Interim Results

1st Jul 2008 07:00



1 July 2008

Alternative Networks plc

Interim Results for the six months to 31 March 2008

Alternative Networks plc, a leading independent business-to-business telecoms reseller, today reports its Interim Results for the six months ended 31 March 2008.

Unaudited six months to 31 March	2008 £000	2007 £000	Change %
Underlying performance*
Turnover	46,094	34,979	32%
EBITDA	5,288	3,997	32%
Operating profit	5,001	3,810	31%
Profit before taxation	5,046	3,964	27%
Earnings per share - basic	8.1p	6.3p	29%
- diluted	7.9p	6.0p	32%
Statutory performance
Turnover	46,094	34,979	32%
EBITDA	5,242	3,997	31%
Operating profit	4,268	3,732	14%
Profit before taxation	4,313	4,006	8%
Net cash inflow from operations	5,495	1,831	200%
Dividend per share **	1.5p	1.0p	50%
Earnings per share - basic	6.7p	7.1p	-6%
- diluted	6.4p	6.7p	-4%

* Results before amortisation on intangible assets other than computer software purchased, and restructuring costs. 

** Calculated by taking the interim paid or proposed in each period and dividing by the shares currently in issue. 

2007 results are restated for the adoption of IFRS, and are stated before profits on disposal of investments; and the earnings per share calculations assume that tax excludes the exceptional tax deduction for EMI options exercised in 2007. A full reconciliation between statutory and adjusted earnings is set out in note 4.

Operational highlights

Sales were up 32%, including Echo. The organic sales growth rate was 9% underlying (7% FY 2007)

Mobile subscriber base increased 19% to 49,049 (H1 2007: 41,077), with organic growth of 13%

Gross profits have increased across all product sets, both organically and with Echo

Underlying EBITDA growth of 32% to £5.3m puts Group in solid position to meet 2008 target

Underlying operating margins steady at 10.8% (2007: 10.9%)

Echo delivered EBITDA of £1.1m in the 6 months to 31 March 2008, which was as much as achieved in the 12 months to 31 March 2007

Bank facilities doubled to £12m, with improved terms

Strong operating cash flow of £5.5m (H1 2007: £1.8m) and cash conversion of 105% 

Corporate Highlights

Proposed dividend increased 50% to 1.5p (2007: 1.0p)

Up to £4m cash proposed to be returned to shareholders by way of tender offer 

James Murray, Chief Executive Officer, commented:

"This has been an excellent period of trading for the business, with progress made in the integration of the Echo acquisition and the successful focus on low churn and larger customer wins across the group. Sales, underlying EBITDA and diluted adjusted earnings have all increased 32% and we have improved the interim dividend by 50%. Cash generation has once again been very strong with over 100% cash conversion of operating profits, and we are proposing to return up to £4m surplus cash to the shareholders."

Enquiries:

Alternative Networks plc
James Murray, Chief Executive Officer	0870 190 7444
Edward Spurrier, Chief Financial Officer
Investec	0207 597 5970
Martin Smith, Patrick Robb
Financial Dynamics
Juliet Clarke/Haya Chelhot	0207 831 3113

Chairman's Statement 

I am very pleased to report that Alternative Networks has delivered its seventh consecutive set of solid results, achieving significant revenue growth, including continued organic growth across all product lines. Profits improved in the period whilst both gross margins and underlying operating margins were stable, reflecting the strong fundamentals of the business and the delivery of our growth strategy, including our declared focus on large customers in the SME space, cross-selling of products, reduction in churn and product development.

Our recent acquisition of The Telecom Centre Limited ("Echo") in August last year has also delivered very positive results, with EBITDA for this six month period matching that achieved for the whole of the previous year. Moreover, solid progress has been made in cross-selling Alternative Networks products into the Echo customer base.

Collectively, the business is performing well on all fronts, with an increase in the underlying organic growth rate of the business, stable margins and the group continues to generate a very healthy level of cash. We have raised the proposed interim dividend by 50% to 1.5p.

The scale of the business has increased again, with revenues up a third since we reported a year ago. The mobile subscription base is increased by nearly one-fifth, with the majority of this growth being organic, and the fixed line revenues of the business are also up by nearly one-fifth, with the number of lines managed by the business up 36%, following a number of new customer wins. The group has had a successful period combating churn, and in mobile products we witnessed record low levels of churn and record high numbers of existing customers having renewed their contracts. The group now records separately the revenue streams and profits of the IP Pbx and data businesses and these account for one sixth of the group's revenues and this is an area we intend to build on further.

The four key elements of our strategic focus, as outlined above, continue to prove their worth. Our successful efforts on cross-selling, winning new larger customers and reducing churn are self evident from the results set out below.  Product development has had less impact despite some improvements in mobile data products, but we have an exciting remainder of the year with the majority of our focus being on some new launches in the second half of the year for teleworking plus upgrades to our Clarity reporting tools, and the new Blackberry Bold with related mobile data offerings.

The Company also announces today a tender offer to return up to £4 million to shareholders with a price range of 140 - 145 pence. It is expected that a circular containing details of the tender offer and a notice of an extraordinary general meeting (required to grant authority to proceed with the tender offer) will be posted to shareholders today.

The Board would like to thank all of our employees for their continued hard work and commitment throughout the period. The Group has established strong foundations to allow continued organic growth as well as the ability to assimilate further acquisitions if appropriate.

Kenneth McGeorge

Non-executive Chairman 

Business Review

We are delighted to report another period of strong profits and sales growth. The period to 31 March 2008 has been one in which we have concentrated on our core organic growth strategy of reducing churn, winning larger customers, cross-selling into new customers, while at the same time integrating the Echo business. 

Results Overview

Our solid track record continues with sales and profits growth and healthy cash generation. The highlights are:

Total sales increased 32% to £46.1m, including £8.9m of sales from Echo. Adjusting for the mobile EU roaming price reductions which were felt in this half for the first time, sales were up 9% on a like for like basis, building on the 7% organic growth rate of 2007.

We are pleased to note that gross profit margins have stabilised as expected at 35% (H1 2007: 35%), even without Echo's slightly higher margins. During the period, a modest improvement in outbound calls' margins offset a slight erosion of mobile margins which was caused by the increase in cost of 2 year contract renewals with greater hardware costs.

