Half Yearly Report

RNS Number : 7371Y

K3 Business Technology Group PLC

06 March 2012

 



KBT

K3 BUSINESS TECHNOLOGY GROUP PLC

("K3" or "the Group" or "the Company")

Unaudited Half-yearly Report

For the

Six months to 31 December 2011

KEY POINTS

Financial Key Points

·       Revenue up 35% to £33.36m (2010: £24.67m) − includes £3.73m from acquisitions in H1 and benefit of acquisitions made in 2010 

-  recurring income up 36% to £17.1m (2010: £12.6m)

·       Adjusted profit from operations*¹ up 11% to £6.91m (2010: £6.24m)

Profit from operations unchanged at £4.66m (2010: £4.66m)

·       Investment of c.£0.5m made in managed services and retail software (AX), continuing in H2

·       Adjusted profit before tax*² up 7% to £6.23m (2010: £5.81m)

Profit before tax of £3.98m (2010: £4.23m)

·       Adjusted basic earnings per share*³ up 7% to 18.1p (2010: 16.9p)

        Basic earnings per share of 12.3p (2010: 12.7p)

·       Underlying operating cash generation*⁴ of £7.29m - represents 105% of adjusted profit from operations^*1 (2010: £5.97m, 96% of adjusted profit from operations^*1 )

·       Placing raised £5.02m (net) in July 2011 and further banking facility of £1.05m agreed

·       Net debt at 31 December 2011 of £13.35m (2010: £11.48m, 30 June 2011: £15.49m)

·      No interim dividend (in line with dividend policy) but final dividend expected

·      Commencement of formal sale process, announced on 1 March 2012

Operational Key Points

·       Increased revenues across all four divisions (Microsoft UK, SYSPRO and Sage, International and Managed Services)

·        Five significant acquisitions completed.  Total initial payment on acquisitions of £6.36m - all complementary, readily integrated

·        Major new order wins totalled £8.6m, up 72% (2010: £5.0m)

·        Significant investment in Microsoft AX capability - flagship new order win with Eason 

·        Significant investment in Managed Services Division - hosting platforms now in place for  SYSPRO, Microsoft Dynamics NAV and Sage 200

·        Board views prospects for the remainder of the year positively

Commenting on the results, Tom Milne, Chairman of K3, said,

"We are pleased with K3's performance over the six months to 31 December 2011.  A number of major new orders were closed in the period and our International Division in particular is showing encouraging growth.   Results were supported by the high levels of recurring income the Group enjoys from annual software licence and support renewals across our growing customer base. Cash flows were also strong as expected.

We have continued our acquisition strategy to accelerate the growth of the business. The acquisitions in the period have added further customers, additional intellectual property and increased the reach of the business. The new divisional structure is a good platform for generating synergies from the existing business and the acquisitions.

The expansion of our hosting capability in the Managed Services Division remains a major focus. We have recruited additional skilled resource and invested in capacity and will continue to do so.   

As announced on 1 March 2012, we have commenced a formal sales process and will be making further announcements in due course. With the growth opportunities available and our strong financial position and supportive bankers, we expect K3 to make good progress over the remainder of the financial year and beyond."

Notes:

*¹ Adjusted profit from operations for the six months ended 31 December 2011 is calculated before amortisation of acquired intangibles of £1.75m (2010: £1.43m) and acquisition and reorganisation costs of £0.50m (2010: £0.15m).

^*2 Adjusted profit before tax for the six months ended 31 December 2011 is calculated before amortisation of acquired intangibles of £1.75m (2010: £1.43m) and acquisition and reorganisation costs of £0.50m (2010: £0.15m).

^*3 Adjusted basic EPS for the six months ended 31 December 2011 is calculated before amortisation of acquired intangibles (net of tax) of £1.19m (2010: £0.93m) and acquisition and reorganisation costs (net of tax) of £0.46m (2010: £0.15m).

^*4 Underlying operating cash is calculated before the cost of regularising liabilities in acquired entities of £1.18m (2010: £0.91m) and acquisition and reorganisation costs of £0.30m (2010: £0.15)

Enquiries:

K3 Business Technology Group plc	Andy Makeham (CEO)	T: 020 3178 6378 (today)
	David Bolton (CFO)	Thereafter 0161 876 4498
Deloitte Corporate Finance	Jonathan Hinton/ James Lewis	T: 020 7936 3000
(Financial Adviser)
FinnCap Limited	Marc Young/ Henrik Persson	T: 020 7220 0500
(NOMAD)
Biddicks	Katie Tzouliadis/Sophie McNulty	T: 020 3178 6378

OVERVIEW

In tough market conditions, results for the six months to 31 December 2011 are encouraging and continue to illustrate the robustness of K3's earnings, which are underpinned by high levels of recurring income. The Group's revenues increased by 35% year-on-year to £33.36m, helped by the acquisitions we have made. Adjusted profit before tax^*1 increased to £6.23m, which is a 7% rise on the same period last year. The level of profitability was held back, as expected, by the significant investment that we made in our Managed Services and Microsoft UK Divisions in the period.    

