28 Sep 2009 11:04
28 September 2009
REDSTONE PLC
("Redstone" or "the Group")
Preliminary Results for the 12 months ended 31 March 2009
Redstone plc (AIM:RED.L) Redstone plc, the integrated ICT and Communications Solutions provider, today announces its financial results for the 12 months ended 31 March 2009.
FINANCIAL SUMMARY
Revenues steady at £197.8 million (2008: £200.7 million)
Gross profit margin 34.6% (2008: 38.9%)
Adjusted EBITDA* £5.0 million (2008: £14.1 million)
Operating loss of £49.7 million including a £43.8 million impairment of intangibles charge (2008: operating profit of £3.2 million)
Diluted loss per share of 37.73p (2008: profit 2.21p)
Diluted adjusted EBITDA* per share of 3.44p (2008: 9.62p)
Year end net debt of £24.3m (2008: £20.5m)
*before net finance costs, tax, depreciation, amortisation, exceptional items and share based payment charges.
OPERATIONAL SUMMARY
Awarded the Birmingham BSF contract with projected revenue of approximately £150 million over next 10-15 years.
Secured £6 million of additional debt funding through the issue of a convertible loan note to SVG Investment Managers Limited and Gartmore Investment Limited. (right to conversion is subject to shareholder approval).
Revised Facility signed with Barclays Bank until 2011.
Sale of Redstone Telecom/Mobile post year end for £17 million.
Stephen Yapp appointed to Board of Directors.
SUMMARY OF POST BALANCE SHEET EVENTS AND REVISED GROUP STRATEGY
The Group has been successfully refinanced so that it will be able to continue to trade and build upon its strengths. During the last four months, the business has been refocused as an ICT business with the sale of the Telecoms division to Daisy Group plc and the awarding of the Birmingham BSF contract. This refocusing of the Group, coupled with the refinancing will, in the opinion of the Board, enable the Group to move forward and become a major player in the ICT sector within the UK and Ireland. The Board would like to thank Redstone's employees for their continued hard work through what has been a difficult period for the Group.
ENQUIRIES:
| Redstone plc | Tel. +44 (0)845 200 2200 |
| Tim Sherwood, Deputy Chairman | |
| Tim Perks, Chief Financial Officer | |
| FinnCap | |
| Marc Young | Tel. +44 (0)20 7600 1658 |
| ICIS Limited | Tel. +44 (0)20 7651 8688 |
| Tom Moriarty, Bob Huxford or Fiona Conroy |
Chairman's Statement
Following the close of the financial year covered in this report, there have been a number of significant changes to the Redstone business. We have completed the successful sale of the fixed and mobile telecom divisions, refocused our strategy, raised new funds to support future growth, further reduced the Group's cost base and reorganised the Board. Our industry is continuing to cope with difficult market conditions and, as one of the major players in the industry, Redstone was, and continues to be, affected by the challenges created by these conditions. The business is likely to experience some market turbulence during the remainder of this year but these changes described in more detail below put us on a firmer footing to deal with this turbulence.
Such conditions demand radical and rapid measures to be taken to ensure the future security and success of the business. The Board has been quick to react and far reaching changes have been made at all levels of the business. In addition to Martin Balaam, CEO, leaving the business on 28th April 2009 by mutual consent the Group has:
Sold the Fixed and Mobile Telecoms divisions for approximately £17 million; from this, some £15 million has been paid to Barclays Bank to reduce the group bank debt to £15 million. The sale process completed in August this year and we are due to finalise the completion accounts by November. From the proceeds, £0.5 million pounds is held in Barclays accounts to cover any warranty claims and adjustments from the completion process; if none arise, then these funds will be used to further reduce the debt.
Following the sale of these two divisions, the Board has refocused the Group around its core ICT strategy based on the Comunica and Converged services division, with the Managed Services Division providing security and connectivity services and Redstone Technology developing its close relationship with the Irish Government and delivering high end storage networks. This refocused strategy is starting to be reflected in the awarding of the largest contract in the Group's history: the ICT element of the Birmingham Building Schools for the Future project, the total contract value of which is expected to generate turnover of approximately £150 million to Redstone over the next 15 years.
In order to take this strategy forward, and to provide sufficient working capital, the Group has the ability to issue up to £6 million of loan notes and has revised its Bank financing. The loan note was signed on 16th September 2009 and carries significant redemption premiums. It is being issued in two tranches with a total of £6 million being issued between SVG Investment Managers Limited and Gartmore Investment Limited of which, £3 million was drawn down on signing and the other £3 million will be provided by these two companies at Redstone's request. Subject to shareholder approval these loan notes are convertible into ordinary shares in Redstone plc and a circular detailing all the associated terms will be sent to shareholders in due course.
In addition to the loan notes, our arrangements with Barclays Bank have been restructured so that we now have an £18 million pound facility split into a £10 million term loan and a £8 million revolving credit facility. Both these facilities are repayable on 30th September 2011.
The Group has continued to reduce its costs base through ongoing actions such as decentralisation of IT and other central functions, salary reductions, and a reduction of the central overheads.
Following on from the re-financing, we have also restructured the Board. Stephen Yapp has joined as a non-executive director and will replace me once the Annual Report and Accounts are published: Tim Sherwood has become non-executive deputy Chairman and remains Chairman of the Audit Committee. David Payne remains as a non-executive Director and Chairman of the Remuneration Committee and Tim Perks remains as Chief Financial Officer.
These have clearly been difficult times, but I believe the Group is now much better attuned to the reality of the economic environment it faces. Morale is improving and I am pleased to report that throughout the organisation our people are seizing the challenges facing them. We continue to win significant ICT engagements and currently have a strong pipeline of prospects. Inevitably there will be some delay to project implementation as there will be to payment cycles.
As I mentioned above, I will be leaving the Company as these reports and accounts are finalised and I would like to take this opportunity to thank all the staff in all the Group Divisions for all their hard work and dedication to the success of the Group for the three years when I was non-executive Chairman and the five months I was interim executive Chairman. I wish them and you as shareholders, every success for the future.
Alan Coppin
Interim Executive Chairman
28 September 2009
Operational Review
Despite difficult trading conditions Redstone has continued to make progress across its continuing divisions.
The recognised need to reduce the cost base during the second half of 2008 led to restructuring measures being implemented that will result in future cost savings and included a substantial decrease in head count across the Group. Redstone would like to thank these employees for their contribution to the Group. All of Redstone's staff are considered an asset and are valued for their hard work and loyalty. However, cost cuts were essential to appropriately adjust the business in line with the current macro-economic conditions.
In addition, post the period end, Redstone disposed of its Telecom and Mobile divisions for a sum of £17.0 million (before costs) in cash, the proceeds of which have been used to significantly reduce the Group's bank debt.
The Group has been successfully refinanced so that Redstone will be able to continue to trade and build upon the business strengths, focussing on the ICT industry. The details are included in the Group financial review. The Board is confident it has the necessary financial resources to weather the current economic storm and emerge from the recession in a stronger market position.
Business Developments
Key developments during the period have included:
Redstone Converged Solutions
Redstone Converged Solutions is a provider of converged IP solutions, with expertise in contact centres, voice and video, IP networks, intelligent building (OneNET) physical security and managed service and maintenance contracts. The division has particular expertise in providing solutions to businesses and organisations in the health, education, local government, retail, finance, energy, media and transport sectors.
