Aventus Group Annual Report 2011

Plain-text annual report

Avanti Communications Group plc Avanti Communications Group plc Annual Report & Accounts 2011 New high speed communications products for high growth markets. A v a n t i C o m m u n i c a t i o n s G r o u p p l c A n n u a l R e p o r t & A c c o u n t s 2 0 1 1 Avanti Communications Group plc 74 Rivington Street London EC2A 3AY www.avantiplc.com Avanti Communications Group plc Avanti Communications Group plc Annual Report & Accounts 2011 New high speed communications products for high growth markets. A v a n t i C o m m u n i c a t i o n s G r o u p p l c A n n u a l R e p o r t & A c c o u n t s 2 0 1 1 Avanti Communications Group plc 74 Rivington Street London EC2A 3AY www.avantiplc.com Highlights • Successful launch of our ﬁ rst satellite, HYLAS 1. • Modest available capacity ﬁ lling fast. • HYLAS 2 is fully ﬁ nanced and under construction. • High growth markets in Africa and Asia responding very well. This has been a landmark year for Avanti Communications Group with the successful launch of our ﬁ rst satellite, HYLAS 1, and the receipt of the ﬁ rst revenues generated by it. John Brackenbury CBE, Chairman Avanti owns scarce, valuable spectrum and satellite resources, in a lightly competed sub-sector of a global telecoms market which is experiencing breakneck growth in data demand through the increasing use of high data applications. David Williams, Chief Executi ve The shape of the balance sheet has changed signiﬁ cantly over the last 12 months. The group now has net assets of £207 million. Nigel Fox, Group Finance Director Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 01 Business Proﬁ le Our New Approach Our Customers The Year in Review Chairman’s Statement Chief Executi ve’s Report Finance and Operati ng Review Governance Board of Directors Employees Corporate Social Responsibility Directors’ Report Corporate Governance Report Financial Statements Independent Auditors’ Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Positi on Company Statement of Financial Positi on Statement of Cash Flows Statements of Changes in Equity Notes to the Financial Statements Shareholder Information Noti ce of Annual General Meeti ng Form of Proxy Oﬃ cers and Professional Advisers 02 04 06 08 13 16 18 20 22 27 28 29 29 30 31 32 33 34 64 67 69 B u s i n e s s P r o ﬁ e l T h e Y e a r i n R e v i e w G o v e r n a n c e F i n a n c i a l S t a t e m e n t s S h a r e h o l d e r I n f o r m a ti o n AVN2725 AR11 1 Business profile AW06.indd 1 11/10/2011 16:50 This year we enjoyed the successful launch of HYLAS 1, Europe’s first Ka-band satellite. Our second satellite, HYLAS 2, is fully financed and under construction. It is scheduled to launch in Q2 2012. These satellites will operate for 15 years. Avanti is building a global business with a very long term view. Watch the launch of HYLAS 1: www.avantiplc.com/satellite-fleet/ hylas-1 Avanti’s first satellite, HYLAS 1, launched on 26 November 2010 and is the first superfast broadband satellite launched in Europe. Who we are What we do Our satellites We are bringing a new approach to the satellite communications industry We are 125 people drawn together from space, telecoms and finance backgrounds bringing a new approach to the satellite communications industry. Our operational managers have an average of 7 years service at Avanti. We have built this company together from the beginning and have a shared long term ambition to build a global business of significant scale. We are headquartered in London but with significant operations in Cornwall, Cyprus, Germany and the USA. We are a data communications provider Avanti sells satellite data communications services to telecoms companies which use them to supply institutional, enterprise and consumer users. Our technology is new, but so is our flexible business model which responds to the different needs and strategies of our service providers in 50 countries. HYLAS 1 HYLAS 2 HYLAS 3 The first Ka-band satellite in Europe serves every country between Ireland and Poland. We enjoyed its successful launch in November 2010 and target to have it full by Spring 2014. HYLAS 2, Avanti’s second satellite, is being built by the Orbital Sciences Corporation in the USA. HYLAS 2 will quadruple Avanti’s satellite capacity and provide new capacity across the Middle East and Africa. Thus we become predominantly an emerging markets telecoms business. The business plans seeks to fill it by 2017, but the pre-sales activity suggests we will beat this target by a long way. HYLAS 3 is being financed with very low cost government funded debt and customer pre-sales, which over the long term greatly enhances shareholder returns. It will put new capacity into the Americas and Africa. Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 69 Officers and Professional Advisers Bankers HSBC Bank Plc 70 Pall Mall London SW1Y 5EZ Solicitors Osborne Clark 2 Temple Black East Temple Quay Bristol BS1 6EG Registered Auditors PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH Directors F E J G Brackenbury CBE Chairman D J Williams Chief Executive D J Bestwick Managing Director Cyprus N A D Fox Group Finance Director M J O’Connor Chief Operating Officer D A Foster Non-Executive Director W P Wyatt Non-Executive Director C R Vos Non-Executive Director M Walker OBE Non-Executive Director Secretary N A D Fox Registered Office 74 Rivington Street London EC2A 3AY Company Number 6133927 S h a r e h o l d e r I n f o r m a ti o n This year we enjoyed the successful launch of HYLAS 1, Europe’s first Ka-band satellite. Our second satellite, HYLAS 2, is fully financed and under construction. It is scheduled to launch in Q2 2012. These satellites will operate for 15 years. Avanti is building a global business with a very long term view. Watch the launch of HYLAS 1: www.avantiplc.com/satellite-fleet/ hylas-1 Avanti’s first satellite, HYLAS 1, launched on 26 November 2010 and is the first superfast broadband satellite launched in Europe. Who we are What we do Our satellites We are bringing a new approach to the satellite communications industry We are 125 people drawn together from space, telecoms and finance backgrounds bringing a new approach to the satellite communications industry. Our operational managers have an average of 7 years service at Avanti. We have built this company together from the beginning and have a shared long term ambition to build a global business of significant scale. We are headquartered in London but with significant operations in Cornwall, Cyprus, Germany and the USA. We are a data communications provider Avanti sells satellite data communications services to telecoms companies which use them to supply institutional, enterprise and consumer users. Our technology is new, but so is our flexible business model which responds to the different needs and strategies of our service providers in 50 countries. HYLAS 1 HYLAS 2 HYLAS 3 The first Ka-band satellite in Europe serves every country between Ireland and Poland. We enjoyed its successful launch in November 2010 and target to have it full by Spring 2014. HYLAS 2, Avanti’s second satellite, is being built by the Orbital Sciences Corporation in the USA. HYLAS 2 will quadruple Avanti’s satellite capacity and provide new capacity across the Middle East and Africa. Thus we become predominantly an emerging markets telecoms business. The business plans seeks to fill it by 2017, but the pre-sales activity suggests we will beat this target by a long way. HYLAS 3 is being financed with very low cost government funded debt and customer pre-sales, which over the long term greatly enhances shareholder returns. It will put new capacity into the Americas and Africa. Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 69 Officers and Professional Advisers Bankers HSBC Bank Plc 70 Pall Mall London SW1Y 5EZ Solicitors Osborne Clark 2 Temple Black East Temple Quay Bristol BS1 6EG Registered Auditors PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH Directors F E J G Brackenbury CBE Chairman D J Williams Chief Executive D J Bestwick Managing Director Cyprus N A D Fox Group Finance Director M J O’Connor Chief Operating Officer D A Foster Non-Executive Director W P Wyatt Non-Executive Director C R Vos Non-Executive Director M Walker OBE Non-Executive Director Secretary N A D Fox Registered Office 74 Rivington Street London EC2A 3AY Company Number 6133927 S h a r e h o l d e r I n f o r m a ti o n 02 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 Our New Approach Our technology has fundamentally changed the economics of high speed data communications in emerging markets. AVN2725 AR11 1 Business profile AW06.indd 2 10/10/2011 18:43 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 03 B u s i n e s s P r o ﬁ e l The high frequency and advanced power of a Ka-band satellite enables it to carry at least 8 ti mes more data than the lower frequency satellites used mainly for TV. This is bringing a new generati on of service providers and end user customers to satellite services. Satellite capacity is not a simple commodity. Every service provider wants something a litt le diﬀ erent, and every satellite beam delivers slightly diﬀ erent characteristi cs. We designed highly flexible technology which puts the control of network or product design into the hands of our service providers – we don’t just sell a one size ﬁ ts all product. AVN2725 AR11 1 Business profile AW06.indd 3 10/10/2011 18:43 04 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 Our Customers Our customers sell to users in the following ﬁ ve main markets: Avanti sells access to a cloud to service providers who then customise products to suit their niche. 1 2 Government Enterprise networks High speed data services with large coverage areas are perfect for Government applicati ons in supporti ng overseas missions and UAV operati ons as well as homeland security. Companies which have many dispersed sites to be connected with common technology, with high resilience are increasingly choosing Ka-band satellites. AVN2725 AR11 1 Business profile AW06.indd 4 10/10/2011 18:44 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 05 B u s i n e s s P r o ﬁ e l 3 4 5 Wireless backhaul Rural broadband Business internet conti nuity Wireless networks need to move data between core network and remote base stati ons. Satellites do this job well. In Europe, satellite will supply at least 2% of connecti ons, and it may be much higher. In emerging markets, satellite is almost the default choice as economies leapfrog ﬁ bre and go directly to wireless. Avanti has an internati onally patented back up product which can restore a broken landline connecti on and associated IP addressing instantly. Thus an SME which relies heavily on its internet connecti on now has a reason to consider the use of a satellite product. AVN2725 AR11 1 Business profile AW06.indd 5 10/10/2011 18:44 06 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 Chairman’s Statement This has been a landmark year for Avanti Communications Group with the successful launch of our ﬁ rst satellite, HYLAS 1, and the receipt of the ﬁ rst revenues generated by it. John Brackenbury CBE Chairman Continued success in the construction and commercialisation of HYLAS 2 Signiﬁ cant increase in the number of signed customer contracts and pipeline of customer enquiries for HYLAS 1 and HYLAS 2 This has been a landmark year for Avanti Communicati ons Group with the successful launch of our fi rst satellite, HYLAS 1, and the receipt of the fi rst revenues generated by it. As a result, it gives me parti cular pleasure to present our fi nancial results for the year ended 30 June 2011. I am also able to report on conti nued success in the constructi on and commercialisati on of HYLAS 2, which remains on target for launch in Q2, 2012. Given recent fi nancial markets turmoil it is very sati sfying that the fi nancing decisions taken in this and the previous fi nancial years mean that Avanti has two satellites fully funded with a very strong balance sheet and products which are selling on target. Following the launch of HYLAS 1 and its introducti on to service, we have seen a signifi cant increase in the number of signed customer contracts and also the pipeline of customer enquiries for HYLAS 1 and HYLAS 2. Having a satellite in service as opposed to design or constructi on has considerably improved our profi le in the market. In additi on, we have seen conti nued strong demand across all the geographies we cover in consumer, enterprise and military sectors. New applicati ons for our capacity, like digital cinema, have appeared on HYLAS 1. Avanti has technological advantages in a number of areas and in focussing on these we are holding pricing at good levels. Given that the HYLAS 1 satellite has relati vely modest capacity available, we are confi dent that it will be full within the three years we have AVN2725 AR11 2 Year in Review AW04.indd 6 10/10/2011 18:45 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 07 T h e Y e a r i n R e v i e w Strong demand for HYLAS 2 capacity in Africa and the Middle East forecast. We have already sold enough capacity to fi ll the satellite to 36.7% usage by the end of that three year period, we are adding new customers every month and existi ng customers are already returning to add to their capacity commitments. Although for most companies the general economic backdrop probably seems unhelpful, we see no sign of this in the high growth markets of Africa and the Middle East, so I believe we made good strategic decisions in that, following the launch of HYLAS 2, 75% of our capacity will address growth markets. There is strong demand for HYLAS 2 capacity from commercial customers in Africa and government customers in the Middle East and we expect to convert this demand to further signifi cant backlog before launch. During the year we repaid our high yielding PIK bond following a £70 million equity fund raising which made our low cost Export Credit Agency HYLAS 2 fi nancing easier to operate and generated a signifi cant fi nancial saving. We completed the placing of insurance for HYLAS 2 at a premium which generated a saving of some $15m against budget, which clearly demonstrates that our technology and management are well regarded in the expert space insurance market. In additi on, we commenced work on the constructi on of HYLAS 3. Avanti ’s senior management team has faced a diffi cult period, as some short term speculators att acked the share price. I am concerned that loyal, long term shareholders, especially private investors who are not allowed by law to receive the detailed reports produced by investment banks, have experienced temporarily diminished value, perhaps without a clear understanding of how this has come about. But it has not changed our approach to our business model at all. We have set out a fi ve year business plan to fi ll our satellites. Our products and geographies are exhibiti ng very strong demand and I am sati sfi ed that in the fi rst commercial year of this plan we are achieving our objecti ves. It is clear that Avanti owns scarce and valuable resources in one of the few lightly competed sub-sectors of the global telecoms industry which should see us create very signifi cant value. I see great opportunity in emerging markets telecoms and our advantages in these markets are signifi cant. I am grateful for the resolute support of our core long term investors. Pati ence and confi dence in the quite excepti onal and unique advantages Avanti has will be rewarded. Our pipeline of new business gives us confi dence in our ability to meet expectati ons. John Brackenbury, CBE Chairman AVN2725 AR11 2 Year in Review AW04.indd 7 10/10/2011 18:45 08 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 Chief Executive's Report I am pleased to report results for the year which include the ﬁ rst revenues from HYLAS 1, following its successful launch and introduction into service during this ﬁ nancial year. David Williams Chief Executi ve The market for our products remains strong and is growing In these volatile economic times, shareholders can draw great comfort from the stable long term ﬁ nancial resilience of our balance sheet Introducti on I am pleased to report results for the year which include the first revenues from HYLAS 1, following its successful launch and introduction into service during this financial year. The satellite launch in November 2010 was followed by a period of in orbit testing. As we had expected, HYLAS 1 passed its tests successfully and was brought into service in April 2011. We completed the transfer of our legacy customer base from its old fashioned rented Ku-band satellite onto HYLAS 1 with its considerably faster Ka-band service by May 2011. HYLAS 2 remains on track for a launch in Q2 2012. The market for our products remains strong and is growing and the progress made in sales for HYLAS 1 and pre-sales for HYLAS 2 means we are confident in achieving our objective of selling out HYLAS 1 in three years and HYLAS 2 in five years from service launch. The growth in market demand has encouraged us to begin the early stage work for the construction of our third satellite, HYLAS 3. Financial Review Our result for the year produced turnover of £5.46m (2010: £5.82m) including