Final Results

Glen Group PLC 12 January 2007 Glen Group plc Final Results for the year ended 30 September 2006 Glen Group plc, the Edinburgh based provider of integrated IT and communication services, today announces final results for the year ended 30 September 2006. Key points: â€¢ Group size and activities significantly increased with acquisition of Eclectic in February 2006 and Explore IT in September. â€¢ Turnover increased from Â£538,397 to Â£3,698,245 with strong organic growth from Glen Communications which almost doubled its turnover to Â£965,101. â€¢ Strong performance from Eclectic results in payment of maximum deferred consideration under the terms of the acquisition agreement. â€¢ The Group continues to be well placed for further acquisitions and to expand services and geographical coverage. â€¢ Results reported under IFRS. Eric Hagman CBE, Chairman of Glen Group, commented: 'Our strategy is to continue to build the group organically and by acquisition so that we reach a size that attracts more interest in our shares, particularly institutional interest, as our objective remains to build a substantial business over time. Your Board is very focused on the need to deliver sustained profitability for the group as a whole and increase shareholder value. Your Board is placing emphasis on organic growth, but we will also look at selected acquisitions when we believe it is appropriate to do so' 12 January 2007 Enquiries: Glen Group plc Graham J Duncan, Chief Executive Officer 0845 119 2100 Chairman's Statement This has been a transforming year for Glen Group plc ('Glen Group'). In February we completed the acquisition of Eclectic Holdings Limited ('Eclectic'), a niche IT provider of business intelligence consultancy and training services to the corporate market, based in Glasgow, Edinburgh and London. The maximum consideration payable was Â£3m which included a deferred consideration of up to Â£787,500, conditional on Eclectic generating PBITA, as defined in the acquisition agreement, of at least Â£400,000 in the twelve months to 31st July 2006. I am pleased to announce today that the PBITA for that period was Â£414,842 and the former shareholders of Eclectic will now receive the maximum deferred consideration, to be satisfied by the issue of 73,825,818 shares in Glen Group at a price of 1.0667 p per share. Application will be made for these shares to be admitted to trading on AIM and dealings are expected to commence on 17 January 2007. In early September, we acquired Explore IT Limited ('Explore'), a small IT services business based in Edinburgh for a consideration of Â£115,000, paid in cash. Explore provides IT services and support to the SME market and this acquisition has given us a stronger support business which we can now develop in the UK. Explore has become a wholly owned subsidiary of Glen Communications Limited ('Glen Communications'), our company which focuses on providing integrated IT and communication services to the SME market. In the year ended 30 September 2006, our turnover was Â£3,698,245 compared to Â£538,397 the previous year. This significant increase is the result of both organic growth and the effect of the Eclectic acquisition. Eclectic contributed turnover of Â£2,733,144 and Glen Communications contributed a very creditable Â£965,101, against Â£538,397 the previous year. The operating loss for the year was Â£589,222, similar to the 2005 operating loss of Â£561,204. The Group holding company costs for the year were Â£371,269 compared to Â£223,381 for 2005, partly due to the additional costs of International Financial Reporting Standards (IFRS) reporting on the AIM market, certain reallocation of costs, and the fact that 2005 was a ten month reporting period. Eclectic has however delivered a solid operating profit of Â£147,941 for the period since acquisition, over what is historically the poorer half of the year. Glen Communications has seen a dramatic reduction in its losses between the first and second halves of our financial year, with first half losses of Â£292,962 reduced to Â£72,932 in the second half as we increase our penetration of the market. Our strategy is to continue to build the group organically and by acquisition so that we reach a size that attracts more interest in our shares, particularly institutional interest, as our objective remains to build a substantial business over time. Your Board is very focused on the need to deliver sustained profitability for the group as a whole and increase shareholder value. Your Board is placing emphasis on organic growth, but we will also look at selected acquisitions when we believe it is appropriate to do so. I would like to thank our Chief Executive, Graham J Duncan, and his team for successfully building the business to a much more meaningful size this year, compared to last, and we look forward to further expansion in the new financial year. Eric M Hagman CBE Chairman 12 January 2007 Business Review Strategy We joined AIM in December 2004 as a very small business, with a turnover in the full year prior to admission of approximately Â£374,000. Two years on, our turnover has grown nearly ten fold to approximately Â£3.7m. Our strategy is to grow the business organically and by acquisition and seek to create shareholder value over time. Our business is firmly rooted in the information technology and communications industries where we continue to see interesting and exciting opportunities. These exist particularly in certain key areas such as: â€¢ business information delivery over mobile networks â€¢ opportunities brought about by the introduction of IP technologies to the world of voice traffic â€¢ the business intelligence market where, fuelled by regulatory and business requirements, businesses need to be able to disseminate information intelligently throughout the organisation, knowing that it is up to date, complete and meaningful to the end user. All of these areas are high growth. Two years on, and with two acquisitions completed, we have both the skill set and the structure that allow us to focus on these markets, target our sales and support teams and deliver high added value to our customers. We continue to see strong growth in our various markets. We have chosen to direct our market efforts through our two main operating companies: â€¢ Eclectic, whose main focus is in business intelligence consulting to corporate customers across a range of software platforms, and â€¢ Glen Communications, which, in association with its new subsidiary company Explore IT, provides IT and communications services, consulting and support to SME customers, and seeks to be the sole provider of these services to individual clients. We also believe in being able to refine our strategy as the market moves and changes, and seek other opportunities where we can see potential