Phoenix IT Group plc

 

Audited Preliminary Results for the year ended 31 March 2010

 

Resilient Performance - Profit Increased

 

Phoenix IT Group plc, ("Phoenix" or the "Group"), the UK IT services company, announces its preliminary results for the year ended 31 March 2010.

                                           

 

FINANCIAL HIGHLIGHTS

 

Financial Performance

 

·    Group revenues decreased, as anticipated, by 2.9% to £245.8m (2009: £253.2m)

·    Underlying* profit from operations decreased 3.5% to £34.4m (2009: £35.7m)

·    Underlying* profit before tax increased by 4.2% to £29.5m (2009: £28.3m)

·    Normalised** diluted earnings per share increased 6.8% to 28.1p (2009: 26.3p)

·    Proposed final dividend of 4.3p per share, a 2.4% increase for the full year dividend to 6.45p per share (2009: 6.3p)

·    Cash generated by operations before non-recurring cash flows*** £46.3m (2009: £51.6m) representing 134.6% (2009: 144.7%) of underlying* profit from operations

·    Strong cash generation - net debt (including finance leases) reduced by £20.5m to £67.9m (2009: £88.4m)

 

Statutory Performance

 

·    Profit before tax increased by 61.0% to £25.2m (2009: £15.6m)

·    Profit from operations up 30.8% to £30.1m (2009: £23.0m)

·    Diluted earnings per share increased by 73.2% to 24.6p (2009: 14.2p)

 

 

OPERATIONAL HIGHLIGHTS

 

·    Significant new contract wins to provide outsourced services

·    Acquisitions of Aghoco 1000 Limited (KCOM field services) and Office Shadow bring new skills and products to the Group

·    Growth in cloud computing services organically and through acquisition 

·    Growth in annual contract value of 13.2% and order book of 23.0% with particular momentum in the second half

·    Strong cost management and improvements in operational efficiency

·    Good cash generation and further reduction in net debt 

 

 

* Underlying - adjusted for non-recurring items £1.2m (2009: £9.3m) and amortisation of intangibles £3.1m (2009: £3.4m)

** Normalised - net profit excluding non-recurring items and amortisation of intangibles using the normalised tax rate.  The normalised tax rate is based on the effective tax rate for the year adjusted for some one-off credits - see note 13.

*** Cash generated by operations of £44.0m (2009: £45.8m) plus non-recurring cash flows of £2.3m (2009: £5.8m) relating to costs expensed during 2009.

 

 

Nick Robinson, Chief Executive of Phoenix, commented:

 

"Phoenix had a successful financial year despite a tough trading environment with growth in pre-tax profits and a stable operating margin performance.  During the year we made some selective investments, including two small acquisitions, which have enabled us to expand our service offering and broaden our customer base.  In addition, with the market for cloud computing developing fast we have continued to develop our service offering significantly over the past year and we are well positioned to deliver in this area.

 

Our strategy remains consistent, with our focus remaining on attractive niche markets and organic growth supported by customer led capital investment combined with selective acquisitions.  The Group continues to have good forward visibility from its order book and high levels of recurring revenues from a diversified customer base."

 

 

 

Enquiries:

 

Phoenix	Tel: +44 (0)1604 769000
Peter Bertram	Executive Chairman
Nick Robinson	Chief Executive Officer

 

 

Financial Dynamics	Tel: +44 (0)20 7831 3113
Charles Palmer
Haya Herbert-Burns
Nicola Biles

 

 

 

Forward looking statements

 

Any forward looking statements made within this statement have been made in good faith by the Directors based on the information available up to the date of the Director's approval of this report and these forward looking statements should be treated with caution due to the inherent uncertainties, including macro economic, IT services market uncertainties and business risk factors which may affect the outcome.

 

This statement has been prepared for the Phoenix IT Group as a whole and therefore it gives greater emphasis to those matters, which are significant to Phoenix IT Group plc and its subsidiary undertakings when viewed as a whole.

 

CHAIRMAN'S STATEMENT

 

 

Review of the Year

I am pleased to report that Phoenix IT Group plc has continued to make good progress over the past year despite challenging trading conditions.  The Group has again grown profits and improved cash management.

 

A review of the year's trading and results is given in the Business Review.

 

Results

Group revenues decreased as expected by 2.9% to £245.8m (2009: £253.2m) and profit before tax increased by 61.0% to £25.2m (2009: £15.6m).  Underlying* profit before tax increased by 4.2% to £29.5m (2009: £28.3m).  Diluted earnings per share increased by 73.2% to 24.6p (2009: 14.2p) and normalised** diluted earnings per share increased by 6.8% to 28.1p (2009: 26.3p).  The Group is highly cash generative and during the year net debt (including finance leases) reduced by £20.5m to £67.9m (2009: £88.4m).

 

Dividend

The Board recommends a proposed final dividend of 4.3p per share (2009: 4.2p) which, if approved at the Annual General Meeting, will be paid on 8 October 2010 to shareholders on the register at 17 September 2010.  Combined with the interim dividend of 2.15p per share paid on 6 April 2010 this would make a total dividend per share of 6.45p (2009: 6.3p), an increase of 2.4%. 

 

Board

On 16 November 2009 the Group announced that David Simpson had served notice of his resignation as Group Finance Director for personal reasons and accordingly stepped down from the Board with immediate effect.  The process of appointing a new Group Finance Director continues.

 

Employees

This has been another year of good performance by the Group and these results have been delivered by our staff in a challenging economic environment.  On behalf of the Board and the Shareholders I would like to thank all our staff for their hard work during the year which has resulted in this successful performance.

 

Annual General Meeting

The Annual General Meeting will be held at the Group's registered office, Technology House, Hunsbury Hill Avenue, Northampton on 26 August 2010 at 10.30 am.

 

Outlook

The Board remains confident in the long-term growth potential of the Group and will continue to explore opportunities to supplement organic growth by selective acquisitions.

 

 

 

 

 

 

Peter Bertram

Chairman

4 June 2010

 

* Before non-recurring items and amortisation of intangibles

** Before non-recurring items and amortisation of intangibles, using a normalised tax rate adjusted for some one-off credits (see note 13)

 

Business Review

 

Overview

 

As expected, the year proved to be challenging for the Group due to some very testing markets.  However, as the year progressed operating conditions steadily improved and we have increased profitability, continued to invest in solutions offerings and strengthened our position in the market.  We have also seen customers starting to move from cost saving to investing for the future and this is partly reflected in an increased level of order book activity for the Group during the second half of the year.

 

We have been encouraged by the number of recent new business wins and the Partner Services division secured its largest services contract win to date with a new partner in the retail sector.  This contract with Torex Retail Holdings Ltd is a five year outsource agreement providing a range of services to end users.  The order book for the Group increased by 23.0% to £353.0m at 31 March 2010 (2009: £286.9m) which is encouraging in a business environment where customers remain wary of making long-term commitments preferring instead to contract work on a shorter, incremental basis.

 

The growth in order book is evidence that customers are turning to the Group not only to help them reduce operating costs but also as they see us as a supplier of cloud computing services.

 

The Group has continued to invest carefully for future growth through selective capital expenditure on additional hosting facilities, including virtual shared platforms, data replication and data storage.  We also made two acquisitions during the latter part of the year enabling us to expand our service offering and broaden our customer base.

 

We have had a successful year financially.  For the year ended 31 March 2010 underlying profit before tax grew by 4.2% to £29.5m (2009: £28.3m).  Group revenues decreased as expected, by 2.9% to £245.8m (2009 £253.2m) reflecting the increased competitive pressure in the markets that the Group serves.  Underlying operating margins remained broadly stable at 14.0% as the Group continues to focus on annuity revenues.  Cash generation was strong enabling a reduction in net debt (including finance leases) of £20.5m to £67.9m (2009: £88.4m).

 

A consistent strategy

 

The Group's strategy of focusing on attractive niche markets remains unchanged and this is reflected in the Group's operating structure, which comprises three operating divisions each focusing on a specific sector of the UK market:

 

·      ICM Continuous Business: business continuity services and planning software

·      Phoenix IT Services: IT support services to large partner organisations

·      Servo: mid-market and public sector with the main focus on managed hosting

 

Each of the three operating divisions benefit from being part of the wider Group, leveraging our centres of excellence as well as giving opportunities to cross-sell between divisions and to sell a wider portfolio of services to existing and new customers.  In addition, as we plan for the longer-term growth of the Group, we have established a strong modular structure, which can be readily expanded with the addition of service lines and potential further acquisitions which meet our strict criteria, as has been demonstrated in the year.

 

The growth of the business will continue to be primarily organic, but selective acquisitions may play an important role in future growth, specifically where they enable the Group to enter new niche markets and acquire new skills and service solutions that fit into the cloud computing offering as a platform for further organic growth.  The Group has a proven ability in successfully acquiring and integrating people businesses and we expect this to continue as opportunities present themselves.

 

The market for cloud computing services is developing at a fast rate and covers a broad spectrum of services, which allow businesses to move all of their computing needs including software and data to a hosted service, accessible over the internet.  This is a dramatic change in the landscape of information technology and the Group is well positioned to deliver this type of IT-related capability through its three operating divisions.  We have continued to develop our service offering in this area over the past 12 months including the introduction of the Emergency Office, Replication and Online Back Up business continuity services which utilise the latest technology.

 

As the business expands through both acquisition and organic growth, the increasing number of services available to the operating divisions coupled with an increasing customer base gives us the opportunity to cross-sell our various services.  The more services that a customer takes from a single supplier the more loyal they are to that supplier and as a Group we continue to exploit these opportunities wherever possible. 

 

We are confident that we have the right strategy in place.  The Board believes that a continuing focus on increasing annuity revenues in niche areas combined with growing cloud computing services both organically and through acquisitions in the UK will maximise the performance of the Group for the foreseeable future.

 

Summary of results

 

The key financial highlights for the year are as follows:

 

	Year ended 31 March 2010	Year ended 31 March 2009	Change
	£m	£m	% / £m
Revenues	245.8	253.2	(2.9%)
Underlying profit from operations (1)	34.4	35.7	(3.5%)
Underlying profit before tax (2)	29.5	28.3	4.2%
Profit after tax	19.2	11.0	73.6%
Net debt (including finance leases)	67.9	88.4	(20.5m)
Capital expenditure net of proceeds from disposals	7.1	15.4	(8.3m)
Diluted earnings per share	24.6p	14.2p	73.2%
Normalised diluted earnings per share (3)	28.1p	26.3p	6.8%
Dividend	6.45p	6.30p	2.4%

 

Order book	353.0	286.9	23.0%
Annual contract value	203.7	179.9	13.2%

 

⁽¹⁾  Before non-recurring items and amortisation of intangibles

⁽²⁾ Profit before tax of £25.2m (2009: £15.6m) plus amortisation of intangibles £3.1m (2009: £3.4m) and non-recurring items £1.2m (2009: £9.3m)

⁽³⁾  Before non-recurring items and amortisation of intangibles, using a normalised tax rate adjusted for some one-off credits (see note 13)

 

 

Revenues and profits

 

Revenue for the year has decreased, as anticipated, by 2.9% to £245.8m (2009: £253.2m).  On a pro-forma basis revenue decreased by 2.7% to £244.8m (2009: £251.6m) assuming that the Group's French business had been disposed of on the first day of the previous financial year and no acquisitions had been made during this financial year.

 

Underlying profit from operations decreased in the year by 3.5% to £34.4m (2009: £35.7m).  Underlying operating margins however, have remained broadly stable at 14.0% (2009: 14.1%) as the Group has improved operational efficiencies and responded rapidly to changes in the sales mix.  On a pro-forma basis, underlying operating profit decreased by 3.0% to £34.4m (2009: £35.4m) assuming that the Group's French business had been disposed of on the first day of the previous financial year and no acquisitions had been made during this financial year.

 

Underlying profit before tax increased in the year by 4.2% to £29.5m (2009: £28.3m) and profit before tax increased by 61.0% to £25.2m (2009: £15.6m).

 

Acquisitions

 

In December 2009 the ICM Continuous Business division purchased the UK business and certain assets of Office Shadow Limited ("Office Shadow") from the administrator for £0.4m.  Office Shadow sells a suite of hosted software used by businesses to manage their business continuity plans.  This important acquisition further enhances the Group's offering in this area adding Business Continuity Planning Software, including Business Impact Analysis, Risk Management and Compliance capabilities to the existing IT and Work-area services portfolio.  The addition of Office Shadow not only expands our business continuity offering to existing customers but brings with it additional revenue streams and extends our customer base.

 

In February 2010, the Servo division, through the purchase of the entire share capital of Aghoco 1000 Limited from KCOM Group plc ("KCOM") for £1.8m, acquired support contracts with an annual value of £9.7m.  As part of the same agreement, Phoenix IT Services entered into a multi-year outsourcing agreement with KCOM to provide field engineering services for its Managed Services customers.  This is an important agreement, which not only strengthens the Group's long established position in the Networks arena but also enables it to expand activities into voice support and particularly Voice Over IP (VOIP) through the acquisition of multi platform skills and take full advantage of the growing trend for converged technologies. 

