CTP.L Regulatory News (CTP)

11 July 2011

Redstone plc

("Redstone", "the Company" or "the Group")

Unaudited Preliminary Results for the Year Ended 31 March 2011

Redstone Plc (AIM:RED) a leading provider of network based end to end managed services, technology and infrastructure solutions, today announces its unaudited preliminary results for the year ended 31 March 2011 a period of substantial change for the company.

Highlights

§ Substantial re-organisation programme completed within the year

§ Continuing business resilient with healthy growth expected - strong current pipeline of significant business opportunities

§ Adjusted EBITDA* of £1.1 million (2009/10 adjusted EBITDA loss £0.5 million) an increase of 340.6%

§ Operating loss reduced by 19.1% to £5.3 million (2009/10 £6.6 million)

§ Aggregate selling and distribution costs and administrative expenses reduced by £5.7 million (13.3%) to £36.8 million (2009/10 £42.5 million), including a £1.9 million (57.0%) reduction in Group Central Operating Costs 

§ Reorganisation has yielded further annualised cost savings of £4.0 million, of which £1.5 million have impacted adjusted EBITDA* in the year

§ Net finance costs reduced by £3.3 million (72.3%) to £1.2 million (2009/10 £4.5 million)

§ Loss before taxation reduced by 41% to £6.6 million (2009/10 £11.1 million)

§ £4.7 million increase in value on revaluation of metropolitan area network assets

§ Positive cash flow from continuing operating activities (before reorganisation costs) of £1.9 million (2009/10 £0.2 million) an increase of 965.9%

§ Total Borrowings (net of cash and cash equivalents) reduced by £8.1 million (40.0%) to £12.1 million (2009/10 £20.1 million)

§ Gearing reduced to 51% (2009/10 78.8%) based on enterprise value (aggregate of total equity and total borrowings)

§ Total equity increased by £6.2 million (114.7%) to £11.6 million (09/10 £5.4 million)

* Before net finance costs, tax, depreciation, amortisation, integration and strategic costs and share-based payments 

Ian Smith, Chairman of Redstone, commented:

"Redstone has regained its corporate confidence and is now looking outwards to engage dynamically with its resilient and high quality client base and generally to its re-defined target market. We believe there will be opportunities to grow the business, particularly in the financial sector where we have proven credentials and established relationships. We also believe that leveraging the core network will provide opportunities for the successful marketing of our managed service capabilities".

"The current pipeline of contract opportunities is strong, and the business is performing to management expectations in the new financial year to date. The Board remain optimistic for the future prospects of the Group."

11th July 2011

Enquiries:

Redstone plc

Annual Report 2011

Chairman's Statement

Dear Shareholder

The Annual Report for the year ended 31 March 2011 includes a seven month period of comprehensive re-organisation and restructuring, which commenced following my appointment as Executive Chairman and Tony Weaver's as Chief Executive both on 8th September 2010. As a result, the components and management structure of the Group have changed considerably.

Almost inevitably during a period of fundamental change, the performance of the business becomes adversely impacted by the associated uncertainty and diversion, the impact of which is felt by our clients, suppliers, management and staff. However, we come out of this process a leaner, more efficient, focussed and integrated business. As a result we now have a clear strategy to position Redstone to become the largest mid-market provider of network based end to end managed services, technology and infrastructure solutions, delivering customer applications over leading edge technologies across Redstone's own high speed resilient network. Our acquisition of the ICT integration specialist, Fujin Systems Limited ("Fujin") on 8th November 2010 is a key component of our new strategy.

Despite this upheaval during the period and the limited impact to date of the cost savings arising from recent restructuring, the continuing business activities have demonstrated their resilience, generating adjusted EBITDA* of £1.1 million (2010 adjusted EBITDA loss £0.5 million). Group headcount is currently 413 a decrease of approximately 52% on an average of 860 employed in the year to 31 March 2010, as a result of the divestment programme summarised below, and internal restructuring. The resulting continuing businesses are therefore now structured and well placed to increase adjusted EBITDA margins (before central costs) towards our stated objective of 10% of revenues.

I would like to thank our clients, suppliers and staff for their forbearance during what has been, at times, a very difficult period of restructuring for Redstone. We are confident that the beneficial impact of the cost savings made will be evidenced during the coming financial year, and will reflect a business that has finally emerged from the financial distress of the past two years.

Inevitably, the results for the year reflect material non-recurring integration and strategic costs and losses attributable to businesses now discontinued, which in aggregate account for £7.2 million of the total loss for the year of £11.0 million. The refinancing of the Group in September 2010, as detailed in my Chairman's Statement on 29 September 2010, and summarised again in this report, provided the financial wherewithal to undertake the programme of restructuring. Whilst it will take a while for the credit rating of the Group to fairly reflect the positive changes implemented, the Board are pleased that this programme is now at an end, and that the continuing Group is fit for purpose.

Divestments

A summary of the businesses divested are as follows:

·; On 29th September 2010 we announced the novation of the Group's contractual interests in the Building Schools for the Future ("BSF") ICT Birmingham contracts to Bovis Lend Lease Limited ("BLL") for the sum of £2.0 million, together with the receipt of accelerated payments of invoiced and invoice-able debtor balances of a further £2.2 million, resulting in a net cash inflow of £4.2 million to the Group.