In line with our growth plan, we continued to make acquisitions, completing five significant purchases in the period. Initial payments on acquisitions were £6.36m. All the acquisitions are complementary to our existing operations and can be readily integrated. A major strand of our acquisition strategy is to add complementary customer bases which are suitable for introduction to our hosting model.  In this way, we will accelerate the growth of our recurring income stream.  

I am particularly encouraged by the growth in our International Division which has seen revenues rise by 29% to £4.84m and adjusted profit from operations^*2 rise by 25% to £1.4m in the first half.  These excellent results have been driven by a combination of steady order wins in our fashion/wholesale market and a high level of activity with Inter IKEA Systems B.V. (the owner and franchisor of The IKEA Concept), the largest customer in the International Division. We anticipate further good growth in this division.

The UK market remained challenging and our Microsoft UK Division and SYSPRO and Sage Division are highly focused on minimising costs whilst delivering sales targets. We have however invested heavily in the development of our Retail AX Multi Channel solution as we believe there are significant opportunities to drive growth as Microsoft takes this product to market.  This decision bore fruit at the end of the period with a number of very significant order wins, including Eason and Son Ltd ("Eason"), the largest supplier of books, magazines and newspapers in Ireland.

The development of our Managed Services Division has huge potential to drive K3's long-term growth and we have invested heavily in this in the current financial year and will continue to do so. Revenues at the Division are growing well, however the required investment and increase in costs together with the phased recognition of income (which is recognised over the life of the hosting contract) means that profitability is being impacted.  The exploitation of the hosting proposition is the key focus of our growth plans.

On 1 December 2011, we announced that we had received an approach from K3's largest shareholder, Mr P J Claesson, regarding a possible offer for the Company.  At the same time, we also began a strategic review of the options available to the Group.  Since then, on 26 January 2012, we announced that the Board of K3 did not wish to take Mr Claesson's proposal forward.  On 1 March 2012, we announced that the Company had received a number of indicative proposals at levels materially higher than the current share price at that date. Whilst the Board firmly believes that the Company has a secure future as an independent business, it recognises that further investment will enable it to more fully exploit the potential of its managed services business. The strategic review has therefore completed and the Company is holding ongoing discussions with these potential offerors. We will make any further announcements as appropriate. 

K3 continues to generate good cash flows and our bankers are highly supportive of both our acquisition strategy and our working capital needs.  K3 is financially and operationally well-placed.  Our strong product offering and good cash flows will help to support our growth and we view prospects for the remainder of the year positively.  

FINANCIAL RESULTS

For the six months to 31 December 2011, the Group generated revenues of £33.36m, representing an increase of 35% over the prior period (2010: £24.67m).  The five acquisitions completed in the period made a revenue contribution totalling £3.73m.  Recurring revenues from maintenance and support in the half year totalled £17.1m (2010: £12.6m), representing 51% of Group income in the first half, and it continues to underpin profitability. 

Adjusted profit from operations^*2 for the six month period rose by 11% to £6.91m against the same period last year (2010: £6.24m). It should be noted that this was after significant investment in our Managed Services Division and Retail AX software suite in the period, of which we have expensed £0.5m. Additionally,we have capitalised £0.45m in respect of platforms and intellectual property that will benefit future periods and spent £0.25m on equipment.  Acquisitions contributed £0.51m of the adjusted profit^*3.  Acquisition and reorganisation costs included write-off of investments of £0.10m (2010: £nil). Profit from operations remained flat at £4.66m (2010: £4.66m) reflecting higher acquisition and exceptional costs together with an increased charge for the amortisation of intangibles. 

Adjusted profit before tax^*1 rose by 7% to £6.23m (2010: £5.81m).  Profit before tax was 6% lower at £3.98m (2010: £4.23m). This is after a £0.35m increase in acquisition and reorganisation costs, a £0.26m increase in finance costs and a £0.32m increase in goodwill amortisation. Adjusted earnings per share^*4 increased by 7% to 18.1p (2010: 16.9p).  Basic earnings per share was 3% lower at 12.3p (2010: 12.7p).  This is stated after amortisation of acquired intangibles (net of tax) of £1.19m (2010: £0.93m) and acquisition and reorganisation costs of £0.46m (2010: £0.15m). The tax charge for the period was £0.52m (2010: £0.98m) and includes the benefit of a £0.57m credit to deferred tax on acquired intangibles (2010: £0.51m) and a £0.20m current tax credit primarily in respect of research and development from prior years. 