Highlights for the division during the year include the selection as preferred bidder for the Birmingham Building Schools for the Future (BSF) programme. As part of a consortium, led by Catalyst Lend Lease & Bovis Lend Lease, Redstone was selected to deploy the complete converged IT and communications infrastructure for the programme.
The scheme involves the redevelopment of 89 secondary and special needs schools across the city, providing for the educational needs of over 77,000 students. Redstone will supply each school with a fully integrated IP network and communications and e-learning environment. The initial waves of 43 schools and datacentre build has a total expected turnover of approximately £120 million over 15 years, with the potential of a wave of 46 schools.
Other highlights for the division have included the provision of the ICT element of the Westfield shopping centre in London (Europe's largest inner-city retail centre), securing preferred bidder status for the Titanic Quarter development in Belfast and the continual development of its recurring revenue business through managed service and maintenance contracts.
Birmingham BSF
During the year Redstone was selected as preferred bidder to deploy the complete converged IT and communications infrastructure for the Building Schools for the Future ("BSF") programme in Birmingham. Subsequently, post the period end, on 24 August 2009, it was announced that Redstone had achieved financial close on the first phase of the programme.
Redstone, in partnership with the City Council, will be supplying a complete IT and Communications solution that will give each school a fully integrated IP network, communications and e-learning environment. The total contract value to Redstone is expected to have turnover of approximately £150 million over the next 10 - 15 years.
Redstone Managed Solutions
Redstone Managed Solutions delivers a comprehensive portfolio of network management and internet services for businesses and public sector organisations. Solutions and services include security software, server and desktop deployment, application development, hosting and co-location, network and system management, internet service provision and consultancy.
The Managed Solutions division has enjoyed a number of contract wins during the year. Redstone's IP Clear contract with BT is generating solid revenue growth for the Group and is being supported by a number of strategic initiatives. Other noteworthy customers include HSBC, Siemens, e-on and Lloyds TSB.
The division has also undergone a number of operational developments post the year end following the appointment of Robert Cavan as Managing Director in April. Since this time a number of new product offerings have been introduced and the finance and sales teams have been restructured. Several new marketing initiatives have also been put in place and these have already resulted in a significant enhancement to the number of cross-sales being achieved by the division.
Redstone Telecom and Redstone Mobile
Redstone Telecom and Redstone Mobile were negatively affected in terms of revenue and EBITDA during the course of the year by the economic downturn. In addition, turnover was specifically impacted by a new revenue share proposition introduced by O2 meaning that upfront payments from O2 would no longer contribute to Redstone's revenue. The Company initially reacted to these developments by implementing a number of cost-saving initiatives across the divisions. Post the period end, on 14 August 2009, Redstone disposed of the Redstone Telecom and Redstone Mobile Solutions to Daisy Telecoms Limited, a wholly owned subsidiary of Daisy Group plc on a debt free and cash free basis, for £17.0 million (before costs) in cash.
The transaction is also subject to any working capital adjustment capped at £500,000 (upwards or downwards) and there is a retention fund of £500,000 which will be released six months from completion. The retention fund relates to any claim for compensation or indemnity arising from the agreement including adjustments in relation to the completion accounts. The transaction completed on 28 August 2009.
The sale proceeds have been used to reduce the Group's bank debt. Bank debt after completion of the Transaction was approximately £14 million and the Group's net debt approximately £17 million (assuming full release of the retention fund). The Transaction allows Redstone to focus its attentions more clearly on the remaining areas of its business. This transaction is referred to in greater detail above in the 'Business Developments' section.
Redstone Technology
Redstone Technology is a successful provider of leading-edge enterprise storage solutions, business critical servers, engineering support services and professional services and consultancy in Ireland. It has enjoyed another successful year of operation, Ireland is a relatively small market and in order to grow the division the UK market will need to be accessed. The most likely route for this will be working with our major partners to develop UK opportunities.
Strategic Partnerships
Redstone has utilised its strong relationships with partners to secure a number of significant contract wins within the ICT arena during the period. These partnerships include Catalyst Lend Lease and Bovis Lend Lease, with whom Redstone has bid for the BSF contracts; Hammerson plc, enabling Redstone to bid for OneNET intelligent buildings network infrastructure contracts; and Westfield for the shopping centre contract. The Group is confident that these partnerships will continue to be successful, and is actively seeking new partnerships to increase the already expanding customer reach of Redstone.
Board Changes during the year
As detailed in the Chairman's Report, there have been several changes to the Board in the year. On 28 April 2009, Martin Balaam stepped down from his role as Chief Executive Officer. Alan Coppin, who had served as Redstone's Chairman and Non-Executive Director since 28 June 2006, became interim Executive Chairman of Redstone. Following the year end, on the 17 September 2009, Stephen Yapp joined the Board as a non-executive director, replacing Mr. Coppin who will retire from the Board upon publication of the Group's Annual Report and Accounts. Tim Sherwood has become non-executive deputy Chairman and remains Chairman of the Audit Committee. David Payne remains as a non-executive Director and Chairman of the Remuneration Committee and Tim Perks remains as Chief Financial Officer.
Outlook
The construction industry continues to suffer and banks remain reticent to provide funding to the industry. Therefore despite our previous successes in this arena, Redstone is focusing its attentions on its other markets for the foreseeable future, although we remain in a position to capitalise on any short term upturns.
Following our robust action plan, the Group is now fitter; strategically more focussed and, therefore, well placed to cope with the vestiges of the recession, to capitalise on any upturn in the economy and to plan for growth.
This will involve increasing our presence in the Building Schools for the Future projects and our success in this field has already been demonstrated, particularly in winning preferred bidder status for the Birmingham contract during the period. We are also aiming to expand our activities in other areas of the Public Sector such as Local Government and the Academies programme.
We will continue to concentrate on improving the operational efficiencies of our business further reducing costs where appropriate.
Finally, the breadth of our offering presents a number of opportunities to cross-sell our services to existing customers. We will endeavour to capitalise on this favourable positioning and exploit opportunities wherever possible going forward.
Group Financial Review
Trading
For the year ended 31 March 2009, the Group is reporting an adjusted EBITDA* of £5.0 million, this compares with £14.1 million in the prior year. Operating loss was £49.7 million compared with a profit of £3.2 million in the year ended 31 March 2008. This includes a goodwill impairment of £43.8 million and intangible amortisation of £5.3m.
Gross profit decreased by 12.5% to £68.4 million from £78.2 million in 2008, while Gross margin decreased to 34.6% compared with 38.9% last year.
Redstone Telecom consolidated its position within the market, having integrated prior acquisitions and reduced the number of billings platforms. The division also acquired a new switch before the disposal to Daisy Telecoms Limited.
Redstone Mobile contributed revenues of £31.2 million (2008: £34.9 million), predominantly from the indirect dealer distribution channel.
Subsequent to the year end, Redstone Telecom and Redstone Mobile were sold.
Redstone Converged Solutions has continued to build its longer term project pipeline and made a significant investment in the year in major infrastructure projects. This will provide longer term revenue streams and increased future visibility. There have been a number of significant contract wins completed in the year including the White City shopping centre project, currently the largest development of its type in Europe.
Subsequent to the year end, the Company has won the Birmingham BSF contract, in a consortium with a projected turnover of approximately £150 million over the next 15 years.
Redstone Managed Solutions has now strengthened its relationship with a major supplier and has increased turnover by 40% to £17.2 million, compared with £12.3 million in 2008.
