ADT.L Regulatory News (ADT)

AdEPT Telecom plc

("AdEPT" or the "Company")

Final results for the year ended 31 March 2014

AdEPT (AIM: ADT), a leading UK independent provider of award-winning telecommunications services for fixed line, mobile, data connectivity and VoIP, announces its results for the year ended 31 March 2014.

Financial Highlights

· Eleventh consecutive year of increased underlying EBITDA up 8.3% to £4.04m (2013: £3.73m)

· Underlying EBITDA margin % increased by 1.6% to 19.4% (2013: 17.8%)

· 12.8% increase to Profit Before Tax to £1.85m (2013: £1.64m)

· 35.2% increase to Profit After Tax to £1.33m (2013: £0.98m)

· 18.0% increase to Adjusted Basic Earnings Per Share of 14.99p (2013: 12.70p)

· 100% increase to dividends declared to 3.0p (Interim 1.50p, Final 1.50p) (2013: 1.50p)

· Cash generation with free cash flow, after interest, of £2.6m (2013: £3.0m)

· Net debt reduction of £0.3m year-on-year to £3.0m (2013: £3.3m)

· Total interest costs reduced by 30.4% to £0.26m (2013: £0.37m)

Operational Highlights

· 26.9% increase to data connectivity and broadband revenues year-on-year

· Acquisition of customer base from Bluebell Telecom Limited completed in August 2013

Commenting upon these results Chairman Roger Wilson said:

"AdEPT has delivered its eleventh consecutive year of increased EBITDA and continues to deliver consistent free cash flow generation. The Company has achieved a reduction to net borrowings despite undertaking a customer base acquisition during the year, with a further acquisition completed and fully integrated post year-end. The continued strong cash generation has funded a 100% increase to dividends declared during the year. The Board is confident that continued focus on underlying profitability and strong cash generation will support a progressive dividend policy. Organically the Company has strengthened its position through successfully leveraging its various frameworks to increase the scale of its public sector customer base."

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

AdEPT Telecom Plc

Roger Wilson, Chairman 07786 111 535

Ian Fishwick, Chief Executive 01892 550 225

John Swaite, Finance Director 01892 550 243

Northland Capital Partners Limited

Edward Hutton/Lauren Kettle 020 73821100

CHAIRMAN'S STATEMENT

Review of Operations

I am pleased to report an 11th consecutive increase to underlying EBITDA, up 8.3% to £4.04m. EBITDA margin has improved further from 17.8% to 19.4%. In August 2013 AdEPT completed its 18th acquisition, a customer base from Bluebell Telecom Limited which has been fully integrated into the customer management system in Tunbridge Wells, Kent.

AdEPT's continued strong cash flow generation resulted in £2.6m of free cash flow after interest. This free cash flow is after making corporation tax payments of £1.1m, which increased by £0.5m compared to the previous year following our transition to large company status for corporation tax purposes. During the 12 months ended 31 March 2014 the Company has made payment of both the 2013 corporation tax liability and advance instalments of three quarters of the current year's tax liability. £2.2m of free cash has been used to fund the deferred consideration of the customer base acquisition from Expanse (UK) Communications Limited in 2012 and the initial consideration for the customer base acquisition from Bluebell Telecom Limited. £0.3m of free cash was used to meet dividend payments to shareholders. The issue of new equity during the year to directors increasing their shareholdings following the exercise of share options resulted in a cash inflow of £0.3m.

In line with its progressive policy, AdEPT has doubled the dividend year-on-year, declaring a final dividend of 1.50p per Ordinary Share (2013: 0.75p), making total dividends declared during the year ending 31 March 2014 of 3.00p per Ordinary Share (2013: 1.50p). The board is confident that the continued strong cash generation will support a progressive dividend policy.

New products

AdEPT continues to provide voice and data services to its customers byoffering best of breed products from all major UK networks. Continued deployment of 21CN data connectivity products has led to data and broadband revenues increasing by 27% in the year ended 31 March 2014. As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 10Gb Optical Spectrum Services (OSA) and is currently underway with the launch of 40Gb and 100Gb Optical Spectrum Services (OSEA).

Growth strategy

The strategy of the Company remains that of increasing EBITDA and free cash generation by concentrating organic sales efforts on winning direct new business with larger customers, particularly in the public sector, and complementing this with value adding acquisitions. Rather than operate a telesales operation aimed at acquiring smaller business customers organically we instead use our free cash generation to acquire customer bases from other telesales operations in the industry.

AdEPT has been highly successful in gaining traction in the public sector space during the year with a number of organic contract wins with public sector clients, including several County Councils. AdEPT was awarded approved supplier status to the Crown Commercial Service under the Telephony Service Framework RM1035 during the year. This is in addition to AdEPT's existing framework agreements with Ja.net and ESPO Telecom Framework 7.

