30 Sep 2010 09:14
30 September 2010
Redstone plc
("Redstone", "the Company" or "the Group")
Final Results to the Year Ended 31 March 2010
Redstone plc (AIM:RED), the integrated ICT and Communications Solutions provider, today announces its final results for the year ended 31 March 2010.
Financial Highlights
● Net Debt reduced by £4.1 million or 16.9% to £20.1 million at 31 March 2010
● Significant capital restructuring post year end:
§ Equity placing and subscription raising £7.0 million in cash (less expenses)
§ Issue of 2009 Convertible Loan Notes raising cash of £1.5 million
§ Entire 2009 Convertible Loan Note principal of £4.5 million converted to equity
§ Eckoh Loan of £2.9 million settled for £1.0 million in new equity and £0.5 million in cash
§ Bank facilities of £18.0 million amended and extended by 2 years and 3 months to 31 December 2013
● Revenue from Continuing Operations decreased by 20.7% to £97.6 million (2009: £123.1 million)
● Gross profit from Continuing Operations decreased by £11.6 million or 20.2% to £45.9 million (2009: £57.5 million)
● Selling, Distribution and Administration costs and expenses decreased by £26.5 million or 31.5% to £57.7 million (2009 £84.2 million)
● Adjusted EBITDA* loss of £1.9 million (2009 £0.8 million profit). Excluding Redstone i4e, adjusted EBITDA was £0.4 million profit (2009 £0.0 million)
● Operating Losses reduced by £14.8 million or 55.8% to £11.7 million (2009 £26.5 million). Losses on ordinary activities before taxation reduced by £14.8 million or 47.8% to £16.2 million (2009 £31.0 million)
● Basic loss per share reduced by 50.0% to 10.91p (2009 21.80p)
*Earnings before net finance costs, tax, depreciation, amortisation, exceptional items, goodwill impairment and share-based payment charges
Post Period Highlights
● Completed £8.5 million fundraising in September 2010
● New Chairman and Chief Executive appointed to the board and undertaking a review of the business. Ian Smith and Tony Weaver bring significant experience of a proven track record of delivering growth through buy and build strategies
● Building Schools for the Future ("BSF") ICT Contracts in Birmingham, which comprised the total trading activities of Redstone i4e was novated to Bovis Lend Lease on 29 September 2010 for a cash consideration of £2.0 million, together with the receipt of accelerated payment of invoiced and invoiceable debtor balances of a further £2.2 million
The Annual Report for the year ended 31 March 2010 is being posted to shareholders today and will be available on the Company's website www.redstone.co.uk.
Enquiries
| Redstone plc Peter Hallett, Chief Financial Officer Tel. +44 (0)845 203 3903 | FinnCap Marc Young / Charlotte Stranner Tel. +44 (0)20 7600 1658 | Hansard Communications Justine James Tel.+44 (0)20 7245 1100
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Redstone plc
Chairman's statement
Introduction
I am reporting to you for the first time as Chairman of Redstone plc, following my appointment as Executive Chairman, replacing Stephen Yapp, on 8 September 2010, alongside my colleague, Tony Weaver who was appointed Group Chief Executive contemporaneously. Our appointment as executive directors follows a short period of non-executive responsibility following appointment as such on 2 August 2010.
The Board wish to thank Stephen for his contribution over the past year; he joined the Company in order to stabilise and safeguard the business and he leaves having helped negotiate a successful refinancing and equity fundraising which has left the business in what the Directors believe to be a strong position for future growth. Peter Hallett continues as Chief Financial Officer (CFO) of the Company.
Background to and reasons for the refinancing
The Group raised up to £6 million of committed funding in September 2009 by creating the 2009 Convertible Loan Notes ('2009 CLN'), of which prior to the refinancing detailed below (approved by shareholders in General Meeting on 8 September 2010) the Group had issued £4.5 million.
However, the nature of the 2009 CLN, which is classified as a debt instrument, combined with the existing debt facilities provided to the Group, resulted in a high level of borrowings and consequent gearing. As a consequence, the Group's credit rating and perceived risk profile in its operating markets was adversely affected. Divisional trading was also beginning to be adversely affected and the Group was unable to capitalise upon certain new business opportunities that it was well placed to deliver from an operational perspective.
It therefore became apparent that the Group needed to recapitalise to reduce the level of gearing and at the same time re-negotiate its Banking Facilities and the repayment terms of the loan outstanding to Eckoh plc. It was also recognised that the Board required strengthening by the appointment of Tony and I to provide specific IT sector expertise.
Details of the refinancing
The refinancing comprised the following significant elements:
·; An 'Initial Placing' of 1,304,800,000 new Ordinary Shares at a price of 0.5p per share raising approximately £6.5 million (before commissions and expenses)
·; The subscription of 100,000,000 Ordinary Shares at a price of 0.5p per share to raise £0.5 million (on or before 31 December 2010)
·; The injection of £1.5 million under the 2009 CLN, bringing the total principal outstanding under the 2009 CLN to £4.5 million. The Company received notice from the noteholders to convert the entire outstanding principal sum under the 2009 CLN into Ordinary Shares at a price of 0.5p per share, resulting in the issue of a further 900,000,000 Ordinary Shares
·; The settlement of the Eckoh Loan for a cash payment of £0.5 million payable by the Company, together with the issue of 200,000,000 Ordinary Shares in consideration for waiving all sums due under the Eckoh Loan. The Eckoh Loan settled by the agreement was £2.9 million, comprising the original loan principal of £2.7 million and an additional fee payable on 30 September 2012 of £0.2 million.
·; Therefore approximately £8.5 million of new funding (including £1.5 million under the 2009 CLN) has been injected into the Group through the refinancing, which will be used to strengthen the balance sheet, and provide additional working capital headroom and funding for the future development of the business.
In conjunction with the injection of new capital, the Group has also amended the terms of its existing senior debt facilities with the Bank. A summary of the key changes are as follows:
·; Extension of the Facility Term by two years and three months to 31 December 2013
·; Variation to the repayment profile of the term loan, acquisition and disposal restrictions, existing hedging arrangements and excess cash flow sweep provisions
·; Restructuring of the various fees payable under the Facility
·; Variation to the financial covenants including a holiday from financial covenant testing for a limited period and a once only right to elect not to test the financial covenants during a limited period
·; The Board are pleased with the revised terms agreed with the Bank and are grateful for their engagement and commitment over the past 12 months since the rescue refinancing in September 2009, enabling the Group to design and structure what the Board consider is an optimal and longer term capital solution for all stakeholders.
Operational review
As highlighted in the Half Year Report, the business has actively devolved more autonomy to the Trading Divisions, and has consolidated the Converged Solutions operations within a single trading entity. The Group now has clarity in respect of its operations, which will assist greatly in our operational review of the business as we seek to maximise returns by focusing the Group on high margin and high value business.
The clarity and autonomy provided by the divisional restructure has already resulted in a significant reduction in central costs in terms of headcount and by the closure and surrender of the lease, on the former head office in Great Eastern Street, London. As a result, the annualised central costs run rate from 1 April 2010 has been reduced by approximately 50% from £3.4 million p.a. of central costs reported for the year to 31 March 2010, to circa £1.4 million p.a.
A summary of the divisional performance is provided below. The last few months to September 2010 have been particularly challenging, whilst the business sought a solution to its capital structure and balance sheet constraints, and the Directors would like to thank the Company's employees for their continued hard work and professionalism, and our customers and suppliers for their ongoing support. A detailed Financial Review of the year can be found below.
Converged Solutions
Against a difficult economic backdrop, the former Converged and Comunica businesses have been consolidated into a single trading entity, Converged Solutions, and have continued to secure significant new clients and maintain and develop existing client relationships.
The financial performance for the year is satisfactory given the difficult market conditions, the consolidation of the division, and client concerns expressed over the strength of the Group balance sheet, which have now been addressed.
The performance of the division was largely underpinned by recurring revenues provided by our contracted managed services and maintenance business. This has compensated for the lack of major projects business, due to the historically low level of major construction projects being undertaken in the current market. Our strategy of ensuring a good sector spread of clients resulted in 25% of turnover arising from new clients in financial, legal, education, government, health and media sectors.