Operating profit margins have also performed well, with underlying operating profit margins steady at 10.84% (H1 2007 : 10.89%), in spite of Echo's historically lower margins, and this performance reflects some slightly increased efficiencies of scale.

Statutory profits before tax have increased 8% to £4.3m, and include an increased amortisation charge of £0.6m under IFRS principally as a result of the addition of the intangible assets acquired with Echo. The underlying adjusted profits before tax were up 27% to £5.0m (H1 2007: £4.0m)

Net funds and facilities

EBITDA cash conversion remained excellent at 105%. For the six months to 31 March 2008, the group generated £5.5m of cash. This was boosted unexpectedly by a working capital net inflow of £0.2m, due to some fractionally later than usual payments of suppliers over the Easter period and beyond the period end. 

Period end cash balances were £5.9m (2007: £9.1m), and net funds were £4.9m (2007: £8.1m). During the period, the Group increased its available banking facilities to £12m (2007: £6m). These remain unutilised to date.

Earnings per share

Underlying fully diluted earnings per share have increased by 32% from 6.0p to 7.9p. The adjustments relate to amortisation on intangible assets and some small restructuring costs in 2008. The earnings in 2007 are adjusted to tax all profits at 30% (2008: 29.4% before adding back the adjustments and their related tax treatments) and exclude profits on disposal of investments.

As a result, basic earnings per share were 6.7p down from 7.1p as restated for IFRS.  The weighted average shares in issue were 1.7m up on 2007 due to 590,882 in respect of the Echo purchase, and the remainder was due to the exercise of options early in H1 2007 by group employees. 

Dividend

The Group proposes to pay an interim dividend of 1.5 pence per share (2007: 1.0 pence) on 24 July, to all shareholders on the register on 11 July 2008, representing an increase of 50%. 

Echo Update

The Telecom Centre Limited ("Echo") was acquired on 31 August 2007, and this is the first full reporting period of trading. Echo delivered sales of £8.9m, gross profits of £3.2m, and EBITDA of £1.1m during the period.

The integration of Echo's Networks business covering Mobile, Inbound and Outbound products was successfully completed at the beginning of the period and trading has been robust with the gross profits in the 6 months to 31 March 2008 being £0.4m ahead year on year.

The cross selling of the Alternative Networks mobile, inbound and WLR products into Echo's systems maintenance clients is proving successful. Approximately £1.5m annualised revenues have been signed to date, and the majority were orders which have been signed since Easter, and many since the period end. The forward order book remains healthy. Notable client wins included the mobile fleet of Abel & Cole, the organic food distributors, and the fixed line products of the Portsmouth Primary Care Trust.

The Echo hardware and maintenance businesses overall have performed in line with expectations, with maintenance revenues performing well, but with reported revenues in hardware sales a little behind expectations. This was mainly due to more than £2m of orders being signed and not fulfilled by period end. This is higher than expected, and is due to two large orders which were slightly delayed and have now completed. The earn-out is based on revenues and profits to 31 August 2008. It is estimated that performance correlates with the original estimates of the deferred consideration payable.

Since the period end, the operations of the Echo London office has been transferred to the London offices of AN, and all of Echo's business is now integrated within AN's network of offices in the UK. It is anticipated that some small further day to day operating efficiencies will arise during 2008, and additional significant synergies are expected to be achieved when the businesses of ANTS and Echo are combined. It is currently anticipated that this integration process will commence after 31 August 2008.

The London freehold property of Echo has now been put up for sale and to date the company has received offers at or above the £1.2m carrying value in the accounts.

Mobile

Mobile	2008 Group	2008 Group pre Echo	2007 Group
Turnover (£m)	21.3	20.1	18.8
Gross Profit (£m)	6.4	6.1	5.8
Gross Margin %	30%	30%	31%
Mobile KPIs
Subscribers at 31 March	49,049	46,383	41,077
Monthly ARPU (£)	61	60	63
AN only KPIs
Monthly average contract length		22m	20m
Gross new connections in period		8,164	7,267
Network churn		12%	18%
AN £ churn		16%	22%
% Subscribers in-contract		83%	79%
Data connections (included in above)		14,435	9,782
Data connections as % of  total subscribers		31%	24%

Underlying organic sales growth of 11% - the regulatory pricing changes affecting EU roaming rates were adjusted on 30 September 2007 and the impact is over £0.8m reduction in revenues in the period. Headline sales including Echo have increased 13%, with 7% organic growth. Adjusting for the EU Roaming rates reductions, organic sales growth would have been 11%. 

Overall growth in new connections remained strong and higher than the previous two half year periods, with more than 8,000 new connections gained. This was in spite of the market continuing to moving towards one device per customer. Converged devices in AN's mobile base increased by over 50% on 12 months ago to nearly 8,500.

Business subscribers have increased to 49,049 representing a net gain of 3,329 over the 6 months (2007: 833) from 30 September 2007. The base has grown 13% year on year, increasing from 41,077 to 46,383, and this growth rate supports the underlying sales growth outlined above. The Echo base has performed well, growing 27% from 2,105 at 30 September 2007 to 2,666 at 31 March 2008.

Data connections now represent 31% (31 March 2007: 24%), with over 6,000 data only devices, which is up over 40% on the year, reflecting the popularity of faster speed laptop dongles. This fast growth, which dilutes ARPU but is a core part of servicing and retaining business clients, is expected to continue. 

ARPU has declined to £61 (2007 FY: £63). The ARPU of the base excluding Echo has declined £3 to £60, with the regulatory EU roaming price reductions accounting for the entirety of this reduction, being nearly 5% of total calls and line rentals revenues. Otherwise ARPU has been solid with the ARPU boosting impact of increased numbers of converged devices matching the ARPU erosion of ongoing voice price reductions and the increase in low spend data only connections. The outlook for ARPU remains positive as Mobile Email increases penetration into the base. Currently just over 1 in 6 devices is a converged device (March 2007: one in seven).

Network churn levels have decreased to 12% (H1 2007: 18%, FY 2007: 17%) which marks a record for a 6 month period. This success is due mostly to a significant effort to re-sign customers, as is evidenced by the increase in customers in contract from 79% last year to 83% at March 2008. This performance was also helped by two more factors: a) customers being retained at the Network level, and b) the notable lack of churn of large customers in the period. The Board would continue to expect churn to be in the 16-20% band. In 2007, the churn was adversely impacted by a spike of ICB customers leaving. This is not repeated in 2008. The group also measures churn at a customer spend level, and this was 16% in the period (H1 2007: 22%; FY 2007: 21%) further reflecting the Group's tremendous efforts in this area.

