Final Results

Alternative Networks plc

Results for the year ended 30 September 2016

Alternative Networks plc, ('the Company' or 'the Group'), a leading provider of IT managed services and business-to-business communications, reports its Preliminary Results for the twelve months ended 30 September 2016.

HIGHLIGHTS

Performance in line with revised expectations with growth in Advanced Solutions recurring revenues and strong cash generation alongside significant operational enhancements

· Revenue declined 7.5% to £135.8m (2015: £146.8m)

o Advanced Solutions recurring revenue growth of 2% offset by non-recurring revenue decline of 17%, resulting in the overall 6% Advanced Solutions revenue decline.

o Fixed Line and Mobile revenue declined 11% and 8% respectively.

· Adjusted EBITDA decreased 16.6% to £18.4m (2015: £22.1m)

· Continued strong cash generation

o Operating cash conversion of 84% of adjusted EBITDA (2015: 99%)

o Net debt of £19.1m (2015: £18.7m)

o Net debt leverage under 1.1 times adjusted EBITDA

· No final dividend has been proposed due to the Board announcement on 21 November 2016 of the recommended offer by Daisy Intermediate Holdings plc for the entire share capital of Alternative Networks plc.

KEY FINANCIAL INFORMATION

* Profit before intangible assets amortisation excluding software, exceptional items and share based payments

** Earnings before interest, taxation, depreciation and amortisation*** Adjusted earnings per share is based on adjusted profit after tax as set out in note 11

Mark Quartermaine, Chief Executive of Alternative Networks, commented:

"2016 has been a challenging year overall, impacted by two unforeseen events; being the mobile roaming tariff reset and the uncertainty in the run up to and caused by the result of the United Kingdom's European Union membership referendum. These events impacted the financial performance of the Group, but we have continued to invest in the business and drive improvements in customer service and operational performance whilst launching new innovative products.

The improved profit performance in the second half of 2016, together with the high recurring revenue levels in the Group and continued robust cash generation, means that the Board is confident that the business is well placed for the future. The combination with Daisy will ensure that the Group is best placed to capitalise on future growth opportunities and remain the provider of choice for our customers. In particular, the strong complementarity and strategic fit between Daisy and Alternative Networks will ensure our competitiveness and benefit our customers through access to a broader range of unified communications solutions"

CHAIRMAN'S STATEMENT

CHAIRMAN'S STATEMENT

Introduction

The 2016 financial year has seen Alternative Networks' financial performance impacted by two external events; the UK mobile carriers new tariffs on rest of world roaming and the impact of the uncertainty in the run up and immediately after the United Kingdom's European Union membership referendum. Despite these events we have made good progress in driving further business improvements that will benefit customers and help us return to growth. We have continued to strengthen our offering, adding further market leading products and services that can meet customers' communications and data needs. The investments we have made are delivering good operational results and position us well for the future.

Results

Reported revenue for the year ended 30 September 2016 was £135.8m, down 8% on 2015. Gross margins remained steady and adjusted EBITDA at £18.4m was 17% below the prior financial year.

Cash generation has remained strong across the Group with 84% of adjusted EBITDA converted to cash. Group net debt at 30 September 2016 was reduced to £19.1m (30 September 2015: £18.7m).

Recommended offer by Daisy Intermediate Holdings

On 21 November 2016, the Board announced a recommended cash offer by Daisy Intermediate Holdings plc to acquire the entire issued and to be issued share capital of Alternative Networks plc.

Review of operations

The acquisitions made in 2014 are fully integrated into the Advanced Solutions division, which now represents more than 53% of Group revenue. Revenue in the Advanced Solutions division comprises multiyear contractual arrangements with customers (recurring) and one off hardware and other sales (non-recurring). Advanced Solutions recurring business grew in the financial year, although both recurring and non-recurring new business performance were lower over the summer following the United Kingdom's European Union membership referendum, and we closed the year with a strong £5.0 million order backlog (2015: £5.2m). The division also enjoyed some excellent new client wins, and reinforced its particularly strong presence in the Higher Education sector.