On 1 August 2013 the Company acquired a customer base from Bluebell Telecom Limited. The acquisition was funded from operating cash flow. After the balance sheet date, on 8 April 2014 the Company acquired the entire issued share capital of Bluecherry Telecom Limited.

The Board continues to identify and evaluate strategic acquisitions that are considered to meet the criteria of complementing existing business whilst adding value to our shareholders. The organic growth strategy continues to be winning larger customers and existing client retention. We also continue to target greater cross-sell penetration and development of new products.

Employees

The improved profitability this year was made possible by the continued hard work and focus of all employees at AdEPT. As a Company we are immensely proud of the track record we have created over the last 11 years and on behalf of the Board I would like to take this opportunity to thank all of our employees for their continued hard work.

Shareholder Benefits Scheme

The AdEPT shareholder benefits scheme has continued to attract new members during the year. The scheme, which is available to all shareholders owning a minimum of 1,000 shares, provides eligible shareholders with free residential line rental worth approximately £154 per annum for as long as they remain eligible shareholders.

Outlook

The improved EBITDA this year was underpinned by focus on underlying profitability through improving margins on customer contracts, operational efficiencies, tight credit control and strategic acquisition of complementary customer bases. The Board is confident that continued strong cash generation will support a progressive dividend policy.

The business focus for the coming year remains on continued development of organic sales through leveraging AdEPT's approved supplier status on the various telecom frameworks, maintaining profitability and cash flow generation, which will be used to reduce net borrowings and/or fund suitable earnings-enhancing acquisitions if identified. We will therefore continue to invest in our organic sales channels, work with our network partners to develop new products and complement this with further investment in retention activities to retain customers.

Roger Wilson

Non-executive Chairman

STRATEGIC REPORT

PRINCIPAL ACTIVITIES AND REVIEW OF BUSINESS

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

SUMMARY of three year financial performance:

REVENUE

During the year AdEPT has continued its diversification from a traditional fixed line service provider towards next generation products. Total revenue generated from data, mobile, inbound and other services represented 24.7% of total revenue in the year ended 31 March 2014 (2013: 20.2%).

Total revenue decreased by 0.8% to £20.9m (2013: £21.0m):

· Traditional fixed line revenues reduced to £15.7m (2013: £16.8m), with this reduction largely being driven by the impact of OFCOM regulation reducing call spend from landline to mobile networks. We have now reached the end of the regulatory price control for mobile termination costs and therefore a large proportion of the regulatory price changes are reflected in current end user pricing. In addition, call volume reductions, which is a reflection of the continuing uncertain economic environment, and continued substitution with email and mobile based telephony have applied further top line pressure to call revenues. The Company's reliance on call revenues has been reduced further with call revenue providing only 29.3% of total revenue in the year ended 31 March 2014 (2013: 34.8%).

· Data and broadband product revenues were up 26.9% to £3.3m (2013: £2.6m). AdEPT has continued to make progress in expanding the number of circuits and connections from new customer additions and through cross-selling into the existing customer base. As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 10Gb Optical Spectrum Services (OSA) and is currently underway with the launch of 40Gb and 100Gb Optical Spectrum Services (OSEA).

The Company continues to focus on products delivering fixed monthly revenue streams to reduce revenue volatility. The proportion of revenue, which is fixed monthly values, increased to 63.3% of total revenue for the year ended March 2014 (2013: 59.8%) following the continued focus on multi-product sales (calls, line rental, broadband and data products) and the enhancement of the data connectivity product portfolio.

AdEPT has been highly successful in gaining traction in the public sector space during the year through leveraging its approved status on various frameworks; some of this contract success is included in the 2014 revenue figures. AdEPT was awarded approved supplier status to the Crown Commercial Service under the Telephony Service Framework RM1035 during the year. This is in addition to existing framework agreements with Ja.net, under which AdEPT is one of only a small number of companies approved to sell data connectivity and networks to UK Universities and Colleges, and the ESPO Telecom Framework 7, under which AdEPT is the sole recommended supplier to public service bodies and registered charities for calls, lines, broadband, super-fast broadband (fibre) and SIP trunks.

The Company is continuing to focus its organic sales efforts on adding and retaining larger customers whilst complementing this with an acquisitive strategy for smaller business customers. AdEPT's largest 1,000 customers account for approximately 50% of total revenue, with the top 10 customers accounting for 13.8% of total revenue (March 2013: 15.3%).

GROSS MARGIN

The price of calls to mobiles continued to decrease during the year ended March 2014 as a result of the OFCOM regulatory impact of reduced mobile termination rates. However, gross margins have been maintained at an absolute and per cent. level through close monitoring of customer profitability and supply chain management of wholesale contracts.