Gross margins have remained steady, falling just over 0.5% compared with the previous year. The reduction in lower margin roaming calls as a percentage of total sales has meant that overall calls and line rental margins have increased. However in this period, the significant number of clients re-signing in AN's base has meant that costs of equipment especially on converged devices (which are written off immediately, even on a two year deal) have increased significantly, and we estimate these have impacted margins by more than 1.5%. It is expected that a period of higher costs incurred by the service provider will continue in a competitive UK market and given the same accounting policy going forward, it is likely margins will occupy the lower end of the 29 - 31% band we have seen over the last three years.

Network Services

The numbers and prior year comparatives have been restated to include all inbound services, which have been moved from "Advanced Solutions". In addition, we have separately disclosed Inbound revenues to allow greater clarity. As the market moves towards an IP based infrastructure, the inbound services will increasingly be managed on the same network and sold and managed jointly with other fixed line features. As a result, all inbound services are now included in Network Services and no longer Advanced Solutions.

Network Services	2008 Group	2008 Group pre Echo	2007 Group
Turnover (£m)	17.2	15.1	14.4
Gross Profit (£m)	7.0	6.2	6.0
Gross Margin %	41%	41%	41%
Outbound KPIs
Monthly ARPU (£)	1,082	1,198	1,085
WLR as a % of total Network Services revenues	31%	31%	25%
Number of lines/channels	45,397	40,184	33,259
Average new customer contract length (months = "m")	n/a	17 m	21 m
Inbound KPIs
Turnover (£m)	3.5	3.4	3.0
Gross margin %	57%	57%	58%

Sales are up 19% on 2007, and stripping out the new Echo customers, the organic growth rate has increased 5%. The decline in minutes revenues continues to overshadow the increased momentum in customer wins as is illustrated by the increased WLR base size. 

Outbound Line rental (WLR) continued to grow with an increase of 4,600 lines since 30 September 2007, and an annual organic growth in the base size of 21%. ISDN30 channels continue to dominate with over 50% of these lines, reflecting the larger customers in the base. Organic AN revenues from WLR grew 29%, with the overall group revenues growing to £4.2m.

Outbound average revenue per customer per month ('ARPU') is steady with the lower ARPU customers of Echo, being £700, for the first time this year bringing down the increases made by the legacy base which rose from £1,085 to £1,198. The ARPU gains in AN reflects the success in securing additional larger customers such as the Metropolitan Housing Trust, and the continued bolt on of WLR revenues onto existing minutes only customers. 

Inbound revenues - these have returned to double digit organic sales growth (13%) in line with expectations. The regulatory changes expected due to Ofcom's regulation of the 0870 revenue share products have started to have a modest impact on headline revenues and margins, but are not expected to have any material sudden adverse impact, any more than the addition or loss of key customers.

Gross margins across both inbound and outbound have performed steadily and are consistent with expectations. The advance of WLR sales with lower margins and the reduction in inbound margins, principally due to customer product changes in anticipation of 0870 regulation has been offset by some good buying gains, and the outlook remains positive. 

The growth in Echo revenues and margins has been comfortably in line with expectations, with some substantial synergy achieved in buying gains, such that Echo's gross profits increased by an estimated £0.4m.

Advanced Solutions

These include the revenues from Echo and Alternative Networks TS Limited ("ANTS") subsidiaries in respect of the provision and maintenance of IP enabled system hardware and data products. The inbound services revenues have been transferred to the Network Services product grouping.

Advance solutions	2008 Group	2008 Group pre Echo	2007 Group
Turnover (£m)	7.6	2.1	1.8
Gross Profit (£m)	2.8	0.65	0.5
Gross Margin	37%	31%	30%

£5.5m revenues come from Echo for the first time, and the performance is covered under the Echo update paragraph above. 

Of the total sales of £7.6m, £3.2m represents recurring revenues, being £2.2m maintenance service contracts and £1m data services. The remainder were Hardware installs and add-on equipment and professional services.

Organic sales from ANTS have increased 17% year on year, with the majority of this growth coming from new hardware sales to new customers, together with some improved cross-selling of the data products. Margins have held up at the same levels as last year. Their growth supports the confidence with which we approached the Echo acquisition. 

Gross margins are much stronger in Echo at over 39% as its maintenance revenue base is more than 5 times larger than ANTS, and overall margins were in line with management expectations. 

Organic Growth

We have continued to focus successfully on areas which we believe are key, as set out last year: 

Focus on larger customers in SME space

During the period we have continued to target the mid-enterprise market, which we define as business customers with between 50 and 500 employees. Excluding the new Echo customers, it has been a successful period of new client acquisition and cross-selling as the number of customers spending over £1,000 has increased by 70 to 1,270. In Echo, the customer base has been profiled and of their 1,600 active customers, over 500 now take Network products. We will report further at the year end on the growth of larger recurring revenue customers in the Echo customer base. 

Cross-selling of products

A key part of our organic growth strategy remains to sell more products to new and existing customers. During the period we have seen encouraging ongoing growth in product penetration to our clients. The amount of customers taking more than 1 product has increased from 33% to 35% in AN customer base. Looking at our larger customers, at 31 March 2008, the number of customers spending over £1,000 who took more than one product has remained steady at 67% (67% in H1 07), but the number of higher spending customers taking three products or more increased to 44% (31 March 2007: 41%). The early successes in Echo's cross-sales are covered above.

Reduction in churn

The group has experienced low churn levels across all products and to date the low churn rates in Echo has been very encouraging. The churn statistics are set out in the Mobile analysis above.

Product development

Since 1 October 2007, there has been a relatively low level of significant activity on the new product front, with the only noteworthy features being some improvements in the mobile data suite of products from O2 and Vodafone, especially the latter's dongle, and the launch of the Blackberry Professional Software which allows smaller companies to engage 90% of the advantages of the Blackberry Enterprise Software system. Simply put, it can sit on the company's main server (not separately), and works for up to 30 users. 