the first two months of HYLAS 1 revenues. In the run up to the launch of HYLAS 1 we stopped selling our interim broadband service on rented satellite capacity which was highly unprofitable as a result of the high prices of legacy Ku-band capacity. We also decided that there was no merit AVN2725 AR11 2 Year in Review AW04.indd 8 11/10/2011 16:47 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 09 T h e Y e a r i n R e v i e w in installing systems which would be replaced within a few months. It was however invaluable in developing and testing in a live environment the control and management software which is now being used to deliver a high quality experience for HYLAS 1 customers. The consumers on this system were successfully migrated to HYLAS 1 in the first two months of service. As anti cipated, our costs increased during the year as we recruited more staff to sell and support our products and also to manage three satellite projects instead of one. In additi on we incurred our fi rst depreciati on on HYLAS 1. Our currency exposures are all hedged so that there is no cash risk, but Accounti ng Standards oblige us to report the noti onal changes in value of hedging and again this year it can be seen that our hedging strategies protected us from losses, and this manifests itself in a profi t of £0.11 million (2010: profi t of £0.97 million). The loss from operati ons was in line with our expectati ons at £12.86 million (2010: loss £2.44 million). During the year we raised £70 million in an equity placing to refi nance an expensive PIK bond and fund the early stage design work for HYLAS 3. In additi on, with the constructi on of HYLAS 2 underway, we drew $190.3 million on our Export Credit Agency debt faciliti es of $328 million. The debt is at att racti ve fi xed interest rates of 5.5% and is drawn down during the period up to HYLAS 2’s launch and then repayable over a seven year period from December 2012. In these volati le economic ti mes, shareholders can draw great comfort from the stable long term fi nancial resilience of our balance sheet. Business Overview The successful launch and introducti on into service of our fi rst satellite has led to a signifi cant increase in interest from potenti al customers in buying capacity on both HYLAS 1 and 2. Ka-band is new to Europe, but expert customers can now experience the product before buying it. As a result we are now recognised as a credible soluti on for our service providers as they grapple with increasing and accelerati ng demands for bandwidth from corporate, consumer and government customers. We are benefi tti ng from this through the successful development of products across all our markets. Consumer Broadband For consumers, the growth in high data rate applications such as video and cloud computing, as well as the requirement to interact on-line with many companies such as utilities providers means that fast broadband is now a requirement rather than a luxury, regardless of geographic location. Avanti provides competitively priced products at speeds of up to 10Mb/s in this market, and the contractual and technical methods by which our service providers interact with us are unique and differentiated. We have signed a number of contracts with service providers who are migrating legacy Ku-band customer bases to HYLAS which will amount to approximately 25,000 when the migrations are completed, in addition to the new business our 75 service providers are adding every day. I am pleased that the UK government made specific provision for satellite to be used in its £800m rural broadband programme, and we have already had success in the first tender to be awarded under this programme in Kent. Our history of successful projects in England, Scotland and Ireland should position us perfectly to benefit further from this work, and we are now seeing progress on projects with other European governments. The smaller companies proved to be more nimble and made the earliest commitments to us. However Avanti now has systems installed with the rural broadband projects of three of the largest incumbent telcos in Europe and progress with those projects could be very large once in full scale deployment. Enterprise Networks In the enterprise sector we are seeing strong demand for the provision of both back-up and primary networks. Our internationally patented back-up Business Internet Continuity product AVN2725 AR11 2 Year in Review AW04.indd 9 11/10/2011 16:47 10 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Chief Executive's Report continued is bundled into a telecoms service provider’s offering as a cost effective alternative to a second fixed telecoms line. For primary networks we are seeing demand amongst corporates for machine to machine communication such as ATM networks, telemetry for energy producers and also companies with multiple remote locations. We have also begun work with a project to deploy digital cinema services to one major cinema operator, a market that we think is potentially very large. Cellular Backhaul The cellular backhaul market is well established in emerging markets because wireless providers struggle to get reliable cables to connect their remote towers. We see strong business for HYLAS 2 already in the pipeline. However we are now actively trialling our backhaul products on HYLAS 1 with wireless providers in the UK and expect to proceed to contracted roll-out soon. Government In the military/institutional market, we successfully completed testing of our Ka-band spectrum for its suitability for military applications with excellent results. Whilst we expect demand for military applications to be limited for HYLAS 1, given its largely European footprint, we expect to see stronger demand for HYLAS 2 with its beam configuration over the Middle East and Africa. There is currently a round of tendering taking place in several NATO countries for Ka-band capacity and as the only NATO domiciled Ka-band operator with capacity for sale across the relevant Middle Eastern countries in 2012 it seems reasonable to expect that Avanti’s products will be successful in processes which should conclude before the launch of HYLAS 2. Backlog and Pipeline During the year we extended our customer base on HYLAS 1 so that we have sold capacity to over seventy service providers in Europe. Our customers typically commit only to enough bandwidth to serve the business they can forecast in the short term. Naturally during the first six months of service, those customers have been focussing on filling the capacity they committed to pre-launch. But we have already seen the first of these successfully sell all of the capacity they acquired from us and come back for more. We expect to continue to sign new customers and remain very confident that we will sell out all of the capacity on HYLAS 1 within 3 years of service launch. At present, our backlog of customer contracts for HYLAS 1 is £141m. Thus the backlog increased despite taking some of it to P&L in the six months since service launch. Many of our customers bought modest capacity to begin with and we expect them all to come back to us to buy more bandwidth to cope with growth. In addition, we are negotiating with new customers seeking significant capacity. Construction of HYLAS 2 is progressing well and the satellite remains on target to launch in Q2, 2012. Pre-launch sales interest has been very strong and we expect to ink significant deals soon in Southern and Eastern Africa, Iraq and Afghanistan. The backlog of customer contracts for HYLAS 2 is £30m. In addition the options over capacity (for military use) increased to £170m. There is strong interest in Avanti’s military capacity, but since we are not presently regulated to sell directly to military organisations, we sell to service providers who are, and some of those pay for options to give them an advantage in bidding processes. The strong customer interest in our capacity is illustrated by the pipeline of new business. These represent potential contracts where a business proposal has been made to the customer and negotiations on that proposal have commenced. Our pipeline of new business for HYLAS 1 and 2 stands at £473m. We provide an expanded definition for pipeline and backlog, and have re- introduced the peak fill rate metric in response to shareholder enquiries. AVN2725 AR11 2 Year in Review AW04.indd 10 11/10/2011 16:47 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 11 T h e Y e a r i n R e v i e w • The HYLAS 1 peak uti lisati on rate occurring in Year 3 based on current sales is 36.7%. We are targeti ng a service launch peak fi ll rate on HYLAS 2 of 25%. • Pipeline is defi ned as the total potenti al value of contracts which are currently under negoti ati on in respect of HYLAS 1 and HYLAS 2, and only includes projects where detailed technical informati on and a committ ed price has been delivered and the customer is proceeding with work on that basis. • Backlog includes the total value of contracts signed for sale of services. We do not include any value for the potenti al renewal of the contracts we sign with service providers beyond the specifi ed term. We do include in backlog the value of certain historic conti nuing business: • The small directly contracted base of consumer broadband customers in the UK which was built under government funded projects prior to HYLAS 1 launch is assumed to roll forward, since those customers have conti nued with service beyond their initi al term. • We also assume that our small European consulti ng business which uses HYLAS 1 to create advanced new technologies for government customers conti nues to generate the level of turnover it has averaged in the last fi ve years. HYLAS 3 We have announced our intention to construct our third HYLAS satellite and have already completed the first phase of design and long lead time item work. We have received a preferred offer of highly efficient debt financing to complete the construction of HYLAS 3. The financing offer rests upon the successful pre- sale of significant capacity. We have conditionally contracted pre-sales of $120m, and are close to finalising the balance. In the satellite industry, the long term planning cycles and construction schedules can often be frustrating I know, but this is a business which should produce extraordinary cash flows over the long term and it is important that Avanti makes decisions which maximise shareholders’ returns rather than jumping into expensive financing or poorly priced sales deals for the purpose of short term momentum. We hope to update the market on HYLAS 3 very soon. Competi ti ve Environment There is presently only one Ka-band competitor in each of our geographies. This resembles the competitive environment in the UK mobile phone industry in the early 1990s when only BT and Racal were competing. It does not represent intense competition and as a result it is possible to win business with product differentiation, not price. Every satellite has different characteristics which fundamentally affect its suitability for specific customers such as orbital position and elevation, power and beam shapes, radio frequency specifics, and the design and characteristics of ground equipment and software. Avanti’s key advantages are in several areas: • HYLAS 1 beam coverage give us advantages in certain areas, such as very high power over Western Europe, and the ability for customers to receive satellite TV and broadband in a single dish in Iberia, which is unique. • HYLAS 2 has highly sought aft er military capacity over the Middle East and military spectrum whose commercial use is unusual and we are turning the short term lead to market advantages into enduring and loyal business relati onships. • Being fi rst into certain African countries is also important because these countries exhibit growth that is not encumbered by sovereign debt crises or recession • Avanti sells a Virtual Network to service providers which enable them to benefi t from unique advantages such as:    Moving capacity dynamically between beams Modifying all Service parameters directly – they design their products, not us Licensed use of the Avanti patented Business Internet Conti nuity (BIC) products AVN2725 AR11 2 Year in Review AW04.indd 11 11/10/2011 16:47 12 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Chief Executive's Report continued Avanti has excellent differentiation in its products and is winning business at good prices. Our five year business plan is well poised to deliver exceptional returns to investors and there is additional upside for us to be found in completing new projects financed with very efficient debt. Our pipeline of new business gives us confidence in our ability to meet expectations. David Williams Chief Executive • There are also always relationship issues at play and Avanti’s new fresh approach helps, but also, of course, competitors in individual markets usually want to secure separate supply chains. Thus in lightly competed markets whose services are always bespoke, Avanti has sufficient differentiation to focus on selling to its strengths. Trading Update Avanti signed four contracts on 30 September 2011. The first is a contract for the sale of HYLAS 2 services to Bentley Walker for services on HYLAS 2 in Afghanistan. Avanti also added three new contracts for HYLAS 1 service. We completed the placement of $328m of Launch plus first year insurance on HYLAS 2 at a premium which is $15m under budget, supporting our view that it is a well managed and low risk project. We are grateful for the support of our insurers. Outlook Avanti owns scarce and valuable spectrum resources, in a lightly competed sub- sector of a global telecoms market which is experiencing breakneck growth in data demand through the increasing use of high data applications in government, business and consumer sectors and growing penetration of consumer telecoms usage. AVN2725 AR11 2 Year in Review AW04.indd 12 11/10/2011 16:47 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 13 Finance and Operating Review The shape of the balance sheet has changed signiﬁ cantly over the last 12 months. The group now has net assets of £207 million. T h e Y e a r i n R e v i e w Nigel Fox Group Finance Director Accounti ng policies The Group has reviewed its accounti ng policies in accordance with IAS 8 “Accounti ng Policies, Changes in Accounti ng Esti mates and Errors” and determined that they are appropriate for the Group. Operati ng performance 2011 saw Avanti generate revenues from its own satellite for the fi rst ti me. HYLAS 1 was launched in November 2010, however commercial services were not provided unti l April 2011 as we fully tested the many diff erent confi gurati ons of the satellite and drift ed it through to its fi nal orbit. Total revenue for the year was £5.5 million (2010: £5.8 million). Cost of sales, which include depreciati on of HYLAS 1 for the fi rst ti me, as well as a full year of the rented satellite costs, were £7.7 million which resulted in a gross loss of £2.2 million (2010 gross profi t: £2.7 million). We conti nue to carefully manage our overheads ahead of generati ng any signifi cant revenues. Total overheads for the year of £11.3 million were slightly distorted by the arbitrati on costs associated with the recovery of the SpaceX receivable – see below. Staff costs remain our largest single expenses and our average head count for the year was 97 (2010: 81) with a closing headcount of 116. In additi on there were one off costs associated with the move to Cyprus of the HYLAS 2 business of £0.8 million and a non-cash charge for share based payments of £0.78 million (2010: £0.60 million). This has resulted in an EBITDA loss of £9.7 million (2010: £1.7 million) and a loss before taxati on of £12.7 million (2010: loss £2.0 million). This is in line with our expectati ons for the year. Other operati ng Income During the year we were successful in our arbitrati on proceedings against Space Explorati ons in recovering monies paid against the purchase of a Falcon 9 launch vehicle. Avanti terminated this contract in June 2009 following SpaceX’s failure to demonstrate a successful launch heritage in the required ti meframe. This amount was shown in full in last year’s Annual Report and Accounts in note 16 under other receivables. In May 2011 we recovered the $7.6 million owed to us together with interest from the date of the contract terminati on. This additi onal amount (£427k) has been shown separately under other operati ng income. The signifi cant costs of the arbitrati on have been expensed in operati ng expenses. Taxati on The group tax credit was £3,027,000 (2010: £24,000 credit), resulting in an effective tax rate of 23.8%. The rate has been negatively affected by the fall in the UK corporation tax rate from 28% to 26%, which has impacted the brought forward deferred tax asset values. AVN2725 AR11 2 Year in Review AW04.indd 13 10/10/2011 18:45 14 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Finance and Operating Review continued Loss per share Basic loss per share was 12.14 pence (2010: loss 3.68 pence). contracted for further uplinks in Germany and Goonhilly (UK). Financing and treasury In July 2010 we completed the placing of 16.3 million shares at 430 pence which generated gross proceeds of £70 million. The majority