Redstone Technology has enjoyed another successful year in Ireland where it predominantly operates and has delivered satisfactory growth in the period, given the difficult trading conditions, with turnover within the period increasing by 15% to £14.0 million from £12.2 million in 2008.
*before net finance costs, tax, depreciation, amortisation, exceptional items and share based payment charges.
Summary Financial Performance
| Year ended | Year ended | |
| 31 March | 31 March | |
| 2009 | 2008 | |
| £000 | £000 | |
| Adjusted EBITDA* | 5,017 | 14,074 |
| Depreciation | (2,139) | (1,849) |
| Amortisation of intangibles | (5,307) | (6,128) |
| Impairment of Goodwill | (43,771) | - |
| Exceptional items | (1,713) | (2,748) |
| Share based payment charges | (1,783) | (190) |
| Operating (loss)/profit | (49,696) | 3,159 |
| Net finance costs | (4,557) | (2,265) |
| (Loss)/Profit on ordinary activities before taxation | (54,253) | 894 |
*before net finance costs, tax, depreciation, amortisation, exceptional items and share based payment charges.
Operating Loss/profit
Operating expenses before amortisation and impairment of intangibles, share based payment charges and exceptional items, decreased to £65.7 million for the Group, compared with £66.0 million last year. The adjusted EBITDA* reduced to £5.0 million compared with a £14.1 million in 2008. The overall operating loss was £49.7 million compared with a profit of £3.2 million in the year ended 31 March 2008. This is mainly due to the goodwill impairment charge of £43.8 and reduced trading activity in the year.
Share based payments for the year resulted in a charge of £1.8 million up from £0.2 million last year. This is all from equity settled share based payments.
Net finance costs
There was interest receivable in the year of £0.2 million compared with £0.4 million last year.
Interest payable increased to £4.7 million in the year from £2.6 million in 2008. The interest payable includes £1.8m being the movement in the valuation of our interest rate swap. This is a non-cash item, and its value is calculated by reference to the estimated movements in interest rates over the next six and a half years when compared to the rates at which the Group has hedged.
Net borrowings increased during the current year due to loans drawn down to fund working capital and loan note repayments.
Amortisation of intangibles
Amortisation of intangibles of £5.3 million within the current year has decreased by £0.8 million from last year.
Goodwill Impairment
The Directors have projected cash flows from operations of the business entities of the group and concluded a goodwill impairment of £43.8 million to be appropriate.
Exceptional items
Exceptional items are £1.7 million compared with £2.7 million last year. These primarily relate to the costs associated with integrating the acquired subsidiaries and in response to the economic downturn. This comprises staff costs, mainly redundancy and other payroll costs, together with related costs of providing for the closure of excess properties. In addition, the Group incurred £160,000 of costs relating to aborted transactions.
Tax
Tax for the year is a charge of £0.7 million compared with a credit of £2.3 million last year. The main reason for this is the impact of the reduction in the recognition of the deferred tax asset in line with the economic downturn.
Balance sheet and cash flow
Cash flow
The Group's cash position decreased in the year by £2.2 million to £7.4 million.
There was a cash inflow from operations of £3.0 million (2008: £6.8 million); the decrease is mainly due to the reduction in profitability.
The cash outflow from capital expenditure was £4.0 million during the year, compared with £3.3 million in the previous year, an increase of £0.7 million. The main reason for this is the continuing group integration of acquired activities and upgrade to the IT infrastructure.
Debt
At 31 March 2009 the Group had a total facility with Barclays Bank plc of £30.25 million (2008: £29.5 million). This is a structured facility with a term loan of up to £11.25 million (2008: £18.0 million), a £11.5 million revolver facility and a convertible loan of £7.5 million. The debt facility was drawn down during the year to fund working capital and loan note repayments. As at 31 March 2009, the balance sheet value of borrowings was £28.6 million compared to £26.6 million at 31 March 2008. This was repayable over the term of the agreement to December 2011.
The Group also has a loan outstanding to Eckoh Technologies plc of £2.7 million relating to the acquisition of Symphony. Repayment of this loan was due in tranches of £1.0 million in June 2009 and £1.7 million in June 2010.
The total debt, net of cash at bank and excluding finance leases was £23.9 million at 31 March 2009 (2008: £20.2 million).
Subsequent to the year end the Board has refinanced the business as described below.
Bank Facilities
Subsequent to the year end in September 2009, the Group agreed an amendment to the terms of its existing debt facilities with Barclays Bank plc to effect the following changes:
A reduction in the level of commitment available under the senior debt facilities;
Revised financial covenants, projections, forecast and budgets within which the Group must operate;
A reduction in on-going financing costs payable under the senior debt facilities;
Shortening the term of the senior debt facilities by three months;
Alteration to the repayment profile of the senior debt facilities to allow more senior term debt to be repaid on final maturity of the senior debt facilities;
Additional monitoring rights over the Group for Barclays Bank PLC;
Further restrictions on payments of dividends or other distributions by the Group;
Intercreditor arrangements between Barclays Bank PLC, SVG and Gartmore as holders of the loan notes; and
Tighter restrictions on the Group incurring additional debt;
The total facility now provided by Barclays Bank comprises a £10m term loan repayable on 30 September 2011 and an £8m overdraft facility.
The term loan and overdraft facility are secured on fixed and floating charges over the assets of the Group.
Fund Raising
In addition the Group completed a fundraising of up to £6 million through the issue of a convertible loan note to SVG Investment Managers Limited and Gartmore Investment Limited. The fundraising provides funds for general working capital purposes and to strengthen the Group's balance sheet.
The key terms of the loan note are as follows:
The loan note can be converted into shares at a conversion price based on a price per share equal to £2 million divided by the number of shares in issue, on a fully diluted basis, as at the conversion date. This conversion is subject to shareholder approval;
A premium equal to two times the outstanding principal amount shall be payable on the maturity date;
In the event that shareholder approval and/or the approval of The Panel on Takeovers and Mergers to waive rule 9 of The City Code and Takeover and Mergers is not obtained, as well as the Repayment Premium, a superpremium equal to two times the outstanding principal amount shall be payable on the maturity date;
Eckoh Loan
Furthermore the Group has agreed a standstill agreement with Eckoh regarding the Eckoh Loan the key terms of which are as follows:
£ 1 million is now repayable on 30 September 2011 and the balance of £ 1.7 million is repayable on 30 September 2012.
Interest is payable monthly in arrears.
Eckoh has been granted security over the assets of the business which is subordinated to Barclays Bank PLC and the holders of the loan note
Eckoh will no longer be entitled to convert the Eckoh Loan into shares in the Company; and
A fee of £350,000 is payable to Eckoh by the Company of which £125,000 is paid on signature of the agreement and £225,000 is payable on 30 September 2012.
Going Concern
The Directors are required to be satisfied that the Group has adequate resources to continue in business for the foreseeable future. The validity of this assumption depends on the ability of the Group to meet its cash flow forecasts and the continuing support of its bankers by providing adequate overdraft facilities and of its debt holders. The Group has agreed new facilities with Barclays Bank through to 30 September 2011, and the bank has agreed to waive any default of covenants tests, prior to 31 December 2010. Whilst the nature of the Group's business is such that there can be considerable variation in the cash inflows and this adds risk to the Group's ability to forecast cash, and in the current economic environment there can be no absolute certainty that the Group will achieve its EBITDA forecasts, the present cash flow forecasts indicate that the Group will be able to operate within the present overdraft facilities for at least twelve months from the date of approval of the financial statements.