WLR3 and fixed line products such as SIP trunking have been further delayed by suppliers, although we have just begun now trialling a SIP trunking product, for launch later this year.

Meantime the Group has focused its attention on its customer service and solutions and specifically are set to launch in the second half of this year:

A trio of solutions around Teleworking, being Hot Desking, Mobile working and Home Working. These are convergence solutions combining parts of the Echo and AN product offerings.

A further set of upgrades to our Clarity on-line reporting tools - specifically we will be launching a Personal Billing service which allows the fleet manager to split the bills to individuals; and an Asset Management system which enables easier mass tracking of fleet devices.

Further product developments in the second half of the year are:

Launch of the Blackberry Bold, the 3G Blackberry whose processor is expected to be up to 4 times faster than the 8310 ("Curve"), and has full wi-fi capabilities and has substitute 3G modem sales opportunities. This launch, expected later this summer, following the launch of the Apple i-phone 2, is expected to stimulate demand. 

Launch of 03xx inbound numbers which may appeal to the public sector. These manage inbound calls which offer the same features in terms of network-based call routing, resilience, and reporting as 0870 numbers, but the calls are paid for by the owner not the caller. 03xx numbers present advantages for the caller over current 0800 numbers in that mobile networks treat them as a normal local or national call, and do not put a premium price on the calls.

Growth by Acquisition

The Group has evaluated a number of acquisition opportunities, mostly operating in the IT, data and mobility sectors, and we remain very careful to assess what benefit these businesses would bring our customers, as well as applying rigorous financial criteria. During the period, the Group doubled its banking facilities to provide £12m (unused). Given the high levels of cash generation and support the Group has, the Board has every confidence it can take advantage as opportunities arise over the remainder of the year.

IFRS

These unaudited results, including comparatives and the year ended 30 September 2007, are prepared under IFRS, adopted for the first time. Reconciliation to previously disclosed results is included. 

Summary

The period under review has shown that we are well placed to continue to grow organically. The business model is particularly resilient to a number of factors: a broad base of business customers, suppliers and products, over 80% recurring revenues, the business critical nature of our services and the fact that the market is open to increasingly longer fixed contract terms. The Board is confident that these strengths will continue to serve us well. 

There are also many opportunities for stimulating further growth with new products, acquisitions and greater efficiencies.

James Murray

UNAUDITED CONSOLIDATED INCOME STATEMENTS 

		Six months to	Six months to	Year to
		31 March 2008	31 March 2007	30 September 2007
	Notes	£'000	£'000	£'000
Turnover:		46,094	34,979	72,083
Cost of sales		(29,888)	(22,631)	(46,853)
Gross profit		16,206	12,348	25,230
Operating costs		(11,938)	(8,616)	(17,755)
Operating profit:		4,268	3,732	7,475
Total operating profit - analysed:
Operating profit before operating  exceptional items and amortisation  of intangible fixed assets		5,001	3,810	7,814
Operating exceptional item in  respect of restructuring costs  of acquired operations		(46)	-	(82)
Amortisation of intangible fixed assets	7	(687)	(78)	(257)
Total operating profit		4,268	3,732	7,475
Profit on part disposal of  subsidiary operations		-	120	120
Finance income		89	183	418
Finance costs		(44)	(29)	(60)
Profit on ordinary activities  before taxation		4,313	4,006	7,953
Taxation on profit on ordinary activities	6	(1,267)	(892)	(1,763)
Profit on ordinary activities  after taxation		3,046	3,114	6,190
Attributable to;-
Equity shareholders of the company		3,044	3,110	6,183
Minority interest		2	4	7
		3,046	3,114	6,190
Earnings per ordinary share:
Basic	4	6.7p	7.1p	13.9p
Diluted	4	6.4p	6.7p	13.3p

UNAUDITED CONSOLIDATED BALANCE SHEET

		Six months to	Six months to	Year to
		31 March 2008	31 March 2007	30 September 2007
	Notes	£'000	£'000	£'000
ASSETS
Non-current assets
Intangible assets	7	19,879	6,604	20,436
Tangible assets		2,116	1,937	3,267
Deferred tax asset		436	282	679
Assets held for re-sale		1,195	-	-
Property deposits		-	63	63
		23,626	8,886	24,445
Current assets
Inventories		293	71	269
Trade and other receivables		14,931	10,735	14,354
Cash and cash equivalents	9	5,905	9,093	3,422
		21,129	19,899	18,045
Total assets		44,755	28,785	42,490
EQUITY AND LIABILITIES
Equity
Called up share capital		60	59	60
Share premium		4,580	4,559	4,577
Merger reserve		1,905	934	1,905
Retained earnings		14,127	9,560	12,217
		20,672	15,112	18,759
Minority interest		9	4	7
		20,681	15,116	18,766
Current liabilities
Borrowings	9	34	39	33
Deferred consideration		447	-	-
Trade and other payables		20,734	12,635	19,672
		21,215	12,674	19,705
Non-current liabilities
Borrowings	9	978	995	1,546
Deferred consideration		-	-	447
Deferred tax liabilities		1,881	-	2,026
		2,859	995	4,019
Total liabilities		24,074	13,669	23,724
Total equity and liabilities		44,755	28,785	42,490

UNAUDITED STATEMENT OF CHANGES IN EQUITY

	Share capital	Share premium	Merger reserve	Profit And loss	Total	Minority interest	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at
01-Oct-06	57	4,116	934	7,508	12,615	-	12,615
Shares issued	2	443	-	-	445	-	445
IFRS2 share based  payments	-	-	-	138	138	-	138
Deferred tax on share  options	-	-	-	(344)	(344)	-	(344)
Retained profit for  financial period	-	-	-	3,110	3,110	4	3,114
Dividends paid	-	-	-	(852)	(852)	-	(852)
Balance at
31-Mar-07	59	4,559	934	9,560	15,112	4	15,116
Shares issued	1	18	971	-	990	-	990
IFRS2 share based  payments	-	-	-	82	82	-	82
Deferred tax on  share options	-	-	-	(28)	(28)	-	(28)
Retained profit for  financial period	-	-	-	3,073	3,073	3	3,076
Dividends paid	-	-	-	(470)	(470)	-	(470)
Balance at
30-Sep-07	60	4,577	1,905	12,217	18,759	7	18,766
Shares issued	-	3	-	-	3	-	3
IFRS2 share based  payments	-	-	-	74	74	-	74
Deferred tax on  share options	-	-	-	(112)	(112)	-	(112)
Retained profit for  financial period	-	-	-	3,044	3,044	2	3,046
Dividends paid	-	-	-	(1,096)	(1,096)	-	(1,096)
Balance at
31 March 2008	60	4,580	1,905	14,127	20,672	9	20,681

