6th Dec 2006 07:00
Alternative Networks plc06 December 2006 6 December 2006 Alternative Networks plc Preliminary Results for the year to 30 September 2006 Alternative Networks plc, the UK business communications service provider, todayreports preliminary results for the year to 30 September 2006 extracted from theaudited accounts. Underlying performance* 2006 2005 Change £000 £000 % Turnover 65,964 46,404 42%Operating profit 6,700 4,174 61%EBITDA ** 7,111 4,551 56%Profit before taxation 6,798 4,300 58%Net cash inflow from operating activities 9,387 3,691 154% Earnings per share - basic 10.8p 7.1p 52% - diluted 10.2p 6.7p 52% Statutory performance Turnover 65,964 46,404 42%Operating profit 5,869 3,808 54%EBITDA** 6,823 4,305 58%Profit before taxation 5,967 3,934 52%Net cash inflow from operating activities 9,286 3,570 160% Earnings per share - basic 9.5p 6.5p 46% - diluted 8.9p 6.1p 46% Dividend per share *** 2.6p 1.5p 73% * Results before employee share scheme charges, restructuring charges and amortisation of intangible fixed assets. Please refer to Note 9 for more details on items adjusted. **Earnings before interest, taxation, depreciation and amortisation. *** Dividend per share is the interim dividend paid and the proposed final dividend, divided by the number of shares in issue at the year end. Highlights • Strong sales growth, up 42% to £66.0m (2005: £46.4m) : • Organic sales growth of 11% • ICB acquisition contributed £14.4m • Underlying profits before taxation increased by 58% to £6.8m (2005: £4.3m) with improvements in operating margins as the Group focuses on organic growth and synergies with ICB were realised. Profits before taxation increased 52% to £6.0m. • Strong cash conversion at 136% EBITDA. • Strong performance in mobile sales: • Sales up 87% to £33.9m (2005: £18.1m) • Organic growth of 29% • Business subscribers up over 100% to 40,244 (2005: 20,100) • Proposed increased final dividend of 1.83p (2005: 1.1p), an increase of 66% : James Murray, Chief Executive Officer, commented: "I am delighted to announce an excellent set of results. Strong increases inboth revenue and profit growth endorse our strategy of organic and acquisitivegrowth and the success of our strategic initiatives. During the year we havesuccessfully acquired and integrated the UK company, Integrated Communicationsfor Business (UK) Limited ("ICB"). Furthermore, we have seen an impressiveorganic growth rate within Mobile and a decrease in churn levels, validating thestrength of our business offering which focuses heavily on high service levels,enhanced billing features, and more complex voice and data solutions. "In order to grow the Group on all levels in a challenging market, we havefocused on four core elements of our organic growth strategy: moving towardslarger customers in the SME space, cross selling products, reducing churn andfollowing a clear product strategy aimed at offering bespoke, client drivenservices. "The Group's in-depth understanding of the market in which it operates and itsclose, long-term relationships with its suppliers enable the Board to plan forthe future with confidence. In 2007 we expect sustained success as we continueto focus on maintaining organic growth of the core business in addition toseeking out value-enhancing acquisitions." For more information contact: Alternative Networks plc 0870 190 7444James Murray, Chief Executive OfficerEd Spurrier, Chief Financial Officer Financial Dynamics 020 7831 3113Juliet Clarke / Hannah Sloane About Alternative Networks Alternative Networks (ticker: AN.L) is a UK business communications serviceprovider. The Group offers a full range of fixed line, mobile, voice and dataproducts. Launched in 1994, Alternative Networks has achieved a track record ofconsistently profitable growth and in February 2005 it listed on the AlternativeInvestment Market. Alternative Networks is a reseller for providers such as BT, Verizon, Cable &Wireless, Avaya, O2 and Vodafone. The Group caters to a broad range oftelecoms needs, including both stand alone products and fully convergedsolutions, for larger SMEs and smaller corporate customers in the UK. Its over4,000 business customers include clients such as JC Decaux, Channel 4, Miele andSecuritas. The Group has grown rapidly over the past 10 years, now employing over 300people, across five UK sites. For more information please visit: http://www.alternativenetworks.com Chairman's Statement I am delighted to announce another year of tremendous progress for the Group. The results show significant revenue and profit growth, with healthy grossmargins and cash generation, as we see the initial results of our twin trackorganic and acquisitive growth strategy, as set out in the interim results inJune 2006. On a divisional basis, the Group is growing in line with our expectations.Network Services benefited from the addition of ICB, although an increase inlower margin Wholesale Line Rental sales had a slight impact on gross margins.Mobile saw very significant organic (as well as acquired) growth, underpinned byan increase in data and converged voice and data products. Advanced Solutionsexperienced a flat performance in line with