Subsequent to the year end, in September 2009, the Group completed a fund raising of up to £6 million through the issue of a loan note to two existing shareholders, SVG Investment Managers Limited and Gartmore Investment Limited, £3 million of which has been drawn down and the remaining tranche can be requested by the Group at any time provided there has not been a material adverse change in the operating performance or debt position of the Group. The loan notes are secured on the assets of the business, and this security is secondary to the Barclays Bank facilities.
Under the terms of the loan note arrangement, a premium equal to two times the outstanding principal amount is payable on the maturity date on 1 October 2011, and in the event that the approval of the shareholders of the terms of the conversion and/or the approval of the Panel on Takeovers and Mergers to waive rule 9 of the City Code on Takeovers and Mergers is not obtained, an additional superpremium equal to two times the principal drawn down is payable at maturity.
If the loan notes are not converted into equity or repaid, then on 1 October 2011, this will lead to the Group's liabilities that have fallen due significantly exceeding the Group's assets.
The note holders have confirmed to the Group that in the event that the Group is unable to make repayment of the loan notes on their maturity date, they would expect to work with the Group to refinance the loan notes, for example through converting the loan notes into shares, alternative financing arrangements or through extending the maturity date; and that it is not their current intention to wind up the Company in the event that it is unable to repay the loan notes on the maturity date. For these reasons the Directors believe the going concern basis to be appropriate.
Treasury activities and policies
The Group's treasury objectives and policies were agreed by the Board and are designed to manage the Group's financial risk and secure funding for the Group's operations. The Group finances its operations by cash, loan notes and borrowings. Overdrafts are used to satisfy any short-term cash flow requirements. Other financial assets and liabilities, such as trade receivables and trade payables, arise directly from the Group's operating activities. The Board has sanctioned a number of institutions with whom surplus funds may be invested with a view to maximising returns whilst minimising credit risks.
The main risks associated with the Group's financial assets and liabilities include:
Foreign currency risk
The Group has one subsidiary in Ireland and also buys and sells goods and services denominated in currencies other than Sterling. As a result the value of the Group's non-Sterling revenues, purchases, financial assets and liabilities and cash flows can be affected by movements in exchange rates in general and in US Dollar and Euro rates in particular. The Group's policy on foreign currency risk is not to enter into forward contracts for purchases until a firm commitment is in place.
The Group considers using derivatives where appropriate to hedge its exposure to fluctuations in foreign exchange rates; the Group has not entered into any such arrangements in the year. The purpose is to manage the currency risks arising from the Group's operations.
Interest rate risk
The Group's policy is to manage interest rate risk and to maximise its return from its cash balances.
Interest on borrowings with a floating rate is set at a percentage above the LIBOR base rate. Interest on fixed rate borrowings is fixed until maturity of the instrument. The other financial instruments of the Group are non-interest bearing and are therefore not subject to interest rate risk.
The Group has entered into an interest rate swap agreement with Barclays Capital whereby the interest on the Barclays term loan of £17.5 million is capped once the LIBOR rate reaches 6.5%.
Credit risk
The Group's policies are aimed at minimising losses due to credit risk. Customers who demonstrate appropriate payment history and satisfy credit checks are granted deferred payment terms. Debtor days, bad debt and cash flows are reviewed weekly by management.
Liquidity risk
The Group's policy is to manage liquidity risk by ensuring that adequate available funding is in place through committed credit facilities. The Group monitors rolling cash forecasts of the Group's liquidity reserve and cash and cash equivalents on the expected cash flow.
The Group aims to mitigate liquidity risk by managing cash within its operations. This is applied within the operations by setting cash collection targets and controlling expenditure by maintaining authorisation limits. Any excess cash is placed on low risk, short-term interest-bearing deposits.
Other balance sheet areas
Vacant property has continued to reduce during the year as the Group has handed back properties where leases have ended or managed to sub-let. As a result, the cash outflow in respect of vacant property has reduced from £0.6 million in 2008 to £0.4 million in 2009. This is reflected in a reduction in provisions.
Goodwill of £27.2 million (2008: £71.0 million) represents goodwill on the acquisition of subsidiaries. As required by lAS 36 the Board has conducted a review of the carrying value of goodwill on the balance sheet, which has resulted in an impairment charge of £43.8 million. The other intangible assets of £18.7 million (2008: £23.0 million) comprise mainly the value attributed to acquired contracts and customer relationships. These were subject to an amortisation charge of £5.3 million during the year in line with the Group's amortisation policy.
The value of property plant and equipment increased by £0.9 million, to £5.5 million, mainly as a result of the implementation of a new switch as well as other systems implementations.
The trade and other payables balance includes deferred income of £8.5 million (2008 £9.5 million).
Shareholders' funds have decreased to £22.0 million from £76.1 million in 2008.
Tim Perks
Chief Financial Officer
28 September 2009
Consolidated Income Statement year ended 31 March 2009
| Year ended | Year ended | ||
| 31 March | 31 March | ||
| 2009 | 2008 | ||
| Note | £000 | £000 | |
| Revenue | 2 | 197,802 | 200,720 |
| Cost of sales | (129,401) | (122,553) | |
| Gross profit | 68,401 | 78,167 | |
| Other operating income | 185 | 77 | |
| Selling and distribution costs | (16,983) | (15,673) | |
| Administrative expenses | (99,586) | (56,664) | |
| Exceptional items | 3 | (1,713) | (2,748) |
| Adjusted EBITDA* | 2 | 5,017 | 14,074 |
| Depreciation | (2,139) | (1,849) | |
| Amortisation of intangibles | 4 | (5,307) | (6,128) |
| Goodwill Impairment | 4 | (43,771) | - |
| Exceptional items | 3 | (1,713) | (2,748) |
| Share based payments | (1,783) | (190) | |
| Operating (loss)/profit | 2 | (49,696) | 3,159 |
| Finance income | 160 | 371 | |
| Finance costs | (4,717) | (2,636) | |
| Net finance cost | (4,557) | (2,265) | |
| (Loss)/profit on ordinary activities before taxation | 2 | (54,253) | 894 |
| Tax on (loss)/profit on ordinary activities | (739) | 2,338 | |
| (Loss)/Profit for the year (attributable to shareholders in the parent company) | (54,992) | 3,232 | |
| Earnings per share | |||
| Basic earnings per share | (37.73) | 2.23p | |
| Diluted earnings per share | (37.73) | 2.21p | |
| Basic adjusted EBITDA* per share | 3.44 | 9.69p | |
| Diluted adjusted EBITDA* per share | 3.44 | 9.62p |
*earnings before net finance costs, tax, depreciation, amortisation, exceptional items and share based payment charges.