Mobile Network Services was impacted by the mobile roaming tariff reset in the first half of the financial year but, following management actions, underlying performance stabilised in the second half of the year. Despite the challenges we continued to grow market share, with an increased number of subscribers in a competitive market, representing a very creditable achievement. As expected Fixed Voice revenue was down on the previous year and in line with market trends, and the division now represents less than 20% of Group revenues. Our market leading Synapse portal has continued to be a key differentiator, and we continue to drive further enhancements to its functionality, stability and reliability.

Growth strategy

The last year has been one of investment as we focus on becoming one of the UK's leading providers of IT managed services to UK businesses. This investment has been made to enable the Group to take maximum advantage of the expanded portfolio of services it has steadily developed, both in-house and through acquisition.

We have built a strong platform, and are positioned to use our breadth of products and services to establish ourselves as the long term supplier of choice for a larger customer target base and drive organic growth. The outlook for the Group and its growth prospects are positive but it should be recognised that the growth strategy is subject to execution risk and changes in the market environment. In this context, the mobile tariff reset and the uncertainty caused by the outcome of the referendum on the United Kingdom's continued membership of the European Union were unwelcome developments. As the Referendum is still relatively recent, the potential longer term impact on Alternative Networks' future trading performance is unclear.

We are able to invest further in product development so as to remain at the cutting edge of the market and maintain our competitive strengths. The growth of our pipeline, the increasing number of larger businesses taking more of our services and the conversion rate of orders, suggest that our strategy is working and can continue to deliver value. We therefore remain positive about future prospects for the business.

James Murray

Executive Chairman

7 December 2016

Chief Executive Officer's Review

Overview

Despite the trading challenges, the Group has continued to focus on operational improvement projects, and investing to create a strong platform to support future growth. This has resulted in a business that is well placed to increase sales and deliver even greater customer satisfaction in the coming years.

The major highlights of the year were as follows:

· Continued gains in key growth areas;

o Mobile subscribers increased 6% to 105,490 (2015: 99,413)

o Advanced Solutions recurring revenues growth of 2%

· Major product development with the release of new 'as a service' consumption based propositions as well as enhanced versions of existing products. These include;

o OnlineUC; Online Compute and Online Storage which all offer our customer modern, high functionality solutions that complement our existing portfolio and drive recurring revenues and margins

· A significant investment in our customer service infrastructure that ensures we can now provide a single interface and improved customer service experience for all customers.

The enhanced product offering and investments in improving operational performance provide the Group with a solid platform for future growth. The Group is better positioned to expand both its managed service product portfolio and its selling capability to deliver the portfolio to new and existing customers more effectively.

Trading and performance overview

In 2016 the Group trading performance was below the level seen in 2015 as two external factors impacted the business: the UK mobile carriers new tariffs on rest of world roaming and the impact of the uncertainty in the run up and immediately after the United Kingdom's European Union membership referendum. This has resulted in decreases in reported revenues, gross profit and adjusted EBITDA compared with the prior period. Group reported revenues of £135.8m were 8% below the level of 2015, with gross profit 9% below and adjusted EBITDA 17% below 2015.

Cash generation was once again strong, with operating cash conversion of 84% of adjusted EBITDA. As a result, net debt was £19.1m, which was broadly in line with our stated objective of one times adjusted EBITDA.

The Advanced Solutions business was 6% below the prior year. Non recurring revenue was impacted by the slowdown in new business orders over summer 2016 in the run up and immediately following the United Kingdom's European Union membership referendum and was 17% below the prior year. Recurring revenue was 2% ahead of the prior year driven by growth in On Demand Services. Trading performance in Managed Services has been solid, with minimal client attrition. New orders have been generated across the portfolio, with some notable areas of success particularly in Higher Education.

The Mobile business was significantly impacted by new tariffs introduced in the first half of the financial year by the UK mobile carriers which reduced the revenue and profitability of rest of world roaming. Following actions taken by management, performance has stabilised in the second half of the year with improved gross margin levels as a direct consequence of management's actions taken including new carrier arrangements. The underlying performance was good in the period, gaining market share with a 6% increase in the subscriber base year on year, and more than 1,700 subscribers signed that will connect by the end of the first quarter of 2017. Revenues were 8% below the prior year £37.4m, representing 28% of the Group's overall revenue.

