Interim Results
K3 Business Technology Group PLC
25 September 2006
KBT.L
('K3' or the 'Group' or the 'Company')
INTERIM RESULTS
FOR THE SIX MONTHS TO 30 JUNE 2006
Key Points
• Benefits of business transformation showing through
• All divisions making excellent progress:
- Retail Software Division performed strongly with sales up 23%
- Information Engineering acquisition successfully integrated into Manufacturing
Software Division
- Benefits of reorganisation showing through in Distribution Software Division
with new contract wins
• Turnover up 36% to £12.73m (2005: £9.34m)
• Adjusted operating profit*1 rose by 54% to £1.30m (2005: £0.84m)
• Operating profit, after amortisation of goodwill of £1.11m (2005:
£0.68m), was £0.19m (2005: £0.17m)
• Adjusted earnings per share*1 were 4.5p (2005: 3.8p), a rise of 18%.
Loss per share was 1.7p (2005: 1.2p)
• Opportunities to accelerate new licence sales especially good within
Retail and Distribution sectors
• Group is well positioned to achieve full year expectations
Commenting on results, Tom Milne, Chairman of K3, said,
'The Group is at an exciting stage in its development. Over the past two years,
the business has been fundamentally transformed through acquisition. K3 now
distributes market-leading, Microsoft-based software in three sectors: retail,
distribution and manufacturing. Results for the first half demonstrate
continuing strong progress in our core retail software operation and we are
pleased with the performances of our distribution and manufacturing software
divisions. The pipeline across all three business units remains encouraging and
we believe the Group is well positioned to achieve market expectations for the
full year.
We are actively engaged in seeking appropriate acquisition opportunities to
complement our existing business activities and continue to view the Group's
prospects with confidence.'
Enquiries:
K3 Business Technology Group plc Andy Makeham, Chief Executive T: 01282 864111
David Bolton, Chief Finance Officer T: 01282 864111
Biddicks Katie Tzouliadis T: 020 7448 1000
*1 Calculated before amortisation of goodwill of £1.11m (2005: £0.68m).
OVERVIEW
This is my first statement as Chairman of K3, having joined the Board in May
2006, and I am pleased to report very good progress. The Group is at an exciting
stage in its development. Over the past two years, the business has been
fundamentally transformed through acquisition. K3 now distributes
market-leading, Microsoft-based software in three sectors: retail, distribution
and manufacturing. The Group's earnings comprise a mix of new licence sales from
the rapidly growing Retail and Distribution Divisions, supported by recurring
licence fee income, a large proportion of which is generated by K3's dominant
position within the SME manufacturing sector. Opportunities to accelerate the
growth of new licence sales are especially good within our retail and
distribution marketplaces.
Results for the first six months of the year are encouraging, with our core
Retail Software Division continuing to trade strongly. Information Engineering,
the manufacturing software business we acquired in June 2005, has been
successfully integrated within the Group and is performing well. We expect to
recognise the major part of its profits in the second half of the year since a
high level of annual licence billings are made in the last quarter of the year.
Demonstrating the strength of our retail product offering, I am pleased to
report that K3 has been appointed to Microsoft's Inner Circle, which is reserved
for its top 50 partners worldwide, and that the Company has also been recognised
as a member of Microsoft's President's Club for top sales generators.
Financial Results
For the six month period, Group turnover rose by 36% to £12.73m from £9.34m.
This reflected a full six months' revenue contribution of £2.20m from
Information Engineering acquired in June 2005 and strong growth in both the
Retail and Distribution Software Divisions. Excluding Information Engineering,
Group turnover increased by 16% year on year.
Adjusted operating profit*1 rose by 54% to £1.30m (2005: £0.84m) reflecting
growth in both sales and margins in the Retail and Distribution Software
Divisions. After amortisation of goodwill of £1.11m (2005: £0.68m), the
operating profit was £0.19m (2005: £0.17m).
Adjusted profit before tax*1 showed an increase of 57% to £1.16m from £0.74m
last year and adjusted earnings per share*1 were 4.5p (2005: 3.8p), a rise of
18%. After taking into account amortisation of goodwill and intangibles of
£1.11m (2005: £0.68m), profit before taxation was £0.05m (2005: £0.06m) and loss
per share was 1.7p (2005: 1. 2p).
