, plant & equipment and intangibles 23 47

27 Reconciliation of movements in cash and cash equivalents

1 January

2009

£000

Cash flow

£000

31 December 2009

£000

Cash at bank and in hand 279 (112) 167

Term deposits 2,487 284 2,771

2,766 172 2,938


28 Commitments

(a) Capital commitmentsIn respect of contracted out software development expenditure a development commitment existed at 31 December 2009 with the contractors equating to approximately £34,000 (2008: £125,000). There were no other capital commitments at 31 December 2009 or 31 December 2008.

(b) Operating lease commitmentsThe Company has the following lease commitments:

Lease of land & buildings Other leases

31 December 2009

£000

31 December 2008

£000

31 December 2009

£000

31 December 2008

£000

Within one year 163 207 35 48

Within two to five years – 136 22 29

163 343 57 77

The Group holds five property leases. In the UK there are four leases relating to six business units occupied by operations in Milton Keynes. All four leases expire on 30 November 2010. Rent is payable quarterly in advance. The fifth lease relates to the Peladon Software Inc offices in San Diego which expires on 30 April 2010.

The classification of other leases relates to Company vehicles, photocopiers and a telephone system. All are three year contracts. The Company vehicle leases have an up-front payment of three months in advance followed by a monthly payment and the rest are payable quarterly in advance.

29 pension commitmentsDuring 2008 and 2009 the Group operated various separate defined contribution schemes for the benefit of employees and Executive Directors. In all cases the assets of the schemes are administered by trustees in funds independent of the Group. Pension contributions are shown in Note 8.

30 share–based payments Details of options granted:

Date of Grant Type

Original number of shares

grantedVesting period Term

Exercise price

Method of settlement

Year end 31 December 2004

7 April 2004 Employees 170,000 3 years 10 years Nil Equity


29 March 2006Directors and

employees 602,973 3 years 3 years Nil Equity


13 April 2007Directors and


13 April 2007Directors and









30 share–based payments continuedMovements in the year:


1 January 2008 31 December 2008

Date of GrantOutstanding

options Exerciseable

options Granted Lapsed ExercisedOutstanding


options


7 April 2004 – 50,000 – – – – 50,000


2 November 2005 511,000 – – (511,000) – – –


29 March 2006 497,514 – – – – 497,514 –


13 April 2007 369,333 – – – – 369,333 –

13 April 2007 339,347 – – – – 339,347 –


12 March 2008 – – 736,627 – – 736,627 –

12 March 2008 – – 449,872 – – 449,872 –


1 January 2009 31 December 2009

Date of GrantOutstanding


options Granted Lapsed ExercisedOutstanding


options


7 April 2004 – 50,000 – – – – 50,000


29 March 2006 497,514 – – (497,514) – – –


13 April 2007 369,333 – – – – 369,333 –

13 April 2007 339,347 – – – – 339,347 –


12 March 2008 736,627 – – – – 736,627 –

12 March 2008 449,872 – – – – 449,872 –


Calculation of the fair value:

Valuation model

Share price at grant

Exercise price

Expected volatility

Expected life

Expected dividends

Risk–free interest rate

Fair value of 1 unit


7 April 2004 Binomial 60.5p 0p 45.13% 3 years 3.67% 4.92% 56.76p


29 March 2006 Monte Carlo 37.0p 0p 43.43% 3 years – 5.12% 31.40p


13 April 2007 Monte Carlo 37.5p 0p 36.64% 4.5years – 5.44% 22.48p

13 April 2007 Monte Carlo 37.5p 0p 36.64% 4.5years – 5.44% 22.48p


12 March 2008 Monte Carlo 20.75p 0p 31.68% 4.5years – 4.16% 15.11p

12 March 2008 Monte Carlo 20.75p 0p 31.68% 4.5years – 4.16% 15.11p


20 May 2009 Monte Carlo 14.50p 0p 34.00% 3 year 2.07% 1.98% N/A

Performance criteriaEMI share options granted to employees in 2004 are subject to the employees remaining in the employment of the Group over a three year vesting period, after which time the options are exercisable.