Fixed Voice revenues were 11% below the prior year, in line with expectations. Gross profit was more resilient at 7% behind the prior year due to the positive impact of new commercial agreements signed in the period. Whilst we continue to manage the product set for profitability, the key focus remains the migration of the fixed line base to SIP channels which have grown 32% year on year. Overall the Fixed Voice business now represents less than 19% of the Group's revenue.

Strategy

The Group's strategy is to become the leading IT managed services provider for UK businesses, via both organic and acquisitive growth. The Group operates in the UK Telecoms and Information Technology (IT) market as an IT Managed Services company covering the full spectrum of services and products from device to the datacentre.

The financial performance of the Group, including revenues, profits, cash flows and net debt is set out in the Chief Financial Officer's Review together with a discussion of the KPIs of the Group.

Platform for growth

2016 has been another year of progress and change. Key areas of investment have been product development and IT application development focused on providing customers with a further enhanced experience and improving the Group's operational efficiency. These combined investments have not only improved our offering to customers, but will also increase productivity and collaboration amongst our people and allow easier integration of future acquisitions.

The Board is committed to building a broader and stronger platform for growth. We have set out our vision to be the leading IT managed services provider of choice to UK businesses. We have invested in the development of a platform and products that allow customers to bridge private and public cloud services, in addition to routine recurring capital investments. The technical strategy is focussed on three elements:

The Group infrastructure and hosting services are critical to the delivery of this strategy and in 2016 we have launched our own UC cloud platform and OnlineCompute, Alternative's cloud infrastructure platform.

All products are now supported by a group wide rollout of ServiceNow (a market leading case management system). This provides us the platform to offer improved customer service and alongside the integration with our Synapse portal, improved visibility and control of a customer's infrastructure.

Strategically, we are positioning ourselves to continue to support our customers to consume business critical applications via a variety of communication methods, and this will support our growth aspirations going forward.

Organic growth

The Group continues to build successfully on the following four key areas of focus to deliver continued organic growth:

In 2016 the average spend per client was up 2.7% on the prior year demonstrating the successful implementation of the strategy. At the period end, average monthly spend of our 'large customers' (i.e., those with a monthly spend in excess of £1,000) remained in line with 2015, reflecting a satisfactory level of customer service.

The Group's ability to win large contracts with new customers has been proven once again in 2016 including sizeable deals with Channel 4 and the North Lincolnshire and Goole NHS Trust.

Product penetration statistics continue to show a broadening uptake of services from across our customer base, with increases in sales per customer showing that our customer service levels continue to improve.

Product penetration across the customer base remains strong, with 46% of customers taking more than one product (2015: 46%) and the proportion taking 4 or more products increasing to 18% (2015:17%). This is in line with the Group's stated strategy of growing the average size of the customers, via enterprise sales and driving product penetration in our existing base.

Product development

We have always aligned our technical strategy with our customers' needs and have now successfully transitioned the Group into IT managed services. We continually look at new product offerings to further support customers and align their IT with the needs of the end user, and to deliver bespoke IT solutions for our customers from the device to the datacentre. As a result we are well positioned to take increasing amounts of market share with new services, most importantly PaaS (Platform as a Service) and DaaS (Desktop as a Service). In 2016 we have added IaaS (Infrastructure as a Service) and an Online Voice offering.

Portal development

Central to this strategy is the use of Synapse, the Group's dynamic service interface, offering customers significant service and flexibility benefits. During 2016 the Group has continued developing Synapse as well as continuing the process of converging the other, wider Group portal systems into it, providing an enhanced interface, covering the Group's device to datacentre portfolio.

Growth by acquisition

The Group's cash generative nature has facilitated the significant reduction in net debt since the 2014 acquisitions. This, combined with the strong balance sheet, leaves us well placed to capitalise on further opportunities and as such the Group monitored the market proactively during 2016 for further "right-fit" acquisitions. Potential opportunities were targeted to complement the existing products and to further expand our capabilities and product set in the Advanced Solutions area, with a focus on managed and hosted services, applying strict selection criteria.