our expectations, due to regulatoryuncertainty earlier in the year, and latterly due to reorganising our databusiness in ANTS. In order to grow the Group on all levels and maintain margins in a challengingmarket, we have focused on four core elements of our organic growth strategy:moving towards larger customers in the SME space, cross selling products,reducing churn and following a clear product strategy aimed at offering bespoke,client driven services. Each element has been successful: by actively focusing on larger customers,particularly following the ICB acquisition, the average spend per customer hasrisen; increased cross-selling has resulted in more customers taking more thanone product; and mobile churn has reduced. As part of the product strategy, theongoing investment in bespoke software applications has proven to be a keycustomer retention tool, and focus remains strongly on offering the mostappropriate products and latest technology to our customers. Following the successful addition of ICB to the Group at the beginning of thefinancial period, acquisitions remain a core part of the Group's strategy forgrowth. The Board continues to actively evaluate a number of opportunities. Inthe current environment, where valuations appear to be rising in a mannerdisproportionate to inherent value, the criteria for acquisitions remainstringent. The Group has delivered strong free cash flow of £7.6m, with cash conversion ofoperating profits running at more than 100%, and it is with confidence in theGroup's prospects that we are proposing an increased final dividend of 1.83p,making 2.6p for the year, up from 1.5p in 2005. In summary, this has been a very successful year for the Group, and my sincerethanks go out to all our employees who have contributed to a record performance. Through a combination of carefully executed initiatives to drive organicgrowth and a good start to our acquisition strategy, the Board and I believethat Alternative Networks is well prepared for future growth. Kenneth McGeorge Non-executive Chairman 6 December 2006 Business Review Overview The Group has had a highly successful year: Organic revenue growth of 11% was driven particularly by mobile sales organicgrowth of 29%. This has been particularly pleasing in a year when competitionand ongoing regulatory intervention has continued to drive prices down acrossthe industry, in the region of 5% to 15% per product, according to Groupinternal estimates. This performance has been boosted by pleasing improvementsin product penetration into the existing customer base, with the percentage ofcustomers taking more than one product increasing over the year from 30% to 38%.This has helped keep levels of attrition low for larger customers. The ICB acquisition has been successfully integrated, with the deferredconsideration settled resulting in a total consideration of £6.25m. ICB hasperformed in line with the Board's expectations, reporting operating profits,before exceptional restructuring costs, of £1.8m. Gross margins remain healthy, although the Group margins overall have declineddue to a change in sales mix. Some good buying gains were achieved later in theyear, largely as a result of building stronger partnerships with all the keysuppliers. Group profits have been ahead of Board expectations due to strong salesperformance and cost control. The Group has again showed vigorous cash management, with operating cash inflowof £9.3m (2005: £3.6m) during the year. This has allowed the Group to fund thepurchase of ICB, invest in the Group's Customer Relationship Management systems("CRM"), increase the dividend paid to shareholders and boost Group cashbalances by £2.3m. Results The Group reports sales increases of 42% to £66.0 million (2005: £46.4m) withorganic growth of 11% when excluding acquired operations. ICB contributed £14.4min sales. Underlying operating profits of the Group increased by 61% to £6.7m (2005:£4.2m). Alternative Networks' legacy business excluding acquired operations ("AN") increased underlying profits by 17% up to £4.9m, with ICB contributingunderlying operating profits of £1.8m. Underlying pre-tax profits increased 58%to £6.8m (2005: £4.3m). On a statutory basis, pre-tax profits increased 52% from £3.9m to £6.0m, withoperating profits increasing 54% from £3.8m to £5.9m. Trading review by products (Including reporting on key performance indicators by product) Network Services 2006 2006 2005 2004 Group AN AN ANTurnover (£'000) 22,431 19,118 18,983 19,758ARPU (£) 990 1,137 1,117 1,123Gross Profit (£'000) 8,731 7,313 8,381 7,834Gross Margin 38.9% 38.3% 44.2% 39.6% • Sales increased 18% from £19.0m to £22.4m. Excluding ICB, sales increased 1% to £19.1m. Sales in the second half of the year were 1% ahead of the first half. • ARPU for the Group was £988. AN's ARPU was £1,137 up from £1,117 in 2005, an increase of 1%, reflecting the continued success of lower margin Wholesale Line Rental ("WLR") sales and the loss of some smaller, less economic customers. • A number of smaller customers churned in the year. At 30 September 2005, AN had 1,416 network services customers. A further 502 customers were added by the acquisition of