·; On 18th October 2010 we announced the sale of certain assets of Marcom Communications Limited ("Marcom") and other telephone systems maintenance contracts, which form a small part of the Redstone Converged Solutions Limited ("RCS") business, to Maintel Europe Limited (a subsidiary of Maintel plc) for a cash consideration of £1.75 million.

·; On 2nd November 2010 the Group completed the sale of the business undertaking of Redstone Technology Limited ("RTL") based in Ireland. The sale, effected by means of a disposal of a wholly owned Irish subsidiary, comprised the entire business undertaking and trading assets of RTL, excluding property and intra-group indebtedness. The business was acquired by PFH Technology Group Limited ("PFH"), for a consideration of £2.25 million. Cash consideration of £2.0 million was received on completion with the balance deferred until the first anniversary of the completion date.

·; On 10th December 2010 the Group announced the sale of the security business of Redstone Managed Solutions Limited ("RMSL") to RMS Managed ICT Security Limited ("RMS"), a company predominately owned by the management team led by the Managing Director Robert Cavan, for a total consideration of £1.0 million.

* Before net finance costs, tax, depreciation, amortisation, integration and strategic costs and share-based payments 

The Group was advised on the novation of the BSF ICT Birmingham contracts and the disposal of certain assets of Marcom and other telephone systems maintenance contracts, which formed a small part of the RCS business, by MXC Capital Limited ("MXC"), the specialist financial advisory boutique controlled by Tony Weaver and myself. The fees charged in connection with the corporate finance advice given were equal to 1.5% of the disposal value (amounting to £56,250) and are deemed, under the AIM Rules for Companies to constitute a related party transaction. The directors of Redstone, with no investment interest in MXC, at the time of the novation and disposal (being David Payne and Peter Hallett) considered, having consulted with finnCap Limited, that the terms of the MXC fee arrangements were fair and reasonable insofar as the shareholders of the Group are concerned.

Acquisition

As reported above, the Group acquired Fujin Systems Limited ("Fujin") on the 8th November 2010.

Fujin is an ICT integration specialist serving mid market and enterprise market customers with specific strengths in the installation and management of advanced Ethernet technologies, next generation security and high availability core data services. Fujin specialises in data centre consolidation in a number of key vertical markets including research, media and on-line gaming, partnering with a number of leading edge technology manufacturers, including Brocade and Arista. Total consideration payable is up to £2.9 million payable as below:

·; £0.4 million paid in cash on completion in November 2010;

·; £2.5 million payable subject to achieving profit before tax target of £560,000 for the year ended 31 October 2011 to be settled by;

·; the issue of £2.0 million of new ordinary shares in Redstone based on an issue price of 0.9p per share and

·; the payment of £0.5 million in cash

The consideration payable is adjustable should Fujin not achieve the targeted profit before tax of £560,000 for the year to 31st October 2011, subject to a maximum adjustment of £2.5 million. The adjustment mechanism provides for a reduction of approximately £10 for every £1 of shortfall in targeted profit before tax for the year ended 31 October 2011.

The deal structure therefore aligned the consideration payable by Redstone to the earnings to be delivered by Fujin in the year to 31 October 2011, and also incentivises the management of Fujin to continue to build upon their already impressive sales growth and market position.

I am pleased to report that Fujin is likely to exceed its earn-out target profit before tax of £560,000 in the year to 31 October 2011. As a result, the Accounts for the year to 31 March 2011 assume the maximum consideration of £2.9 million becomes payable in respect of the acquisition of Fujin. It is important to note that no further consideration is payable should Fujin exceed target.

The acquisition of Fujin was classified as a related party transaction under the AIM Rules as Tony Weaver, and I were each interested in approximately 21 per cent. of the ordinary share capital of Fujin. The independent Directors of Redstone (being Peter Hallett, Richard Ramsay and David Payne) considered, having consulted with finnCap Limited, that the terms of the transaction were fair and reasonable insofar as shareholders of Redstone are concerned.

Tony and I have worked with the management of Fujin previously. They have an outstanding track record which was the reason we personally helped to finance the business prior to its acquisition by Redstone. The addition of the significant new technology partnerships that Fujin hold complements Redstone's existing offering and will promote good cross selling opportunities. The acquisition is an initial and important strategic step in adding to Redstone's market proposition as we reposition the business as a leading provider of network-based end to end managed services, technology and infrastructure solutions.

Refinancing

As I reported in my Chairman's Statement accompanying the Annual Report dated 29 September 2010, the Group undertook a comprehensive refinancing exercise to address a high and unsustainable level of borrowings and consequent gearing, which was having a material and adverse impact on the Group's credit rating and trading prospects, and also to provide financing for the required restructuring.

The refinancing reduced and consolidated all the Group's borrowings to a single facility with Barclays Bank.

Approximately £8.5 million of new funding (including £1.5 million under the 2009 Convertible Loan Notes) has been injected into the Group in the year through refinancing, which has strengthened the balance sheet and provided additional working capital funding and headroom for the business restructuring.

In parallel with the injection of new equity capital, the Group also amended the terms of its existing senior debt facilities with Barclays Bank.

Board Changes

On 2 August 2010, Tony Weaver and I were appointed as non-executive Directors.