high growth. Our vision is to build our businesses to a size where they can be important market players in their chosen markets, with our focus on the creation of shareholder value. To deliver on this vision requires us to continue to invest in our organic growth and continue to seek out acquisitions that fit into our business model and that add value for our shareholders. Performance The financial statements for the year have been drawn up on the basis of the recognition and measurement requirements of International Financial Reporting Standards ('IFRS'). Although AIM companies are not required to comply with IFRS until 2007/2008, your Board has decided that we should adopt these at the earliest possible opportunity. The main effect of the adoption has been to unwind the merger accounting that we applied for the Company's acquisition of Glen Communications in late 2004 and this has created goodwill on the consolidated balance sheet. The other main change is to expense the cost of share options. This has resulted in a charge of Â£19,213 to the 2006 results (2005: Â£815). Business Review An analysis of the turnover across the last three years is tabulated below: 30th September 2006 30th September 2005 30th September 2004 Turnover Â£ Â£ Â£ Glen Communications -Continuing 942,582 466,950 229,269 -Discontinued (phone cards) 22,519 71,447 144,577 Total 965,101 538,397 373,846 Eclectic (from 15th February 2006) 2,733,144 - - Total Turnover 3,698,245 538,397 373,846 -------------------------- -------------------------- -------------------------- These results show strong progress. Glen Communications exited the declining pre-paid phone card business in February 2006 and, excluding the turnover from phone cards, Glen Communications' continuing business has more than doubled its turnover each year for the last two years. Turnover from Eclectic, which we have consolidated from the date of acquisition on 15 February 2006, contributed turnover of Â£2,733,144 in the period. The main business of Eclectic is in the implementation of business intelligence solutions to corporate clients. Eclectic also has a training division which contributed 33.8% of the turnover from Eclectic for the period. Our consolidated gross margin for the full year was 36.0%. This continues to be robust, despite the changing mix of services. Eclectic's gross margin was 33.6% with Glen Communications at 43.0% (2005: 45.0%). Our operating costs continue to increase as the business expands. The costs of the business over the last three years can be analysed as follows: 30th September 2006 30th September 2005 30th September 2004 Â£ Â£ Â£ Other operating charges Glen Group 371,269 223,381* - Glen Communications 780,463 580,191 333,993 Eclectic (from 15th February 2006) 769,839 - - Total operating charges 1,921,571 803,572 333,993 -------------------------- ------------------------------ --------------------------------- *10 months Over the summer we have centralised, within Glen Group, certain group services particularly financial management and accounting, which had previously been undertaken by the individual operating companies. Overall, the group has incurred an operating loss before interest of Â£589,222 for the full year. The operating loss in the first half of the year was Â£372,674, with the second half at Â£216,548: a reduction of over 40% in the second half. After net interest and taxation, the retained loss for the year was Â£613,591 (2005: Â£570,597). Business Review An analysis of the operating losses over the last three years is as follows: 30th September 2006 30th September 2005 30th September 2004 Operating loss Â£ Â£ Â£ Glen Group (371,269) (223,381)* - Glen Communications (365,894) (337,823) (205,162) Eclectic (from 15th February 2006) 147,941 - - ------------------ ------------------ ------------------ Total operating loss (589,222) (561,204) (205,162) ------------------ ------------------ ------------------ *10 months Financing In October 2005, we raised Â£250,000 of additional working capital by the issue of 10,000,000 new shares at 2.5p each. In February 2006, we raised Â£2,500,000 through the issue of 250,000,000 new shares at 1p each as further capital to finance the acquisition of Eclectic and to provide working capital for the group. The consideration for this transaction consisted of two elements: a first consideration, payable in cash and shares at completion, and a second consideration, payable in shares, based on an earn out formula. As indicated in the Chairman's statement, the second consideration has been earned in full which takes the cost of this acquisition to Â£3m, excluding acquisition costs. Because of our size, the costs of the acquisition, placing and re-admission to AIM which we concluded on 15 February 2006 were material amounting to approximately Â£500,000 in fees and other costs. The costs of the acquisition itself, amounting to approximately Â£71,242, have been allocated to goodwill, with the balance deducted from the share premium account. The market value of the first and second consideration shares issued and to be issued in respect of the acquisition of Eclectic Holdings Limited differs from the value agreed with the vendors. This difference of Â£417,221 has been credited to goodwill. The consideration for the acquisition of Explore IT Limited in early September 2006 was Â£115,000 which was funded from internal resources and existing bank facilities. We have allocated Â£100,000 of this to intangible assets and the balance to goodwill. The costs of acquisition, including due diligence and legal fees, amounted to a further Â£49,117, which has been added to the goodwill arising on the acquisition. At 30 September 2006, we had net borrowings of Â£665,213. This included net overdrafts of Â£475,547. At the same date, our overdraft facilities (excluding loans) totalled Â£620,000. Since the year end we have further increased our bank facilities (excluding loans), which now stand at approximately Â£1,000,000. Outlook and opportunities The markets in which we operate are significant, dynamic and continue to grow. These markets are fuelled by new technology, regulatory requirements and the need for businesses to be competitive. The Board believe that these growing markets create opportunity and we look forward to servicing these opportunities and continuing to build the business. I would like to thank my team for the very significant efforts that have been made over the last year to change fundamentally the size and scope of the business and establish a sound platform for future growth. Graham J Duncan Chief Executive Officer 12 January 2007 Glen Group plc Report and financial statements 30 September 2006 Consolidated income statement for the year ended 30 September 2006 2006 2005 Note Â£ Â£ Revenue Continuing operations 4 942,582 466,950 