ICB in October 2005, making 1,918 customers. During the year, there was a net loss of 110 customers, with 50 from AN, leaving 1,808 at 30 September 2006. • Gross margins declined from 44.2% to 38.9%. The 4th quarter margins were 38.0%, which were marginally ahead of the 3rd quarter margins, as the Group benefited from improved buying rates from September 2006 onwards. More than half of the annual margin erosion is due to the dilutive impact of WLR sales growth at lower margin. This accounts for 2.8% of the fall. • In September 2006, WLR accounted for 25% (September 2005: 15%) of AN Network Services revenues and 16% ICB revenues. Mobile 2006 2006 2005 2004 Group AN AN ANTurnover (£'000) 33,872 23,419 18,116 12,794ARPU (£) 63 67 72 78Gross Profit (£'000) 10,093 6,888 5,086 3,515Gross Margin 29.8% 29.4% 28.1% 27.5% Subscribers at 30 Sept 40,244 26,763 20,100 14,313 Data connections(included in above) 8,640 6,283 2,859 557 Data connections as % oftotal subscribers 21.5% 23.5% 14.2% 3.9% • Sales increased 87% from £18.1m to £33.9m. Organic growth of AN was 29% to £23.4m (2005: £18.1m). • The business subscriber base has doubled from 20,100 to 40,244 subscribers, including 13,481 ICB customers. • Organic growth saw the AN base increase 33% to 26,763, adding a net 3,121 in the second half of the year. • ICB had 13,730 mobile subscribers at 30 September 2005, which included some small consumer customers. • The growth is being underpinned by the growth in data and converged voice and data products (e.g. BlackBerry/MS mail), which represented over 40% net new subscriber adds. • ARPU in the second half held steady at £63 in the Group, as increased data and voice usage offset the effect of price erosion. As expected, ARPU for the AN base dropped due to continued expansion of the separate Data devices with considerably lower ARPU. This trend may be reversed over the next 18 months as some customers move towards one device. • Average length of contracts for AN was 19.4 months (2005: 17 months), and the percentage of subscriptions in contract at 30 September 2006 was 81% (2005: 80%). • Gross margins were strong, growing 1.3% on a like for like basis. ICB margins were buoyant at over 30% as the company was able to take advantage of better Group terms. • Network churn for the Group has returned to the low levels experienced in 2004, at 16% (2005: 24%). As highlighted in the 2005 annual report this has been a key focus for senior management, with improved service levels and enhanced billing features helping to retain customers, as well as increasing contract lengths. This network churn remains one of the key drivers for the commercials of our contracts with the Networks. This basis of reporting subscriber churn is under review as it will increasingly be distorted by the move of customers to one device. Going forwards, from 31 March 2007, we intend to also report on churn as a measure of customer attrition calculated by revenue value. More details will be provided. We estimate this to be 18% for AN for the year ended 30 September 2006. Advanced Solutions 2006 2006 2005 2004 Group AN AN ANTurnover (£'000) 9,661 9,040 9,304 8,475Gross Profit (£'000) 4,665 4,525 4,735 4,640Gross Margin 48.3% 50.0% 50.9% 54.7% • Group sales increased 4% to £9.7m. • The systems hardware business grew by 6% to £2.1m. During the first half of year the Data and Systems hardware businesses were operationally reorganised in a new subsidiary AN Technical Services Limited (ANTS). Early results are encouraging. • Data sales in AN were 15% down on 2005, reduced by £0.25m. This accounts for the reduction in sales for Advanced Solutions in 2006. This was due to a number of cancellations as well as renewals at much lower prices for leased line circuits. Many of these were stimulated following the transfer of the business to ANTS and subsequent attempts to re-engage the customer. However, the order book has been strong in the last quarter and H2 new sales orders were ahead of H1 by 50%, albeit on a lower base. • Excluding data sales, the remainder of the Advance Solutions business has performed as expected. The temporary stalling of growth in the Inbound Solutions business has been highlighted previously due to the regulatory intervention in the 0870 non-geographic pricing from 2007. The order book is now recovering and further growth is anticipated during 2007, although the sales cycle is longer than other products. • Gross margins have stabilised with stronger margins in the second half of the year (H1 2006: 47%) in spite of some significant discounts on re-signing the key customers. Group margins have eroded due to the lower margin ICB business acquired, although margins have since improved. Recent buying gains were achieved across the Group in the last quarter and are encouraging for the immediate future. Strategy The Group is continuing with its twin strand strategy of organic growth andacquisitions as set out previously following admission to the AIM market inFebruary 2005. The aim is to accelerate the Group's growth to become the UK'sleading independent total business communications service provider. The focus over the next year is to: • Maintain