of these funds (£53.6 million) were used to repay the original HYLAS 1 PIK bond which was raised in July 2007. We have continued to drawdown the HYLAS 2 facility from US EXIM and COFACE. At 30 June 2011 the gross debt was $190.3 million (£118.5 million). The total facility is $328 million which will be fully utilised around the time of the launch of HYLAS 2 in the first half of 2012. HYLAS 2 in Cyprus As I highlighted last year we had begun the process of moving the HYLAS 2 business to Cyprus. During the year we established an office in Limassol and David Bestwick, CTO, has taken the role of Managing Director of Avanti HYLAS 2 Cyprus Limited. The Cyprus companies now directly employ 10 people and has established outsource contracts for various arms length services from other Group companies. HYLAS 2 will cover Eastern Europe, Middle East, East and Southern Africa, and therefore Cyprus represents an ideal base from which to run this business. We have already started work on the key uplink ground station in Cyprus and have The HYLAS 2 debt, provided by US EXIM and COFACE, remains with the Cypriots’ UK parent company, Avanti HYLAS 2 Limited, and the Cyprus companies have been equity funded by this company. All companies within the HYLAS 2 sub Group have a functional currency of US dollars since the debt is US dollar based, the assets are predominantly purchased in US dollars and we anticipate that a significant majority of revenues will be US dollar denominated. Balance sheet The shape of the balance sheet has changed significantly over the last 12 months. Total non-current assets have increased by £157.4 million in the period. Expenditure on HYLAS 2 has been £147 million and £43.4m on HYLAS 1. Current assets have fallen from £52.1 million to £48.0 million mainly as a result of the fall in receivables following the receipt from SpaceX. Cash balances have increased by £4.6 million to £38.8 million. Gross debt has increased from £49.4 million to £118.7 million. The opening figure represents the HYLAS 1 PIK bond which was repaid in the period and the closing balance is the partial drawdown of the HYLAS 2 facility with US EXIM and COFACE. Cash flow The loss from operations of £12.9 million has significant non-cash items, which when combined with prudent management of working capital resulted in a net cash outflow from operations of £1.0 million including the receipt of £4.7m from SpaceX (2010: inflow £2.3 million). During the year we raised an additional £70 million of equity, which was partially used to repay the expensive PIK bond initially raised in 2007 for HYLAS 1 (repayment of £53.6 million). Furthermore, we drew down £118.5 million of the EXIM/ COFACE debt facility for HYLAS 2 against capital expenditure of £119.3 million (2010: £108.8 million). Finally in May 2011, after the successful arbitration proceedings in New York, we received full settlement of the outstanding SpaceX receivable of £4.7 million. Net cash balances increased by £4.6 million (2010: £9.6 million). Principal risk and uncertainty Fill Rates on HYLAS 1 and 2 We have previously stated that we expect to fill HYLAS 1 and HYLAS 2 in 3 and 5 years respectively from the start of commercial service. In respect of HYLAS 1 we are 6 months into the 3 year target and already have a peak fill rate of 36.7%. We are therefore ahead of plan in achieving the three year target. In respect of HYLAS 2 we already have a backlog of £30 million AVN2725 AR11 2 Year in Review AW04.indd 14 11/10/2011 15:26 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 15 T h e Y e a r i n R e v i e w and £170 million of opti ons. Furthermore we have a signifi cant pipeline across both satellites which leads us to believe our target fi ll rates are achievable. Pricing HYLAS 1 operates in a lightly competed market place and we conti nue to achieve pricing in excess of our base case. HYLAS 2 will operate, primarily, in emerging markets and to date we have not seen any signifi cant pricing pressures. HYLAS 2 launch HYLAS 2 remains on target for a launch in the second quarter of 2012. We have reti red most of the signifi cant risks that could cause any serious delay. HYLAS 2 will be launched on an Ariane 5 launch vehicle, which is the most reliable launch vehicle in the market. We have also completed the insurance of the HYLAS 2 project for a total sum insured of $328 million. Financial asset We now carry a loan receivable as a fi nancial asset to a strategic partner. The loan accrues interest at 7%. We have assumed that this asset is fully recoverable over the term of the loan. The Group has collateral over the balance, which consti tutes 75% of the equity interest in the partner, should there be a default. Global economic environment Poor macro-economic circumstances, parti cularly in Greece, Portugal, Spain and Ireland might be retarding our sales eﬀ orts. However we do not have a long standing trend with which to compare. It does however feel as though companies are only making commitments to buy services that they know they can for certain use or sell on i.e. very few clients are making highly speculati ve commitments. However, oﬀ setti ng this eﬀ ect are two positi ves. Firstly, telecoms services appear to remain non-cyclical. The long held belief that customers regard telecoms as an essenti al uti lity has held quite fi rm during the recession, with churn rates actually falling in Western Europe during 2010. Secondly, governments in Europe are spending money on broadband subsidy, especially as a result of long planned projects whereby the funding is in locked up EU budget pots. Thus it is difficult to show that recession is affecting our business. We remain the provider of highly desirable services where demand is not met by current or planned supply, with end user consumers whose purchasing decisions are not highly price sensitive. Criti cal accounti ng policies Details of our criti cal accounti ng policies are in Note 1 to the consolidated Annual Report. Nigel Fox Group Finance Director AVN2725 AR11 2 Year in Review AW04.indd 15 11/10/2011 15:26 16 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 Board of Directors John Brackenbury CBE* + • Chairman John was founder Chairman of Pubmaster which was sold in 2003 to Punch Taverns. He is a leading industrialist with over 40 years experience in the drinks and leisure sector. He is also President of Business in Sport and Leisure Limited, Trustee and Director of Springboard UK, Trustee and Director of Bradﬁ eld Foundati on, Trustee and Director of GamCare. John is the founder Chairman and Chairman of the Nominati ons Committ ee of Avanti Communicati ons Group plc. David Williams Chief Executi ve David is a co-founder of the Company. Prior to this he spent ten years working in the City ﬁ nancing telecommunicati ons projects. David Bestwick Managing Director Cyprus David is a co-founder of the Company. David graduated from the University of Leicester in 1987 with a BSc in Physics with Astrophysics. Following three years at Marconi Research Centre (MRC), he joined VEGA Group PLC in 1990 where he worked on a wide range of satellite applicati ons projects. Nigel Fox Finance Director and Secretary Nigel is a Chartered Accountant and has held various senior ﬁ nance roles before joining Avanti Communicati ons in 2007, including Chief Financial Oﬃ cer of Climax Group; Group Financial Controller at ARC Internati onal; Finance Director of Ruberoid Building Products, and Group Financial Controller of Ruberoid Plc. Matt hew O’Connor Chief Operati ng Oﬃ cer Matt hew joined Avanti in 2005 having worked in the telecommunicati ons industry for 20 years initi ally for BT where he held a number of sales and marketi ng roles within the UK and Internati onal Divisions. He joined Telewest in 1996 as a Director of its Business Division, where he was part of the team that grew the business from a £30m regional business to a £300m turnover nati onal operati on in 6 years. He went on to be Managing Director of the Wholesale Division with customers that included T-Mobile, 3, Cable and Wireless, NTL, and many telecoms re-sellers. AVN2725 AR11 3 Board & Map AW03.indd 16 11/10/2011 16:36 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 17 Alan Foster+ • Non-Executi ve Alan was a senior partner of de Zoete & Bevan for over twenty years and, on the creati on of BZW Asset Management, he was appointed Deputy Chairman. This company was the forerunner of Barclays Global Investors. Alan is the Chairman of the Remunerati on Committ ee of Avanti Communicati ons Group plc. Professor Michael Walker OBE FREng Non-Executi ve Professor Walker is adviser to Vodafone Group Technology, having spent 18 years of his professional career there culminati ng in the post of Group R&D Director. He is visiti ng professor at the University of Surrey and sits on the scienti ﬁ c advisory boards for the Universiti es of Warwick and Surrey. He also holds directorships with Alacrity Foundati on, Glasswall Soluti ons Ltd, Mobile VCE and Walker and Associates Telecoms Consultancy Ltd. G o v e r n a n c e Richard Vos* Non-Executi ve Richard is a telecommunicati ons and satellite professional, with internati onal experience, gained over 40 years working in the industry. His previous positi ons included Chairman of SatCom Group Holdings plc, Inmedia Communicati ons Ltd. and of Inmarsat Ventures PLC, and Head of Satellite Investments for Briti sh Telecommunicati ons plc (BT), serving as Governor for the UK and Ireland on the Board of INTELSAT and as Chairman of the Board. Richard is the Chairman of the Audit Committ ee of Avanti Communicati ons Group plc. William Wyatt * + • Non-Executi ve Will is Chief Executi ve Oﬃ cer of Caledonia Investments plc. He is also a Non-Executi ve Director on the boards of Bristow Group Inc, Cobepa, Melrose Resources plc, REI plc, TGE Marine AG, and Terrace Hill plc. * Audit committ ee + Remunerati on committ ee • Nominati ons committ ee AVN2725 AR11 3 Board & Map AW03.indd 17 11/10/2011 16:36 18 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Employees Drawing expertise from across the globe. Director Finance Networks AVN2725 AR11 3 Board & Map AW03.indd 18 11/10/2011 16:36 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 19 G o v e r n a n c e Administrati on AVN2725 AR11 3 Board & Map AW03.indd 19 11/10/2011 16:36 20 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Corporate Social Responsibility Supporting future careers in space. This year saw the launch of three new initiatives. These initiatives are designed to complement one another. Our aim is to attract new talent into the company whilst encouraging students to pursue a career in the space industry. By offering science students invaluable industry experience we believe we enhance their studies and career prospects. Avanti Space Scholarship Scheme The Avanti Space Scholarship Scheme was launched to support a number of students from underprivileged backgrounds with an interest and flair in science to pursue university studies in relevant space science degrees. Five Scholarship students have been selected for the October 2011 university undergraduate intake. All five students come from low income families and throughout their university course they will receive support from Avanti. We believe a person’s background should not be a barrier to a career in the Space Industry. This valuable scheme offers student support in a number of ways, including an annual bursary of £3,000; paid summer internships; coaching and mentoring; and a six month contract of employment on completion of their degree. It is envisaged that once graduated, these Scholarship students will naturally progress into a Graduate career at Avanti. Graduate Recruitment Scheme The Graduate Recruitment Scheme was launched to develop graduates with good, relevant science degrees into talented engineers within the organisation. The programme is designed to expose the graduates to all aspects of the organisation in order for them to develop their understanding of how academic theory can be dovetailed with practical industry knowledge and commercial focus. Our first four graduates started work with Avanti in September and they will have the opportunity to develop their skills in all areas of the business over the initial 2 year program. This programme also offers flexibility for them to develop in the part of the business where they have flair, whether that is satellite procurement, sales and marketing or customer services. Apprentice Trainee Scheme The Apprentice Trainee Scheme was launched this year. Taking advantage of the Government funded scheme we are offering young people the opportunity to gain work experience whilst earning a salary and working towards nationally recognised NVQ qualifications. We take pride in giving young people the opportunity to learn their key skills on-the- job and develop their career within Avanti. These three schemes have been positively received by students and universities as well as industry bodies, including the UK Space Agency and The National Space Centre. Avanti believes that through this investment we develop talented, motivated and knowledgeable individuals to become the next generation of engineers at Avanti. AVN2725 AR11 4 Govenance AW03.indd 20 10/10/2011 19:02 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 21 G o v e r n a n c e SOS Children is very glad to have partnered with Avanti Communications for the last 3 years. SOS Children’s Villages Ennerdale, South Africa This village was the fi rst to be built in South Africa, in 1984, 30km south of Johannesburg. Today it is home to over 150 children in its 15 family homes, as well as a house for reti red SOS mothers who act as grandmothers for the children. treatment to up to 2,000 pati ents a year and the day-care centre has a capacity to take in up to 40 children between ages 0-3. HIV/ AIDS aff ected families receive materials, medical support, educati on and counselling and are supported with income generati ng acti viti es. Moreover, HIV/AIDS awareness and preventi on campaigns are organised. The adjoining SOS Kindergarten has the capacity to take in up to 100 children and the SOS Social Centre, which was opened in 2000, houses a clinic, a day-care centre and an HIV/AIDS community-based child care and support programme. The clinic off ers AVN2725 AR11 4 Govenance AW03.indd 21 10/10/2011 19:02 22 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Directors’ Report The directors have pleasure in submitting their annual report together with the audited financial statements for the year ended 30 June 2011. Principal activities and review of the business The principal activity of the Company is the provision of satellite communication services. The services are principally provided via Ka-band satellite. The first Avanti satellite, HYLAS 1 was launched in November 2010, and brought into full commercial service in April 2011. Business review and key performance indicators (“KPI’s”) The information that fulfils the requirements of the business review can be found in the finance and operating review on pages 13 to 15, which are incorporated in this report by reference. As the company is still in the early stages of its strategy with a focus on the future, we do not currently have a focus on traditional KPI’s. Instead our business model is focussed on the launch of the satellite and subsequent capacity sales. A comprehensive set of KPIs will be introduced next year reflecting a full year of service on Hylas 1. In the Chairman’s statement and Finance and Operating Review, we have highlighted key financial statistics such as revenue and operating profit, however given the nature of the business at the current time, we do not consider them to be KPI’s. Results and dividends The results for the year ended 30 June 2011 are shown on page 29. No equity dividend was paid in the year ended 30 June 2011 (2010: £nil). No final dividend is proposed at the year-end (2010: £nil). The loss for the year transferred to reserves was £9,700,000 (2010: loss of £1,932,000). Qualitative and Quantitative disclosures about interest, foreign exchange, credit and liquidity risks A discussion of the Group’s financial risk management objectives and policies and the exposure of the group to interest rate, foreign exchange, credit and liquidity risk is included in Note 23 to the Consolidated Financial Statements. Research and development The Group continues to invest in new services and technology through its research and development programs which can lead to profitable exploitation of Avanti’s satellite capacity. These include pure research into new products as well as developing those services which have been demonstrated to have a profitable business case. Directors The directors who served during the year were as follows: F E J G Brackenbury CBE D J Williams D J Bestwick N A D Fox M J O’Connor D A Foster C R Vos W P Wyatt I C Taylor MBE (resigned 12/04/2011) M Walker OBE (appointed 19/04/2011) AVN2725 AR11 4 Govenance AW03.indd 22 10/10/2011 19:02 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 23 Directors’ emoluments The remunerati on of the directors including the highest paid director and Chairman was as follows: For the year ended 30 June 2011 Executi ve D J Williams D J Bestwick N A D Fox M J O’Connor Total Executi ve Non-executi