Final Results

AdEPT Telecom plc

("AdEPT", the "Company" or together with its subsidiaries the "Group")

Final results for the year ended 31 March 2016

AdEPT (AIM: ADT), a leading UK independent provider of award-winning telecommunications services for business-to-business communications, announces its results for the year ended 31 March 2016.

Financial highlights

· 13th consecutive year of increased underlying EBITDA up 34.0% to £6.15m (2015: £4.59m)

· Revenue increased by 30.8% to £28.9m (2015: £22.1m)

· Underlying EBITDA margin % increased by 0.5% to 21.3% (2015: 20.8%)

· 28.7% increase to profit before tax to £2.8m (2015: £2.1m)

· 28.0% increase to profit after tax to £2.0m (2015: £1.5m)

· 27.2% increase to basic earnings per share of 8.78p (2015: 6.90p)

· 24.2% increase to adjusted earnings per share of 19.57p (2015: 15.76p)

· 36.8% increase to dividends declared to 6.50p (Interim 3.00p, Final 3.50p) (2015: 4.75p)

· Year-end net debt* of £6.0m (2015: £1.5m)

Operational highlights

· Managed services accounted for 44.3% of total revenue (2015: 27.4%)

· Acquisition of entire issued share capital of Centrix Limited completed in May 2015

· Acquisition of entire issued share capital of Comms Group UK Limited completed in May 2016

* Net debt is defined as cash and cash equivalents less short-term and long-term borrowings

Commenting upon these results Chairman Roger Wilson said:

"AdEPT has delivered its 13th consecutive year of increased underlying EBITDA through a combination of strategic acquisition and organic contract wins and the Group continues to deliver consistently high levels of free cash flow generation. The continued strong cash generation has funded a 37% increase to dividends declared during the year and the Board is confident that continued focus on underlying profitability and cash generation will support a progressive dividend policy.

Organically the Company has strengthened its position during the year through successfully gaining approved status on further public sector frameworks, which have been leveraged to increase the scale of its public and healthcare sector customer base. The new larger debt facility put in place in April 2015 was partially used by the Company to complete the acquisition of Centrix Limited in May 2015, which has been complemented by a further acquisition of another unified communications provider, Comms Group UK Limited post year end in May 2016. The Company has continued its transition towards a complete managed service provider, with revenue from managed services accounting for more than 44% of the total in the year ended 31 March 2016."

This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014.

For further information on AdEPT please visit www.adept-telecom.co.uk or contact:

CHAIRMAN'S STATEMENT

Review of operations

The Group has continued to increase underlying EBITDA and maintain strong free cash flow generation, which have been used to fund the progressive dividend policy and earnings-enhancing acquisitions.

AdEPT has been highly successful in gaining further traction in the public sector space, currently supplying telecoms services and unified communications into 38 councils (2015: 25 councils). We continue to concentrate on winning frameworks rather than individual tenders and in July 2015 the Company was awarded a framework agreement with the Crown Commercial Service under the RM1045 Network Services framework which has resulted in a number of new public sector contracts, not all of which are fully reflected in these results.

The Group's continued strong cash generation resulted in £4.5m of free cash flow after interest. This, combined with the drawdown of debt from the new £15m Revolving Credit Facility put in place with Barclays in April 2015, was used to fund the transformational acquisition of the entire issued share capital of Centrix Limited ('Centrix') in May 2015 and the continued progressive dividend policy.

Centrix is a well established UK-based specialist provider of complex unified communications, Avaya IP telephony, hosted IP solutions and managed services. Centrix offers its clients the delivery of complex unified communications and managed service solutions, which is an increasing requisite for AdEPT's existing and targeted enterprise and public sector customer base. The acquisition of Centrix, combined with organic sales, has increased the rate of transition of the Group towards managed services, which accounted for 44.3% of total revenue in the year ended 31 March 2016. Following the acquisition, the Group is now telecoms partner for 20 award-winning private hospitals and specialist clinics across London and Manchester and has a strong presence in business centres, supplying telecoms for eight out of 15 London-based business centres which have opened in the last 24 months. The team at Centrix has provided an excellent fit with AdEPT and has been successful in jointly working on unified communications contracts, particularly in the public sector, with five new contracts secured with councils post-acquisition. The post-acquisition performance of Centrix has delivered growth and therefore we anticipate the contingent deferred consideration to be at the top end of the range at around £3.0m. Testament to the success of the acquisition, the Group is pleased to announce that the Group's largest customer, which was a long-standing Centrix customer, has extended its contract for unified communications to the end of December 2019.