On 8 September 2010, Stephen Yapp resigned as Executive Chairman of the Board and Tony Weaver and I were appointed Chief Executive Officer and Executive Chairman respectively.

On 18 October 2010, Tim Sherwood resigned as non-executive Director and was replaced by Richard Ramsay as a non-executive Director.

I would like to thank Tim for his service to the Group through some difficult times and wish him well for the future, and at the same time welcome Richard to the Board.

Richard, aged 60, is a highly experienced Director with a strong track record in delivering growth, project direction and maximising profitability during a 35 year career, including directorships of Hill Samuel, Barclays De Zoete Wedd, Ivory & Sime and Aberdeen Football Club. His current non executive roles include being chairman of Northcourt, a start up insurance managed agency and a director of Castle Trust, a start up mortgage business. His appointment strengthens and complements the skills of the current Board.

At the forthcoming AGM, having steered Redstone through the refinancing and corporate restructuring, I intend to stand down as Executive Chairman and hand over the Chair, to Richard Ramsay who has agreed to act as non executive Chairman. I will continue as an executive director, with specific responsibility for M&A and corporate strategy.

Outlook

Economic recovery in the UK remains fragile, with weak consumer confidence and public sector retrenchment providing continued uncertainty across the economy and I believe that companies will continue to drive internal efficiencies to counter the weak trading environment. We are confident that Redstone will continue to provide ICT solutions for improving client efficiency and consequently will continue to see opportunities to maintain and grow the refocused business. The restructured business now also provides a stable platform to take advantage of appropriate opportunities which may arise from economic distress in the sector.

Redstone has regained its corporate confidence and is now looking outwards to engage dynamically with its resilient and high quality client base and generally to its re-defined target market. We believe there will be opportunities to grow the business, particularly in the financial sector where we have proven credentials and established relationships. We also believe that leveraging the core network will provide opportunities for the successful marketing of our managed service capabilities

The current pipeline of contract and investment opportunities is strong, and the business is performing to management expectations in the new financial year to date. The Board remain optimistic for the future prospects of the Group.

Ian Smith

Executive Chairman

11th July 2011

Redstone plc

Annual Report 2011

Chief Executive's Operational Review

Ian Smith and I commenced a detailed operational review of the Business following appointment to our respective executive roles on 8 September 2010. The divestment activity detailed in the Chairman's statement has largely arisen and resulted from our review, which identified businesses and activities which were regarded as non-core to the future strategic direction of the Group as we re-focus activities on the provision of network based end-to-end managed services, technology and infrastructure solutions.

The residual businesses comprise predominately all the activities of Converged Solutions together with the connectivity and managed services activities of RMSL, being the residual Managed Solutions businesses, and Fujin. We have now consolidated the management of all trading activities, clearly branded "Redstone", under a single executive management board, comprising the directors of the trading businesses, Group CFO, Peter Hallett, and myself as Chairman.

Consequently, Redstone now presents a single consolidated brand to the customer, and will increasingly move away from the old divisional engagement with customers. This will therefore be the last set of accounts that disclose performance by division, and will instead segment the business between "Recurring/Annuity" (comprising campus based managed services, connectivity and hardware maintenance) and "Project" (comprising cabling, ICT projects and equipment sales & professional services).

Our intention is to continue to focus on delivering those products and services for which Redstone is recognised as a proven quality provider, and to enhance and strengthen that offering with new technology products and expertise so as to evolve clearly into a leading provider of network based end to end managed services, technology and infrastructure solutions. We have already commenced this process following the acquisition of Fujin.

Fujin introduced leading edge technology manufacturers, including Brocade and Arista and expertise in the installation and management of advanced Ethernet technologies, next generation security and high availability core data services to Redstone.

As part of this re-focussing, we commissioned a fair value assessment of our Metropolitan Area Networks ("MANs"). Redstone currently owns seven fibre-optic based MANs (based in Cambridge, Derby, Newbury, Northampton, Nottingham, Portsmouth and Southampton) with a total duct length of 131 km, of which 104 km has been "fibred", being Cambridge, Portsmouth and Southampton. Of these fibred MANs, only Cambridge is currently operational, though it is our intention to commission Portsmouth during 2011/12. The historic net book value of the MANs was currently £0.9 million, as a result of significant impairment charges and depreciation of the original build cost of £13.0 million.

The further development and focus on the core fibre network is a key part of the new strategy, and it is important that the fair value of these important assets is visible to our shareholders. The fair value assessment attributed a value of £5.5 million to the Cambridge MAN based on a discounted cash flow valuation model, resulting in an uplift in asset value of £4.7 million. This increase in fair value has been recognised in the 31 March 2011 balance sheet. Portsmouth (and other MANs as appropriate) will be similarly modelled and re-valued when operational.

The business is developing and extending the reach and capability of the Redstone Core Network for Next Generation Technologies with the launch of an 'Ethernet in the First Mile' (EFM) service for the City of Cambridge. This advancement in Next Generation Network Technology, will deliver the latest evolution of internet services to the Cambridge Area. The EFM service provides the most flexible, reliable and cost effective connectivity and has the capacity to deliver 30 Mbps symmetrical bandwidth over existing telephone infrastructure already available at most businesses. This development demonstrates the leverage that our core Metropolitan Area and National MPLS Network assets provide in driving further growth and shareholder value.