Consolidated Statement of Changes in Equity year ended
31 March 2009
| Other reserves | |||||||||
| Called up | Share | Capital | |||||||
| share | premium | Merger | redemption | Translation | Retained | Total | |||
| capital | account | reserve (a) | reserve (b) | reserve (c) | earnings | equity | |||
| Note | £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| Equity as at 31 March 2007 | 14,469 | 17,512 | 216 | 5,683 | 100 | 33,276 | 71,256 | ||
| Profit for the year | - | - | - | - | - | 3,232 | 3,232 | ||
| Share-based payments | - | - | - | - | - | 877 | 877 | ||
| Currency translation differences | - | - | - | - | (52) | - | (52) | ||
| Consideration shares | (e) | 105 | 647 | - | - | - | - | 752 | |
| Equity as at 31 March 2008 | 14,574 | 18,159 | 216 | 5,683 | 48 | 37,385 | 76,065 | ||
| Loss for the year | - | - | - | - | - | (54,992) | (54,992) | ||
| Purchase of own shares | (d) | - | - | - | - | - | (917) | (917) | |
| Share-based payments |
| - | - | - | - | - | 1,783 | 1,783 | |
| Currency translation differences | - | - | - | - | 64 | - | 64 | ||
| Equity as at 31 March 2009 | 14,574 | 18,159 | 216 | 5,683 | 112 | (16,741) | 22,003 | ||
(a) Merger reserve
The merger reserve resulted from the acquisition of Redstone Communications Limited (formerly Redstone Network Services Limited) and represents the difference between the value of the shares acquired (nominal value plus related share premium) and the nominal value of the shares issued.
(b) Capital redemption reserve
The capital redemption reserve arose on the elimination of deferred shares and represents the nominal value of the deferred shares.
(c) Translation reserve
The translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.
(d) Purchase of own shares
Shares in Redstone plc purchased by and held in the Employee Benefit Trust, as well as shares purchased by the company in terms of the SIPP rules, have been recognised in retained earnings in accordance with SIC 12 and IAS 32.
(e) Consideration shares
Consideration shares are shares issued in order to satisfy purchase consideration in respect of business combinations.
Consolidated Balance Sheet as at 31 March 2009
| 31 March | 31 March | ||
| 2009 | 2008 | ||
| Note | £000 | £000 | |
| Assets | |||
| Non-current assets | |||
| Intangible assets | 4 | 45,945 | 93,953 |
| Investments | - | 129 | |
| Property, plant and equipment | 5,511 | 4,623 | |
| Deferred tax asset | 1,353 | 3,215 | |
| Other non-current assets | 467 | 525 | |
| 53,276 | 102,445 | ||
| Current assets | |||
| Inventories | 2,262 | 1,195 | |
| Trade and other receivables | 5 | 42,799 | 44,598 |
| Income tax receivable | 632 | 577 | |
| Cash and cash equivalents | 7,368 | 9,609 | |
| 53,061 | 55,979 | ||
| Total assets | 106,337 | 158,424 | |
| Equity and liabilities | |||
| Equity | |||
| Called up share capital |
| 14,574 | 14,574 |
| Share premium account | 18,159 | 18,159 | |
| Other reserves | 6,011 | 5,947 | |
| Retained earnings | (16,741) | 37,385 | |
| Total equity | 22,003 | 76,065 | |
| Current liabilities | |||
| Trade and other payables | 6 | 44,083 | 44,009 |
| Derivative financial instruments | 415 | - | |
| Deferred consideration |
| 30 | 100 |
| Borrowings | 7 | 29,824 | 7,660 |
| Provisions | 354 | 508 | |
| 74,706 | 52,277 | ||
| Non-current liabilities | |||
| Trade and other payables | 6 | 177 | 58 |
| Derivative financial instruments | 2,019 | 381 | |
| Borrowings | 7 | 1,821 | 22,480 |
| Provisions | 800 | 1,070 | |
| Deferred tax liability |
| 4,811 | 6,093 |
| 9,628 | 30,082 | ||
| Total liabilities | 84,334 | 82,359 | |
| Total equity and liabilities | 106,337 | 158,424 |
Consolidated Cash Flow Statement year ended 31 March 2009
| Year ended | Year ended | ||
| 31 March | 31 March | ||
| 2009 | 2008 | ||
| Note | £000 | £000 | |
| Cash flows from operating activities | |||
| Cash generated by/(absorbed) in operations | 8 | 3,034 | 6,769 |
| Income tax paid | (214) | (111) | |
| Net cash flows generated from/ (used in) operating activities | 2,820 | 6,658 | |
| Cash flows from investing activities | |||
| Proceeds from sale of property, plant and equipment | - | 80 | |
| Purchase of property, plant, equipment | (2,946) | (2,387) | |
| Purchase of intangible assets | (1,094) | (960) | |
| Purchase of investment | - | (202) | |
| Acquisition of subsidiaries, net of cash acquired | (20) | (3,541) | |
| Net cash flows used in investing activities | (4,060) | (7,010) | |
| Cash flows from financing activities | |||
| Proceeds from borrowings | 7,917 | 6,450 | |
| Repayment of borrowings | (6,000) | (4,945) | |
| Interest received | 160 | 382 | |
| Interest paid | (3,078) | (2,347) | |
| Net cash flows from/ (used in) financing activities | (1,001) | (460) | |
| Net decrease in cash and cash equivalents | (2,241) | (812) | |
| Cash and cash equivalents at 1 April | 9,609 | 10,421 | |
| Cash and cash equivalents at 31 March | 7,368 | 9,609 |
Notes to the Consolidated Financial Statements
year ended 31 March 2009
1. Authorisation of financial statements and statement of compliance with IFRSs
The consolidated financial statements of Redstone plc (the 'Company') and its subsidiaries (together the 'Group') for the year ended 31 March 2009 were authorised for issue by the Board of Directors on 28 Sep 2009 and the balance sheet was signed by the Deputy Chairman Tim Sherwood and the CFO Tim Perks. Redstone plc is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM division of the London Stock Exchange.
The Group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applied in accordance with the provisions of the Companies Act 1985.
Accounting policies - Group
The principal accounting policies, which have been applied consistently throughout the year, are set out below:
1.1 Basis of preparation
The consolidated financial statements of Redstone plc have been prepared on the going concern basis and in accordance with EU Endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative financial instruments) at fair value through profit or loss.
The Directors are required to be satisfied that the Group has adequate resources to continue in business for the foreseeable future. The validity of this assumption depends on the ability of the Group to meet its cash flow forecasts and the continuing support of its bankers by providing adequate overdraft facilities and of its debt holders. The Group has agreed new facilities with Barclays Bank through to 30 September 2011, and the bank has agreed to waive any default of covenants tests, prior to 31 December 2010. Whilst the nature of the Group's business is such that there can be considerable variation in the cash inflows and this adds risk to the Group's ability to forecast cash, and in the current economic environment there can be no absolute certainty that the Group will achieve its EBITDA forecasts, the present cash flow forecasts indicate that the Group will be able to operate within the present overdraft facilities for at least twelve months from the date of approval of the financial statements.
Subsequent to the year end, in September 2009, the Group completed a fund raising of up to £6 million through the issue of a loan note to two existing shareholders, SVG Investment Managers Limited and Gartmore Investment Limited, £3 million of which has been drawn down and the remaining tranche can be requested by the Group at any time provided there has not been a material adverse change in the operating performance or debt position of the Group. The loan notes are secured on the assets of the business, and this security is secondary to the Barclays bank facilities.
Under the terms of the loan note arrangement, a premium equal to two times the outstanding principal amount is payable on the maturity date on 1 October 2011, and in the event that the approval of the shareholders of the terms of the conversion and/or the approval of the Panel on Takeovers and Mergers to waive rule 9 of the City Code on Takeovers and Mergers is not obtained, an additional superpremium equal to two times the principal drawn down is payable at maturity.