Cash flow and banking

Net debt at the period end increased to £13.35m (2010: £11.48m) but has reduced from the 30 June 2011 position of £15.49m.  We completed a share placing of £5.02m (net of costs) in July 2011 and in the same month agreed £1.05m of additional revolving credit facility, which was used for an acquisition.  The acquisitions we made in the first half were also funded by cash in the business and the share placing completed in July 2011. The initial net cash cost of acquisitions (i.e. net of amounts paid/deducted for cash balances and overdrafts in the acquired businesses) was £6.36m with a further £1.27m payable on a contingent basis and up to £1.48m of potential earn out subject to the achievement of performance criteria. A further £1.18m was utilised to fund the working capital requirements and loan repayments of the acquired businesses, together with acquisition costs of £0.26m. Additional facilities of up to £5.00m are available to match the net receipts of the share placing though we have not utilised these to date.  Operating cash flow in the first half was £5.81m, representing 84% of adjusted profit from operations^*2 (2010: £4.91m, representing 79%). After adding back  overdue liabilities, together with acquisition and reorganisation costs relating to the acquisitions, the underlying operating cash for the period is £7.29m, representing 105% of adjusted operating profit^*2.  Finance costs at £0.69m (2010: £0.43m) reflect higher average borrowings and facility fees.

Dividend

In line with the Group's dividend policy, no interim dividend is proposed but the Directors intend to propose a final dividend with results for the full financial year.

Operational Review

As indicated in the annual report and financial statements for the year ended 30 June 2011, from 1 July 2011, the reporting of results reflects four trading divisions: Microsoft UK, International, SYSPRO and Sage, and Managed Services together with central costs. The comparatives for the six months ended 31 December 2010 have been restated accordingly.

The financial results by operating division are summarised in the table below:

	Revenue	Revenue	Adjusted profit	Adjusted profit
	Six months	Six months	Six months	Six months
	to 31 Dec	to 31 Dec	to 31 Dec	to 31 Dec
	2011	2010	2011	2010
	£m	£m	£m	£m
Microsoft UK	12.10	10.67	1.52	1.58
International	4.84	3.75	1.40	1.12
SYSPRO and Sage	13.81	8.57	4.07	3.53
Managed Services	2.61	1.68	0.09	0.15
Central costs	-	-	(0.17)	(0.14)
	33.36	24.67	6.91	6.24

Microsoft UK Division

Revenues at the Microsoft UK Division increased by 13% to £12.10m (2010: £10.67m), with recurring income delivering £4.37m (2010: £3.41m). However adjusted profit from operations^*5 at £1.52m was unchanged year-on-year (2010: £1.58m) partly reflecting the major investment we are making in our retail software offering, in particular bringing the Microsoft AX product in line with our Microsoft Dynamics NAV portfolio. We also invested in our sales and delivery resource in advance of sales of this product offering. The cost of our investment was £0.30m with a further £0.25m capitalised as development costs. 

After a slow start to the financial year in our UK retail markets, the Division closed three major new deals in November and December worth a combined £5.7m (2010: eight major contracts, £3.4m). This included our first major order for Microsoft's new AX for Retail solution in a substantial contract we won with Eason, which was secured against some tier one competitors.  We are very encouraged by the increasing demand for this new solution and are well placed to exploit it. A large element of our own IP is included in these sales, which supports good margins.

In the course of our Group reorganisation to create the Microsoft UK Division, we have integrated our other smaller Microsoft based software units under a single management team. This is allowing cost savings to be achieved and we are also seeing efficiencies arising from the use of common resources. 

The addition of Retail Systems Group Ltd ("RSG") in December 2011, one of the leading providers of Microsoft Dynamics 'RMS' to retailers in the UK and Ireland, brings us a software suite more suitable for smaller retailers and therefore widens our marketplace.  RSG also has a managed service offering which will further expand K3's own growing Managed Services Division. 

The prospects pipeline for the Division stands at approximately £24.0m (2010: £18.0m), with nearly half the opportunities focused on our Microsoft AX Multi Channel retail solution. 

International Division

The International Division, based in The Netherlands, performed very strongly in the first half.  Revenues increased by 29% year-on-year to £4.84m (2010: £3.75m), with recurring income at  £1.90m (2010: £1.76m), and adjusted profit from operations^*6 rose by 25% to £1.40m (2010: £1.12m). These results are in part due to the strengthening of our relationship with Inter IKEA Systems B.V. (the owner and franchisor of The IKEA Concept), the largest customer in the Division.  They also reflect the growth of the Pebblestone acquisitions, made in 2010, which established K3 as a major supplier of ERP systems in the Dutch fashion market and added a 30 country international partner channel for K3's IP. Sales into this reseller channel have increased by 58% to £0.75m as a result of investment in the Pebblestone solution that was made over the last 18 months.