At 30 June 2006, the Group held a cash balance of £0.06m compared with a net
overdrawn position of £1.19m at 30 June 2005 and cash in hand of £0.87m at 31
December 2005. We expect to generate good cash inflows during the second half of
the year from the strong sales incurred in the latter part of the first half and
the annual licence billings at Information Engineering which occur during the
last quarter of the year. In December 2005, the Group negotiated a bank loan of
£1m, of which £0.85m was outstanding at 30 June 2006 (2005: £nil).
Dividend
The Directors do not propose to pay a dividend (2005: £nil). However, following
the Company's successful application to the High Court for the requisite
confirmation of the cancellation of the share premium account in July 2006, the
Directors are in a position to consider the introduction of progressive dividend
policy from 2007.
International Financial Reporting Standards
The Group is required to adopt International Financial Reporting Standards
(IFRS) for the year ended 31 December 2007. A project is currently in progress
to identify the likely impact of IFRS upon the Group results. It is envisaged
that this project, including financial restatement of previously reported
results, will not be completed in full until 2007. One notable impact will be
the removal of the requirement to systematically amortise goodwill held within
the balance sheet which will instead be subject to an annual impairment review.
OPERATIONAL REVIEW
Retail Software Division
The Retail Software Division continues to perform strongly, with sales
increasing by 23% to £7.78m from £6.30m last year. Adjusted operating profit*2
more than doubled to £1.00m against £0.45m in 2005. These excellent results were
supported by five new contracts wins worth a total of £2.92m as well as our
Carpetright contract, agreed in May 2005.
Over the period, we made an important operational change within this division.
We re-focused our activities to concentrate on sectors where we can build a
significant presence. This 'verticalisation' policy is working very well and we
have created sector specific business units in Breweries/Drinks, Food, Household
Goods and Fashion. Our ability to demonstrate specialist sector knowledge as
well as reference customers aided new business wins with Frederick Robinson
(breweries), Admiral Taverns (breweries), Beales plc (department stores) and
Fultons (home furnishings). We also increased our penetration into the Food
Sector with a substantial EPOS order with Booths Supermarkets, an existing
customer. This EPOS order demonstrates the strength of the functionality of our
software and we believe there is scope to make further EPOS-only sales.
The pipeline for the division remains strong and we remain confident of
delivering full year expectations.
Distribution Software Division
In the second half of last year, we reorganised this division and I am pleased
to report that the benefits showed through in the first half year of this year.
Revenues grew by 24% to £1.00m, from £0.81m in 2005, and the division returned
to profitability, with an adjusted operating profit*3 of £0.01m (2005: adjusted
operating loss*3 of £0.12m). New business order values have increased together
with margins and we secured five major new business deals worth a total of
£0.42m over the six month period. These were with Ardington Fulfilment
(fulfilment house), Haddon House (conservatory furniture), House of Bruar
(department store), Sofa.Com (furniture) and Aspinals (luxury leather goods).
In May, our contract with Scotts of Stow, the mail order catalogue specialists,
went 'live' smoothly. The Scotts of Stow contract was our largest contract to
date for the Distribution Software Division and the success of this major
software implementation is most encouraging. Scotts of Stow will be an important
reference customer for the division. Looking forward, the pipeline has some
large opportunities for the second half year and with our reinvigorated sales
team, we remain encouraged about prospects for the remainder of the year.
Manufacturing Software Division
Information Engineering, one of only two Syspro distributors in the UK, which we
acquired in June last year, has integrated well. Reflecting the impact of the
Information Engineering acquisition, revenues for the manufacturing software
division as a whole increased to £3.95m from £2.23m in the first half of 2005.
Adjusted operating profit*4 is £0.30m compared to £0.52m for the same period in
2005. However, last year's profit includes a proportion of profit arising from
the major contract Information Engineering signed with Doncaster Group in June
last year. This year, we expect the bulk of Information Engineering's profits to
fall in the second half of the year, when annual licence income is billed.