ve F E J G Brackenbury CBE D A Foster W P Wyatt M Walker OBE I C Taylor MBE C R Vos Total Non-Executi ve Total Salaries Bonus Other beneﬁ ts Post employment beneﬁ ts Total 2011 300,000 237,329 170,000 160,000 867,329 100,000 35,000 30,000 6,250 30,000 35,000 236,250 1,103,579 144,750 158,000 93,000 98,000 439,750 – – – – – – – 493,750 46,466 5,855 9,593 2,485 64,399 4,498 – – – – – 4,498 68,897 95,750* 25,674 20,000 20,000 586,966 426,858 292,593 280,485 161,424 1,586,902 – – – – – – – 161,424 104,498 35,000 30,000 6,250 30,000 35,000 240,748 1,827,650 G o v e r n a n c e * During the year ended 30 June 2011, DJ Williams chose to take £58,250 of his bonus as additi onal company pension contributi on. For the year ended 30 June 2010 Salaries Bonus Other beneﬁ ts Post employment beneﬁ ts Total 2010 Executi ve D J Williams D J Bestwick N A D Fox M J O’Connor Total Executi ve Non-executi ve F E J G Brackenbury CBE D A Foster W P Wyatt I C Taylor MBE C R Vos Total Non-Executi ve Total 131,630* 83,553* 150,400 135,840 501,423 60,000 25,000 25,000 25,000 25,000 160,000 661,423 – – – – – – – – – – – 19,417 1,529 8,467 2,378 31,791 2,344 – – – – 2,344 34,135 103,745* 78,841* 7,020 6,792 196,398 – – – – – – 196,398 254,792 163,923 165,887 145,010 729,612 62,344 25,000 25,000 25,000 25,000 162,344 891,956 * During the year ended 30 June 2010, DJ Williams and DJ Bestwick made salary sacrifi ces of £97,170 and £75,163 respecti vely which the Company paid into their private pensions. AVN2725 AR11 4 Govenance AW03.indd 23 10/10/2011 19:02 Total 1,196,105 840,009 237,501 278,128 2,551,743 Total 441,450 380,096 289,286 309,227 24 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Directors’ Report continued Directors’ Long Term Incentive Plans Original allocations: D J Williams D J Bestwick N A D Fox M J O’Connor Total Core Exceptional Extraordinary 565,480 350,741 137,238 139,238 1,192,697 350,741 209,384 50,000 69,445 679,570 279,884 279,884 50,000 69,445 679,213 Outstanding allocations Core Exceptional Extraordinary D J Williams D J Bestwick N A D Fox M J O’Connor Total Executive 161,566 100,212 39,286 39,782 340,846 – – – – – 279,884 279,884 250,000 269,445 1,079,213 1,420,059 All unvested shares are held in the Employee Benefit Trust (EBT). The Long Term Incentive Plan (LTIP) has been established by the Company with approval from the Remuneration Committee to reward and incentivise the Executive Directors and senior managers of the Company. The LTIP allocations are in separate sub funds within the EBT and are subject to a discretionary Trust. The shares are subject to automatic revocation if certain criteria (set out below) are not met and continue to be revocable for the entire Trust period. During the year an additional 200,000 LTIP shares were issued to both Nigel Fox and Matthew O’Connor respectively. These LTIP shares are subject to automatic revocation if the criteria for the Extraordinary Achievement tranche are not met. The allocations into the LTIP vary for each executive. The total allocation to each executive is split into three separate tranches: i) The Core Tranche This element of the grant becomes exercisable in 7 equal instalments. The first instalment was exercisable on grant and the second on 30 June 2008. The remaining 5 are annually thereafter. 5/7ths of this core grant is not automatically revocable. ii) The Exceptional Achievement Tranche This element of the grant was amended during the year. Originally, these options were only exercisable if the average market value of the share exceeded £5 for a consecutive period of six months prior to 30 June 2010. Given the unprecedented market conditions over the previous year, the remuneration committee considered that whilst the executives had performed well and that the share price had outperformed the FTSE 100 and AIM all share index since the LTIPs were granted, the target set in the LTIP rules may still not be achieved. In May 2010 the remuneration committee agreed to extend the target date to 31 December 2010 and that the six month average target price should be increased £5.50. This benchmark was satisfied in November 2010. iii) The Extraordinary Achievement Tranche This element of the grant is only exercisable if the Market Value of a Share exceeds £10 for a consecutive period of six months before 30 June 2013. AVN2725 AR11 4 Govenance AW03.indd 24 11/10/2011 16:58 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 25 Non-executi ve Directors’ Unapproved Plans F E J G Brackenbury CBE D A Foster C R Vos Total 2011 31,431 7,500 15,000 53,931 2010 62,863 15,000 15,000 92,863 The unapproved scheme was established during 2007. The opti ons are issued for 10 years with 25% vesti ng at the end of years 3, 4, 5 and 6. There are no performance criteria associated with these opti ons and they are exercisable as long as the opti on holder remains with the Company. Directors’ share interests The following Directors held interests in the share capital of the Company: D J Williams D J Bestwick N A D Fox M O’Connor F E J G Brackenbury CBE D A Foster W P Wyatt C R Vos M Walker OBE Fully paid Ordinary Shares of 1p each 30 June 2011 30 June 2010 1,587,092 1,211,648 109,677 154,009 380,432 388,750 25,342 6,030 – 1,543,905 1,102,264 89,897 144,564 442,891 359,639 11,200 6,030 – G o v e r n a n c e At 31 August, the Company had been noti fi ed, pursuant to the Financial Services Authority’s Disclosure & Transparency Rules, of the following noti fi able voti ng rights in the Company’s issued ordinary share capital. Caledonia Investments plc M&G Investment Management Ltd Directors & Related and EBT The Capital Group Companies, Inc. Kames Capital London London – London/Los Angeles Edinburgh 12,737,000 12,507,850 7,497,031 3,495,222 3,307,410 In additi on, 1.4 million shares are held under LTIP. Dividend and voti ng rights have been waived. Policy and practi ce on payment of creditors The Group’s policy and practi ce on payment of creditors is: • To pay all suppliers within the ti me limit agreed at the start of business with that supplier; • To ensure that suppliers are aware of the terms of payment; and • To pay in accordance with the contractual and other legal obligati ons whenever it is sati sfi ed that the supplier has provided goods and services in accordance with the agreed terms and conditi ons. At 30 June 2011, the Company did not have any trade creditors (2010: nil). AVN2725 AR11 4 Govenance AW03.indd 25 11/10/2011 16:58 26 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Directors’ Report continued Political and charitable donations During the year the Group made a political donation to the Conservative party of £4,000 (2010: £5,000). Directors’ and Officers’ liability insurance Avanti Communications Group plc maintains appropriate insurance to cover Directors’ and Officers’ liability for itself and its subsidiaries. At the date upon this report was approved and for the year to 30 June 2011, the Company provided an indemnity in respect of all of the Company’s Directors. Directors’ responsibilities The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and the company and of the profit or loss of the group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and the group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. In the case of each director in office at the date the directors’ report is approved: a) so far as the directors are aware, there is no relevant audit information of which the company’s auditors are unaware; and b) they have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the company’s auditors are aware of that information. Approved by the Board of Directors and signed on behalf of the Board Nigel Fox Secretary and Group Finance Director London AVN2725 AR11 4 Govenance AW03.indd 26 10/10/2011 19:02 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 27 Corporate Governance Report The Group is quoted on AIM. Although the rules of AIM do not require the Company to comply with the Combined Code 2006 on Corporate Governance (‘the Code’) the Company fully supports the principles set out in the Code and will seek to comply wherever practi cal, given both the size and resources available to the Company. Details are provided below of how the Company applies those parts of the Code which it believes to be appropriate. The board The Company has appointed non-executi ve directors to bring an independent view to the board and to provide a balance to the executi ve directors. The board of directors comprises four executi ve directors and fi ve non-executi ve directors one of whom is the chairman. Despite the fact that some of the non-executi ve directors have share opti ons, the board considers that each of the non-executi ve directors is independent. The board meets at least six ti mes per year and receives a board pack comprising individual reports from each of the executi ve directors and members of the senior management team, together with any other material deemed necessary for the board to discharge its duti es. The board has responsibility for formulati ng, reviewing and approving the Group’s strategy, budgets, major items of expenditure and acquisiti ons. Board committ ees The Board has established three committ ees: audit, remunerati on and nominati ons, all having writt en terms of delegated responsibiliti es. Each is chaired by a diff erent non-executi ve director. A copy of each committ ee’s terms of reference can be found at the Avanti website: www.avanti plc.com Audit committ ee The audit committ ee consists of R Vos, W Wyatt , and J Brackenbury and is chaired by R Vos. It meets at least twice a year and is responsible for ensuring that the appropriate fi nancial reporti ng procedures are properly maintained and reported on and for meeti ng the auditors and reviewing their reports relati ng to the Group’s accounts and internal control systems. The committ ee also receives all internal operati onal review reports. Remunerati on committ ee The remunerati on committ ee consists of A Foster, J Brackenbury, and W Wyatt and is chaired by A Foster. It meets at least twice a year and is responsible for reviewing the performance of the executi ve directors and other senior executi ves and for determining appropriate levels of remunerati on. Nominati ons committ ee The nominati ons committ ee consists of W Wyatt , J Brackenbury and A Foster and is chaired by J Brackenbury. It meets as and when necessary and is responsible for nominati ng candidates for appointment as Directors to the Board, bearing in mind the need for a broad representati on of skills across the Board. Shareholder relati ons The Company meets with insti tuti onal shareholders and analysts as appropriate and uses its website to encourage communicati on with private, existi ng and prospecti ve shareholders. Avanti Communicati ons Group plc welcomes feedback from investors about its published reports and website. Please address your feedback to our investor relati ons team at Redleaf Communicati ons Limited by email info@redleafpr.com or in writi ng to Redleaf Communicati ons Limited, 9-13 St Andrews Street, London EC4A 3AF. Internal control and risk management The Group operates a system of internal control and conti nues to develop and review that system in accordance with the guidance published by the Insti tute of Chartered Accountants in England and Wales. The internal control system is designed to manage rather than eliminate the risk of failure to achieve business objecti ves. The board is responsible for the system of internal control and for reviewing its eff ecti veness. It can only provide reasonable, but not absolute, assurance against material misstatement or loss. The board operates a formal process of risk assessment and reporti ng. Each major business unit carries out formal risk assessments annually and regularly updates those during the year. Reports on the assessments and related miti gati on acti ons of all signifi cant risks are provided to the board. The Group does not have an internal audit functi on due to the small size of the Company’s administrati ve functi on, the high level of director review and authorisati on of transacti ons. However, the Company undertakes a programme of operati onal reviews designed to visit all major businesses on a regular basis. The fi nance director is responsible for that programme and its reporti ng to the audit committ ee. The board recognises that an essenti al part of its responsibility is the eff ecti ve safeguarding of assets, the proper recogniti on of liabiliti es and the accurate reporti ng of results. The Group has a comprehensive system for regular reporti ng to the board. This includes an annual planning and budgeti ng system with budgets approved by the board. The fi nancial reporti ng system compares against budget and prior year and reconsiders its fi nancial year forecast on a monthly basis. The board has established a formal policy of authorisati on setti ng out matt ers which require its expressed approval and certain authoriti es delegated to the executi ve directors. In compliance with AIM rules the Company has established a policy and share dealing code relati ng to dealing in the Company’s shares by directors, employees and connected persons. The Company maintains appropriate insurance cover in respect of legal acti ons against directors as well as against material loss or claims against the Group, and reviews the adequacy of cover regularly. There were no noti fi able environmental impacts at any Avanti Communicati ons Group site during the fi nancial year. G o v e r n a n c e AVN2725 AR11 4 Govenance AW03.indd 27 10/10/2011 19:02 28 Avanti Communications Group plc Annual Report and Accounts for the year ending 30 June 2011 Independent Auditors’ Report to the members of Avanti Communications Group plc • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. J. Booker (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 30 September 2011 We have audited the group and parent company financial statements (the ‘‘financial statements’’) of Avanti Communications Group plc for the year ended 30 June 2011 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the company statement of financial position, the consolidated and company statement of cash flows, the consolidated and company statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 26, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Avanti Communications Group plc Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 30 June 2011 and of the group’s loss and group’s and parent company’s cash flows for the year then ended; AVN2725 AR11 5 Accounts AW04.indd 28 11/10/2011 17:00 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 29 Consolidated Income Statement year ended 30 June 2011 Revenue Cost of sales Gross (loss)/profi t Operati ng expenses Other operati ng income Loss from operati ons Finance income Finance expense Net fi nancing income Loss before tax Income tax credit Loss for the year Att ributable to: Equity holders of the parent Basic (loss)/earnings per share (pence) Diluted (loss)/earnings per share (pence) Year ended 30 June 2011 £’000 Year ended 30 June 2010 £’000 Notes 2 3 6 7 7 8 9 9 5,462 (7,678) (2,216) (11,279) 636 (12,859) 428 (296) 132 (12,727) 3,027 (9,700) (9,700) (12.14p) (12.14p) 5,815 (3,140) 2,675 (8,739) 3,628 (2,436) 1,071 (591) 480 (1,956) 24 (1,932) (1,932) (3.68p) (3.68p) Consolidated Statement of Comprehensive Income year ended 30 June 2011 F i n a n c i a l S t a t e m e n t s Loss for the year Other comprehensive (loss)/income Exchange diff erences on translati on of foreign operati ons and investments Total comprehensive (loss)/income for the year enti rely att ributable to the equity holders of the parent Year ended 30 June 2011 £’000 Year ended 30 June 2010 £’000 (9,700) (1,932) (4,335) (14,035) 2,194 262 AVN2725 AR11 5 Accounts AW04.indd 29 10/10/2011 18:47 30 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Consolidated Statement of Financial Position as at 30 June 2011 ASSETS Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Other financial assets Total non-current assets Current assets Inventories Trade and other receivables Derivative financial instruments Cash and cash equivalents Total current assets Total assets LIABILITIES AND EQUITY Current liabilities Trade and other payables Derivative financial instruments Provisions for other liabilities Loans and other borrowings Total current liabilities Non-current liabilities Trade and other payables Provisions for other liabilities Loans and other borrowings Total non-current liabilities Total liabilities Equity Share capital Share premium Foreign currency translation reserve Retained earnings and other reserves Total shareholders’ equity Total liabilities and equity Notes 30 June 2011 £’000 30 June 2010 £’000 11 12 18 13 16 17 23 19 20 23 21 22 20 21 22 24 24 315,390 170,231 3 3,386 9,135 11 268 – 327,914 170,510 1,284 7,916 – 38,829 48,029 375,943 1,398 15,993 525 34,181 52,097 222,607 30,395 13,460 83 30 397 – 30 269 30,905 13,759 18,997 3 118,678 137,678 168,583 849 188,678 (2,141) 19,974 207,360 375,943 7,228 33 49,404 56,665 70,424 686 120,496 2,194 28,807 152,183 222,607 The financial statements of company number 6133927 on pages 29 to 63 were approved by the Board of Directors on 30 September 2011 and signed on its