The Group's long standing and consistently strict criteria for acquisitions remains unchanged. Targets must:

Outlook

The strategic acquisitions in 2014 and the transformational projects in 2015 and 2016 have resulted in an IT Services business with a unified operational structure, a fully invested sales force and a market leading product portfolio, able to deliver end-to-end solutions to a larger and more receptive customer base. Product penetration statistics continue to show a broadening uptake of services from across our customer base, with increases in average sales per customer showing that our customer service level continues to exceed expectations.

The outlook for Group and its growth prospects remain positive; its growth strategy is subject to execution risk and changes in the market environment. The dividend payments and dividend policy have been an important part of the Group's investment case. While the Board reiterated its intention to deliver annual growth in the dividend of no less than 10 per cent in the recent trading update released on 27 September 2016, the Alternative Networks Directors also believe that, in the longer term, any growth in dividends will need to reflect the growth in the Group's underlying profits.

The combination with Daisy will ensure that the Group is best placed to capitalise on future growth opportunities and remain the provider of choice for our customers. In particular, the strong complementarity and strategic fit between Daisy and Alternative Networks will ensure our competitiveness and benefit our customers through access to a broader range of unified communications solutions.

Mark Quartermaine

Chief Executive Officer

7 December 2016

Chief Financial Officer's Review

Results & trading overview

In 2016 the Group experienced continued growth in Advanced Solutions recurring revenues, and continued strong cash performance. The Advanced Solutions segment now accounts for 54% of Group revenues (2015: 53%) with a reduction in the contribution value from Fixed Voice services, which is in managed decline.

Year ended 30 September 2016

In order to facilitate understanding of business performance, the Group splits out its operating KPIs, both financial and non-financial into three distinct revenue groups. These are Advanced Solutions, Mobile and Fixed Voice. These enable the Group's performance to be benchmarked against competitors and allow the Board to control more clearly the underlying drivers to the Group's business. All recent acquisitions are reported in Advanced Solutions and have no impact on Mobile or Fixed Voice. For avoidance of doubt, the business does not operate separate trading divisions but sells a converged product offering, with teams of sales and service organised according to customer size.

Group revenue decreased 7.5% to £135.8m (2015: £146.8m) largely due to the slowdown in Advanced Solutions non-recurring revenues, mitigated by the increase in recurring revenues. Coupled with this, the fall in Mobile revenue of 7.7% (£3.0m) meant that performance was unable to compensate for the managed decline of the Fixed Voice Business, which fell 11.4% (£3.2m).

Gross profit decreased by 8.6% (£5.2m) to £55.5m. Gross margins are level year on year, reflecting the effect of good margin growth in Fixed Voice and margin stability in Advanced Solutions, netted off by the pressures across Mobile owed to the new tariffs on roaming rates implemented by the carriers. Further analysis is detailed below by product.

Adjusted EBITDA at £18.4m was down £3.7m (16.6%). Throughout the year the effects of the reduction in gross profits were mitigated by savings in sales, operational costs and overheads by £1.9m, reflecting the drive in Operational efficiency. The Group also benefitted from a refund of National Insurance (£0.4m). During the period the Group focused its resources on the introduction of new products such as OnlineCompute and Hosted Voice.

Advanced Solutions

Advanced Solutions revenues decreased by 6% to £73.2m. Decline in the second half of the year was steeper than in the first half as new business performance was lower over the summer following the United Kingdom's European Union membership referendum. Reassuringly, new business performance recovered well in August and September. Growth in recurring products has maintained healthy levels with £0.8m higher recurring income in 2016. New orders have been generated across all industry verticals and notable contract wins with new and existing customers.

The margin in Advanced Solutions is broadly level with the prior year at 37% (2015: 38%) as a result of growth in higher margin services including Online Desktop and Billing Services, netted against some pricing pressure for larger deals involving legacy hardware and maintenance solutions.