Discontinued operations 22,519 71,447 Acquisitions 2,733,144 - ---------------- ----------------- 3,698,245 538,397 ---------------- ---------------- Cost of sales (2,365,896) (296,029) Gross profit 1,332,349 242,368 Other operating charges 5 (1,921,571) (803,572) ---------------- ---------------- Operating loss (589,222) (561,204) ---------------- ---------------- Interest payable (23,620) (16,109) Interest receivable 3,054 6,716 ---------------- ---------------- Finance costs 7 (20,566) (9,393) Loss before taxation (609,788) (570,597) ---------------- ---------------- Taxation 21 (3,803) - ---------------- ---------------- Loss for the year (613,591) (570,597) ---------------- ---------------- Loss per share 9 - basic and diluted (0.28)p (1.18) p ----------------------------------------- ------------------------------------- There are no other gains and losses other than the loss for the year See accompanying notes to the financial statements. Consolidated balance sheet as at 30 September 2006 2006 2005 Note Â£ Â£ Assets Non-current assets Goodwill 10 3,562,740 935,315 Intangible assets 12 100,000 - Property, plant and equipment 13 112,667 50,317 Total non-current assets 3,775,407 985,632 Current assets Inventories 15 26,752 10,113 Trade and other receivables 16 1,571,471 208,626 Cash and cash equivalents 17 1,075 211,160 Total current assets 1,599,298 429,899 Total assets 5,374,705 1,415,531 Liabilities Current liabilities Short term borrowings 578,731 68,169 Trade and other payables 939,817 126,583 Accruals and deferred income 238,247 78,840 Other creditors 164,139 73,217 Total current liabilities 18 1,920,934 346,809 Non-current liabilities Long-term borrowings 19 87,557 58,516 Total non-current liabilities 87,557 58,516 Total liabilities 2,008,491 405,325 Net assets 3,366,214 1,010,206 Equity Share capital 20 3,276,831 600,000 Share premium account 20 860,817 957,541 Shares to be issued 20 787,500 - Other reserve 20 20,028 815 Fair value adjustment 20 (417,221) - Profit and loss reserve (1,161,741) (548,150) Total equity 3,366,214 1,010,206 See accompanying notes to the financial statements. Consolidated statement of changes in equity for the year to 30 September 2006 Share Share Shares Other Fair Retained Total Capital premium to be reserve Value earnings issued At 1 October 2004 250,000 500,000 - - - 22,447 772,447 Recognised directly in equity Share Issue 350,000 350,000 Premium on share issue 700,000 700,000 Expenses incurred on share issue (242,459) (242,459) Share based payments 815 815 -------- -------- ------- ------- ------- -------- -------- Net change directly in equity 350,000 457,541 - 815 - - 808,356 -------- -------- ------- ------- ------- -------- -------- Loss for the year (570,597) (570,597) -------- -------- ------- ------- ------- -------- -------- Total movements 350,000 457,541 - 815 - (570,597) 237,759 -------- -------- ------- ------- ------- -------- -------- Equity at 30 September 2005 600,000 957,541 - 815 - (548,150) 1,010,206 -------- -------- ------- ------- ------- -------- -------- At 1 October 2005 600,000 957,541 - 815 - (548,150) 1,010,206 Recognised directly in equity Share 2,676,831 (417,221) 2,259,610 Issue Shares to be issued as 787,500 787,500 part of acquisition Premium on share issue 335,669 335,669 Expenses incurred on share issue (432,393) (432,393) Share based payments 19,213 19,213 -------- -------- -------- ------- -------- -------- -------- Net change directly in equity 2,676,831 (96,724) 787,500 19,213 (417,221) - 2,969,599 Loss for the year (613,591) (613,591) -------- -------- -------- ------- -------- -------- -------- Total movements 2,676,831 (96,724) 787,500 19,213 (417,221) (613,591) 2,356,008 -------- -------- -------- ------- -------- -------- -------- Equity at 30 September 2006 3,276,831 860,817 787,500 20,028 (417,221) (1,161,741) 3,366,214 -------- -------- -------- ------- -------- --------- -------- Consolidated cash flow statement for the year to 30 September 2006 2006 2005 Â£ Â£ Cash flows from operating activities Operating loss (589,222) (561,204) Adjustments for Depreciation and amortisation 49,596 17,515 Other non-cash items 19,213 815 (Increase)/decrease in inventories (16,639) (1,877) Increase in trade and other receivables (1,362,845) (145,767) Increase in trade payables, accruals and other creditors 1,099,760 166,596 Net cash outflow from operating activities (800,137) (523,922) Cash flows from investing activities Purchase of property, plant and equipment (56,573) (56,492) Sale of property, plant and equipment 414 190 Acquisition of subsidiary, net of cash acquired (2,412,933) - Net cash used in investing activities (2,469,092) (56,302) Cash flows from financing activities Interest paid (net) (20,566) (9,393) Issue of shares 3,012,500 1,050,000 Receipt of bank finance 84,215 - Repayment of borrowing (32,612) (16,486) Repayment of directors and shareholders loans (40,000) 7,270 Former subsidiary director's loan notes less repayments 50,000 - Receipt from finance leases less repayments 9,547 - Expenses paid in connection with share issues (432,393) (242,459) Net cash used in financing activities 2,630,691 788,932 Net (decrease)/increase in cash (638,538) 208,708 Cash and bank overdrafts at beginning of period 162,991 (45,717) Cash and bank overdrafts at end of period 475,547 162,991 Cash and bank overdrafts comprise Cash and cash equivalents 1,075 211,160 Bank overdrafts (476,622) (48,169) 475,547 162,991 Analysis of changes in net funds At 30th September At 30th September 2005 Cash Flows 2006 Â£ Â£ Â£ Cash 211,160 -210,085 1,075 Bank overdraft -48,169 -428,453 -476,622 162,991 -638,538 -475,547 Debt -118,516 -71,150 -189,666 Net funds 44,475 -709,688 -665,213 Notes to the financial statements 1. General Information The consolidated financial statements of the group have been prepared in accordance with International Financial Reporting Standards as adopted by the EU and International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). Glen Group plc has adopted IFRS for the first time in its consolidated financial statements for the year ending 30 September 2006. The transition to IFRS reporting has resulted in a number of changes in the reported financial statements, notes thereto and accounting principles compared to previous annual reports. Note 2 provides further details on the transition from UK GAAP to IFRS. Glen Group plc, a public limited company, is the group's ultimate parent company. It is incorporated in England. The address of Glen Group plc's registered office is 8-10 New Fetter Lane, London, EC4A 1RS. Its principal place of business is Glen House, 6 Straiton View, Straiton Business Parc, Edinburgh, EH20 9QZ. The financial statements for the year ended 30 September 2006 (including the comparatives for the year ended 30 September 2005), were approved by the board of directors on 12 January 2007. 