organic growth in the core business, especially by focussingon larger customers, keeping churn low and increasing product penetration to awider customer base. • Invest in the growth of the business. Specifically, increaseinvestment in the sales and marketing arm with a focus on the existing customerbase. • Continue to align our interests closer to our strategic partners, andarrange the extension of our service provider licences due for renewal at theearliest opportunity. • Continue the active program to review acquisition opportunities (seebelow) and play an active part in the consolidation of the sector. • Continue to reorganise the business so that key staff are moremotivated and empowered and that the business has a flatter, more efficientstructure. • Commitment to improving business processes and quality of service.During 2006, the Group received first time accreditation from the BritishStandards Institute ("BSI") for its Information System management system ISO/IEC27001:2005; and also in October 2006, the ICB business was accredited to ISO9001:2000 Quality Management System. Both standards are focussed on improvingefficiency of processes and assuring customers of the quality of the business. Organic Growth factors The four key organic growth factors supporting our strategy are : Focus on larger customers in SME space The target customer in the market for the Group remains the business customerwho spends between £1,000 and £10,000 per month. During this period we havecontinued to focus on maximising the numbers of customers who spend more than£1,000 on telecoms whether this is one product or multi-product. At 30 September 2006, there were over 1,200 customers spending over £1,000,being 27% of our total customer base by number. Excluding the new ICB customers,we saw an increase of 88 net new customers in this category from 30 September2005, and segmenting our client base further we can see that the number ofcustomers who spend more than £3,000 each month increased by 69. Currently, the Group is considering a new proposition for growing customersspending between £500 and £1,000 a month, and part of the investment proposedfor developing the Group's extranet in 2007 will be geared around ensuring thatthese smaller customers' needs can be serviced electronically and willfacilitate more customer self-service to help reduce management costs. Cross-selling The Group has made progress in cross-selling the product set. Of the totalcustomer base at 30 September 2006, 38.4% took more than 1 product (2005: 30%).This percentage increase is enhanced by the loss of single product smallercustomers, as mentioned above. Customers spending more than £1,000 are taking more products in general: 66.8%took more than 1 product (31 March 2006: 65%) and 39.4% took 3 products or more(31 March 2006: 35%) Mobile services are currently treated as one product whether data, voice orancillary services. Client managers are appropriately incentivised to increase product penetrationof key accounts, giving us confidence that this encouraging trend is set tocontinue. Reduction in churn In addition to tracking the net increase in larger customers and the change intotal customers, the Group also tracks the churn of revenues by product. Inaddition, the Group reports the network churn (see below) for the mobile productset. These latter two measures have recorded pleasing results in the year underreview, in spite of the net reduction in overall customer numbers, and show theGroup has a sound platform for growth. Product development Investment in bespoke software applications. During the year the Group has continued to invest in producing unique billingand data reporting applications for customers, both via development of the CRMand Billing platforms, but also specifically around the on-line billing andreporting platform "Clarity". These applications were developed to help thebusiness buyer manage and review the multi-products on one platform. Examples ofits functions are next-day reports which can be set up by named user, costcentre or telephone number, whether on a mobile or fixed-line, and automaticemail alerts on client configured spend limits, destinations or time/datethresholds. The Group is set to continue to develop and invest in theseapplications as a key customer retention tool. Converged Communications products - becoming the partner of choice The Group has concentrated on ensuring that new products are tested and trialledprior to being recommended to customers, and the key focus in 2006 has been onmobile data. There has been continued success with RIM's "BlackBerry" products with goodtake-up of the recently launched new 8700 series and the "Pearl", and a steadygrowth in Network 3G data cards. Judging by its initial success, the "Pearl"appears to be the first popular truly converged voice and data device in themarket, and we are hopeful for a strong year of sales with this already in ourportfolio. We have begun distributing XDAs with Microsoft Mobile 5 OS enabled.Due to the lack of penetration of the Exchange 2003 servers with the requiredlevel of software, take-up has been slower than anticipated, but growth isexpected