 

ICM Continuous Business (Business Continuity)

 

	Year ended 31 March 2010	Year ended 31 March 2009	Change %
Revenue	£53.1m	£51.2m	3.7%
Underlying profit from operations	£13.3m	£13.0m	2.1%
Underlying operating margin	25.0%	25.4%
Order book	£104.3m	£98.8m	5.6%
Annual contract value	£54.5m	£51.5m	5.7%

 

The division has delivered a robust performance during the year with a 3.7% increase in revenue to £53.1m (2009: £51.2m), a 2.1% increase in underlying profit from operations to £13.3m (2009: £13.0m) and a 5.6% increase in order book to £104.3m.  Revenues were held back during the first part of the year by the economic uncertainty, particularly in the financial services market, but we are now seeing an easing of these pressures and over the last three months there has been marked improvement in order intake within the London market. 

 

During the year the business has continued to develop new products and services with an emphasis on offering customers proactive business solutions rather than more traditional reactive recovery responses.  For services that support the workforce an "emergency office" service was launched during the year providing secure connectivity for customer employees to use home PCs to connect to a virtual desktop environment to enable them to continue working, combined with investment in enhanced telephony and call centre infrastructure at all of its Workplace Recovery centres.  A new data replication product was also launched during the year whereby data is backed-up remotely to a secure offsite location for resilience.

 

The acquisition of Shadow Planner, one of the assets of Office Shadow, provides the business with additional professional services capability.  This will enable the Group to engage throughout the Business Continuity support cycle, from early strategy and planning through to testing and ultimately the provision of standby services and facilities from which customers can continue to operate in the event of them suffering a disaster.  Shadow Planner is already a popular product and will continue to be developed with new features that benefit users.  On a pro-forma basis, assuming that Office Shadow had not been acquired, revenues increased by 3.1% to £52.8m (2009: £51.2m) and underlying profit from operations increased by 1.5% to £13.2m (2009: £13.0m).

 

The division continues to increase its utilisation of syndicated seats, with its utilisation rate increasing to 56% at 31 March 2010 (2009: 47%), and selectively expand its hosting capacity.  Capital expenditure spend has been lower than in previous years at £4.5m (2009: £10.4m) but we expect expenditure levels to increase again as this investment is primarily customer driven.

 

Phoenix IT Services (Partner Services)

 

	Year ended 31 March 2010	Year ended 31 March 2009	Change %
		(restated)
Revenue	£104.2m	£110.3m	(5.6%)
Underlying profit from operations	£16.4m	£16.9m	(3.1%)
Underlying operating margin	15.7%	15.3%
Order book	£194.4m	£144.7m	34.3%
Annual contract value	£101.3m	£88.5m	14.6%

 

Restatement: During the year ended 31 March 2009 certain customer contracts were transferred from the Servo division to the Phoenix IT Services division.  Prior year revenue, underlying profit from operations, order book and annual contract value have been restated (increased) by £4.8m, £0.8m, £2.5m and £3.1m respectively.

 

Phoenix IT Services has experienced difficult market conditions during the year, resulting in revenue decreasing, as anticipated, by 5.6% to £104.2m.  The decline in revenues has largely been in projects and professional services where customers continued to defer some purchasing decisions, particularly during the first half of the year.  Significant improvements in operational efficiency this year have resulted in an increase in the divisional underlying operating margin to 15.7% compared to 15.3% in 2009.

 

The decrease in revenue is in part due to the disposal of the French division in November 2008.  On a pro-forma basis, assuming France was disposed of on the first day of the comparative period, revenues have decreased by 4.1% to £104.2m (2009: £108.7m) and underlying profit from operations decreased by 1.8% to £16.4m (2009: £16.7m).

 

Pressures in the market presented increased opportunities in the second half of the year for outsourcing as companies looked to reduce their overhead base.  We have won several large outsourcing contracts during the second half of the year, which have significantly increased the order book at 31 March 2010 by 34.3% to £194.4m (2009: £144.7m).  These contracts have had minimal financial impact in the current year.

 

As announced in the interim results in November 2009, Phoenix IT Services won its largest single contract to date.  This was a five year outsource agreement with Torex Retail Holdings Ltd to provide a range of services to end users.  The contract, which started on 1 February 2010, presents an opportunity for the Group to develop its presence in the retail sector and also to sell additional products and services into this market.  We expect first year revenues of circa £13.0m from this contract.

 

As previously announced on 3 February 2010, Phoenix IT Services entered into a seven year outsourcing contract with KCOM Group plc to provide outsourced services to its customers.  The contract, which started on 1 April 2010, strengthens our position in the Networks area and brings new expertise in voice technology to the Group.  We expect this contract to generate revenues of £6.0m in its first full year of operation.

 

During the year Phoenix IT Services was awarded a 5 year contract with Capita to provide hardware field maintenance and logistics activities. The contract commenced in February 2010 as planned and is expected to generate £3.5m of revenue per annum.

 

With outsourcing agreements of this size and complexity, the division will necessarily incur certain one off start up costs relating to the implementation of the contracts.  These costs will be amortised over the life of the contract and we would anticipate achieving double digit margins over the contract terms after taking account of these start up costs.

 

Phoenix IT Services has good momentum going into the new financial year and, in spite of continuing macroeconomic uncertainties, continues to have good forward visibility from its order book and high levels of recurring revenue.  The strategy for this business remains unchanged: to provide a comprehensive range of IT services, including hosting and business continuity to Partner organisations to support their typically multi-year contracts with their end user customers.  In these changeable markets, having reviewed its cost base and improved operational efficiencies the business remains well positioned to take advantage of further opportunities and capture market share.

 

Servo (Mid-Market Services)

 

	Year ended 31 March 2010	Year ended 31 March 2009	Change %
		(restated)
Revenue	£88.5m	£91.7m	(3.5%)
Underlying profit from operations	£8.0m	£9.2m	(13.6%)
Underlying operating margin	9.1%	10.1%
Order book	£54.3m	£43.4m	25.1%
Annual contract value	£47.9m	£39.9m	20.0%

 

Restatement: During the year ended 31 March 2009 certain customer contracts were transferred to the Phoenix IT Services division from the Servo division.  Prior year revenue, underlying profit from operations, order book and annual contract value have been restated (decreased) by £4.8m, £0.8m, £2.5m and £3.1m respectively.

 

Servo sells a broad range of IT services and IT products to the Mid-Market providing SME customers with a complementary and extensive range of services on a UK-wide basis.  The division has experienced challenging trading conditions during the year and this has particularly affected product and traditional maintenance services revenues, which have declined as customers reduce or delay their technology investments and non-critical project expenditure.  Revenues fell by 3.5% to £88.5m (2009: £91.7m) and underlying profit from operations decreased by 13.6% to £8.0m (2009: £9.2m).

 

Activity levels remain high in respect of managed hosting and there has been continued investment in capacity during the year in response to strong market demand for these services.  In particular, the Group has seen a continuing trend of customers moving away from requiring dedicated platforms to using virtual shared platforms using VMWare Software Technology.  Managed hosting annual contract values increased by 30.3% to £9.6m at 31 March 2010 (2009: £7.4m).  It is these high quality annuity contracts that help to improve the long-term visibility and predictability of future earnings and revenues within the division and the Group as a whole.

 

Although the first half of the year proved to be particularly difficult, during the second half of the year there have been signs of an improving environment with a number of larger size opportunities starting to emerge, particularly in the managed services business where customers recognise the value in our services.  The order book has increased by 25.1% to £54.3m at 31 March 2010 (2009: £43.4m) reflecting the continued growth in managed hosting and the acquisition of support contracts from KCOM Group plc on 26 February 2010, relating to network, voice and data field services.  On a pro-forma basis, assuming that these contracts had not been acquired, revenues decreased by 4.3% to £87.7m (2009: £91.7m) and underlying profit from operations decreased by 12.8% to £8.1m (2009: £9.2m).

 

The divisional management team was strengthened with the appointment of a new Sales Director in March 2010 as the business continues to extend its presence in the Mid-Market sector.  There is a clear focus on growing the annuity revenues with a particular emphasis on managed hosting. 

 

The business entered the new financial year with a robust opening order book and a continuing trend in business mix towards contractual services.  The pipeline for the future is encouraging and with a diversified customer base and strong market offering the business is well placed to take advantage of any recovery in the market and the move to a new era in IT infrastructure, which provides further opportunity for the division to grow its contractual services.

 

Other financial items

 

Finance costs and investment income

 

Finance costs, net of investment income for 2010 were £4.9m (2009: £7.4m).

 

Within finance costs, interest on bank borrowings totalled £3.7m (2009: £6.3m).  The decrease on prior year is due to both lower levels of debt and lower interest rates.  The Group has an interest rate swap in place that fixes 75% of the term loan at a rate of 5.78%.  The instrument matures on 30 September 2010.  The remaining borrowings are at a floating rate linked to LIBOR.

 

Other items included in finance costs are finance lease interest of £0.7m (2009: £0.8m), a net pension charge of £0.1m (2009: £0.1m), and amortisation of loan issue costs of £0.3m (2009: £0.4m).

 

Taxation

 

The effective tax rate for the period was 24.1% (2009: 29.5%).  The rate for 2010 has benefitted from some one-off credits relating to enquiries by HMRC that were settled favourably during the year.  The normalised effective tax rate after adjusting for these one-off items was 26.9%; the normalised rate, adjusted for non-recurring items and amortisation of intangibles, was 25.9%.  A full analysis of the tax charge for the year is set out in note 12.

 

Earnings and dividends

 

Normalised diluted earnings per share were 28.1p (2009: 26.3p).  Underlying diluted earnings per share were 29.0p (2009: 26.3p), diluted earnings per share were 24.6p (2009: 14.2p) and basic earnings per share were 25.4p (2009: 14.7p).

 

The Board recommends a proposed final dividend of 4.3p per share (2009: 4.2p) which, combined with the interim dividend of 2.15p per share, gives a total dividend per share for the year of 6.45p (2009: 6.3p), an increase of 2.4%.  If approved, the final dividend will be paid on 8 October 2010 to shareholders on the register at 17 September 2010.

 

Assets held for sale

 

The Group has several freehold properties that continue to be held for sale.  Despite active marketing throughout the year, the properties remain unsold at 31 March 2010 and so continue to be classified as current assets.

 

Independent valuations were performed on each of the properties at 31 March 2010 which indicated an impairment in value of £1.2m which has reduced the book value of the assets to £2.2m (2009: £3.4m).

 

Pension scheme

 

The pension deficit has increased during the year from £1.1m to £5.1m.  The increase in the deficit was largely due to a decrease in the discount rate from March 2009, caused by declining bond yields offset by rises in asset values.

 

Further details relating to the pension scheme are presented in note 10.

Cash flow and capital expenditure

 

The Group has continued to be highly cash generative.  Through close management of working capital and capital expenditure, cash from operations before non-recurring cash flows in the year was £46.3m (2009: £51.6m) representing 134.6% (2009: 144.7%) of underlying profit from operations.

 

This strong cash generation has led to a reduction in net debt (including finance leases) by £20.5m to £67.9m (2009: £88.4m) during the year, after the cost of acquisitions of £2.4m.  As a consequence, we remain within our banking covenants and well financed with £86.0m of committed, syndicated credit facilities.

 

Capital spend has reduced in 2010 following the significant investment in business continuity and hosting centres in prior years as the utilisation of these existing facilities is maximised.  The Group continues to invest for future expansion in the business with the acquisition in the year of a further property lease in Farnborough to add to our current portfolio of data centre facilities and we expect expenditure levels to increase over the next two years, primarily in work place recovery centres and data centres.

 

Total capital expenditure for the year, net of proceeds from disposals was £7.1m.  The capital expenditure cash flow in the year, net of proceeds from disposals was £5.2m (2009: £15.4m).  This includes expenditure on intangible assets of £0.2m.  A further £1.9m of capital expenditure on property plant and equipment had been incurred but not paid for at 31 March 2010.

 

Borrowing facilities and liquidity

 

The Group has committed borrowings in place through a syndicated bank facility, which consists of a term loan of £56.0m and revolving credit facility of £30.0m.  The Group also has access to an overdraft facility of £10.0m with our principal bankers, providing the Group with total facilities of £96.0m (2009: £109.0m), of which £86.0m are committed.

 

The term loan amortises to expiry in May 2012 as follows: £16.0m on 30 September 2010; £16.0m on 30 September 2011; £24.0m on 27 May 2012.  The revolving credit facility is available to the Group until 27 May 2012.

 

The syndicated credit facility is subject to financial covenants, which are measured bi-annually to test for compliance.  The covenants relate to:

 

·      leverage (net debt : EBITDA)

·      interest cover (EBITDA : net finance costs)

·      debt service cover (debt service costs : cash flows)

 

As our bank facilities are committed until 2012, for prudence and security, it is likely that these facilities will be renewed in the next twelve months.  We continue to maintain a close dialogue with our group of banks and others.

 

 

Treasury

 

The Group operates within policies and guidelines approved by the Board using conventional financial instruments and specified derivatives.

 

It is the Board's preference to manage market risks without the use of derivatives but they are used where necessary and appropriate to reduce the levels of volatility to both income and equity.  The use of derivatives is strictly controlled and they are not permitted to be used for speculative or trading purposes.

 

The Group's main treasury risks relate to the availability of funds to meet its future requirements.  The Group's policy with respect to facilities is to ensure that these are sufficient to cover the expected needs of the Group, having reflected the inherent uncertainty of projections and forecasts.  Whilst the Group maintains un-committed facilities to maintain short-term flexibility, its principal debt funding comprises committed bank facilities, which are detailed above.