UNAUDITIED CONSOLIDATED Cash flow statementS

		Six months to	Six months to	Year ended
	Notes	31 March 2008	31 March 2007	30 September 2007
		£'000	£'000	£'000
Cash flows from operating activities
Cash generated from operations	8	5,495	1,831	8,784
Income tax paid		(791)	(727)	(2,067)
Net cash from operating activities		4,704	1,104	6,717
Cash flows from investing activities;-
Purchases of property, plant  and equipment		(481)	(347)	(565)
Proceeds from sale of property,  plant and equipment		-	-	7
Interest received		89	183	418
Cash acquired with acquisitions		-	-	732
Purchase of subsidiary undertaking		(125)	-	(11,548)
Proceeds of sale of subsidiary		-	120	120
Net cash used in investing activities		(517)	(44)	(10,836)
Cash flows from financing activities;-
Dividends paid	3	(1,096)	(852)	(1,322)
Proceeds from issue of share capital		3	445	462
Capital element of loan repayments		(567)	(19)	(27)
Interest paid		(44)	(29)	(60)
Net cash used in financing activities		(1,704)	(455)	(947)
Increase/(decrease) in cash  and cash equivalents		2,483	605	(5,066)
Cash and cash equivalents  at start of period		3,422	8,488	8,488
Cash and cash equivalents at  end of period		5,905	9,093	3,422
Bank loans		(1,012)	(1,034)	(1,579)
Cash and cash equivalents		4,893	8,059	1,843

NOTES TO THE ACCOUNTS

1. Basis of preparation

The financial information contained in this interim statement does not constitute accounts as defined by section 240 of the Companies Act 1985. The interim report has been neither audited nor reviewed by the Group's auditors. The financial information for the year ended 30 September 2007 is derived from the statutory accounts for that period that have been delivered to the Registrar and included an audit report, which was unqualified and did not contain any statement under section 237 of the Companies Act 1985. These results have been amended to comply with International Financial Reporting Standards (IFRS) as disclosed in note 11.

Alternative Networks plc's consolidated financial statements have been prepared in accordance with UK Generally Accepted Accounting Principles (GAAP) until 30 September 2007. These interim financial statements have been prepared in accordance with IFRS and International Accounting Standards (IAS). 

Reconciliations and explanations of the effect of the transition from GAAP to IFRS on the Group's equity and its net income are provided in note 11.

Fixed annual charges are apportioned to the interim period on the basis of time elapsed provided that a contractual or constructive obligation exists at the interim balance sheet date. Other expenses are accrued in accordance with the same principles used in the preparation of the annual accounts, as modified by the introduction of new accounting standards.

The interim results were approved by the Board on 25 June 2008. 

2. Principal Accounting Policies

The principal accounting policies that the Group has applied in preparing the restated financial information under IFRS are set out below.

Basis of consolidation

On acquisition of a subsidiary its assets and liabilities are recorded at their fair values as at the date of acquisition. Accounting policies are consistent throughout the Group. Intra-group revenue and profits are eliminated on consolidation. The Group financial statements consolidate the financial statements of the company and its subsidiary undertakings using the acquisition method.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value.

Depreciation, down to residual value, is calculated on a straight-line basis over the estimated useful life of the asset as follows;-

Building element of long leaseholds	2%
Leasehold improvements	over the lease term
Equipment, fixtures and fittings	20% - 33%
Motor vehicles	25%

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount.

An item of property, plant and equipment is removed upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is derecognised.

Leases

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.

Intangible assets

Business combinations and goodwill subsequent to transition to IFRS are accounted for using the purchase method. This involves recognising identifiable assets (including previously unrecognised intangible assets) and liabilities (including contingent liabilities and excluding future restructuring) of the acquired business at fair value. Goodwill is initially measured at cost, being the excess of the fair value of payments made, assets transferred and future payments, over the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities. The results of the acquired entities are included in the Group's results from the date when control of the company passes to the Group.

Goodwill recognised under UK GAAP prior to the date of transition to IFRS (1 October 2006) is recognised at its net book value as at the transition date as allowed under IFRS1 and then tested annually for impairment.

Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. In the event that management forecasts do not facilitate accurate impairment testing at divisional level goodwill will be held centrally and reflected as such in the segment reporting.

Purchased customer contracts are capitalised at cost and amortised on a straight line basis over their estimated useful economic life, from the date of acquisition, as considered reasonable by the Directors.

Software and software licences includes computer software that is not integral to a related item of hardware. These assets are stated at cost less accumulated amortisation and any impairment in value. Amortisation is calculated on straight-line basis over the estimated useful life of the asset.

Intangible assets - other for acquisitions after 1 October 2006 the fair value of customer relationships, supplier relationships and trade names was determined by the net present value of the future cash flow benefits anticipated to arise from the intangible assets less accumulated amortisation and impairment losses.

Amortisation of other intangibles is charged to the profit or loss on a straight line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are tested systematically for impairment at each annual balance sheet date. Other intangible assets are amortised from the date that they are available for use. The estimated useful lives are as follows:

• Customer relationships	7 years
• Supplier relationships	7 years
• Trade name	7 years
• Purchased customer contracts	3-5 years
• Software	3-5 years

Investments

All investments are initially recognised at cost, being the fair value of the consideration given and including acquisition charges associated with the investment. Investments are tested for impairment at each reporting date or if events indicate that the carrying value has been diminished.

Inventory

Inventories are valued at the lower of average 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.

Work in progress is valued at the lower of cost and net realisable value less any payments received on account. Costs include materials and other expenses incurred on the contract at the date of the balance sheet.

Trade and other receivables

Trade receivables, which generally have 14-60 day terms, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Cash and cash equivalents

Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits. For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

Financial liabilities

Financial liabilities held for trading are held at fair value in the balance sheet with fluctuations in value taken to the income statement. All other financial liabilities are held at amortised cost and fluctuations in value are taken to the income statement.