Our strategy is focused on delivering an equal mix of managed solutions/maintenance services and project works; and to also have a blended mix between ICT and connectivity solutions. This will ensure we are able to maintain business across a broad spectrum of market sectors; and continue to develop innovative solutions which create real value for our clients.
The key focus areas for the business will be connectivity solutions; IP based Physical Security solutions, OneNET intelligent buildings, ICT solutions, Redreach support and managed services including desktop support.
Managed Solutions
The Managed Solutions division continued to trade solidly despite difficult market conditions.
Managed Solutions connects, secures and manages large enterprises and organisations in both the private and public sector, and offers additional expertise in sustainability. Our solutions can span the entire IT infrastructure, increasingly cloud based, of our customers, ensuring that their businesses are connected efficiently and that data and information is available and securely protected, encapsulated by the provision of 'Secure Access to Business Intelligence'.
Our connectivity business continues to grow in excess of 20% per annum, driving our long-term recurring revenue base. We have signed a number of new Wide Area Network contracts with leading companies, including Brighthouse, Hays Group, Cardiff Pinnacle, RIBA and Vitacress.
The security business continues to evolve by expansion of its key strategic partnerships with world-class software vendors such as McAfee, Computer Associates, Sophos, IBM, Websense and Microsoft. We recently announced an exclusive formal agreement with Secure Passage of Kansas, USA, for the funding of Managed Solutions sales and technical personnel to assist in the development of Secure Passage's market penetration and customer support in the UK and Europe. Secure Passage are a leading US based global provider of Firewall technology.
The managed services indirect channel continues to expand based on our key partnerships with major systems integrators such as Fujitsu, Serco and Steria, with notable contract wins seen throughout the year such as National Air Traffic Services and Serco Local Government end point security contract.
Redstone i4e
This division was set up on 1 January 2010 to manage the Building Schools for the Future ('BSF') Birmingham Contract, which at the time of signing had potential revenues of up to £150 million over 15 years, and represented an opportunity for the Group to establish itself in a new market.
On 5 July, Michael Gove, Minister for Education announced the scrapping of the BSF programme, stating that school projects that had reached financial closure would continue, although, all other projects were cancelled forthwith, subject to limited exceptions.
There has consequently been a great deal of uncertainty surrounding the Birmingham BSF contract and although the position remains unclear, 5 schools out of a total of 39 had reached financial closure and will continue. A further 8 schools are expected to reach financial closure within a short period of time.
As a consequence of the cancellation of such a large proportion of the expected 39 school programme, we have prudently written off £1.6 million of costs in the 2010 accounts which would ordinarily have been deferred against expected future profits arising from the original 39 school programme.
On 29 September 2010 the Group announced the novation of its contractual interests in the BSF ICT Birmingham Contracts to Bovis Lend Lease Limited for the sum of £2.0 million, together with the receipt of accelerated payments of invoiced and invoiceable debtor balances of a further £2.2 million, resulting in a net cash inflow of £4.2 million to the Group.
Virtually all staff of Redstone i4e have, as a result of the novation, transferred to Bovis Lend Lease in accordance with the TUPE regulations. Following novation, the Group has no further future liability in respect of the BSF ICT Birmingham Contracts.
Technology
Following the particularly dramatic downturn in the Irish economy, Redstone Technology restructured the business at the beginning of the year removing €1.3 million per annum of costs. Revenues were impacted significantly as the number of large projects reduced but the restructured business achieved a positive EBITDA of £0.4 million in the toughest trading conditions for decades.
The Technology business continues to be a major player in the enterprise solutions and services market in Ireland and the outlook for the business remains positive with a major focus on the development of a specialist managed services application to drive growth in recurring revenue.
The business has also formed a key alliance with Microsoft representing a shift in focus from a predominantly hardware based business in the past.
Outlook
The economic environment continues to be difficult, with the full impact of the government spending cuts to be announced shortly and taxation increases soon to impact the economy. Redstone has already felt some of the economic pain through the cancellation of a large part of the BSF ICT Birmingham contracts although our interest in these contracts has now been novated to Bovis Lend Lease Limited.
However, following the successful refinancing of Redstone, the associated transformation of the Group's balance sheet and business restructuring completed to date, the Group is well placed to build and consolidate the excellent client base maintained and extended throughout a problematical 12 months. In addition, the weakness of the economy and its impact on the ICT sector provides attractive opportunities to further consolidate our areas of increased focus through corporate activity.
The Board firmly believe that Redstone is well placed to build on its position in the ICT sector, and provides a platform where significant value can be unlocked through the disposal of non-core and low margin assets and activities, together with sensible consolidation of duplicated processes. The Board is optimistic for the future prospects of the Group.
Ian Smith
Executive Chairman
29 September 2010
Financial Review
Trading
The Group reported an operating loss of £11.7million (2009: £26.5 million loss) and an adjusted EBITDA* loss of £1.9 million (2009 £0.8 million profit) from Continuing Operations for the year ended 31 March 2010.
The loss was principally due to an adjusted EBITDA* loss of £2.3 million in Redstone i4e, combined with central costs of £3.4 million, which were reflective of running a larger Group inclusive of the Telecoms and Mobile businesses, which were sold in August 2009. The Group has since significantly restructured central support operations, including moving from the former Head Office in Great Eastern Street in London, and relocated and downscaled central Group operations to smaller and more cost-effective premises in Kirtlington, Oxfordshire. Future central costs will therefore show a significant reduction from the level reported in these accounts, commensurate with the smaller Group.
Gross profit decreased by 20.2% to £45.9 million (2009: £57.5 million), though the margin improved to 47.1% (2009: 46.8%). The decrease largely arose in H1 which recorded a reduction in gross profit of £10.4 million, which was principally driven by the completion of the White City shopping centre contract in 08/09.
Selling and distribution costs of £9.7 million (2009: £11.8 million) and administrative expenses of £45.4 million (2009: £72.4 million) have in aggregate decreased by £26.5 million or 31.5%. This is made up of a £17.6 million decrease in goodwill impairment charges, with an additional underlying decrease in costs and expenses of £8.9 million.
Redstone Converged Solutions reported an adjusted EBITDA* of £2.0 million (2009: £1.0 million), an increase of 100%. This pleasing result reflects the actions taken to reduce the operating cost base in response to the economic downturn and associated dearth of major construction projects.
The division continues to focus on providing added value services to its existing client base, to maintain high levels of client retention and maximise revenue opportunities and despite difficult market conditions, Redstone Converged Solutions continues to win new business.
Redstone i4e reported an adjusted EBITDA* loss for the year of £2.3 million, of which £1.8 million related to the exit of the BSF contract in Lancashire. The remaining loss of £0.5 million is made up of overheads incurred in setting up the Redstone i4e division. Provisions of £1.6 million against costs deferred on the BSF Birmingham project have been included as exceptional items.
As reported in the Chairman's statement, there has been a great deal of uncertainty surrounding the Birmingham BSF contract and although the position remains unclear, 5 schools out of a total of 39 had reached financial closure and will continue and a further 8 schools are expected to reach financial closure within a short period. Work on the first 5 schools which had reached financial closure commenced after the 31 March 2010. Delivery of the data centre is ongoing and the first 5 schools are expected to go live in phases from January 2011.
All bidding activity within Redstone i4e is suspended pending clarification of the future of public spending on education.
On 29 September 2010 the Group announced the novation of its contracted interests in the BSF ICT Birmingham Contracts to Bovis Lend Lease Limited for the sum of £2.0 million, together with the receipt of accelerated payment of invoiced and invoiceable debtor balances of a further £2.2 million, resulting in a net cash inflow of £4.2 million to the Group.
All staff of Redstone i4e, except for the Managing Director and divisional CFO, have as a result of this novation transferred to Bovis Lend Lease Limited in line with TUPE regulations.
Following novation the Group has no further future liability in respect of the BSF ICT Birmingham Contracts.