Managed services

Managed services encompass the Group's offerings in all hosting, cloud and utility services, including all outsourcing services. Growth in the recurring products in is a key focus with both existing and new customers. High margins in this area represent the added value nature of the services provided. The 2.8% decline in revenue in the year reflects a combination of one off credits following service outages (£0.2m), price renegotiation and a small amount of client churn. Colocation revenue has remained constant as the Group encourages clients to move towards higher margin, fully managed services.

Online desktop

Online desktop represents the Group's cloud based Desktop as a Service (DaaS) remote access offering, acquired as part of the 2014 acquisitions. Revenue growth was 20% as we seek to take a key position in this growing market.

Maintenance

Maintenance represents work undertaken at customer sites by in house resource or by third parties. Revenues have remained in line with 2015. During the year the Group lost one of its key customers which offset the new business won. Margins are in line year on year as the Group has been able to renew contracts at historical pricing levels due to the service quality available to clients, and proactively churn any that involve lower pricing.

Connectivity

Connectivity revenues increased 13% to £9.4m in 2016 (2015: £8.3m). This growth was generated from data connectivity sales to both existing and new customers.

Hardware & software

Hardware and Software revenues comprise all individual non-recurring direct sales across the Group, and decreased 17.6% to £21.6m (2015: £26.3m). Gross margins have reduced slightly across the Group due to a number of large deals where competitive pricing has been offered in order to secure further growth opportunities in higher margin products and services with recurring revenue.

Professional services

Professional services revenue, comprising a mix of IT solution design and installation of data hardware, decreased 13.4% to £5.7m (2015 £6.6m) largely in reflection of the reduced hardware sales seen in the year.

Billing services

Billing Services revenues were up 6.2% to £4.4m (2015: £4.2m). This is as a result of further growth in sales to third party customers and revenue from providing a hosted managed billing service. Gross margins increased by 3.5% points to 56%, as the Group maintained its high client retention level and delivered more consultancy services to clients.

Telephony Services - Mobile

Mobile revenues decreased 7.7% to £37.3m. Whilst the Group continues to take significant market share, performance declined as new tariffs on roaming rates implemented by the carriers adversely affected gross profit and margins, which decreased 12.4% and 240bps respectively.

There was continued high growth in the contract base with a 6% increase in subscribers to 105,490 at the end of 2016. This is the result of significant new connections, demonstrating a continued ability to win in a flat market. Churn levels remained in line year on year.

Mobile KPIs

The Group uses three principal KPIs to measure the performance of Mobile Voice, being "ARPU", "ADPU" and churn.

Telephony Services - Fixed Voice

The market continues to operate on two-tiers with legacy fixed voice providers seeing network traffic in decline by mid-single digit rates and resellers and service providers migrating their customers to IP services. The Group manages its Fixed Voice Services in the context of the declining market place, whilst improving market share and profitability, and continues to retain its customer base via migration to SIP based telephony. In the year the number of SIP lines has increased by 32% from 10,924 to 14,371.

Fixed Voice revenues declined 11.4% in 2016 to £25.3m as a combined result of customer churn and reduction in call volume to mobiles, regulatory price reductions and the continuing move to email and mobile. However the Group has again succeeded in the proactive management of this base with further commercial gains and active retention.

The gross margin on this product set has continued to grow in 2016, from 43% to 45%, but with the revenue decline, total gross profit has reduced 7.3% year on year. The growth in gross margin is as a result of improved commercial arrangements from key suppliers.

Outbound services

Inbound services

Financial Overview

Adjusted and statutory results

In these results we refer to adjusted and statutory results. Adjusted results are prepared to provide a more comparable indication of the Group's underlying business performance. Adjusted results exclude adjusting items as set out below and in note 27 to the financial statements.

Restructuring, acquisition and associated costs

As a result of the various restructuring activities the Group incurred non-recurring charges of £0.9m. This comprised £0.3m of redundancy charges and £0.6m on restructuring and other charges which includes £0.1m of refinancing costs, £0.1m of costs associated with the proposed acquisition of the Company and £0.1m of datacentre dual running costs.