The issue of new equity during the year to directors increasing their shareholdings following the exercise of share options resulted in a cash inflow of £0.1m, which was used by the Company to repurchase 35,000 of its own shares during the year ended 31 March 2016 at an average price of 257.7p, pursuant to the stock exchange announcement issued on 18 December 2014. The Board believes that the share repurchase scheme can improve stock liquidity and increase value to shareholders and therefore the directors will continue to determine if further repurchases remain in the shareholders' best interests.

In line with its progressive policy, AdEPT has increased the dividend declared year-on-year by 36.8%, declaring a final dividend of 3.50p per ordinary share (2015: 2.50p), making total dividends declared in respect of the year ended 31 March 2016 of 6.50p per ordinary share (2015: 4.75p).

Employees

The improved profitability and free cash flow generation this year was made possible by the continued hard work and focus of all employees at AdEPT. As a Group we are immensely proud of the track record we have created over the last 13 years and, on behalf of the Board, I would like to take this opportunity to thank all of our employees for their continued hard work.

Director changes and rebranding

The Group announces that after more than 13 years with AdEPT, its Chief Operating Officer, Amanda Woodruffe, has decided to retire and will therefore stand down from the Board with immediate effect. After a handover period, Amanda will leave the Group during summer 2016 with our best wishes for the future. The Board would like to take this opportunity to thank Amanda for her valuable contribution to AdEPT.

The Group is pleased to announce that it has appointed Richard Burbage, former director of Centrix, to the Board as Unified Communications Director, with immediate effect. Richard Burbage was the original founder of Centrix and one of the three owners who sold the business to AdEPT. He has over 20 years' experience running the Fleet business and is recognised as an industry expert in unified communications technologies. Richard will be responsible for overseeing the Centrix operation and developing the unified communications strategy, with particular focus on continued development of the public and healthcare sectors.

Following the completion of the contingent deferred consideration period for Centrix, and as part of Richard's introduction to the Group, Centrix has been rebranded in line with AdEPT, with effect from 1 June 2016. This provides the Group and its employees with a single brand identity, which should enable the Group to leverage benefits, particularly in relation to its public sector framework agreements.

Outlook

The excellent result for this year was delivered through a combination of strategic acquisition and organic contract wins, improving margins on customer contracts and maintaining high levels of operational efficiency. The Board is confident that continued strong cash conversion of operating profit will support its intention of a progressive dividend policy.

The focus for the coming year remains on developing organic sales through leveraging AdEPT's approved supplier status on the various public sector telecom frameworks, maintaining profitability and cash flow conversion, which will be used to reduce net borrowings and/or fund suitable earnings-enhancing acquisitions.

Roger Wilson

Non-executive Chairman

STRATEGIC REPORT

PRINCIPAL ACTIVITIES AND REVIEW OF BUSINESS

The principal activity of the Group is the provision of voice and data communication services to both domestic and business customers. A review of the business is contained in the Chairman's statement and the highlights are summarised in the strategic report.

SUMMARY of three year financial performance:

REVENUE

During the year AdEPT has continued its transition from a traditional fixed line service provider towards a managed services provider. Total revenue generated from managed services represented 44.3% of total revenue in the year ended 31 March 2016 (2015: 27.4%).

Total revenue increased by 30.9% to £28.9m (2015: £22.1m):

· Managed services product revenues increased by £6.8m to £12.8m (2015: £6.0m). This reflects the impact of the contribution from the acquisition of Centrix in May 2015 combined with an increased level of organic contract wins and a lower relative churn rate. AdEPT has continued to make progress in expanding the number of circuits and connections from new customer additions and through cross-selling into the existing customer base. As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 1-10Gb services.

· Traditional fixed line revenues were flat at £16.1m (2015: £16.0m), which is largely a reflection of the relative contribution from the Centrix acquisition which has been partially offset by the substitution impact of new technologies. The Group's reliance on fluctuating call revenues continues to reduce, with call revenue providing only 19.4% of total revenue in the year ended 31 March 2016 (2015: 25.3%).

The proportion of AdEPT revenue being generated from recurring products and services remains high at 91.7% of total revenue. The acquisition of Centrix extended the AdEPT product set to include hardware supply and installation services, which, by their nature, are project based and not a fixed recurring revenue streams, however, a high proportion of installations are further products and services being supplied to the existing customer base.