2. Transition to International Financial Reporting Standards The transition from previous GAAP to IFRS has been made in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards. The group's consolidated financial statements for 2006 and the comparatives presented for 2005 comply with all presentation and disclosure requirements of IFRS applicable for accounting periods commencing on or after 1 October 2004. The following reconciliations and explanatory notes thereto describe the effects of the transition on the IFRS opening balance sheet as at 1 October 2004 and for the financial year 2006. All explanations should be read in conjunction with the IFRS accounting policies of Glen Group plc as disclosed in the Principal Accounting Policies. Note 2a comments on the group's new balance sheet structure. No adjustments to Glen Group plc's share and additional paid-in capital were necessary in the opening IFRS balance sheet as at 1 October 2004 and the comparatives prepared for the year ended 30 September 2005. The reconciliation of the group's equity reported under previous GAAP to its equity under IFRS may be summarised as follows: Reconciliation of equity under UK GAAP to equity under IFRS 2006 2005 Â£ Â£ Shareholders equity under UK GAAP 2,865,199 91,970 Adjustment to goodwill relating to reversal of merger accounting 916,339 916,339 Amortisation of goodwill reversed 1,897 1,897 Fair value adjustment (417,221) - Shareholders equity under IFRS 3,366,214 1,010,206 The reconciliation of the group's loss reported under previous GAAP to its loss under IFRS may be summarised as follows: Reconciliation of loss under UK GAAP to loss under IFRS 2006 2005 Â£ Â£ Loss attributable to shareholders under UK GAAP (596,275) (571,679) Amortisation of goodwill 1,897 1,897 Share options expensed through income statement (19,213) (815) Loss attributable to shareholders under IFRS (613,591) (570,597) a) Merger Accounting Following the adoption of IFRS, the company has unwound the merger accounting treatment of the acquisition of Glen Communications Limited in November 2004. This has created additional goodwill on the consolidated balance sheet of Â£916,339. b) Goodwill Under IFRS Goodwill is not amortised. Instead Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Note 11 contains further information on the treatment of Goodwill under IFRS. As required by IFRS 1, Goodwill recognised under previous GAAP has been tested for impairment at the date of transition to IFRS. No impairment loss was required to be recognised. In accordance with IFRS 1, this amount has been considered the carrying amount of Goodwill in the opening IFRS balance sheet. For the year ended 30 September 2006, Goodwill is not amortised under IFRS. As a result the amortisation of Goodwill under UK GAAP was reversed in the reconciliation from UK GAAP to IFRS figures with a corresponding reduction of expenses (see reconciliation as at 30 September 2005.) 3. Basis of Consolidation 3.1. Acquisition of Eclectic Holdings Limited On 15 February 2006 the group acquired the entire share capital of Eclectic Holdings Limited and its subsidiaries, a provider of business intelligence consultancy and other IT services to the corporate market. The maximum purchase consideration was Â£3,000,000 of which Â£2,212,500 was paid at completion and the balance of up to Â£787,500 (the second consideration) payable when the group issued its preliminary announcement for the year ending 30th September 2006. The second consideration payment was dependent on Eclectic Holdings Limited's profit before interest, taxation and amortisation ('PBITA') for the twelve month period ending 31st July 2006 in accordance with the following formula: PBITA of between Â£250,000 and Â£299,999, the second consideration is Â£196,875 PBITA of between Â£300,000 and Â£349,999, the second consideration is Â£393,750 PBITA of between Â£350,000 and Â£399,999, the second consideration is Â£590,625 PBITA of Â£400,000 and above, the second consideration is Â£787,500 The entire second consideration is payable in shares in Glen Group plc subject to a maximum of 78,750,000 shares. The PBITA, for the measurement period was Â£414,842. Accordingly the Directors have accrued the full amount of the second consideration, totalling Â£787,500. In accordance with the share price formula included in the acquisition agreement, the Company will be issuing 73,825,818 shares at 1.0667p per share to satisfy the additional consideration. The book values of the net assets of Eclectic Holdings Limited and its subsidiaries on acquisition were Â£1,089,270 and, having been adjusted for goodwill, have been fair valued as follows: Assets Â£ Non-current assets Property, plant and equipment 40,211 Total non-current assets 40,211 Current assets Inventories 4,495 Trade and other receivables 1,116,475 Cash and cash equivalents 28,626 Total current assets 1,149,596 Total assets 1,189,807 Liabilities Current liabilities Short term borrowings 144,028 Trade and other payables 534,415 Accruals and deferred income 370,335 Other creditors 50,000 Total current liabilities 1,098,778 Non-current liabilities Long-term borrowings 25,000 Total non-current liabilities 25,000 Total liabilities 1,123,778 Net assets 66,029 Goodwill on acquisition has been calculated as follows: Â£ Purchase price and acquisition expenses 3,071,242 Net assets acquired (66,029) Cash received from Eclectic employee options (17,600) --------------------------------------- ----------- 2,987,613 --------------------------------------- ----------- Fair Value adjustment - first consideration (128,046) Fair Value adjustment - second consideration (289,175) --------------------------------------- ----------- Fair value adjustment (417,221) --------------------------------------- ----------- --------------------------------------- ----------- Goodwill 2,570,392 --------------------------------------- ----------- Turnover and operating profit of the companies acquired for the post acquisition period were Â£2,733,143 and Â£147,941 respectively. For the period 1 October 2005 to 30 September 2006 the turnover was Â£4,576,512 and the operating profit was Â£347,839. The directors are satisfied that there are no intangible assets that should be recognised on the acquisition of Eclectic Holdings Ltd as the inherent value of the company is represented by the skill and knowledge of the employees who provide consultancy and training services. 