behalf by: Nigel Fox Finance Director 30 September 2011 AVN2725 AR11 5 Accounts AW04.indd 30 10/10/2011 18:47 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 31 Company Statement of Financial Position as at 30 June 2011 ASSETS Non-current assets Deferred tax assets Investments Total non-current assets Current assets Trade and other receivables Derivati ve fi nancial instruments Total current assets Total assets LIABILITIES AND EQUITY Current liabiliti es Trade and other payables Derivati ve fi nancial instruments Total current liabiliti es Total liabiliti es Equity Share capital Share premium Foreign currency translati on reserve Retained earnings and other reserves Total shareholders’ equity Total liabiliti es and equity Notes 30 June 2011 £’000 30 June 2010 £’000 18 14 17 23 20 23 24 24 191 84,728 84,919 105,190 – 105,190 190,109 3 83 86 86 849 188,678 174 322 190,023 190,109 62 41,320 41,382 80,234 525 80,759 122,141 9 – 9 9 686 120,496 174 776 122,132 122,141 The fi nancial statements of company number 6133927 on pages 29 to 63 were approved by the Board of Directors on 30 September 2011 and signed on its behalf by: Nigel Fox Finance Director 30 September 2011 F i n a n c i a l S t a t e m e n t s AVN2725 AR11 5 Accounts AW04.indd 31 10/10/2011 18:47 32 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Consolidated and Company Statement of Cash Flows year ended 30 June 2011 Group Company Year ended 30 June 2011 £’000 Year ended 30 June 2010 £’000 Year ended 30 June 2011 £’000 Year ended 30 June 2010 £’000 Notes Cash flow from operating activities Loss from operations before taxation Depreciation and amortisation Provision for impairment of trade receivables Onerous lease provision Share based payments expense Loss on disposal of fixed assets Movement in working capital Decrease/(increase) in inventories Decrease/(increase) in trade and other receivables Increase/(decrease) in trade and other payables "SpaceX" settlement Cash (absorbed by)/generated from operations Interest received Interest paid Derivative cash received Net cash (absorbed by)/generated from operating activities Cash flows from investing activities Payments for other financial assets and investments Payments for property, plant and equipment Receipt on sale of motor vehicles Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowing Proceeds from share issue Share issue costs Proceeds from lease and lease back Finance lease paid 3 17 21 25 22 (9,113) (1,082) (12,859) 2,939 50 (30) 776 11 81 3,059 232 4,716 (1,025) 38 (87) 718 (356) (2,436) (29) 769 13 (30) 602 – (1,047) (1,756) 6,168 – 2,283 99 (155) – – – – 54 – 25 – (24,603) (358) – (24,936) – – – (59) – – – 54 – (5) – (72,872) (3,092) – (75,969) – – – 2,227 (24,936) (75,969) (8,857) (119,261) 3 – (43,409) (41,031) (108,803) – – – – – (128,115) (108,803) (43,409) (41,031) 118,475 (53,606) 70,000 (1,655) 567 (448) – – 120,500 (3,500) – (402) – – 70,000 (1,655) – – – – 120,500 (3,500) – – Net cash received from financing activities 133,333 116,598 68,345 117,000 Effects of exchange rate on the balances of cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year (214) 4,648 34,181 38,829 (456) 9,566 24,615 34,181 19 – – – – – – – – AVN2725 AR11 5 Accounts AW04.indd 32 11/10/2011 15:29 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 33 Consolidated and Company Statement of Changes in Equity year ended 30 June 2011 Group 2010 At 1 July 2009 Loss for the year Other comprehensive income Issue of share capital Share based payments Tax credit taken directly to reserves At 30 June 2010 2011 At 1 July 2010 Loss for the year Other comprehensive loss Issue of share capital Share based payments Tax credit taken directly to reserves At 30 June 2011 Share Capital £’000 Share premium £’000 Retained earnings £’000 Foreign currency translati on reserve £’000 Total equity £’000 449 – – 237 – – 686 686 – – 163 – – 849 34,041 – – 86,455 – – 29,974 (1,932) – – 602 163 – – 2,194 – – – 64,464 (1,932) 2,194 86,692 602 163 120,496 28,807 2,194 152,183 120,496 – – 68,182 – – 28,807 (9,700) – – 776 91 2,194 – (4,335) – – – 152,183 (9,700) (4,335) 68,345 776 91 188,678 19,974 (2,141) 207,360 £47,000 has been adjusted between opening reserves and Group share capital in respect of shares held in the Employee Benefi t Trust. Company 2010 At 1 July 2009 Profi t for the year Other comprehensive income Issue of share capital Share based payments Tax credit taken directly to reserves At 30 June 2010 2011 At 1 July 2010 Loss for the year Other comprehensive income Issue of share capital Share based payments Tax expense taken directly to reserves At 30 June 2011 Share Capital £’000 Share premium £’000 Retained earnings £’000 Foreign currency translati on reserve £’000 Total equity £’000 449 – – 237 – – 686 686 – – 163 – – 849 34,041 – – 86,455 – – 120,496 120,496 – – 68,182 – – 188,678 (34) 723 – – 54 33 776 776 (504) – – 54 (4) 322 – – 174 – – – 174 174 – – – – – 34,456 723 174 86,692 54 33 122,132 122,132 (504) – 68,345 54 (4) 174 190,023 F i n a n c i a l S t a t e m e n t s AVN2725 AR11 5 Accounts AW04.indd 33 10/10/2011 18:47 34 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts 1 Accounting Policies Statement of compliance The Group financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU "IFRS", International Financial Reporting Interpretations Committee (IFRIC) Interpretations, and the Companies Act 2006 applicable to companies preparing their accounts under IFRS. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation The financial statements have been prepared on the historical cost basis, with the exception of share based payments and financial derivatives, which are incorporated using fair value. The Company has elected to take the exemption under section 408 of the Companies Act 2006 to not present the parent company income statement. No new standards were applied during the year ended 30 June 2011. New standards and interpretations not applied The following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning 1 July 2010 but are not currently relevant for the Group, or have had no impact: Annual improvements 2009 (effective 1 January 2010) Amendment to IFRS 2, 'Share based payments – Group cash-settled share-based payment transactions' (effective 1 January 2010) Amendments to IFRS 1 for additional exemptions (effective 1 January 2010) Amendments IAS 32 Financial instruments: Presentation on classification of rights issues (effective 1 February 2010) Amendment to IFRS 1, First time adoption on financial instrument disclosures (effective 1 July 2010) IFRIC 15, 'Arrangements for construction of real estates' (effective 1 January 2009 but EU endorsed for 1 January 2010) IFRIC 19, 'Extinguishing financial liabilities with equity instruments' (effective 1 July 2010) AVN2725 AR11 6 Notes AW03.indd 34 10/10/2011 18:49 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 35 New standards and interpretati ons The following new standards, amendments to standards and interpretati ons have been issued, but are not eff ecti ve for the fi nancial year beginning 1 July 2010 and have not been early adopted: IAS 34, 'Interim fi nancial reporti ng', has been amended by the 2010 Improvements to require the following disclosures in interim fi nancial reports in respect of fi nancial instruments, if they are signifi cant: Impairments recognised on fi nancial assets and the reversal of previous impairments; Changes in the business or economic circumstances that aff ect the fair value of the enti ty’s fi nancial assets and fi nancial liabiliti es, whether those assets or liabiliti es are recognised at fair value or amorti sed cost; Transfers between levels of the fair value hierarchy used in measuring the fair value of fi nancial instruments; Changes in the classifi cati on of fi nancial assets as a result of a change in the purpose or use of those assets. The disclosures apply for accounti ng periods beginning on or aft er 1 January 2011. IFRS 9, ‘Financial instruments’, issued in December 2009. This addresses the classifi cati on and measurement of fi nancial assets and is likely to aff ect the Group’s accounti ng for its fi nancial assets. The standard is not applicable unti l 1 January 2013 but is available for early adopti on. Revised IAS 24, ‘Related party disclosures’, issued in November 2009. It supersedes IAS 24, ‘Related party disclosures’, issued in 2003. The revised IAS 24 is required to be applied from 1 January 2011. Earlier applicati on, in whole or in part, is permitt ed. ‘Prepayments of a minimum funding requirement’ (Amendments to IFRIC 14), issued in November 2009. The amendments correct an unintended consequence of IFRIC 14, ‘IAS 19 – The limit on a defi ned benefi t asset, minimum funding requirements and their interacti on’. Without the amendments, enti ti es are not permitt ed to recognise as an asset some voluntary prepayments for minimum funding contributi ons. The amendments are eff ecti ve for annual periods beginning 1 July 2011. Earlier applicati on is permitt ed. The Directors do not anti cipate that the adopti on of any of the above standards, amendments or interpretati ons will have a material impact on the Group’s fi nancial statements on initi al applicati on. The Group is currently assessing the impact of the standards on its results, fi nancial positi on and cash fl ows. The Group conti nues to monitor the potenti al impact of other new standards and interpretati ons which may be endorsed by the European Union and require adopti on by the Group in future accounti ng periods. Criti cal accounti ng esti mates and management judgement The presentati on of fi nancial statements in conformity with IFRS requires the use of certain criti cal accounti ng esti mates. It also requires management to exercise its judgement in the process of applying the Group’s accounti ng policies. The esti mates and assumpti ons that have a signifi cant risk of causing a material adjustment to the carrying amounts of assets and liabiliti es within the next fi nancial year are addressed below. (a) Revenue recogniti on The group uses the percentage-of-completi on method in accounti ng for its consultancy and space projects. Use of the percentage-of completi on method requires the group to esti mate the services performed to date as a proporti on of the total services to be performed. F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 35 10/10/2011 18:49 36 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 1 Accounting Policies continued (b) Impairment of satellites The carrying amount of the satellites are dependent on the Group's ability to sell sufficient capacity in the satellites over their useful economic lives. In management's view, at this early stage in the life of the HYLAS 1 satellite, the sale of capacity is progressing well and in line with plans. The Group will assess impairment annually. (c) European Space Agency funding and sale of capacity In April 2006 the group entered into a contract with ESA to receive funding for the build of the satellite and also giving ESA the right to use up to 10% of capacity on HYLAS 1 for a period of 3 years if the capacity is available. An assessment of the fair value of the revenues for the sale of capacity has been performed in order to account for this as a multiple element arrangement . The fair value of the capacity sales will be recognised on a straight line basis over a 3 year period commencing in this period given HYLAS 1 is now operational. Management has made their best estimate of the fair value of the revenue element of the transaction based on market prices of the capacity at the inception of the arrangement. The residual fair value represents the value of the capital grant and this will be released to other operating income over a period of 15 years to match the useful economic life of the satellite. If the fair value of the capacity sale was altered by 10% the impact on the revenue figure would be £110,000. (d) Other financial assets The Group carries a loan receivable as a financial asset to a strategic partner. The loan accrues interest at 7%. We have assumed that this asset is fully recoverable over the term of the loan. The Group has collateral over the balance which constitutes 75% of the equity interest in the borrower should there be a default. Going concern The accounts have been prepared on a going concern basis which assumes that the Group will continue in operational existence for the foreseeable future. Basis of consolidation Where the company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The financial statements present the results of the company and its subsidiaries, including the Employee Benefit Trust (“the group”) as if they formed a single entity. Intercompany transactions, balances, income and expenses are therefore eliminated in full. The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition. There is no minority interest in the net assets of the Group, and no goodwill arising on acquisition of subsidiaries. The financial statements of subsidiaries are prepared for the same reporting year as the parent company using consistent accounting policies. Revenue recognition The group currently earns revenue primarily from the sale of satellite broadband services to customers and from providing consultancy advice connected with the exploitation of the space assets. Following the launch of HYLAS 1, revenue from the sale of satellite broadband services will be the key revenue stream of the business with space consultancy contracts being a smaller proportion of the total revenues. Broadband satellite communications services revenues are recorded on a straight-line basis over the term of the contract concerned net of discounts, VAT and other similar allowances. Revenues also include sales of terminals recognised upon installation when the risks and rewards of ownership have transferred to the customer. Revenue from space consultancy and other consultancy contracts connected with the exploitation of the space assets are recognised by reference to the stage of completion of the contract activity at the balance sheet date. The contracts are broken down into separable elements which are all judged individually on a percentage of completion basis in order to ascertain the completeness of an overall project. By its nature these projects require a certain element of judgement by management. Contract costs are recognised as an expense in the period they are incurred. Accrued income represents the excess of revenue recognised over amounts invoiced. Deferred income represents any unearned balances remaining from amounts received from customers pursuant to prepaid contracts. AVN2725 AR11 6 Notes AW03.indd 36 10/10/2011 18:49 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 37 Appropriate allowances for esti mated irrecoverable amounts are recognised as an expense when there is objecti ve evidence that trade receivables are impaired. Accounts receivable balances are specifi cally reviewed to assess a customer’s ability to make payments. Leased assets The determinati on of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfi lment of the arrangement is dependent on the use of a specifi c asset or assets and whether the arrangement conveys the right to use the asset. Leases of property, plant and equipment where the group holds substanti ally all the risks and rewards of ownership are classifi ed as fi nance leases. Assets acquired under hire purchase or a fi nance lease are capitalised in the balance sheet. Those held under hire purchase and fi nance lease contracts are depreciated over their esti mated useful lives. The interest element of these obligati ons is charged to the profi t and loss account over the relevant period. The capital element of the future payments is treated as a liability. Leases where a signifi cant porti on of the risks and rewards are held by the lessor are classifi ed as operati ng leases. Rentals are charged to the income statement on a straight line basis over the period of the lease. Interest income and expense Borrowing costs incurred for the constructi on of the satellite assets are capitalised during the period of ti me required to complete and prepare the assets for their intended use, in accordance with IAS 23 ‘Borrowing Costs’. Other borrowing costs are expensed in the Income Statement. Interest income on cash deposits is recognised on an eff ecti ve interest rate methodology, taking into account the principal amounts outstanding and the interest rates applicable. Foreign currency Transacti ons entered into by the group enti ti es in a currency other than the currency of the primary economic environment in which it operates (the “functi onal currency”) are recorded at the rates ruling when the transacti ons occur. Foreign currency monetary assets and liabiliti es are translated at the rate ruling at the balance sheet date. Exchange diff erences arising on the retranslati on of unsett led monetary assets and liabiliti es are recognised immediately in the income statement. The presentati onal currency of the Group is sterling. On consolidati on, assets and liabiliti es of foreign undertakings are translated into Sterling at year end exchange rates. The results of foreign undertakings are translated into Sterling at average rates of exchange for the year (unless this average