AdEPT continued to be highly successful in gaining further traction in the public sector space during the last year through leveraging its approved status on various frameworks; this contract success is included in the 2016 revenue figures. AdEPT currently supplies a range of telecom services and unified communications for 38 councils. In July 2015 AdEPT was awarded a framework agreement with the Crown Commercial Service under the RM1045 Network Services framework. This is in addition to AdEPT's existing framework agreements with Ja.net, under which AdEPT is one of only a small number of companies approved to sell data connectivity to UK Colleges and Universities, and the ESPO framework, as the sole recommended supplier to public service bodies and registered charities for calls, lines, broadband, super-fast broadband (fibre) and SIP trunks.

The Group is continuing to focus its organic sales efforts on adding and retaining larger customers whilst complementing this with an acquisitive strategy. AdEPT's largest 1,400 customers (spending £5,000 per annum or more) account for approximately 63% of total revenue (2015: 1,000 customers, 50% of total revenue), with the top ten customers accounting for 26.1% of total revenue (2015: 12.9%).

GROSS MARGIN

Gross margin percentage has improved during the year.

Gross margins for fixed line services have been maintained at an absolute and percent. level through close monitoring of customer profitability and supply chain management of wholesale contracts.

Gross margins for managed services, such as installations, support and maintenance are higher than fixed line; this is a reflection of the headcount costs of supporting the project installations and maintenance being included within operating expenditure.

Underlying EBITDA

Underlying EBITDA is defined as operating profit after adding back depreciation, amortisation, impairment charges, acquisition fees and share-based payment charges. The Group uses underlying EBITDA as a measure of performance in line with the telecommunications sector's general approach to relative performance measurement. As the Group operates a capex-light model, the Board considers that underlying EBITDA is the best indication of the underlying cash generation of the business. Below is a reconciliation of underlying EBITDA to the reported profit before tax:

Underlying EBITDA has increased for the 13th consecutive year since AdEPT's inception in 2003. The Group has focused on the underlying profitability of customers and revenue streams combined with tight overhead control, industry leading debt collection and wholesale supply chain negotiation.

FINANCE COSTS

Total interest costs have increased to £0.61m (2015: £0.23m), arising largely from the increase in net borrowings to fund the acquisition of Centrix in May 2015. Also included within interest costs is a £0.20m charge in relation to the discounted cash flow impact of the contingent deferred consideration payable in relation to the Centrix acquisition. Increases to interest costs have been partially mitigated through treasury management of surplus cash balances to minimise the amount of drawn funds.

PROFIT BEFORE TAX

This year the Group has recorded a £0.61m improvement to profit before tax with a reported £2.75m (2015: £2.14m). The improvement to profit before tax arises from the £1.56m underlying EBITDA improvement, which has been absorbed by the £0.38m increase in finance costs and the acquisition costs of £0.39m in relation to Centrix.

PROFIT AFTER TAX AND EARNINGS PER SHARE

The profit for the year, after taxation, amounted to £1.96m (2015: £1.53m). Basic earnings per share increased by 27.2% to 8.78p (2015: 6.90p). Adjusted earnings per share, based on the profit for the year attributable to equity holders adding back amortisation and acquisition costs (see Note 25), increased by 24.2% to 19.57p per share (2015: 15.76p).

During the year ended 31 March 2016 the Company continued with a small share buyback of its own ordinary shares in order to improve stock liquidity and increase value to shareholders. The Company repurchased 35,000 shares (2015: 122,203 shares) at an average price of 257.7p (2015: 148.9p); the cost of these repurchases was met from the cash proceeds of share options exercised by the executive directors during the year. All shares repurchased by the Company were cancelled prior to the year end. The directors will continue to monitor the level of cash required for the business and determine if further repurchases remain in the shareholders' best interests.

DIVIDENDS AND DIVIDEND PER SHARE

On the back of strong cash flow generation AdEPT announced an interim dividend of 3.00p per share, which was paid to shareholders on 8 April 2016. The Board of AdEPT Telecom announced on 5 April 2016 that, subject to shareholder approval at the annual general meeting later in the year, it is declaring a final dividend of 3.50p per ordinary share (2015: 2.50p). This dividend is expected to be paid on or around 7 October 2016 to shareholders on the register at 23 September 2016.