3.2. Acquisition of Explore IT Limited On 4 September 2006, Glen Communications Limited acquired 100% of the share capital of Explore IT Limited, a company registered in England. The total cost of the acquisition includes the components stated below. The purchase price of Â£115,000 was settled in cash. The book values of the net assets of Explore IT Limited on acquisition were Â£7,084 and have been fair valued at the same amount. This can be analysed as follows: Assets Â£ Non-current assets Property, plant and equipment 5,179 Total non-current assets 5,179 Current assets Trade and other receivables 69,952 Cash and cash equivalents 5,974 Total current assets 75,926 Total assets 81,105 Liabilities Current liabilities Short term borrowings 9,138 Trade and other payables 41,778 Accruals and deferred income 16,956 Other creditors 6,149 Total current liabilities 74,021 Total non-current liabilities - Total liabilities 74,021 Net assets 7,084 Goodwill on acquisition has been calculated as follows: Â£ Purchase price and acquisition expenses 164,117 Net assets acquired (7,084) ---------------------------------------- --------- 157,033 Transferred to intangibles (100,000) ---------------------------------------- --------- Goodwill 57,033 ---------------------------------------- --------- Turnover and operating profit of the company acquired for the post acquisition period were Â£44,219 and Â£10,539 respectively. For the period 1 October 2005 to 30 September 2006 the turnover was Â£506,676 and the operating loss was Â£22,325. 4. Segment Reporting 4.1.1 Analysis of revenue 2006 2005 Â£ Â£ By business sector Mobile services 631,003 321,154 Information technology 3,041,633 143,675 Phone cards - discontinued operations 22,519 71,447 Other communication services 3,090 2,121 Total revenue 3,698,245 538,397 By destination United Kingdom 3,698,245 538,397 Total revenue 3,698,245 538,397 By origin Glen Communications - continuing operations 942,582 466,950 Glen Communications - discontinued operations 22,519 71,447 Eclectic 2,733,144 - Total revenue 3,698,245 538,397 4.1.2. Analysis of operating loss 2006 2005 Â£ Â£ By business sector Mobile services (368,510) (337,296) Information technology (199,272) (147,441) Phone cards - discontinued operations (10,920) (74,263) Other communication services (10,520) (2,204) Operating loss (589,222) (561,204) By destination United Kingdom (589,222) (561,204) Operating loss (589,222) (561,204) By origin Glen Group (371,269) (223,381) Glen Communications (365,894) (337,823) Eclectic 147,941 - Operating loss (589,222) (561,204) 4.2. Analysis of assets and liabilities Holding SME communications Corporate IT company and IT services services By Business sector Non-current assets Investment in subsidiaries 4,621,242 176,009 1,023,241 Property, plant and equipment 3,499 71,930 37,237 ----------------------------- -------- -------- -------- Total non-current assets 4,624,741 247,939 1,060,478 ----------------------------- -------- -------- -------- Current assets Inventories - 11,175 15,577 Trade and other receivables 435,014 430,597 469,187 Cash and cash equivalents - 1,075 - ----------------------------- -------- -------- -------- Total current assets 435,014 442,847 1,484,764 ----------------------------- -------- -------- -------- ----------------------------- -------- -------- -------- Total assets 5,059,755 690,786 2,545,242 ----------------------------- -------- -------- -------- Liabilities Current liabilities Short term borrowings 12,996 82,424 475,600 Trade and other payables 45,677 205,246 688,893 Accruals and deferred income 21,967 872,043 211,847 Other creditors 21,648 18,594 23,520 ----------------------------- -------- -------- -------- Total current liabilities 102,288 1,178,308 1,399,860 ----------------------------- -------- -------- -------- Total non-current liabilities 4,000 39,537 44,019 ----------------------------- -------- -------- -------- Total liabilities 106,288 1,217,845 1,443,879 ----------------------------- -------- -------- -------- ----------------------------- -------- -------- -------- Net assets 4,953,467 (527,059) 1,101,363 ----------------------------- -------- -------- -------- 5. Other operating income and charges 2006 2005 Â£ Â£ -------------------------------- -------- -------- Administrative expenses 1,921,571 803,572 -------------------------------- -------- -------- 6. Operating Loss Operating loss is stated after charging: 2006 2005 Â£ Â£ Depreciation of owned fixed assets 49,596 17,514 Other operating lease rentals: - buildings 29,691 15,730 - office equipment - 1,032 Auditors' remuneration - company 11,500 9,000 - group 45,541 8,500 Non-audit fees - company - - - group 2,500 675 In addition, remuneration paid to the auditors in respect of flotation and re-listing totalling Â£72,076 (2005: Â£26,651) has been included within the share premium account. 7. Finance income and finance costs Finance cost includes all interest-related income and expenses. The following amounts have been included in the income statement line for the reporting periods presented: 2006 2005 Â£ Â£ Interest income resulting from short term bank deposits 3,054 6,716 -------------------------------- -------- -------- Finance income 3,054 6,716 -------------------------------- -------- -------- Interest expense resulting from - bank loans 8,025 14,137 - directors loans 500 - - finance leasing liabilities 3,146 - - loan notes 2,361 - - bank overdrafts 9,588 1,972 -------------------------------- -------- -------- Finance costs 23,620 16,109 -------------------------------- -------- -------- 8. Employee costs 8.1. Directors and employees The average number of staff employed by the company during the financial year amounted to: 2006 2005 No No Number of management staff 6 5 Number of operational staff 40 12 -------------------------------- -------- -------- Total 46 17 -------------------------------- -------- -------- Employee numbers are stated including directors but excluding fees payable to E M Hagman which are shown in Note 8.4. 8.2. Employee Remuneration Expense recognised for employee benefits is analysed below: 2006 2005 Â£ Â£ Wages and salaries 1,718,412 431,197 Share options costs 19,213 815 Social security costs 250,820 44,247 Pension - defined contribution plans 7,834 10,675 -------------------------------- -------- -------- Total 1,996,279 486,934 -------------------------------- -------- -------- 8.3. Share-based remuneration During the year the company set up an EMI share option scheme as part of the remuneration of senior management. For the options to vest the senior management are required to reach certain performance targets applicable to the year ended 30th September 2009. The performance targets have been set by the remuneration committee of the Board. The maximum term of current arrangements under the EMI scheme ends on 14 February 2016. Upon vesting, each option allows the holder to purchase one ordinary share at the pre-agreed option price. All share-based employee remuneration will be settled in equity. The group has no legal or other obligation to repurchase or settle the options. Share options and the exercise price are as follows for the