is not a reasonable approximati on of the cumulati ve eff ects of the rates prevailing on the transacti on dates, in which case income and expenses are translated at the dates of the transacti ons). Foreign exchange diff erences arising on retranslati on are recognised directly in a separate component of equity, the foreign currency translati on reserve. In the event of the disposal of an undertaking with assets and liabiliti es denominated in a foreign currency, the cumulati ve translati on diff erence associated with the undertaking in the translati on reserve is charged or credited to the gain or loss on disposal recognised in the income statement. Pension schemes Employees have the opti on to establish their own pension scheme to which the Group will match employee contributi ons up to a maximum amount. There is no on-going liability to the Group beyond the period that the contributi ons are made. The cost of such contributi ons are charged to the income statement when incurred. Share based payments The group operates a number of equity sett led share-based payment arrangements, under which the group receives services from employees as considerati on for equity instruments (share opti ons and shares) of the group. Equity sett led share-based payments are measured at fair value (excluding the eff ect of non market-based vesti ng conditi ons) at the date of grant, but including any market- based performance criteria and the impact of non investi ng conditi ons. The fair value determined at the grant date is recognised on a straight-line basis over the vesti ng period, based on the group’s esti mate of the opti ons or shares that will eventually vest and adjusted for the eff ect of non market-based vesti ng conditi ons. Fair value is measured using either the Binomial opti ons pricing model or Monte Carlo simulati ons, whichever is most appropriate to the award. F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 37 10/10/2011 18:49 38 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 1 Accounting Policies continued Share based payments continued Service and performance conditions are vesting conditions. Any other conditions are non-vesting conditions which have to be taken into account to determine the fair value of equity instruments granted. In the case that an award or option does not vest as a result of a failure to meet a non-vesting condition that is within the control of either counterparty, this is accounted for as a cancellation. Cancellations must be treated as accelerated vesting and all remaining future charges are immediately recognised. As the requirement to save under an employee share save arrangement is a non-vesting condition, employee cancellations must be treated as an accelerated vesting. Current tax The charge for taxation is based on taxable profits for the year. Taxable profits differ from profit as reported in the income statement because it excludes items of income and expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities based on tax rates that have been enacted or substantially enacted by the balance sheet date. Deferred tax Deferred tax is recognised on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary difference can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates that have been enacted or substantially enacted by the balance sheet date. The measurement of the deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when the group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same taxation authority on either the same taxable group company; or different group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liability simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered. Property plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is provided so as to write off the cost or valuation of assets, other than assets under construction, over their estimated useful lives using the straight-line method. Cost includes the original purchase price of the asset and the costs directly attributable to bringing the asset to its working condition for its intended use. Motor vehicles 25% per annum Plant and machinery 25% per annum Network assets 20-25% per annum Leasehold improvements 25% per annum Fixtures and fittings 25% per annum Satellite in construction Nil Satellite in operation 6.67% per annum AVN2725 AR11 6 Notes AW03.indd 38 10/10/2011 18:49 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 39 The esti mated useful lives, residual values and depreciati on method are reviewed at each year end, with the eff ect of any changes in esti mate accounted for on a prospecti ve basis. The gain or loss arising on the disposal of assets is charged to the profi t and loss account and is calculated as the diff erence between the disposal proceeds and the carrying amount of the assets. Assets held under fi nance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. Satellite in constructi on relate to costs (including employee related costs) directly att ributable to the constructi on of the HYLAS satellites. Once the satellites become operati onal and placed into service, the assets are transferred to a space asset category and depreciated over the life of the satellites. Following its successful launch in November 2010, Hylas 1 assets have been transferred to "satellites in operati on" and are being depreciated over 15 years. The fi rst depreciati on expense was recorded in the year ended June 2011. Where the conditi ons are not met the costs are expensed through the income statement. Intangible assets Intangible assets are stated at cost less accumulated amorti sati on and any accumulated impairment losses. Amorti sati on is provided so as to write off the cost or valuati on of assets, other than assets under constructi on, over their esti mated useful lives using the straightline method. The amorti sati on rate on computer soft ware is 25%. Cost includes the original purchase price of the asset and the costs att ributable to bringing the asset to its working conditi on for its intended use. The esti mated useful lives, residual values and amorti sati on method are reviewed at each year end, with the eff ect of any changes in esti mate accounted for on a prospecti ve basis. The gain or loss arising on the disposal of assets is charged to the profi t and loss account and is calculated as the diff erence between the disposal proceeds and the carrying amount of the assets. Research and development costs in relati on to the satellites are capitalised if they meet the conditi ons set out in IAS 38 ‘Intangible Assets’ which are that development costs are only capitalised once a business case has been demonstrated as to the technical feasibility and commercial viability. Capitalised development costs are amorti sed over the expected useful life of the assets. Impairment of non-fi nancial assets Assets that are subject to amorti sati on and depreciati on are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The impairment review comprises a comparison of the carrying amount of the fi xed asset with its recoverable amount, which is the higher of fair value less costs to sell and value in use. Fair value less costs to sell is calculated by reference to the amount at which the asset could be disposed of. Value in use is calculated by discounti ng the expected future cash fl ows obtainable as a result of the asset’s conti nued use, including those resulti ng from its ulti mate disposal, at a market-based discount rate on a pre-tax basis. An impairment loss is recognised in the Income Statement whenever the carrying amount of an asset exceeds its recoverable amount. The carrying amount will only be increased where an impairment loss recognised in a previous period for an asset either no longer exists or has decreased, up to the amount that it would have been had the original impairment not occurred. For the purpose of conducti ng impairment reviews, CGUs are identi fi ed as groups of assets and liabiliti es that generate cash fl ows that are largely independent of other cash fl ow streams. The assets and liabiliti es include those directly involved in generati ng the cash fl ows and an appropriate proporti on of corporate assets. For the purposes of impairment, individual satellites are treated as individual CGUs. Investments Investments are recorded at cost. Investments are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Investments in subsidiaries are stated at cost and reviewed for impairment on an annual basis. European Space Agency (ESA) Funding As noted in the criti cal esti mates and judgements, an element of income from ESA represents revenue for the sale of capacity on the satellite. The fair value of the capacity sold to ESA will be recognised as revenue over 3 years on a straight line basis. F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 39 10/10/2011 18:49 40 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 1 Accounting Policies continued Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Cost is determined by the first-in first-out method. Net realisable value is based on estimated selling price less any further costs expected to be incurred to completion and disposal. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of directly attributable issue costs. Trade receivables and other financial assets Trade and loan receivables are measured at initial recognition at fair value and are subsequently measured at amortised cost using the effective interest rate method where the time value of money is material. Appropriate allowances for estimating irrecoverable amounts are recognised in the Income Statement where there is evidence that the asset is impaired. This impairment would be recognised within operating expenses. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise of cash on hand and demand deposits, and other short term highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of change in value. For the purpose of the consolidated cash flow statement, cash and cash equivalents are stated net of outstanding bank overdrafts. Provisions Provisions are recognised when the Group has a legal or constructive obligation to transfer economic benefits arising from past events and the amount of the obligation can be estimated reliably. Provisions are not recognised unless the outflow of economic benefits to settle the obligation is more likely than not to occur. Borrowings Interest-bearing bank loans and overdrafts are measured initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Trade payables Trade payables are initially measured at fair value, and are subsequently measured at amortised cost. Derivative financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. The group uses derivative financial instruments mainly to reduce exposure to foreign exchange risks. The group does not hold or issue derivative financial instruments for trading purposes. Derivatives are recognised at fair value on the date a contract is entered into and are subsequently re-measured at their fair value. Hedge accounting is currently not applied. Changes in fair value of derivative financial instruments are recognised in the income statement as they arise. AVN2725 AR11 6 Notes AW03.indd 40 10/10/2011 18:49 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 41 2. Revenue As noted in note 1, the group currently earn revenue primarily from the sale of satellite broadband services to customers and from providing consultancy advice connected with the exploitati on of the space assets. On adopti on of IFRS 8, ‘Operati ng Segments’, the group concluded that the Chief Operati ng Decision Maker (the Avanti Executi ve Board) manage the business and the allocati on of resources on the basis of the provision of satellite services, resulti ng in one segment. Revenue of £5,462,000 (2010: £5,815,000) represents invoiced sales of satellite broadband services provided to external customers, revenue on space and consultancy contracts recognised on a percentage of completi on basis and the sale of terminals. As referred to in the criti cal esti mates and judgements, revenues from ESA representi ng the sale of capacity on HYLAS 1 comprise 20.6% (2010: £nil) of total revenue. The group derived £1,081,000 (2010: £1,334,000) of its turnover from European countries outside the United Kingdom, and £4,381,000 (2010: £4,481,000) from the United Kingdom. 3. Operati ng expenses Operati ng expenses by functi on are as follows: Selling and distributi on Administrati on Operati ng proﬁ t for the year is stated aft er charging the following: Operati ng expenses: Depreciati on of property, plant and equipment Amorti sati on of intangible assets Research and development costs writt en oﬀ as incurred Employee beneﬁ t expense Operati ng lease expenses: – Minimum lease payments – Sublease payments received – Onerous lease provision uti lised Cost of sales: Satellite depreciati on on HYLAS 1 Release of ESA grant Satellite services Materials purchased Sub contractors 30 June 2011 £’000 30 June 2010 £’000 990 10,289 11,279 805 8 19 5,433 588 (50) (30) 2,311 (185) 3,005 1,634 529 551 8,188 8,739 759 10 15 4,542 408 (50) (30) – – 2,183 524 146 F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 41 11/10/2011 17:03 42 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 4. Auditors’ remuneration Fees payable to company’s auditor for the audit of parent company and consolidated financial statements Fees payable to the company’s auditor and its associates for other services: – The audit of company’s subsidiaries pursuant to legislation – Other services pursuant to legislation – Tax services – Other services 30 June 2011 £’000 30 June 2010 £’000 82 20 13 541 36 692 54 20 13 270 4 361 £520,000 (2010: £244,000) of the tax services fees relate to the advice given in respect of the re-domicile of the HYLAS 2 assets to Cyprus. The remaining balance relates to fees for normal ongoing tax advice and compliance assistance. 5. Employee benefit costs The aggregate remuneration of all employees comprised: Wages and salaries Social security costs Pension costs Share based payment expense Less: costs capitalised as satellite in construction 30 June 2011 £’000 30 June 2010 £’000 6,073 666 168 776 7,683 (2,250) 5,433 4,898 534 229 602 6,263 (1,721) 4,542 Employee numbers The average monthly number of people (including the Executive Directors) employed during the year by category of employment: Operations Sales and marketing Development and engineering Administration and executive 30 June 2011 No. employees 30 June 2010 No. employees 23 29 23 22 97 21 21 21 18 81 AVN2725 AR11 6 Notes AW03.indd 42 10/10/2011 18:49 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 43 6. Other operati ng income Exchange gain on trade receivables and payable balances Interest received Liquidated damages received 30 June 2011 £’000 30 June 2010 £’000 209 427 – 636 426 – 3,202 3,628 Interest of £427,000 was received from Space Explorati ons Inc ("SpaceX") on sett lement of their debt. Liquidated damages were received from Astrium due to the late delivery of HYLAS 1 in November 2009. These damages compensated for the additi onal costs incurred as a result of the late delivery of the satellite and were recognised on a straight-line basis over the additi onal period that the incremental running costs were being incurred. All liquidated damages have now been recognised in the income statement. 