Derecognition of financial assets and liabilities

A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires.

Derivative financial instruments and hedging activities.

The Group's financial assets and liabilities are recorded at historical cost except as described otherwise. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

Trade payables

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

Interest bearing loans and borrowings

All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any expected reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Share capital

Equity instruments issued by the Group are recorded at proceeds received, net of direct issue costs.

Current taxation

Current income tax expense is recognised based on management's best estimate of the weighted average annual tax rate expected for the full financial year.

Deferred taxation

Deferred income tax is provided using the liability method, on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax assets are recognised only to the extent that the Directors of the company consider it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.

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. The following specific recognition criteria must also be met before revenue is recognised:

Turnover from calls, which excludes value added tax and trade discounts, is recognised in the profit and loss account at the time the call is made with the exception of international roamed calls which are recognised when the data is supplied by the UK networks. Calls made in the year, but not billed by year end are accrued within debtors as accrued income with the exception of international roamed calls as noted above.

Turnover from line rentals is recognised in the month that the charge relates to, commencing with a full month's charge in the month of connection. Turnover and related costs from the sale of handsets are recognised on the date of connection.

Connection commissions received by mobile network operators are recognised when the customer is connected to the mobile network after providing for expected future clawbacks. Mobile commissions in respect of average revenue per user are recognised at the end of the relevant performance period.

Turnover and related costs from the sale of accessories are recognised when despatched.

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

Income and related expenditure is recognised upon completion of work for systems installations, and maintenance income in respect of systems is recognised evenly over the period to which it relates.

Pensions and other post-employment benefits

The Group operates a defined contribution scheme and contributes to an independent stakeholder pension. Contributions are recognised as an expense in the income statement as they become payable in accordance with the rules of the scheme.

Employee benefits

In accordance with IAS 19, the Group provides for accrued holiday benefit. The cost is measured as the additional amount that the Group expects to pay as a result of the unused holiday entitlement that has accumulated at the balance sheet date.

Share-based payment transactions

The Group's management awards certain employees bonuses in the form of share options on a discretionary basis. The options are subject to three-year vesting conditions and their fair value is recognised as an employee benefits expense with a corresponding increase in retained earnings over the vesting period. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised. The group has applied IFRS2 'Share based payments' and has adopted the Black-Scholes model for the purposes of computing 'fair value'.

Exceptional items

Exceptional items are items which are of a one-off nature or of a material size, and are separated out for additional disclosure purposes.

Significant accounting judgements, estimates and assumptions

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

Impairment of goodwill. The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the 'value in use' of the cash-generating units to which the goodwill 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.

Deferred tax assets. Deferred tax assets are recognised for all unused tax losses and other timing differences to the extent that it is more likely than not that taxable profit will be available against which the losses and other timing differences can be utilised. Management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

Share based payment. The estimation of the fair value of share options and other equity instruments at the date of their grant requires management to make estimates concerning the expected volatility of, and dividends payable on the underlying shares and the time at which employees are likely to exercise vested options.

Litigation and other claims. Estimates are required to judge the level of exposure on existing claims and estimate the incidence and outcome of future claims.

Debtors. Debts are recognised to the extent that they are judged recoverable. Management reviews are performed to estimate the level of reserves required for irrecoverable debt. Provisions are made specifically against invoices where recoverability is uncertain.

Amounts recoverable on contracts. Management assess the percentage completion and cost to complete on a contract by contract basis.

Deferred consideration. Management estimate the amount of deferred consideration payable on contracts based on past performance and future forecasts.

3. Dividends

The reported dividend in these statements represents the 2007 proposed final dividend of 2.30 pence per £0.00125p ordinary share, which was paid on 31 January 2008 (2007: represents the 2006 proposed and paid final dividend of 1.83 pence per £0.00125p ordinary share). The amount of dividend paid was £1,096,000 (2006: £852,000).

The directors propose a dividend for the 2008 interims of 1.5 pence per £0.00125p ordinary share (2007: 1.0 pence per share), with a total payment value of £715,000 (2007: £470,000). This was approved on 28 May 2008, and has not been accrued in the financial statements. This will be paid on 25 July 2008 to shareholders on the register on 11 July 2008. The ex-dividend date is 9 July 2008.

4. Earnings per share

Earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of shares in issue during a six month period. The weighted average number of shares in issue during the six months to 31 March 2008 was 45,730,000 (six months to 31 March 2007: 44,017,000; year to 30 September 2007: 44,610,000).

The potentially dilutive number of share options was 1,595,000 during the six months to 31 March 2008 (six months to 31 March 2007: 2,327,000; year to 30 September 2007: 2,010,000). 

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potential dilutive ordinary shares.

	Six months to		Six months to		Year to
	31 March 2008		31 March 2007		30 September 2007
	Earnings	Per share amount	Earnings	Per share amount	Earnings	Per share amount
	£'000	pence	£'000	pence	£'000	pence
Basic EPS
Earnings attributable to ordinary shareholders	3,044	6.7	3,110	7.1	6,183	13.9
Amortisation of intangible  fixed assets	687	1.5	78	0.2	257	0.6
Profit on disposal of subsidiary	-	-	(120)	(0.3)	(120)	(0.3)
Exceptional items	46	0.1	-	-	82	0.2
Tax adjustment of above  based on effective tax rates	(60)	(0.2)	13	0.0	(40)	(0.1)
Tax deduction of EMI share options exercised in period - exceptional	-	-	(309)	(0.7)	(621)	(1.4)
Adjusted earnings	3,717	8.1	2,772	6.3	5,741	12.9
Diluted EPS
Earnings attributable to ordinary shareholders	3,044	6.4	3,110	6.7	6,183	13.3
Amortisation of intangible  fixed assets	687	1.5	78	0.2	257	0.5
Profit on disposal of subsidiary	-	-	(120)	(0.3)	(120)	(0.3)
Exceptional items	46	0.1	-	-	82	0.2
Tax adjustment of above  based on effective tax rates	(60)	(0.1)	13	0.0	(40)	(0.1)
Tax deduction of EMI share options exercised in period - exceptional	-	-	(309)	(0.6)	(621)	(1.3)
Adjusted earnings	3,717	7.9	2,772	6.0	5,741	12.3

Adjusted basic and diluted EPS have been calculated to exclude the after tax effect of amortisation of intangible fixed assets and operating exceptional items in order that the effect of these items on reported earnings can be fully appreciated.