Redstone Managed Solutions reported an adjusted EBITDA* of £1.4 million (2009 £1.4 million) for the full year, which was a creditable result in difficult market conditions, despite having reported adjusted EBITDA* growth of £0.2 million or 42.2% in H1.
Revenues increased by 25% to £18.8 million (2009 £15.0 million), demonstrating the success of the strategy of integrated security and connectivity offering to market.
The investment in the sales team required to generate revenue growth reduced the adjusted EBITDA* margin in the short term as expected.
Redstone Technology reported adjusted EBITDA* of £0.4 million (2009: £0.5 million).This was a commendable performance in a severely constrained market following the economic downturn witnessed in Ireland, where as a result turnover decreased by 33.5% to £9.3 million (2009: £14.0 million).
In response to the downturn, the division rationalised its operating cost base, resulting in a 34.3% decrease to £8.9 million. The business has also formed a key alliance with Microsoft representing a shift in focus from a predominantly hardware based business in the past to support services and maintenance.
*Earnings before net finance costs, tax, depreciation, amortisation, exceptional items, goodwill impairment and share-based payment charges.
Operating loss
The Operating loss for the year was £11.7 million (2009: £26.5 million). The £14.9 million reduction in operating losses was principally due to the adjusted EBITDA* adverse impact of £2.7 million offset by a £17.6 million reduction in goodwill impairment charges to £1.5 million in 2010 (2009: £19.2 million).
A further goodwill impairment charge of £1.5 million has been provided in 2010 against Redstone Technology based on the value of projected future cash flows of the respective divisional entities.
Other variations in operating loss arise from a decrease of £0.4 million in aggregate Depreciation and amortisation of intangibles, an increase in exceptional costs of £1.2 million and a decrease in share-based payments of £0.7 million.
Exceptional items
Exceptional items amounted to £2.6 million (2009 £1.3 million), and comprise:
|
| 2010 £m | 2009 £m |
| Employee related costs | 1.1 | 0.9 |
| Reversal of IFRS share-based payments provision | (1.1) | - |
| Integration and reorganisation costs | 1.0 | 0.3 |
| Provision for irrecoverable BSF Birmingham costs | 1.6 | - |
| Hilton head fair value adjustment | - | 0.1 |
|
| 2.6 | 1.3 |
Employee related and integration and reorganisation costs represent costs incurred in the continuing reorganisation of the Group following the disposal of the Telecoms division and the group's refinancing in 2009. These have been offset by the reversal of an IFRS 2 share-based payments provision relating to an LTIP in respect of former executive Directors.
In addition, following the announcement by the government of the cancellation of all Building Schools for the Future (BSF) projects which had yet to reach financial close excepting some which were very close to financial close, the Group has made provision for uncertainty with respect to the recoverability of costs incurred to 31 March 2010 in respect of the BSF Birmingham projects. The total amount of the provision is £1.6 million.
Net finance cost
Finance income receivable was unchanged at £0.2 million (2009: £0.2 million).
Finance costs were similarly largely unchanged at £4.7 million (2009: £4.7 million). The total includes £0.7 million (2009: £1.6 million) being the movement in the valuation of the interest rate swap. This is a non-cash item and its value is calculated with reference to the estimated movements in interest rates over the next 5 and a half years when compared to the rates at which the Group has hedged.
Net borrowings decreased to £20.1 million (2009: £24.3 million) during the year due to the disposal of the Telecoms division and a release of working capital, offset by operating losses and cash restructuring costs.
Corporation Tax
The tax credit for the year was £0.3 million (2009: £0.7 million tax charge). The tax charge in 2009 arose because of a reduction in the in the recognition of the deferred tax asset in line with the economic downturn. In 2010, the deferred tax asset has been similarly reduced but is proportionately less than 2009 because of the reduced operating losses.
Profit/(Loss) for the period from Discontinued Operations
On 28 August 2009, the Group disposed of its Telecoms and Mobile businesses for a cash consideration of £16.5 million before costs. The net proceeds were used to significantly reduce the Group's bank debt.
The overall profit for the period in respect of Discontinued Operations is £1.0 million (2009: £23.2 million loss). This comprises the trading results of the Telecoms businesses for the period up to disposal on 28 August 2009 which produced a profit before taxation of £0.4 million (2009: £23.2 million loss), and a net profit on disposal of the businesses of £0.6 million, together with a corporation tax credit of £0.3 million loss for the period attributable to owners of the parent company amounted to a loss of £14.9 million for the year (2009: £55.0 million loss)
*Earnings before net finance costs, tax, depreciation, amortisation, exceptional items, goodwill impairment and share-based payment charges.
Cash flow
The Group generated a cash outflow of £12.5 million (2009 £2.2 million):
|
| 2010 £m |
| Net decrease in cash and cash equivalents 31 March 2009 | (2.2) |
| Increase in Operational cash flows from Continuing Operations | (3.7) |
| Decrease in cash flows due to Discontinued Operations | (2.8) |
| Decrease in tangible and intangible capital expenditure | 0.4 |
| Sale of Telecoms and Mobile businesses | 14.1 |
| Net cash flows used in financing activities | (18.3) |
| Net decrease in cash and cash equivalents 31 March 2010 | (12.5) |
Operational cash outflow for the year amounted to £4.5 million (2009: £0.8million outflow) with a further out flow of interest paid of £3.0million (2009: £3.1 million). Operational cash flow benefited from a release of funds from working capital of £0.5 million (2009: £0.3 million investment in working capital), and also included the cash out flows of exceptional items of £2.6 million (2009: £1.3 million).
Total cash outflows generated from Continuing Operations amounted to £7.5 million (2009: £3.8 million), and Discontinued Operations generated an additional outflow £0.1million (2009 cash inflow £2.7 million).
Capital expenditure on acquiring tangible and intangible assets amounted to £2.1 million (2009: £2.0 million), reflecting the Group's commitment to investing in the core business activities.
In addition, the Group realised £14.1 million of net cash from the disposal of the Telecoms and Mobile businesses, which was effectively expended in the £16.4m outflow (2009: £1.9 million cash inflow) in restructuring Group borrowings.
Debt
At 31 March 2010, the Group had a total facility with Barclays Bank plc of £18.0 million (2009: £30.25 million). The facility comprised a term loan of £10.0 million (2009: £11.25 million) and a revolving credit facility of £8.0 million (2009: £11.5 million). The synthetic convertible loan with Barclays was repaid in the year (2009: £7.5 million).
The net reduction in facilities was primarily funded by the disposal of the Telecoms and Mobile businesses.
At 31 March 2010, the balance sheet value of borrowings under the bank facility was £16.1 million (2009: £28.6 million). Borrowings under the bank facility were repayable on 30 September 2011 and fully secured by a fixed and floating charge over Group assets.
At 31 March 2010 the Group also had an £8.0 million loan facility (2009 £nil) under the 2009 Convertible Loan Facility ('2009 CLN'), of which £6.0 million was committed and £3.0 million was drawn during the financial year to provide additional working capital.
The key terms of the loan notes were as follows:
·; Loan notes were convertible into shares, at the loan note holders' option and subject to shareholder approval, at a conversion price of 1.37 pence per share on maturity. The conversion price was subsequently varied with the agreement of the CLN holders to 0.5p per share in the capital restructuring detailed in the Chairman's statement and below
·; A premium equal to 2 times the outstanding principal amount was payable at maturity. The premium was subsequently waived by the CLN holders as part of the capital restructuring detailed in the Chairman's statement and below
·; Additional loan notes could be issued/drawn upon at any time, subject to the required notice being served by the Group, and up to the maximum amount provided under the facility
·; The maturity date was 1 October 2011
·; Secured by a fixed and floating charge over the Group's assets, though ranking behind the security of Barclays Bank plc
At 31 March 2010, the Group also had loan outstanding to Eckoh plc of £2.7 million (2009: £2.7 million) plus a fee payable on 30 September 2012 of £0.2 million (2009: £nil), relating to the acquisition of Symphony Telecom Limited ('the Eckoh loan'), the key terms of which were as follows:
·; Repayments of £1.0 million and £1.8 million due on 30 September 2011 and 2012 respectively
·; A fee of £0.2 million was payable on 30 September 2012
·; Secured over the assets of the Group but subordinated behind Barclays Bank and the 2009 CLN holders
Subsequent to 31 March 2010, and as part of the capital restructuring detailed in the Chairman's statement and below, the Eckoh Loan was settled by a combined cash and equity consideration of £0.5 million and £1.0 million respectively.