We signed nine major new contracts in the period, worth a total of £0.50m (2010: six contracts, £0.64m). The Division also generated excellent levels of services income and we are currently recruiting additional personnel to add extra resource. 

In December 2011, we acquired certain assets of Unisoft BV, a leading provider of retail point of sale solutions in Holland and Scandinavia.  The solutions complement our existing offering and should create cross-selling opportunities.

The prospects pipeline, excluding potential business anticipated in a long term plan with Inter IKEA Systems B.V., currently amounts to approximately £3.3m of orders. It also includes a number of AX opportunities, a market that is now becoming increasingly important to us.

SYSPRO and Sage Division

In the first half, the SYSPRO and Sage Division (which comprises four business units) saw revenues increase by 61% to £13.81m (2010: £8.57m), with recurring income at £8.79m (2010: £6.15m).  Adjusted profit from operations^*7 rose by 15% to £4.07m (2010: £3.53m).  Acquisitions contributed £3.09m of revenue and £0.31m of adjusted operating profit^*8. The majority of the revenue increase relates to Sage acquisitions that generally deliver lower operating margins. The pipeline of prospects is holding up well with a value of £9.20m, split relatively evenly between Sage and SYSPRO opportunities.

Our key business unit in this Division, K3 SYSPRO (formerly Supply Chain Solutions) which supplies SYSPRO ERP solutions, performed robustly. It closed six new deals with a combined value of £0.60m in the period (2010 full year: 13 deals; £0.93m) and generated significant additional work from the customer base.  Annual software licence fee renewals for SYSPRO were collected between October and December and licence renewals were in excess of 98% as is usual.  The SYSPRO maintenance licence and support income is worth approximately £5.90m per annum and we recognise some 85% of this figure in this half of our financial year. 

Having entered the Sage marketplace in November 2010, we are now a leading Sage supplier and provide the full range of Sage products, from Sage 50 up to enterprise level Sage 1000. Our Sage customer base now stands at 900 customers (2010: 400 customers) and generates recurring income of around £6.00m (2010: £2.4m) per annum, approximately half of which falls in the first half of our financial year. In July 2011, we acquired Fifth Dimension Systems Ltd and, in October 2011, the business secured the Sage Enterprise Partner of the Year award, which entitles it to higher margins in the next year.  Our Sage operations secured 39 new deals worth £1.3m (2010: 16 deals worth £0.3m).  While the Sage support market is highly price competitive, we continue to attract customers from other Sage partners.  Mirroring the model we are deploying for our Microsoft and SYSPRO customers, we will be cross-selling our Cloud Computing solutions to our new Sage customer base and have a deployment model already operational for the Sage 200 product.

The other two business units comprise customers running smaller ERP systems who can be offered upgrade opportunities to our SYSPRO or AX solutions and hosting.  These businesses contributed £1.02m (2010: £1.15m) of sales in the period, substantially all of which is recurring.

Managed Services Division

Revenue rose by 55% to £2.61m (2010: £1.68m), with recurring income delivering £2.04m (2010: £1.09m).  However, as expected, profits lagged revenue growth as we invested £0.2m in additional resource.  Divisional overheads have increased to £1.36m (2010: £0.7m), capitalised development was £0.22m and capital expenditure was £0.25m.   Adjusted profit from operations^*9 was £0.09m (2010: £0.15m). We now have platforms in place for the hosting of SYSPRO, Microsoft Dynamics NAV and Sage 200 software and are seeing a good demand for these and the other complementary services we can offer from "the Cloud".  Our deployment now ranges from on-site managed services to fully hosted services provided on a multi-tenanted solution in the Cloud.

As this Division grows, it will increase our annualised recurring income, which at 31 December 2011 had increased to c.£4.2m (2010: £3.28m), with a delivery pipeline of £0.77m awaiting deployment.  Currently, the prospects pipeline stands at £2.38m of potential income.

Head Office

Central costs^*10 for the first half were £0.17m (2010: £0.14m).  Underlying costs remain unchanged but subject to the operational performance of the Group.

Outlook

The increase in K3's underlying profitability and cash flow is highly encouraging. We have an excellent record of acquiring complementary businesses and delivering synergies.  We also have a number of exciting growth opportunities to leverage our large customer base and build on our key customer and supplier relationships.  A formal sale process is now in place and we will be making further announcements in due course. 

With the growth opportunities available and the strong financial platform in place, we remain excited about the future prospects for the Group.