to be more pronounced in 2007. In 2007, we will also be following with interest the potential exciting wi-ficonverged product suite, for example generated by the integration of the Nokia Eseries mobile handsets with the Avaya or Mitel IP PBX telephone systems, both ofwhich the Group supplies. The Group considers the future combination of wireless voice and data devicesroaming between the fixed IP based Network, and Satellite networks as the mostexciting element of "Convergence". Voice over IP ("VoIP") and the unbundling of the local loop ('LLU') The gradual shift from digital to using Voice over IP technology remainsinevitable, and is a good opportunity for the Group to win new business as aproven performer in the converged technology space. We have trialled a number ofproducts, both of direct and hosted Voice over IP, and are keeping close to oursuppliers so as to be among the first to trial a business fit for purpose LLUproduct when it is available. Progress has been disappointing. Although thereare VoIP products that work well over the local and wide area network, we havenot found a product that we consider suitable for launching into the larger SMEbusiness market, where the commercial proposal needs to be compelling. Acquisitions The Group continues to seek earnings enhancing bolt-on acquisitions. During theyear, the Group reviewed the operations of a number of competing businesses,pursued due diligence on less than a handful of businesses, and completed onesignificant acquisition at the beginning of the year, being ICB. Whilst a fewopportunities are still being pursued and there are plenty still left in themarket, the Group has been careful not to chase deals and overpay in a rapidlyconsolidating market. The acquisition of ICB on 10 October 2005 provided the Group with a significantchange in scale, adding an additional 70% onto the Group's mobile subscriberbase. ICB was rapidly re-branded and by May 2006 fully integrated into theGroup's business. The results are set out above. The acquisition was funded mostly by cash, £5m, and some equity (871,538 shareswere issued in October 2005), with £0.2m of additional consideration beingagreed in full settlement in May 2006. Capital investment The Group invested £0.38m (2005: £0.37m) in tangible fixed assets during theyear. The majority of this related to CRM software and an upgrade of the ITserver infrastructure. During the year, the first phase of the CRM system wasimplemented successfully, replacing legacy customer databases, and "Clarity",the online billing and reporting platform, was deployed. The total spend for the year was £0.4m less than expected due to a delay in thesecond phase of the CRM installation, the bulk of which is geared around theTelemarketing and Sales teams. This spend is now expected in 2007. The delay waspartly caused by a need for the Group to update the specification forsignificant improvements in business processes and make allowances for theimpact of the ICB acquisition, and partly due to staff shortages beyond theGroup's control. Whilst some quick fixes have been implemented, the core elementof the project is expected to be delayed at least until late Spring 2007. Therehas not been any adverse impact on operations as a result. The Group isexpecting now to be able to complete in-house a large part of the final phaseand accelerate some of these elements. It should be noted that the investment in2006 allowed the monthly invoicing run to be brought forward, delivering aone-off cash flow benefit, detailed below. Aside from this significant investment in CRM and customer facing software, theGroup has minimal capital investment requirements. Cash Flow Cash inflow from operations was £9.3m (2005: £3.6m), representing a cashconversion of 136% EBITDA (2005: 83%). It should be noted that £2.3m wasgenerated from favourable working capital movements. Over £1.8m was due toinvestment in the bill cycle, bringing forward the monthly bill run, so that thedirect debit could be taken before the month end. This is a one off benefit,and expected to remain the case going forward. The remainder (£0.5m) was due totiming differences around the year end with regards to payments to suppliers.This is expected to reverse in the next year. After stripping out thesemovements, the conversion rate of operating cash inflow was 94% (2005: 83%) The operating cash flow of the business was applied as follows : 2006 2005 £ million £ millionNet operating inflow 9.3 3.6Investment returns 0.1 0.1Taxation (1.4) (1.2)Capital expenditure (0.4) (0.4)Free cash flow 7.6 2.1 Acquisitions (4.4) (0.7)Dividends (0.8) (0.2)Financing (0.1) (1.2) Net cash inflow 2.3 - Tax The total tax charge was 31.3% of pre tax profits (2005: 30.7%). The increase in2006 is driven by the additional £0.4m goodwill charge arising on consolidationin respect of the ICB acquisition which is not deductible for tax purposes,representing 2% increased tax percentage. Offsetting the impact of this is afavourable movement in the deferred tax provision of £0.1m being due to furtherdepreciation in excess of capital allowances as well as the unwinding of theprevious deferred tax provision in respect of the