The Doncaster Group contract progressed well with twelve of the thirteen sites
now live and the prospect of further business remains high. We are encouraged by
the further ten Syspro deals won by the Manufacturing Software Division worth a
total of £1.07m and the pipeline for the second half is encouraging.
OUTLOOK
Results for the first half demonstrate continuing strong progress in our core
retail software operation and we are pleased with the performances of our
Distribution and Manufacturing Software Divisions. The pipeline across all three
business units remains encouraging and, with the impact of the Information
Engineering licence income in the second half, we believe the Group is well
positioned to achieve market expectations for the full year.
We are actively engaged in seeking appropriate acquisition opportunities to
complement our existing business activities and continue to view the Group's
prospects with confidence.
Tom Milne
Chairman
25 September 2006
*1 Calculated before amortisation of goodwill and intangibles of £1.11m (2005:
£0.68m)
*2 Calculated before amortisation of goodwill and intangibles of £0.47m (2005;
£0.47m)
*3 Calculated before amortisation of goodwill and intangibles of £0.04m (2005;
£0.05m)
*4 Calculated before amortisation of goodwill and intangibles of £0.60m (2005;
£0.17m)
K3 BUSINESS TECHNOLOGY GROUP PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the six months ended 30 June 2006
Unaudited Unaudited Audited
Six months Six months Year to 31
to 30 June to 30 June December
Notes 2006 2005 2005
As restated As restated
£'000 £'000 £'000
Turnover
Continuing 12,733 9,344 22,029
Discontinued - - -
-----------------------------------
Total 12,733 9,344 22,029
-----------------------------------
Operating profit before goodwill
amortisation 1,296 844 2,356
Goodwill amortisation (1,106) (679) (1,752)
-----------------------------------
Continuing 190 165 604
Discontinued - - -
-----------------------------------
Operating profit 3 190 165 604
Loss on disposal of operations - - (90)
Net interest payable and similar
charges (140) (106) (287)
-----------------------------------
Profit on ordinary activities
before taxation 50 59 227
Tax on profit on ordinary
activities (354) (225) (493)
-----------------------------------
Loss for the financial period (304) (166) (266)
-----------------------------------
(Loss) earnings per share 4
Basic:
Continuing (1.7p) (1.2p) (0.9p)
Discontinued - - (0.9p)
-----------------------------------
(1.7p) (1.2p) (1.8p)
-----------------------------------
Diluted:
Continuing (1.7p) (1.2p) (0.9p)
Discontinued - - (0.9p)
-----------------------------------
(1.7p) (1.2p) (1.8p)
-----------------------------------
The group has no recognised gains or losses in any of the above periods other
than the loss for that period other than the prior year adjustment as explained
in note 7.
K3 BUSINESS TECHNOLOGY GROUP PLC
CONSOLIDATED BALANCE SHEET
As at 30 June 2006
Unaudited Unaudited Audited
As at As at As at 31
30 June 30 June December
2006 2005 2005
Notes As restated As restated
£'000 £'000 £'000
Fixed assets
Development costs and
intellectual property 239 125 162
Goodwill 14,656 16,269 15,682
-----------------------------------
Intangible fixed assets 14,895 16,394 15,844
Tangible assets 484 685 508
Investments - 17 -
-----------------------------------
15,379 17,096 16,352
-----------------------------------
Current assets
Debtors 7,725 6,889 6,596
Cash at bank and in hand 64 56 874
7,789 6,945 7,470
-----------------------------------
Creditors: amounts falling due
within one year
Convertible debt - (523) -
Other creditors 5 (10,448) (11,481) (10,583)
-----------------------------------
(10,448) (12,004) (10,583)
-----------------------------------
Net current liabilities (2,659) (5,059) (3,113)
-----------------------------------
Total assets less current
liabilities 12,720 12,037 13,239
Creditors: amounts falling due
after more than one year 6 (2,186) (3,045) (2,439)
Provisions for liabilities and
charges - - -
-----------------------------------
Net assets 10,534 8,992 10,800
-----------------------------------
Capital and reserves
Called-up share capital 4,435 3,895 4,435
Share premium account 7 7,813 6,463 7,813
Other reserve 7 6,070 6,070 6,070
Share option reserve 7 122 44 83
Treasury shares 7 (21) - (20)
Profit and loss account 7 (7,885) (7,480) (7,581)
----------------------------------
Equity shareholders' funds 10,534 8,992 10,800
----------------------------------
K3 BUSINESS TECHNOLOGY GROUP PLC
CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 30 June 2006
Unaudited Unaudited Audited
Six months Six months Year to 31
to 30 June to 30 June December
2006 2005 2005
Notes As As
restated restated
£'000 £'000 £'000
Net cash (outflow) inflow from 8
operating activities (159) 1,507 4,267
Returns on investments and
servicing of finance (118) (107) (279)
Taxation 45 - (80)
Capital expenditure and
financial investment (119) (87) (106)
Acquisitions and disposals (94) (3,726) (5,153)
---------------------------------
Cash (outflow) inflow before
financing (445) (2,413) (1,351)
Financing (365) 823 1,822
---------------------------------
(Decrease) increase in cash in
the period (810) (1,590) 471
---------------------------------
The comparative amounts for 30 June 2005 have been restated as explained in note
8.