Tom Milne

Chairman

*1	Group adjusted profit before tax is calculated before amortisation of acquired intangibles of £1.75m (2010: £1.43m) and acquisition and reorganisation costs of £0.50m (2010: £0.15m)
*2	Group adjusted profit from operations is calculated before amortisation of acquired intangibles of £1.75m (2010: 1.43m) and acquisition and reorganisation costs of £0.50m (2010: £0.15m)
*3	Adjusted profit from operations on acquisitions is calculated before amortisation of acquired intangibles of £0.08m and acquisition and reorganisation costs of £0.38m
*4	Group adjusted earnings per share is calculated before amortisation of acquired intangibles (net of tax) of £1.19m (2010: £0.93m) and acquisition and reorganisation costs (net of tax) of £0.46m (2010: £0.15m)
*5	Microsoft UK Division adjusted profit from operations is calculated before amortisation of acquired intangibles of £0.20m (2010: £0.12m) and acquisition and reorganisation costs of £0.11m (2010: £nil)
*6	International Division adjusted profit from operations is calculated before amortisation of acquired intangibles of £0.60m (2010: £0.59m) and acquisition and reorganisation costs of £0.10m (2010: £nil)
*7	SYSPRO and Sage Division adjusted profit from operations is calculated before amortisation of acquired intangibles of £0.88m (2010: £0.62m) and acquisition and reorganisation costs of £0.17m (2010: £0.14m)
*8	Adjusted profit from operations on SYSPRO and Sage acquisitions is calculated before amortisation of acquired intangibles of £0.05m and acquisition and reorganisation costs of £0.17m
*9	Managed Services Division adjusted profit from operations is calculated before amortisation of acquired intangibles of £0.08m (2010: £0.11m)
*10	Central costs are calculated before acquisition and reorganisation costs of £0.12m (2010: £nil)