accelerated tax relief arisingon share related transfers. Share buy-back programme The Group announced on 27 November 2006 that a resolution had been passed byshareholders in general meeting to give the Directors authority to buy back, onmarket, up to 10% of the Group's issued share capital. In reaching a decisionto purchase ordinary shares, the Directors will take into account the company'scash resources and capital and the effect of such purchases on the Group'sbusiness and will only make market purchases if satisfied that they would beearnings enhancing and be in the interests of the shareholders generally. EPS and Dividend per Share Underlying basic earnings per share has increased by 52% to 10.8p (2005: 7.1p). Basic earnings per share have increased 46% from 6.5p to 9.5p. On 10 October2005, the Group allotted and issued 871,538 shares in respect of the ICBacquisition. In January 2006, the Group granted 429,307 new EMI share options at the marketvalue exercise price of 102.5 pence per share. Of these, 50,700 have lapsed todate. The options can not be exercised until 31 December 2008, and areconditional on the Group achieving earnings per share growth of RPI plus 3%. The Board has proposed a final dividend of 1.83 pence per share (2005: 1.1 penceper share) making a total dividend of 2.6 pence per share for the full year(2005: 1.5 pence per share). The dividend will be paid on 7th February 2007 toshareholders on the register as of 19th January 2007. The Group has aprogressive dividend policy. Outlook The Group's in-depth understanding of the market in which it operates and itsclose, long-term relationships with its suppliers enable the Board to set itsstrategy with confidence. By following this strategy, the Board feels that theGroup will continue to grow. In the short term, pricing pressure may berelaxing, with alleviation expected particularly in fixed network services, assector consolidation and technology advances impact on competitive behaviour.Further protection is also provided by the more complex services in which theGroup specialises. Looking forward, there will continue to be investment in thecore areas of business as we strive for further improvement and to provide solidfoundations for future growth. James Murray Edward Spurrier 06 December 2006 Consolidated profit and loss account for the year ended 30 September 2006 Note Restated 2006 2005 £'000 £'000 Total TotalTurnover 65,964 46,404Continuing operations 51,578 46,404Acquired operations 14,386 -Total continuing operations 65,964 46,404Cost of sales (42,475) (28,202)Gross profit 23,489 18,202Other operating costs (17,620) (14,394)Operating profit 5,869 3,808Continuing operations 4,519 3,808Acquired operations 1,350 -Total continuing operations 5,869 3,808 Total operating profit - analysedOperating profit before employee share scheme charges, restructuring charges and amortisationof intangible fixed assets 6,700 4,174Employee share scheme charges 9 (187) (246) Restructuring charges 9 (101) - Amortisation of intangible fixed assets 9 (543) (120)Total operating profit 5,869 3,808 Interest receivable and similar income 162 199Interest payable and similar charges (64) (73)Profit on ordinary activities before taxation 5,967 3,934Taxation on profit on ordinary activities (1,866) (1,207)Profit on ordinary activities for the financial year 4 4,101 2,727 Earnings per ordinary shareBasic 3 9.5p 6.5pDiluted 3 8.9p 6.1p Consolidated and Company balance sheets as at 30 September 2006 Restated Company and Group Company Group Note 2006 2006 2005 £'000 £'000 £'000Fixed assetsIntangible assets 6,107 476 632Tangible assets 2,353 2,313 2,317Investments - 5,253 - 8,460 8,042 2,949Current assetsStock - finished goods 73 11 99Debtors 10,554 7,573 9,315Cash at bank and in hand 8,488 6,352 6,211 19,115 13,936 15,625Creditors: amounts falling duewithin one year (14,441) (10,803) (9,803)Net current assets 4,674 3,133 5,822 Total assets less current liabilities 13,134 11,175 8,771 Creditors: amounts falling due inmore than one year (1,015) (1,015) (1,055)Provision for liabilities and charges - - (41)Net assets 12,119 10,160 7,675 Capital and reservesCalled up share capital 4 57 57 55Share premium 4 4,116 4,116 4,116Merger reserve 4 934 - -Profit and loss account 4 7,012 5,987 3,504Total shareholders' funds 4 12,119 10,160 7,675 The comparative figures have been restated following the adoption of FRS 21 asdescribed in Note 1. Consolidated cash flow statement for the year ended 30 September 2006 Notes 2006 2005 £'000 £'000Net cash inflow from operating activities 5 9,286 3,570Returns on investments and servicing of financeInterest received 162 199Interest paid (64) (73)Net cash inflow from returns on investmentsand servicing of finance. 