The LTIP and EMI share options granted from 2005 onwards are based on:

the level of EPS in the last reported financial year on the third anniversary of grant; and •

the TSR over these three years being at least at the median compared to the companies constituting the •FTSE All Share Software & Computer Services index.

The extent to which the option will be exercisable is based on a sliding scale dependent upon the EPS reported in the audited annual accounts being greater than 3.0p per share. 25% of the option will be exercisable if the EPS equals 3.0p and 100% will be exercisable if the EPS is 6.0p per share, with exercise being on a pro–rata basis between these levels.

Under the Rules of the VCP, units will convert to nil–cost options at the end of the three year performance provided that the hurdle price of 35p has been achieved. The number of nil–cost options granted to all participants in the VCP will be calculated by reference to the value created for shareholders from the date of grant and the prevailing share price at the end of the three year performance period.



30 share–based payments continuedValuation methodologiesIn order to calculate fair values of the options under consideration the Group has taken into account factors those knowledgeable, willing market participants would consider in valuing the options.

The fair values of the EMI options to employees with no additional market conditions were estimated using a Binomial option pricing model.

The fair value of the LTIP and EMI awards from 2005 onwards, where an element of the release of shares is contingent upon relative performance of the Group’s Total Shareholder Return (TSR) against the TSRs of the companies in the comparator group, was calculated using a Monte Carlo Simulation model.

The units granted under the VCP in 2009, where the potential number of nil–cost options granted to Executive Directors will be dependent upon the absolute return to shareholders over the performance period was also calculated using a Monte Carlo Simulation model. The total fair value of all units granted to participants in the VCP was £32,461.

Volatility assumptionsAnnualised expected volatility of all the options and units granted under the VCP were determined by calculating the average of standard deviations of daily continuously compounded returns of the Group’s share price calculated over one, two and three years back from the date of grant of each instrument.

Options outstandingThe weighted average exercise price of the options outstanding at 31 December 2009 is 18.67p (2008: 21.37p).

paRent Company statement of finanCial position at 31 December 2009


Notes

2009

£000

2008

£000

ASSETS

Non–current assets

Property, plant and equipment 34 2,660 2,700

Investment in subsidiaries 35 3,814 3,814

Amounts owed by subsidiaries 36 – –

6,474 6,514

Current assets

Trade and other receivables 36 87 90

Cash and cash equivalents 37 2,025 2,487

2,112 2,577

Total assets 8,586 9,091

EQUITY

Capital and reserves attributable to the Company’s equity holders

Share capital 38 1,731 1,731

Share premium account 39 5,377 5,377

Capital redemption reserve 39 115 115

Treasury shares (1,166) (1,166)

Own shares reserve 39 (319) (319)

Retained earnings (1,107) (1,244)


LIABILITIES

Non–current liabilities

Borrowings 40 2,250 2,250

Deferred income tax liabilities 41 181 186

2,431 2,436

Current liabilities

Trade and other payables 42 1,496 2,155

Current income tax liabilities 28 6

1,524 2,161

Total liabilities 3,955 4,597

Total equity and liabilities 8,586 9,091

The financial statements were approved by the Board of Directors on 22 March 2010 and signed on its behalf by:


paRent Company statement of Changes in equity for the year ended 31 December 2009


Share capital

£000

Share premium account

£000

Capital redemption

reserve

£000

Treasury shares

£000

Own shares reserve

£000

Retained earnings

£000

Total

£000

At 1 January 2008 1,731 5,377 115 (1,166) (335) 2,669 8,391

Dividend – – – – – (285) (285)

Employee share-based compensation – – – – – (26) (26)

Own shares vesting – – – – 16 (16) –

Transactions with owners – – – – 16 (327) (311)

Loss for the period – – – – – (3,586) (3,586)