reporting periods presented: 2006 2005 Weighted average Weighted average exercise price exercise price Number Â£ Number Â£ Outstanding at 1 October 666,667 0.03 - - Granted 25,000,000 0.01 666,667 0.03 -------- ----------- ---------- ----------- Outstanding at 30 September 25,666,667 0.01052 666,667 0.03 --------- ----------- ---------- ----------- As at 30 September 2006, Glen Group plc has granted the following outstanding share options: 2006 2005 Weighted Weighted Weighted Weighted average average average average exercise remaining exercise remaining price contractual price contractual life life Number Â£ Months Number Â£ Months Earliest exercise date: 2005 666,667 0.03 98 666,667 0.03 110 2009 25,000,000 0.01 112 - - - ------------ -------- ------- -------- -------- ------- -------- 25,666,667 666,667 The fair values of options granted during 2006 were determined using the Black-Scholes valuation model. Significant inputs into the calculation include a weighted average share price of 1.78p and exercise prices as illustrated above. Furthermore, the calculation takes into account no future dividends and a volatility rate of 50% based on expected share price. Risk-free interest rate was determined at 4.13%. It is assumed that options granted under the EMI scheme have an average remaining life of 66 months. The underlying expected volatility was determined by reference to historical volatility of quoted comparable companies as well as giving consideration to the volatility of Glen Group plc itself. In total Â£19,213 of employee remuneration expense has been included in the consolidated income statement for 2006 (2005: Â£815). 8.4 Directors Fees Salaries Pensions Benefits Totals 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Â£ Â£ Â£ Â£ Â£ Â£ Â£ Â£ Â£ Â£ Non-Executive E M Hagman 20,000 18,334 - - - - 978 815 20,978 19,149 P J Ford - - 15,000 14,167 - - - - 15,000 14,167 Executive G J Duncan - - 96,000 90,000 11,250 9,375 11,164 2,936 118,414 102,311 -------------------------------------------------------------------------------------------------------- 20,000 18,334 111,000 104,167 11,250 9,375 12,142 3,751 154,392 135,627* -------------------------------------------------------------------------------------------------------- *2005 was a ten month period. Benefits includes the costs of share options issued to the directors as follows: Name of Director 2006 2005 E M Hagman 978 815 G J Duncan 7,294 - 8,272 815 9. Loss per share 2006 2005 Â£ Â£ Loss attributable to ordinary shareholders 613,591 570,597 No No Weighted average number of ordinary shares in issue 219,481,795 48,333,333 Loss per share (pence) 0.28 1.18 Both the basic and diluted earnings per share have been calculated using the net loss attributable to the shareholders of Glen Group plc as the numerator. The weighted average number of outstanding shares used for basic earnings per share amounted to 219,481,795 shares. (2005: 48,333,333) 10 Goodwill The main changes in the carrying amounts of goodwill result from the acquisition of Eclectic Group Limited and Explore IT Limited. The net carrying amount of goodwill can be analysed as follows: 2006 2005 Â£ Â£ Gross carrying amount 3,562,740 935,315 Accumulated impairment losses - - -------------------------------- -------- -------- Carrying amount at 30 September 3,562,740 935,315 -------------------------------- -------- -------- The carrying amount at 1 October 2005 related to Glen Communications Limited. Changes in the net carrying amount can be analysed as: 2006 2005 Â£ Â£ Carrying amount at 1 October 935,315 - Additions: Glen Communications Limited - 935,315 Eclectic Group Limited 2,570,392 - Explore IT Limited 57,033 - Impairment loss recognised - - -------------------------------- -------- -------- Carrying amount at 30 September 3,562,740 935,315 -------------------------------- -------- -------- 11 Impairment of goodwill Goodwill has been allocated for impairment testing purposes to three cash generating units, all in the UK. The carrying amount of goodwill allocated to Eclectic Group Limited and Glen Communications Limited is significant in comparison with the total carrying amount of goodwill. The recoverable amounts are based on certain similar key assumptions. Eclectic Group Limited The recoverable amount of Eclectic goodwill has been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets and estimates approved by management covering a 10 year period and a discount rate of 20%. Cash flows beyond 5 years have been extrapolated using a steady 2.5% growth rate. This growth rate does not exceed the long-term average growth rate for the market in which Eclectic operates. Management believes that any change in the key assumptions on which Eclectic's recoverable amount is based would not cause Eclectic's carrying amount to exceed its recoverable amount. Glen Communications Limited and Explore IT Limited The recoverable amount of Glen Communications and Explore IT goodwill has been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets and estimates approved by management covering a 10 year period and a discount rate of 30%. Cash flows beyond 5 years have been extrapolated using a steady 2.5% growth rate. This growth rate does not exceed the long-term average growth rate for the markets in which Glen Communications and Explore IT operate. Management believes that any change in the key assumptions on which Glen's and Explore IT's â€¢ recoverable amounts are based would not cause Glen's or Explore IT's carrying amounts to exceed their recoverable amounts. 12. Intangible assets The following intangible asset arose on the acquisition of Explore IT Limited: 2006 2005 Â£ Â£ -------------------------------- -------- -------- Maintenance contracts 100,000 - -------------------------------- -------- -------- Maintenance contracts of Â£100,000 (2005: Â£nil) relate to maintenance contracts obtained as part of the acquisition of Explore IT Limited on 4 September 2006, see also note 3. The group's policy is to amortise the maintenance contracts over the expected life of the contracts. Due to the date of acquisition, there has been no amortisation charge in the current year 13. Property, plant and equipment IT Fixtures and Plant, Total fittings, and machinery, and leasehold motor vehicles Equipment improvements Â£ Â£ Â£ Â£ Gross carrying amount 16,984 2,752 2,254 21,990 Accumulated depreciation and impairment 8,887 1,070 504 10,461 -------------------- --------- --------- --------- --------- Carrying amount at 1 October 2004 8,097 1,682 1,750 11,529 -------------------- --------- --------- --------- --------- Gross carrying amount 62,952 11,726 3,614 78,292 Accumulated depreciation and impairment 23,415 3,085 1,475 27,975 -------------------- --------- --------- --------- --------- Carrying amount at 30 September 2005 39,537 8,641 2,139 