At 31 March 2010, total debt, net of cash at bank and excluding finance leases was £19.6 million (2009: £23.9 million).
Capital Restructuring
As detailed in the Chairman's statement, subsequent to the year end the Group executed a significant recapitalisation of the Group.
The total cash raised was £8.5 million and £5.5 million, (including £1.5 million of the cash raised), of debt was converted into equity, resulting in a £12.5 million increase in equity summarised as follows:
·; £12.5 million of new equity raised by way of:
·; An Initial Placing of 1,304,800,000 new Ordinary shares for cash at 0.5p per share
·; A Subscription for 100,000,000 new Ordinary Shares for cash at 0.5p per share
·; Conversion of £4.5 million of the 2009 CLN to equity by the issue of 900,000,000 new Ordinary shares
·; Issue of 200,000,000 new Ordinary shares at 0.5p per share in part settlement of the Eckoh Loan.
The new equity has been employed as follows:
● Total cash raised from the Placing, and Subscription was approximately £7.0 million yielding estimated net proceeds of £6.4 million after expenses. This has been utilised in payment of the £0.5 million cash consideration element of the Eckoh Loan settlement, with the balance received by the Group to fund working capital and future development of the business.
● £4.5 million in full settlement of the total principal outstanding under the 2009 CLN.
● £1.0 million as part of the the Eckoh Loan settlement. The Eckoh Loan of £2.9 million has been settled for £1.0 million in equity and £0.5 million in cash in September 2010.
Revised bank facilities
As part of the capital restructuring detailed above, the Group has recently amended the terms of its existing senior debt facilities with Barclays Bank plc to effect the following key changes:
● An extension of the final repayment date by two years and three months to 31 December 2013
● A variation of the repayment profile
● Restructuring of the various fees payable in respect of the facilities. The bank has agreed to treat the sum of £0.6 million in respect of fees owed to it by the Group in relation to existing facilities as satisfied, by the issue of fully paid warrants over 28,000,000 new Ordinary shares equivalent to £140,000 at the placing price of 0.5p per share. The warrants may be exercised at any time from the date of Admission, and are freely transferable
● Variation to the restrictions on acquisitions and disposals by the Group
● An increase in the limit permitted for third party asset finance facilities and other financial indebtedness
● A variation to the financial covenants including a holiday from financial covenant testing for a limited period and a one-off right to elect not to test the financial covenants for a limited period
● A consent to the settlement with Eckoh plc
● An amendment to the excess cash flow sweep provisions which will now commence two years later than originally provided for, with effect from 31 March 2012
● The revised banking facilities were subject to the satisfaction of various conditions precedent, all of which are now satisfied.
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 in providing adequate overdraft facilities and of its debt holders and shareholders. The Group has raised further equity finance, converted the loan notes subsequent to the year end (note 31), agreed new facilities with Barclays Bank through to 31 December 2013, and the bank has agreed to a variation to the financial covenants.
The variations to the covenants include a holiday from financial covenant testing for a limited period and a one-off right to elect not to test the financial covenants during a limited period, see note 31 for further details.
The Group's new strategy is expected to achieve cost savings and realise proceeds from the sale of certain business assets. The nature of the Group's business and its new strategy is such that there can be considerable variation in cash inflows, and the timing thereof. Whilst 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 12 months from the date of approval of these financial statements.
For these reasons the Directors believe the going concern basis of preparation for the financial statements for the year ended 31 March 2010 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 with cash, bank borrowings, lease finance and capital provided by its shareholders. The revolving credit facility is used to provide short-term cash flow requirements. Other financial assets and liabilities, such as trade receivables and 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 though has not entered into any such arrangements in the year. The purpose is to manage currency risks arising from the Group's operations.
Interest rate risk
The Group's policy is to manage interest rate risk and to minimise the cost of borrowings and to maximise its return from its cash balances.
Interest on borrowings with a floating rate is set at a percentage margin above either LIBOR or base rate. There are no fixed rate borrowings. The other financial instruments of the Group as at 31 March 2010 are non-interest bearing and are therefore not subject to interest rate risk.
The Group has an interest rate swap agreement with Barclays Capital whereby the interest on a reducing notional principal is capped once the LIBOR rate reaches 6.5%. If LIBOR falls below 4.89% the interest rate rises on a 1 for 1 basis for each incremental fall. The notional principle as at 31 March 2010 was £12.5 million (2009: £17.5 million).
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 debts 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 flow forecasts of the Group's working capital headroom and cash and cash equivalents on a daily basis.
The Group aims to mitigate liquidity risk by managing cash within its operations. This is applied within the operations by the setting of cash collection targets and controlling expenditure through central authorisation of payments. Any excess cash would be placed on low risk, short-term interest bearing deposits.
Other balance sheet areas
Vacated property has remained constant during the year as the Group has been unable to hand back properties through negotiation with the landlord, no leases have ended, and we have been unable to sub-let any vacated property. As a result, the cash outflow in respect of vacant property has remained constant at £0.4 million (2009: £0.4 million).
Goodwill of £17.2 million (2009: £27.2 million) represents goodwill on the acquisition of subsidiaries. As required by IAS 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 £1.5 million (2009: £43.8 million).
The other intangible assets of £10.7 million (2009 £18.7 million) comprise mainly the value attributable to acquired contracts and customer relationships. Other intangible assets were subject to an amortisation charge of £3.7 million (2009: £5.3 million) during the year in line with the Group's amortisation policy.
The value of property plant and equipment decreased by £1.2 million to £4.3 million (2009: £5.5 million) mainly as a result of reduced capital expenditure.
Shareholders' funds now stand at £7.0 million as at 31 March 2010 (2009: £22.0 million), prior to the capital restructuring.
Following the capital restructuring the Group is in a much stronger financial position, and is provided with a stronger base to build new business and retain the trust of our existing clients and suppliers.
Peter J Hallett
Chief Financial Officer
29 September 2010
Consolidated Income Statement
for the year ended 31 March 2010
|
| Note | Year ended 31 March 2010 £000 | Year ended 31 March 2009 £000 |
| Continuing Operations |
|
|
|
| Revenue | 2 | 97,559 | 123,068 |
| Cost of sales |
| (51,624) | (65,534) |
| Gross profit |
| 45,935 | 57,534 |
| Other operating income |
| 77 | 185 |
| Selling and distribution costs |
| (9,731) | (11,772) |
| Administrative expenses |
| (47,940) | (72,429) |
| Adjusted EBITDA* |
| (1,876) | 819 |
| Depreciation |
| (1,848) | (1,902) |
| Amortisation of intangibles | 4 | (2,776) | (3,088) |
| Goodwill impairment | 4 | (1,535) | (19,174) |
| Exceptional items included within administrative expenses | 3 | (2,552) | (1,338) |
| Share-based payments |
| (1,072) | (1,799) |
| Operating (loss) |
| (11,659) | (26,482) |
| Finance income |
| 167 | 160 |
| Finance costs |
| (4,712) | (4,717) |
| Net finance cost |
| (4,545) | (4,557) |
| (Loss) on ordinary activities before taxation |
| (16,204) | (31,039) |
| Income tax credit/(expense) |
| 303 | (739) |
| (Loss) for the year from Continuing Operations (attributable to shareholders in the parent company) |
| (15,901) | (31,778) |
| Profit/(loss) for the period from Discontinued Operations |
| 1,047 | (23,214) |
| Loss for the period attributable to owners of the parent company |
| (14,854) | (54,992) |
| Earnings per share |
|
|
|
| Basic earnings per share |
| (10.91p) | (21.80p) |
| Diluted earnings per share |
| (10.91p) | (21.80p) |
*Earnings before net finance costs, tax, depreciation, amortisation, exceptional items, goodwill impairment and share-based payment charges.