As the product mix has moved further towards the relatively lower margin data and broadband revenue streams, this has provided some downward pressure on blended total gross margin although this has been offset by improvements to data and broadband gross margins during the year and higher relative margin inbound service charges acquired with the Bluebell customer base. Future gross margin pressure is anticipated as our product mix moves increasingly towards the relative lower margin line rental, data connectivity and broadband revenue streams.

EBITDA

Underlying EBITDA is defined as operating profit add back depreciation, amortisation and impairment charges and share based payment charges. In the prior year, the gain on the bargain purchase in relation to Expanse (UK) Communications Limited has been excluded from underlying EBITDA as it is purely an accounting adjustment and is not considered to be a recurring item.

EBITDA has increased for the eleventh consecutive year since AdEPT's inception in 2003 despite top line pressure. The Company has focussed on the underlying profitability of customers and revenue streams combined with tight overhead control, industry leading debt collection and wholesale supply chain negotiation.

FINANCE COSTS

Total interest costs have reduced by 30.4% to £0.26m (2013: £0.37m) arising from further deleveraging combined with treasury management of surplus cash balances and the termination of the relatively high cost historic interest rate swap arrangement.

Finance costs for the year ended 31 March 2014 include a credit of £0.06m (2013: credit of £0.075m) in relation to the movement in the fair value of the interest rate swap as required by IAS 39 'Financial Instruments'. This is not a reflection of a decrease in the real cost of borrowing as the interest rate swap provided a fixed rate of interest on borrowings. This historic interest rate swap arrangement ended during the current year and the Company has decided not to replace it for the time being.

PROFIT BEFORE TAX

This year the Company has recorded a £208,765 improvement to profit before tax with a reported £1,845,802 (2013: £1,637,037). The 2013 comparative profit before tax includes the gain on bargain purchase of £215,080 in respect of the acquisition of a customer base from Expanse Communications (UK) Limited, this is purely an accounting adjustment and therefore underlying profit before tax improvement is considered to be significantly better than the reported figures. The improvement to profit before tax arises from the EBITDA improvement combined with the reduction in finance costs.

RESULTS ANDEARNINGS PER SHARE

The profit for the year, after taxation, amounted to £1,330,256 (2013: £984,005).

Adjusted earnings per share, based on the profit for the period attributable to equity holders adding back amortisation and non-recurring costs (see Note 24), increased by 18.0% to 14.99p per share (2013: 12.70p).

DIVIDENDS AND DIVIDEND PER SHARE

On the back of strong cash flow generation AdEPT announced an interim dividend of 1.50p per share, which was paid to shareholders on 11 April 2014. The Board of AdEPT Telecom announced on 8 April 2014 that, subject to Shareholder approval at the Annual General Meeting later in the year, it is declaring a final dividend of 1.50p per Ordinary Share (2013: 0.75p). This dividend is expected to be paid on 10 October 2014 to shareholders on the register at 19 September 2014. Total dividends approved and declared during the year ending 31 March 2014 of 3.00p per Ordinary Share represent a 100% increase year-on-year (2013: 1.50p). The dividends approved and declared during the year absorbed £661,710 of shareholder funds (2013: £316,012). The Board constantly monitors shareholder value and is confident that the continued strong cash generation will support a progressive dividend policy.

CASH FLOW

The Company benefits from an excellent cash generating operating model. Low capital expenditure results in EBITDA turning into cash. Reported EBITDA turned into net cash from operating activities is 69.8% (2013: 83.9%), this has reduced during the year due to the transition to large company status for corporation tax purposes which has resulted in the company paying both the prior year corporation tax liability and three quarters of the current year's tax liability by advance instalments during the 12 months ended 31 March 2014. Excluding the cash impact of the double corporation tax the EBITDA turned to net cash from operating activities was 82.2%. The Company has continued to manage its credit risk in the current economic climate and the collections of trade receivables have been maintained during the year with customer collection periods of 28 days (2013: 26 days).

Cash outflows of £2.2m have been incurred in the year ended 31 March 2014 in relation to customer base acquisitions. The deferred consideration in respect of the customer base of Expanse (UK) Communications Limited was paid in April 2013 with no further amounts due. The initial consideration of £1.9m was paid in August 2013 in relation to the customer base acquired from Bluebell Telecom Limited.

Cash inflows of £0.3m were generated from the issue of new equity during the year. Two of the executive director team increased their shareholdings in the Company following the exercise of share options.

There was an increase to cash and cash equivalents during the year of £2.1m. An amount of £2.0m was drawn down on the Barclays revolving credit facility just prior to year end in order to make funds available for the acquisition of the share capital of Bluecherry Telecom Limited, which was completed on 8 April 2014. The Company will continue to apply its treasury management policies to minimise the cost of finance whilst retaining flexibility to meet its growth strategies.