Currency translation adjustment – – – – – – –

Deferred tax on items relating to equity – – – – – – –

Total comprehensive income for the period – – – – – (3,586) (3,586)

At 31 December 2008 1,731 5,377 115 (1,166) (319) (1,244) 4,494

At 1 January 2009 1,731 5,377 115 (1,166) (319) (1,244) 4,494

Employee share-based compensation – – – – – – –

Own shares vesting – – – – – – –

Transactions with owners – – – – – – –

Profit for the period – – – – – 137 137


Currency translation adjustment – – – – – – –

Deferred tax on items relating to equity – – – – – – –

Total comprehensive income for the period – – – – – 137 137

At 31 December 2009 1,731 5,377 115 (1,166) (319) (1,107) 4,631

paRent Company statement of Cash flows for the year ended 31 December 2009


Note

2009

£000

2008

£000

Cash flows from operating activities

Cash (used) from operations 43 (352) (678)

Interest paid (133) (267)

Income tax paid – (23)

Net cash (used) in operating activities (485) (968)

Cash flows from investing activities

Interest received 23 155

Net cash generated from investing activities 23 155

Cash flows from financing activities

Re–mortgage on Linford Wood office – –

Dividends paid to Company’s shareholders – (285)

Net cash used in financial activities – (285)

Net (decrease) in cash and cash equivalents (462) (1,098)

Cash and cash equivalents at beginning of period 2,487 3,585

Cash and cash equivalents at end of period 2,025 2,487

notes to the paRent Company finanCial statements for the year ended 31 December 2009


31 accounting policiesThese financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

The principal accounting policies adopted by the Company are the same as the Group’s accounting policies, see Note 2 for details, subject to the following additions:

31.1 Investment in subsidiariesInvestments in subsidiaries are measured at cost less accumulated impairment.

31.2 Financial risk factorsThe Company’s activities expose it to a variety of financial risks. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

(a) Market risk(i) Currency risk

The Company manages the cash requirements for subsidiaries that operate internationally and are subject to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the euro. The Company does not hedge any transactions, and foreign exchange differences on retranslation of foreign assets and liabilities are recognised in the income statement.

Wherever possible the Company looks to transact its affairs in sterling. However, its subsidiary Peladon Software Inc is based in California and trades in US dollars.

(ii) Interest rate riskThe Company finances its operations through a mixture of shareholders’ funds and bank loans. The Company’s exposure to interest rate fluctuations on its borrowings is managed by the use of capped floating facilities. The Company mixes the duration of its deposits to reduce the impact of interest rate fluctuations.

(b) Credit riskThe Company’s only creditors are its subsidiary companies.

(c) Liquidity riskThe Company takes a prudent approach to managing liquidity risk to ensure sufficient cash is available to meet foreseeable needs and to safely finance the successful completion of large scale contracts within the Group, thereby minimising liquidity risk issues.

31.3 Share-based paymentsDRS Data & Research Services plc manages all share-based arrangements for the Group. The basis of calculation for the cost of these share-based payments is set out in Note 30. The calculated cost is then charged out as a service to the relevant subsidiary.

32 profit for the yearDRS Data & Research Services plc has not presented its own income statement and related notes as permitted by Section 408 of the Companies Act 2006. The profit for the financial year dealt with in the financial statements of the Parent Company is £137,000 (2008: loss £3,586,000).

Details of Directors’ remuneration and share payments are borne by DRS Data Services Limited and are disclosed in Notes 8 and 31.


33 auditor’s remuneration

2009

£000

2008

£000

Auditor’s remuneration:

– audit services 4 4

Details of non–audit services are shown in Note 5.