Consolidated Statement of Comprehensive Income
|
| Year ended 31 March 2010 £000 | Year ended 31 March 2009 £000 |
| Loss for the period | (14,854) | (54,992) |
| Currency translation differences | (149) | 64 |
| Total comprehensive income attributable to owners of the parent company | (15,003) | (54,928) |
Consolidated Statement of Changes in Equity
year ended 31 March 2010
|
|
|
|
| Other reserves |
|
| ||
|
| Note | Called up share capital £000 | Share premium account £000 | Merger reserve (a) £000 | Capital redemption reserve (b) £000 | Translation reserve (c) £000 | Accumulated Loss £000 | Total equity £000 |
| Equity as at 1 April 2008 |
| 14,574 | 18,159 | 216 | 5,683 | 48 | 37,385 | 76,065 |
| Total Comprehensive Income |
| - | - | - | - | 64 | (54,992) | (54,928) |
| Transactions with owners: |
|
|
|
|
|
|
|
|
| Stock Compensation scheme | 27 | - | - | - | - | - | 1,783 | 1,783 |
| Purchase of own shares | (d) | - | - | - | - | - | (917) | (917) |
| Equity as at 1 April 2009 |
| 14,574 | 18,159 | 216 | 5,683 | 112 | (16,741) | 22,003 |
| Total Comprehensive Income |
| - | - | - | - | (149) | (14,854) | (15,003) |
| Transactions with owners: |
|
|
|
|
|
|
|
|
| Stock Compensation scheme | 27 | - | - | - | - | - | 91 | 91 |
| Purchase of own shares | (d) | - | - | - | - | - | (136) | (136) |
| Consideration shares | (e) | 4 | 26 | - | - | - | - | 30 |
| Equity as at 31 March 2010 |
| 14,578 | 18,185 | 216 | 5,683 | (37) | (31,640) | 6,985 |
(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 have been recognised in retained earnings in accordance with SIC 12 and IAS 32.
(e) Consideration shares
Consideration shares were issued to satisfy the purchase consideration of business combinations undertaken in 2007.
Consolidated Balance Sheet
as at 31 March 2010
|
| Note | 31 March 2010 £000 | 31 March 2009 £000 |
| Assets |
|
|
|
| Non-current assets |
|
|
|
| Intangible assets | 4 | 27,903 | 45,945 |
| Property, plant and equipment |
| 4,308 | 5,511 |
| Other non-current assets |
| 773 | 467 |
|
|
| 32,984 | 51,923 |
| Current assets |
|
|
|
| Inventories |
| 1,672 | 2,262 |
| Trade and other receivables | 5 | 28,553 | 42,799 |
| Deferred tax asset |
| 1,217 | 1,353 |
| Income tax receivable |
| 509 | 632 |
| Cash and cash equivalents |
| 934 | 7,368 |
|
|
| 32,885 | 54,414 |
| Total assets |
| 65,869 | 106,337 |
| Equity and liabilities |
|
|
|
| Equity |
|
|
|
| Share capital |
| 14,578 | 14,574 |
| Share premium account |
| 18,185 | 18,159 |
| Other reserves |
| 5,862 | 6,011 |
| Accumulated loss |
| (31,640) | (16,741) |
| Total equity |
| 6,985 | 22,003 |
| Current liabilities |
|
|
|
| Trade and other payables | 6 | 31,174 | 44,083 |
| Derivative financial instruments |
| - | 415 |
| Deferred tax liability |
| 467 | - |
| Deferred consideration |
| - | 30 |
| Borrowings | 7 | 6,171 | 29,824 |
| Provisions |
| 285 | 354 |
|
|
| 38,097 | 74,706 |
| Non-current liabilities |
|
|
|
| Trade and other payables | 6 | 12 | 177 |
| Derivative financial instruments |
| 3,140 | 2,019 |
| Borrowings | 7 | 14,908 | 1,821 |
| Provisions |
| 439 | 800 |
| Deferred tax liability |
| 2,288 | 4,811 |
|
|
| 20,787 | 9,628 |
| Total liabilities |
| 58,884 | 84,334 |
| Total equity and liabilities |
| 65,869 | 106,337 |
The notes are an integral part of these consolidated financial statements.
Approved by the Board on 29 September 2010
I Smith P Hallett
Director Director
Consolidated Cash Flow Statement
year ended 31 March 2010
|
| Note | Year ended 31 March 2010 £000 | Year ended 31 March 2009 £000 |
| Cash flows from continuing operating activities |
|
|
|
| Cash (absorbed) in operations | 8 | (4,537) | (635) |
| Income tax credited/(paid) |
| 76 | (214) |
| Cash flows absorbed by continuing operating activities |
| (4,461) | (849) |
| Interest received |
| - | 160 |
| Interest paid |
| (3,002) | (3,078) |
| Net cash flows absorbed by continuing operating activities |
| (7,463) | (3,767) |
| Net cash (outflow)/inflow from discontinued operating activities |
| (99) | 2,674 |
| Cash flows from investing activities |
|
|
|
| Purchase of property, plant and equipment |
| (2,081) | (2,042) |
| Purchase of intangible assets | 4 | (575) | (1,003) |
| Sale of business operations, net of costs |
| 14,093 | - |
| Acquisition of subsidiaries, net of cash acquired |
| - | (20) |
| Net cash flows generated from/(used in) investing activities |
| 11,437 | (3,065) |
| Cash flows from financing activities |
|
|
|
| Proceeds from issue of convertible loans |
| 2,733 | - |
| Proceeds from bank borrowings |
| - | 7,917 |
| Repayment of borrowings |
| (19,138) | (6,000) |
| Net cash flows used in financing activities |
| (16,405) | 1,917 |
| Net decrease in cash and cash equivalents |
| (12,530) | (2,241) |
| Cash and cash equivalents at 1 April |
| 7,368 | 9,609 |
| Cash and cash equivalents at 31 March |
| (5,162) | 7,368 |
Notes to the Consolidated Financial Statements
year ended 31 March 2010
1 Accounting policies - Group
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 2006. The principal accounting policies, which have been applied consistently throughout the year and by all subsidiary companies, 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 adopted International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 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 and shareholders. Subsequent to the year end (note 31) the Group has raised further equity finance, converted the loan notes, agreed new facilities with Barclays Bank through to 31 December 2013, and the bank has agreed to a variation to the financial covenants. The variation to the covenants includes a holiday from financial covenant testing for a limited period and a one-off right to elect not to test the financial covenants during a limited period. The Group's new strategy is expected to achieve cost savings and proceeds from the sale of certain non core assets and activities. The nature of the group's business and its new strategy is such that there can be considerable variation in cash inflows, and the timing thereof. Whilst this adds risk to the groups 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 12 months from the date of approval of these financial statements. For these reasons the Directors believe the going concern basis to be appropriate.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in 1.27 in the accounting policies.
New standards adopted in the year are discussed in Section 1.26.
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 12 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 13). 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.
Other intangible assets
Other intangible assets are carried at cost less accumulated amortisation and impairment losses (note 1.5). Other intangible assets acquired separately from a business are carried initially at cost. An intangible asset acquired as part of a business combination is recognised outside goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably.
Costs that are directly associated with development of identifiable and unique software products generated for use by the Group, and that will probably generate economic benefits exceeding costs beyond 1 year, are recognised as intangible assets. These represent the direct employment costs of software developers time spent on relevant projects. Computer software development costs recognised as assets are amortised over their estimated useful lives being 3 years.
Software and software licences are classified as intangible assets and include computer software that is not integral to a related item of hardware.
Intangible assets with a finite life are amortised on a straight-line basis over their expected useful lives, as follows:
Customer contracts and related relationships 1-17 years Trademarks, licences and other intangible assets 5 years Software 3-4 years
Impairment and amortisation charges are included within the administrative expenses line in the income statement.