If the loan notes are not converted into equity or repaid, then on 1 October 2011, this will lead to the Group's liabilities that have fallen due significantly exceeding the Group's assets.
The note holders have confirmed to the Group that in the event that the Group is unable to make repayment of the loan notes on their maturity date, they would expect to work with the Group to refinance the loan notes, for example through converting the loan notes into shares, alternative financing arrangements or through extending the maturity date; and that it is not their current intention to wind up the Company in the event that it is unable to repay the loan notes on the maturity date. For these reasons the Directors believe the going concern basis to be appropriate.
1.2 Basis of consolidation
The consolidated financial statements comprise the financial statements of Redstone plc and its subsidiaries as at and for the year ended 31 March of each year.
Subsidiaries are consolidated from the date at which control is obtained by the Group, and cease to be consolidated from the date at which the Group no longer retains control. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefits from their activities, and is achieved through direct or indirect ownership of voting rights, currently exercisable or convertible potential voting rights, or by way of contractual agreement.
Business combinations are accounted for using the purchase method. Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination (fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition) over the Group's acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Provisional values are finalised within a maximum of twelve months following the date of acquisition. The financial statements of the subsidiaries are prepared for the same reporting year as the parent Company.
All inter-company balances and transactions are eliminated in full.
1.3 Intangible assets
Goodwill
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses (note 1.5). Goodwill already carried in the balance sheet at 1 April 2004 is not amortised after that date.
The carrying amount of goodwill allocated to a cash-generating unit is taken into account when determining the gain or loss on disposal of the unit, or of an operation within it. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.
1.4 Impairment of assets
Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. As at the acquisition date any goodwill acquired is allocated to each of the cash generating units expected to benefit from the business combination's synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. When the recoverable amount of the cash-generating unit is less than the carrying amount, including goodwill, an impairment loss is recognised.
Other intangible assets and property plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying values may not be recoverable. In addition, the carrying value of capitalised development expenditure is reviewed for impairment annually. 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.
The recoverable amount of intangible assets and property, plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined by the cash-generating unit to which the asset belongs. Fair value less costs to sell is, where known, based on actual sales price net of costs incurred in completing the disposal.
2. Segment reporting
The following tables present information on revenue, profit and certain assets and liabilities in respect of the Group's business segments for the years ended 31 March 2009 and 2008.
| (a) For the year ended 31 March 2009 | ||||||||
| Converged | Managed | |||||||
| Telecom | Mobile | Solutions | Solutions | Technology | Central | Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| Total segment revenue | 43,561 | 31,173 | 92,235 | 18,383 | 14,037 | - | 199,389 | |
| Inter-segment revenues | - | - | (343) | (1,178) | (66) | - | (1,587) | |
| Revenue | 43,561 | 31,173 | 91,892 | 17,205 | 13,971 | - | 197,802 | |
| Adjusted operating costs* | (41,011) | (29,527) | (90,248) | (15,595) | (13,514) | (2,890) | (192,785) | |
| Adjusted EBITDA* | 2,550 | 1,646 | 1,644 | 1,610 | 457 | (2,890) | 5,017 | |
| Depreciation | (225) | (11) | (711) | (434) | (289) | (469) | (2,139) | |
| Amortisation of intangible assets | (1,466) | (753) | (2,436) | (195) | (63) | (394) | (5,307) | |
| Impairment of goodwill | (20,515) | (4,082) | (15,716) | - | (3,458) | - | (43,771) | |
| Exceptional items | (356) | (20) | (711) | (53) | (55) | (518) | (1,713) | |
| Equity-settled share-based payments | 55 | (39) | (332) | (108) | (76) | (1,283) | (1,783) | |
| Segment result | (19,957) | (3,259) | (18,262) | 820 | (3,484) | (5,554) | (49,696) | |
| Net finance costs | (4,557) | |||||||
| Tax | (739) | |||||||
| (Loss)/profit for the year | (19,957) | (3,259) | (18,262) | 820 | (3,484) | (5,554) | (54,992) | |
| Assets and liabilities | ||||||||
| Segment assets | 21,139 | 9,402 | 49,340 | 15,238 | 7,670 | 3,548 | 106,337 | |
| Segment liabilities | 10,742 | 3,922 | 24,666 | 4,934 | 2,929 | 37,141 | 84,334 | |
| Net Assets | 10,397 | 5,480 | 24,674 | 10,304 | 4,741 | (33,593) | 22,003 | |
| Other segment information | ||||||||
| Capital expenditure | ||||||||
| Property, plant and equipment | 858 | 46 | 533 | 690 | 327 | 492 | 2,946 | |
| Intangibles - software | 70 | 21 | 69 | - | - | 934 | 1094 | |
| Loss arising from Joint Ventures | (94) | - | - | - | - | - | (94) | |
| Aggregate investment | 448 | - | - | - | - | - | 448 | |
*earnings and operating costs before net finance costs, tax, depreciation, amortisation, exceptional items and share based payment charges.
Included in the central segment assets, is £1.0 million of fixed assets (2008: £1.0 million), £1.3 million of intangible assets (2008: £0.6 million), investments of £nil (2008: £0.1million), prepayments and other receivables of £1.2 million (2008: £1.9 million) and cash of £nil million (2008: £1.3 million).
Included in the central segment liabilities, is the Group's outstanding loan notes and Barclays borrowings at 31 March 2009 of £31.3 million (2008: £26.6 million), property provisions £1.0 million (2008: £1.4 million), accruals and other creditors £4.8 million (2008: £3.5 million).
| (b) For the year ended 31 March 2008 | ||||||||
| Converged | Managed | |||||||
| Telecom | Mobile | Solutions | Solutions | Technology | Central | Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| Total segment revenue | 48,248 | 34,937 | 93,045 | 12,297 | 12,314 | - | 200,841 | |
| Inter-segment revenues | - | - | - | - | (121) | - | (121) | |
| Revenue | 48,248 | 34,937 | 93,045 | 12,297 | 12,193 | - | 200,720 | |
| Adjusted operating costs* | (42,518) | (32,931) | (86,323) | (11,456) | (11,041) | (2,377) | (186,646) | |
| Adjusted EBITDA* | 5,730 | 2,006 | 6,722 | 841 | 1,152 | (2,377) | 14,074 | |
| Depreciation | (197) | (21) | (651) | (376) | (195) | (409) | (1,849) | |
| Amortisation of intangible assets | (1,446) | (738) | (3,505) | (195) | (63) | (181) | (6,128) | |
| Exceptional items | (1,283) | (186) | (941) | (114) | (16) | (208) | (2,748) | |
| Equity-settled share-based payments | (81) | (37) | (269) | (111) | (100) | (279) | (877) | |
| Cash-settled share-based payments | - | - | - | - | - | 687 | 687 | |
| Segment result | 2,723 | 1,024 | 1,356 | 45 | 778 | (2,767) | 3,159 | |
| Net finance costs | (2,265) | |||||||
| Tax | 2,338 | |||||||
| Profit for the year | 3,232 | |||||||
| Assets and liabilities | ||||||||
| Segment assets | 46,270 | 12,179 | 71,820 | 12,141 | 11,120 | 4,894 | 158,424 | |
| Segment liabilities | 13,518 | 3,465 | 26,180 | 4,737 | 2,943 | 31,516 | 82,359 | |
| Net Assets | 32,752 | 8,714 | 45,640 | 7,404 | 8,177 | (26,622) | 76,065 | |
| Other segment information | ||||||||
| Capital expenditure | ||||||||
| Property, plant and equipment | 72 | - | 547 | 625 | 418 | 725 | 2,387 | |
| Property, plant and equipment acquired - business combinations | 18 | - | - | - | - | - | 18 | |
| Intangibles - software | - | 83 | 141 | 135 | - | 601 | 960 | |
| Intangible assets acquired - business combinations | 180 | - | - | - | - | - | 180 | |
| Profit arising from Joint Ventures | 34 | - | - | - | - | - | 34 | |
| Aggregate investment | 528 | - | - | - | - | - | 528 | |
Redstone has five operating business units, namely Telecom, Mobile, Converged Solutions, Managed Solutions and Technology. All divisions operate within the UK, with the exception of Redstone Technology, which is based in Ireland. In addition there is a Central division including back office functions and executive management to support the Group. All divisions deliver independent products and services.