34 property, plant and equipment

Total

£000

Freehold land & buildings

£000

Fixtures & fittings

£000

At 1 January 2008

Cost 3,128 2,900 228

Accumulated depreciation (388) (160) (228)

Net book amount 2,740 2,740 –


Opening net amount at 1 January 2008 2,740 2,740 –

Depreciation charge (40) (40) –

Closing net book amount at 31 December 2008 2,700 2,700 –

At 31 December 2008

Cost 3,128 2,900 228





Depreciation charge (40) (40) –


At 31 December 2009

Cost 3,128 2,900 228



Bank borrowings are secured on Linford Wood land and buildings for the value of £2,250,000 (2008: £2,250,000). See Note 22.

notes to the paRent Company finanCial statements continued


35 investment in subsidiariesAt 31 December 2009 the principal subsidiary undertakings of the Company are as follows:

Name of CompanyCountry of incorporation

and operation Shareholding Main activity

DRS Data Services Limited UK 100%

Provision of data capture services, manufacture and sale of optical and image

scanning equipment

Peladon Software Inc. California, US 100%Distribution of document management

software within North America

Peladon Software Limited UK 100%* Non-trading

*Shares held by Peladon Software Inc.

Total

£000

DRS Data Services

Limited

£000

Peladon Software Inc

£000

At 31 December 2008

Cost 6,283 3,814 2,469

Accumulated impairment (Note 10) (2,469) – (2,469)




Impairment provision – – –


At 31 December 2009

Cost 6,283 3,814 2,469

Accumulated provision (2,469) – (2,469)


36 trade and other receivables

31 December 2009

£000

31 December 2008

£000

Non–current loans and receivables

Amounts owed by subsidiaries 989 1,026

Less provision for impairment of receivable (989) (1,026)

– –

Current loans and receivables

Amounts owed by subsidiaries – –

Prepayments and accrued income 87 90

87 90

A 100% impairment provision has been created against the Peladon Software Inc and Peladon Software Limited inter–Company balances, see Note 45.


There is no material difference between the fair value and carrying value of these assets.

There are no trade receivables.

37 Cash and cash equivalents

31 December 2009

£000

31 December 2008

£000

Cash at bank and in hand 2,025 2,487

The Company’s approach to managing liquidity and currency risks is in accordance with the Group, details of which are set out in Note 3.1.

The table below show the extent to which the Company has monetary assets in currencies other than sterling.

2009 US dollars

£000

2009 euro

£000

2008 US dollars

£000

2008 euro

£000

Sterling equivalent – 23 292 –

38 share capitalSee Note 18 for details of the share capital of the Company.

39 other reservesSee Note 19 for details of the other reserves of the Company.

40 BorrowingsSee Note 22 for details of the secured loan for £2,250,000 of the Company.

41 deferred income tax

31 December 2009

£000

31 December 2008

£000

Analysis for financial reporting purposes

Deferred tax liabilities 181 186

181 186

The movement in the year in the Company’s net deferred tax position was as follows:

31 December 2009

£000

31 December 2008

£000

At 1 January 186 30

Charge to income for the year (5) 156

At 31 December 181 186



41 deferred income tax continuedThe following are the major deferred tax liabilities and assets recognised by the Company and the movements thereon during the period:

Accelerated tax depreciation

£000

Revaluation of property

£000

Total

£000

At 1 January 2009 168 18 186

Charge to income for the year (4) (1) (5)

At 31 December 2009 164 17 181

42 trade and other payables

31 December 2009

£000

31 December 2008

£000

Financial liabilities measured at amortised cost

Amounts owed to Group undertakings 1,286 1,918

Accrued expenses 118 103

1,404 2,021

Derivative financial instrument

Fair value of interest rate collar (see Note 22) 92 134

1,496 2,155

Fair value of interest rate collar equates to carrying value.

43 Cash generated from operations

31 December 2009

£000

31 December 2008

£000

Profit/(loss) for the period 137 (3,586)

Adjustments for:

– income tax 17 159

– depreciation of property, plant and equipment (Note 34) 40 40

– share–based payment (credit) in respect of EBT – (32)

– share–based payment charge in respect of LTIP shares – 6

– impairment on investment – 2,469

– exchange loss on cash holdings – –

– interest income (23) (155)

– interest expense 133 267

Changes in working capital (excluding the effects of acquisition and exchange differences on consolidation):

– trade and other receivables 3 625

– trade and other payables (659) (471)

Cash (used) from operations (352) (678)

There were no sales or disposals of property, plant and equipment.