1.4 Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value (note 1.5).
Depreciation, down to residual value, is calculated on a straight-line basis over the estimated useful life of the asset which is reviewed on an annual basis.
Leasehold improvements 5 years or over lease term if shorter Network infrastructure and equipment 1-20 years Equipment, fixtures and fittings 2-5 years
An item of property, plant and equipment is de-recognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is de-recognised.
1.5 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
Operating segments are reported in a manner consistent with the internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been identified as the Group Chief Executive and the Chief Financial Officer. The Group Chief Executive and the Chief Financial Officer are jointly responsible for resources allocation and assessing the performance of the operating segments. The operating segments are defined by distinctly separate product offerings or markets. The operating segments consist of i4e, Converged Solutions, Managed Solutions, Technology and the Central segment. On adopting IFRS 8 the segments have changed in that i4e is shown separately having previously been a part of Converged Solutions and a division of the Telecoms business that was not sold is now included within Converged Solutions. 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 2010 and 2009.
(a) For the year ended 31 March 2010
| Continuing Operations | i4e £000 | Converged Solutions £000 | Managed Solutions £000 | Technology £000 | Central £000 | Total £000 |
| Total segment revenue | 289 | 68,048 | 19,358 | 9,864 | - | 97,559 |
| Inter-segment revenues | 1,342 | (213) | (558) | (571) | - | - |
| Revenue | 1,631 | 67,835 | 18,800 | 9,293 | - | 97,559 |
| Adjusted operating costs* | (3,883) | (65,881) | (17,430) | (8,878) | (3,363) | (99,435) |
| Adjusted EBITDA * | (2,252) | 1,954 | 1,370 | 415 | (3,363) | (1,876) |
| Depreciation | - | (702) | (570) | (329) | (247) | (1,848) |
| Amortisation of intangible assets | - | (1,775) | (65) | (43) | (893) | (2,776) |
| Impairment of goodwill | - | - | - | (1,535) | - | (1,535) |
| Exceptional items | (1,599) | (398) | (7) | (22) | (526) | (2,552) |
| Equity-settled share-based payments | - | (528) | (199) | (110) | (235) | (1,072) |
| Segment result | (3,851) | (1,449) | 529 | (1,624) | (5,264) | (11,659) |
| Net finance costs |
|
|
|
|
| (4,545) |
| Income tax credit |
|
|
|
|
| 303 |
| (Loss)/profit for the year |
|
|
|
|
| (15,901) |
| Assets and liabilities |
|
|
|
|
|
|
| Segment assets | 1,208 | 41,965 | 15,404 | 5,274 | 2,018 | 65,869 |
| Segment liabilities | 3,296 | 15,765 | 3,693 | 2,052 | 34,078 | 58,884 |
| Net assets | (2,088) | 26,200 | 11,711 | 3,222 | (32,060) | 6,985 |
| Other segment information |
|
|
|
|
|
|
| Capital expenditure |
|
|
|
|
|
|
| Property, plant and equipment | 7 | 742 | 464 | 130 | 699 | 2,042 |
| Intangibles - software | - | 148 | - | - | 427 | 575 |
| Depreciation | - | 702 | 570 | 329 | 247 | 1,848 |
| Amortisation | - | 1,775 | 65 | 43 | 893 | 2,776 |
*Earnings and operating costs before net finance costs, tax, depreciation, amortisation, goodwill impairments, exceptional items and share-based payment charges.
Inter-segment revenues are accounted for on the same basis as third party transactions.
Included in the central segment assets is £1.2 million of fixed assets (2009: £1.0 million), £0.7 million of intangible assets (2009: £1.3 million) and prepayments and other receivables of £0.5 million (2009: £1.2 million).
Included in the central segment liabilities, is the Group's outstanding loan notes and Barclays' borrowings at 31 March 2010 of £27.8 million (2009: £31.3 million), provisions £0.6 million (2009: £1.0 million), accruals and other creditors £5.7 million (2009: £4.8 million).
No single customer represented 10% or more of the Group's revenue and the Group is not overly reliant on a single customer.
All revenue is earned and all assets are held within the UK with the exception of the Technology segment where all revenue is earned and all assets are held in Ireland.
Segment reporting year ended 31 March 2009 (Restated)
| Continuing Operations | Discontinued £000 | i4e £000 | Converged Solutions £000 | Managed Solutions £000 | Technology £000 | Central £000 | Total £000 |
| Total segment revenue |
| - | 92,235 | 18,383 | 14,037 | - | 124,655 |
| Inter-segment revenues |
| 4,436 | (2,607) | (3,350) | (66) | - | (1,587) |
| Revenue |
| 4,436 | 89,628 | 15,033 | 13,971 | - | 123,068 |
| Adjusted operating costs* |
| (3,604) | (88,617) | (13,624) | (13,514) | (2,890) | (122,249) |
| Adjusted EBITDA* |
| 832 | 1,011 | 1,409 | 457 | (2,890) | 819 |
| Depreciation |
| - | (710) | (434) | (289) | (469) | (1,902) |
| Share-based payments |
| - | (332) | (108) | (76) | (1,283) | (1,799) |
| Impairment of goodwill |
| - | (15,716) | - | (3,458) | - | (19,174) |
| Amortisation of intangible assets |
| - | (2,436) | (195) | (63) | (394) | (3,088) |
| Exceptional items |
| - | (712) | (53) | (55) | (518) | (1,338) |
| Segment result |
| 832 | (18,895) | 619 | (3,484) | (5,554) | (26,482) |
| Net finance costs |
|
|
|
|
|
| (4,557) |
| Income tax expense |
|
|
|
|
|
| (739) |
| Loss for the year |
|
|
|
|
|
| (31,778) |
| Assets and liabilities |
|
|
|
|
|
|
|
| Segment assets | 30,541 | - | 49,340 | 15,238 | 7,670 | 3,548 | 106,337 |
| Segment liabilities | 14,664 | - | 24,666 | 4,934 | 2,929 | 37,141 | 84,334 |
| Net assets | 15,877 | - | 24,674 | 10,304 | 4,741 | (33,593) | 22,003 |
| Other segment information |
|
|
|
|
|
|
|
| Capital expenditure |
|
|
|
|
|
|
|
| Property, plant and equipment |
| - | 533 | 690 | 327 | 492 | 2,042 |
| Intangibles - software |
| - | 69 | - | - | 934 | 1,003 |
| Depreciation |
| - | (710) | (434) | (289) | (469) | (1,902) |
| Amortisation |
| - | (2,436) | (195) | (63) | (394) | (3,088) |
*Earnings from continuing operations before interest, tax, depreciation, amortisation, exceptional items and share-based payments.
Redstone has 4 operating business units, namely Converged Solutions, i4e, 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.
On 14 August 2009, Redstone announced that it had entered into an agreement to sell its Telecom and Mobile businesses to Daisy Telecoms Limited, a wholly owned subsidiary of Daisy Group plc on a debt free and cash free basis, for a cash consideration of £17.0 million (before costs).
The sale proceeds were used to reduce the Group's bank debt including repayment in full of the synthetic convertible loan.
Redstone Converged Solutions is a provider of converged IP solutions, with expertise in contact centres, voice and video, IP networks, intelligent building 10neNET 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.
Redstone i4e (information for education) provides IT solutions and services specifically tailored for the requirements of the education sector.
3 Exceptional items
During the year the Group has undergone further restructuring in response to the economic downturn and the group's refinancing, including the costs accelerated depreciation on assets and of exiting Great Eastern street, giving rise to exceptional costs of £2.1million (2009:£ 1.3million). This has been offset by the reversal of an IFRS 2 share based payments charge relating to an LTIP where the beneficiaries have left the company.
In addition, following the announcement by the government of its intention to cancel the Building Schools for the Future project in respect of all non contracted schools subsequent to the year end, the Group has made a provision for uncertainty with respect to the recoverability of deferred costs incurred to 31 March 2010 in respect of these projects. The total amount of the provision is £1.6m (2009 nil).