CAPITAL EXPENDITURE AND BUSINESS COMBINATIONS

The Company has low capital requirements and therefore expenditure on fixed assets is low at 0.4% of revenue (2013: 0.5%).

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

On 1 August 2013 the Company acquired a customer base from Bluebell Telecom Limited, a supplier of fixed line calls, line rental and data connectivity products to small and medium-sized businesses. Total consideration is estimated at approximately £2.3m. Consideration of £1.9m was paid in cash on completion by the Company during the year ended 31 March 2014 with the payment of the balance of the estimated consideration being deferred until after August 2014. Acquisition related costs have been recognised as an expense in the statement of comprehensive income for the period ended 31 March 2014. The assets acquired from Bluebell Telecom Limited contributed revenue and profit of £1.3m and £0.4m respectively in the statement of comprehensive income for the year ended 31 March 2014.

A fair value of £2.3m in relation to the customer base for the acquired business has been recognised as intangible asset additions in the year ended 31 March 2014. No other assets or liabilities were acquired. Included in the fair value calculations above is an intangible asset, representing the estimate of future cash flows of the acquired customer base in the hands of the Company.

NET DEBT

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow, which is supported by more than £9m reduction to net borrowings since the peak of £12.3m in June 2008. As a result of the Company's focus on underlying profitability and cash conversion, free cash flow after bank interest of £2.6m was generated during the year ended March 2014; excluding the cash impact of the transition to corporation tax instalments this figure is £3.1m free cash flow.

£2.2m of free cash flow has been used to fund acquisitions of customer bases, £0.3m being applied to net debt reduction during the year, £0.3m dividends paid and £0.1m capital expenditure. Net cash inflows of £0.3m have arisen from the issue of new equity following the exercise of share options by executive directors. Net debt, which comprises cash balances and bank borrowings, has improved to £3.0m at the year-end (2013: £3.3m).

The Company's available banking facilities are described in Note 25 to the financial statements.

KEY PERFORMANCE INDICATORS (KPIs)

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

PRINCIPAL RISKS AND UNCERTAINTIES

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

Liquidity risk

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

Credit risk

The Company extends credit to customers of various durations depending on customer creditworthiness and industry custom and practice for the product or service. In the event that a customer proves unable to meet payments when they fall due, the Company will suffer adverse consequences. To manage this, the Company continually monitors credit terms to ensure that no single customer is granted credit inappropriate to its credit risk. Additionally, 67% of our customer receipts are by monthly direct debit. The risk is further reduced by the customer base being spread across all industry and service sectors. The top ten customers account for approximately 14% of revenues.

Competitor risk

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

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

Acquisition integration execution

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

RESILIENT BUSINESS MODEL

The Board believes that AdEPT operates a resilient business model and has a strong customer proposition which it is believed will present opportunities in the coming year. These features include:

· highly cash generative with strong underlying profitability;

· supplies are nearly all business critical - an essential part of the customer's daily operational requirements;

· highly automated systems provides sector leading labour costs : turnover productivity;

· low capital investment requirements relative to turnover;

· continued focus on broadening the product range, particularly with regard to data connectivity;

· customers are spread across all industries; the top ten customers account for approximately 14% of revenues;

· trade suppliers and partners are all top-tier suppliers, providing confidence in the continuity and reliability of service to customers;

· 67% of the Company's customers pay by monthly direct debit, reducing the Company's credit risk;

· highly fragmented telecom reseller market provides acquisition opportunities for further consolidation; and

· the Company has agreed banking facilities through to October 2015 and 2016.

John Swaite

Finance Director

STATEMENT OF COMPRHENSIVE INCOME

All amounts relate to continuing operations.

STATEMENT OF FINANCIAL POSITION

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

1. Nature of operations and general information

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

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

2. Accounting policies

Basis of preparation of financial statements

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

Accounting standards require the directors to consider the appropriateness of the going concern basis when preparing the financial statements. The directors confirm that they consider that the going concern basis remains appropriate. The directors have taken notice of the Financial Reporting Council guidance "Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009" which requires the reasons for this decision to be explained. The Company's available banking facilities are described in Note 25 to the financial statements. The Company has adequate financing arrangements which can be utilised by the Company as required. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

· IAS 16 and IAS 38 - Amendments: Clarification of Acceptable Methods of Depreciation and Amortisation

· IAS 19 - Amendment: Defined Benefit Plans: Employee Contributions

· IAS 36 - Amendments: Recoverable Amount Disclosures for non-Financial Assets

· IAS 39 - Amendments: Novation of Derivatives and Continuation of Hedge Accounting

· IFRS 9 - Financial Instruments

· IFRS 11 - Amendments to Accounting for Acquisitions of Interests in Joint Operations