Redstone Telecom provides telephony network services to the private and public sector. The portfolio includes telephony services (both inbound and outbound calls), line rental, SMS (short message service) and premium rate services (inbound calls to '09' number ranges). Redstone Telecom has a strategic relationship with BT Wholesale guaranteeing service quality and availability. This is complemented by customer-focused services including dedicated account management and 24 hours a day, 7 days a week customer support.
Redstone Mobile which was acquired as part of the Symphony Group operates as a service provider and distributor of mobile telephony. It has strategic relationships with 02 and Vodafone.
Redstone Converged Solutions is a provider of converged IP solutions, with expertise in contact centres, voice and video, IP networks, intelligent building (OneNET) and security. The division has particular expertise in providing solutions to businesses and organisations in the health, education, local government, retail, finance, energy, media and transport sectors.
Redstone Managed Solutions delivers a comprehensive portfolio of network management and internet services for businesses and public sector organisations. Solutions and services include security software, server and desktop deployment, application development, hosting and co-location, network and system management, internet service provision and consultancy.
Redstone Technology provides enterprise storage solutions and is a specialist in business critical enterprise-class servers and provides an array of professional, consulting, logistics and maintenance services throughout Ireland.
3. Exceptional items
During the year the Group has undergone further restructuring to achieve synergies from acquisitions made in previous years and in response to the economic downturn, giving rise to exceptional costs of £1,713,000 (2008: £2,748,000). The analysis of the exceptional costs is as follows: employee related costs of £1,010,000 (2008: £1,894,000), integration costs of £185,000 (2008: £323,000), Group reorganisation costs of £75,000 (2008: £92,000), occupancy costs of £151,000 (2008: write back of £102,000), a fair value charge of £129,000 relating to a one-off non-trading item (2008: £nil) and back salaries relating to the Morgan Stanley Contract £nil (2008: £460,000). In addition, included in exceptional items in the year are aborted transactions costs of £163,000 (2008: £81,000).
| 4. Intangible assets | ||||||
| Customer | ||||||
| contracts Trademarks, | ||||||
| & related | names | |||||
| Goodwill | Software relationships | & licences | Other | Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Cost | ||||||
| As at 31 March 2007 | 172,938 | 3,969 | 28,438 | 1,038 | 1,542 | 207,925 |
| Acquisitions of subsidiaries | 1,419 | - | 180 | - | - | 1,599 |
| Additions | - | 960 | - | - | - | 960 |
| As at 31 March 2008 | 174,357 | 4,929 | 28,618 | 1,038 | 1,542 | 210,484 |
| Additions | - | 1,024 | - | - | 70 | 1,094 |
| Adjustment to prior year acquisitions (note 2) | (24) | - | - | - | - | (24) |
| As at 31 March 2009 | 174,333 | 5,953 | 28,618 | 1,038 | 1,612 | 211,554 |
| Accumulated amortisation and impairment | ||||||
| As at 31 March 2007 | (103,362) | (3,353) | (2,987) | (77) | (624) | (110,403) |
| Amortisation | - | (473) | (5,447) | (208) | - | (6,128) |
| As at 31 March 2008 | (103,362) | (3,826) | (8,434) | (285) | (624) | (116,531) |
| Amortisation | - | (604) | (4,492) | (207) | (4) | (5,307) |
| Impairment of Goodwill | (43,771) | - | - | - | - | (43,771) |
| As at 31 March 2009 | (147,133) | (4,430) | (12,926) | (492) | (628) | (165,609) |
| Net carrying amount 31 March 2009 | 27,200 | 1,523 | 15,692 | 546 | 984 | 45,945 |
| Net carrying amount 31 March 2008 | 70,995 | 1,103 | 20,184 | 753 | 918 | 93,953 |
| Net Carrying amount 1 April 2007 | 69,576 | 616 | 25,451 | 961 | 918 | 97,522 |
Goodwill
Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
Goodwill was allocated for impairment testing purposes to cash generating units (CGU's) as follows:
Telecom;
Mobile;
Converged Solutions;
Managed Solutions; and
Technology.
These CGUs represent the lowest level within the Group at which goodwill was monitored by management for internal reporting purposes, and the level that represented the smallest identifiable group of assets which generated largely independent cash inflows.
With the exception of the Telecom and Mobile, the recoverable amount of all the CGUs was based on a value in use calculation using cash flow projections based on the 2010 budget forecast ending March 2010 which was approved by the Board and extrapolated for a further 4 years by growth rates applicable to each unit to March 2014. An appropriate terminal value based on a perpetuity calculation using 2% real growth was then added. Discount rates were then applied to these projections ranging from 12% to 15% reflecting management's expected risk profile for each CGU.
In addition to revenue growth, the assumptions used in the impairment testing were as follows:
Gross margin percentage;
Discount rate; and
Rates of growth in cash generating units beyond the budget period, and in determining the terminal value.
The Telecom and Mobile CGUs are valued at fair value less costs to sell, being the net sales proceeds arising from their disposal subsequent to the year end.
Gross margin
Gross margins have been based on flat or declining margins starting at current levels. Where declining margins have been assumed at 0.5% per year in certain CGU's, this allows for cost increases from network providers, suppliers and competitive market influences. This has been assumed in respect of Redstone Technology and part of Redstone Converged Solutions. The assumption of margins remaining flat assumes a mix of cost savings in service delivery offset by competitive market influences. This has been applied in respect of Redstone Managed Solutions and part of Redstone Converged Solutions.
Discount rate
A discount rate of 15% was applied to the Converged Solutions CGU because it is dependent on strong relationships with certain key suppliers and the projects it delivers are complex in nature.
A discount rate of 12% was applied to the Managed Solutions and Technology CGU's, which reflects management's estimate of ROCE required. The Managed Solutions CGU and Technology CGU have an element of recurring revenue through maintenance contracts and this reduces the risk inherent in the businesses.
A 1% increase in the discount rate in respect of Redstone Technology would give rise to a potential impairment of approximately £300,000.
Rates of growth in cash generating units beyond the budget period
After the initial period covered by the latest budget revenues were projected to grow at between 2% and 5% for the following four years. The growth rates do not include BSF cash flows on the basis that we are looking at various financing options and do not have visibility of the resulting cash flows
Cost growth after the budget period was projected at between 1% and 3%. Cost growth assumptions were linked to the revenue growth assumptions with an allowance for the decline in gross margins as set out above.
Capital expenditure growth after the budget forecast period is projected at 2% across all divisions where there is significant capital spend.