The analysis of the exceptional costs is as follows:
|
| 2010 £000 | 2009 restated £000 |
| Employee related costs | 1,120 | 859 |
| Reversal of IFRS 2 share-based payments provision | (1,098) | - |
| Integration costs | 56 | - |
| Occupancy costs | 328 | 112 |
| Aborted transaction costs | 51 | 163 |
| Hilton head fair value adjustment | - | 129 |
| Group reorganisation costs | 496 | 75 |
| Provision for irrecoverable costs on Building Schools for the Future projects | 1,599 | - |
|
| 2,552 | 1,338 |
4 Intangible assets
|
| Goodwill £000 | Software £000 | Customer contacts and related relationships £000 | Trademarks, names and licences £000 | Other £000 | Total £000 |
| Cost |
|
|
|
|
|
|
| As at 31 March 2008 | 174,357 | 4,929 | 28,618 | 1,038 | 1,542 | 210,484 |
| Acquisitions of subsidiaries | - | 1,024 | - | - | 70 | 1,094 |
| Adjustment to prior year acquisitions | (24) | - | - | - | - | (24) |
| As at 31 March 2009 | 174,333 | 5,953 | 28,618 | 1,038 | 1,612 | 211,554 |
| Additions | - | 575 | - | - | - | 575 |
| Disposals | (73,445) | (604) | (10,457) | (538) | (70) | (85,114) |
| As at 31 March 2010 | 100,888 | 5,924 | 18,161 | 500 | 1,542 | 127,015 |
| Accumulated amortisation and impairment |
|
|
|
|
|
|
| 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) |
| Amortisation | - | (1,038) | (2,487) | (145) | - | (3,670) |
| Impairment of goodwill | (1,535) | - | - | - | - | (1,535) |
| Disposal | 65,012 | 367 | 5,995 | 328 | - | 71,702 |
| As at 31 March 2010 | (83,656) | (5,101) | (9,418) | (309) | (628) | (99,112) |
| Net carrying amount 31 March 2010 | 17,232 | 823 | 8,743 | 191 | 914 | 27,903 |
| Net carrying amount 31 March 2009 | 27,200 | 1,523 | 15,692 | 546 | 984 | 45,945 |
| Net carrying amount 1 April 2008 | 70,995 | 1,103 | 20,184 | 753 | 918 | 93,953 |
The amortisation of £3,670,000 comprises £894,000 (2009: £2,219,000) in respect of discontinued operations and £2,776,000 (2009: £3,088,000) in respect of continuing operations. The impairment in 2010 related to the Technology segment, and in 2009 to the Telecoms, Mobile, Converged and Technology segments.
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 (CGUs) as follows:
Marcom (this is included within the Converged solutions segment); Converged Solutions; Managed Solutions; and Technology.
These CGUs represent the lowest level within the Group at which the business 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.
The recoverable amount of all the CGUs was based on a value in use calculation using cash flow projections based on the 2011 budget forecast ending March 2011 which was approved by the Board and extrapolated for a further 4 years by growth rates applicable to each unit to March 2015. An appropriate terminal value based on a perpetuity calculation using 2% real growth was then added.. After the initial period covered by the latest budget revenues were projected to grow at between 2% and 5% for the following 4 years. 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.
In addition to revenue growth, the key assumptions used in the impairment testing were as follows:
● the long-term gross margin percentage; and
● the long-term discount rate
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 CGUs, 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. A 5% reduction in the long-term gross margin would give rise to a potential impairment of £435,000 in Techology and not in any other segment.
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 15% to the Technology CGUs, which reflects management's estimate of return on capital employed (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. In the case of Technology the discount rate was increased due to the perceived increase in risk in the Irish economy and is assumed to be 12% in the long term.
A 1% increase in the long-term discount rate would not give rise to an impairment in any CGU other than Technology where there would be a potential impairment of approximately £200,000.
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 £1.5 million (2009: £43.7million of which £25,370 related to discontinued operations).
Summary of goodwill by CGU
|
| Telecom £000 | Mobile £000 | Converged Solutions £000 | Managed Solutions £000 | Technology £000 | Total £000 |
| 2010 |
|
|
|
|
|
|
| Goodwill | - | - | 8,586 | 6,256 | 2,390 | 17,232 |
| 2009 (restated*) |
|
|
|
|
|
|
| Goodwill | 7,206 | 2,030 | 7,783 | 6,256 | 3,925 | 27,200 |
* The restatement relates to the movement of £803,000 of goodwill from the Telecoms segment to the Converged Solutions segment. The elements of the Telecoms segment that were not sold are now viewed by the CODM as a part of the Converged Solutions segment.
5 Trade and other receivables
|
| 2010 £000 | 2009 £000 |
| Trade receivables | 15,864 | 21,945 |
| Less: provision for impairment of trade receivables | (647) | (2,278) |
| Less: customer retentions greater than 1 year | (773) | (434) |
| Trade receivables - net | 14,444 | 19,233 |
| Other receivables | 903 | 559 |
| Prepayments | 5,175 | 5,467 |
| Amounts recoverable on contracts | 7,025 | 7,171 |
| Accrued income | 1,006 | 10,369 |
|
| 28,553 | 42,799 |
The divisions had a number of contracts in progress as at the year ended 31 March 2010. The aggregate amount of costs incurred for contracts in progress at the year end were £13.9 million (2009: £4.2 million). The aggregate amount of recognised profits (less recognised losses) for contracts in progress at the year end was a loss of £2.8 million (2009: profit of £0.5 million).
As at 31 March 2010, trade receivables of £0.6 million (2009: £2.3 million) were impaired and fully provided for. The quality of trade receivables can be assessed by reference to the historical default rate of £325,000 (2009: £547,000) for the preceding 365 days at 1.7% of the opening net trade receivables balance (2009: 2.5%). The carrying value of trade receivables that would otherwise be past due or impaired but whose terms were renegotiated were nil (2009: nil). The individually impaired receivables relate to receivables over 365 days, customers in financial difficulty, customer acceptance issues and cancelled contracts.
As at 31 May 2010, trade receivables of £6.7 million (2009: £7.4 million) were past due but not impaired. In the table below, these comprise the debtors over 30 days, which relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of net trade receivables is as follows:
| Days outstanding | 2010 £000 | 2009 £000 |
| 31-60 days | 3,337 | 4,480 |
| 61-90 days | 859 | 1,023 |
| 91-180 days | 1,529 | 1,537 |
| 181-270 days | 913 | 341 |
| 271-365 days | 49 | - |
|
| 6,687 | 7,381 |
In calculating the amounts above, the bad debt provision has been allocated based on aging, by allocating the provision to the oldest balances first. The provision is calculated by local management in each division on a specific basis based on their best estimate of recoverability taking into account the age and specific circumstances relating to the debtor. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. The carrying amounts of the Group's trade and other receivables are denominated in the following currencies:
|
| 2010 £000 | 2009 £000 |
| Pounds | 27,579 | 41,368 |
| Euros | 974 | 1,431 |
|
| 28,553 | 42,799 |
Movements on the Group provision for impairment of trade receivables are as follows:
|
| £000 |
| At 1 April 2008 | 1,934 |
| Provision for receivables impairment | 1,088 |
| Receivables written off during the year as uncollectible | (547) |
| Unused amounts reversed | (197) |
| At 31 March 2009 | 2,278 |
| Provision for receivables impairment | 213 |
| Receivables written off during the year as uncollectible | (325) |
| Unused amounts reversed | (23) |
| Reversed on disposal of related assets | (1,496) |
| At 31 March 2010 | 647 |
The creation and release of a provision for impaired receivables has been included in 'administrative expenses' in the income statement. Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash.
The other asset classes within trade and other receivables do not contain impaired assets.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security.