 

Going concern

 

The Group's business activities, the factors likely to affect its future development, performance and position along with the financial position of the Group, its cash flows, liquidity position and borrowing facilities are described above.  In addition, notes 18 and 19 to the financial statements include the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit and liquidity risk.

 

The Directors have reviewed the Group's future cash forecasts and revenue projections for a period of 12 months from the date of signing the accounts, which they believe are based on prudent market data and past experience and have formed a judgement that at the time of approving these financial statements, based on those forecasts and projections, there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

 

The Directors are currently of the opinion that the Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within its current borrowing facilities and comply with its banking covenants.  A breach of one or more of the covenants could result in the Group's debt becoming immediately repayable.  Should a covenant breach become likely, the Group would enter into negotiations with its debt providers, which could result in it accepting higher financing costs. 

 

The current banking facilities are due to expire in May 2012.  The Group has held initial discussions with its bankers about its future borrowing needs and no matters have been drawn to our attention to suggest that renewal or replacement may not be forthcoming on acceptable terms.  However, at this stage no written commitment has been sought.

 

The Group is subject to a number of risks and uncertainties, which arise as a result of the current economic environment.  In determining that the Group is a going concern, these risks have been considered by the Directors, who have determined that the risks detailed below currently do not represent a significant threat to the Group.  The most significant are:

 

·      Whilst the Directors have considered reasonable changes in market conditions and competitive pressures, in the current environment a further significant downturn could impact Group revenues and margins to a greater extent than they have currently envisaged.

 

·      Liquidity risks are greater because of the difficulties within the banking sector.  However, the Group currently has £96.0m of facilities subject to periodic amortisation until 2012 that provide it with sufficient headroom for the foreseeable future.

 

·      Interest rate movements present a risk to the Group, although they are significantly reduced through the use of an interest rate swap which is in place until September 2010.

 

·      Credit risk is heightened as a result of difficulties that might be faced by some of the Group's customers in the current climate and also because of credit risks associated with other counterparties, such as banks, with which the Group has dealings.

 

·      The Group has a defined benefit pension scheme, which has an accounting deficit at 31 March 2010 of £5.1m.  Any deterioration in the scheme's funding position could impact the Group's liquidity.

 

Taking into account the results of sensitivity testing and the remedial actions available to the Group, the Directors consider that it remains appropriate to prepare the financial statements on a going concern basis.

 

Principal risks and uncertainties

 

As a result of the contracted revenues in the order book, the Group has a high degree of forward visibility of its revenues over the next twelve months.  Nonetheless, there are a number of potential risks and uncertainties, in addition to those noted above, which could have a material impact on the Group's performance over the next financial year and which could cause the Group's actual results to materially deviate from historical and expected results.

 

Macroeconomic risk

 

Whilst the Group has not seen a significant downturn in activity, there remains a heightened risk of this occurring as long as the uncertainty in the UK economy continues with an increased number of business failures in the UK and a lengthening of the decision-making cycle between prospect and contract.  For the Group this risk is mitigated by the high proportion of long-term contracted annuity business and stringent working capital and cash management.

 

Competitor risk

 

The IT services industry is highly competitive.  Several competitors, including, in some cases, Phoenix's partners, have longer operating histories, higher brand recognition and greater financial, technical, marketing, personnel and other resources than the Group.  The Group's competitors have, and other potential competitors may have, well established relationships with current and potential customers of the Group.  As a result, these competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their services, than the Group.  In addition, the Group may experience increased competition from low cost outsourcing centres, including offshore centres, and new or existing niche market participants whose costs may be lower.  Increased competition could lead to the loss of market share, loss of material contracts, renegotiation of price levels or a general reduction in revenues of the Group.

 

Management of new business

 

The Group has made a number of significant contract wins and acquisitions during the year.  The failure to effectively and efficiently manage simultaneous acquisitions and the winning of large contracts could lead to lower profitability, damage to our reputation, loss of material contracts and loss of market share.  The risk is mitigated through rigorous co-ordination planning where simultaneous activities are being executed, both pre and post acquisition to ensure that integration activities run as smoothly as possible.

 

Loss of key locations

 

The Group's Business Continuity business is reliant on a number of facilities in strategic locations around the UK, close to major business centres.  The loss of access to a key site would present significant operational difficulties to the Group and could result in a material loss of contracts.  The 'primary' sites, which are critical to our success, have been identified and provisions put in place to manage our continued access in line with business requirements.

 

Key performance indicators ('KPIs')

 

The Group uses a number of KPIs to monitor the performance of the business.  The more important KPI's are set out below.

 

Profitability

 

The Group's principle profitability KPIs are underlying profit from operations and diluted earnings per share.  Underlying profit from operations reduced in the year by 3.5% to £34.4m (2009: £35.7m) while normalised diluted earnings per share have increased by 6.8% to 28.1p (2009: 26.3p).

 

Operating margin

 

This represents the Group's underlying profit from operations divided by Group revenues.  For the year ended 31 March 2010, Group underlying operating profit margin remained broadly consistent at 14.0% (2009: 14.1%).

 

Cash generated from operations

 

Strong control is exercised over the Group's working capital and conversion of profit into cash.  For the year ended 31 March 2010, cash generated from operations was down 3.9% to £44.0m (2009: £45.8m).  Cash generated by operations before non-recurring cash flows was £46.3m (2009: £51.6m) representing 134.6% of underlying profit from operations (2009: 144.7%).

 

 

Order book

 

The contracted order book increased in the year by 23.0% to £353.0m (2009: £286.9m) reflecting predominantly the large contract wins in the Partner Services market over the year. 

 

Annual contract value

 

Annualised contract value ("ACV") represents the revenue that would be generated from current contracts over a 12 month period.  Total ACV for the Group has increased by 13.2% to £203.7m (2009: £179.9m), primarily driven by new contract wins in the Phoenix IT Services division.

 

Outlook

 

We have positioned the business to succeed in these challenging times.  Our strategy remains consistent, with our focus remaining on attractive niche markets and organic growth supported by customer led capital investment combined with selective acquisitions.  The Group continues to have good forward visibility from its order book and high levels of recurring revenues from a diversified customer base.

 

 

 

Nick Robinson

Chief Executive

4 June 2010

 

Responsibility statement 

The responsibility statement below has been prepared in connection with the Company's full annual report for the year ending 31 March 2010. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

·      the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

 

·      the management report, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

 

 

Consolidated statement of income

For the year ended 31 March 2010

 

 

		2010			2009
	Note	Before non-recurring items £m	Non-recurring items (note 7) £m	Total £m	Before non-recurring items £m	Non- recurring items (note 7) £m	Total £m
Continuing operations
Revenue	5	245.8	-	245.8	253.2	-	253.2
Profit from operations before amortisation of
intangibles		34.4	(1.2)	33.2	35.7	(9.3)	26.4
Amortisation of intangibles	16	(3.1)	-	(3.1)	(3.4)	-	(3.4)
Profit from operations	8	31.3	(1.2)	30.1	32.3	(9.3)	23.0
Investment income	5,11	0.9	-	0.9	0.9	-	0.9
Finance costs	11	(5.8)	-	(5.8)	(8.3)	-	(8.3)
Profit before tax		26.4	(1.2)	25.2	24.9	(9.3)	15.6
Tax	12	(6.0)	-	(6.0)	(7.0)	2.4	(4.6)
Profit for the period	34	20.4	(1.2)	19.2	17.9	(6.9)	11.0
Earnings per share
Basic	13	27.0p		25.4p	23.9p		14.7p
Diluted	13	26.2p		24.6p	23.1p		14.2p

 

 

Consolidated statement of comprehensive income

For the year ended 31 March 2010

 

		2010		2009
	Note		£m		£m
Exchange differences on translation of foreign operations			-		(0.1)
Gain/(loss) taken to equity in respect of cash flow hedges	18		1.7		(1.8)
Actuarial losses on defined benefit pension schemes	10		(5.0)		(0.8)
Tax on items taken directly to equity	12		0.9		0.7
Other comprehensive income for the period, net of tax			(2.4)		(2.0)
Profit for the period	34		19.2		11.0
Total comprehensive income for the period			16.8		9.0

 

Consolidated balance sheet

As at 31 March 2010

 

		2010	2009
	Note	£m	£m
Non-current assets
Goodwill	15	180.2	178.8
Intangible assets	16	18.1	18.8
Property, plant and equipment	17	62.1	68.2
Other receivables	23	-	1.0
		260.4	266.8
Current assets
Inventories	22	13.0	11.1
Trade and other receivables	23	54.1	54.7
Cash and cash equivalents	24	10.3	5.9
		77.4	71.7
Assets held for sale	20	2.2	3.4
		79.6	75.1
Total assets		340.0	341.9
Current liabilities
Trade and other payables	26	(39.3)	(40.8)
Current tax liabilities		(4.9)	(3.6)
Obligations under finance leases and hire purchase contracts	27	(5.0)	(4.9)
Bank loans	25	(15.7)	(12.7)
Provisions	28	(0.8)	(0.5)
Derivative financial instruments	18	(1.1)	-
Deferred revenue		(55.7)	(52.9)
		(122.5)	(115.4)
Net current liabilities		(42.9)	(40.3)
Non-current liabilities
Obligations under finance leases and hire purchase contracts	27	(7.6)	(11.1)
Bank loans	25	(49.9)	(65.6)
Provisions	28	(4.4)	(4.1)
Deferred tax liabilities	29	(4.3)	(7.0)
Derivative financial instruments	18	-	(2.8)
Deferred revenue		(0.7)	(0.8)
Other non-current liabilities	26	(6.5)	(7.6)
Retirement benefit obligations	10	(5.1)	(1.1)
		(78.5)	(100.1)
Total liabilities		(201.0)	(215.5)
Net assets		139.0	126.4
Equity
Share capital	30	0.8	0.8
Share premium account	31	37.5	37.4
Merger reserve	32	57.5	57.5
Other reserves	33	-	(1.3)
Retained earnings	34	43.2	32.0
Total equity		139.0	126.4

 

The financial statements were approved by the Board of Directors and authorised for issue on 4 June 2010. They were signed on its behalf by:

 

 

 

 

 

 

Peter Bertram

Executive Chairman

 

 

Consolidated statement of changes in equity

For the year ended 31 March 2010

 

 

 

		Share capital	Share premium account	Merger reserve	Other reserves	Retained earnings	Total equity
	Note	£m	£m	£m	£m	£m	£m
At 1 April 2008		0.7	37.4	57.5	1.0	23.7	120.3
Profit for the period		-	-	-	-	11.0	11.0
Exchange differences on translation of foreign operations		-	-	-	(0.1)	-	(0.1)
Loss recognised on cash flow hedge		-	-	-	(1.8)	-	(1.8)
Actuarial loss on defined benefit pension scheme	10	-	-	-	-	(0.8)	(0.8)
Tax on items taken directly to equity	12	-	-	-	0.5	0.2	0.7
Total comprehensive income for the period		-	-	-	(1.4)	10.4	9.0
Shares transferred to the employee benefit trust		0.1	-	-	-	-	0.1
Share option expense	39	-	-	-	(0.3)	-	(0.3)
Dividends	14	-	-	-	-	(2.7)	(2.7)
Transfer to retained earnings on exercise of share options		-	-	-	(0.6)	0.6	-
Total transactions with owners		0.1	-	-	(0.9)	(2.1)	(2.9)
At 1 April 2009		0.8	37.4	57.5	(1.3)	32.0	126.4
Profit for the period		-	-	-	-	19.2	19.2
Gain recognised on cash flow hedge		-	-	-	1.7	-	1.7
Actuarial loss on defined benefit pension scheme	10	-	-	-	-	(5.0)	(5.0)
Tax on items taken directly to equity	12	-	-	-	(0.5)	1.4	0.9
Total comprehensive income for the period		-	-	-	1.2	15.6	16.8
Exercise of share options	31	-	0.1	-	-	-	0.1
Share option expense	39	-	-	-	0.4	-	0.4
Dividends	14	-	-	-	-	(4.7)	(4.7)
Transfer to retained earnings on exercise of share options		-	-	-	(0.3)	0.3	-
Total transactions with owners		-	0.1	-	0.1	(4.4)	(4.2)
At 31 March 2010		0.8	37.5	57.5	-	43.2	139.0

 

 

 

Consolidated cash flow statement

For the year ended 31 March 2010

 

 

				2010	2009
			Note	£m	£m
Net cash from operating activities			36	33.1	33.9
Investing activities
Purchases of property, plant and equipment				(5.4)	(15.5)
Proceeds on disposal of property, plant and equipment				0.4	0.1
Purchases of intangible assets				(0.2)	-
Acquisition of subsidiary undertaking:
	- Cash consideration			(2.2)	-
	- Costs of acquisition			(0.2)	-
Disposal of subsidiary undertaking				-	(0.9)
Net cash used in investing activities				(7.6)	(16.3)
Financing activities
Dividends paid				(4.7)	(2.7)
Repayments of borrowings				(13.0)	(24.3)
(Decrease)/increase in net obligations under finance leases and hire purchase contracts				(3.4)	3.0
Net cash used in financing activities				(21.1)	(24.0)
Net increase/(decrease) in cash and cash equivalents				4.4	(6.4)
Cash and cash equivalents at beginning of period				5.9	12.3
Cash and cash equivalents at end of period				10.3	5.9

 

Notes to the consolidated financial statements

For the year ended 31 March 2010

 

 

1. General information

Phoenix IT Group plc is a company incorporated in the United Kingdom under the Companies Act 2006.  The nature of the Group's operations and its principal activities are set out in note 6 and in the Business Review.