50,317 -------------------- --------- --------- --------- --------- Gross carrying amount 312,662 61,520 6,538 380,720 Accumulated depreciation and impairment 216,895 48,987 2,171 268,053 -------------------- --------- --------- --------- --------- Carrying amount at 30 September 2006 95,767 12,532 4,367 112,667 -------------------- --------- --------- --------- --------- The carrying amounts of property, plant and equipment for the periods presented in the consolidated financial statements as at 30 September 2006 are reconciled as follows: IT Fixtures and Plant, Total equipment fittings, and machinery, and leasehold motor improvements vehicles Cost Â£ Â£ Â£ Â£ At 1 October 2005 62,952 11,726 3,614 78,292 Additions 51,290 870 4,413 56,573 Additions by acquisition 198,420 48,924 - 247,344 Disposals - - (1,489) (1,489) --------------------- --------- ---------- --------- --------- At 30 September 2006 312,662 61,520 6,538 380,720 --------------------- --------- ---------- --------- --------- Depreciation At 1 October 2005 23,415 3,085 1,475 27,975 Charge for year 39,664 8,161 1,771 49,596 Acquisition 153,816 37,741 - 191,557 Disposals - - (1,075) (1,075) --------------------- --------- ---------- --------- --------- At 30 September 2006 216,895 48,987 2,171 268,053 --------------------- --------- ---------- --------- --------- --------------------- --------- ---------- --------- --------- NBV at 30 September 2006 95,767 12,533 4,367 112,667 --------------------- --------- ---------- --------- --------- --------------------- --------- ---------- --------- --------- NBV at 1 October 2005 39,537 8,641 2,139 50,317 --------------------- --------- ---------- --------- --------- All depreciation and impairment charges are included in 'depreciation, amortisation and impairment of non-financial assets' in the income statement. 14. Leases 14.1. Finance leases Glen Group plc currently has finance leases which relate to the group's computer equipment. The net carrying amount of the assets held under the leases is Â£4,149. The assets are included under IT equipment. Future minimum lease payments as at 30 September 2006: Within 1 year 1 to 5 years More than 5 years Total Â£ Â£ Â£ Â£ ---------------- --------- --------- --------- --------- Lease payments 7,709 1,838 - 9,547 ---------------- --------- --------- --------- --------- There were no future minimum lease payments as at 30 September 2005. 14.2. Operating leases The group's minimum operating lease payments are as follows: Within 1 year 1 to 5 years More than 5 years Total Â£ Â£ Â£ Â£ ---------------- --------- --------- --------- --------- As at 30 September 2006 107,321 162,842 - 270,163 ---------------- --------- --------- --------- --------- As at 30 September 2005 58,273 109,022 - 167,295 ---------------- --------- --------- --------- --------- Lease payments recognised as an expense during the period amount to Â£172,655 (2005: Â£45,256). No sublease income is expected as all assets held under lease agreements are used exclusively by the group. The rental contract for the office rented since 2000 at 121 West Regent Street, Glasgow, has non-cancellable terms of 4 years 4 months. The rental contract for the office rented since 2003 at 1st floor, 113 West Regent Street, Glasgow, has non-cancellable terms of 1 year 4 months. The rental contract for the office rented since 2004 at ground floor, 113 West Regent Street, Glasgow, has non-cancellable terms of 1 year 4 months. Operating leases do not contain any contingent rent clauses. None of the operating lease agreements contain renewal of purchase options or escalation clauses or any restrictions regarding dividends further leasing or additional debt. 15. Inventories 2006 2005 Â£ Â£ Consumables 26,752 10,113 -------------------------------- -------- -------- Inventories 26,752 10,113 -------------------------------- -------- -------- 16. Trade and other receivables 2006 2005 Â£ Â£ Trade receivables, gross 1,281,684 51,615 Other debtors 1,186 2,090 Prepayments and accrued income 288,601 154,921 -------------------------------- -------- -------- Trade and other receivables 1,571,471 208,626 -------------------------------- -------- -------- Trade receivables are usually due within 30-45 days and do not bear an effective interest rate. All trade receivables are subject to credit risk exposure. However, Glen Group does not identify specific concentrations of credit risk with regards to trade and other receivables, as the amounts recognised resemble a large number of receivables from various customers. 17. Cash and cash equivalents Cash and cash equivalents include the following components: 2006 2005 Â£ Â£ -------------------------------- -------- -------- Cash at bank and in hand 1,075 211,160 -------------------------------- -------- -------- 18. Trade and other payables 2006 2005 Â£ Â£ Bank overdrafts 476,622 48,169 Bank loans - current element 44,400 20,000 Loan notes 50,000 - Finance leasing liability - current element 7,709 - -------------------------------- -------- -------- Short term borrowings 578,131 68,169 Trade payables 939,817 126,583 Accruals and deferred income 238,247 78,840 Corporation tax payable 3,803 - Other taxation and social security 156,410 42,217 Other creditors 3,926 3,000 Directors' loans - 28,000 -------------------------------- -------- -------- Trade and other payables 1,920,934 346,809 -------------------------------- -------- -------- Note 14.1 contains further information on the finance lease liability. The overdrafts are secured by bonds and floating charges over the assets of the subsidiary companies with cross guarantees from Glen Group plc. The loan note is payable to a former director of Eclectic Group Limited. It is subject to interest at 2% above the Bank of Scotland base rate and is repayable in six 6-monthly instalments, with the final payment payable by 31 July 2007. The fair values of the trade and other payables has not been disclosed as due to their short duration, management considers the carrying amounts recognised in the balance sheet to be a reasonable approximation of their fair value. 19. Long term financial liabilities 2006 2005 Â£ Â£ Bank loans 85,719 58,516 Finance leasing liability - long term element 1,838 - -------------------------------- -------- -------- Long term financial liabilities 87,557 58,516 -------------------------------- -------- -------- The bank loans at 30 September 2006 include a loan taken out by Eclectic Group Limited of Â£42,182 (2005: Nil) at an effective interest rate of 2% over base rate. This loan matures on 30 September 2009 and requires monthly payments. The bank loans at 30 September 2006 also include a loan taken out by Glen Communications Limited of Â£39,537 (2005: 58,516) at an effective interest rate of 2.75% over base rate. This loan matures on 30 September 2008 and requires monthly payments. The finance lease liability has an effective interest rate of 12%, which is equal to the rate implicit in the leases. Lease payments are made on a monthly basis. The leasing arrangements mature on 31 May 2008. Long-term financial liabilities have been fair valued at the same amount. 