6 Trade and other payables
Current
|
| 2010 £000 | 2009 £000 |
| Trade payables | 10,324 | 16,771 |
| Other payables | 272 | 257 |
| VAT and social security | 5,553 | 7,770 |
| Accruals | 7,727 | 11,005 |
| Deferred income | 7,298 | 8,280 |
|
| 31,174 | 44,083 |
Non-current
|
| 2010 £000 | 2009 £000 |
| Deferred income | 12 | 177 |
7 Borrowings
Current
|
| 2010 £000 | 2009 £000 |
| Loan notes | - | 1,000 |
| Finance leases | 76 | 221 |
| Bank loan | - | 21,573 |
| Overdrafts | 6,095 | - |
| Synthetic convertible loan | - | 7,030 |
|
| 6,171 | 29,824 |
Non-current
|
| 2010 £000 | 2009 £000 |
| Loan notes | 2,766 | 1,700 |
| Finance leases | 435 | 121 |
| Bank loan | 9,587 | - |
| Convertible Loan Notes | 2,120 | - |
|
| 14,908 | 1,821 |
As at 31 March 2010, arrangement fees of £1,019,000 (2009: £1,062,000) are included within borrowings.
Loan notes
The loan notes were due to Eckoh. Subsequent to the year end the Company entered into an agreement to settle the Eckoh loan and the details are disclosed in note 31. At the year end the £2.8million shown as loan notes was net of arrangement fees of £0.1m. The key terms of the loan notes were as follows:
● £1 million was repayable on 30 September 2011 and the balance of £1.8 million was repayable on 30 September 2012;
● Interest was payable monthly in arrears;
● Eckoh was granted security over the assets of the business which was subordinate to the security of Barclays Bank PLC and the holders of the convertible loan notes;
● A previous entitlement to convert the loan notes into shares in the Company had been cancelled; and
● A fee of £350,000 was payable to Eckoh by the Company of which £125,000 had been paid and the remainder was payable on 30 September 2012.
Bank loan and overdrafts
Subsequent to the year end the Group agreed an amendment to the terms of its existing debt facilities with Barclays Bank PLC. The details of this are disclosed in note 31.
At 31 March 2010 the Group held a total facility with Barclays Bank PLC of £18.00 million (2009 £30.25 million). This was a structured facility with a term loan of up to £10 million and an overdraft facility of £8million. This facility would have expired in September 2011. As at 31 March 2010, the amount outstanding was £15.7 million (2009 £21.6 million).
The term loan could be repaid in whole or in part (if in part a minimum of £200,000 and an integral multiple of £50,000). The term loan and overdraft facilities carried interest charged at a rate based on a margin above LIBOR. The margin was 2% at the year end The borrowing facilities are subject to certain financial and non-financial covenants, and are secured on the assets of the Group. The undrawn borrowing facility at 31 March 2010 was £1.9 million (2009 £0.1 million).
All bank loans and loan notes are denominated in UK Pounds Sterling.
Convertible loan notes
In September 2009, the Group completed a fundraising of up to £6.0 million, through the issue of convertible loan notes to SVG Investment Managers Limited and Gartmore Investment Limited and £3.0 million was drawn down. The agreement also provided for a further £2 million facility, which was uncommitted. The fundraising provided funds for general working capital purposes and to strengthen the Group's balance sheet. Subsequent to the 2010 year end there has been a further draw down of £1.5 million Loan Note and the entire outstanding principal sum of £4.5 million was converted into new Ordinary Shares (note 31). No further amounts can be drawn down under this agreement.
The key terms of the loan notes at the year end were as follows:
● The loan notes could be converted into shares at a conversion price of 1.37p;
● A premium equal to 2 times the outstanding principal amount was payable on the maturity date;
● The loan notes could be issued in tranches on different dates with the initial tranche being an aggregate of £3.0 million;
● The second tranche of up to £3.0 million can be requested by the Company at any time provided that there had not been a material adverse change;
● The maturity date was 1 October 2011 or, if earlier, the occurrence of a major transaction;
● The loan notes were secured on fixed and floating charges over the assets of the Group and ranked behind the Barclays Bank term loan and overdraft facilities;
The convertible loan note is accounted for as a compound financial instrument comprising a debt note and an embedded derivative. The economic characteristics and risks of the embedded derivative are not closely related to the debt note and therefore the derivative is separately identified as a derivative instrument within financial liabilities and separately measured at fair value (note 23). Changes in fair value are recognised in the income statement. The debt note component was valued on issue by approximating the value of a loan of similar characteristics that did not include the embedded derivative. The expense in respect of the debt principal is calculated using the effective interest method and the effective interest rate used is 146%. The difference between the value of the loan note and the total amount repayable on maturity is charged evenly to the income statement as a finance cost over the period to the maturity date or expensed at the date new facilities are agreed if this is earlier and included as interest income (note 7).
Synthetic Convertible Loan
At 31 March 2009 as a component of the Bank facilities then available the group held a synthetic convertible loan of £7.5 million. This facility was due to expire in December 2011. This loan was repaid in September 2009. The synthetic convertible loan carried interest at LIBOR plus mandatory cost plus a margin. The mandatory cost was calculated based on the minimum reserve requirements of the lender as required by the regulatory authorities, and was set monthly by the lender. The margin was initially set at 4% and could vary between 3.5% and 4.5% depending on the Net Debt to EBITA ratio. The lender had the option to convert all or part of the loan, subject to a minimum notice period, into a fixed number of shares in the Company at a fixed price. If the lender exercised this option, the Company could 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 the Company had to settle the entire value of all shares over which the Bank had an option, and not just the proportion over which Barclays has exercised the option. In addition, The Company had the option to repay the loan at any time, subject to a schedule of pre-payment fees. No pre-payment fee was due if the loan was paid off at the termination date. The options detailed above are accounted for as a single embedded derivative, which is included in derivative financial instruments (note 23). 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 accreted on this balance over the term of the contract.
Fair value of non-current borrowings
The carrying amounts and fair value of the non current borrowings are as follows:
|
| Carrying amount | Fair value | ||
|
| 2010 £000 | 2009 £000 | 2010 £000 | 2009 £000 |
| Borrowings | 14,908 | 1,811 | 14,988 | 1,811 |
Fair values are based on discounted cash flows, using a rate based on the borrowing rates at 31 March 2010 and 2009 as per the table below. For borrowings greater than 1 year-old the fair value is greater than the carrying amount as the fair value reflects the effect of the time value of money.
The effective interest rates based on average forecast borrowings are as follows:
|
| 2010 % | 2009 % |
| Loan notes | 2.50 | 1.5 |
| Bank loans | 6.27 | 4.7 |
| Finance leases | 2.44 | 5.5 |
Finance leases
Future minimum lease payments under non-cancellable finance leases as at 31 March are as follows:
|
| 2010 £000 | 2009 £000 |
| Not later than 1 year | 76 | 240 |
| After 1 year but not more than 5 years | 455 | 129 |
| Future finance charges on finance leases | (20) | (27) |
| Present value of finance lease liabilities | 511 | 342 |
The present value of the finance lease liability is as follows:
|
| 2010 £000 | 2009 £000 |
| Not later than 1 year | 76 | 221 |
| After 1 year but not more than 5 years | 435 | 121 |
|
| 511 | 342 |
8 Net cash flows from operating activities
|
| 2010 £000 | 2009 £000 |
| Loss on ordinary activities before taxation | (16,204) | (31,039) |
| Adjustments for: |
|
|
| Net Finance costs | 4,545 | 4,557 |
| Depreciation of property, plant and equipment | 2,106 | 1,902 |
| Amortisation of intangible assets | 2,775 | 3,088 |
| Impairment of goodwill | 1,535 | 19,174 |
| Equity-settled share-based payments | (26) | 1,799 |
| Loss/(profit) on disposal of property, plant and equipment | - | 7 |
| Financial assets at fair value through profit or loss | - | 129 |
| Movements in working capital: |
|
|
| Decrease/(increase) in inventories | 200 | (662) |
| (Increase)/decrease in trade and other receivables | (848) | 529 |
| Increase in trade and other payables | 2,292 | 121 |
| (Increase/decrease in non-current assets | (306) | 36 |
| (Decrease) in provisions | (429) | (263) |
| Foreign exchange gains on operating activities | (177) | (13) |
| Cash absorbed by continuing operations | (4,537) | (635) |