K3 BUSINESS TECHNOLOGY GROUP PLC CONSOLIDATED INCOME STATEMENT For the six months ended 31 December 2011 Notes Unaudited Six months to 31 Dec 2011 Unaudited Six months to 31 Dec 2010 Audited Year to to 30 June 2011 £'000 £'000 £'000 Revenue 33,355 24,671 52,800 Profit from operations before amortisation of acquired intangibles, acquisition and reorganisation costs 6,912 6,237 9,581 Amortisation of acquired intangibles (1,754) (1,434) (2,826) Acquisition and reorganisation costs (498) (146) (942)   Profit from operations 4,660 4,657 5,813 Finance income 3 2 35 Finance expense (688) (426) (940) Profit before taxation 3,975 4,233 4,908 Tax expense 2 (518) (981) (428) Profit for the period 3,457 3,252 4,480 All of the profit for the period is attributable to equity holders of the parent. Earnings per share 3 Basic 12.3p 12.7p 17.5p Diluted 12.0p 12.5p 17.0p     K3 BUSINESS TECHNOLOGY GROUP PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the six months ended 31 December 2011           Notes Unaudited Six months to 31 Dec 2011 Unaudited Six months to 31 Dec 2010 Audited Year to 30 June 2011     £'000 £'000 £'000           Profit for the period   3,457 3,252 4,480 Other comprehensive (expense) income         Exchange differences on translation of foreign operations     (900)   635 1,511 Net investment hedge   278 (258) (504) Cash flow hedges:           Losses recognised on hedging instruments   (4) (16) (22)   Transferred to income statement   35 67 113 Other comprehensive (expense) income, net of tax     (591)   428 1,098   Total comprehensive income for the period   2,866   3,680 5,578 All of the total comprehensive income for the period is attributable to equity holders of the parent.       K3 BUSINESS TECHNOLOGY GROUP PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2011         Notes Unaudited As at 31 December 2011 Unaudited As at 31 December 2010 Audited As at 30 June  2011       £'000 £'000 £'000 ASSETS         Non-current assets         Property, plant and equipment   2,310 1,942 1,993 Goodwill   44,293 36,272 39,082 Other intangible assets   22,846 16,739 17,635 Deferred tax assets   524 487 551 Available-for-sale investments   98 196 196 Total non-current assets   70,071 55,636 59,457 Current assets         Trade and other receivables   26,791 21,238 22,642 Cash and cash equivalents   1,405 2,684 814 Total current assets   28,196 23,922 23,456 Total assets   98,267 79,558 82,913   LIABILITIES   Non-current liabilities Long-term borrowings 5 - 10,711 11,502 Other non-current liabilities 6 1,915 1,104 442 Deferred tax liabilities   5,551 4,481 4,427 Total non-current liabilities   7,466 16,296 16,371 Current liabilities         Trade and other payables 7 30,300 23,224 24,074 Current tax liabilities   819 1,258 428 Short-term borrowings 5 14,751 3,457 4,798 Total current liabilities   45,870 27,939 29,300 Total liabilities   53,336 44,235 45,671   EQUITY Share capital   7,119 6,443 6,477 Share premium account   7,236 2,795 2,863 Other reserves   10,448 10,448 10,448 Cashflow hedging reserve   (54) (125) (85) Translation reserve   1,108 1,100 1,730 Retained earnings   19,074 14,662 15,809 Total equity attributable to equity holders of the parent     44,931   35,323   37,242 Total equity and liabilities   98,267 79,558 82,913         K3 BUSINESS TECHNOLOGY GROUP PLC CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended 31 December 2011 Notes Unaudited Six months to 31 Dec 2011 Unaudited Six months to 31 Dec 2010 Audited Year to 30 June 2011   £'000 £'000 £'000 Cash flows from operating activities Profit for the period 3,457 3,252 4,480 Adjustments for: Share based payments charge 36 16 52 Depreciation of property, plant and equipment 382 180 462 Amortisation of intangible assets and development expenditure 2,215 1,620 3,305 Loss on sale of property, plant and equipment - - 7 Impairment loss on available-for-sale investment 98 - - Finance income (3) (2) (35) Finance expense 688 426 940 Tax expense 518 981 428 Increase in trade and other receivables (1,967) (4,217) (4,909) Increase in trade and other payables 383 2,656 910 Cash generated from operations 8 5,807 4,912 5,640 Finance expense paid (409) (529) (982) Income taxes paid (605) (625) (1,368) Net cash generated from operating activities 4,793 3,758 3,290 Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired 8 (3,823) (2,184) (4,197) Acquisition of other business units 8 (2,729) (967) (1,210) Development expenditure capitalised (753) (449) (1,374) Purchase of property, plant and equipment (480) (419) (681) Finance income received 3 2 35 Net cash absorbed by investing activities (7,782) (4,017) (7,427) Cash flows from financing activities Net proceeds from issue of share capital 4,988 103 174 Proceeds from long-term borrowings 1,050 5,025 7,500 Payment of long-term borrowings (1,650) (1,616) (2,768) Payment of finance lease liabilities (40) (44) (106) Dividends paid - - (64) Net cash generated from financing activities 4,348 3,468 4,736 Net change in cash and cash equivalents 1,359 3,209 599 Cash and cash equivalents at start of period 113 (571) (571) Exchange (losses) gains on cash and cash equivalents (67) 46 85 Cash and cash equivalents at end of period 1,405 2,684 113 K3 BUSINESS TECHNOLOGY GROUP PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 31 December 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 2010 6,380 2,627 10,448 (194) 1,642 10,739 31,642 Changes in equity for six months ended 30 June 2010 Share-based payment debit - - - - - (56) (56) Proceeds on share issue 31 84 - - - - 115 Own shares acquired - - - - - (11) (11) Dividends to equity holders - - - - - (128) (128) Total comprehensive income for the period - - - 18 (919) 782 (119) At 30 June 2010 6,411 2,711 10,448 (176) 723 11,326 31,443 Changes in equity for six months ended 31 December 2010 Share-based payment credit - - - - - 97 97 Proceeds on share issue 32 84 - - - - 116 Own shares acquired - - - - - (13) (13) Total comprehensive income for the period - - - 51 377 3,252 3,680 At 31 December 2010 6,443 2,795 10,448 (125) 1,100 14,662 35,323 Changes in equity for six months ended 30 June 2011 Share-based payment credit - - - - - 14 14 Proceeds on share issue 34 68 - - - - 102 Own shares acquired - - - - - (31) (31) Dividends to equity holders - - - - - (64) (64) Total comprehensive income for the period - - - 40 630 1,228 1,898 At 30 June 2011 6,477 2,863 10,448 (85) 1,730 15,809 37,242 Changes in equity for six months ended 31 December 2011 Share-based payment debit - - - - - (165) (165) Proceeds on share issue 642 4,373 - - - - 5,015 Own shares acquired - - - - - (27) (27) Total comprehensive income for the period - - - 31 (622) 3,457 2,866 At 31 December 2011 7,119 7,236 10,448 (54) 1,108 19,074 44,931 K3 BUSINESS TECHNOLOGY GROUP PLC NOTES TO THE UNAUDITED INTERIM STATEMENT 1.            