 

These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates.

 

2. Adoption of new and revised Standards and restatements

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 March 2009, with the exception of the following standards, amendments to and interpretations of published standards adopted during the year:

 

·    IFRS 7 (Amended) 'Financial Instruments: Disclosures', effective from 1 January 2009

The amendment expands the disclosure required in respect of fair value measurements and liquidity risk. The amendment to liquidity risk has not changed the way this is disclosed in note 19. The Group has elected not to provide comparative information for these expanded disclosures in the current year in accordance with the transitional relief offered in this amendment.

·    IAS 1 (Amended) 'Presentation of Financial Statements', effective from 1 January 2009

The amendment requires "non-owner" and "owner" changes in equity to be presented separately. The Group has elected to present two statements: an income statement and a statement of comprehensive income. Other changes introduced by the revised standard include the requirement to give the Statement of Changes in Equity equal prominence to the other Primary Standards. The financial statements have been prepared under the revised disclosure requirements.

 

The following new standards, amendments to standards or interpretations are mandatory for the first time for the year ending 31 March 2010 but have no material impact on the Group's financial statements:

 

·    IFRS 2 (Amended) 'Share-based Payment', effective from 1 January 2009

The amendment to the standard limits vesting conditions to service conditions and performance conditions. The amendment also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment, i.e. acceleration of the expense based on the grant date fair value.

·    IFRS 8 'Operating Segments', effective from 1 January 2009

The standard replaces IAS 14 Segment Reporting, and aligns operating segments reported to those segments reported internally to senior management. This standard has not changed the way the segments are disclosed in note 6.

·    IAS 36 (Amended) 'Impairment of Assets', effective from 1 January 2009

The amendments align the disclosure required when measuring the recoverable amount on fair value less costs to sell with that based on value in use.

·    IAS 38 (Amended) 'Intangible Assets', effective from 1 January 2009

The amendments confirm how to account for advertising and promotional activities and clarify the units of production amortisation method.

·    IAS 39 (Amended) 'Financial Instruments: Recognition and Measurement', effective from 1 January 2009

The amendments address designating and documenting hedges at the segment level and guidance on the applicable effective interest rate on cessation of fair value hedge accounting.

 

At the date of authorisation of these financial statements, certain new standards, interpretations and amendments to existing standards are not yet effective and have not been early adopted by the Group. Those which are considered relevant to the Group's operations are as follows:

 

 

IFRS 2	Share-based Payment (amended) Group equity-settled and cash-settled share-based payment transactions	1 January 2010
IFRS 3	Business Combinations (revised) Comprehensive revision on applying the acquisition method	1 July 2009
IFRS 5	Non-current Assets (amended) Disclosures of non-current assets classified as held for sale or discontinued operations	1 July 2009
IFRS 8	Operating Segments (amended) Disclosure of information about segment assets	1 January 2010
IFRS 9	Financial Instruments Simplifies the mixed measurement model and establishes primary measurement Categories for financial assets	1 January 2013
IAS 17	Leases (amended)  Classification of leases of land and buildings	1 January 2010
IAS 24	Related Party (revised)  Revised definition of related parties	1 January 2011
IAS 27	Consolidated and Separate Financial Statements (revised) Accounting for changes in ownership interests in subsidiaries	1 July 2009
IAS 36	Impairment of Assets (amended) Unit of accounting for goodwill impairment	1 January 2010
IAS 38	Intangible Asset (amended)  Additional consequential amendments arising from revised IFRS 3 and measuring fair value of an intangible asset acquired in a business combination	1 July 2009
IAS 39	Financial Instruments: Recognition and Measurement (amended) Amendments for eligible hedged items Cash flow hedge accounting	1 July 2009 1 January 2010

 

The adoption of these standards is not expected to have a material impact on the reported results or financial statements.

 

 

3. Significant accounting policies

 

Basis of accounting

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs).  The financial statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation.

 

The financial statements have been prepared on the historical cost basis except where stated below. The principal accounting policies adopted are set out below.

 

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 March each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

 

On acquisition, the assets (including identifiable intangible assets, excluding goodwill) and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill.  The results of subsidiaries acquired or disposed of during the year are included from the effective date of acquisition or up to the effective date of disposal, as appropriate.

 

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

 

Going concern

The directors have, at the time of approving the financial statements, a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the Business Review.

 

Discontinued operations and assets held for sale

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 value and fair value less costs to sell.  No depreciation is charged on assets and businesses classified as held for sale.

 

Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use.  This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. 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.

 

Where an asset held for sale has not sold within one year, the asset may remain classified as held for sale provided that the delay is caused by events or circumstances beyond the Group's control and management are still committed to the sale and the above criteria are still met.

 

Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition.

 

Goodwill is recognised as an asset and reviewed for impairment at least annually with cash generating units assessed by segment (see note 15). Any impairment is recognised immediately in profit for the period and is not subsequently reversed.

 

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

 

Goodwill arising on acquisitions before the date of transition to IFRS as adopted by the European Union has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP in the year ended 31 March 1999 and earlier periods has not been reinstated and is not included in determining any subsequent profit or loss on disposal.

 

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes.

 

Product

Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of goods.

 

Maintenance contracts

For fixed-fee maintenance contracts the revenue arising is spread evenly over the term of the contract. Costs related to the delivery of services under these contracts are charged to the income statement as they arise (typically these contracts are annual and costs arise evenly over the contract term). An element of costs incurred in the initial set up, transition or transformation phase of the contract are deferred and recorded within current assets. These costs are then recognised in the income statement on a straight line basis over the remaining contractual term. These costs are directly attributable to specific contracts, relate to future activity, will generate future economic benefits and are assessed for recoverability on a regular basis.

 

Other contract revenues

Other contract revenues are recorded according to the stage of completion of the contract by reference to the value of work performed.

 

The amount by which revenue differs from payments on account is shown under receivables as accrued income, or under payables as deferred revenue, as appropriate.

 

Provision is made for all anticipated contract losses as soon as they are identified.

 

Where a contract contains several service elements, the individual elements are accounted for separately at fair value.

 

Interest income

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount.

 

Dividend income

Dividend income from investments is recognised when the Shareholders' rights to receive payment have been established.

 

Leasing

Assets held under finance leases and hire purchase contracts are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.

 

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

 

Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

 

Foreign currencies

Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rate prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in net profit or loss for the period.

 

On consolidation, the assets and liabilities of the Group's overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group's profit and loss reserve. Such translation differences will be recognised as income or as expenses in the period in which the operation is disposed of.

 

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

 

All other borrowing costs are recognised in the income statement in the period in which they are incurred.

 

Retirement benefit costs

 

Defined contribution pension schemes

The principal subsidiary undertakings contribute to a number of Group personal pension plans in respect of certain employees. These plans are defined contribution plans and the annual charge to the income statement is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet.

 

Defined benefit pension scheme

The Group operates a defined benefit funded pension scheme.

 

The costs of providing pensions under the defined benefit funded pension scheme are estimated on the basis of independent actuarial advice, with full actuarial valuations carried out on a triennial basis, and updated at each balance sheet date.

 

The operating and finance costs of the scheme are recognised separately within the statement of income.  Actuarial gains and losses are recognised in full in the period in which they occur and are presented in the statement of recognised income and expense.

 

The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service costs, and as reduced by the fair value of scheme assets.

 

Short-term employee benefits

The cost of short-term accumulating balances is charged to the income statement over the period during which the entitlement is earned, at an average pay rate plus social security costs. Differences between the entitlement earned and the entitlement actually paid is shown as either accruals or prepayments in the balance sheet.

 

Taxation

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

 

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

 

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

 

Investments

Investments are included at cost less provisions for impairment.

 

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and recognised impairment.

 

Depreciation is charged so as to write off the cost of assets, other than freehold land, over their estimated useful lives, using the straight-line method, on the following bases:

 

Freehold buildings                                   50 years

Leasehold property                                 Period of lease

Fixtures and equipment                           2 to 5 years

Motor vehicles                                         4 years

 

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.

 

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.

 

Intangible assets

Intangible assets are stated at cost less accumulated amortisation and any accumulated impairment losses.

 

Development costs

Expenditure incurred in the development of software products or enhancements, and their related intellectual property rights, is capitalised as an intangible asset only when the future economic benefits expected to arise are deemed probable and the costs can be reliably measured. Development costs not meeting these criteria, and all research costs, are expensed in the income statement as incurred. Capitalised development costs are amortised on a straight line basis over their useful economic lives once the related software product or enhancement is available for use.

 

Other intangible assets

Intangible assets acquired through a business combination are initially measured at fair value and are amortised on a systematic basis over their estimated useful lives on the following bases:

 

Value of trade name                               15 years

Customer contracts and relationships    6 to 10 years

 

Impairment policy

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.  An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

 

Recoverable amount is the higher 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 which the estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is immediately recognised as an expense.

 

Where an impairment loss on assets, other than goodwill, subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is immediately recognised as income.

 

Inventories

Inventories are stated at the lower of cost and net realisable value.

 

Service stocks, other than consumable stocks, are systematically amortised over four years so as to reduce their value to nil at the end of the period. Consumable stocks are expensed as they are purchased.

 

Financial instruments

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

 

Financial assets

Trade receivablesare recognised initially at fair value, which is usually the original invoiced amount and are subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established when there is evidence of a risk of non-payment, taking into account ageing, previous losses experienced and general economic conditions.

Cash and cash equivalentscomprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

 

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.

Trade payablesare recognised initially at fair value, which is usually the original invoiced amount and are subsequently measured at amortised cost using the effective interest method.

Borrowings are recorded at the proceeds received, net of direct issue costs.  Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accrual basis to the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

Equity instrumentsare any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.  Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

 

Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments such as interest rate swaps to hedge risks associated with interest rate fluctuations.  Such derivative financial instruments are stated at fair value.  The fair values of interest rate swaps are determined by reference to market rates for similar instruments.

 

In order to qualify for hedge accounting, the Group is required to document from inception the relationship between the item being hedged and the hedging instrument.  The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis.  This effectiveness testing is performed at each period end to ensure that the hedge remains highly effective.

 

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting.  At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the highly probable forecast transaction occurs.  If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the consolidated statement of income for the period.

 

Cash flow hedges 

Changes in the effective portion of the fair value of derivative financial instruments that are designated as hedges of future cash flows are recognised directly in equity, and the ineffective portion is recognised immediately in the statement of income where relevant.  If the cash flow hedge of a firm commitment or forecast transaction results in the recognition of a non-financial asset or liability, then, at the time it is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement.  For hedges that result in the recognition of a financial asset or liability, amounts deferred in equity are recognised in the statement of income in the same period in which the hedged item affects net profit or loss.

 

Provisions

Provisions relate to the obligation to reinstate certain properties to their former condition at the end of their leases.  Provisions are measured at management's best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present value where the effect is material.

 

Non-recurring items

Non-recurring items are items of income or expenditure that, in management's judgement, should be disclosed separately on the basis that they are material, either by their nature or their size.  Such items are included within the income statement caption to which they relate, and are separately disclosed either in the notes to the consolidated financial statements or on the face of the consolidated income statement.

 

Share-based payments

The Group has applied the requirements of IFRS 2 Share-based Payments. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005.

 

The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of options that will eventually vest.

 

The fair value of the share-based payments (except for the total shareholder return scheme) is measured by the use of the Black-Scholes model. The fair value of the total shareholder return (TSR) share-based payment scheme is measured by the use of a Stochastic model. The expected life used in these models have been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

 

Shares purchased through the employee benefit trust (EBT) are held at cost and are deducted from shareholders equity. The right to a dividend on these shares has been waived.

 

4. Critical accounting judgements and key sources of estimation uncertainty

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Information about such judgements and estimation is contained in the accounting policies or the notes to the accounts, and the key areas are summarised below.

 

Areas of judgement that have the most significant effect on the amounts recognised in the financial statements are:

 

Non-recurring items

Non-recurring items are items of income or expenditure that, in management's judgement, should be disclosed separately on the basis that they are material, either by their nature or their size, to an understanding of the Group's financial performance and significantly distort the comparability of financial performance between periods.  Items of income or expense that are considered by management for designation as non-recurring items include such items as significant restructuring; impairments of assets; integration of acquired businesses; and gains and losses on disposals of non-current assets.  Details of non-recurring items are included in note 7.

 

Assets held for sale

Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use.  This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. 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, however an asset may remain in this categorisation for longer than one year if it remains unsold due to events or circumstances beyond the Group's control.  In making this judgement, impairment losses of £1.2m (2009: £1.4m) have been reflected in the income statement as non-recurring items.  Details of the losses are disclosed in note 20.

 

Valuation of intangible assets and useful life

The Group has made assumptions in relation to the potential future cash flows to be determined from separable intangible assets acquired as part of business combinations.  This assessment involves assumptions relating to potential future revenues, appropriate discount rates and the useful life of such assets.  These assumptions impact the income statement over the useful life of the intangible asset.  These assumptions are discussed further below.