· IFRS 10, IFRS 12 and IAS 27 - Amendments: Investment Entities

· IFRS 14 - Regulatory Deferral Accounts

· IFRIC 21 - Levies

In addition the following standards are available for adoption but do not have to be adopted until the year starting on or after 1 January 2014. The company and group have not yet adopted these standards:

· IAS 27 - Separate Financial Statements

· IAS 28 - Investments in Associates and Joint Ventures

· IFRS 10 - Consolidated Financial Statements

· IFRS 11 - Joint Arrangements

· IFRS 12 - Disclosure of Interests in Other Entities

The following standard has been issued by the IASB but not yet EU approved:

· IFRS 15 - Revenue from Contracts with Customers (1 January 2017)

Adoption of these Standards and Interpretations is not expected to have a material impact on the results of the Company or Group Application of these standards may result in some changes in presentation of information within the Company's financial statements.

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

Segmental reporting

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

Revenue

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

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

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

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

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

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

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

In accordance with IFRS 3 "Business Combinations", an intangible asset acquired in a business combination is deemed to have a cost to the Company of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Company.

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

The intangible asset 'customer base' is amortised to the income statement over its estimated useful economic life on a straight line basis. The average useful economic life of all the customer bases has been estimated at 14 years (2013: 15 years) with a range of seven to 16 years.

Other intangible assets

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

Customer management system - Three years straight line

Other licences - Contract licence period

Computer software - Three years straight line

Property, plant and equipment and depreciation

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

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

Fixtures and fittings - Three years straight line

Office equipment - Three years straight line

Motor vehicles - Four years straight line

Leasing and hire purchase commitments

Assets held under finance leases and hire purchase contracts, which are those where substantially all the risks and rewards of ownership of the asset have passed to the Company, are capitalised in the balance sheet and depreciated over their useful economic lives. The corresponding lease or hire purchase obligation is treated in the balance sheet as a liability.

The interest element of the rental obligations is charged to the income statement over the period of the lease and represents a constant proportion of the balance of capital repayments outstanding.

Rentals under operating leases, where substantially all of the benefits and risks of ownership remain with the lessor, are charged to the profit and loss on a straight line basis, even if payments are not made on such a basis.

Inventories

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

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

Pensions

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

Capital instruments

The costs incurred directly in connection with the issue of debt instruments are charged to the income statement on a straight line basis over the life of the debt instrument.

Income tax

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

Deferred income tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred income tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.

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

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

Share-based payments

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

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

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

Non-recurring items

Material and non-recurring items of income and expense are separated out in the income statement. Examples of items which may give rise to disclosure as non-recurring items include costs of restructuring and reorganisation of existing businesses, integration of newly acquired businesses and asset impairments. Non-recurring costs include the current year expense charged to the income statement in relation to restructuring which has taken place since the year end to derive the underlying profitability of the Group and Company.

Cash and cash equivalents

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

Financial instruments

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

The Company makes use of derivative financial instruments to hedge its exposure to interest rate risks arising from financing activities. In accordance with its treasury policy, the Company does not hold or issue derivative financial instruments for trading purposes.

Derivative financial instruments are recognised initially at fair value, i.e. cost. Subsequent to initial recognition derivative financial instruments are measured at fair value. The gain or loss on re-measurement to fair value is recognised immediately in the income statement as a component of financing income or cost.

The fair value of the derivative financial instrument is the estimated amount that the Company would receive or pay to terminate the instrument at the balance sheet date, taking into account current interest rates and the current creditworthiness of the instrument counterparties.

Capital

The capital structure of the Company consists of debt, which includes the borrowings disclosed in Notes 18 and 25, cash and cash equivalents, and equity attributable to equity holders, comprising issued capital, reserves and retained earnings.

Borrowings and borrowing costs

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

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

3. Critical accounting estimates and judgements

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

Key sources of estimation and uncertainty are:

· measuring the fair value of customer bases on acquisition;

· subsequent impairment of customer bases; and

· receivables.

Impairment of intangible assets

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

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

· the churn rate (turnover of customers);

· discount rate; and

· gross margins.

Churn rates ranging between 5.2% and 20.7% are based upon actual historical churn rates of the revenue stream for each customer base.

The discount rate of 6.9% used to discount the cash flows is based upon the Company's weighted average cost of Capital (WACC), which is the recommended discount rate suggested by International Financial Reporting Standards and is a calculated figure.

Gross margins of 39.9% is based upon actual margins achieved in previous years. The actual outcomes have been materially equivalent.

The calculations are sensitive to any movement in the discount rate, margin or churn rate and would therefore result in an impairment charge to the income statement. A 1% change to the discount rate, gross margin and churn rate would result in additional impairment charges of £2,200, £1,400 and £4,200 respectively.