K3 BUSINESS TECHNOLOGY GROUP PLC
NOTES TO THE INTERIM STATEMENTS
1. The interim financial information has been prepared consistently in accordance
with the accounting policies adopted in the accounts for the year ended 31 December
2005, with the exception of the adoption of FRS20, Share-based payments, which was
adopted on 1 January 2006.
2. The financial information in this statement relating to the six months ended
30 June 2006 and the six months ended 30 June 2005 is unaudited and does not
constitute full statutory accounts within the meaning of Section 240 of the Companies
Act 1985. The figures for the year ended 31 December 2005 have been extracted from
the statutory accounts which have been filed with the Registrar of Companies. The
audit report was unqualified and did not contain any statement under section 237
(2) and (3) of the Companies Act 1985.
3. Operating profit
The operating profit for the six months ended 30 June 2006 is stated after
charging £0.04m for share options (2005: £0.01m). The group has capitalised
development costs during the period of £0.08m (2005: £nil).
4. (Loss) earnings per share
The calculations of (loss) earnings per share are based on the (loss) profit for
the financial year and the following numbers of shares:
Unaudited six Unaudited six Audited year
months to 30 months to 31 December
June 2006 to 30 June 2005 2005
Number of shares Number of shares Number of shares
Weighted average
number of shares:
For basic earnings per
share 17,715,039 13,416,215 14,999,027
Exercise of share
options 17,569 27,196 154,501
---------------------------------------------------
For diluted earnings
per share 17,732,608 13,443,411 15,153,528
---------------------------------------------------
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 (losses) profits and the above number of shares:
Unaudited six Unaudited six Audited year
months months to 30 June to 31 December 2005
to 30 June 2006 2005
Earnings Per Earnings Per Earnings Per Per
(losses) share (losses) share (losses) share share
amount amount amount amount
Basic As restated Basic As restated Basic Diluted
and and
Diluted Diluted As As
As restated restated restated
£'000 p £'000 p £'000 p p
(Loss) earnings per
share (eps) (304) (1.7) (166) (1.2) (266) (1.8) (1.8)
Effect of goodwill
amortisation 1,106 6.2 679 5.0 1,752 11.7 11.6
------------------------------------------------------------------------
Eps before amortisation
of goodwill and
intangibles 802 4.5 513 3.8 1,486 9.9 9.8
Exceptional items
(net of tax) - - - - *1 140 0.9 0.9
------------------------------------------------------------------------
Eps before amortisation
of goodwill and
intangibles and
exceptional items 802 4.5 513 3.8 1,626 10.8 10.7
------------------------------------------------------------------------
*1 Relates to loss on disposal of the manufacturing software operation based at
Crewe of £0.09m on which there was a tax charge of only £0.05m due to the
availability of capital losses.