The current split of business revenue between "recurring/annuity" and "project" is approximately 54%:46% and it is our intention to grow the recurring element to become the major part of the business. Our management team is proactively engaged in negotiating extension of term and breadth of existing managed service contracts with major blue chip clients.

The business has clear expertise in the financial sector and is a trusted partner to many blue chip global financial institutions, evidenced by the award of two contracts for £4.98 million and £5.0 million in December 2010 and March 2011 respectively, by a Fortune Global 500 UK Bank for the installation of structured cabling and an intelligent management system and environmental monitoring solution in its state-of-the-art data centre facility. Similarly, in June 2011, we announced the extension of an existing managed services contract with a major US Bank for a further 4 years, with an estimated contract value of £10 million over the extended contract term.

There have been some management changes arising from our operational review which are additional to the members of staff leaving through the disposal of non-core businesses and assets. The Managing Director and Sales Director of Converged Solutions, Rick Marshall and Richard Bell, each resigned. Frank Philbin is the new Managing Director of the integrated business, and I am delighted to have Richard Archer join as Sales Director. Frank has been with Redstone for 22 years, the last 12 years of which he has been the Director in charge of managed services to the Financial Sector. Richard is a sales director with 26 years experience in the IT sector, having previously held similar positions in Dealogic and Computercenter plc. I wish them both well in their new positions.

The continuing businesses have reduced their aggregate headcount by 145 full time employees in the restructuring process. The Board would like to thank all departing employees for their contribution whilst employed at Redstone.

Tony Weaver

Chief Executive Officer

11th July 2011

Redstone plc

Annual Report 2011

Financial Review

Financial Highlights

Continuing Operations

The disposal activity during the year, comprising the novation of the BSF ICT Birmingham contracts, the sale of certain assets of Marcom and telephone systems maintenance contracts of RCSL , the sale of the business undertaking of RTL and the sale of the security business of RMSL have impacted the segmental disclosures. The results for the disposed assets, contracts and business undertakings for the period and for prior periods are included on the face of the Consolidated Income Statement within Profits/Losses from Discontinued Businesses.

Revenue

Group revenues for continuing operations declined by 7.1% or £5.1 million to £67.1 million (2009/10 £72.2 million).

The decrease was mainly attributable to Converged which declined by £7.0 million or 11.1% to £55.6 million, excluding Fujin, (2009/10 £62.6 million), due mainly to deferred or cancelled ICT contracting business reflecting difficult market conditions, the adverse impact of the material restructuring of the business during H2.

However, Managed Solutions connectivity revenue grew by 2.8% or £0.3 million to £9.9 million (2009/10 £9.6 million), reflecting steady growth in contract base revenues. We have strengthened the connectivity sales team, having identified the potential for further growth and utilisation of the network assets. Post acquisition revenues from Fujin of £1.7 million were in line with expectations.

Gross Profit

Gross profit decreased by 12.1% or £4.3 million to £31.5 million (2009/10 £35.8 million), with gross margins declining to 46.9% (2009/10 49.6%).

The decrease as principally due to the downturn in the Converged ICT projects business, where declining revenues resulted in £6.4 million reduction in cash margin. Whilst the reorganisation undertaken in H2 reduced the direct cost base to the lower level of activity, margins in the Converged businesses were adversely impacted in the year reducing to 46.5% (2009/10 49.7%).

However, the decline in the Converged ICT projects margin was offset by a £1.2m increase in campus managed services margin, a £0.5 million increase in connectivity margins and a post acquisition contribution of £0.5 million from Fujin.

Operating expenses

Operating expenses comprising Selling and Distribution costs and administrative expenses (including depreciation and amortisation, integration and strategic costs and share based payments) decreased by 13.4% or £5.7 million to £36.8 million (2009/10 42.5 million).

£3.9 million of operating expense reduction has been realised in the trading divisions and more specifically in Converged, where the cost base has been realigned to reflect the current level of run-rate business. Approximately £1.5 million of total annualised cost savings of £4.0million arising from re-alignment have been realised in the current year. In addition, further cost reductions in general overheads amounting to £3.0 million have been realised.

Group central adjusted operating costs have also been reduced by £1.9 million, or 57.0%, in the year to £1.4 million (2009/10 £3.4 million) This reflects the full year impact of restructuring of central group operations undertaken in H2 of 2009/10, including moving from the former Head Office in Great Eastern Street in London, and relocating to smaller and more cost effective premises in Kirtlington, Oxfordshire.

The above cost savings were offset by a net increase of £0.9 million in aggregated depreciation and amortisation of £3.7 million (2009/10 £4.3 million), integration and strategic costs of £2.7 million (2009/10 £0.9 million), and provision for share based incentive payments of £0.7 million (2009/10 £1.0 million).

The re-organisation of the business was operationally complete at 31 March 2011, and the identified costs provided within strategic and integration costs.

Adjusted EBITDA*

Adjusted EBITDA* of £1.1 million has increased by £1.5 million or 340.1% (2009/10 loss (£0.5) million).

Fujin contributed £0.2m of adjusted EBITDA* in the 5 month period from acquisition, and remains on track to deliver the maximum earn-out target of £0.6 million in the year to 31 October 2011.