7. Net ﬁ nance income Finance income Fair value gain on derivati ves Interest income on bank deposits Finance expense Interest expense on borrowings and loans Financing exchange loss Finance lease expense Net ﬁ nance income 30 June 2011 £’000 30 June 2010 £’000 110 318 428 (59) (214) (23) (296) 132 972 99 1,071 (88) (456) (47) (591) 480 F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 43 11/10/2011 15:31 44 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 8. Income tax (credit)/expense Current tax Adjustment in respect of prior periods Total current tax Deferred tax Origination and reversal of temporary differences Adjustment in respect of prior periods Impact of change in UK tax rate Total deferred tax Total income tax (credit)/expense 30 June 2011 £’000 30 June 2010 £’000 – – (3,332) 90 215 (3,027) (3,027) 76 76 (403) 278 25 (100) (24) The tax on the group’s loss before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows: Loss before tax Tax charge/(credit) at the corporate tax rate of 27.5% (2010: 28%) Tax effect of non-deductible expenses Adjustment in respect of prior periods Impact of change in UK tax rate Income tax (credit)/expense 9. Earnings/(loss) per share Basic (loss)/earnings per share 30 June 2011 £’000 30 June 2010 £’000 (12,727) (3,500) 168 90 215 (3,027) (1,956) (548) 145 354 25 (24) 30 June 2011 pence 30 June 2010 pence (12.14) (3.68) The calculation of basic and diluted earnings/(loss) per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year. (Loss)/profit for the year attributable to equity holders of the parent company 30 June 2011 £’000 30 June 2010 £’000 (9,700) (1,932) Weighted average number of ordinary shares for the purpose of basic earnings per share 79,920,631 52,430,725 10. Profit of the parent company As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the parent Company is not presented as part of these accounts. The parent company’s loss after tax for the year ended 30 June 2011 amounted to £504,000 (2010: £723,000 profit). AVN2725 AR11 6 Notes AW03.indd 44 10/10/2011 18:49 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 45 11. Property, plant and equipment Leasehold improvements £’000 Network assets £’000 Fixtures and ﬁ tti ngs £’000 Satellite in operati on £’000 Satellite in constructi on £’000 Motor vehicles £’000 Cost Balance at 1 July 2009 Additi ons Disposals Balance at 1 July 2010 Additi ons Transfer Disposals Balance at 30 June 2011 Depreciati on Balance at 1 July 2009 Charge for the year Disposals Balance at 1 July 2010 Charge for the year Disposals Balance at 30 June 2011 Net book value Balance at 30 June 2011 Balance at 30 June 2010 250 4 – 254 9 – – 263 181 39 – 220 24 – 244 19 34 3,321 2,239 – 5,560 985 – – 515 92 – 607 63 – – – – – – – 49,712 117,094 – 166,806 147,233 148,730 (148,730) – – 6,545 670 148,730 165,309 – – – – 2,311 – 2,311 – – – – – – – 1,809 618 – 2,427 672 – 3,099 3,446 3,133 365 68 – 433 76 – 509 161 174 Group total £’000 53,910 119,456 – 173,366 148,290 – (44) 321,612 2,376 759 – 3,135 3,116 (29) 6,222 112 27 – 139 – – (44) 95 21 34 – 55 33 (29) 59 146,419 – 165,309 166,806 36 84 315,390 170,231 At 30 June 2011 the Group held assets under ﬁ nance lease agreements with a net book value of £110,625 (2010: £416,000). A depreciati on charge for the year of £305,234 (2010: £331,000) has been provided on these assets. These assets are included in network assets. HYLAS 1 launched on 26 November 2010, consequently the HYLAS 1 assets of £148,544,000 (2010: £103,166,000) have been transferred from satellites in constructi on to satellites in operati on. The satellite in constructi on assets of £165,308,000 now relate to HYLAS 2 and HYLAS 3 satellites (2010: £63,640,000). Included in the satellite costs are capitalised ﬁ nance costs of £15,224,096 in the HYLAS 2 satellite and £21,116,117 in the HYLAS 1 satellite (2010: £18,159,523, HYLAS 1). The ﬁ nance costs on HYLAS 2 will average 5.5% over the lifeti me of the faciliti es (2010: HYLAS 1 16.5% above LIBOR). Satellites in operati on have been depreciated from 1 April 2011 when the satellite came into commercial service. F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 45 11/10/2011 15:36 46 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 12. Intangible assets Cost Balance at 1 July 2009 Additions Disposals Balance at 1 July 2010 Additions Disposals Balance at 30 June 2011 Amortisation Balance at: 1 July 2009 Charge for the year Disposals Balance at: 1 July 2010 Charge for the year Disposals Balance at 30 June 2011 Net book value Balance at 30 June 2011 Balance at 30 June 2010 13. Other financial assets Group Financial assets Computer software £’000 395 – – 395 – – 395 374 10 – 384 8 – 392 3 11 30 June 2011 £’000 30 June 2010 £’000 9,135 – The investment is represented by a loan to a major strategic partner. The initial interest rate is 7% with interest accruing for the first 12 months and repayments starting thereafter. The loan was made in February 2011 and the group has collateral over this balance which constitutes 75% of the equity interest in the borrower should there be a default. AVN2725 AR11 6 Notes AW03.indd 46 10/10/2011 18:49 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 47 14. Investments Company Shares in subsidiary undertakings Beginning of the year Capital contributi on Equity investments in Avanti HYLAS 2 Limited End of year 30 June 2011 £’000 30 June 2010 £’000 41,320 – 43,408 84,728 289 15 41,016 41,320 The directors believe that the carrying value of the investments is supported by their underlying net assets. A full list of the company’s subsidiaries is disclosed in note 15. 15. Subsidiaries As at the end of the year the group and company held the following investments in subsidiary companies: Name of subsidiary Avanti Communicati ons Limited Avanti Space Limited Avanti Space 2 Limited Avanti Space 3 Limited Avanti Launch Services Limited Avanti Broadband Limited Avanti Broadband (Ire) Limited Avanti (NI) Limited Avanti Hylas 2 Limited Avanti Hylas 2 Launch Services Limited Avanti Communicati ons Infrastructure Company Limited Avanti Caledonian Broadband Limited Avanti Employee Benefi t Trust Avanti Hylas 2 Cyprus Limited Avanti Hylas 2 Services Limited Avanti Communicati ons Marketi ng Services Limited Avanti Communicati ons Germany GmBH* Avanti Communicati ons Sweden AB* Nature of business Telecommunicati on consultancy Satellite services Satellite services Satellite services Management services Satellite broadband business Satellite broadband business Satellite broadband business Satellite services Management services Holding company Scotti sh satellite business Employee benefi t trust Satellite broadband business Project management services Sales and marketi ng Satellite services Satellite services All the above enti ti es were incorporated in England & Wales, except for Avanti Launch Services Limited, Avanti Hylas 2 Launch Services Limited, Avanti Hylas 2 Cyprus Limited and Avanti Hylas 2 Services Limited. Avanti Launch Services Limited, Avanti Hylas 2 Launch Services Limited were incorporated in the Isle of Man. Avanti Hylas 2 Cyprus Limited and Avanti Hylas 2 Services Limited were incorporated in Cyprus. The company holds 100% ownership interest and voti ng power in all the above enti ti es. * These enti ti es were incorporated during the 2011 fi nancial year F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 47 10/10/2011 18:49 48 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 16. Inventories Group Finished goods 30 June 2011 at cost £’000 30 June 2010 at cost £’000 1,284 1,398 Finished goods represent customer premises equipment which includes dishes, modems and outdoor unit transceivers. The cost of inventories recognised as an expense during the period was £1,538,000 (2010: £448,000). There have been no write-downs of inventory during the year. 17. Trade and other receivables Trade receivables Less provision for impairment of trade receivables Net trade receivables Accrued income Prepayments Amounts due from group companies Other receivables For discussion of credit risk, refer to Note 23(b). Group Company 30 June 2011 £’000 30 June 2010 £’000 30 June 2011 £’000 30 June 2010 £’000 1,170 (53) 1,117 3,133 2,640 – 1,026 7,916 611 (3) 608 8,545 1,185 – 5,655 15,993 – – – – 3 105,187 – 105,190 – – – – 6 80,228 – 80,234 AVN2725 AR11 6 Notes AW03.indd 48 10/10/2011 18:49 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 49 18. Deferred taxati on Deferred income tax assets and liabiliti es are off set when there is a legally enforceable right to off set current tax assets against current tax liabiliti es and when the deferred income taxes relate to the same fi scal authority. The off set amounts are as follows: Group Company 30 June 2011 £’000 30 June 2010 £’000 30 June 2011 £’000 30 June 2010 £’000 Deferred tax assets Deferred tax liabiliti es The gross movement on the deferred income tax account is as follows: Balance at 1 July Income tax (expense)/credit Tax credited directly to equity Balance at 30 June Group 30 June 2011 Tax assets Provisions and deferred income Share based payment Unused tax losses Total tax assets Tax liabiliti es Property, plant and equipment Total tax liabiliti es Net deferred tax asset/(liability) 14,658 (11,272) 3,386 268 3,027 91 3,386 6,157 (5,889) 268 5 100 163 268 191 – 191 62 133 (4) 191 Opening balance £’000 Charged to the income statement £’000 Charged to equity £’000 1,806 302 4,049 6,157 (5,889) (5,889) 268 4,797 112 3,501 8,410 (5,383) (5,383) 3,027 – 91 – 91 – – 91 62 – 62 102 (73) 33 62 Closing balance £’000 6,603 505 7,550 14,658 (11,272) (11,272) 3,386 F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 49 10/10/2011 18:49 50 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 18. Deferred taxation continued Group 30 June 2010 Tax assets Provisions and deferred income Share based payment Unused tax losses Total tax assets Tax liabilities Property, plant and equipment Total tax liabilities Net deferred tax asset/(liability) Company 30 June 2011 Tax assets Share based payment Unused tax losses Total tax assets Company 30 June 2010 Tax assets Share based payment Unused tax losses Total tax assets Opening balance £’000 Charged to the income statement £’000 Charged to equity £’000 Closing balance £’000 817 110 2,690 3,617 (3,612) (3,612) 5 989 29 1,359 2,377 (2,277) (2,277) 100 – 163 – 163 – – 163 1,806 302 4,049 6,157 (5,889) (5,889) 268 Opening balance £’000 Charged to the income statement £’000 Charged to equity £’000 Closing balance £’000 60 2 62 11 122 133 (4) – (4) 67 124 191 Opening balance £’000 Charged to the income statement £’000 Charged to equity £’000 Closing balance £’000 23 79 102 4 (77) (73) 33 – 33 60 2 62 At 30 June 2011, none of the deferred tax asset of £14.7m (2010: £6.2m) is expected to be recovered in the next 12 months. At 30 June 2011, none of the deferred tax liability of £11.3m (2010: £5.9m) is expected to be settled in the next 12 months. Deferred tax assets have been recognised despite recurring losses as the group has strong expectations of future profits due to the recent launch of Hylas 1 and forthcoming launch of HYLAS 2. AVN2725 AR11 6 Notes AW03.indd 50 10/10/2011 18:50 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 51 19. Cash and cash equivalents For the purpose of the cash fl ow statement, cash and cash equivalents include cash in hand and at banks net of outstanding overdraft s. Cash and cash equivalents at the end of the fi nancial year as shown in the cash fl ow statement can be reconciled to the related items in the balance sheet as follows: Group Cash and bank balances Short term deposits Net cash and cash equivalents 20. Trade and other payables Current Trade payables Social security and other taxes Other payables Accruals Non-current Accruals and deferred income Included in the deferred income are grants from ESA as follows: Current porti on Non-current porti on 21. Provisions for other liabiliti es Group Onerous lease provision Balance at 1 July 2010 Used during the year Balance at 30 June 2011 30 June 2011 £’000 30 June 2010 £’000 38,125 704 38,829 918 33,263 34,181 Group Company 30 June 2011 £’000 30 June 2010 £’000 30 June 2011 £’000 30 June 2010 £’000 – – – 3 3 – – – – 9 9 – 17,961 218 2,524 9,692 30,395 18,997 5,300 18,876 24,176 7,118 177 1,104 5,061 13,460 7,228 – 7,228 7,228 Current £’000 Non-current £’000 30 – 30 33 (30) 3 Total £’000 63 (30) 33 F i n a n c i a l S t a t e m e n t s The Group leases premises at Hoxton Square and sublets the premises to a third party. The amount that the Group pays for the lease is not covered by the rent received in respect of the premises. As a result, an onerous lease provision has been recorded and is being released over the life of the committ ed lease period. During the year, the Group has released £30,000 to the income statement. The remaining £32,500 will be released over the next 13 months. AVN2725 AR11 6 Notes AW03.indd 51 10/10/2011 18:50 52 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 22. Loans and other borrowings Secured at amortised cost Bank loans Finance lease liabilities (i) Current Non-current 30 June 2011 £’000 30 June 2010 £’000 30 June 2011 £’000 30 June 2010 £’000 – 397 397 – 269 269 118,475 203 118,678 49,191 213 49,404 (i) Finance lease obligations are secured by retention of title to the related assets. The borrowings are on fixed interest rate debt with repayment periods not exceeding 5 years. In December 2009 the group announced that it had agreed debt financing for HYLAS 2 with US Exim bank and COFACE. The total drawdown in this agreement is $328.2m. In accordance with IAS 23 – Borrowing Costs, qualifying borrowing costs have been capitalised as part of the cost to HYLAS 1, recognised as Satellite in Construction in Note 11. 23. Financial instruments and risk management Group The Group is subject to the risks arising from adverse movements in interest rates and foreign currency. The Group uses a variety of derivative financial instruments to manage these risks. The managing of these risks, along with the day-to-day managing of treasury activities is performed by the Finance team. All financial instruments have been measured at amortised cost, except for derivative assets recognised as fair value through the income statement. As such, financial assets being cash and cash equivalents and trade and other receivables are classified as ‘Loans and Receivables’ and financial liabilities being trade and other payables and interest bearing liabilities have been classified as ‘Other Financial Liabilities’. a) Market risk i) Foreign exchange risk management The Group trades in currency other than its functional currency and to hedge the foreign currency risk it enters into forward contracts or natural hedges. These risks are assessed on a continual basis. The derivative liability is in respect of two forward contracts hedging future Euro receivables. The procurement of our second satellite HYLAS 2 has transactions mainly executed in US dollars. This is hedged naturally against the corresponding financing loan denominated in US dollars. At 30 June 2011, if the Euro had weakened/strengthened against the sterling by 5% with all other variables held constant, post tax loss would have improved by £68,954 or worsened by £76,212 (2010: post tax profit would have worsened by £19,316 or improved by £21,349). At 30 June 2011, if the US dollar had weakened/strengthened against the sterling by 5% with all other variables held constant, post tax loss would have improved by £367,971 or worsened by £406,704 (2010: post tax profit would have worsened by £153,114 or improved by £162,232). The US dollar cash reserves and US dollar loan are held in a US dollar denominated company and are revalued through reserves upon consolidation. Management believes that a 5% sensitivity rate provides an adequate analysis of the expected changes in foreign exchange rates. This is the assumption we used last year and management feel it is still valid. AVN2725 AR11 6 Notes AW03.indd 52 10/10/2011 18:50 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 53 ii) Interest Risk Management The Group borrows in pounds sterling and US dollars at fl oati ng and fi xed rates of interest and does not seek to miti gate the eff ect of adverse movements in interest rates. Cash and deposits earn interest at fl oati ng rates based on banks’ short term treasury deposit rates. Short-term trade and other receivables are interest free. b) Credit risk management The Group’s principal fi nancial assets are cash and short term deposits and trade and other receivables. The Group has no signifi cant concentrati ons of credit risk with the excepti on of the other fi nancial assets. Cash and cash equivalents are deposited with high-credit quality fi nancial insti tuti ons with a minimum rati ng of A+ and trade receivables are principally from well established corporati ons. The credit quality of major customers is assessed before trading commences taking into account its fi nancial positi on, past experience and other factors. In respect of other fi nancial assets, the group has collateral over this balance which consti tutes 75% of the equity interest in the borrower should there be a default. Trade receivables Other fi nancial assets Total Trade receivables Other fi nancial assets Total The ageing of trade receivables which have not been impaired was as follows: 30 June 2011 30 June 2010 Not past due £’000 1-30 days £’000 31-60 days £’000 9,870 89 330 60 39 135 60+ days £’000 15 324 Movements in the provision for impairment of trade receivables are as follows: 2011 £’000 1,119 9,135 10,254 2010 £’000 608 – 608 Total £’000 10,254 608 At 1 July 2010 Allowances made in the period Amounts used and reversal of unused amounts At 30 June 2011 30 June 2011 £’000 30 June 2010 £’000 3 53 (3) 53 16 21 (34) 3 The provision of £52,719 (2010: £2,986) has been raised against gross trade receivables of £1,117,000 (2010: £5,657,000). Every major customer is assessed on an individual basis and we provide for bad debts when an impairment has been identi fi ed. Generally when the balance becomes more than 60 days past its due date it is considered that the amount will not be fully recoverable. c) Liquidity risk management The group's exposure to liquidity risk management is minimised due to the prudent monitoring of all of the groups liabiliti es. Cash and cash forecasts are monitored on a daily basis and our cash requirements are met by a mixture of short term cash deposits, debt and fi nance leases. F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 53 10/10/2011 18:50 54 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 23. Financial instruments and risk management continued The following table analyses the Group’s financial liabilities into relevant maturity groupings based on the expected undiscounted cash flows. 