5 Segmental reporting 

IAS 14 requires the disclosure of detailed segmental information based on internal management information as it is reported to the board. Alternative Networks business units are Mobile, Network Services, and Advanced Solution as set out within Business Review.

Since all sales are made within the United Kingdom, Alternative Networks do not consider any secondary segmental reporting to be appropriate.

6 Taxation

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full year. The estimated average annual tax rate used for the year to 30 September 2008 is 29.5% (the estimated tax rate for the first half to 31 March 2007 was 22.5%). This increase is mainly due to last year's tax deduction for EMI share options exercised

7. Intangible fixed assets

	Purchased Customer contracts	Computer software	Other intangibles	Goodwill	Total
	£'000	£'000	£'000	£'000	£'000
Cost
At 1 October 2007	1,662	1,032	7,234	11,811	21,739
Additions	-	264	-	125	389
At 31 March 2008	1,662	1,296	7,234	11,936	22,128
Amortisation
At 1 October 2007	454	376	86	387	1,303
Charge for period	170	114	517	-	801
Deferred tax on amortisation	-	-	145	-	145
At 31 March 2008	624	490	748	387	2,249
Net book amount
At 31 March 2008	1,038	806	6,486	11,549	19,879
At 30 September 2007	1,208	656	7,148	11,424	20,436

The intangibles arising on acquisition is being amortised on a straight-line basis over 7 years which is the anticipated life of the asset. 

8. Cash generated from operations

	Six months to	Six months to	Year ended
	31 March 2008	31 March 2007	30 September 2007
	£'000	£'000	£'000
Operating profit	4,268	3,732	7,475
Adjustments for;-
Depreciation of tangible fixed assets	287	187	402
Amortisation of intangible assets	687	78	257
Employee share scheme charges	74	138	220
Profit on sale of fixed assets	-	-	(7)
Movements in working capital;-
(Increase) / decrease in stocks  and work in progress	(24)	2	9
Decrease /(increase) in trade debtors	751	433	(231)
Increase in other debtors and prepayments	(1,265)	(746)	(121)
Increase/ (decrease) in trade creditors	439	(2,490)	-
(Decrease) / increase in other tax  and social security creditors	(278)	268	455
Increase in other creditors and accruals	556	229	325
Cash generated from operations	5,495	1,831	8,784

9 Analysis of movement of net funds

	As at		As at
	1 October 2007	Cash flow	31 March 2008
	£'000	£'000	£'000
Net Cash:
Cash at bank and in hand	3,422	2,483	5,905
Debt
Debt due within one year	(33)	(1)	(34)
Debt due after one year	(1,546)	568	(978)
Total debt	(1,579)	567	(1,012)
	1,843	3,050	4,893

10. Reconciliation to underlying performance

	Six months to	Six months to	Year ended
	31 March 2008	31 March 2007	30 September 2007
	£'000	£'000	£'000
Operating profit	4,268	3,732	7,475
Operating exceptional item in respect of restructuring costs of acquired operations	46	-	82
Amortisation of intangible fixed assets	687	78	257
Underlying operating profit	5,001	3,810	7,814
Add back Depreciation	287	187	402
Underlying EBITDA *	5,288	3,997	8,216
Net interest received	45	154	358
Underlying profit before taxation	5,046	3,964	8,172

"Underlying" means operating exceptional costs, amortisation of intangible fixed assets (in respect of prior acquisitions), and restructuring costs of acquired operations have all been stripped out, giving in the Board's view a better understanding of the business performance.

* Earnings before interest, taxation, depreciation and amortisation.

11. Adoption of IFRS

Reconciliation of equity at 1 October 2006

		GAAP	Effects of transition to IFRS	IFRS
	Notes	£'000	£'000	£'000
ASSETS
Non-current assets
Intangible assets	a)	6,107	409	6,516
Tangible assets	b)	2,353	(409)	1,944
Deferred tax asset	c)	-	640	640
Assets held for re-sale		-	-	-
Property deposits	d)	-	63	63
		8,460	703	9,163
Current assets
Deferred tax asset	e)	137	(137)	-
Inventories		73	-	73
Trade and other receivables	d)	10,470	(63)	10,407
Cash and cash equivalents		8,488	-	8,488
		19,168	(200)	18,968
Total assets		27,628	503	28,131
EQUITY AND LIABILITIES
Equity
Called up share capital		57	-	57
Share premium		4,116	-	4,116
Merger reserve	f)	934	-	934
Retained earnings	g)	7,005	503	7,508
		12,112	503	12,615
Minority interest		-	-	-
		12,112	503	12,615
Current liabilities
Borrowings		37	-	37
Deferred consideration		-	-	-
Trade and other payables		14,464	-	14,464
		14,501	-	14,501
Non-current liabilities
Trade and other payables		-	-	-
Borrowings		1,015	-	1,015
Deferred tax liabilities		-	-	-
		1,015	-	1,015
Total liabilities		15,516	-	15,516
Total equity and liabilities		27,628	503	28,131

Reconciliation of equity at 1 April 2007

		GAAP	Effects of transition to IFRS	IFRS
	Notes	£'000	£'000	£'000
ASSETS
Non-current assets
Intangible assets	a)	5,829	775	6,604
Tangible assets	b)	2,512	(575)	1,937
Deferred tax asset	c)	-	282	282
Assets held for re-sale		-	-	-
Property deposits	d)	-	63	63
		8,341	545	8,886
Current assets
Deferred tax asset	e)	123	(123)	-
Inventories		71	-	71
Trade and other receivables	d)	10,798	(63)	10,735
Cash and cash equivalents		9,093	-	9,093
		20,085	(186)	19,899
Total assets		28,426	359	28,785
EQUITY AND LIABILITIES
Equity
Called up share capital		59	-	59
Share premium		4,559	-	4,559
Merger reserve	f)	901	33	934
Retained earnings	g)	9,234	326	9,560
		14,753	359	15,112
Minority interest		4	-	4
		14,757	359	15,116
Current liabilities
Borrowings		39	-	39
Deferred consideration		-	-	-
Trade and other payables		12,635	-	12,635
		12,674	-	12,674
Non-current liabilities
Trade and other payables		-	-	-
Borrowings		995	-	995
Deferred tax liabilities		-	-	-
		995	-	995
Total liabilities		13,669	-	13,669
Total equity and liabilities		28,426	359	28,785