98 126 TaxationUK corporation tax paid (1,420) (1,159) Capital expenditure and financial investmentPurchase of tangible fixed assets (380) (369)Proceeds from sale of tangible fixed assets 2 9Net cash outflow for capital expenditureand financial investment (378) (360)Free cash inflow before acquisitions and financing 7,586 2,177 Acquisitions and disposalsPurchase of subsidiary undertaking 8 (5,251) -Cash acquired with subsidiary 838 -Net payments to acquire customer contracts - (723) Net cash outflow from acquisitions and disposals (4,413) (723) Equity dividends paid 2 (844) (200) Net cash inflow before financing 2,329 1,254 FinancingIssue of ordinary share capital - 4,000Share issue costs - (757)Purchase of own shares - (4,432)Capital element of loan repayments (52) (24) Net cash outflow from financing (52) (1,213) Increase in net cash 7 2,277 41 Notes to the Financial Statement 1. Basis of preparation The financial information is abridged and does not contain the Group's fullfinancial statements for the years ended 30 September 2005 and 30 September2006. Full financial statements for the year ended 30 September 2005 (which receivedan unqualified audit report) have been filed with the Registrar of Companies.Financial statements for the year ended 30 September 2006 will be presented tothe Members at the forthcoming Annual General Meeting; the auditors haveindicated that their report on these Financial Statements will be unqualified. The financial information has been prepared in accordance with the historicalcost convention, and in accordance with UK Generally Accepted AccountingPrinciples and the Companies Act 1985. The Group has adopted FRS 21, "Events after the balance sheet date". The effect of the change in accounting policy to adopt FRS 21 has impacted theprior year, as dividends had been proposed or paid in the period. Dividends arenow reported in the period that the shareholder's right to receive payment insestablished, which will normally be after the relevant board meeting orshareholders' meeting. The effect of this change is to recognise the finalproposed dividend in respect of the 2005 financial year in the current period.As a result, the net assets at 30 September 2005 increased by £500,000. 2. Dividends Restated 2006 2005 £'000 £'000Final Paid - 1.10p (2005: nil) per £0.00125p ordinary share 497 -Interim Paid - 0.77p (2005: 0.40p) per £0.00125 ordinary share 347 200 844 200 The 2005 proposed final dividend of 1.1 pence per £0.00125p ordinary share waspaid on 27 January 2006. The amount of dividend paid was £497,000 (2005: £nil). The directors also paid a 2006 interim dividend of 0.77 pence per £0.00125pordinary share, with a total payment value of £347,000 (2005: £200,000). Thiswas paid on 7 July 2006 to shareholders on the register on 23 June 2006. In addition, the directors are proposing a final dividend in respect of thefinancial year ending 30 September 2006 of 1.83 pence per £0.00125p ordinaryshare which will absorb an estimated £827,000 of shareholders' funds. Assumingit is approved by the shareholders at the Annual General Meeting on 29 January2007, it will be paid on 7 February 2007 to shareholders who are on the registerof members at 19 January 2007. 3. Earnings per share The calculation of basic and fully diluted earnings per ordinary share is basedon the profit after taxation for the period and the weighted average number ofordinary shares in issue during the year, The profit and weighted average number of shares used in the calculations areset out below: Weighted average Profit attributable of £0.00125 Per shareBasic and fully diluted Earnings per share to shareholders ordinary shares amount £'000 Number Pence2005 Earnings per share - basic 2,727 41,943,846 6.5Potentially dilutive shares - 2,473,962 (0.4) 2005 Earnings per share - diluted 2,727 44,417,808 6.1 2006 Earnings per share - basic 4,101 43,280,049 9.5Potentially dilutive shares - 2,570,685 (0.6)2006 Earnings per share - diluted 4,101 45,850,734 8.9 The underlying EPS is based on the underlying profit after tax as set out innote 9, and the weighted average number of shares as described above. As in prior periods, the calculation of the weighted average number of shares inissue excludes the shares held by the Alternative Networks Employee BenefitTrust of 1,915,200. These shares are then added to the total of extant optionswhen calculating the fully diluted weighted average number of shares. There were 45,216,738 shares in issue at 30 September 2006. On 30 September 2005there were 44,345,200 shares and on 10 October 2005, 871,538 shares were issued.The weighted average number of shares during the year was 45,850,734. 4. Reserves Group Share Share Merger Profit and capital premium reserve loss Total £'000 £'000 £'000 £'000 £'000Balance at 1 October 2005 as previously reported 55 4,116 - 3,004 7,175Prior year adjustment - FRS 21 - - - 500 500Balance at 1 October 2005 restated 55 4,116 - 3,504 7,675Shares issued 2 - 998 - 1,000Realisation of merger reserve - - (64) 64 -Shares held by EBT (UITF 38 adjustment) - - - 187 187Retained profit for financial year - - - 4,101 4,101Dividends paid - - - (844) (844)Balance at 30 September 2006 57 4,116 934 7,012 12,119 Company Share Share Merger Profit and capital premium Reserve loss Total £'000 £'000 £'000 £'000 £'000Balance at 1 October 2005 as previously reported 55 4,116 - 3,004 7,175Prior year adjustment - FRS 21 - - - 500 500Balance at 1 October 2005 restated 55 4,116 - 3,504 7,675Shares issued 2 - - - 2Shares held by EBT (UITF 38 adjustment) - - - 187 187Retained profit for the financial year - - - 3,140 3,140Dividends paid - - - (844) (844)Balance at 30 September 2006 57 4,116 - 5,987 10,160 5. Reconciliation of operating profit to net cash inflow from operatingactivities 2006 2006 2006 Total Continuing Acquisitions 2005 £'000 £'000 £'000 £'000 Operating profit 5,869 4,518 1,351 3,808Depreciation of tangible fixed assets 411 363 48 377Amortisation of intangible fixed assets 543 156 387 120Profit on disposal of tangible fixed assets - - - (4)Decrease/(increase) in stocks 48 29 19 (23)Decrease/(increase) in trade debtors 1,986 917 1,069 (53)(Increase) in prepayments, accruedincome and other debtors (747) (167) (580) (221)Increase in trade creditors 1,343 997 346 92(Decrease) in other taxation andsocial security. (176) (38) (138) (202)(Decrease)/increase in other creditors,accruals and deferred income. (178) 816 (994) (449)Employee share schemes charges 187 187 - 125Net cash inflow from operating activities 9,286 7,778 1,508 3,570 6. Reconciliation of net cash flow to movement in net funds 2006 2005 £'000 £'000Increase in cash in the year 2,277 41Decrease in loans 52 24Borrowings acquired with subsidiaries (19) -Increase in net funds in the year 2,310 65Net funds at 1 October 5,126 5,061Net funds at 30 September 7,436 5,126 7. Analysis of net funds 1 October Non-cash 30 September movements 2005 Cash flow 2006 £'000 £'000 £'000 £'000Net cash:Cash at bank and in hand 6,211 - 2,277 8,488Debt:Debt due within one year (30) (59) 52 (37)Debt due after one year (1,055) 40 - (1,015)Total debt (1,085) (19) 52 (1,052) 5,126 (19) 2,329 7,436 8. Acquisitions On 10 October 2005 the Group acquired Integrated Communications for Business(UK) Limited (ICB), a mobile and fixed line telecommunications service providerfor cash consideration of £5,251,000 including costs of £91,000, and the issueof shares in the Group with a value of £1,000,000. Net assets of £455,000 wereacquired and there were fair value adjustment decreases of £228,000.Adjustments due to changes in accounting policy result in an increase in netassets of £6,000. The goodwill on acquisition is being amortised on astraight-line basis over 15 years which is the anticipated life of the asset. In its last financial year to 30 April 2005 ICB made a profit after tax of£328,204. For the period from 1 May 2005 to the date of acquisition (10 October2005), ICB un-audited management accounts show: £'000Turnover 7,218Operating profit 252Profit before taxation 273Taxation (83)Profit attributable to shareholders 190 The balance sheet of Integrated Communication for Business (UK) Limited onacquisition was as follows: Book Value Consistent at 10 October Fair value Accounting Fair value at 2005 adjustments policy acquisition £'000 £'000 £'000 £'000Tangible assets 169 (100) - 69Intangible assets 75 (75) - -Stock 28 (6) - 22Debtors 3,208 (1) (637) 2,570Cash 838 - - 838Creditors due within 1 year (3,863) (46) 643 (3,266)Net assets acquired 455 (228) 6 233Goodwill 6,018Consideration 6,251Satisfied by;-Cash consideration 5,160Acquisition costs 91Issue of shares 1,000 6,251 Revaluations of tangible assets reflect the write-down to fair value onacquisition. Tangible assets acquired include motor vehicles, IT equipment andfixtures and fittings. Revaluations of intangible assets relate to the purchased goodwill in IntegratedCommunications for Business (UK) Limited. Revaluation of stock, which isincluded in debtors, reflects the write down to estimated realisable value. Revaluations of creditors are for an under accrual in the acquired companies'accounts. The fair value adjustment for the alignment of accounting policies reflects therestatement of assets and liabilities at 10 October 2005 in accordance with theGroup's policies including: the immediate expensing of equipment given tocustomers for the term of their contract (£0.637million), and revenuerecognition £0.643 million. An evaluation of the useful economic life of the acquired goodwill was performedby the directors. Based on projected earnings and historic churn levels, 15years was considered to be appropriate. 9. Reconciliation to underlying performance 2006 2005 £'000 £'000Profit after tax 4,101 2,727Exceptional items: 831 366Tax effect of adjustments (255) (112)Underlying profit after tax 4,677 2,981Add taxation on ordinary activities 1,866 1,207Add back tax effect of above adjustments 255 112Underlying profit before tax 6,798 4,300Less net interest receivable (98) (126)Underlying operating profit 6,700 4,174Add back depreciation 411 377 Underlying EBITDA* 7,111 4,551Net cash inflow from operating activities 9,286 3,570Operating exceptional item in respect of redundancy costs ofacquired operations 101 -Cash paid in respect of National Insurance on shares issued toemployee benefit trust - 48Operating exceptional items in respect of share schemes - 73Net cash inflow from operating activities - underlying 9,387 3,691 • Earnings before interest, taxation, depreciation and amortisation. This analysis is provided as the Group considers it provides a truer reflectionof the underlying performance of the business. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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