 

Key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are:

 

Retirement benefits

The Group operates a defined benefit pension scheme which has been accounted for in accordance with IAS 19 - Employee Benefits.  Application of IAS 19 requires the exercise of judgement in relation to various assumptions including future pay rises in excess of inflation, employer and pensioner demographics and the future expected returns on assets.  Phoenix IT Group determines the assumptions to be adopted in discussion with its actuaries, and believes these assumptions to be in line with UK practice generally, but the application of different assumptions could have a significant effect on the amounts reflected in the financial statements.  Further details can be found in note 10.

 

Impairment of goodwill and intangible assets

Determining whether goodwill and intangible assets have been impaired requires an estimation of the value in use of the cash-generating units to which they have been allocated.  The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.  Details of the carrying amount of goodwill and intangible assets are shown in notes 15 and 16 respectively.

 

Share-based payments

In valuing the share-based payments realised in the Group's accounts, the Company has used the Black-Scholes calculation model and a Stochastic model, which makes various assumptions on factors outside the Group's control, such as share price volatility and risk-free interest rates.  Details of the options and assumptions used in deriving the share-based payments are disclosed in note 39.

 

Dilapidation provisions

Dilapidation provisions have been derived on the basis of the most recent assessment of likely cost.  Many of these obligations will not arise for a number of years and the costs are difficult to predict accurately.  In making these assessments, the Group has sought the aid of independent experts where appropriate.  The total provisions are disclosed in note 28.

 

5. Revenue

An analysis of the Group's revenue is as follows:

 

		2010	2009
		£m	£m
Revenue - continuing operations:
Product		31.4	34.6
Maintenance contracts		35.1	46.6
Other contract revenues		179.3	172.0
		245.8	253.2
Investment income		0.9	0.9
		246.7	254.1

 

 

6. Segmental reporting

The Board has determined its operating segments by business line, based on the Group's management and internal reporting structure.  The Group's operations are based entirely in the UK. The Group has no significant concentration of sales to a particular individual external customer.

 

Principal activities are as follows:

 

Partner services	Provision of information technology services, networking support and infrastructure services
Business continuity	Provision of business continuity and IT disaster recovery services
Mid-market services	Provision of information technology services and systems

 

Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.  Corporate costs relate to central Group costs, including finance, legal and employee costs that are not directly attributable to the operating segments.  

 

Inter segment turnover has been eliminated.

 

	Business continuity	Partner services	Mid-market services	Corporate	Total
Year ended 31 March 2010	£m	£m	£m	£m	£m
Revenue	53.1	104.2	88.5	-	245.8
Profit from operations before amortisation of intangibles and non-recurring items	13.3	16.4	8.0	(3.3)	34.4
Amortisation of intangibles					(3.1)
Non-recurring items					(1.2)
Profit from operations					30.1
Investment income					0.9
Finance costs					(5.8)
Profit before tax					25.2
Capital expenditure on segment assets	4.5	0.8	2.2	-	7.5
Depreciation and amortisation in period	10.5	0.7	5.0	-	16.2
Impairment losses recognised in period	-	-	1.2	-	1.2
Balance sheet
Segment assets	138.9	67.5	123.2	0.1	329.7
Unallocated assets					10.3
Total assets					340.0
Segment liabilities	(55.3)	(38.0)	(32.9)	1.0	(125.2)
Unallocated liabilities					(75.8)
Total liabilities					(201.0)

 

 

	Business continuity	Partner services (restated)	Mid-market services (restated)	Corporate	Total
Year ended 31 March 2009	£m	£m	£m	£m	£m
Revenue	51.2	110.3	91.7	-	253.2
Profit from operations before amortisation of intangibles and non-recurring items	13.0	16.9	9.2	(3.4)	35.7
Amortisation of intangibles					(3.4)
Non-recurring items					(9.3)
Profit from operations					23.0
Investment income					0.9
Finance costs					(8.3)
Profit before tax					15.6
Capital expenditure on segment assets	10.4	0.5	4.6	-	15.5
Depreciation and amortisation in period	10.8	0.9	5.2	-	16.9
Impairment losses recognised in period	0.1	-	1.3	-	1.4
Balance sheet
Segment assets (restated)	146.7	56.1	133.2	-	336.0
Unallocated assets					5.9
Total assets					341.9
Segment liabilities	(58.0)	(34.7)	(30.7)	(0.4)	(123.8)
Unallocated liabilities					(91.7)
Total liabilities					(215.5)

 

Revenue and profit before amortisation of intangibles and non-recurring items have been restated by £4.8m and £0.8m respectively, to reflect the transfer of certain customer contracts from the Mid-market services division to the Partner services division.

 

The analysis of total assets and liabilities excludes inter-segment balances.  Unallocated assets comprise of cash and cash equivalents and unallocated liabilities comprise of bank loans and overdrafts, taxation and derivative financial liabilities.

 

 

7. Non-recurring items

 

	2010	2009
	£m	£m
Impairment loss on property held for sale (note 20)	1.2	1.4
Costs of reorganisation of newly acquired subsidiaries	-	5.7
Loss on disposal of subsidiaries	-	0.8
Redundancy costs	-	1.4
	1.2	9.3

 

 

8. Profit from operations

 

	2010	2009
	£m	£m
Revenue	245.8	253.2
Raw materials and consumables	(6.5)	(6.6)
Staff costs	(99.0)	(100.9)
Depreciation of property, plant and equipment	(13.1)	(13.5)
Amortisation of intangibles	(3.1)	(3.4)
Other operating charges	(94.0)	(105.8)
	30.1	23.0

 

The analysis of auditors' remuneration is as follows:

 

	2010	2009
	£m	£m
Fees payable to Deloitte LLP for the Company's annual financial statements	-	-
Fees payable to Deloitte LLP for other services to the Group:
Audit of the Company's subsidiaries pursuant to legislation	0.2	0.2
	0.2	0.2
Other services pursuant to legislation	-	-
Tax services	0.1	0.1
	0.1	0.1
	0.3	0.3

 

 

9. Staff costs

 

	2010	2009
	£m	£m
Their aggregate remuneration comprised:
Wages and salaries	87.4	88.9
Social security costs	9.3	10.0
Other pension costs (note 10)	1.9	2.3
Share-based payments	0.4	(0.3)
	99.0	100.9

 

The average monthly number of employees (including Directors) was:

 

	Number	Number
Partner services	1,902	2,096
Business continuity	205	192
Mid-market services	451	484
Central administration	16	18
	2,574	2,790

 

The remuneration of the key management personnel (including Directors) of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.

 

	2010	2009
	£m	£m
Directors
Short-term employee benefits	1.0	1.3
Post-employment benefits	0.1	0.2
	1.1	1.5
Other key personnel
Short-term employee benefits	0.2	-
	1.3	1.5

 

Other key personnel comprise of David Simpson from the date he resigned (16 November 2009) as Director.

 

 

10. Retirement benefit schemes

 

Defined contribution scheme

The Group operates a defined contribution retirement benefit scheme.  The assets of this scheme are held separately from those of the Group.

 

Pension costs for defined contribution schemes are as follows:

 

	2010	2009
	£m	£m
Defined contribution scheme	1.7	1.8

 

Defined benefit scheme

The Group operates a defined benefit scheme for certain of its employees. Under the scheme the employees are entitled to retirement benefits varying between 1.25% and 1.67% of final salary, multiplied by number of years of pensionable service, on attainment of a retirement age of 65.  No other post retirement benefits are provided.  The scheme is a funded scheme.

 

The most recent full actuarial valuation of the scheme's defined benefit obligation was carried out at 6 April 2006 and updated to 31 March 2010 by a qualified independent actuary for IAS 19 purposes. The projected unit method was used in all valuations and assets were taken into account using market values.

 

The major assumptions used by the actuary were:

 

	2010	2009
	%	%
Discount rate	5.50	6.70
Expected return on equities, bonds and cash	6.54	6.43
Expected rate of salary increases	4.45	3.75
Future pension increases	3.45	3.00
Inflation	3.80	3.10
Mortality tables used	PCxA00(YOB) Males 0.8LC Females 0.6LC	PxA92(YOB)MC

 

The current life expectancies post retirement (in years) underlying the value of the accrued liabilities for defined benefit pension scheme are:

 

	2010		2009
	Male	Female	Male	Female
Member currently age 65	22.8	24.4	22.1	25.0
Member currently age 40	25.3	26.7	23.3	26.1

 

Amounts recognised in income in respect of the defined benefit scheme are as follows:

 

	2010	2009
	£m	£m
Current service cost	0.3	0.5
Interest cost	0.9	0.9
Expected return on scheme assets	(0.8)	(0.9)
	0.4	0.5

 

The current service cost for the period has been included in staff costs.  Actuarial losses of £5.0m (2009: £0.8m) have been reported in the consolidated statement of comprehensive income.

 

The amount included in the balance sheet arising from the Group's obligations in respect of its defined benefit scheme is as follows:

 

	2010	2009
	£m	£m
Present value of defined benefit obligations	22.0	12.6
Fair value of scheme assets	(16.9)	(11.5)
Deficit in scheme and liability recognised in the balance sheet	5.1	1.1

 

 

Movements in the present value of defined benefit obligations were as follows:

 

	2010
	£m
At 1 April 2009	12.6
Current service cost	0.1
Interest cost	0.9
Benefits paid	(0.2)
Members' contributions	0.4
Actuarial losses on defined benefit obligation	8.2
At 31 March 2010	22.0

 

Movements in the fair value of scheme assets were as follows:

 

	2010
	£m
At 1 April 2009	11.5
Expected return on scheme assets	0.8
Contributions by employer	1.2
Members' contributions	0.4
Benefits paid	(0.2)
Actuarial gains on scheme assets	3.2
At 31 March 2010	16.9

 

The fair value of the scheme assets at the balance sheet date is analysed as follows:

 

	2010	2009
	£m	£m
Equities	10.5	7.0
Bonds	6.4	4.3
Cash	-	0.2
	16.9	11.5

 

The scheme assets do not include any of the Group's own financial instruments, nor any property occupied or other assets used by the Group.

 

 

The expected rate of return on the equities was determined by reference to long term historic out performance of this asset class over bonds so a view was taken that it was appropriate to take a future return rate on equities of 7.50% (2009: 7.20%) pa. The investment return in relation to these assets is variable and as such they are considered riskier investments. This results in 'the equity risk premium' which is included in the yield on the equity investment and compensates investors for the additional risk of holding this type of investment. There is significant uncertainty about the expected size of this risk premium and this risk is managed by holding assets which are less risky in nature but have a corresponding lower return.

 

The expected rate of return on bonds was determined by taking a blend between the gross redemption yields on corporate and government bonds, which were the two types of bonds held within the scheme at 31 March 2010, resulting in a return rate on bonds of 5.00% (2009: 5.40%). The risk of default on these assets is considered to be small.

 

The expected rate of return on cash was determined by reference to the level of bank base rate of 0.50% (2009: 0.50%) pa.

 

The overall expected rate of return is calculated by weighting the individual rates in accordance with how the plan assets are invested.

 

The actual return on scheme assets was a gain of £4.0m (2009: loss of £2.1m).

 

The history of the Group's defined benefit arrangement is as follows:

 

	2010	2009	2008
	£m	£m	£m
Present value of defined benefit obligation	22.0	12.6	13.2
Fair value of scheme assets	(16.9)	(11.5)	(12.1)
Deficit	5.1	1.1	1.1
Experience adjustments on scheme liabilities	-	-	-
Percentage of scheme liabilities	0%	0%	0%
Experience adjustments on scheme assets	3.2	(3.0)	(1.0)
Percentage of scheme assets	19.2%	25.9%	8.0%

 

The estimated amounts of contributions expected to be paid to the scheme during the next financial year is £1.2m which includes payments to eliminate the pension deficit of £0.7m. The employer's ordinary contribution rate is 8.9% of pensionable salaries. The Group has agreed with the trustees that it will aim to eliminate the deficit over a three year period.

 

The sensitivities regarding the principal assumptions used to measure the scheme liabilities are set out below:

 

Assumption	Change in assumption	Impact on scheme liabilities £m
Discount rate	Decrease by 0.5ppts	Increase by 2.9
Rate of salary growth	Increase by 0.25ppts	Increase by 0.4
Inflation	Increase by 0.25ppts	Increase by 1.0
Mortality	Improved life expectancy by using 100% of long cohort	Increase by 0.7

 

11. Finance costs and investment income

 

	2010	2009
	£m	£m
Finance costs:
Interest on bank overdrafts and loans	(3.7)	(6.3)
Interest on obligations under finance leases and hire purchase contracts	(0.7)	(0.8)
Amortisation of loan issue costs	(0.3)	(0.4)
Other interest	(0.3)	(0.1)
Interest cost on defined benefit scheme	(0.9)	(0.9)
Total interest expense	(5.9)	(8.5)
Less: amounts included in the cost of qualifying assets	0.1	0.2
	(5.8)	(8.3)
Investment income:
Expected return on defined benefit pension scheme assets	0.8	0.8
Interest on bank deposits	0.1	0.1
	0.9	0.9
Net finance costs	(4.9)	(7.4)

 

Borrowing costs included in the cost of qualifying assets during the year arose on the general borrowing pool and are calculated by applying a capitalisation rate of 5.430% (2009: 7.098%) to expenditure on such assets.

 

12. Taxation

The tax charge on profit from operations for the year was as follows:

 

					2010	2009
					£m	£m
Current tax:
UK corporation tax					8.4	5.9
Adjustment in respect of prior periods					(1.0)	0.1
Foreign tax					-	0.1
					7.4	6.1
Deferred tax (note 29):
Current year					(1.1)	(0.9)
Adjustment in respect of prior periods					(0.3)	(0.6)
					6.0	4.6

 

Corporation tax is calculated at 28% (2009: 28%) of the estimated assessable profit for the year. 

 

The charge for the year can be reconciled to the profit per the income statement as follows:

 

	2010		2009
	£m	%	£m	%
Profit before tax	25.2		15.6
Tax at the UK corporation tax rate of 28%	7.0	28.0	4.4	28.0
Effects of:
Expenses that are not deductible in determining taxable profit	0.5	2.2	0.6	3.7
Tax adjustments relating to share options	(0.2)	(0.7)	0.1	0.6
Adjustments in respect of prior periods	(1.3)	(5.4)	(0.5)	(2.8)
Tax expense and effective tax rate for the year	6.0	24.1	4.6	29.5

 

The effective tax rate for the period was 24.1% (2009: 29.5%). The rate in the current year has benefitted from some one off credits relating to enquiries by HMRC that were settled during the year.

 

In addition to the amount charged to the income statement, the following amounts have been charged/(credited) directly to equity:

 

				2010	2009
				£m	£m
Deferred tax (note 29):
Tax on actuarial losses				(1.4)	(0.2)
Tax on cash flow hedge				0.5	(0.5)
				(0.9)	(0.7)

 

13. Earnings per share

 

		2010	2009
Normalised earnings per share excluding amortisation of intangibles and non-recurring items based on the normalised tax rate
	Basic	29.0p	27.1p
	Diluted	28.1p	26.3p

 

		2010	2009
Underlying earnings per share excluding amortisation of intangibles and non-recurring items
	Basic	30.0p	27.1p
	Diluted	29.0p	26.3p

 

The calculation of the basic and diluted earnings per share is based on the following data:

 

Earnings

	2010	2009
	£m	£m
Earnings for the purposes of basic earnings per share and diluted earnings per share being net profit attributable to equity holders of the parent	19.2	11.0
Amortisation of intangibles	3.1	3.4
Non-recurring items	1.2	9.3
Tax on amortisation of intangibles and non-recurring items	(1.0)	(3.3)
Earnings for the purposes of underlying earnings per share being net profit attributable to equity holders of the parent excluding amortisation of intangibles and non-recurring items	22.5	20.4
Normalisation of tax rate	0.7	-
Earnings for the purpose of normalised earnings per share being net profit attributable to equity holders of the parent excluding amortisation of intangibles and non-recurring items using the normalised tax rate	21.8	20.4

 

The normalised tax rate is based on the effective tax rate for the year adjusted for some one-off credits relating to enquiries by HMRC that were settled favourably during the year.

 

Number of shares

	2010	2009
	m	m
Weighted average number of Ordinary Shares for the purposes of basic earnings per share	75.2	75.1
Effect of dilutive potential Ordinary Shares:
Share options	2.4	2.4
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share	77.6	77.5

 

 

14. Dividends

 

	2010	2009
	£m	£m
Amounts recognised as distributions to Shareholders in the year:
Interim dividend for the year ended 31 March 2009 of 2.10p per share	1.6	-
Final dividend for the year ended 31 March 2009 of 4.20p (2008: 3.65p) per share	3.1	2.7
	4.7	2.7
Proposed interim dividend for the year ended 31 March 2010 of 2.15p (2009: 2.10p) per share	1.6	1.6
Proposed final dividend for the year ended 31 March 2010 of 4.30p (2009: 4.20p) per share	3.6	3.1

 

The proposed interim dividend was recommended by the Board on 19 November 2009 and was paid on 6 April 2010.

 

The proposed final dividend was recommended by the Board on 1 June 2010 and if approved will be paid on 8 October 2010.

 

These dividends are subject to approval by Shareholders at the Annual General Meeting and accordingly they have not been included as a liability in these financial statements.

 

 

15. Goodwill

 

	£m
Cost and carrying amount
At 1 April 2008	174.6
Additions arising from revisions to provisional fair values	4.2
At 1 April 2009	178.8
Additions (note 35)	1.4
At 31 March 2010	180.2

 

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination.  Before recognition of impairment losses, the carrying amount of goodwill has been allocated as follows:

 

	2010	2009
	£m	£m
Partner services	32.6	21.7
Business continuity	80.4	79.9
Mid-market services	67.2	77.2
	180.2	178.8

 

The movement in allocation of goodwill to the CGUs is due to the transfer of certain customer contracts from the Mid-market services division to the Partner services division.

 

 

Impairment

The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations and from time to time the Group may also obtain independent appraisals of fair values to determine recoverable amounts.

 

The recoverable amounts of the CGUs are determined from value-in-use calculations based on the 3 year detailed financial budget approved by the Directors. The main assumptions within the budget operating cash flows include the Directors conservative estimates of revenue growth, future profitability and ongoing levels of working capital and capital expenditure to support growth.

 

The key assumptions used in determining the value in use calculations are set out below and these assumptions have been revised in the year in light of the current economic environment which has resulted in more conservative estimates about the future.

 

 

Cash flow projections

The Group prepares risk-adjusted cash flow forecasts derived from the most recent annual financial budgets approved by the Directors with an extrapolation of these cash flows beyond a 3 year horizon to perpetuity applying an assumed annual growth rate of 2.25%.

 

Discount rate

The Directors have used discount rates ranging from 10-12% (2009: 10-12%) which represents the Group pre-tax weighted average cost of capital adjusted for the risk profiles of the individual CGUs.

 

Growth rates

Growth rates are determined with reference to current market conditions, external forecasts and historical trends for the Group's key end markets. Cash flow growth rates are derived from the Directors latest estimates of forecast revenues taking into consideration past experience of operating margins achieved in the CGU. Historically, such forecasts have been reasonably accurate. To forecast beyond three years a long-term average growth rate of 2.25% has been used to calculate a terminal value. The Directors have made the judgement that this long-term growth rate does not exceed the long-term average growth rate for the industry. The terminal value represents the value of cash flows beyond the third year to perpetuity. In the short-term (up to 3 years) growth rates of between 0% and 22.8% have been used.

 

In assessing goodwill for impairment as at 31 March 2010, the Directors made use of the most recent detailed calculations of the recoverable amount of the Group's CGUs, prepared at 31 March 2010. Those calculations resulted in recoverable amounts exceeding the carrying values for each of the Group's three CGUs, despite the weaker markets currently being experienced.

 

Sensitivity to changes in assumptions

Whilst the Directors consider that their assumptions are realistic, it is possible that an impairment would be identified if any of the above key assumptions were changed significantly. The Group's impairment review is sensitive to a change in the key assumptions used, most notably the discount rates. Based on the Group's sensitivity analysis, an increase in the discount rate in any of the CGUs of 3.3% or a decrease in forecast cash flows of 26.1% (in isolation) would lead to an impairment.

 

Using a discounted cash flow methodology necessarily involves making numerous estimates and assumptions regarding revenue growth, operating margins, tax rates, appropriate discount rates, capital expenditure levels and working capital requirements. These estimates will likely differ from future actual results of operations and cash flows, and it is possible that these differences could be material. In addition, judgements are applied by the Directors in determining the level of cash-generating unit identified for impairment testing and the criteria used to determine which assets should be aggregated. A difference in testing levels could affect whether an impairment is recorded and the extent of impairment loss.

 

Changes in business activities or structure may also result in changes to the level of testing in future periods. Further, future events could cause the Group to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Group's financial condition and results of operations.

 

 

16. Intangible assets

 

	Brand name  £m	Customer contracts & relationships £m	Computer software development £m	Total £m
Cost
At 1 April 2008 and 1 April 2009	11.6	18.2	-	29.8
Acquired with subsidiary undertaking (note 35)	-	2.2	-	2.2
Additions	-	-	0.2	0.2
At 31 March 2010	11.6	20.4	0.2	32.2
Accumulated amortisation
At 1 April 2008	0.6	7.0	-	7.6
Charge for the year	0.8	2.6	-	3.4
At 1 April 2009	1.4	9.6	-	11.0
Charge for the year	0.8	2.3	-	3.1
At 31 March 2010	2.2	11.9	-	14.1
Net book value
At 31 March 2010	9.4	8.5	0.2	18.1
At 31 March 2009	10.2	8.6	-	18.8

 

Customer contract additions arose on the acquisitions of Aghoco 1000 Limited and Office Shadow.  These assets relate to the acquired customer contracts and relationships expected to endure beyond the minimum contracted order terms.

 

Computer software development additions represented assets purchased from third parties.

 

 

17. Property, plant and equipment

 

		Short	Fixtures
	Freehold	leasehold	and	Motor
	property	properties	equipment	Vehicles	Total
	£m	£m	£m	£m	£m
Cost
At 1 April 2008	25.5	7.8	53.8	1.6	88.7
Reclassifications	0.8	(1.6)	0.4	0.1	(0.3)
At 1 April 2008 restated	26.3	6.2	54.2	1.7	88.4
Adjustments to provisional fair values	(4.8)	-	-	-	(4.8)
Additions	-	1.6	13.9	-	15.5
Reclassified as held for sale	-	-	(0.3)	-	(0.3)
Disposals	-	-	(0.5)	(0.2)	(0.7)
At 1 April 2009	21.5	7.8	67.3	1.5	98.1
Reclassifications	-	(2.2)	2.2	-	-
Additions	0.1	0.3	6.9	-	7.3
Disposals	(0.2)	-	(0.5)	(0.4)	(1.1)
At 31 March 2010	21.4	5.9	75.9	1.1	104.3
Accumulated depreciation
At 1 April 2008	0.5	1.9	14.1	0.7	17.2
Reclassifications	-	(0.3)	-	-	(0.3)
At 1 April 2008 restated	0.5	1.6	14.1	0.7	16.9
Charge for the year	0.7	0.7	11.6	0.5	13.5
Disposals	-	-	(0.3)	(0.2)	(0.5)
At 1 April 2009	1.2	2.3	25.4	1.0	29.9
Reclassifications	-	0.2	(0.2)	-	-
Charge for the year	0.4	0.7	11.8	0.2	13.1
Disposals	-	-	(0.4)	(0.4)	(0.8)
At 31 March 2010	1.6	3.2	36.6	0.8	42.2
Net book value
At 31 March 2010	19.8	2.7	39.3	0.3	62.1
At 31 March 2009	20.3	5.5	41.9	0.5	68.2

 

The current year reclassifications to cost and depreciation are to re-analyse construction in progress between asset classes when they are brought into use.

 

Included in the above is land at cost of £5.8m (2009: £5.8m) which is not depreciated.

 

The net book value of fixed assets includes £11.9m (2009: £15.4m) in respect of assets held under finance leases and hire purchase contracts.

 

At 31 March 2010, the Group had entered into contractual commitments amounting to £1.0m (2009: £0.1m).

 

 

18. Derivative financial instruments

 

		2010		2009
		Liability		Liability
		Fair value	Notional	Fair value	Notional
		£m	£m	£m	£m
Cash flow hedges
Interest rate swaps		1.1	42.0	2.8	51.8

 

The Group has entered into an interest rate swap to hedge risks associated with interest rate fluctuations on variable rate borrowings.  The main terms of the interest rate swap are disclosed in note 19. The derivative financial instrument matures on 30 September 2010.

 

Financial instruments that are measured at fair value subsequent to their initial recognition are grouped into levels 1 to 3 based on the degree to which the fair value is observable:

·    Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

·    Level 2 far value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset of liability, either directly or indirectly; and

·    Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data.

 

The interest rate swap is categorised as level 1 in the fair value hierarchy. There were no financial instruments measured at fair value included in level 2 or level 3 and there were no transfers between categories during the year.

 

19. Financial risk management

The Group's activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk.

 

Funding and treasury risk management is carried out under a framework of policies and guidelines approved by the Board.  The Board is responsible for regular review and monitoring of treasury activity and for approval of specific transactions, the authority of which may be delegated.  The Group accounting function provides regular update reports of treasury activity to the Board of Directors. 

 

The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

 

 

Capital risk management

The Group seeks to match long term assets with long term funding and short term assets with short term funding.

 

Equity, retained profits and long term fixed interest debt are used primarily to finance intangible assets and fixed assets. Short term borrowings are required primarily to finance current assets.

 

The Group capitalisation policy seeks to maintain a strong credit rating and an appropriate funding structure whilst safeguarding Group ability to continue as a going concern.

 

Market risk

(a) Foreign exchange risk

The Group publishes its consolidated financial statements in sterling but also conducts some business in foreign currencies, mainly the US Dollar and Euro.  As a result it is subject to foreign exchange currency risk due to exchange rate movements, which will affect the Group's transaction costs.

 

The Board periodically reviews the net exchange risk and implements strategies as appropriate.  Due to the relative stability of the foreign currencies in which the Group deal and size of the foreign exchange transactions, the Group does not hedge the foreign exchange risk as the  potential exposure is considered not to be material to the Group's results.

 

The carrying amounts of the Group's foreign currency denominated monetary assets and liabilities at the reporting date are as follows:

 

		Assets			Liabilities
		2010		2009	2010	2009
		£m	£m		£m	£m
US Dollar		0.5	0.9		0.2	0.1
Euro		0.1	-		0.1	-
Norwegian Kroner		0.1	0.1		-	-
		0.7	1.0		0.3	0.1

 

(b) Interest rate risk

The Group is exposed to interest rate risk as entities in the Group borrow funds at both fixed and floating interest rates.  The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts.  These practices serve to reduce the volatility of the Group's reported financial performance.

 

All borrowings before interest rate swaps are at variable rates.  The table below sets out the carrying amount of borrowings that are exposed to interest rate risk after taking into account interest rate swaps:

 

	2010	2009
	£m	£m
Fixed interest rate borrowings	42.0	51.8
Floating interest rate borrowings	24.0	27.2
Total borrowings	66.0	79.0

 

The contractual maturity of these borrowings can be found in note 25.

 

The Group holds an interest rate swap to hedge risks associated with interest rate fluctuations on variable rate the £42m term loan (note 18) which matures on 30 September 2010.  The interest rate swap settles on a quarterly basis.  The rate was fixed at 5.78% based on three months LIBOR.  The Group will settle the difference between the fixed and floating interest rate on a net basis.  The interest swap has been designated as a cash flow hedge in order to reduce the Group's cash flow exposure resulting from the variable interest rate on the term loan.  The interest rate swaps and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in profit or loss over the period that the floating rate interest payments on debt impact profit or loss.

 

The quantitative disclosures relating to derivative financial instruments can be found in note 18.

 

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.  The Group monitors its credit exposures to its counterparties via their credit rating, where applicable, or through other publicly available financial information and its own trading records.

 

The Group does not have any significant credit risk exposure to any single counterparty or group of counterparties having similar characteristics.  The Group defines counterparties as having similar characteristics if they are connected entities.  Concentration of credit risk with respect to trade receivables is limited due to the Group's customer base being large and unrelated.  The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-rating assigned by international credit rating agencies.

 

The carrying amounts of financial assets recorded in the financial statements, which is net of impairment losses, represents the Group's maximum exposure to credit risk.

 

Liquidity risk

The Group manages its liquidity requirements by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows.  All borrowing is agreed and monitored by the Board of Directors.  The Group's undrawn committed borrowing facilities are shown in note 25.  The Group has a policy of pooling Group cash flows in order to maximise the return on surplus cash and also utilise cash within the Group.  Surplus cash is placed on short-term deposits.

 

The following is an analysis of the contractual undiscounted cash flows payable under financial liabilities and derivative financial instruments as at the balance sheet date.  The table includes both interest and principal cash flows:

 

	Due within one year	Due between one and two years	Due between two and three years	Due in over three years	Total
	£m	£m	£m	£m	£m
Non derivative financial liabilities
Bank loans	16.0	16.0	34.0	-	66.0
Finance lease liabilities	5.4	4.7	2.3	1.0	13.4
Other non interest-bearing liabilities	30.1	-	-	-	30.1
	51.5	20.7	36.3	1.0	109.5
Derivative financial instruments
Net settled interest rate swaps	1.1	-	-	-	1.1
Total as at 31 March 2010	52.6	20.7	36.3	1.0	110.6
Non derivative financial liabilities
Bank loans	13.0	16.0	16.0	34.0	79.0
Finance lease liabilities	5.5	4.9	4.2	2.7	17.3
Other non interest-bearing liabilities	30.9	-	-	-	30.9
	49.4	20.9	20.2	36.7	127.2
Derivative financial instruments
Net settled interest rate swaps	1.9	0.9	-	-	2.8
Total as at 31 March 2009	51.3	21.8	20.2	36.7	130.0

 

Floating rate interest has been estimated using a future interest rate curve as at 31 March. The cash flow movements on the interest rate swap are expected to affect the statement of income in the same period in which they occur.

 

Sensitivity analysis

Financial instruments affected by market risk include borrowings, deposits and derivative financial instruments.  The following analysis, required by IFRS 7, is intended to illustrate the sensitivity to changes in market variables, being UK interest rates and the US dollar to sterling exchange rate on the Group's financial instruments.

 

The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-retirement benefits obligations and provisions.

 

The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and the derivative portfolio and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 31 March 2010 and 31 March 2009, respectively. 

 

The following table shows the illustrative effect on the income statement and items that are recognised directly in equity that would result from reasonably possible movements in changes in UK interest rates and in the US dollar to Sterling exchange rate, before the effects of tax.

 

		2010			2009
		Income statement		Equity	Income statement	Equity
		-/+ £m	-/+ £m		-/+ £m	-/+ £m
UK interest rates +/- 0.50ppts		0.1	-		0.1	-
US dollar exchange rate +/- 10%		-	-		0.1	-

 

20. Assets held for sale

Assets held for sale of £2.2m (2009: £3.4m) consist of properties held in the Mid-market services segment.

 

These assets were classed as held for sale at 31 March 2008 however due to market conditions outside of the Group's control they remained unsold at 31 March 2010. Management are still committed to the sale of these assets, are actively marketing them at a price reasonable given the change in market conditions and hope the sale will occur in the next financial year ending 31 March 2011.

 

An impairment loss of £1.2m (2009: £1.4m) has been recognised in the year on properties held for sale and reflects the difference between their carrying value and their estimated fair value in the market less costs of sale.

 

21. Subsidiaries

The significant subsidiaries included within the Group accounts at 31 March 2010 are as follows:

 

Name of subsidiary	Country of registration	Class of share capital held	Nature of business
Phoenix IT Services Limited	England and Wales	Ordinary	Provision of information technology services
Trend Network Services	England and Wales	Ordinary	Provision of information technology, networking support and infrastructure services
ICM Business Continuity Services Limited	England and Wales	Ordinary	Provision of business continuity and IT disaster recovery services
ICM Continuity Consulting Limited	England and Wales	Ordinary	Software development and support
Servo Limited	England and Wales	Ordinary	Provision of information technology services and systems
Aghoco 1000 Limited	England and Wales	Ordinary	Provision of information technology services

 

22. Inventories

 

	2010	2009
	£m	£m
Service stocks	13.0	11.1

 

23. Trade and other receivables

Trade and other receivables at the balance sheet date comprise:

 

	2010	2009
	£m	£m
Included within non-current assets:
Prepayments and accrued income	-	1.0
Included within current assets:
Trade debtors	37.8	42.4
Other debtors	3.9	4.3
Prepayments and accrued income	12.4	8.0
	54.1	54.7

 

The Group's trade receivables are stated after allowances for bad and doubtful debts based on managements' assessment of creditworthiness, an analysis of which is as follows:

 

	2010		2009
	£m		£m
Balance at the beginning of the period		0.8	0.3
Increase in provision		0.3	1.2
Amounts utilised		(0.7)	(0.7)
Balance at the end of the period		0.4	0.8

 

As at 31 March 2010, trade receivables of £2.7m (2009: £6.4m) were past due but not impaired.  The ageing of these trade receivables from due date is as follows:

 

	2010		2009
	£m		£m
Under 30 days		1.6	3.3
30 - 60 days		0.9	0.9
60 - 90 days		0.2	1.1
90 - 120 days		-	0.5
Over 120 days		-	0.6
Total		2.7	6.4

 

Concentration of credit risk with respect to trade receivables is limited due to the Group's customer base being large and unrelated.  Due to this, the Directors believe there is no further credit risk provision required in excess of the allowance for bad and doubtful debts.

 

The Directors consider that the carrying amount of trade and other receivables approximates their fair value due to their short maturities.

 

24. Cash and cash equivalents

 

	2010		2009
	£m		£m
Cash and cash equivalents		10.3	5.9

 

Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.

 

Net cash and cash equivalents are held in the following currencies; those held in currencies other than sterling have been converted into sterling at year-end exchange rates.

 

	2010		2009
	£m		£m
Sterling		10.1	5.4
Euro		0.1	-
US Dollar		-	0.4
Norwegian Kroner		0.1	0.1
		10.3	5.9

 

 

25. Bank loans

The following table analyses bank borrowings, excluding bank overdrafts:

 

	2010	2009
	£m	£m
Current:
Bank loans	15.7	12.7
Non-current
Bank loans	49.9	65.6
Total borrowings	65.6	78.3

 

Total borrowings are repayable as follows:

 

	2010	2009
	£m	£m
Within one year	15.7	12.7
In more than one year but not more than two years	15.8	15.7
In more than two years but not more than five years	34.1	49.9
	65.6	78.3

 

All bank borrowings are denominated in sterling.

 

The other principal features of the Group's borrowings are as follows:

 

(i)   a loan of £56.0m.  Repayments are annual in September and the loan expires in May 2012. The Company and certain subsidiaries (as guarantor) have entered into a composite guarantee in favour of Royal Bank of Scotland on account of the Company and certain subsidiaries (as principal). The loan carries an interest rate of 1.004% above LIBOR.  The hedging terms relating to the loan are discussed in note 19.

 

(ii)  a revolving credit facility of £30.0m.  The facility is due for repayment in full in May 2012. The Company and certain subsidiaries (as guarantor) have entered into a composite guarantee in favour of Royal Bank of Scotland on account of the Company and certain subsidiaries (as principal). The loan carries an interest rate of 1.004% above LIBOR.

 

The Directors estimate the fair value of the Group's bank borrowings to be equivalent to its book value. At 31 March 2010, of the total committed borrowing facilities of £86.0m (2009: £99.0m), the Group had available £20.0m (2009: £20.0m) of undrawn facilities.

 

 

26. Trade and other payables

Trade and other payables principally comprise the following amounts:

 

	2010	2009
	£m	£m
Included within non-current liabilities:
Other creditors	6.5	7.6
Included within current liabilities:
Trade creditors	12.6	16.1
Other creditors	3.7	4.3
Social security and other taxes	8.8	8.7
Accruals	14.2	11.7
	39.3	40.8

 

As at 31 March 2010, trade creditors of the Group were equivalent to 37 days (2009: 38 days).

 

The Directors consider that the carrying amount of trade payables approximates their fair value.

 

 

27. Obligations under finance leases and hire purchase contracts

 

	Minimum lease payments		Present value of minimum lease payments
	2010	2009	2010	2009
	£m	£m	£m	£m
Amounts payable under finance leases and hire purchase contracts:
Within one year	5.4	5.5	5.0	4.9
In the second to fifth years inclusive	8.0	11.8	7.6	11.1
	13.4	17.3	12.6	16.0
Less: future finance charges	(0.8)	(1.3)
Present value of lease obligations	12.6	16.0
Less: amounts due for settlement within 12 months	(5.0)	(4.9)
Amounts due for settlement after 12 months	7.6	11.1

 

It is the Group's policy to lease certain of its fixtures, fittings and equipment under finance leases and hire purchase contracts. The average term is 5 years. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

 

All lease and hire purchase obligations are denominated in sterling.

 

There is no material difference between the minimum lease payments and the present value of the minimum lease payments.

 

The fair value of the Group's lease and hire purchase obligations approximates their carrying amount.

 

The Group's obligations under finance leases and hire purchase contracts are secured by the lessors' charges over the leased assets.

 

28. Provisions

 

	2010	2009
	£m	£m
Balance at the start of the period	4.6	4.6
Additional provision in the year	1.0	0.6
Utilisation of provision	(0.4)	(0.6)
Balance at the end of the period	5.2	4.6
Included in current liabilities	0.8	0.5
Included in non-current liabilities	4.4	4.1
	5.2	4.6

 

The provision relates to the obligation to reinstate certain properties to their former condition at the end of their leases which end between 2010 and 2020.

 

 

29. Deferred tax

The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior year.

 

			Accelerated	Share		Retirement
		Intangible	tax	option		benefit
	Hedging	assets	depreciation	costs	Provisions	obligations	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 April 2008	0.3	(6.2)	(7.2)	0.5	1.5	0.3	(10.8)
Adjustments to fair values	-	-	1.3	-	0.3	-	1.6
Charge to income	-	1.0	1.5	(0.4)	(0.4)	(0.2)	1.5
Charge to equity	0.5	-	-	-	-	0.2	0.7
At 1 April 2009	0.8	(5.2)	(4.4)	0.1	1.4	0.3	(7.0)
Acquisition of subsidiary (note 35)	-	0.4	-	-	-	-	0.4
Charge to income	-	0.9	1.0	0.2	(0.4)	(0.3)	1.4
Charge to equity	(0.5)	-	-	-	-	1.4	0.9
At 31 March 2010	0.3	(3.9)	(3.4)	0.3	1.0	1.4	(4.3)

 

 

30. Share capital

 

			Authorised			Allotted and fully paid
			Number	£m		Number	£m
Ordinary shares of 1p each
At 1 April 2008			100,000,000	1.0		74,989,555	0.7
Exercise of share options			-	-		32,000	-
Shares transferred to the employee benefit trust			-	-		119,579	0.1
At 1 April 2009			100,000,000	1.0		75,141,134	0.8
Exercise of share options			-	-		41,199	-
Shares transferred to the employee benefit trust			-	-		24,541	-
At 31 March 2010			100,000,000	1.0		75,206,874	0.8

 

During the year, options were exercised on 41,199 Ordinary Shares at prices varying from 10p to 200p and that number of shares was issued for a total gross consideration of £71,920 comprising £71,550 of share premium and £370 of capital.

 

A total of 39,873 Ordinary Shares are held by the employee benefit trust (2009: 129,941), for which the right to receive dividends has been waived.

 

The Company has one class of ordinary share capital which carries no right to fixed income.

 

31. Share premium account

 

	£m
At 1 April 2008 and 1 April 2009	37.4
Premium on issue of shares	0.1
At 31 March 2010	37.5

 

 

32. Merger reserve

 

	£m
At 1 April 2008 and 1 April 2009	57.5
Premium on issue of shares	-
At 31 March 2010	57.5

 

In accordance with section 612 of the Companies Act 2006, the premium on ordinary shares issued in relation to acquisitions is recorded as a merger reserve. The reserve is not distributable but can be used to make a bonus issue on fully paid shares or to make a transfer to the profit and loss reserve, an amount equal to the amount that has become realised, on either the disposal or write down of the related investment.

 

33. Other reserves

 

	Hedging	Translation	Shares to
	Reserve	Reserve	be Issued	Total
	£m	£m	£m	£m
At 1 April 2008	(0.7)	0.1	1.6	1.0
Disposal of subsidiary	-	(0.1)	-	(0.1)
Share option expense	-	-	(0.3)	(0.3)
Transfer to retained earnings on exercise of share options	-	-	(0.6)	(0.6)
Loss recognised on cash flow hedges	(1.3)	-	-	(1.3)
At 1 April 2009	(2.0)	-	0.7	(1.3)
Share option expense	-	-	0.4	0.4
Transfer to retained earnings on exercise of share options	-	-	(0.3)	(0.3)
Gain recognised on cash flow hedges	1.2	-	-	1.2
At 31 March 2010	(0.8)	-	0.8	-

 

Other reserves are shown net of taxation, as appropriate.

 

Hedge reserve

The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges.  The cumulative deferred gain or loss on the hedge is recognised in profit or loss when the hedged transaction impacts the profit or loss, or is included as a basis adjustment to the non-financial hedged item, consistent with the applicable accounting policy.

 

Translation reserve

The translation reserve represents exchange differences relating to the translation of net assets of the Group's foreign operations from their functional currency to the parent's functional currency.

 

Shares to be issued

Shares to be issued represents amounts expensed in the income statement in connection with awards made under the Group's share option scheme less any exercises or lapses of such awards.

 

34. Retained earnings

 

	£m
At 1 April 2008	23.7
Movement on pension deficit	(0.8)
Deferred tax on pension reserve	0.2
Exercise of share options	0.6
Retained profit for the year	11.0
Dividends	(2.7)
At 1 April 2009	32.0
Movement on pension deficit	(5.0)
Deferred tax on pension reserve	1.4
Exercise of share options	0.3
Retained profit for the year	19.2
Dividends	(4.7)
At 31 March 2010	43.2

 

 

35. Acquisition of subsidiary undertaking

 

Aghoco 1000 Limited

 

On 26 February 2010 the Group acquired control of Aghoco 1000 Limited (Aghoco). The Group acquired 100% of the share capital of Aghoco for a cash consideration of £1.8m and incurred costs in relation to the acquisition of £0.1m. The following table sets out the book values of the assets and liabilities acquired and their provisional fair values to the Group.

 

			Fair value
	Book value	Revaluation	to Group
	£m	£m	£m
Fixed assets
Goodwill	2.1	(2.1)	-
Intangible asset arising on acquisition	-	0.9	0.9
Current assets
Inventories	0.5	-	0.5
Trade and other receivables	1.8	1.1	2.9
Deferred tax asset	-	0.4	0.4
Total assets	4.4	0.3	4.7
Liabilities
Trade and other payables	(0.1)	(1.1)	(1.2)
Deferred revenue	(2.5)	-	(2.5)
Total liabilities	(2.6)	(1.1)	(3.7)
Net assets	1.8	(0.8)	1.0
Goodwill	-	0.9	0.9
	1.8	0.1	1.9
Satisfied by:
Cash			1.8
Cash - costs of acquisition			0.1
			1.9

 

The goodwill recognised of £0.9m is attributable to the value of the established workforce, the future growth potential and the anticipated synergies arising from the acquisition.

 

Aghoco contributed £nil to Group operating profit in the current financial year.  If Aghoco had been acquired on the first day of the current financial year the Group revenue would have been £1.5m and the Group operating profit £nil.

 

Office Shadow

 

On 23 December 2009 the Group acquired the trade and certain assets and liabilities of Office Shadow Limited for consideration of £0.4m. The following table sets out the book values of the assets and liabilities acquired and their provisional fair values to the Group.

 

			Fair value
	Book value	Revaluation	to Group
	£m	£m	£m
Fixed assets
Goodwill	0.4	(0.4)	-
Intangible asset arising on acquisition	-	1.3	1.3
Total assets	0.4	0.9	1.3
Liabilities
Trade and other payables	-	(0.1)	(0.1)
Provisions	-	-	-
Deferred tax liabilities	-	-	-
Deferred revenue	-	(1.2)	(1.2)
Total liabilities	-	(1.3)	(1.3)
Net assets	0.4	(0.4)	-
Goodwill	-	0.5	0.5
	0.4	0.1	0.5
Satisfied by:
Cash			0.4
Cash - costs of acquisition			0.1
			0.5

 

The goodwill recognised of £0.5m is attributable to the value of the established workforce, the future anticipated profitability of selling the acquired product into the markets the Group serves.

 

Office Shadow contributed £0.1m to Group operating profit in the current financial year. 

 

36. Notes to the cash flow statement

 

				2010	2009
				£m	£m
Profit from operations				30.1	23.0
Adjustments for:
Depreciation of property, plant and equipment				13.1	13.5
Impairment of property				1.2	1.4
(Profit)/loss on disposal of property, plant and equipment				(0.1)	0.1
Amortisation of intangibles				3.1	3.4
Share option costs				0.4	(0.3)
Loss on disposal of subsidiaries				-	0.7
Retirement benefit - difference between contribution and amounts charged				(1.0)	(0.8)
Operating cash flows before movements in working capital				46.8	41.0
Increase in stocks				(1.4)	(1.4)
Decrease in receivables				4.5	6.1
Decrease in payables				(4.9)	(2.3)
(Decrease)/increase in deferred income				(1.0)	2.4
Cash generated by operations				44.0	45.8
Income taxes paid				(6.1)	(5.0)
Interest received				0.1	0.1
Interest paid				(4.9)	(7.0)
Net cash from operating activities				33.1	33.9

 

Additions to fixtures and equipment during the year amounting to £1.5m (2009: £7.0m) were financed by new finance leases.

 

37. Reconciliation of net borrowings

 

				2010	2009
				£m	£m
Increase/(decrease) in cash and cash equivalents during the period				4.4	(6.4)
Movement in borrowings				16.1	20.9
Movement in net borrowings during the period				20.5	14.5
Net borrowings brought forward				(88.4)	(102.9)
Net borrowings carried forward				(67.9)	(88.4)
Cash and cash equivalents				10.3	5.9
Other current borrowings				(20.7)	(17.6)
Non-current borrowings				(57.5)	(76.7)
Net borrowings carried forward				(67.9)	(88.4)

 

 

38. Operating lease arrangements

 

The Group as lessee

	2010	2009
	£m	£m
Minimum lease payments under operating leases recognised in income for the year	7.9	8.5

 

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

 

	2010	2009
	£m	£m
Within one year	9.4	7.3
In the second to fifth years inclusive	26.9	23.6
After five years	11.3	11.9
	47.6	42.8

 

Operating lease payments represent rentals payable by the Group for land and buildings, fixtures and fittings, equipment and motor vehicles.

 

 

39. Share-based payments

 

Equity-settled share option plans

The Company has operated the following equity-settled share option plans during the period:

 

Employee Share Plan (ESP)

Enterprise Management Incentive Plan (EMI)

Performance Share Plan (PSP)

 

Post flotation, no further awards will be made under the ESP or the EMI plan.

 

The general terms and conditions of each plan are as follows:

 

 

	ESP	EMI	PSP
Exercise price:	Agreed market price of the Company's shares at date of grant	All grants under the EMI plan were made at prices higher than the agreed market price of the Company's shares at the date of grant. The grant prices reflected the grant prices of option rights under the ESP waived by option holders prior to the adoption of the EMI plan.	All awards made under the PSP have a nil exercise price. The number of options granted to eligible Group employees is determined as a proportion of base salary using the average of the middle market quotes for the Company's shares for the three days immediately prior to grant.
Vesting period:	Generally three years from the date of grant.	Vesting of all EMI plan options was conditional upon the flotation of the Company. Consequently, all the EMI plan options vested in November 2004.	Three years from the date of grant.
Lapse date:	Generally options granted under the ESP automatically lapse if they remain unexercised after a period of seven years from the date of grant. Furthermore, generally options granted under the ESP are forfeited if the option holder ceases to be a Group employee before exercising the option.	All EMI plan options automatically lapse if they remain unexercised after a period of 10 years from the date of grant. Furthermore, options are forfeited if the option holder ceases to be a Group employee before exercising the option.	i) Scheme 1: EPS PSP options lapse if they remain unexercised after a period of10 years from the date of grant. Furthermore, options are forfeited if the option holder ceases to be a Group employee before exercising the option.
			ii) Scheme 2: TSR There is no specific timeframe within which the shares must be acquired. However, options are forfeited if the option holder ceases to be a Group employee before exercising the option.

 

 

Performance conditions:	None.	None.	i) Scheme 1: EPS The PSP awards are subject to achieving a performance condition related to average annual growth in either EPS or profit growth over a three-year period of between 5% and 20% per annum. This results in between 20% and 100% of the options granted vesting. Performance between these points is on a progressive scale.
			ii) Scheme 2: TSR The extent to which options vest depend on the Group's performance over the three-year period following the award date. The PSP awards are subject to the Group's total shareholder return (TSR) performance which will be measured against the companies comprising the FTSE All Share Index (excluding FTSE 100 Index and investment trust companies).

 

 

ESP

	2010		2009
		Weighted		Weighted
		average		average
		exercise		exercise
	Options	price	Options	price
Balance at the start of the period	107,500	197p	132,500	197p
Exercised during the period	(35,000)	200p	(25,000)	200p
Outstanding at the end of the period	72,500	195p	107,500	197p
Exercisable at the end of the period	72,500	195p	107,500	197p

 

EMI

	2010		2009
		Weighted		Weighted
		average		average
		exercise		exercise
	Options	price	Options	price
Balance at the start of the period	118,000	81p	125,500	80p
Exercised during the period	(2,000)	96p	(7,000)	62p
Forfeited during the period	-	-	(500)	96p
Outstanding at the end of the period	116,000	80p	118,000	81p
Exercisable at the end of the period	116,000	80p	118,000	81p

 

PSP

	2010		2009
		Weighted		Weighted
		Average		average
		Exercise		exercise
	Options	Price	Options	price
Balance at the start of the period	2,369,867	-	2,221,811	-
Granted during the period	1,068,000	-	877,004	-
Exercised during the period	(106,075)	-	(238,295)	-
Forfeited during the period	(381,508)	-	(71,014)	-
Expired during the period	(557,491)	-	(419,639)	-
Outstanding at the end of the period	2,392,793	-	2,369,867	-
Exercisable at the end of the period	52,608	-	131,749	-

 

The weighted average share price at the date of exercise for share options exercised during the period was:

 

ESP 274p

EMI 174p

PSP 236p

 

The optionsoutstanding at31 March 2010hadaweighted average exercise price of 9p, and a weighted average remaining contractual life of 8 years.  In 2009, options weregrantedon 20June2008.  Theaggregateof theestimated fairvalues of the optionsgrantedon those dates is £2.0m. In 2010 options were granted on 7 July 2009 and 30 September 2009. The aggregate of the estimated fair values of the options granted on those dates is £3.2m.

 

The weighted average fair value of the share options granted during the year was calculated using a stochastic model (2009: Black-Scholes model), with the following assumptions and inputs:

 

 

	2010	2009
Weighted average share price	£2.11	£2.93
Weighted average exercise price	Nil	Nil
Expected volatility	43%	30%
Expected life	3 years	4 years
Weighted average risk-free rate	n/a	5.22%
Weighted average dividend yield	2.99%	1.87%

 

Expected volatility was determined by calculating the historical volatility of the Group's share price over the previous three years and by comparison with comparable companies.

 

Other share-based plans

The Company introduced a Share Incentive Plan on flotation. All employees were entitled to apply for free shares up to a value of £1,250 depending on their period of service. The Company issued 259,558 shares in connection with this award.

 

In addition, employees are able to buy shares by deduction from their pre-tax salary. Under the current SIP legislation this is restricted to

a maximum of £1,500 in each tax year or, if less, 10% of salary.

 

The Group recognised total expense of £0.4m relating to equity-settled share-based payment transactions in 2010 (2009: credit of £0.3m).

 

40. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.

 

 

 

The financial information set out above does not constitute the Company's statutory accounts, within the meaning of section 435 of the Companies Act 2006, for the year ended 31 March 2010, and section 240 of the Companies Act 1985, for the year ended 31 March 2009, but is derived from those accounts. Statutory accounts for 2009 have been delivered to the Registrar of Companies and those for 2010 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 498(2) or (3) of the Companies Act 2006, in respect of the report for the year ended 31 March 2010, and under section 237(2) or (3) Companies Act 1985, in respect of the report for the year ended 31 March 2009.