Finance costs

Finance costs were £1.0m (2015: £1.3m) driven by the Group's debt facilities in place for the whole year. In May 2016 the Group amended and extended its existing financing facilities and converted them into a £40 million revolving credit facility. At September 2016 the margin applied to this facility had fallen to 1.35% over LIBOR based on a leverage position of the balance sheet of less than 1.25.

Taxation

The effective tax rate for the year was 17.5% (2015: 17.0%). The effective tax rate in the current period is lower than the UK statutory rate principally due to the recognition of £0.1m of prior year R&D credits that have been successfully received in the current year and a reduction in the rate of tax at which deferred tax assets and liabilities are measured.

Earnings per share

Basic adjusted earnings per share have decreased by 18% from 28.4p to 23.4p. Fully diluted adjusted earnings per share have decreased by 17% to 23.2p (2015: 27.8p). Statutory (unadjusted) fully diluted earnings per share have decreased 33% from 23.3p to 15.6p.

The weighted average number of shares in the year used for calculating the basic earnings per share has increased by 300,454, as outlined in note 11 to the financial statements. The dilutive share number has decreased by 206,736, due to the fact that a number of share options have lapsed during the year.

Net debt and bank facilities

In May 2016 the Group amended and extended the outstanding amount of its incumbent £43m credit facility (previously consisting of both a term and revolving facility) with a £40m revolving credit facility. The principal financial covenants under the new facility are limited to maximum net debt to EBITDA of 2.5 times (unchanged over the life of the loan) and minimum interest cover of 5 times. The previous cashflow covenant has been removed.

The year-end net debt balance was £19.1m (2015: £18.7m). This is after £4.0m of total capital expenditure and paying dividends of £8.3m. The net debt level is down from a peak of £41.3m at the time of the acquisitions in January 2014.

Net debt performance is primarily driven by the strong operating cash conversion of the business (see below) which has been greatly facilitated by the completion of acquisition integration activities.

Cash flow

Working capital and cash management remains a key priority of the Group and once again cash flow has been good. Cash inflow from operations was £15.5m (2015: £21.9m), compared to adjusted EBITDA of £18.4m (2015: £22.1m), representing a cash conversion of 84% (2015: 99%). Alongside this the Group debtor days stood at 32 days at the year end.

Capital expenditure

Capital expenditure in the period was £4.0m compared to £5.5m in 2015 when additional non-recurring investments in the Group's infrastructure were made.

The remaining £4.0m of spend was in line with expectations and previous periods, and represented further expenditure in respect of IT development, including additional investment in a consolidated customer portal service, expanding on the existing Synapse functionality and investments in the existing CRM platform to improve our service to customers and reduce operating costs.

In 2017 we expect capital expenditure to continue at routine underlying levels, with some additional investment required across our product portfolio's, including software development to ensure our unique proposition is consistent across all service lines.

Dividend per share

No final dividend has been proposed due to the Board announcement on 21 November 2016 of the recommended offer by Daisy Intermediate Holdings plc for the entire issued and to be issued share capital of Alternative Networks plc. The interim dividend was 6.2 pence per share (2015: 5.5 pence per share) making a total ordinary dividend of 6.2 pence per share for the full year (2015: 16.4 pence per share).

Principal risks and uncertainties

Managing the financial, operational and reputational risks across our business and operations is critical to our success. Below we highlight the identified key areas of risk that are monitored on an ongoing basis. The Group's Risk Management Framework requires a regular review of the key risks facing the Group.

Contracts with suppliers

The Group resells the products of its suppliers and whilst many of the Group's products are supplier agnostic and there exists a freedom to substitute various suppliers' products, the Group acknowledges that it has reliance in particular on the contracts with the mobile networks, O2 and Vodafone. Both managed service agreements run until March 2018 and are subject to various performance criteria which there is no guarantee will be met.

The Group mitigates these risks by maintaining strong relationships with its suppliers at various levels of the business, as well as paying close attention to ensuring the expectations of suppliers are met, and where possible exceeded.

Technological change

The Group operates in a market of rapid and dynamic technology changes, and there is a risk that the Group fails to secure the necessary contracts to supply its customers with a new technology (disruptive) which substitutes existing technology. The Group mitigates this risk by maintaining close relationships with its suppliers, and by employing a product development team whose duties include research, review and procurement of appropriate new technology products for testing prior to release to our customers.