5. Creditors: amounts falling due within one year
Unaudited Unaudited Audited
As at As at As at 31
30 June 30 June December
2006 2005 2005
£'000 £'000 £'000
Convertible debt
6% convertible loan notes - 523 -
-----------------------------
Other creditors
Bank loans and overdrafts 322 1,243 311
Obligations under finance leases and hire
purchase contracts 177 312 249
Other loans - 550 -
Other loans due to related parties 283 827 229
Trade creditors 2,184 1,849 1,221
Corporation tax 622 204 223
Taxation and social security 1,380 1,188 1,536
Other creditors 170 95 262
Deferred consideration 70 90 70
Accruals 1,638 967 2,308
Deferred income 3,602 4,156 4,174
-----------------------------
10,448 11,481 10,583
-----------------------------
6. Creditors: amounts falling due after more than one year
Unaudited Unaudited Audited
As at As at As at 31
30 June 30 June December
2006 2005 2005
£'000 £'000 £'000
Bank loans 526 - 689
Obligations under finance leases and hire
purchase contracts 162 187 130
Other loans 10 100 -
Other loans due to related parties 385 1,458 513
Deferred consideration 1,103 1,300 1,107
------------------------------
2,186 3,045 2,439
------------------------------
7. Reserves
Share Other Share Treasury Profit
premium reserve option shares and loss
account reserve account
£'000 £'000 £'000 £'000 £'000
At 1 January 2006 - as
previously stated 7,813 6,070 - (20) (7,498)
Prior year adjustment -
see below 83 (83)
----------------------------------------------
At 1 January 2006 - as
restated 7,813 6,070 83 (20) (7,581)
Retained loss for the
period - - - (304)
Cost of share options - - 39 - -
Treasury shares acquired - - - (1) -
----------------------------------------------
At 30 June 2006 7,813 6,070 122 (21) (7,885)
----------------------------------------------
The other reserve comprises a merger relief reserve.
Following the Company's successful application to the High Court for the
requisite confirmation of the cancellation of the share premium account in July
2006, the balance on the share premium account is now £nil and the proforma
balance on the profit and loss account at 30 June 2006 is a deficit of £72,000.
In accordance with UK Generally Accepted Accounting Practice, the group has
adopted FRS20, Share-based payments, in 2006. This has resulted in a charge for
the current period of £39,000 and a prior year adjustment of £83,000 as follows:
Share Profit
option and loss
reserve account
£'000 £'000
At 1 January 2005 - as previously stated - (7,283)
Cost of share options to 31 December 2004 31 (31)
-------------------
At 1 January 2005 - as restated 31 (7,314)
Loss for six months ended 30 June 2005 - as
previously stated - (153)
Cost of share options for six months ended 30 June
2005 13 (13)
-------------------
At 30 June 2005 - as restated 44 (7,480)
Loss for six months ended 31 December 2005 - as
previously stated - (61)
Currency translation differences on foreign currency
net investments - as previously stated - (1)
Cost of share options for six months ended 31
December 2005 39 (39)
-------------------
At 31 December 2005 - as restated 83 (7,581)
-------------------
8. Cash flow statement
Reconciliation of operating profit to operating cash flows
Unaudited Unaudited Audited
Six months Six months Year
to 30 June to 30 June to 31 Dec
2006 2005 2005
As As
restated restated
£000 £000 £000
Operating profit 190 165 604
Depreciation and fixed asset impairment 187 146 341
(Profit) loss on sale of tangible fixed
assets (25) 27 33
Amortisation of goodwill and
intangibles 1,106 679 1,752
Share options 39 13 52
Write down of investments - - 17
(Increase) decrease in debtors (1,129) 1,533 1,372
(Decrease) increase in creditors (527) (1,056) 96
--------------------------------
(159) 1,507 4,267
--------------------------------
The comparative amounts for 30 June 2005 have been restated to reflect loans due
to related parties as financing cash flows, and loan notes payable under
acquisitions as cash flows in relation to acquisitions, not as movements in
operating cash flows. The comparative amounts for 30 June 2005 and 31 December
2005 have been restated to reflect the prior year adjustment in relation to the
charge for share options.
9. The above information is being sent to the shareholders and is available
from the Company's registered office: Linden Business Centre, Linden Road, Colne,
Lancashire, BB8 9BA.
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