The Managed connectivity business grew adjusted EBITDA* by 11.9% to £1.5 million (0910 £1.3 million), on revenues which grew by 2.8% to £9.9 million (2009/10 £9.6 million). Gross margin declined to 47.8% (2009/10 48.9%) reflecting tightening pricing in the market, particularly in respect of the higher volume customers now targeted.

Converged adjusted EBITDA, excluding Fujin, was disappointing at £0.9 million (2009/10 £1.6 million) a decline of 45.0% principally due to disappointing revenues in ICT projects, although there was a strong performance in campus managed services. The resulting gross margin consequently declined by £5.2 million to £29.5 million (2009/10 £31.1 million). Total cost savings of £4.5 million arising from continuing tight control of overheads, together with the impact of H2 re-organisation have mitigated the decline in margin.

The balance of the net increase in adjusted EBITDA was provided by a £1.9 million or 57.0% reduction in central costs.

Operating loss

Operating losses of £5.3 million (2009/10 loss £6.6 million), are an improvement of £1.3 million or 19.2%.

The £1.5 million improvement in adjusted EBITDA* was not maintained at operating loss level due to a net aggregate increase of £0.3 million in depreciation, amortisation, integration and strategic costs and share based payments.

Net finance cost

Net finance costs amounted to £1.2 million (2009/10 £4.5 million). The charge for the year includes £1.2 million of accrued interest on the £3.0 million of convertible loan notes, however, the convertible loan noteholders agreed to the conversion of the loan notes at par value as part of the comprehensive refinancing agreed by shareholders on 8 September 2010. Accordingly, at the time of the agreement the accreted interest on the loan notes amounted to £1.8 million and represented an accounting gain on conversion. This gain is also included in net finance costs.

Loss before taxation

The resulting loss before taxation is £6.6 million (2009/10 £11.1 million), a reduction of £3.5 million or 40.8%. The tax credit for the period of £0.7 million (2009/10 £0.3 million) arises from the reduction in deferred taxation liabilities in line with amortisation of intangible assets recognised on acquisition. The resulting loss for the period from continuing operations (attributable to the shareholders of the parent company) is therefore £5.9 million (2009/10 £10.8 million).

Discontinued Operations

Disposal activity in the year comprising the novation of the BSF ICT Birmingham contracts, the sale of certain assets of Marcom and telephone systems maintenance contracts RCSL , the sale of the business undertaking of RTL and the sale of the security business of RMSL have impacted the segmental disclosures. Accordingly, the results for these disposed assets, contracts and business undertakings for the period and for prior periods are included on the face of the Consolidated Income Statement within Profits/Losses from Discontinued Businesses.

The loss for the year from discontinued operations amounted to £5.1 million (2009/10 £4.1 million). The revenue in respect of discontinued operations includes £2.0 million of cash consideration received in respect of the novation of the BSF ICT Birmingham contracts.

Overall Result for the Period

The net loss for the year from continuing and discontinued operations is £11.0 million (2009/10 £14.9 million), a decrease of 26.0%.

Basic loss per share has decreased to 0.38p (2009/10 loss of 7.41p), an improvement of 94.9%.

* Before net finance costs, tax, depreciation, amortisation, integration and strategic costs and share-based payments 

Cash Flow

The net cash outflow from continuing operating activities was £0.2 million (2009/10 £0.7 million) a decrease of 78.2%. The net outflow in the year largely arises from integration and strategic costs of £2.1million (2009/10 £0.9 million), which offsets operational cash generated of £1.9m (2009/10 £0.2 million).

A further £1.5 million (2009/10 £3.0 million) of cash was consumed by net finance charges, a 49.5% reduction of £1.5 million. The reduction reflects the reduction in borrowings arising from the refinancing in September 2010.

In addition, discontinued operations consumed £3.2 million of cash (2009/10 outflow £4.0 million) resulting in total cash expended on continuing and discontinued operating activities of £4.9 million (2009/10 outflow £7.7 million).

The purchase of tangible and intangible assets resulted in a cash outflow of £1.5 million (2009/10 £2.5 million).

Proceeds of issue of shares pursuant to the refinancing detailed earlier in this report of £8.5 million (2009/10 £Nil) include the value of placing proceeds of £6.5 million, the share subscription of £0.5 million, the shares issued on conversion of the convertible loan notes of £4.5 million, and the shares issued in settlement of the Eckoh loan of £1.0 million. The costs of share issue paid in the period amounted to £0.5 million (2009/10 £nil).

Cash proceeds from the issue of convertible loan notes in the period amounted to £1.5 million (2009/10 £2.7 million).

Repayment of borrowings from proceeds of the issue of shares and convertible loan notes and from proceeds of disposal activity amounted to £5.6 million (2009/10 £19.1million), and include the settlement of the Eckoh loan of £0.5 million. Net proceeds from financing activities therefore amounted to £2.4 million (2009/10 net outflow £16.4 million).

The resulting net decrease in cash and cash equivalents amounted to £1.0 million (2009/10 decrease £12.5 million).

Borrowings and Bank Facilities

Total borrowings (net of cash and cash equivalents) amounted to £12.1 million (2009/10 £20.1 million) a decrease of 40.0% or £8.1 million. Resultant gearing based on enterprise value (the aggregate of total equity and total borrowings) is 51.0% (2009/10 78.8%) arising from reduced borrowings and increase in the total equity to £11.6 million (2009/10 £5.4 million).