Ability to continue to attract and retain key sales and customer management executives

Ability to continue to attract and retain key sales and client management executives - the Group is a direct sales and marketing business and whilst the revenues of the Group are largely recurring on a monthly basis, the Group depends on being able to recruit and retain staff of the right calibre in order to win and service key contracts. The Group has sought to mitigate this risk by investing in a succession and training plan for career development, and improving the employee benefits and remuneration over the last three years, including commissions, and specifically share options and pension contributions. The Board monitors the results of exit interviews, recruitment statistics and staff attrition by department on a regular basis.

Regulatory risk

The Group acknowledges that the pricing of products and services can be affected by regulatory bodies in the UK and the EU. In recent years, usage pricing from fixed to mobile destinations and EU Roaming mobile voice and data retail prices have been substantially altered. The Board believes that where the pricing regulations are directed at wholesale prices, the Group is more able to mitigate the risk through its own buying and pricing policies. Where the regulator imposes price caps at the retail level, the Group is more exposed to a reduction in margin where the operators do not substantially reduce their wholesale prices. The Group mitigates the risks by careful and detailed research on the future regulations, and has been involved in lobbying where applicable. The Group assesses each risk and builds it into its forecasts of income as soon as possible and amends its pricing policies accordingly.

IT environment and control risk

The Group is increasingly dependent on IT systems for delivering its products and services and for retaining customers, as well as for running the operations of the Group. To date, the Group has used its own internal expertise together with external consultants, where necessary, to build its own IT infrastructure and software products, and is continuing to invest each year in improving its systems and adding more resilience. The Board believes the Group mitigates the IT control risks in a number of ways. Firstly, it employs a broad range of highly skilled IT personnel and ensures that there is a succession and retention plan associated with these highly talented individuals. Recommendations from audits are tracked through by the Board. Secondly, the Group operates best practise in its adherence with standards issued by the International Organisation for Standardisation and the British Standards Institute. Currently, the Group has accreditation for: - ISO 27001: Information Security Management; ISO9001: Quality Management; ISO 14001: Environmental Management; ISO20000 Service Management and ISO 22301: Business Continuity Management in the majority of its operating divisions. In order to retain these accreditations, the IT control environment is regularly reviewed by the British Standards Institute.

The Board believes that there is a satisfactory framework for monitoring, assessing and reporting on these risks. There is also a robust regular framework for reporting on predictive KPIs in the business.

Gavin Griggs

Chief Financial Officer

7 December 2016

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2016

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 September 2016

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 September 2016

NOTES TO THE FINANCIAL STATEMENTS

1 Basis of preparation

Alternative Networks plc is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The address of the registered office is 5th Floor, 240 Blackfriars Road, London SE1 8NW. The shares of the Company are listed on the Alternative Investment Market.

This financial information is abridged and has been extracted from the Group's full financial statements for the years ended 30 September 2016 and 2015.

The Group's financial statements have been prepared in accordance with IFRS as adopted by the EU and IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention.

Full financial statements for the year ended 30 September 2015 (which received an unqualified audit report) have been filed with the Registrar of Companies. Financial statements for the year ended 30 September 2016 were approved by the Board of Directors on 7 December 2016 and will be presented to the Members at the forthcoming Annual General Meeting.

2 Segmental information

IFRS 8, "Operating Segments" requires identification of the Group's segments on the basis of the internal reporting about components of the Group that is regularly reviewed by the chief operating decision maker to allocate resources and to assess performance.

The chief operating decision maker has been identified as the Board. The Board reviews the Group's internal reporting in order to assess performance and allocate resources. The Board assesses the performance of the operating segments based on revenue and gross profit. The reportable segments of the Group are Telephony Services and Advanced Solutions.

Telephony Services consists of the Group's Fixed Voice and Mobile Voice services. Advanced Solutions includes the installation and maintenance of telephone systems, the integration of computer networks, the provision of managed hosting solutions and the provision of billing facilities.

Assets and liabilities, operating profit, finance income, finance costs and taxation are not disclosed by segment as they are not reported to the chief operating decision maker.

Transactions with the largest customer of the Company are less than 10% of Group revenue.

All sales have taken place within the United Kingdom and those between segments are all carried out on arm's length basis.

All non-current assets are located within the United Kingdom.

3 Dividends

The 2015 proposed final dividend of 10.9 pence per 0.125p ordinary share (2014: 9.60 pence) was paid on 29 January 2016. The amount of dividend paid was £5,276,000 (2015: £4,643,000).

The Company paid a 2016 interim dividend of 6.20 pence per 0.125p ordinary share (2015: 5.50 pence), with a total payment value of £3,013,000 (2015: £2,662,000). This was paid on 8 July 2016 to shareholders on the register on 17 June 2016.

No final dividend is proposed by the Directors in respect of the financial year ended 30 September 2016 (2015: 10.90 pence).

4 Earnings per share

The calculation of basic and fully diluted earnings per ordinary share is based on the profit attributable to owners of the Company divided by the weighted average number of ordinary shares in issue during the year.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has one category of potential ordinary shares: those share options granted to employees where the exercise price is less than the average price of the Company's ordinary share during the year.

The profit and weighted average number of shares used in the calculations are set out below:

The adjusted EPS is based on the adjusted profit after tax as set out in note 7, and the weighted average number of shares as described above.

Share option costs included within adjusted profit attributable to owners of the company are reducing the earnings per share in 2016 by 0.3p (2015: 2.7p).

There were 49,759,471 shares in issue at 30 September 2016 (2015: 49,729,817). The weighted average number of shares during the year was 48,513,073 (2015: 48,212,619).

5 Intangible assets

Amortisation has been charged through the income statement within operating costs.

The carrying amounts of goodwill by reportable segment are as follows;

Each operating segment is deemed to be a Cash Generating Unit (CGU), being the lowest level for which cash flows are separately identifiable. Goodwill is attributed to each CGU and reviewed for the purposes of the annual impairment review as this is the level that management monitors goodwill. The Group's operating segments to which goodwill has been allocated are Mobile Voice and Advanced Solutions.

During the year goodwill in respect of each cash generating unit was tested for impairment in accordance with IAS 36. All CGUs were assessed to have a value in use in excess of their respective carrying values, and hence no impairments to goodwill were considered necessary.

The key assumptions in the value in use calculations were:

The forecasts were based on pre-tax cash flows derived from approved budgets for the 2016-2018 financial years. Management believes the forecasts are reasonably achievable based on market performance and its expectations of market developments. The directors consider that the key metric in the forecasts is earnings before interest, tax and amortisation. Subsequent cash flows were extrapolated using a 1.0% (2014: 1.0%) growth rate reflecting an approximate forecasted long term growth rate for the UK economy, the Group's principal market.

The pre-tax discount rate used to assess the carrying value of goodwill is 9.7% (2014: 10.0%) which approximates the Group's weighted average cost of capital. This discount rate has been calculated on a consistent basis.

The review performed at the year-end did not result in the impairment of goodwill for any cash generating unit as the estimated recoverable amount exceeded the carrying amount in all cases. The Group undertakes sensitivity analysis based on reasonably possible changes in assumptions by increasing the weighted average cost of capital and reducing future growth expectations in the model. The results of this analysis show no indication of impairment.

6 Cash generated from operations

7 Reconciliation to adjusted performance

Adjusted EPS is calculated on adjusted earnings after deduction of share option costs. This analysis is provided as the Group considers it provides a truer reflection of the underlying performance of the business and is common practice in the investment analyst community.

(c) Restructuring, acquisition and associated costs consist of the following:

8 Post Balance Sheet event

On 21 November 2016 the Board announced an agreement on the terms of a recommended cash acquisition by Daisy Intermediate Holdings Limited of the entire issued and to be issued ordinary share capital of Alternative Networks plc. The acquisition values the entire issued and to be issued ordinary share capital of Alternative Networks plc at £165.3 million on a fully diluted basis. If the transaction completes as expected the Company will incur professional advisory fees of £2 million which have not been recognised in these financial statements.