Reconciliation of equity at 1 October 2007

		GAAP	Effects of transition to IFRS	IFRS
	Notes	£'000	£'000	£'000
ASSETS
Non-current assets
Intangible assets	a)	17,372	3,064	20,436
Tangible assets	b)	3,923	(656)	3,267
Deferred tax asset	c)	-	679	679
Assets held for re-sale		-	-	-
Property deposits	d)	-	63	63
		21,295	3,150	24,445
Current assets
Deferred tax asset	e)	548	(548)	-
Inventories		269	-	269
Trade and other receivables	d)	14,417	(63)	14,354
Cash and cash equivalents		3,422	-	3,422
		18,656	(611)	18,045
Total assets		39,951	2,539	42,490
EQUITY AND LIABILITIES
Equity
Called up share capital		60	-	60
Share premium		4,577	-	4,577
Merger reserve	f)	1,833	72	1,905
Retained earnings	g)	11,776	441	12,217
		18,246	513	18,759
Minority interest		7	-	7
		18,253	513	18,766
Current liabilities
Borrowings		33	-	33
Deferred consideration		-	-	-
Trade and other payables		19,672	-	19,672
		19,705	-	19,705
Non-current liabilities
Trade and other payables		-	-	-
Borrowings		1,546	-	1,546
Deferred consideration		447	-	447
Deferred tax liabilities		-	2,026	2,026
		1,993	2,026	4,019
Total liabilities		21,698	2,026	23,724
Total equity and liabilities		39,951	2,539	42,490

Explanations of transition impacts to IFRS at 1 October 2006, 1 April 2007, and 1 October 2007.

	1 October	1 April	1 October
	2006	2007	2007
	£'000	£'000	£'000
a). Intangibles
i). See note below.	-	200	468
ii). See note below.	-	-	(86)
iii). See note below.	-	-	2,026
iv). See note below.	409	575	656
	409	775	3,064

i). IFRS 3 - Business Combinations; IAS 38 - Intangible Assets;

IFRS 3 applies to accounting for business combinations for which the acquisition date is on or after 1 October 2006. The Group has elected not to apply IFRS 3 retrospectively to business combinations that took place prior to 1 October 2006. As a result in the opening balance sheet, positive goodwill arising from previous business combinations and other intangibles remain, (£6.1m) as stated under UK GAAP at 1 October 2006.

The transitional provisions of IFRS 3 have required the Group to carry forward the UK GAAP net book value of positive goodwill as deemed cost under IFRS. The adoption of IFRS 3 has resulted in the Group ceasing annual goodwill amortisation from 1 October 2006. As a result, the UK GAAP amortisation charge of £200,000 for positive goodwill has been removed from the Group's first half of 2007, and £468,000 from the full year for 2007.

ii). Amortisation of intangible assets.

iii). Deferred tax recognised on intangibles assets.

iv). Reclassification of computer software from tangible to intangible assets.

b). Tangible fixed assets	(409)	(575)	(656)
Computer software has been reclassified to intangible assets per note a). iv). above.

c). Non-current deferred tax asset	640	282	679
The deferred tax assets have been reclassified from current to non-current assets.

d). Property deposits	63	63	63
The property deposits have been reclassified from current to non-current assets.

e). Current deferred tax asset
i). Deferred tax reclassified per note b). above.	(640)	(282)	(679)
ii). See note below.	503	159	131
	(137)	(123)	(548)
ii). Deferred tax on anticipated additional gain, over and above IFRS2 costs  already booked for employee share options. Credit taken to reserves, rather  than through the current year tax charge.

f). Merger reserve	-	33	72
The Group has ceased annual amortisation of the merger reserve from  1 October 2006.

g). Retained earnings
Per note a). i). above.	-	200	468
Per note a). ii). above.	-	-	(86)
Per note e). ii). above.	503	159	131
Per note f). above.	-	(33)	(72)
	503	326	441

h). Deferred tax liability	-	-	2,026
Deferred tax recognised on intangible assets per note a). iii). above.

Reconciliation of profit for the six months ended 31 March 2007

		GAAP	Effects of transition to IFRS	IFRS
	Notes	£'000	£'000	£'000
Turnover:		34,979	-	34,979
Cost of sales		(22,631)	-	(22,631)
Gross profit		12,348	-	12,348
Operating costs	a).	(8,816)	200	(8,616)
Operating profit:		3,532	200	3,732
Total operating profit - analysed:
Operating profit before operating  exceptional items and amortisation  of intangible fixed assets		3,810	-	3,810
Operating exceptional item in respect of restructuring costs of acquired operations		-	-	-
Amortisation of intangible fixed assets		(278)	200	(78)
Total operating profit		3,532	200	3,732
Profit on part disposal of subsidiary  operations		120	-	120
Finance income		183	-	183
Finance costs		(29)	-	(29)
Profit on ordinary activities before taxation		3,806	200	4,006
Taxation on profit on ordinary activities		(892)	-	(892)
Profit on ordinary activities after taxation		2,914	200	3,114

Reconciliation of profit for the year ended 30 September 2007

		GAAP	Effects of transition to IFRS	IFRS
	Notes	£'000	£'000	£'000
Turnover:		72,083	-	72,083
Cost of sales		(46,853)	-	(46,853)
Gross profit		25,230	-	25,230
Operating costs	a).	(18,137)	382	(17,755)
Operating profit:		7,093	382	7,475
Total operating profit - analysed:
Operating profit before operating  exceptional items and amortisation  of intangible fixed assets		7,814	-	7,814
Operating exceptional item in respect of restructuring costs of acquired operations		(82)	-	(82)
Amortisation of intangible fixed assets		(639)	382	(257)
Total operating profit		7,093	382	7,475
Profit on part disposal of subsidiary  operations		120	-	120
Finance income		418	-	418
Finance costs		(60)	-	(60)
Profit on ordinary activities before taxation		7,571	382	7,953
Taxation on profit on ordinary activities		(1,763)	-	(1,763)
Profit on ordinary activities after taxation		5,808	382	6,190

a). Being the sum of Note 11 a). i). and ii). 

ENDIR KBLFXVQBLBBD

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