Total dividends approved and declared during the year ended 31 March 2016 of 6.50p per ordinary share represent a 36.8% increase year-on-year (2015: 4.75p). The Board constantly monitors shareholder value and is confident that the continued strong cash generation will support a progressive dividend policy.

CASH FLOW

The Group benefits from an excellent cash-generating operating model. Low capital expenditure results in underlying EBITDA turning into cash. Reported EBITA turned into net cash from operating activities after income tax is 85.7% (2015: 99.2%). The Group has continued to manage its credit risk in the current economic climate and the collections of trade receivables have been reasonably stable during the year with customer collection periods of 27 days (2015: 24 days).

Cash interest paid has increased during the year to £0.32m (2015: £0.17m), which arises from the increase in net borrowings to fund the acquisition of Centrix in May 2015.

Cash outflows of £7.1m have been incurred in the year ended 31 March 2016 in relation to acquisitions. The contingent consideration in respect of the acquisition of the entire issued share capital Bluecherry Telecom Limited was paid in April 2015 with no further amounts due. The initial cash consideration of £6.9m (net of cash acquired) was paid in May 2015 in relation to the acquisition of the entire issued share capital of Centrix Limited.

Dividends paid during the year ended 31 March 2016 absorbed £1.1m of cash (2015: £0.7m). This increase over the prior period arises from the continued application of the progressive dividend policy.

Cash inflows of £0.9m were generated from the issue of new equity during the year. Three of the executive director team increased their shareholdings in the Company following the exercise of share options. Pursuant to the stock exchange announcement during December 2014, these funds were used by the Company to make strategic purchases of its own shares.

There was an increase to cash and cash equivalents during the year of £4.1m. This arises from a net increase in the drawn element of the Barclays revolving credit facility at the year end which was used to fund the initial consideration for the acquisition of Comms Group UK Limited. The Group will continue to apply its treasury management policies to minimise the cost of finance whilst retaining flexibility to meet its growth strategies.

CAPITAL EXPENDITURE

The Group operates an asset light strategy and has low capital requirements; therefore, expenditure on fixed assets is low at 1.8% of revenue (2015: 0.5%). Capital expenditure has increased during the year largely due to an essential upgrade to the customer billing system combined with the fit out costs of the new Centrix office and head office refurbishment costs.

BUSINESS COMBINATIONS 

The strategy of the Group is to concentrate organic sales efforts on attracting larger customers, particularly in the public and healthcare sector. Rather than operate a telesales operation aimed at acquiring smaller business customers organically, we instead use our free cash generation to acquire customer bases from other telecommunications suppliers in the industry.

On 1 May 2015 the Company acquired the entire issued share capital of Centrix Limited, a well established UK-based provider of complex unified communications, Avaya IP telephony, hosted IP solutions and managed services. Total consideration was an initial £6.9m plus the value of the cash balance of Centrix at completion (approximately £1.9m) with contingent consideration of up to £3.5m dependent upon the performance of Centrix post-acquisition. Acquisition related costs of £0.4m have been recognised as an expense in the statement of comprehensive income for the period ended 31 March 2016.

A fair value of £10.4m in relation to the customer contracts for the acquired business has been recognised as intangible asset additions in the year ended 31 March 2016. Further details on the acquisition during the year are described in Note 27 to the financial statements.

Post year end, on 1 May 2016, the Company acquired the entire issued share capital of Comms Group UK Limited for an initial consideration of £3.5m plus the value of the cash balance at completion (approximately £1.1m), payable in cash. Further contingent consideration of between £Nil and £3.5m will be payable, also in cash, dependent upon performance of Comms Group UK Limited post-acquisition.

Further details on the acquisition post-balance sheet date are described in Note 28 to the financial statements.

NET DEBT AND BANK FACILITIES

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow and therefore support net borrowings. As a result of the Group's focus on underlying profitability and cash conversion, free cash flow after bank interest paid of £4.5m was generated during the year ended 31 March 2016 (2015: £4.3m). Income taxes paid during the year increased from £0.3m to £0.9m. Lower charges in earlier periods are a reflection of corporation tax deductions in relation to share option exercises.