Basis of preparation The consolidated interim financial information has been prepared in accordance with the accounting policies that are expected to be adopted in the Group's full financial statements for the year ending 30 June 2012 which are not expected to be significantly different to those set out in Note 1 of the Group's audited financial statements for the year ended 30 June 2011.  These are based on the recognition and measurement principles of IFRS in issue as adopted by the European Union (EU) and are effective at 30 June 2012 or are expected to be adopted and effective at 30 June 2012.  The financial information has not been prepared (and is not required to be prepared) in accordance with IAS 34. The accounting policies have been applied consistently throughout the Group for the purposes of preparation of this financial information. The financial information in this statement relating to the six months ended 31 December 2011 and the six months ended 31 December 2010 has neither been audited nor reviewed pursuant to guidance issued by the Auditing Practices Board. The financial information for the year ended 30 June 2011 does not constitute the full statutory accounts for that period.  The Annual Report and Financial Statements for the year ended 30 June 2011 have been filed with the Registrar of Companies.  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. 2.            Tax expense Unaudited Six months to 31 Dec 2011 Unaudited Six months to 31 Dec 2010 Audited Year to  30 June 2011 £'000 £'000 £'000 Current tax expense UK corporation tax and income tax of overseas operations on profits for the period 1,268 1,403 1,474 Adjustment in respect of prior periods (195) - (53) Total current tax expense 1,073 1,403 1,421 Deferred tax expense Origination and reversal of temporary differences (457) (315) (690) Effect of change in rate of deferred tax (98) (107) (303) Total deferred tax expense (555) (422) (993) Total tax expense 518 981 428 3.            Earnings per share The calculations of earnings per share are based on the profit for the financial period and the following numbers of shares: Unaudited Six months to 31 Dec 2011 Unaudited Six months to 31 Dec 2010 Audited Year to  30 June 2011 Number of Shares Number of Shares Number of Shares Weighted average number of shares: For basic earnings per share 28,134,239 25,553,904 25,650,457 Effects of employee share options and warrants 711,335 393,510 631,663 For diluted earnings per share 28,845,574 25,947,414 26,282,120 Adjusted 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: Unaudited six months to 31 Dec 2011 Unaudited six months to 31 Dec 2010 Audited Year  to 30 June 2011 Earnings Per share amount Basic Per share amount Diluted Earnings Per share amount Basic Per share amount Diluted Earnings Per share amount Basic Per share amount Diluted £'000 p p £'000 p p £'000 P p Earnings per share (eps) 3,457 12.3 12.0 3,252 12.7 12.5 4,480 17.5 17.0 Amortisation of acquired intangibles (net of tax) 1,186 4.2 4.1 927 3.6 3.6 1,759 6.8 6.7 Acquisition and reorganisation costs (net of tax) 462 1.6 1.6 146 0.6 0.6 817 3.2 3.1 Adjusted eps 5,105 18.1 17.7 4,325 16.9 16.7 7,056 27.5 26.8  4.            Acquisitions during the period Azurri  Retail On 1 July 2011 the Company acquired the Retail Merchandising Division of Azurri Computer Solutions Limited ("Azurri Retail").  The initial consideration was £0.84m satisfied on completion in cash.  Contingent consideration of £0.10m is payable dependent on the completion of certain contracts.  Further contingent consideration of up to £0.50m is payable dependent on increases in gross margins generated over the next two years. The following table sets out the book values of the identifiable assets and liabilities acquired and their values to the Group: Book value Adjustments Provisional fair value £'000 £'000 £'000 Assets Other intangible assets - 1,010 1,010 Deferred tax assets - 17 17 Liabilities Other payables (62) - (62) Deferred tax liabilities - (263) (263) Net (liabilities) assets (62) 764 702 Consideration Initial cash consideration 838 Contingent cash consideration 350 1,188 Goodwill 486 Acquisition costs charged to income statement 17 Fifth Dimension Systems Limited On 22 July 2011 the Company acquired FD Systems Limited ("FDS").  The initial consideration was £2.23m satisfied on completion in cash.  Deferred consideration of £0.05m is payable.  Further contingent consideration of up to £1.0m is payable dependent on profits generated in the year after acquisition. The following table sets out the book values of the identifiable assets and liabilities acquired and their values to the Group: Book value Adjustments Provisional fair value £'000 £'000 £'000 Assets Property, plant and equipment 124 - 124 Other intangible assets 250 2,250 2,500 Trade receivables 1,366 - 1,366 Other current assets 451 - 451 Cash and cash equivalents 62 - 62 Liabilities Bank loans (414) - (414) Trade and other payables (3,414) - (3,414) Deferred tax liabilities - (585) (585) Net (liabilities) assets (1,575) 1,665 90 Consideration Initial cash consideration 2,230 Deferred cash consideration 50 Contingent cash consideration 200 2,480 Goodwill 2,390 Acquisition costs charged to income statement 80 Unisoft BV On 7 December 2011 the Company acquired certain assets of Unisoft BV ("Unisoft").  