Goodwill impairment charge
Following the impairment review of the goodwill the Directors considered it necessary to record a goodwill impairment charge in the year of £43,771,000 (2008: £nil).
| Summary of goodwill by CGU | ||||||
| Converged | Managed | |||||
| Telecom | Mobile | Solutions | Solutions | Technology | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| 2009 | ||||||
| Goodwill | 7,207 | 2,030 | 7,783 | 6,256 | 3,925 | 27,201 |
| 2008 | ||||||
| Goodwill | 27,744 | 6,113 | 23,499 | 6,256 | 7,383 | 70,995 |
| 5. Trade and other receivables | ||
| 2009 | 2008 | |
| £000 | £000 | |
| Trade receivables | 21,945 | 24,618 |
| Less: provision for impairment of trade receivables | (2,278) | (1,934) |
| Less: customer retentions greater than one year | (434) | (480) |
| Trade receivables - net | 19,233 | 22,204 |
| Other receivables | 559 | 2,180 |
| Prepayments | 5,467 | 6,103 |
| Amounts recoverable on contracts | 7,171 | 9,444 |
| Accrued income | 10,369 | 4,667 |
| 42,799 | 44,598 |
The division had a number of contracts in progress as at the year ended 31 March 2009. The aggregate amount of costs incurred for contracts in progress at the year end were £4,176,000. The aggregate amount of recognised profits (less recognised losses) for contracts in progress at the year end was a loss of £469,000.
| 6. Trade and other payables | ||
| Current | ||
| 2009 | 2008 | |
| £000 | £000 | |
| Trade payables | 16,771 | 16,894 |
| Other payables | 257 | 474 |
| VAT and social security | 7,770 | 2,933 |
| Accruals | 11,005 | 14,249 |
| Deferred income | 8,280 | 9,459 |
| 44,083 | 44,009 | |
| Non-current | ||
| 2009 | 2008 | |
| £000 | £000 | |
| Accruals | - | - |
| Other payables | - | - |
| Deferred income | 177 | 58 |
| 177 | 58 |
| 7. Borrowings | ||
| 2009 | 2008 | |
| Current | £000 | £000 |
| Loan notes | 1,000 | 500 |
| Finance leases | 221 | 160 |
| Bank loan | 21,573 | 7,000 |
| Synthetic Convertible Loan | 7,030 | - |
| 29,824 | 7,660 | |
| 2009 | 2008 | |
| Non-current | £000 | £000 |
| Loan notes | 1,700 | 2,700 |
| Finance leases | 121 | 180 |
| Bank Loan | - | 19,600 |
| - | ||
| 1,821 | 22,480 |
The Group has loan notes of £2.7 million (2008: £3.2 million). The loan notes are denominated in Sterling and are subject to interest payable at 0.5% above Barclays bank base rate. The loan notes are with Eckoh Technologies plc. The Eckoh loan notes are redeemable as follows:
£1.0 million by 21 June 2009, with the balance due by the loan termination date of 21 June 2010.
As at 31 March 2009, no security was held by Eckoh with respect to this loan. In the event of Redstone defaulting on payment, Eckoh had the ability to serve notice upon Redstone to exercise its option to convert the debt to equity. Since the year end, the group has agreed a standstill agreement with Eckoh Technologies plc, regarding the loan. The details of this are disclosed in note 32, Subsequent Events.
The Group has a total facility with Barclays Bank plc of £30.25 million (2008: £29.5 million). This is a structured facility with a term loan of up to £11.25 million, an £11.5 million revolver facility and a synthetic convertible loan of £7.5m. This facility expires in December 2011. As at 31 March 2009, the amount outstanding was £30.1 million (2008: £26.6 million).
The term loan and revolver facility may be prepaid in whole or in part (if in part a minimum of £200,000 and an integral multiple of £50,000) if not less than 10 days notice is given by the Group and payment made on the last day of an interest period. The borrowings are redeemable as follows: 30 June 2009 £1.875 million, 31 December 2009 £1.875 million, 30 June 2010 £0.5 million, 31 December 2010 £2.0 million, 30 June 2011 £3.5million and 31 December 2011 £1.5 million. The term loan and revolving loan facilities carry interest charged at a rate based on a margin above EBITDA. The margin is currently at 3%, and will fluctuate between 2.5% and 3.5% dependant on the ratio of net debt to EBITDA after February 2010.
The synthetic convertible loan has a termination date of 31 December 2011 and carries interest at LIBOR plus mandatory cost plus a margin. The mandatory cost is calculated based on the minimum reserve requirements of the lender as required by the regulatory authorities, and is set monthly by the lender. The margin is initially set at 4% and can vary between 3.5% and 4.5% depending on the Net Debt to EBITA ratio. From 24 August 2010, the lender has the option to convert all or part of the loan, subject to a minimum notice period, into a fixed number of shares in Redstone plc at a fixed price. If the lender exercises this option, Redstone plc can issue the required number of shares, or settle the option in cash based on the share price at that point. If it settles in cash, then it must settle the entire value of all shares over which the Bank has an option, and not just the proportion over which Barclays has exercised the option. In addition, Redstone plc has the option to repay the loan at any time, subject to a schedule of pre-payment fees. No pre-payment fee is due if the loan is paid off at the termination date or if the loan is being pre-paid after 18 months, and the share price has exceeded a hurdle amount for at least 20 consecutive trading days out of the 30 trading days prior to pre-payment.
The options detailed above are accounted for as a single embedded derivative, which is included in derivative financial instruments (note 24). The host contract is valued at inception as the residual of the compound financial instrument less the fair value of the embedded derivative, and interest accretes on this balance over the term of the contract.
The borrowing facilities are subject to certain financial and non-financial covenants, and are secured on the assets of the group.
The un-drawn borrowing facility at 31 March 2009 is £0.117 million (2008: £2.9 million), expiring in 2011.
As a result of late adjustments made following when finalising the financial statements, the Group has breached its 31 March 2009 financial covenants, with the result that the Barclays borrowings have been reclassified as current. Subsequent to the year end, the synthetic convertible loan has been repaid in full and, the Group agreed an amendment to the terms of its existing debt facilities with Barclays Bank plc and the year end covenant breach was waived.
All bank loans and loan notes are denominated in UK Pound Sterling.
| 8. Net cash flows from operating activities | ||
| 2009 | 2008 | |
| £000 | £000 | |
| Operating (loss)/profit | (49,696) | 3,159 |
| Adjustments for: | ||
| Depreciation of property, plant and equipment | 2,139 | 1,849 |
| Amortisation of intangible assets | 5,307 | 6,128 |
| Impairment of Goodwill | 43,771 | - |
| Equity-settled share-based payments | 1,783 | 877 |
| Cash-settled share-based payments (credit)/charge | - | (687) |
| Loss/(profit) on disposal of property, plant and equipment | 7 | (9) |
| Financial assets at fair value through profit or loss | 129 | 73 |
| Movements in working capital: | ||
| Increase in inventories | (1,067) | (79) |
| (Increase)/Decrease in trade and other receivables | 853 | (8,858) |
| (Decrease)/increase in trade and other payables | 195 | 5,777 |
| Decrease/(increase) in non-current assets | 58 | (470) |
| Decrease in provisions | (424) | (706) |
| Foreign exchange gains on operating activities | (21) | (107) |
| Other non-cash items | - | (178) |
| Cash generated in operations | 3,034 | 6,769 |