The free cash flow plus borrowing drawdowns of £8.4m have been used to fund £7.1m acquisition consideration, £1.1m dividends paid and £0.7m of capital expenditure on tangible and intangible assets. Net cash inflows of £0.1m have arisen from the issue of new equity following the exercise of share options by executive directors which has been used to fund the share repurchases during the year. Net debt, which comprises cash balances and bank borrowings, has increased to £6.0m at the year-end (2015: £1.5m) as a result of the acquisition consideration outflows, mainly in relation to Centrix.

On 22 April 2015 the Group signed a new five year £15m revolving credit facility agreement with Barclays Bank plc. This longer term facility replaced the previous £5m revolving credit facility, which had an 18 month term remaining, and the term loan which was due for repayment by September 2015. The new revolving credit facility offers the Group significantly greater flexibility and is on longer and improved commercial terms when compared to the facility which it replaces. The new revolving credit facility bears interest at 2.30% over LIBOR on drawn funds and is repayable in full on the final repayment date of 21 April 2020.

The Group's available banking facilities are described in Note 26 to the financial statements.

KEY PERFORMANCE INDICATORS (KPIs)

The KPIs outlined below are intended to provide useful information when interpreting the accounts.

PRINCIPAL RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties, which could have a material impact on the Group's long-term performance and could cause actual results to differ materially from expected results.

Liquidity risk

The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. External funding facilities are managed to ensure that both short-term and longer-term funding is available to provide short-term flexibility whilst providing sufficient funding to the Group's forecast working capital requirements.

Credit risk

The Group extends credit to customers of various durations depending on customer creditworthiness and industry custom and practice for the product or service. In the event that a customer proves unable to meet payments when they fall due, the Group will suffer adverse consequences. To manage this, the Group continually monitors credit terms to ensure that no single customer is granted credit inappropriate to its credit risk. Additionally, 67% of our customer receipts are by monthly direct debit. The risk is further reduced by the customer base being spread across all industry and service sectors. The top ten customers account for approximately 13% of revenues.

Competitor risk

The Group operates in a highly competitive market with rapidly changing product and pricing innovations. We are subject to the threat of our competitors launching new products in our markets (including updating product lines) before we make corresponding updates and developments to our own product range. This could render our products and services out-of-date and could result in loss of market share. To reduce this risk, we undertake new product development and maintain strong supplier relationships to ensure that we have products at various stages of the life cycle.

Competitor risk also manifests itself in price pressures which are usually experienced in more mature markets. This results not only in downward pressure on our gross margins but also in the risk that our products are not considered to represent value for money. The Group therefore monitors market prices on an ongoing basis.

Acquisition integration execution

The Group has set out that its strategy includes the acquisition of businesses where they are earnings enhancing. The Board acknowledges that there is a risk of operational disturbance in the course of integrating the acquired businesses with existing operations. The Group mitigates this risk by careful planning and rigorous due diligence.

John Swaite

Finance director

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

All amounts relate to continuing operations.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

COMPANY STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

COMPANY STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

COMPANY STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

1. Nature of operations and general information

AdEPT is one of the UK's leading independent providers of voice and data telecommunication services with award-winning customer service. The Group is focused on delivering a complete telecommunications service for small and medium-sized business customers with a targeted product range including landline calls, line rental, broadband, mobile and data connectivity services.

AdEPT is incorporated under the Companies Act, domiciled in the UK and the registered office is located at One London Wall, London EC2Y 5AB. The Company's shares are listed on AIM of the London Stock Exchange.

2. Accounting policies

Basis of preparation of financial statements

The financial statements have been prepared in accordance with applicable IFRS as adopted by the EU.

Accounting standards require the directors to consider the appropriateness of the going concern basis when preparing the financial statements. The directors confirm that they consider that the going concern basis remains appropriate. The Group's available banking facilities are described in Note 25 to the financial statements. The Group has adequate financing arrangements which can be utilised by the Group as required. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

At the date of authorisation of these financial statements, the directors have considered the standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU) and IFRS 15 "Revenue from Contracts with Customers", IFRS 16 "Leases" and IFRS 9 "Financial Instruments" were considered to be relevant. It is not clear whether the application of IFRS 15, IFRS 16 and IFRS 9 once effective will have a material impact on the results of the Group. Adoption of the other standards and interpretations are not expected to have a material impact on the results of the Group. Application of these standards may result in some changes in presentation of information within the Group's financial statements.

The financial statements are presented in sterling which is the Group's functional and presentation currency. The figures shown in the financial statements are rounded to the nearest thousand pounds.