The initial consideration was €0.50m satisfied on completion in cash, with further consideration of up to €1.0m payable in cash dependent on certain criteria.  Contingent consideration of €1.27m is payable dependent on profits generated in the three years following acquisition.  The following table sets out the book values of the identifiable assets and liabilities acquired and their values to the Group: Book value Adjustments Provisional fair value £'000 £'000 £'000 Assets Property, plant and equipment 29 - 29 Other intangible assets - 918 918 Trade receivables 276 - 276 Liabilities Deferred tax liabilities - (230) (230) Net assets 305 688 993 Consideration Initial cash consideration 491 Contingent cash consideration 1,034 1,525 Goodwill 532 Acquisition costs charged to income statement 101 Integrated Business Systems On 15 December 2011 the Company acquired certain assets of the Integrated Business Systems division ("IBS") of Maxima Holdings plc.  The initial consideration was £1.40m satisfied on completion in cash.  Contingent consideration of £0.20m is payable dependent on the retention of customers.  The following table sets out the book values of the identifiable assets and liabilities acquired and their values to the Group: Book value Adjustments Provisional fair value £'000 £'000 £'000 Assets Other intangible assets - 1,630 1,630 Deferred tax assets - 119 119 Other current assets 8 - 8 Liabilities Trade and other payables (475) - (475) Deferred tax liabilities - (408) (408) Net (liabilities) assets (467) 1,341 874 Consideration Initial cash consideration 1,400 Contingent cash consideration 200 1,600 Goodwill 726 Acquisition costs charged to income statement 46 Retail Systems Group Limited On 20 December 2011 the Company acquired Retail Systems Group Limited ("RSG").  The initial consideration was £1.13m satisfied on completion in cash, with a further payment of £1.50m in respect of surplus cash in the business at the date of acquisition.  Contingent consideration of £0.15m is payable dependent on the outcome of certain warranty and indemnity claims in the period of one year after acquisition.  Contingent consideration of up to £0.20m is payable dependent on profits generated in the two years after acquisition. The following table sets out the book values of the identifiable assets and liabilities acquired and their values to the Group: Book value Adjustments Provisional fair value £'000 £'000 £'000 Assets Property, plant and equipment 22 - 22 Other intangible assets - 626 626 Trade receivables 482 - 482 Current tax 30 - 30 Other current assets 97 - 97 Cash and cash equivalents 1,807 - 1,807 Liabilities Trade and other payables (556) - (556) Deferred tax liabilities (2) (156) (158) Net assets 1,880 470 2,350 Consideration Initial cash consideration 1,130 Initial cash consideration in respect of surplus cash 1,500 Contingent cash consideration 350 2,980 Goodwill 630 Acquisition costs charged to income statement 37 The initial accounting in the above tables of book values of the identifiable assets and liabilities acquired together with their values to the Group contain estimates in respect of the fair value adjustments required. 5.            Loans and borrowings Unaudited As at 31 Dec 2011 Unaudited As at 31 Dec 2010 Audited As at 30 June 2011 £'000 £'000 £'000 Non-current Bank loans and other facilities - 10,699 11,489 Finance lease creditors - 12 13 - 10,711 11,502 Current Bank overdrafts - - 701 Bank loans and other facilities 14,101 2,726 3,420 Finance lease creditors 10 91 37 Loans from related parties 640 640 640 14,751 3,457 4,798 Total borrowings 14,751 14,168 16,300 The bank loans and other facilities include a revolving credit facility which expires in December 2012. 6.            Other non-current liabilities Unaudited As at 31 Dec 2011 Unaudited As at 31 Dec 2010 Audited As at 30 June 2011 £'000 £'000 £'000 Contingent consideration 1,849 483 - Deferred consideration - 386 304 Accruals 66 235 138 1,915            1,104 442 7.            Trade and other payables Unaudited As at 31 Dec 2011 Unaudited As at 31 Dec 2010 Audited As at 30 June 2011 £'000 £'000 £'000 Trade payables 4,808 4,131 4,717 Other payables 315 265 746 Deferred consideration 190 131 207 Accruals 7,912 5,817 6,437 Total financial liabilities, excluding loans and borrowings, classified as financial liabilities measured at amortised cost 13,225 10,344 12,107 Derivative financial instruments 37 138 72 Other tax and social security taxes 3,976 3,333 2,729 Contingent consideration 2,436 1,040 1,347 Deferred revenue 10,626 8,369 7,819 30,300 23,224 24,074 8.            Notes to the cash flow statement Cash generated from operations is stated after payments 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 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: Unaudited Six months ended 31 Dec 2011 Unaudited Six months ended 31 Dec 2010 Audited Year ended 30 June 2011 £'000 £'000 £'000 Cash generated from operating activities 5,807 4,912 5,640 Add: Regularising liabilities 1,180 914 1,693 Acquisition and reorganisation costs 300 146 942 Adjusted cash generated from operations 7,287 5,972 8,275              Acquisition of subsidiaries and other business units, net of cash acquired comprises: Unaudited Six months ended 31 Dec 2011 Unaudited Six months ended 31 Dec 2010 Audited Year ended 30 June 2011 £000 £000 £000 Initial consideration (including costs incurred in 2010) (7,820) (2,512) (4,219) Cash balances acquired 1,455 (617) (883) Contingent and deferred consideration paid (187) (22) (305) (6,552) (3,151) (5,407) 9.            The above information is being sent to the shareholders and is available from the Company's website, www.k3btg.com, and from its registered office: Baltimore House, 50 Kansas Avenue, Manchester M50 2GL.

 

 

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