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

Receivables

Debts are recognised to the extent that they are judged recoverable. Management reviews are performed to estimate the level of provision required for irrecoverable debt. Provisions are made specifically against invoices where recoverability is uncertain. Further information on the receivables allowance account is given in Note 16.

4. Segmental information

IFRS 8 "Operating Segments" requires identification on the basis of internal reporting about components of the Company that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance.

The chief operating decision maker has been identified as the Board. The Board reviews the Company's internal reporting in order to assess performance and allocate resources. The operating segments are fixed line services and data, mobile and other services which are reported in a manner consistent with the internal reporting to the Board. The Board assesses the performance of the operating segments based on revenue, gross profit and EBITDA.

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

Transactions with the largest customer of the Company are less than 10% of total turnover and do not require disclosure for either 2013 or 2014.

5. Operating profit

The operating profit is stated after charging:

6. Auditor remuneration

7. Finance costs

Included within interest is a credit of £62,184 (2013: £75,398) which relates to the movement in the fair value of the interest rate swap liability as calculated in accordance with IAS 39.

8. Employee costs

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

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

Key personnel

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

9. Directors' emoluments

During the year retirement benefits were accruing to one director (2013: one) in respect of money purchase pension schemes. The value of the Company's contributions paid to a money purchase pension scheme in respect of the highest paid director amounted to £18,463 (2013: £19,721).

The share option expense recognised during the year in respect of the directors was £6,702 (2013: £4,996).

Directors' share options

10. Income tax expense

Factors affecting tax charge for year

The relationship between expected tax expense based on the effective tax rate of AdEPT at 23% (2013: 24%) and the tax expense actually recognised in the income statement can be reconciled as follows:

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

11. Dividends

On 26 September 2013 the directors approved an interim dividend of 1.50p per ordinary share (2013: 0.75p), which was paid to shareholders on 11 April 2014. On 27 March 2014 the Directors declared a final dividend, subject to shareholder approval at the 2014 annual general meeting, of 1.50p per ordinary share (2013: 0.75p). Total dividend approved and declared during the year absorbed £661,710 of shareholders' funds (2013: £316,012).

12. Intangible fixed assets

Intangible assets are reviewed annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The net present value of cash flows for each cash-generating unit is reviewed against the carrying value at the balance sheet date. At the final reporting date of 31 March 2014 the net present value of future cash flows of certain cash-generating units indicated that they were below the carrying value and the directors considered it appropriate to record an impairment charge of £2,282 (2013: £154,575) and adjust the economic lives of the respective cash-generating units appropriately.

Included within intangible asset additions is £368,061 (2013 £255,633) being the estimated amount due in respect of customer bases acquired in the current and prior year. This amount is a contingent liability and the actual amount payable is dependent upon the performance of the underlying customer contracts acquired.

The Company has no internally generated intangible assets.

13. Property, plant and equipment

14. Deferred taxation

The deferred tax asset is made up as follows:

15. Inventories

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

16. Trade and other receivables

As at 31 March 2014, trade receivables of £113,080 (2013: £109,113) were impaired and fully provided for. The ageing of the trade receivables which are past due and not impaired are as follows:

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

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

17. Trade and other payables

Included within accruals is £368,061 (2013 £255,633) being the estimated amount due in respect of customer bases acquired in the current and prior year. This amount is a contingent liability and the actual amount payable is dependent upon the performance of the underlying customer contracts acquired.

18. Long-term borrowings

The bank loan is secured by a debenture incorporating a fixed and floating charge over the undertaking and all property and assets present and future including goodwill, book debts, uncalled capital, buildings, fixtures, fixed plant and machinery. Details of the interest rates applicable to the loans are included in Note 25.

Included within bank loans are arrangement fees amounting to £92,752 (2013: £72,824) which are being released over the term of the loan in accordance with IAS 39.

19. Share capital

Share options

At 31 March 2014, the following options and warrants over the shares of AdEPT were in issue:

The weighted average fair values have been determined using the Black-Scholes-Merton Pricing Model with the following assumptions and inputs:

The expected average volatility was determined by reviewing the last 100 historical fluctuations in the share price prior to the grant date of each share instrument. An expected take up of 100% has been applied to each share instrument. Expected dividend yield is estimated at 2.0%; this is based upon the past dividend yield of AdEPT Telecom plc and in accordance with the guidance in IFRS 2.

During the year ended 31 March 2009 a warrant was issued to Barclays Bank plc over 5% of the diluted share capital of the Company. As at 31 March 2014 this entitled the holder to 1,194,764 shares. The weighted average fair value of this equity instrument of £60,779 has been determined using the Black-Scholes-Merton Pricing Model, applying the same assumptions as those applied to the other equity instruments issued during the period due to Barclays Bank plc being unable to provide a sufficiently reliable estimate of the value of services provided in relation to these warrants.