20. Equity 20.1. Share Capital The share capital of Glen Group plc consists of ordinary shares with a par value of Â£0.01. All shares are equally eligible to receive dividends and the repayment of capital, and represent one vote at the shareholders' meeting of Glen Group plc. 2006 2005 Â£ Â£ Shares issued and fully paid - beginning of the year 600,000 250,000 - issued during the year 2,676,831 350,000 -------------------------------- -------- -------- Shares issued and fully paid 3,276,831 600,000 -------------------------------- -------- -------- Shares authorised for share based payments 2,723,169 200,000 -------------------------------- -------- -------- -------------------------------- -------- -------- Total equity shares authorised at 30 September 2006 6,000,000 800,000 -------------------------------- -------- -------- 20.2. Share Premium 2006 2005 Â£ Â£ Balance brought forward 957,541 500,000 Premium on shares issued 335,669 700,000 Share issue expenses (432,393) (242,459) -------------------------------- -------- -------- Balance carried forward 860,817 957,541 -------------------------------- -------- -------- 20.3. Shares to be issued As per note 3.1, an additional issue of shares (the second consideration shares) was required as part of the acquisition of Eclectic Holdings Limited, providing the profit before interest, tax and amortisation exceeded the amount detailed in note 3.1. As the actual profit for Eclectic Holdings of Â£414,842 exceeded the required Â£400,000, the shares to be issued are: 2006 2005 Â£ Â£ -------------------------------- ---------- -------- Shares to be issued per note 3.1 (73,825,818 at a price of 1.0667p) 787,500 - -------------------------------- ---------- -------- 20.4. Other reserve The other reserve represents shares reserved for share-based remuneration for the period. 20.5. Fair Value Adjustment The market value of the first and second consideration shares issued and to be issued in respect of the acquisition of Eclectic Holdings Limited differs from the value agreed with the vendors. The difference in value has been credited to Goodwill, as follows: 2006 2005 Â£ Â£ First Consideration shares 128,046 - Second Consideration shares 289,175 - -------------------------------- -------- -------- Fair Value adjustment 417,221 - -------------------------------- -------- -------- 21. Income tax expenses The tax charge represents: 2006 2005 Â£ Â£ UK corporation tax on profits of the period 5,131 - -------------------------------- -------- -------- Total current tax 5,131 - -------------------------------- -------- -------- Deferred tax: origination and reversal of timing differences (1,328) - -------------------------------- -------- -------- Tax charge 3,803 - -------------------------------- -------- -------- The relationship between the expected tax expense based on the effective tax rate of Glen Group plc at 19% (2005: 19%) and the tax expense actually recognised in the income statement can be reconciled as follows: 2006 2005 Â£ Â£ Result for the year before tax (609,788) (570,597) Tax rate 19% 19% Expected tax expenses (115,860) (108,413) Adjustment for non-deductible expenses 3,026 1,438 Capital allowances in excess of depreciation 7,049 (1,963) Losses surrendered by way of group relief 29,759 0 Tax losses carried forward 81,157 108,938 -------------------------------- -------- -------- Actual tax expense net 5,131 - -------------------------------- -------- -------- 22. Related party transactions Loans from directors were repaid in full during the year. At 30 September 2005 directors' loans were represented by amounts due to P Ford totaling Â£20,000 and G J Duncan totaling Â£8,000. The loans bore interest at 2.75 per cent above the base rate of Bank of Scotland and were repaid on 1 December 2005. Also at 30 September 2005, there was a loan of Â£12,000 due to a related party, Duncan Ventures Limited, a company controlled by Graham J Duncan. This loan bore interest at 2.75 per cent above the base rate of Bank of Scotland and was repaid on 1 December 2005. No further related party transactions were recorded during the year to 30 September 2006. 23. Contingent liabilities There were no contingent liabilities at 30 September 2006 or 30 September 2005. 24. Capital commitments There were no capital commitments at 30 September 2006 or 30 September 2005. 25. Risk Management The group finances its activities through equity and bank borrowings. No speculative treasury transactions are undertaken and during the last two years no derivative contracts were entered into. Financial assets and liabilities include those assets and liabilities of a financial nature, namely cash, investments and borrowings. 25.1 Liquidity risk The group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The group policy throughout the year has been to ensure continuity of funding by a combination of equity funding and available bank facilities. 25.2 Interest rate risk The interest rate on the group's cash at bank is determined by reference to the bank rate. The interest rates on Glen Communication's financial liabilities are at 2.75 per cent above the base rate of Bank of Scotland. The interest rates on Eclectic and Explore IT's financial liabilities are at 2 per cent above the base rate of the Royal Bank of Scotland. At 30 September 2006, the group had total committed overdraft facilities of Â£620,000 (2005: Â£50,000). Since the year end, a new facility of Â£1,000,000 has been committed. This is on a rolling basis, with a 6-month notice period servable only by the group. The group has two loans, the first is a Â£100,000 five year loan facility repayable in 60 monthly instalments of capital and interest, with the final payment falling due in 2008. The second loan is a Â£110,000 five year loan facility repayable in 60 monthly instalments of capital and interest with the final payment falling due in 2009. Loan notes are due to a former director of Eclectic Group Limited, payable in six 6-monthly instalments of capital and interest, with the final instalment due on 31 July 2007. 26, Report and accounts The report and accounts of the group for the year ended 30 September 2006 will be sent to shareholders at the beginning of February 2007 and will be available for collection, free of charge, from the offices of Glen Group plc, 6 Straiton View, Straiton Business Parc, Edinburgh. EH20 9QZ. This information is provided by RNS The company news service from the London Stock Exchange

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