Overdraft and term loan facilities totalling £18.0 million remain in place with Barclays Bank and have been extended to December 2013. In addition the Group has the ability to raise capital lease or hire purchase finance in the ordinary course of business to a maximum of £3.0 million.

Other balance sheet areas

Equity

During the year, the Group undertook an extensive data validation exercise on a number of balances within accruals and deferred revenue whilst implementing a number of enhanced processes and controls as part of the same exercise. This highlighted a number of adjustments which were required totalling £1.6 million. The directors have established that the impact of these adjustments is significant to the year and to prior periods. However, recognising it is impracticable to determine the impact of these in specific prior periods, the directors have recorded the adjustment within reserves in the earliest period presented.

As permitted under IAS 16, the Group has revalued the metropolitan area network assets ("MAN") residing in property plant and equipment, as the value that was attributed to these assets was deemed to be less than fair value. The fair value, which was established with the help of independent expert valuers Oakley Capital Limited, was established at £5.5 million resulting in a non distributable revaluation surplus of £4.7 million which has been taken to reserves.

Share capital and share premium increased by £12.0 million in the year as a result of the issue of shares as part of the refinancing of the Group in September 2010.

The remaining movements in equity comprise the net loss for the period of £11.0 million (2009/10 £14.9 million), £0.3 million (2009/10 £0.1 million) exchange differences arising on translation of the financial statements of foreign subsidiaries, and a credit of £0.7 million (2009/10 £0.1 million) arising from the operation of equity settled share option and incentive plans.

Total equity has therefore increased by a net £6.2 million in the year from the restated opening equity balance of £5.4 million.

Peter J Hallett

Chief Financial Officer

11th July 2011

Consolidated Income Statement

for the year ended 31 March 2011

*Earnings before net finance costs, tax, depreciation, amortisation, integration and strategic costs, goodwill impairment and share-based payment charges.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

for the year ended 31 March 2011

(a) Merger reserve

The merger reserve resulted from the acquisition of Redstone Communications 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 accumulated loss 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.

(f) Revaluation reserve

(i) The Directors have revalued the metropolitan area network assets (MAN) residing in the property plant and equipment. This is permitted under IAS 16 where the value attributed to an asset is less than its fair value.

(ii) Fair value of the MAN has been established by the discounting of the cash flow of future income arising from the asset. The only current operational MAN owned by the group is the network in Cambridge.

(iii) The effective date of the revaluation is 31 March 2011 and the group engaged Oakley Capital Limited, to act as independent valuers in this regard. The principal assumptions used in the valuation model were as follows:

·; Annualised value of the current contract base £1.4 million per annum

·; Annual revenue growth - years 1 - 2, 20% ; years 3 - 4, 5% ; thereafter 2.5%

·; Discount rate applied to cash flows - 15%

·; The future pricing of contracts is based on the average value of current contracts in the base

(iv) The fair value of the revalued assets was established at £5.5 million, resulting in a non distributable revaluation surplus of £4.7 million as at 31 March 2011

(v) The carrying amount that would have been recognised had the asset continued to be carried under the cost model was £0.8 million at 31 March 2011 

 (g) Prior year adjustment

During the year, the Company undertook an extensive data validation exercise of a number of balances within accruals and deferred revenue whilst implementing a number of enhanced processes and controls as part of this exercise. This highlighted a number of adjustments which were required as set out below. The directors have established that the impact of these adjustments is significant to this period and prior periods. However, recognising it is impractical to determine the impact of these in specific prior periods, the directors have recorded the adjustment within reserves in the earliest period presented.

The total adjustment to the reserves at 31 March 2009 was £1,583,000 and the balances affected by this adjustment in the balance sheet for the year ended 31 March 2009 are as follows:

£000

Consolidated Balance Sheet

as at 31 March 2011

Consolidated Cash Flow Statement

for the year ended 31 March 2011

Notes to the Consolidated Financial Statements

year ended 31 March 2011

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. During the year 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 included a holiday from financial covenant testing for a period to 30 June 2011 and a one-off right to elect not to test the financial covenants until 31 December 2011. 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, particularly in the current economic environment, they are confident that the Group will achieve its EBITDA forecasts and that the present cash flow forecasts prepared by management demonstrate that 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.

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 Revaluations

Metropolitan area networks are carried at revalued amounts. Revaluations are carried out every year to ensure that the assets are carried at fair value at the balance sheet date. Revaluation surpluses that arise are taken directly to the revaluation surplus in equity, except to the extent that they reverse a revaluation decrease for the same asset previously recognised as an expense, in which case the surplus is credited to the income statement to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of an asset is charged as an expense to the extent that it exceeds the balance, if any, held in the asset's revaluation surplus relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus in the reserve is transferred to retained earnings.

1.4 Integration and strategic costs

Strategic costs include the costs incurred in sourcing new acquisitions, identifying disposal opportunities which did not take place, related restructuring and refinancing. Integration costs are incurred by the group when integrating one trading business into another. The types of costs include employment related costs of staff made redundant as a consequence of integration, due diligence costs, property costs such as lease termination penalties and vacant property provisions, third party advisor fees and rebranding costs.

Both of the above costs are highlighted separately on the income statement as management believe that they need to be considered separately to gain an understanding of the underlying profitability of the continuing trading businesses.