The mid-market price of the ordinary shares on 31 March 2014 was 139p and the range during the year was 86p.

20. Pension commitments

At 31 March 2014 there were no pension commitments (2013: £Nil).

21. Operating lease commitments

At 31 March 2014 the Company had lease commitments as follows:

Land and buildings

The Company leases its offices under non-cancellable operating lease agreements. There is no material contingent rent payable. The lease agreements do not offer security of tenure. The lease terms are for five years.

Other

The Company leases various office equipment and motor vehicles under non-cancellable operating lease agreements. The lease terms are three years.

The lease expenditure charged to the income statement during the year is disclosed in Note 5.

22. Related party transactions

During the year CKR Holdings Limited and Rykesh Limited, companies controlled by Chris Fishwick, a director, provided consultancy services to the Company in the normal course of business with a total value of £85,000 (2013: £85,000). There was no balance owed to CKR Holdings Limited or Rykesh Limited at the end of the year (2013: £Nil).

Just before the year end Amanda Woodruffe, a director, advanced to the Company an amount of £10,000 in respect of the exercise of share options shortly after the year end. The advance payment is included within other creditors.

At the year end dividends payable were owed to the following directors:

23. Capital commitments

At 31 March 2014 there were capital commitments of £Nil (2013: £Nil).

24. Earnings per share

Earnings per share is calculated on the basis of a profit of £1,330,256 (2013: £984,005) divided by the weighted average number of shares in issue for the year of 21,551,563 (2013: 21,067,443). The diluted earnings per share is calculated on the assumption that the weighted average unapproved and EMI share options outstanding during the period are exercised. This would give rise to a total weighted average number of ordinary shares in issue for the period of 23,932,231 (2013: 24,338,796).

An adjusted earnings per share is calculated by adding back amortisation of intangible assets and non-recurring costs to retained earnings, giving £3,230,306 (2013: £2,676,056). This is divided by the same weighted average number of shares as above.

24. Earnings per share continued

Earnings per share is calculated by dividing the retained earnings attributable to the equity holders by the weighted average number of ordinary shares in issue.

Adjusted earnings per share is calculated by dividing the retained earnings attributable to the equity holders (after adding back amortisation and non-recurring costs) by the weighted average number of ordinary shares in issue.

Earnings per share has been restated for the year ended March 2013 as it was calculated based on retained earnings rather than profit for the period attributable to equity holders as required under IAS33 Earnings Per Share. The impact is an increase in the basic earnings per share for the year ended March 2013 from 3.17p to 4.67p (adjusted basic earnings per share increase from 11.20p to 12.70p).

25. Financial instruments

Set out below are the Company's financial instruments. The directors consider there to be no difference between the carrying value and fair value of the Company's financial instruments.

The Facility A term loan bears interest at 2.25-3.5% over LIBOR, dependent upon the EBITA: Net debt ratchet, and is repayable by quarterly instalments of £312,500, with the final repayment due on 30 September 2015. At the year end the amount outstanding in respect of this facility was £1.832m.

The Facility B loan allows a maximum of £5m to be drawn and bears interest at 2.75% over LIBOR and is repayable in full on the final repayment date of 13 October 2016. At the year end the amount outstanding in respect of Facility B was £5m and is included within long term borrowings.

The financial assets of the Company are surplus funds, which are offset against borrowings under the facility, and there is no separate interest rate exposure.

Barclays Bank plc has a cross guarantee and debenture incorporating a fixed and floating charge over the undertaking and all property and assets present and future including goodwill, book debts, uncalled capital, buildings, fixtures, fixed plant and machinery.

The bank also holds a charge over the life assurance policies of Ian Fishwick and Amanda Woodruffe, directors of the Company, for £1,500,000 and £250,000 respectively.

Obligations under finance leases

As at 31 March 2014 the Company had no finance lease obligations.

Sensitivity analysis

At 31 March 2014 it was estimated that a movement of 1% in interest rates would impact the Company's profit before tax by approximately £53,000.

Interest rate risk

The Company's policy is to manage its interest cost using a mix of fixed and variable rate debts. The Company's current interest rate policy is to keep no minimum percentage of its borrowings at fixed rates of interest. This policy is subject to ongoing review in line with the level of borrowings and potential interest risk exposure. At 31 March 2014, after taking into account the effect of interest rate management, none of the Company's borrowings are at a fixed rate of interest (2013: 93%).

Credit risk

Credit risk associated with cash balances and derivative financial instruments is managed by transacting with financial institutions with high quality credit ratings. Accordingly the Company's associated credit risk is deemed to be limited.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at 31 March 2014 was £5,695,239 (2013: £3,406,013).