Segmental reporting

The directors have considered the requirements of IFRS 8 "Operating Segments" and have concluded that the Group has two segments. For further information see Note 4 of the financial statements.

Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and can be reliably measured.

Revenue from calls, which excludes value added tax and trade discounts, is recognised in the income statement at the time the call is made. Calls made in the year, but not billed by year end, are accrued within receivables as accrued income.

Revenue from line rental is recognised in the month that the charge relates to, commencing with a full month's charge in the month of connection. Revenue and related costs from the sales of mobile handsets are recognised at the date of supply or connection.

Revenue arising from the provision of internet and other services is recognised evenly over the periods in which the service is provided to the customer.

Revenue from the sale of goods is recognised when the goods have been fully installed. Income from maintenance services is recognised over the term of the agreement.

Connection commissions received from mobile network operators are recognised when the customer is connected to the mobile network after providing for expected future clawbacks.

The whole of the revenue is attributable to the provision of voice and data telecommunication services to both residential and business customers. All revenue arose within the United Kingdom.

Intangible fixed assets acquired as part of a business combination and amortisation

In accordance with IFRS 3 "Business Combinations", an intangible asset acquired in a business combination is recognised at fair value at the acquisition date.

After initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Impairment reviews are conducted annually from the first anniversary following acquisition.

The intangible asset 'customer base' is amortised to the income statement over its estimated useful economic life on a straight line basis.

Other intangible assets

Also included within intangible fixed assets are the development costs of the Company's billing and customer management system plus an individual licence. These other intangible assets are stated at cost, less amortisation and any provision for impairment. Amortisation is provided at rates calculated to write off the cost, less estimated residual value of each intangible asset, over its expected useful economic life on the following bases:

Customer management system - Three years straight line

Other licences - Contract licence period straight line

Computer software - Three years straight line

Investments

Shareholdings in subsidiaries are valued at cost less provision for permanent impairment.

Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value of each asset, over its expected useful life on the following bases:

Short-term leasehold improvements - The shorter of five years and the remaining period of the lease straight line

Fixtures and fittings - Three years straight line

Office equipment - Three years straight line

Motor vehicles - Four years straight line

Rental equipment at customer premises - Contract agreement period straight line

Lease accounting

The Group leases equipment under operating leases to non-related parties.

Leases of equipment where the Group retains substantially all risks and rewards incidental to ownership are classified as operating leases. The underlying assets are recognised in tangible fixed assets. Rental income from operating leases (net of any incentives given to the lessees) is recognised in profit or loss on a straight-line basis over the lease term.

Initial direct costs incurred by the Group in negotiating and arranging operating leases are added to the carrying amount of the leased assets and recognised as an expense in profit or loss over the lease term on the same basis as the lease income.

Inventories

Inventories are valued at the lower of cost and net realisable value after making allowance for any obsolete or slow moving items. Net realisable value is reviewed regularly to ensure accurate carrying values. Cost is determined on a first-in-first-out basis and includes transportation and handling costs.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale.

Pensions

The Group contributes to personal pension plans. The amount charged to the income statement in respect of pension costs is the contribution payable in the year.

Income tax

Income tax is the tax currently payable based on taxable profit for the year.

Deferred income tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred income 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.

Deferred income tax liabilities are provided in full, with no discounting. Deferred income tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred income tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.

Changes in deferred income tax assets or liabilities are recognised as a component of income tax expense in the income statement, except where they relate to items that are charged or credited directly to equity in which case the related deferred income tax is also charged or credited directly to equity.

Share-based payments

The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date at which the relevant employees become fully entitled to the award. Fair value is appraised at the grant date and excludes the impact on non-market vesting conditions such as profitability and sales growth targets, using an appropriate pricing model for which the assumptions are approved by the directors. In valuing equity-settled transactions, only vesting conditions linked to the market price of the shares of the Company are considered.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

At each balance sheet date, the cumulative expense (as above) is calculated, representing the extent to which the vesting period has expired, management's best estimate of the achievement or otherwise of non-market conditions and the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market condition, be treated as vesting described above. The movement in the cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

Non-recurring items and acquisition costs

Material and non-recurring items of income and expense are separated out in the income statement. Examples of items which may give rise to disclosure as non-recurring items include costs of acquisition, restructuring and reorganisation of existing businesses, integration of newly acquired businesses and asset impairments.