44 financial assets and liabilitiesCategories of financial assets and liabilities.

The carrying amounts presented in the statement of financial position to the following categories of assets and liabilities:

Note

31 December 2009

£000

31 December 2008

£000

Financial assets

Loans and other receivables

– Trade and other receivables 36 87 90

– Cash and cash equivalents 37 2,025 2,487

2,112 2,577

Financial liabilities

Financial liabilities designated at fair value through profit or loss:

– Non–current borrowings 40 (2,250) (2,250)

Financial liabilities measured at amortised cost:

Current

– Trade and other payables 42 1,404 2,021

Derivatives designated as cash flow hedging instruments (carried at fair value)

– Derivative financial instruments 42 92 134

The Group adopted the amendments to IFRS 7 Improving Disclosures about Financial Instruments effective from 1 January 2009. These amendments require the Group to present certain information about financial instruments measured at fair value in the statement of financial position.

Financial assets and liabilities are measured at fair value in the statement of financial position in accordance with the fair value hierarchy. This hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;•

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either •directly (ie as prices) or indirectly (ie derived from prices); and

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).•

The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The only financial liability affected is the derivative in respect of the interest rate collar described in Note 22 which is classified as level 2.



45 intra–group transactionsDRS Data & Research Services plc provided £810,000 (2008: £720,000) of services to its subsidiaries during 2008. It did not make any purchases from them.

DRS Data & Research Services plc is owed a total of £4,803,000 (2008: £4,840,000) from its three subsidiaries, of which £3,814,000 relates to the value of assets hived down to DRS Data Services Limited on 1 January 2006. DRS Data & Research Services plc does not plan to request payment of this debt in the foreseeable future.

A 100% impairment provision has also been created against the Peladon Software Inc inter–Company balance in view of it not expected to be cash positive in the foreseeable future and there is uncertainty how quickly it will be able to repay the balance.

The Company has provided cross-Company guarantees for the borrowing facilities of its subsidiary DRS Data Services Limited. The Company accounts for these as insurance contracts in accordance with IAS 37.

DRS Data Services

Limited

£000

Peladon Software Inc

£000

Peladon Software

Limited

£000

Total

£000

At 31 December 2008

Amounts owed by subsidiaries 3,814 748 278 4,840

Less impairment provisions – (748) (278) (1,026)

3,814 – – 3,814

Amounts owed to subsidiaries (1,918) – – (1,918)

Net amount owed by subsidiaries 1,896 – – 1,896

At 31 December 2009

Amounts owed by subsidiaries 3,814 711 278 4,803

Less impairment provisions – (711) (278) (989)

3,814 – – 3,814

Amounts owed to subsidiaries (1,284) – – (1,284)

Net amount owed by subsidiaries 2,530 – – 2,530

diReCtoRs and adviseRs

81

This report is printed on 350gsm Lumisilk and 150gsm Lumisilk

81

directors Sir David Brown, Chairman*Anthony LeeArthur Mark TebbuttAnn Limb*Lord Kinnock of Bedwelty*Chris Batterham*#

Company secretarySally Hopwood

Registered head office1 Danbury CourtLinford WoodMilton KeynesBuckinghamshireMK14 6LR

stockbrokersArden Partners plc125 Old Broad StreetLondonEC2N 1AR

auditor Grant Thornton UK LLPRegistered Auditors and Chartered AccountantsGrant Thornton House202 Silbury BoulevardCentral Milton KeynesBuckinghamshireMK9 1LW

principal BankersBarclays Bank plcP O Box 729Eagle Point1 Capability GreenLutonLU1 3US

RegistrarsCapita RegistrarsThe Registry35 Beckenham RoadBeckenhamKentBR3 4TU

* non–Executive Director# Senior Independent Director

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