1.5 Discontinued operations

Cash flows and operations that relate to a major component of the business or geographical region that has been sold or is classified as held for sale are shown separately from continuing operations.

Assets and businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Assets and businesses are classified as held for sale if their carrying amount will be recovered or settled principally through a sale transaction rather than through continuing use. This condition is regarded as being met only when the sale is highly probable and the assets or businesses are available for immediate sale in their present condition or is a subsidiary acquired exclusively with a view to resale. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Finance income or costs are included in discontinued operations only in respect of financial assets or liabilities classified as held for sale or de recognised on sale.

2 Business Combinations

On 8 November 2010 Redstone acquired 100% of the share capital of Fujin Systems Limited for a total consideration including costs of £2,980,776. The consideration is satisfied by £400,000 in cash and deferred consideration of a maximum of £2,500,000 payable partly in cash (£500,000) and the balance (£2,000,000) by the issue of shares. Costs of £80,776 were incurred and disclosed under strategic costs in the Income Statement. The deferred consideration is payable on 31October 2011 subject to the achievement of a profit target of £564,000 for the year ending 31 October 2011. Any shortfall from this target will result in the consideration being reduced by a multiple of the shortfall.

The acquisition is classified as a related party transaction under the AIM Rules for Companies as Ian Smith, Executive Chairman, and Tony Weaver, Chief Executive, are each interested in approximately 21% of the ordinary share capital of Fujin. The other Directors of Redstone, being Peter Hallett, David Payne and Richard Ramsey, after consultation with FinnCap Limited, consider that the terms of the transaction are fair and reasonable insofar as the shareholders of Redstone are concerned.

On acquisition the Redstone plc Directors assessed the business acquired to identify any intangible assets. Customer contracts and related relationships met the criteria for recognition as intangible assets as they are separable from each other and have a measurable fair value, being the amount for which an asset would be exchanged between knowledgeable and willing parties in an arm's length transaction. The provisional fair value of the intangible assets was calculated by using the discounted cash flows arising from the existing maintenance base. An attrition rate of 15% was applied and a discount rate of 12%, the reasonable economic life of the customer relationships was assumed to be 5.5 years. The identifiable intangible assets and related deferred tax liability are as follows:

From the date of acquisition to 31 March 2011, Fujin Systems Limited made a profit before tax and intangible amortisation of £182,000, for the full year the profit before tax and intangible amortisation was £42,000. The revenue from the enlarged group, assuming the combination had taken place at the beginning of the year, would have been £68.5 million.

3 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 Converged Solutions, Managed Solutions and the Central segment. 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 2011 and 2010.

(a) For the year ended 31 March 2011 

*Earnings and operating costs before net finance costs, tax, depreciation, amortisation, goodwill impairments, integration and strategic costs 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 are £0.7 million of property, plant and equipment (2010: £1.2 million), £0.3 million of intangible assets (2010: £0.7 million) and prepayments and other receivables of £0.6 million (2010: £0.5 million).

Included in the central segment liabilities, are the Group's outstanding loan notes and Barclays' borrowings at 31 March 2011 of £14.4 million (2010: £27.8 million), provisions £1.0 million (2010: £0.6 million), accruals and other payables £3.1 million (2010: £5.7 million) and deferred consideration of £2.5 million (2010: £Nil).

No single customer represented 10% or more of the Group's revenue and the Group are not overly reliant on a single customer.

All revenue is earned and all assets are held within the UK.

Redstone has two operating business units, namely Converged Solutions and Managed Solutions. All divisions operate within the UK. In addition there is a Central division including back office functions and executive management to support the Group. The divisions deliver independent products and services.

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 server and desktop deployment, application development, hosting and co-location, network and system management, internet service provision and consultancy.

(b) For the year ended 31 March 2010

*Earnings from continuing operations before interest, tax, depreciation, amortisation, integration and strategic costs and share-based payments.

4 Integration and strategic costs

In accordance with the Groups policy of integration and strategic costs the following charges/ (credits) were incurred for the year:

The Group agreed a settlement in relation to the Eckoh loan of £2.7million. Eckoh was paid £0.5 million in cash and received 200,000,000 ordinary shares in consideration for waiving all sums due under the loan. This resulted in a gain of £1.2 million.

5 Discontinued operations

The Board has undertaken a review of the non-core assets and businesses and as a result has divested of certain businesses and assets.

Building Schools for the Future ICT contract

On 29 September 2010 the Group agreed to novate its interest in the BSF Birmingham ICT contracts to Bovis Lend Lease Limited. This was completed for a cash consideration of £2 million along with an accelerated payment for invoiced and invoiceable receivables balances of approximately £1.9 million (excluding Value Added Tax). Under the novation agreement 27 employees were transferred to Bovis Lend Lease Limited in accordance with TUPE regulations.

The capitalised bid costs and other relevant costs were written off against the £2m consideration resulting in a profit of £0.3 million.

Marcom and the Avaya/Nortel business

On 18 October 2010, as part of its ongoing strategic review, the Group sold certain assets of Marcom Communications Limited and other telephone systems maintenance contracts, which form a part of the Redstone Converged Solutions Limited business, to Maintel Europe Limited (a subsidiary of Maintel plc) for a cash consideration of £1.75 million.