Trade and other receivables

Trade receivables, which generally have 14-60 days terms, are initially recognised at fair value and subsequently held at amortised cost. A provision for impairment of trade receivables is established when it is considered probable that the Group may not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The provision is the difference between the asset's carrying amount and the original invoice amount less bad debts written-off. The carrying amount of the asset is reduced through the use of the provision and the amount of the loss is recognised in the income statement. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables.

Subsequent recoveries of amounts previously written off are credited in the income statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Trade payables

Trade payables are stated at their nominal value, recognised initially at fair value and subsequently valued at amortised cost.

Dividends

Dividend distributions to the Company's shareholders are recognised when payment has been made to shareholders.

Share buybacks

The Company has returned surplus cash to shareholders through a limited share buyback scheme pursuant to the authority given to it at the annual general meeting. Shares purchased for cancellation are deducted from retained earnings at the total consideration paid or payable. The Group will continue to monitor the level of cash required for the business and determine if further repurchases remain in the shareholders' best interests.

Financial instruments

Financial assets and liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Capital

The capital structure of the Group consists of debt, which includes the borrowings disclosed in Notes 19 and 26, cash and cash equivalents, and equity attributable to equity holders, comprising issued capital, reserves and retained earnings.

Borrowings and borrowing costs

Borrowings are recorded initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowing costs are expensed to the income statement as incurred with the exception of arrangement fees which are deducted from the related liability and released over the term of the related liability in accordance with IAS 39.

3. Critical accounting estimates and judgements

The key assumptions concerning the future and other key sources of estimation and uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities with the next financial year, are discussed below.

Key sources of estimation and uncertainty are:

Measuring the fair value of customer bases on acquisition

The main estimates used to measure the fair value of the customer bases on acquisition are:

• the churn rate (turnover of customers);

• discount rate; and

• gross margins.

Churn rates are based upon actual historical churn rates of the revenue stream for each customer base acquired. The discount rate used to discount the cash flows is based upon the Group's weighted average cost of capital (WACC) applicable at the date of acquisition. Gross margins are based upon actual margins achieved by the customer bases in the period prior to acquisition.

Estimating the useful life of customer bases

The main estimates used to conduct the impairment review are:

• the churn rate (turnover of customers);

• discount rate; and

• gross margins.

The average useful economic life of all the customer bases has been estimated at 14 years (2015: 17 years) with a range of seven to thirty years.

Estimating churn, discount rate and gross margins

Churn rates ranging between (9.5%) and 22.7% are based upon actual historical churn rates of the revenue stream for each customer base.

The discount rate of 8.0% (2015: 5.7%) used to discount the cash flows is based upon the Group's weighted average cost of capital (WACC), which is the recommended discount rate suggested by International Financial Reporting Standards and is a calculated figure using actual input variables where available and applying estimates for those which are not, such as the equity market premium.

Gross margins of 44.2% are based upon actual margins achieved by the customer bases in the current and previous years. The actual outcomes have been materially equivalent.

Measuring the fair value of contingent consideration

The fair value of contingent deferred consideration is determined by reference to the growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the asset or share purchase agreement and discounting the net present value of the future cash flows. The range of contingent consideration in the current period was £0 to £3.5m, further details are included in Note 27.

Subsequent impairment of customer bases

The Group determines whether intangible assets are impaired on at least an annual basis. This requires an estimation of the 'value in use' of the cash-generating units to which the intangible value is allocated. Estimating a value in use amount requires management to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

The calculations are sensitive to any movement in the discount rate, margin or churn rate and would therefore result in an impairment charge to the income statement. A 1% change to the discount rate, gross margin and churn rate would result in additional impairment charges of £36,000, £13,000 and £Nil respectively.

More details, including carrying values, are included in Note 12.

Allowance for impairment of receivables

Management reviews are performed to estimate the level of provision required for irrecoverable debt. Provisions are made specifically against invoices where recoverability is uncertain. Further information on the receivables allowance account is given in Note 17.

4. Segmental information

IFRS 8 "Operating Segments" requires identification on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their 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 operating segments are fixed line services (being calls and line rental services) and managed services (which are data connectivity, hardware services, IP telephony, support and maintenance services) which are reported in a manner consistent with the internal reporting to the Board. The Board assesses the performance of the operating segments based on revenue, gross profit and underlying EBITDA.

The assets and liabilities relating to the above segments have not been disclosed as they are not separately identifiable and are not used by the chief operating decision maker to allocate resources. All segments are in the UK and all revenue relates to the UK.