Loans and receivables

Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties and this policy has been implemented by requiring staff to carry out appropriate credit checks on customers before sales commence.

Trade receivables consist of a large number of customers, spread across diverse industries across the United Kingdom. Ongoing credit evaluation is performed on the financial condition of accounts receivable. The Company does not have any significant credit risk exposure to any single counterparty or any Company of counterparties having similar characteristics. The Company defines counterparties as having similar characteristics if they are connected parties.

Liquidity risk

The Company has an appropriate liquidity risk management framework for the management of the Company's short, medium and long-term funding and liquidity risk management requirements. The Company manages liquidity risk by maintaining adequate banking facilities and reserve borrowing facilities through cash flow forecasting, acquisition planning and monitoring working capital and capital expenditure requirements on an ongoing basis.

The following table analyses the Company's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet dated to the contractual maturity date. The amounts disclosed in the table are the contracted undiscounted cash flows. Discounting is not required as this has no material effect on the financial statements.

Amortised cost

Currency risk

The Company's operations are handled entirely in sterling.

Capital risk management

The Company is subject to the risk that its capital structure will not be sufficient to support the growth of the business. The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. There were no changes to the Company's approach to capital management during the year.

As part of the banking arrangements, the Company is required to comply with certain covenants including net debt to adjusted EBITA, interest cover and cash flow cover.

In order to maintain or adjust the capital structure, the Company may return capital to shareholders, issue new shares or sell assets to reduce debt.

26. Business combinations

On 1 August 2013 the Company acquired certain trading assets from Bluebell Telecom Limited for a total consideration estimated at £2.29m.

Bluebell Telecom Limited, based in Newcastle, was a supplier of fixed line calls, line rental and data connectivity products to small and medium-sized businesses. The acquisition forms part of the Company's strategy as the acquired customer base complements that of AdEPT and provides cross-selling opportunities.

Consideration of £1.92m was paid in cash by the Company during the year ended 31 March 2014 with the payment of the balance of consideration being deferred until after August 2014. Total consideration is estimated at £2.29m.

A fair value of £2,288,440 in relation to the customer contracts for the acquired business has been recognised as intangible asset additions in the year ended 31 March 2014. No other assets or liabilities were acquired.

The customer base acquired from Bluebell Telecom Limited contributed revenue and profit of £1.3m and £0.4m respectively in the statement of comprehensive income for the year ended 31 March 2014. Acquisition related costs of £25,036 have been recognised as an expense in the statement of comprehensive income for the year ended 31 March 2014. Contribution of the acquisition to the results for an entire year would be revenue and profit of approximately £1.9m and £0.6m respectively.

27. Events after the balance sheet date

On 8 April 2014 the Company acquired the entire issued share capital of Bluecherry Telecom Limited for an initial consideration of £1.8m plus the value of the net assets at completion (estimated to amount to £0.25m and being represented by cash), payable in cash. Further consideration of between £0.2m and £0.75m will be payable, also in cash, dependent upon performance of the contracts post-acquisition. 

Bluecherry Telecom Limited, based in Milton Keynes, was a supplier of fixed line calls, line rental and data connectivity products to small and medium-sized businesses. The acquisition forms part of the Company's strategy as the acquired customer base complements that of AdEPT and provides cross-selling opportunities.

Management of the customer contracts was transferred to AdEPT's office in Tunbridge Wells, Kent during April 2014. Acquisition related costs of £21,228 will be recognised as an expense in the statement of comprehensive income for the year ended 31 March 2015. Based on unaudited management accounting information, annualised revenue and profit of Bluecherry is approximately £1.2 million and £0.45 million respectively.

NOTE TO THE PRELIMINARY RESULTS ANNOUNCEMENT OF ADEPT TELECOM PLC FOR THE YEAR ENDED 31 MARCH 2014

The financial information set out above does not constitute the Group's financial statements for the years ended 31 March 2014 or 2013, but is derived from those financial statements. Statutory financial statements for 2013 have been delivered to the Registrar of Companies and those for 2014 will be delivered following the Group's annual general meeting. The auditors have reported on the 2013 and 2014 financial statements which carried an unqualified audit report, did not include a reference to any matters to which the auditor drew attention by way of emphasis and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not in itself contain sufficient information to comply with IFRS. The accounting policies used in preparation of this preliminary announcement are consistent with those in the full financial statements that have yet to be published. The preliminary results for the year ended 31 March 2014 were approved by the Board of Directors on 7 July 2014.

AVAILABILITY OF FINANCIAL STATEMENTS

The full financial statements for the year to 31 March 2014 will be posted to shareholders on 13 August 2014, a soft copy of which will be available to download from the Company's website www.adept-telecom.co.uk.