Under the sale agreement 40 employees have transferred to Maintel Europe Limited in accordance with TUPE regulations.

Redstone was advised on the disposal by MXC Capital Limited, the ICT specialist financial advisory boutique controlled by Ian Smith and Tony Weaver (Executive Chairman and Chief Executive Officer respectively of Redstone). The fees charged in connection with the corporate finance advice given were equal to 1.5 per cent of the disposal value (equalling £26,250) and are deemed, under the AIM Rules to constitute a related party transaction. The Directors of Redstonewith no investment interest in MXC (being David Payne and Peter Hallett) consider, having consulted with FinnCap Limited, that the terms of the transaction are fair and reasonable insofar as shareholders of Redstone are concerned. 

Redstone Technology

On 2 November 2010 the Group sold its Redstone Technology business. The sale, by means of a disposal of a wholly owned Irish subsidiary, comprises the entire business, undertaking and trading assets, excluding property and intra-group indebtedness of Redstone Technology Limited (arising from the acquisition of Xpert Group in 2005). The business has been acquired by PFH Technology Group Limited, Ireland's largest private ICT company, for a cash consideration of £2.25 million. Cash consideration of £2.0 million was received upon completion of the sale with the balance deferred until the first anniversary of the completion date.

Redstone Managed Solutions Limited Security Business

On 12 December 2010 the Group sold the security business of Redstone Managed Solutions Limited to RMS Managed ICT Security Limited, a company owned by RMSL's current management team, including Robert Cavan, Managing Director, for a consideration, net of assets being retained, of £0.57million.

£0.1 million has been received on the signing of the sale and purchase agreement and £0.4 million will be received in cash upon completion of the sale. The balance of consideration will be realised from 3.5% loan notes. The loan notes will be secured by a first charge over the assets of RMS Managed ICT Security Limited.

In accordance with TUPE regulations, 58 staff members, who are mostly based at the RMSL Stoke office, will transfer to RMS Managed ICT Security Limited.

Goodwill arising on the acquisition of the businesses sold and intangible assets relating mainly to the value of customer contracts and relationships were written off on disposal.

6 Trade and other receivables

The divisions had a number of contracts in progress as at the year ended 31 March 2010 and 2011. The aggregate amount of costs incurred for contracts in progress at the year end were £16.5 million (2010: £13.9 million). The aggregate amount of recognised profits (less recognised losses) for contracts in progress at the year end was a loss of £2.2 million (2010: loss of £2.8 million).

As at 31 March 2011, trade receivables of £0.4 million (2010: £0.6 million) were impaired and fully provided for. The quality of trade receivables can be assessed by reference to the historical default rate of £102,000 (2010: £325,000) for the preceding 365 days at 0.7% of the opening net trade receivables balance (2010: 1.7%). The carrying value of trade receivables that would otherwise be past due or impaired but whose terms were renegotiated were Nil (2010: Nil). The individually impaired receivables relate to receivables over 365 days, customers in financial difficulty, customer acceptance issues and cancelled contracts.

As at 31 March 2011, trade receivables of £3.8 million (2010: £6.7 million) were past due but not impaired. In the table below, these comprise the receivables 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:

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:

Movements on the Group provision for impairment of trade receivables are as follows:

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.

7 Trade and other payables

Current

Non-current

8 Borrowings

Current

Non-current

As at 31 March 2011, arrangement fees of £116,000 (2010: £1,019,000) are included within borrowings.

Bank loan and overdrafts

The Group has 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;

● 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 to 30 June 2011 and a one-off right to elect not to test the financial covenants at one test date;

● 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.

At 31 March 2011 the Group held a total facility with Barclays Bank PLC of £14.0 million (2010 £18.0 million). This was a structured facility with a term loan of up to £6.0 million and an overdraft facility of £8.0 million. As at 31 March 2011, the amount outstanding was £12.3 million (2010 £15.7 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 2011 was £1.9 million (2010 £1.9 million).

All bank loans and loan notes are denominated in UK Pounds Sterling.

Fair value of non-current borrowings

The carrying amounts and fair value of the non current borrowings are as follows:

Fair values are based on discounted cash flows, using a rate based on the borrowing rates at 31 March 2011 and 2010 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:

9 Funding

Share Placing

In September 2010 the Group issued 1,404,800,000 new Ordinary shares at a price of 0.5p per share. This raised approximately £7.0 million. The £3.0 million convertible loan notes were converted into equity. Interest of £1.2 million accreted on these loan notes in the six months to September 2010 and is included within finance costs. At the time of the agreement the value attributed to these loan notes in the accounts was £4.8 million. It was agreed that the loan notes would convert at par and as a result there was a £1.8 million accounting gain on conversion. This gain is also included within finance costs. A further £1.5 million was drawn down under the 2009 Convertible Loan Notes and converted immediately to equity. The cash in relation to the issue of share, net of fees of £0.5 million, was received in September 2010.

Eckoh Loan

As part of the negotiations relating to the Placing and the Conversion, the Group agreed a settlement in relation to the Eckoh loan of £2.7 million. Eckoh was paid £0.5 million in cash and received 200,000,000 Ordinary shares in consideration for waiving all sums due under the Eckoh loan. This resulted in a gain of £1.2 million that is included in integration and strategy costs in the income statement.

10 Net cash flows from continuing operating activities