Transactions with the largest customer of the Group are less than 10% of total turnover and do not require disclosure for either 2015 or 2016.

5. Operating profit

The operating profit is stated after charging:

6. Auditors remuneration

7. Finance costs

8. Employee costs

Staff costs, including directors' remuneration, were as follows:

The average monthly number of employees, including the directors, during the year was as follows:

Key management personnel

The directors are considered to be the key management personnel of the Group, having authority and responsibility for planning, directing and controlling the activities of the Group.

9. Directors' emoluments

During the year retirement benefits were accruing to one director (2015: one) in respect of money purchase pension schemes. The value of the Group's contributions paid to a money purchase pension scheme in respect of the highest paid director amounted to £15,367 (2015: £15,648). During the year there was one share option transaction in respect of the highest paid director (2015: no share option transactions).

The share option credit recognised during the year in respect of the directors was £2,259 (2015: charge of £2,789). The aggregate amount of gains made by directors on the exercise of share options was £483,323 (2015: £405,400). There were three directors (2015: three) who exercised share options during the year.

Directors' share options

10. Income tax expense

Factors affecting tax charge for year

The relationship between expected tax expense based on the effective tax rate of AdEPT at 20% (2015: 21%) and the tax expense actually recognised in the income statement can be reconciled as follows:

There were no material factors that may affect future tax charges.

11. Dividends

On 30 September 2015 the directors approved an interim dividend of 3.00p per ordinary share (2015: 2.25p), which was paid to shareholders on 8 April 2016. On 30 March 2016 the directors declared a final dividend, subject to shareholder approval at the 2016 annual general meeting, of 3.50p per ordinary share (2015: 2.50p). Total dividends declared in respect of the year ended 31 March 2016 will absorb £1,461,467 of shareholders' funds in future periods (2015: total £1,054,001).

On 7 April 2015 the Company paid dividends of £502,368 in relation to the interim dividend declared in September 2014. On 6 October 2015 the Company paid dividends of £557,435 in relation to the final dividend declared in March 2015. Total dividends paid in the year ended 31 March 2016 absorbed £1,059,803 of cash (2015: £329,094).

12. Intangible fixed assets

Group

Included within the Group's intangible assets is £11,450,987 in relation to the Centrix Limited customer base (2015: £Nil) with an estimated useful life of thirty years.

Company

Intangible assets are reviewed annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The net present value of cash flows for each cash-generating unit is reviewed against the carrying value at the balance sheet date. At the final reporting date of 31 March 2016 the net present value of future cash flows of certain cash-generating units was below the carrying value and an impairment charge of £45,041 (2015: £Nil) has been recorded.

13. Investments in subsidiaries

Company

Details of the principal subsidiaries of the Company are included in Note 29 to the financial statements.

14. Property, plant and equipment

Group

Company

15. Deferred taxation

The deferred tax asset is made up as follows:

16. Inventories

There is no material difference between the replacement cost of inventories and the amount stated above.

17. Trade and other receivables

As at 31 March 2016, trade receivables of £128,811 (2015: £131,280) were impaired and fully provided for. The ageing of the trade receivables which are past due and not impaired is as follows:

Movement of the provision for impairment of trade receivables is as follows:

The creation and release of a provision for impaired receivables has been included in administration expenses in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering cash. Management regularly reviews the outstanding receivables and does not consider that any further impairment is required. The other asset classes within trade and other receivables do not contain impaired assets.

18. Trade and other payables

19. Long-term borrowings

The bank loan is secured by a debenture incorporating a fixed and floating charge over the undertaking and all property and assets present and future including goodwill, book debts, uncalled capital, buildings, fixtures, fixed plant and machinery. Details of the interest rates applicable to the loans are included in Note 26.

Included within bank loans are arrangement fees amounting to £132,000 (2015: £48,973) which are being released over the term of the loan in accordance with IAS 39.

20. Share capital

Movement in shares in issue

Share buyback scheme

On 18 December 2014 the Company announced that it intended to commence a limited share buyback of its own ordinary shares. During the year ended 31 March 2016 the Company repurchased 35,000 shares (2015: 122,203) at an average price of 257.7p (2015: 148.9p). All share repurchased by the Company were cancelled prior to the year end.

Share options

At 31 March 2016, the following options and warrants over the shares of AdEPT were in issue: