Final Results

RNS Number : 4451O

K3 Business Technology Group PLC

19 September 2011

 



KBT

19 September 2011

 K3 BUSINESS TECHNOLOGY GROUP PLC

("K3" or "the Group")

IT solutions supplier to the supply chain industry

Announces

Final results for the 12 months to 30 June 2011

K3 is issuing audited final results for the 12 months ended 30 June 2011.  The statement also provides unaudited financial information for the 12 months ended 30 June 2010 as a guide to the underlying performance of the business as well as audited results for the 18 months to 30 June 2010.  This follows the change of K3's financial year end to 30 June (from 31 December), which took place in December 2009.

Highlights

Financial Key Points

	Audited 12 mths to 30 June 2011	Unaudited 12 mths to 30 June 2010	Audited 18 mths to 30 June 2010	% increase Y.O.Y to June 2011
Revenue	£52.80m	£43.84m	£59.78m	20%
Recurring revenue	£24.18m	£17.36m	£23.78m	39%
Adj. profit from operations*	£9.58m	£7.57m	£9.05m	28%
Profit from operations	£5.81m	£5.49m	£6.16m	6%
Adj. profit before tax*	£8.68m	£6.72m	£7.66m	29%
Profit before tax	£4.91m	£4.46m	£4.77m	10%
Adj. earnings per share**	27.5p	20.5p	23.7p	34%
Basic earnings per share	17.5p	14.6p	15.2p	20%
Dividend	0.75p	0.5p	0.75p	50%

* Adjusted profit from operations and adjusted profit before tax is calculated after taking into account amortisation of acquired intangibles, acquisition costs and exceptional reorganisation costs. (See note 1)

** Adjusted earnings per share is calculated by adjusting basic earnings per share for the impact of amortisation of acquired intangibles, acquisition costs and exceptional reorganisation costs and the related tax charges thereon.  (See note 2)

Operational Key Points

·      Excellent results against a difficult economic backdrop, reflecting:

-        high level of recurring income, at £24.18m per annum (c.46% of Group revenues)

-        high level of sales to existing customers (c. 43% of Group revenues)

-        strong performance from international operations

·      Managed Services Division - very significant growth opportunities

-       revenues almost quadrupled to £4.70m over the year

-       exclusive global agreement signed with SYSPRO to provide hosting services

-       investment to develop product offering and increase capacity

-       demand from customer base for hosting and managed services is strong

·      Major new business wins totalled £11.1m (2010: £12.4m)

·      Four acquisitions completed (Panacea, FDS Sage 200, Sense and Clarita)

-        contributed £8.00m to revenues and £0.88m to adjusted profit from operations (See note 3)

-        added technical skills, IP, new customers and recurring income

·      Entry into the Sage ERP marketplace via acquisition

-        adds annual recurring revenues of £3.2m

-        scope to sell hosted solutions to new and existing Sage customers

·      Continued development of own IP portfolio - over £1.4m invested

·      Group reorganisation to establish four main divisions - Microsoft UK, International, Sage and SYSPRO, and Managed Services

·      Board view prospects for growth very positively despite current economic conditions

Tom Milne, Chairman, said,

"I am pleased to report that K3 has delivered excellent results for the year to 30 June 2011, in a difficult trading environment. Once again the results demonstrate the strength of K3's business model, with continued new business wins underpinned by high levels of recurring income. Some 46% of the Group's income is recurring, derived from K3's substantial customer base, which now numbers in excess of 2,300 customers.  

Of particular note were the performances of the Managed Services Division and our international software operations which both saw significant growth during the year. In addition, the strategic acquisitions we made, both this financial year and last, have added new IP, customers, technical skills and a global distribution network, and will benefit us in the current financial year and beyond.

Looking ahead, while the economic climate remains challenging, we view K3's growth prospects very positively. We see substantial, long-term growth opportunities, especially in hosting and managed services, which will drive recurring revenue growth and cash generation. K3 is well-positioned operationally and financially to continue its development, both organically and via acquisition, and we view prospects for the Group very positively."

Notes:

Note 1	Calculated before amortisation of acquired intangibles of £2.82m (2010: 12 months £2.08m; 18 months £2.89m), acquisition costs of £0.49m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £0.45m (2010: 12 months £nil; 18 months £nil).
Note 2	Calculated before amortisation of acquired intangibles (net of tax) of £1.76m (2010: 12 months £1.50m; 18 months £2.08m), acquisition costs (net of tax) of £0.49m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs (net of tax) of £0.33m (2010: 12 months £nil; 18 months £nil).
Note 3	Calculated before amortisation of acquired intangibles of £0.38m, acquisition costs of £0.45m and exceptional reorganisation costs of £0.25m.

Enquiries:

K3 Business Technology Group	Andy Makeham (Chief Executive) David Bolton (Finance Director)	T: 0161 876 4498
Biddicks	Katie Tzouliadis/ Sophie McNulty	T: 020 3178 6378
Canaccord Genuity	Simon Bridges / Cameron Duncan	T: 020 7050 6500

CHAIRMAN'S STATEMENT

Overview

I am pleased to report that K3 has delivered excellent results for the year to 30 June 2011 in a difficult trading environment. They demonstrate the strength of K3's business model, with continued new business wins underpinned by high levels of recurring income. Revenues rose 20% to £52.80m (2010: 12 months, £43.84m) and adjusted profit before tax^*1 increased 29% to £8.68m (2010: 12 months, £6.72m). Our long term recurring contracted income delivered 46% of the Group's total income and has increased by 39% to £24.18m. A further 43% of income came from existing customers through the sale of additional services or products. The Group also continued to generate good cash flows.

Of particular note this year were the performances of the Managed Services Division and our international software operations. Both areas saw significant growth during the year. The strong performance at our international software operations, based in The Netherlands, was helped by significantly increased activity with Inter IKEA Systems B.V. (the owner and franchisor of The IKEA Concept, the largest customer in the Group) as well as strong sales from our Pebblestone business unit and a significant increase in sales of our retail solutions in Holland and across Europe. Our core UK Retail and Manufacturing Software Divisions continued to win new customers and generated good profit and cash contributions in particularly tough domestic trading conditions.

The level of major contract wins which the Group secured was encouraging. We closed a total of £11.10m of major contracts during the year (2010: 12 months £12.40m). Notable deals signed by our UK business included Hobbycraft, Topps Tiles and Sam McCauley, the chemists.

We completed four acquisitions (Panacea, FDS Sage 200, Sense and Clarita) during the year. These have added additional technical skills, IP and new customers to whom we can cross-sell our products and services. Importantly, two acquisitions, Panacea and FDS Sage 200, have enabled us to complete our strategic move into the Sage marketplace. After the year end, we added a further two acquisitions and we will continue to seek suitable targets which will, in particular, increase the Group's recurring income and provide sales opportunities for our Managed Services Division.

The Managed Services Division almost quadrupled its revenues during the year (helped by the acquisition of Panacea during the first half) and we saw strong demand for these services across the Group. In the second half of the financial year, we signed an exclusive worldwide hosting agreement with SYSPRO, a leading developer of ERP solutions for the manufacturing sector globally. Managed Services represent a substantial growth opportunity for K3 and the investment we made in the year has established a platform for growth. We will continue to focus on this major opportunity over the new financial year and beyond.    

More broadly, the Group's profitability continues to benefit from our strategy of developing our own library of Intellectual Property ("IP"). By enhancing the core business software products we resell, with our own IP, we enrich and tailor these solutions to the specific markets we serve. This improves both our competitive positioning and our operating profit.

While the economic climate remains challenging, we view K3's growth prospects very positively. We see substantial, long-term growth opportunities, especially in hosting and managed services, which will drive recurring revenue growth and cash generation. The acquisitions we have made in the financial year under review, as well as in the prior year, have strengthened the Group and we expect K3 to make further strong progress in the new financial year.

FINANCIAL RESULTS

K3 changed its accounting year end to 30 June (from 31 December) in December 2009 to align its financial year end with Microsoft Corporation, with whom K3 has a strong trading relationship, and to provide shareholders with greater visibility of likely year end results as K3 generates the greater proportion of its revenue in the latter half of the calendar year. 

The comparative audited figures for 2010 are for the 18 month period ended 30 June 2010, referred to throughout as "2010: 18 months".

Unaudited results for the 12 months ended 30 June 2010 have been extracted from the 2010 financial statements (note 30).  The Directors consider these provide a more meaningful comparison and are referred to throughout as "2010: 12 months".

Group revenues over the year ended 30 June 2011 rose by 20% to £52.80m (2010: 12 months £43.84m; 18 months £59.78m).  The four acquisitions completed in the year made a combined contribution of £7.98m to sales.  Adjusted profit from operations^*2 over the year rose by 27% to £9.58m (2010: 12 months £7.57m; 18 months £9.05m), with acquisitions contributing £0.88m^*3. After taking into account amortisation of intangibles, acquisition costs and one-off reorganisation costs, the profit from operations over the year increased by 6% to £5.81m (2010: 12 months £5.49m; 18 months £6.16m).  Amortisation of acquired intangible assets was £2.83m (2010: 12 months £2.08m; 18 months £2.89m). Acquisition costs were £0.49m (2010: 12 and 18 months £nil) and exceptional reorganisation costs were £0.45m (2010: 12 and 18 months £nil).

Adjusted profit before tax*¹ for the year ended 30 June 2011 increased by 29% to £8.68m (2010: 12 months £6.72m; 18 months £7.66m). After taking into account amortisation of acquired intangibles, acquisition costs and exceptional reorganisation costs listed above, profit before taxation rose by 10% over the year to £4.91m (2010: 12 months £4.46m; 18 months £4.77m).

The tax charge for the year ended 30 June 2011 was £0.43m (2010: 12 months, £1.0m; 18 months, £1.02m).  The lower charge for 2011 against 2010 reflected the greater proportion of earnings in Ireland and the Netherlands where tax rates are lower than in the UK, a reduction in the UK Corporation tax rate to 26% in the final quarter of the year and the deferred tax credit arising on acquisition intangible assets.

Adjusted earnings per share^*4 increased by 34% over the year to 27.5p (2010: 12 months 20.5p; 18 months 23.7p) and basic earnings per share increased by 20% to 17.5p over the year (2010: 12 months 14.6p; 18 months 15.2p).

Cash flows and banking

K3 generates good cash flows, with a seasonal weighting in October-December.  Net cash generated from operating activities was £5.64m (2010: 12 months £6.86m; 18 months £7.33m).  Operating cash flows in the year included £1.69m in respect of regularising liabilities that were significantly outside normal statutory due dates and commercial terms at the date of acquiring companies and trades, £0.49m of acquisition costs and £0.45m of exceptional reorganisation costs.   The underlying adjusted cash flow from operations therefore was £8.28m.  During the year the Group made debt repayments of £2.87m, paid £0.98m of interest, paid tax of £1.37m and received proceeds from share issues of £0.17m.  In addition, £5.10m was paid to the vendors of the four cash-based acquisitions, together with outstanding earn out payments from earlier acquisitions. Additional funds of £7.5m were received by way of bank loan to fund the acquisitions and the associated liabilities. Net debt at 30 June 2011 has increased by £4.51m year on year, to stand at £15.49m (30 June 2010: £10.98m).

In September 2010, the Group agreed additional banking facilities including £5.0m of revolving credit facilities ("RCF") for working capital purposes and a further £7.5m of RCF to fund acquisitions.  After the year end, in July 2011, an additional RCF of £1.05m for acquisitions was also made available.  In July 2011, we also raised £5.09m net of costs in a placing of shares.

Group Reorganisation

We completed a reorganisation of the Group during the year which enabled the full integration of the acquired businesses to create a platform for future growth, at a cost of £0.45m (accounted for as an exceptional cost).  Now that the reorganisation is complete we have four main trading divisions, Microsoft UK, International, SYSPRO and Sage, and Managed Services, together with Head office.  Our financial reporting will reflect the Group's new structure from 1 July 2011 and comparative results for the year to 30 June 2011 under the new structure will be as follows:

				Adjusted
		Revenue		profit from operations*2
		£'000		£'000
Microsoft UK		22,880		2,781
International		9,054		2,338
SYSPRO and Sage		16,166		4,171
Managed Services		4,700		540
Head office		-		(249)
		52,800		9,581

Dividend

The Board is pleased to propose a final (and total) dividend for the financial year of 0.75p per share (2010: 12 months, 0.5p; 18 months 0.75p). Subject to shareholder approval at K3's General Meeting, this dividend will be become payable on 12 January 2012 to shareholders on the register at 9 December 2011.

K3's Annual General Meeting will be held on 23 November 2011 at 10.30 am, at the Group's head office at Baltimore House, 50 Kansas Avenue, Manchester M50 2GL.

Outlook

K3 made very good progress in the financial year under review against challenging conditions in its core markets.  Results demonstrate again the strength and resilience of K3's business model, with strong cash flows, high levels of recurring income (46%) and existing customers generating a further 43% of Group revenues a year. The strategic acquisitions we made, both this financial year and last, have added new IP, customers, technical skills and a global distribution network, and will benefit us in the current financial year and beyond.

Managed Services represents a significant opportunity for K3. We have been investing to create a platform for growth and further investment will be needed to fully exploit the potential. The Sage marketplace has opened up additional hosting-related growth opportunities, which we will also be focusing on. 

K3 is well-positioned operationally and financially to continue its development. With the opportunities we see ahead of us, we view both short and long term growth prospects for the Group very positively.

Tom Milne

Chairman

*1	Calculated before amortisation of acquired intangibles of £2.82m (2010: 12 months £2.08m; 18 months £2.89m), acquisition costs of £0.49m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £0.45m (2010: 12 months £nil; 18 months £nil).
*2	Calculated before amortisation of acquired intangibles of £2.82m (2010: 12 months £2.08m; 18 months £2.89m), acquisition costs of £0.49m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £0.45m (2010: 12 months £nil; 18 months £nil).
*3	Calculated before amortisation of acquired intangibles of £0.38m, acquisition costs of £0.45m and exceptional reorganisation costs of £0.25m.
*4	Calculated before amortisation of acquired intangibles (net of tax) of £1.76m (2010: 12 months £1.50m; 18 months £2.08m), acquisition costs (net of tax) of £0.49m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs (net of tax) of £0.33m (2010: 12 months £nil; 18 months: nil)

CHIEF EXECUTIVE'S STATEMENT

INTRODUCTION

K3 has performed exceptionally well in the last 12 months in difficult market conditions, delivering excellent revenue and profits growth.  Major initiatives during the year included a significant investment in Managed Services, continued development of our own IP, further complementary acquisitions and a group reorganisation to provide a stronger platform for growth.

The final six months of the financial year saw a particularly strong financial performance, with revenues up 38% to £28.13m (2010 H2: £20.32m) and adjusted operating profit^*5 up 65% to £3.34m (2010 H2: £2.02m). With the first half year also being ahead of the prior year, the full year revenue was up 20% on the same period last year at £52.80m (2010:  12  months £43.84m: 18 months: £59.78m). Adjusted profit from operations^*6 was up 27% at £9.58m (2010: 12 months £7.57m; 18 months £9.05m). The full year results included the benefit of the four acquisitions we made over the course of the financial year, which together contributed £7.98m to revenues and £0.88m to adjusted operating profit^*7.

Our extensive customer base, today totalling 2,300 customers, is one of the most valuable assets we own and the year's results demonstrate this.  Existing customers have delivered some 89% of the Group's sales, with 46% of sales recurring annually, from software licence and support renewals for the ERP systems we maintain.  Once installed, an ERP software system can remain in place for over 15 years, providing K3 with substantial ongoing recurring income. 

As the Group continues to develop, a central plank of our growth strategy is the delivery of additional services and products to our large customer base. In particular, we are focused on the development of our hosting and managed services offering, which helps to reduce customers' overall IT costs. We believe hosting and managed services represent a major opportunity for K3 and have invested significantly this year in increasing our capability across all our products. The acquisition of Panacea, which contained a substantial managed service business in addition to its Sage customers, in November 2010, was a material step forward, adding critical mass, technical expertise and recurring income to our Managed Services Division. The delivery of hosting and managed services to our substantial customer base represents a major opportunity for K3 and we intend to invest further in these activities to fully exploit this major opportunity.

In a very difficult market, the level of our major contract wins was encouraging, totaling £11.1m compared to £12.4m for the same period last year.

Of particular note was the performance of our international business, based in The Netherlands, where two significant developments have driven strong growth.  Firstly, we have been able to leverage successfully the two Pebblestone acquisitions we made in the second quarter of 2010 to establish K3 as a major supplier of ERP systems to the Dutch Fashion market and to build up the 30 country international partner channel for Group IP.  Secondly, the business commenced a major global initiative with Inter IKEA Systems B.V. (the owner and franchisor of the IKEA Concept, the largest customer in the Group), which will benefit results over an extended period.

A key part of our value proposition is the development of our own IP to enhance the market leading business solutions (Microsoft, SYSPRO and Sage) that we offer. We invested over £1m in IP development during the year and this will help us to maintain our strong competitive positioning, creating further loyal customers and enhancing operating profits. K3 remains a member of Microsoft's Inner Circle (reserved for its top partners worldwide) and our relationship with SYSPRO deepened with an exclusive global partnership agreement for hosting. 

We took the decision to expand into the Sage market in the first half of the financial year, to broaden the Group's product portfolio, and made two acquisitions that have created a Sage Division, with 450 customers who contribute approximately £3.2m of recurring Sage income per annum. This will increase as we roll out our Sage hosting proposition over the coming year.  We see very good opportunities to add further Sage customers, both organically and via acquisition, and believe that our hosting proposition will see strong uptake. 

We strengthened the Group's organisational structure during the year to create a stronger platform for growth and have established four main trading divisions in addition to our Head Office.  The four divisions are Microsoft UK, International, SYSPRO and Sage, and Managed Services.  Reporting in future will reflect this new structure. 

Financially, the Group remains strong, with good cash generation and banking facilities to support further acquisitions.  This places us in a very good position to continue with our growth plans and we view prospects for K3 very positively.

OPERATIONAL REVIEW

K3 changed its accounting year end to 30 June (from 31 December) in December 2009 to align its financial year end with Microsoft Corporation, with whom K3 has a strong trading relationship, and to provide shareholders with greater visibility of likely year end results as K3 generates the greater proportion of its revenue in the latter half of the calendar year. 

The comparative audited figures for 2010 are for the 18 month period ended 30 June 2010, referred to throughout as "2010: 18 months".

Unaudited results for the 12 months ended 30 June 2010 have been extracted from the 2010 financial statements (note 30). The Directors consider these provide a more meaningful comparison and are referred to throughout as "2010: 12 months".

Retail Software Division

	Year to 30 June 2011 (Audited)	Year to 30 June 2010 (Unaudited)	18 months to 30 June 2010 (Audited)
Revenue (£000)	27,838	26,963	36,789
Gross margin percentage	52%	55%	56%
Adjusted  profit from operations*8 (£000)	5,059	3,799	4,934
Recurring revenue (£000)	10,337	8,180	11,805
Percentage of recurring revenue	37%	30%	32%

Overview

For the year to 30 June 2011, our Retail Software Division, which comprises our UK and international businesses, supplying Microsoft Dynamics software, generated revenues of £27.84m, up 3% over the year (2010: 12 months £26.96m; 18 months £36.79m). Adjusted profit from operations*⁸ was £5.06m, up 32% over the year (2010: 12 months £3.80m; 18 months £4.93m).  In the six months to 30 June 2011, revenue showed an 11% uplift to £15.24m against the prior period (2010: £13.71m) and adjusted operating profit^*9 increased by 40% to £2.48m (2010: £1.77m). The acquisition of Clarita in April 2011 contributed revenue of £0.65m and operating profit of £0.10m to the overall results.  All Key Performance Indicators are growing satisfactorily, though margin pressure has been evident as customers have staggered deal implementation and we have invested in Retail AX resources.

The Retail Software Division made excellent progress in the year to 30 June 2011, securing £8.3m of major contract wins compared to £7.7m in the same period last year. Our international business, based in The Netherlands, performed especially well.  In the UK, the strength of our multi-channel offering, incorporating our own IP, continues to support our performance.

Our library of IP in the Retail Software Division has grown over the year and includes multi-channel specialist modules (call centre, kiosk, retail store hospitality and Web linkages), fashion retail and wholesale modules.

UK             

Revenues for the year ended to 30 June 2011 were £19.43m, down 10% over the year (2010: 12 months £21.63m; 18 months £29.43m) though in the six months to 30 June 2011 the decrease was only 2% on the same period last year, at £10.10m (six months to 30 June 2010: £10.30m). The adjusted operating profit^*10 over the year rose by 5% to £3.04m (2010: 12 months £2.90m; 18 months £3.72m).  The results for the six months include the acquisition of Clarita for a three month period.

The UK business secured a total of £5.6m major contract wins in the year compared with £7.7m for the same period last year. Major new wins included orders from Hobbycraft, Sam McCauley, the chemists and Topps Tiles. In the tougher retail environment, we have seen many customers buying in stages thus reducing initial deal size.  The major orders we secured, providing a mixture of consultancy, software, enhancement and hardware revenues, were largely driven by our multi-channel offering, which supplies retailers with a fully integrated retail solution, encompassing online ordering, call centre management, internet kiosks, point of sale functionality and full 'back office' capability.

The value of our retail IP was evident again with good sales to the existing customer base, though margin was reduced due to resourcing of the AX Retail initiative.  We will continue to invest heavily in retail IP, bringing the Microsoft AX product in line with our Microsoft Dynamics NAV portfolio and innovating further on both products. The partnership we signed at the beginning of the financial year with Omnica Ltd, the multi-channel software specialist, extends our AX capability in the retail sector, with specialist modules for the multi-channel sales. Our UK sales pipeline is healthy, with a number of deals potentially closing in the first half of the new financial year.

International

Our Netherlands-based business, K3 Business Solutions, performed strongly, increasing revenues over the year ended to 30 June 2011 by 57% to £8.41m (2010: 12 months £5.34m; 18 months £7.36m) and increasing adjusted operating profit^*11 by 124% to £2.02m (2010: 12 months £0.90m; 18 months, £1.21m).  The last six months of the period saw revenues rise by 50% to £5.13m (six months to 30 June 2010: £3.41m) and adjusted operating profit^*12 grew by 112% to £1.27m (six months to 30 June 2010: £0.60m). 

The Dutch business has seen a step-change in performance.  There are two major factors driving this.  The Pebblestone acquisitions made in the second quarter of 2010 established K3 as a major supplier of ERP systems into the Dutch Fashion market, with a 30 country international partner channel for Group IP.  We also commenced a major global initiative with Inter IKEA Systems B.V. (the owner and franchisor of the IKEA Concept, the largest customer in the Group), which will benefit results over an extended period.  Dutch retail sales are performing well, with deals closing on a regular basis, and we are seeing opportunities open up across Europe. The business is operating at full capacity and we are recruiting further resource to meet the demand we are currently generating. 

Manufacturing Software Division

	Year to 30 June 2011 (Audited)	Year to 30 June 2010 (Unaudited)		18 months to 30 June 2010 (Audited)
Revenue (£000)	15,468	15,580		21,323
Gross margin percentage	72%	75%		74%
Adjusted profit from operations*13(£000)	3,496	4,119		4,490
Recurring revenue (£000)	9,129	8,766		11,164
Percentage of recurring revenue	59%	56%		54%

Overview

The Manufacturing Software Division comprises three business units, K3 Supply Chain Solutions ("SCS"), supplying SYSPRO ERP solutions, K3 AX specialising in process manufacturing and including the Sense Enterprise Solutions business ("Sense") and small systems business based in Hook. 

Revenues from the Manufacturing Software Division for the year were flat at £15.47m (2010: 12 months £15.58m; 18 months £21.32m) and adjusted operating profit^*13 decreased by 15% to £3.50m (2010: 12 months £4.12m; 18 months, £4.49m).  The Sense AX business, acquired in April 2011, contributed revenue of £0.56m and adjusted operating profit^*14 of £0.14m. As a Division we have suffered margin pressure from our key suppliers which is likely to continue in the new financial year.

In the six months to 30 June 2011, revenue at £6.12m was up 8% (2010: £5.67m) but adjusted profit from operations^*15 fell to £0.21m (2010: £0.42m).

There is strong seasonality in the Division's income as the above revenue and profit profile illustrate.  This seasonality is driven by the timing of SYSPRO software licence and support renewals, which are billed in October and are realised in cash during October to December.  The value of this recurring income in the year to 30 June 2011 was £9.13m (2010: 12 months £8.8m). This income stream continues to be very stable and highly predictable, reflecting the business critical nature of the systems we implement and support. The last six months have been difficult with deal cycles lengthening as manufacturing customers defer investment and our margins have also come under pressure from key suppliers.

SCS

K3 Supply Chain Solutions ("SCS"), which supplies SYSPRO ERP solutions, delivered revenues broadly unchanged over the year at £10.36m (2010: 12 months £10.40m; 18 months, £14.08m) and adjusted profit from operations^*16 were stable at £3.01m (2010: 12 months  £3.14m; 18 months, £3.38m). 

In the six months to 30 June 2011, revenues were £3.43m (six months ended 30 June 2010: £3.45m) and the adjusted loss from operations^*17 was £0.03m (six months ended 30 June 2010: profit of £0.15m), reflecting both seasonality and margin pressure mentioned above.    

New order intake at SCS remained under pressure over the year and in the light of this and cost pressure from our major supplier, the year's results are very creditable.  Results were supported by sales of additional services to customers as well as annual software licence and support income and overhead reductions.  To have achieved broadly the same level of profit against the comparable period last year in these difficult market conditions has been an excellent result.

K3 AX

K3 AX, which addresses the process manufacturing marketplace, with product specialisation in fresh food and steel processing, has had an extremely disappointing year following the improved performance in the previous period. While revenue over the year to 30 June 2011 was up by 15% to £2.92m (2010: 12 months £2.54m; 18 months £3.34m), the adjusted loss from operations^*18 was £0.31m (2010: 12 months profit of £0.13m; 18 months, loss of £0.18m).  However, the second half of the year showed an improvement, with revenues at £1.65m (six months ended 30 June 2010: £1.11m) and the adjusted operating loss*¹⁹ at £0.08m (six months ended 30 June 2010: loss of £0.07m).  

Having closed five deals in the last period and expanded our delivery capacity, we found very soft demand this year and new software sales have been hard to close.  Our development plans for the product range were also held back by substantial changes being implemented by Microsoft in the AX product. However, the acquisition of Sense in March 2011 has brought critical mass and additional skills to the AX business unit, as well as 40 new customers. It also positions K3 AX as one of the larger AX provider in the UK and we see very good opportunities to cross-sell our products and services to Sense's existing customer base.  The reduction in losses in the second half compared to the first half year is a reflection of closing three late deals and the profitability of Sense, acquired in the third quarter of the financial year, which contributed £0.56m of revenues and £0.14m of adjusted operating profits.

Small systems division, Hook (formerly in Chertsey)

Our small systems division, which comprises a customer base running smaller ERP systems, generated sales of £2.19m in the year (2010: 12 months £2.65m; 18 months £3.91m) and the adjusted profit from operations^*20 was £0.79m (2010: 12 months  £0.86m; 18 months £1.29m).  The second half of the year shows revenue of £1.03m (six months ended 30 June 2010: £1.12m) and an adjusted profit from operations^*21 of £0.32m (six months ended 30 June 2010: £0.34m). As expected, revenues generated by this division continued to decay gently although we partly mitigated the impact of this by selling CRM services.  Following the acquisition of Panacea in November 2010, we have relocated the business to Hook, which will underpin profitability.

Sage Division                                                                                                                    

	Year to 30 June 2011
Revenue (£000)	4,150
Gross margin percentage	32%
Adjusted profit from operations*22 (£000)	417
Recurring revenue (£000)	2,192
Percentage of recurring revenue	53%

We took the strategic decision to enter the Sage ERP marketplace in the period and two acquisitions in the first half (Panacea in November 2010 and the Sage 200 business of FD Systems Limited in December 2010) have established K3 with a meaningful Sage presence.  The Sage ERP solutions we now offer predominantly service the Distribution sector and our customer base totals approximately 525 companies, delivering recurring income of approximately £3.2m of Sage sales per annum, derived from a mix of software licence and support. 

The Division generated a partial revenue contribution of £4.15m (2010: £nil) and adjusted operating profit^*22 contribution of £0.42m (2010: £nil). These revenues represent approximately 50% of the potential of these two businesses

At the beginning of 2011, we combined the two acquisitions into one site at Hook and have been developing our Sage hosting proposition.  This will roll out over the coming year and will place us in a strong position to cross-sell hosted solutions to new and existing Sage customers, mirroring the model we are deploying for our Microsoft and SYSPRO customers. 

We see a significant opportunity to develop our Sage Division and will continue to acquire complementary Sage businesses to grow K3's contracted recurring revenues and leverage further hosting opportunities.

Managed Services Division

	Year to 30 June 2011 Audited		Year to 30 June 2010 Unaudited	18 months to 30 June 2010 Audited
Revenue (£000)		4,700	1,232	1,604
Gross margin percentage		42%	59%	59%
Adjusted profit from operations*23 (£000)		540	283	408
Recurring revenue (£000)		2,638	687	810
Percentage of recurring revenue		56%	56%	50%

The Managed Services Division offers a range of application solutions both on-premises, hosted and via Software as a Service using hosting centres in New York, London and Edinburgh. 

Over the year to 30 June 2011, revenues generated by the Managed Services Division almost quadrupled to £4.70m (2010: 12 months £1.23m; 18 months, £1.60m).  Adjusted profit from operations^*23 increased by 86% to £0.54m (2010: 12 months £0.28m; 18 months, £0.41m). In the six months to 30 June 2011, revenues rose almost 3.5 times to £3.02m over the prior period (2010: £0.87m) and adjusted profit from operations^*24 rose by 86% to £0.39m (2010: £0.21m).  The managed services business of Panacea, acquired in November 2010, made a partial contribution of £2.64m to revenues and £0.25m to adjusted profit from operations^*25.

The business is continuing to grow rapidly with strong interest in our managed services solutions from our customers. We see a substantial opportunity to develop the Managed Services Division and committed significant investment to its development during the year which accounts for the fall in gross margin and profitability lagging revenue growth. We will continue to invest in this opportunity.

In February 2011, we announced a potentially significant opportunity with SYSPRO, a leading developer of ERP solutions to the manufacturing sector globally.  Under the terms of our agreement, we will be providing hosted Software as a Service on an exclusive basis worldwide to SYSPRO customers.  We will be working with SYSPRO's partner network to market this service and believe this could represent a material opportunity for us. 

The Division's closing run rate of revenue at the year-end was £4.1m (2010: £2.33m).

International IP Division

	Year to 30 June 2011
Revenue (£000)	644
Gross margin percentage	88%
Adjusted operating profit*26 (£000)	318
Recurring revenue (£000)	344
Percentage of recurring revenue	53%

Our International IP Division, established in June 2010 and based in Ireland, manages the portfolio of fashion and wholesale products acquired from Pebblestone, the Pebblestone reseller channel we bought in June 2011, as well as the Group's other IP products suitable for distribution across our customer base. 

The benefit of our library of intellectual property is becoming increasingly evident in Group's results, helping to enhance margins as well as sales. In the year, the Division contributed sales of £0.64m and an adjusted profit from operations*²⁶ of £0.32m.  Additional sales of £0.36m of K3 product are included within the results of the Retail Software Division.

During the year we enhanced the functionality of our Pebblestone product and established a product roadmap for its future development.  We also refreshed the Pebblestone distribution network, which is showing good potential for the future.

We have continued to expand our library of IP across all operating units, especially hosting, Retail AX and Fresh Dynamics AX, mirroring the strategy of Microsoft.  K3's sector specific solutions therefore remain highly competitive and attractive to both new and existing customers.

Central Division

Central costs for the year amounted to £0.25m (2010: 12 months £0.64m; 18 months £0.78m).  These costs included Directors' costs, group human resources and accounting personnel, legal department and costs associated with the Plc.  The costs are stated net of recovery of elements recharged to the operating units, which have increased with the expansion of the Group.

Our share of associated company losses in the year to 30 June 2010 was £nil (2010: 12 months £nil; 18 months £0.03m).  This reflects the change in ownership structure of the underlying investment, which is now treated as an available-for-sale investment.

Group reorganisation

During the year we strengthened the Group's organisational structure to create a stronger platform for growth which enabled the complete integration of the acquired businesses. This reorganisation cost £0.45m which has been shown as an exceptional cost within profit from operations. From 1 July 2011, the reporting of results will reflect four trading Divisions; Microsoft UK, International, SYSPRO and Sage, and Managed Services; together with head office.

Post year end events

After the year end, in July 2011, we completed two acquisitions, buying the Retail Merchandising Division of Azurri Computer Solutions Ltd ("Azurri Retail") and FD Systems Ltd ("FDS"), the Sage solutions and e-commerce provider. 

Azurri Retail, whose customers include Matalan, JJB Sports, Littlewoods and Holland & Barratt, generates recurring income of approximately £0.6m annually.  It is currently being integrated with K3's existing retail software operations.

Having acquired the Sage 200 business of FDS in December 2010, we bought the remainder of FDS seven months later. The deal has added 300 Sage customers and additional expertise across the full range of Sage products.  FDS has also developed its own e-commerce solution, which integrates fully with Sage and Microsoft products.

OUTLOOK

We are delighted with the progress K3 has made in the year under review and results illustrate the high degree of robustness to our earnings.  A very large proportion of the Group's income is recurring, derived from K3's substantial customer base, which now numbers in excess of 2,300 customers.  

The Group also continues to generate good cash flows and the very high level of major contract wins is also pleasing, pointing to the strength of our product offering in the markets we address. 

Over the last year, we have seen the growth in the business that we anticipated in the 2010 financial report.  We expect the business to grow further as we see the full year impact of acquisitions and the annualised impact of business wins in Managed Services.  The Group remains well-funded. We will seek further complementary acquisitions to strengthen our position and continue the growth of the business.

We believe that K3 is well placed to deliver a strong performance over the coming year despite the uncertain economic outlook.

Andy Makeham

Chief Executive

*5	Calculated before amortisation of acquired intangibles of £1.39m (2010 H2: £0.92m), acquisition costs of £0.34m (2010 H2: £nil) and exceptional reorganisation costs of £0.45m (2010 H2: £nil).
*6	Calculated before amortisation of acquired intangibles of £2.82m (2010: 12 months £2.08m; 18 months £2.89m), acquisition costs of £0.49m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £0.45m (2010: 12 months £nil; 18 months £nil).
*7	Calculated before amortisation of acquired intangibles of £0.38m, acquisition costs of £0.45m and exceptional reorganisation costs of £0.25m.
*8	Calculated before amortisation of acquired intangibles of £1.10m (2010: 12 months £1.08m; 18 months £1.28m), acquisition costs of £0.07m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £nil (2010: 12 months £nil; 18 months £nil).
*9	Calculated before amortisation of acquired intangibles of £0.57m (2010 H2: £0.48m), acquisition costs of £0.07m (2010 H2: £nil) and exceptional reorganisation costs of £nil (2010 H2: £nil).
*10	Calculated before amortisation of acquired intangibles of £0.03m (2010: 12 months £nil: 18 months £nil), acquisition costs of £0.05m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £nil (2010: 12 months £nil; 18 months £nil).
*11	Calculated before amortisation of acquired intangibles of £1.07m (2010: 12 months £1.08m: 18 months £1.28m), acquisition costs of £nil (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £nil (2010: 12 months £nil; 18 months £nil).
*12	Calculated before amortisation of acquired intangibles of £0.54m (2010 H2: £0.48m), acquisition costs of £nil (2010 H2: £nil) and exceptional reorganisation costs of £nil (2010 H2: £nil).
*13	Calculated before amortisation of acquired intangibles of £1.13m (2010: 12 months £0.93m; 18 months £1.49m), acquisition costs of £0.15m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £0.20m (2010: 12 months £nil; 18 months £nil).
*14	Calculated before amortisation of acquired intangibles of £0.03m, acquisition costs of £0.15m and exceptional reorganisation costs of £nil.
*15	Calculated before amortisation of acquired intangibles of £0.38m (2010 H2: £0.38m), acquisition costs of £0.15m (2010 H2: £nil) and exceptional reorganisation costs of £0.20m (2010 H2: £nil).
*16	Calculated before amortisation of acquired intangibles of £0.86m (2010: 12 months £0.69m; 18 months £1.12m), acquisition costs of £nil (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £0.12m (2010: 12 months £nil; 18 months £nil).
*17	Calculated before amortisation of acquired intangibles of £0.26m (2010 H2: £0.26m), acquisition costs of £nil (2010 H2: £nil) and exceptional reorganisation costs of £nil (2010 H2: £nil).
*18	Calculated before amortisation of acquired intangibles of £0.27m (2010: 12 months £0.24m; 18 months £0.37m), acquisition costs of £0.15m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £0.08m (2010: 12 months £nil; 18 months £nil).
*19	Calculated before amortisation of acquired intangibles of £0.16m (2010 H2: £0.12m), acquisition costs of £0.15m (2010 H2: £nil) and exceptional reorganisation costs of £0.08m (2010 H2: £nil).
*20	Calculated before amortisation of acquired intangibles of £nil (2010: 12 months £nil; 18 months £nil), acquisition costs of £nil (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £nil (2010: 12 months £nil; 18 months £nil).
*21	Calculated before amortisation of acquired intangibles of £nil (2010 H2: £nil), acquisition costs of £nil (2010 H2: £nil) and exceptional reorganisation costs of £nil (2010 H2: £nil).
*22	Calculated before amortisation of acquired intangibles of £0.21m, acquisition costs of £0.14m and exceptional reorganisation costs of £0.12m.
*23	Calculated before amortisation of acquired intangibles of £0.26m (2010: 12 months £0.06m; 18 months £0.06m), acquisition costs of £0.10m (2010: 12 months £nil; 18 months £nil) and exceptional reorganisation costs of £0.13m (2010: 12 months £nil; 18 months £nil).
*24	Calculated before amortisation of acquired intangibles of £0.24m (2010 H2: £0.06m), acquisition costs of £nil (2010 H2: £nil) and exceptional reorganisation costs of £0.13m (2010 H2: £nil).
*25	Calculated before amortisation of acquired intangibles of £0.10m, acquisition costs of £0.10m and exceptional reorganisation costs of £0.13m.
*26	Calculated before amortisation of acquired intangibles of £0.12m, acquisition costs of £nil and exceptional reorganisation costs of £nil.

CONSOLIDATED INCOME STATEMENT

For the year ended 30 June 2011

	Notes	Year ended 30 June 2011	18 month period ended 30 June 2010
		£'000	£'000
Revenue		52,800	59,783
Cost of sales		(23,486)	(22,460)
Gross profit		29,314	37,323
Administrative expenses		(23,501)	(31,163)
Profit from operations before amortisation of acquired intangibles, exceptional reorganisation costs and acquisition costs		9,581	9,052
Amortisation of acquired intangibles		(2,826)	(2,892)
Acquisition costs	1	(489)	-
Exceptional reorganisation costs	1	(453)	-
Profit from operations		5,813	6,160
Finance income		35	28
Finance expense		(940)	(1,393)
Share of loss of associates		-	(28)
Profit before taxation		4,908	4,767
Tax expense	2	(428)	(1,018)
Profit for the period		4,480	3,749

All of the profit for the period is attributable to equity shareholders of the parent.

Earnings per share
Basic	3	17.5p	15.2p
Diluted	3	17.0p	15.2p

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 June 2011

		Year ended  30 June 2011	18 month period ended 30 June 2010
		£'000	£'000
Profit for the period		4,480	3,749
Other comprehensive income (expense)
Exchange differences on translation of foreign operations		1,511	(2,327)
Net investment hedge		(504)	797
Cash flow hedges:
Losses recognised on hedging instruments		(22)	(170)
Transferred to income statement		113	259
Other comprehensive income (expense), net of tax		1,098	(1,441)
Total comprehensive income for the period		5,578	2,308

All of the total comprehensive income is attributable to equity holders of the parent.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2011

	Notes	2011	2010
		£'000	£'000
ASSETS
Non-current assets
Property, plant and equipment		1,993	1,393
Goodwill		39,082	33,467
Other intangible assets		17,635	13,176
Deferred tax assets		551	370
Available-for-sale investments		196	196
Total non-current assets		59,457	48,602
Current assets
Trade and other receivables		22,642	14,439
Cash and cash equivalents		814	369
Total current assets		23,456	14,808
Total assets		82,913	63,410
LIABILITIES
Non-current liabilities
Long-term borrowings	4	11,502	7,051
Other non-current liabilities	5	442	1,761
Deferred tax liabilities		4,427	3,645
Total non-current liabilities		16,371	12,457
Current liabilities
Trade and other payables	6	24,074	14,728
Current tax liabilities		428	482
Short-term borrowings	4	4,798	4,300
Total current liabilities		29,300	19,510
Total liabilities		45,671	31,967
EQUITY
Share capital		6,477	6,411
Share premium account		2,863	2,711
Other reserves		10,448	10,448
Cashflow hedging reserve		(85)	(176)
Translation reserve		1,730	723
Retained earnings		15,809	11,326
Total equity attributable to equity holders of the parent		37,242	31,443
Total equity and liabilities		82,913	63,410

CONSOLIDATED STATEMENT OF CASHFLOWS

For the year ended 30 June 2011

	Notes	Year ended 30 June 2011	18 month period ended 30 June 2010
		£'000	£'000
Cash flows from operating activities
Profit before tax		4,908	4,767
Adjustments for:
Share-based payments charge (credit)		52	(39)
Depreciation of property, plant and equipment		462	418
Amortisation of intangible assets and development expenditure		3,305	3,788
Loss (profit) on sale of property, plant and equipment		7	(1)
Interest received		(35)	(28)
Interest expense		940	1,393
Share of losses of associates		-	28
Increase in trade and other receivables		(4,909)	(4,022)
Increase in trade and other payables		910	1,027
Cash  generated from operations	7	5,640	7,331
Interest paid		(982)	(1,331)
Income taxes paid		(1,368)	(1,637)
Net cash generated from operating activities		3,290	4,363
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		(4,197)	(424)
Acquisition of other business units		(1,210)	(2,431)
Acquisition of available-for-sale investments		-	(2)
Development expenditure capitalised		(1,374)	(1,195)
Purchase of property, plant and equipment		(681)	(393)
Proceeds from sale of property, plant and equipment		-	5
Purchase of intangibles		-	(50)
Interest received		35	28
Net cash absorbed by investing activities		(7,427)	(4,462)
Cash flows from financing activities
Proceeds from issue of share capital		174	1,431
Proceeds from long-term borrowings		7,500	1,474
Payment of long-term borrowings		(2,768)	(4,752)
Payment of loans from related parties		-	(1,000)
Payment of finance lease liabilities		(106)	(47)
Dividends paid		(64)	(247)
Net cash generated from (absorbed by) financing activities		4,736	(3,141)
Net change in cash and cash equivalents		599	(3,240)
Cash and cash equivalents at start of period		(571)	2,828
Exchange gains  on cash and cash equivalents		85	(159)
Cash and cash equivalents at end of period		113	(571)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2011

	Share capital	Share premium	Other reserve	Cashflow hedging reserve	Translation reserve	Retained earnings	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2009	5,939	1,619	10,448	(265)	2,253	7,874	27,868
Changes in equity for 18 months ended 30 June 2010
Share-based payment debit	-	-	-	-	-	(17)	(17)
Issue of share capital	472	1,092	-	-	-	-	1,564
Own shares acquired	-	-	-	-	-	(33)	(33)
Dividends to equity holders	-	-	-	-	-	(247)	(247)
Total comprehensive income for the period	-	-	-	89	(1,530)	3,749	2,308
At 30 June 2010	6,411	2,711	10,448	(176)	723	11,326	31,443
Changes in equity for year ended 30 June 2011
Share-based payment credit	-	-	-	-	-	111	111
Options exercised	66	152	-	-	-	-	218
Own shares acquired	-	-	-	-	-	(44)	(44)
Dividends to equity holders	-	-	-	-	-	(64)	(64)
Total comprehensive income for the period	-	-	-	91	1,007	4,480	5,578
At 30 June 2011	6,477	2,863	10,448	(85)	1,730	15,809	37,242

The amount included in retained earnings of £4.48m (18 month period ended 30 June 2010: £3.75m) represents profit attributable to the owners of the parent company. The amount included in the cash flow hedging reserve and the translation reserve represent other comprehensive income for each component, net of tax of £nil (18 month period ended 30 June 2010: £nil) .

NOTES

1.             Profit from operations

The Group completed a reorganisation during the year which enabled the full integration of the acquired businesses to create a platform for future growth, at a cost of £0.45m, which is accounted for an exceptional cost.  Now that the reorganisation is complete, from 1 July 2011 the Group has established four main trading divisions, Microsoft UK, International, SYSPRO and Sage, and Managed Services, together with Head Office. 

Following amendments to IFRS 3 "Business Combinations", the costs of acquiring business combinations are no longer treated as part of the cost of the entity acquired and are charged to the income statement.  The costs charged to profit from operations for the year were £0.49m.

2.             Tax expense

	Year ended 30 June 2011	18 month period ended 30 June 2010
	£'000	£'000
Current tax expense
UK corporation tax and income tax of overseas operations on profits for the period	1,474	1,834
Adjustment in respect of prior periods	(53)	(64)
Total current tax expense	1,421	1,770
Deferred tax expense
Origination and reversal of temporary differences	(690)	(752)
Effect of change in rate of deferred tax	(303)	-
Total deferred tax expense	(993)	(752)
Total tax expense	428	1,018

3.             Earnings per share

The calculations of earnings per share are based on the profit for the period and the following numbers of shares:

	Year ended 30 June 2011	18 month period ended 30 June 2010
	Number of shares	Number of shares
Denominator
Weighted average number of shares used in basic EPS	25,650,457	24,599,450
Effects of:
Employee share options and warrants	631,663	48,517
Weighted average number of shares used in diluted EPS	26,282,120	24,647,967

Certain employee options and warrants have not been included in the calculation of diluted EPS because their exercise is contingent on the satisfaction of certain criteria that had not been met at the end of the period.  In addition, certain employee options have also been excluded from the calculation of diluted EPS as their exercise price is greater than the weighted average share price during the period (i.e. they are out-of-the-money) and therefore would not be advantageous for the holders to exercise those options.

The alternative earnings per share calculations have been computed because the directors consider that they are useful to shareholders and investors.  These are based on the following profits and the above number of shares.

	Year ended 30 June 2011			18 month period ended 30 June 2010
	Earnings	Per share amount Basic	Per share amount Diluted	Earnings	Per share amount Basic	Per share amount Diluted
	£000	p	p	£000	p	p
Numerator
Earnings per share	4,480	17.5	17.0	3,749	15.2	15.2
Add back:
Amortisation of acquired intangibles (net of tax)	1,759	6.8	6.7	2,083	8.5	8.5
Acquisition costs (net of tax)	489	1.9	1.9	-	-	-
Exceptional reorganisation costs (net of tax)	328	1.3	1.2	-	-	-
Adjusted EPS	7,056	27.5	26.8	5,832	23.7	23.7

In prior years, the adjusted earnings per share calculations included an adjustment for the cost of share-based payments (net of tax).  This is no longer included as the directors consider the amounts to be immaterial and therefore not useful to shareholders and investors. The comparatives have been adjusted accordingly.

4.             Loans and borrowings       

	2011	2010
	£'000	£'000
Non-current
Bank loans (secured)	11,489	7,051
Finance lease creditors	13	-
	11,502	7,051
Current
Bank overdrafts	701	940
Bank loans (secured)	3,420	2,672
Finance lease creditors	37	48
Loans from related parties	640	640
	4,798	4,300
Total borrowings	16,300	11,351

5.             Other non-current liabilities

	2011	2010
	£'000	£'000
Contingent consideration	-	787
Deferred consideration	304	365
Other payables	-	48
Accruals	138	561
	442	1,761

6.             Trade and other payables - current

	2011	2010
	£'000	£'000
Trade payables	4,717	3,345
Other payables	746	501
Contingent consideration	1,347	548
Deferred consideration	207	137
Accruals	6,437	4,032
Total financial liabilities, excluding loan and borrowings, classified as financial liabilities measured at amortised cost	13,454	8,563
Derivative financial instruments	72	199
Other tax and social security taxes	2,729	1,664
Deferred revenue	7,819	4,302
	24,074	14,728

7.             Notes to the cashflow statement

Cash generated from operations is stated after payments made to regularise liabilities that were significantly outside normal statutory due dates and commercial terms at the date of acquiring companies, that the directors consider to be a cost of the acquisition.  In addition, cash flows from operations include acquisition costs and exceptional reorganisation costs arising as a result of acquisitions during the year.  The adjusted cash generated from operations has been computed because the directors consider it more useful to shareholders and investors in assessing the underlying operating cash flow of the Group.  The adjusted cash generated from operations is calculated as follows:

	2011
	£'000
Cash generated from operating activities	5,640
Add:
Regularising liabilities	1,693
Acquisition costs	489
Exceptional reorganisation costs	453
Adjusted cash generated from operations	8,275

8.             Proforma unaudited results for the year ended 30 June 2010

In the prior year, the group changed its financial year end from 31 December to 30 June, with the objective of bringing its year end in line with that of Microsoft Corporation and providing shareholders with greater visibility on full year results since the majority of revenues typically fall in the second half of the calendar year.  Below is a table of the proforma unaudited results for the twelve months ended 30 June 2010. The information has been extracted from note 30 to the financial statements for the 18 month period to 30 June 2010.  These have been amended for the inclusion within profit from operations of cost of share-based payments as the directors consider the amounts to be immaterial and therefore not useful to shareholders and investors. The comparatives have been adjusted accordingly.

	12 months ended 30 June 2011	Unaudited 12 months ended 30 June 2010
	£'000	£'000
Revenue
Retail UK and Ireland	19,428	21,628
Holland	8,410	5,335
Total Retail Software division	27,838	26,963
Small systems business, Hook	2,187	2,645
SCS	10,357	10,396
AX	2,924	2,539
Total Manufacturing Software division	15,468	15,580
Sage	4,150	-
Managed Services Division	4,700	1,232
IP	644	-
Central division	-	67
Total revenue	52,800	43,842

	12 months ended 30 June 2011	Unaudited 12 months ended 30 June 2010
	£'000	£'000
Adjusted profit from operations*
Retail UK and Ireland	3,039	2,896
Europe	2,020	903
Total Retail Software division	5,059	3,799
Small systems business, Hook	793	855
SCS	3,008	3,139
AX	(305)	125
Total Manufacturing Software division	3,496	4,119
Sage	417	-
Managed Services Division	540	290
IP	318	-
Central division	(249)	(636)
Total adjusted profit from operations	9,581	7,572
Adjusted earnings per share*	27.5p	20.5p
Earnings per share	17.5p	14.6p

^*adjusted for amortisation of acquired intangibles, exceptional reorganisation costs and acquisition costs.           

9.             Events after the reporting date

After the year end, in July 2011, we completed two acquisitions, buying the Retail Merchandising Division of Azurri Computer Solutions Ltd ("Azurri Retail") and FD Systems Ltd ("FDS"), the Sage solutions and e-commerce provider. 

Azurri Retail, whose customers include Matalan, JJB Sports, Littlewoods and Holland & Barratt, generates recurring income of approximately £0.6m annually.  It is currently being integrated with K3's existing retail software operations.

Having acquired the Sage 200 business of FDS in December 2010, we bought the remainder of FDS seven months later. The deal has added 300 Sage customers and additional expertise across the full range of Sage products.  FDS has also developed its own e-commerce solution, which integrates fully with Sage and Microsoft products.

10.          The Board recommends the payment of a dividend of 0.75p per share (18 month period ended 30 June 2010: 0.25p) to be payable to shareholders on the register on 9 December 2011.

11.          The financial information set out above does not comprise the Company's statutory accounts.  The Annual Report and Financial Statements for the period ended 30 June 2010 have been filed with the Registrar of Companies.  The Independent Auditors' Report on the Annual Report and Financial Statement for the period ended 30 June 2010 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. 

The Independent Auditors' Report on the Annual Report and Financial Statement for the year ended 30 June 2011 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.  These will be delivered to the Registrar of Companies following the annual general meeting.

12.         The Group's full statutory financial statements for 30 June 2011 have been prepared in accordance with International Financial Reporting Standards (IFRSs and IFRIC interpretations) as endorsed by the European Union ("endorsed IFRS") and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under endorsed IFRS. 

13.          This preliminary announcement was approved by the Board of directors on 16 September 2011.

14.          The full financial statements will be posted to shareholders on or around 17 October 2011.  Further copies will also be available on its website (www.k3btg.com) and from the Company's registered office at Baltimore House, 50 Kansas Avenue, Manchester, M50 2GL from that date.

 

END

 

 

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