30 June 2011 Bank loans Finance leases Trade Payables 30 June 2010 Bank loans Finance leases Trade Payables Within 1 year £’000 1,051 602 17,961 53,606 262 7,118 1 to 2 years £’000 7,611 – – – 220 – 2 to 5 years £’000 58,683 – – Over 5 years £’000 Contractual amount £’000 Carrying amount £’000 85,908 – – 153,253 602 17,961 118,476 600 17,961 – – – – – – 53,606 482 7,118 49,191 519 7,118 The table below summarises the derivatives as at 30 June 2011 and 2010: 30 June 2011 Foreign currency forward contracts 30 June 2010 Foreign currency forward contracts All derivatives are held in the company. Notional Principal £’000 1,750 12,236 Derivative fair value Asset £’000 – 525 Liability £’000 83 – In addition the company has intercompany balances carried at £105,187,000 (2010: £80,228,000). The contractual amount is equal to the carrying amount. d) Fair value of financial instruments The directors consider the carrying value of all financial assets and liabilities to be approximate to their fair values. e) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The capital structure of the Group consists of debt, which includes the borrowings disclosed in (Note 22), cash and cash equivalents (Note 19) and equity attributable to equity holders of the parent, comprising ordinary share capital, share premium, other reserves and retained earnings. We endeavour to maximise earnings and minimise risk through an appropriate balance of debt and equity. As well as the debt outlined in Note 22, the Group have a total debt facility of $328.2m in relation to Hylas 2 expenditure and is fully funded in this respect. Company The company does not have a material exposure to interest rate risk and foreign exchange risk. Overall market risk, credit risk and liquidity risk are managed on a group wide basis. Derivatives are measured at fair value and intercompany balances and accruals are measured at amortised cost. All intercompany balances are repayable on demand and accruals and derivatives mature in less than 1 year. There is no provision for impairment against any of the company's financial assets. AVN2725 AR11 6 Notes AW03.indd 54 10/10/2011 18:50 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 55 24. Share capital – issued and fully paid 30 June 2010 At 1 July 2010 Shares issued Less transacti on costs At 30 June 2011 Number of shares ‘000 Group and company ordinary shares £’000 Group and company share premium £’000 68,672 16,279 – 84,951 686 163 – 849 120,496 69,837 (1,655) 188,678 On 12 July 2010, the Group issued 16,279,070 shares at £4.30 per share. The total authorised number of ordinary shares is 100 million shares (2010: 100 million) at £0.01 each. 25. Share based payments The fair value of share opti ons charged to the income statement in the period was £776,000 (2010: £602,000). The full fair value of these opti ons is recognised over the vesti ng period for those opti ons. All share based payment plans are equity sett led and details of these plans are set out below. The Company has established eight share opti on schemes: – Enterprise Management Incenti ves scheme (EMI) – Long Term Incenti ve Plan (LTIP) – Unapproved share opti on plan (2007) – Unapproved share opti on plan (March 2010) – Unapproved share opti on plan (July 2010) – Unapproved share opti on plan (October 2010) – Unapproved share opti on plan (April 2011) – Save As You Earn scheme (SAYE) The 2011 charges and weighted average fair value for each of the plans above were as follows: 2011 charge Weighted average fair value LTIP schemes Unapproved 2007 Unapproved March 2010 Unapproved July 2010 Unapproved Oct 2010 Unapproved April 2011 EMI £96,279 £440,203 £24,285 £63,281 £96,917 £35,396 £3,234 SAYE scheme £13,704 £2.04 £3.11 £1.76 £0.66 £2.95 £1.81 £0.80 £0.79 2010 charge £150,000 £405,000 £47,000 Weighted average fair value £2.04 £2.72 £2.42 To date all opti ons (with excepti on of the SAYE scheme) have been granted with a strike price of 1 penny. The strike price on the SAYE scheme is £4.70. F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 55 10/10/2011 18:50 56 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 25. Share based payments continued In July 2007 an Employee Benefit Trust (EBT) was established. The EBT is managed by Bedell Trustees in Jersey. The results of the EBT have been consolidated into the Group’s results.The options granted under each scheme are as follows: 2011 EMI Number of options Weighted average exercise price Unapproved scheme (est. 2007) Number of options Weighted average exercise price Unapproved scheme (est. March 2010) Number of options Weighted average exercise price Unapproved scheme (est. July 2010) Number of options Weighted average exercise price Unapproved scheme (est. Oct 2010) Number of options Weighted average exercise price Unapproved scheme (est. April 2011) Number of options Weighted average exercise price SAYE scheme (est. July 2010) Number of options Weighted average exercise price Outstanding at start of year Granted during year Forfeited in year Exercised during the year Outstanding at end of year 249,303 £0.01 107,863 £0.01 289,490 £0.01 – – – – – – – – – – – – 58,000 £0.01 50,000 £0.01 99,000 £0.01 62,000 £0.01 66,437 £4.70 (6,000) £0.01 (58,488) £0.01 184,815 £0.01 – – (38,932) £0.01 68,931 £0.01 (33,000) £0.01 – – – – – – (7,483) £4.70 – – – – – – – – – – 314,490 £0.01 50,000 £0.01 99,000 £0.01 62,000 £0.01 58,954 £4.70 AVN2725 AR11 6 Notes AW03.indd 56 10/10/2011 18:50 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 57 Outstanding at start of year Granted during year Forfeited in year Exercised during the year Outstanding at end of year 339,505 £0.01 107,863 £0.01 – – – – (51,000) £0.01 (39,202) £0.01 249,303 £0.01 – – – – – – 107,863 £0.01 289,490 £0.01 – – 292,490 £0.01 (3,000) £0.01 2010 EMI Number of opti ons Weighted average exercise price Unapproved scheme (est. 2007) Number of opti ons Weighted average exercise price Unapproved scheme (est. 2010) Number of opti ons Weighted average exercise price The weighted average share price for the year ended 30 June 2011 was £5.40. 27,046 (2010: 17,926) of the EMI opti ons, 30,715 of the unapproved 2007 scheme, 16,667 of the unapproved July 2010 scheme, and 1,629,898 (2010: 170,423) of the LTIP opti ons had vested and were exercisable from 30 June 2011. The exercise price of opti ons outstanding at 30 June 2011 was £0.01 and the weighted average remaining contractual life was 4.6 years. Each model has slightly diff erent exercise criteria and therefore separate valuati on models were used. EMI Scheme The EMI scheme was used to issue opti ons to staff on 24 July 2007 at an exercise price of 1p. The new opti ons are issued for 10 years with 25% vesti ng at the end of years 3, 4, 5 and 6. Those staff who had previously held unvested opti ons in the former parent company at the ti me of the de-merger were given a shorter vesti ng period for these new opti ons. There are no performance criteria associated with these opti ons and they are exercisable as long as the opti on holder remains an employee of the Company. The weighted average inputs to the Black-Scholes model are as follows: Share price at date of Grant Weighted average exercise price Expected volati lity Expected Life Risk free rate Expected dividend yield £2.16 £0.01 35% 4 years 5.5% 1% Expected volati lity was determined by calculati ng the actual volati lity of the Group’s share price since fl otati on. The expected life used in the model has been adjusted, based on management’s best esti mate, for the eff ects of non-transferability, exercise restricti ons, and behavioural considerati ons. F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 57 10/10/2011 18:50 58 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 25. Share based payments continued Long Term Incentive Plan The LTIP has been established by the Company with approval from the Remuneration Committee to reward and incentivise the Executive Directors and senior managers of the Company. The LTIP allocations are in separate sub funds within the EBT and are subject to a discretionary Trust. The shares are subject to automatic revocation if certain criteria (set out below) are not met and continue to be revocable for the entire Trust period. Additional grants to further incentivise management were made during the year to two executive directors of 200,000 options each into the exceptional achievement tranche. The exercise criteria of the grants is as shown below. The allocations into the LTIP vary for each executive. The total allocation to each executive is split into three separate tranches: i) The Core Tranche This element of the grant becomes exercisable in 7 equal instalments. The first instalment was exercisable on grant and the second on 30 June 2008. The remaining 5 are yearly thereafter. ii) The Exceptional Achievement Tranche This element of the grant was amended during 2010. Originally, these options were only exercisable if the average market value of the share exceeded £5 for a consecutive period of six months prior to 30 June 2010. Given the unprecedented market conditions over the previous year, the remuneration committee considered that whilst the executives had performed well and that the share price had outperformed the FTSE 100 and AIM all share index since the LTIPs were granted, the target set in the LTIP rules may still not be achieved. In May 2010 the remuneration committee agreed to extend the target date to 31 December 2010 and that the six month average target price should be increased £5.50. iii) The Extraordinary Achievement Tranche This element of the grant is only exercisable if the Market Value of a Share exceeds £10 for a consecutive period of six months before 30 June 2013. Allocations to 1 July 2010 Core Exceptional Extraordinary Additional grant July 2010 Revised allocation Core vested Exceptional vested Unvested balance outstanding Number of options: Executive Directors 1,192,960 Senior managers 125,000 1,317,960 679,570 62,500 742,070 679,213 62,500 741,713 400,000 2,951,743 (852,114) (679,570) 1,420,059 – 250,000 (35,714) (62,500) 151,786 400,000 3,201,743 (887,828) (742,070) 1,571,845 The criteria for the exceptional achievement tranche was achieved in November 2010. The Core Tranche has been modelled using the Black-Scholes model while the Exceptional and Extraordinary Tranches have been modelled using the Monte-Carlo model, allowing for the market-based performance conditions. The weighted average inputs to both models are as follows: Share price at date of Grant Weighted average exercise price Expected volatility Expected Life Risk free rate Expected dividend yield £1.67 £0.01 34% 5 years 5.1% 1% AVN2725 AR11 6 Notes AW03.indd 58 10/10/2011 18:50 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 59 The weighted average inputs to the Black-Scholes model in relati on to the additi onal 400,000 opti ons granted in July 2010 are as follows: Share price at date of Grant Weighted average exercise price Expected volati lity Expected Life Risk free rate Expected dividend yield £4.44 £0.01 25% 3 years 1.5% 1% Expected volati lity was determined by calculati ng the actual volati lity of the Group’s share price since fl otati on and also taking into account historic volati lity of other companies within the same sector who have been listed for longer periods. The expected life used in the model has been adjusted, based on management’s best esti mate, for the eff ects of non-transferability, exercise restricti ons, and behavioural considerati ons. Unapproved Scheme (est. 2007) The unapproved scheme was established during 2007. The opti ons are issued for 10 years with 25% vesti ng at the end of years 3, 4, 5 and 6 (with the excepti on of one former employee who had the ability to exercise in April 2009). There are no performance criteria associated with these opti ons and they are exercisable as long as the opti on holder remains with the Company. The weighted average inputs to the Black-Scholes model are as follows: Share price at date of Grant Weighted average exercise price Expected volati lity Expected Life Risk free rate Expected dividend yield £1.86 £0.01 35% 3 years 5.5% 1% Expected volati lity was determined by calculati ng the actual volati lity of the Group’s share price since fl otati on. The expected life used in the model has been adjusted, based on management’s best esti mate, for the eff ects of non-transferability, exercise restricti ons, and behavioural considerati ons. Unapproved Scheme (est. March 2010) The unapproved scheme was established in March 2010. The opti ons are issued for 10 years with 33% vesti ng at the end of years 3, 4 and 5. In order for the vesti ng conditi ons to be met the market value of the shares must be £10.00 or more per share for a consecuti ve period of six months. The weighted average inputs to the Monte Carlo model are as follows: F i n a n c i a l S t a t e m e n t s Share price at date of Grant Weighted average exercise price Expected volati lity Expected Life Risk free rate Expected dividend yield £4.33 £0.01 21% 3 years 2.1% 1% Expected volati lity was determined by calculati ng the actual volati lity of the Group’s share price since fl otati on. The expected life used in the model has been adjusted, based on management’s best esti mate, for the eff ects of non-transferability, exercise restricti ons, and behavioural considerati ons. AVN2725 AR11 6 Notes AW03.indd 59 10/10/2011 18:50 60 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 25. Share based payments continued Unapproved Scheme (est. July 2010) The unapproved scheme was established in July 2010 and granted to one employee. The options are issued for 10 years with 33% vesting in January 2011, January 2012 and January 2013. There are no performance criteria associated with these options and they are exercisable as long as the option holder remains with the Company. The weighted average inputs to the Black Scholes model are as follows: Share price at date of Grant Weighted average exercise price Expected volatility Expected Life Risk free rate Expected dividend yield £4.50 £0.01 24% 3 years 1.8% 1% Expected volatility was determined by calculating the actual volatility of the Group’s share price since flotation. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Unapproved Scheme (est. Oct 2010) The unapproved scheme was established in October 2010. The options are issued for 10 years with 33% vesting at the end of years 3, 4 and 5. In order for the vesting conditions to be met the market value of the shares must be £10.00 or more per share for a consecutive period of six months. The weighted average inputs to the Monte Carlo model are as follows: Share price at date of Grant Weighted average exercise price Expected volatility Expected Life Risk free rate Expected dividend yield £6.20 £0.01 20% 3 years 1.8% 1% Expected volatility was determined by calculating the actual volatility of the Group’s share price since flotation. The expected life usedin the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Unapproved Scheme (est. April 2011) The unapproved scheme was established in April 2011. The options are issued for 10 years with 33% vesting at the end of years 3, 4 and 5. In order for the vesting conditions to be met the market value of the shares must be £10.00 or more per share for a consecutive period of six months. The weighted average inputs to the Monte Carlo model are as follows: Share price at date of Grant Weighted average exercise price Expected volatility Expected Life Risk free rate Expected dividend yield £4.48 £0.01 24% 3 years 1.8% 1% Expected volatility was determined by calculating the actual volatility of the Group’s share price since flotation. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. AVN2725 AR11 6 Notes AW03.indd 60 10/10/2011 18:50 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 61 Save as you earn (SAYE) scheme The save as you earn scheme was established in July 2010 and was open to all employees of the company at the ti me. Save as you earn is an HMRC approved all employee savings-related share opti on scheme under which employees save up to a limit of £250 on a four-weekly basis with an opti on to buy shares in the company at the end of a three-year at a discount of up to 20% of the market value on the grant date. Opti ons are not subject to performance conditi ons. All opti ons are exercisable from 1 July 2013 which is three years from the date of grant. All opti ons expire six months from their exercise date (i.e. on 1 January of the relevant year). The weighted average inputs to the Black-Scholes model are as follows: Share price at date of Grant Weighted average exercise price Expected volati lity Expected Life Risk free rate Expected dividend yield £4.50 £4.70 21% 3 years 2.1% 1% Expected volati lity was determined by calculati ng the actual volati lity of the Group’s share price since fl otati on. The expected life used in the model has been adjusted, based on management’s best esti mate, for the eff ects of non-transferability, exercise restricti ons, and behavioural considerati ons. 26. Obligati ons under fi nance leases Leasing arrangements Finance leases relate to capital equipment with lease terms of 5 years. The Group has the opti on to purchase the equipment for a nominal value at the conclusion of the lease agreement. The Group’s obligati ons under fi nance leases are secured by the lessor’s ti tle to the leased assets. Finance lease liabiliti es No later than one year Later than 1 year no later than 5 years Less future fi nance charge Included in the fi nancial statements as: Current borrowings Non-current borrowings Present value of minimum lease payments Minimum lease payments Present value of lease payments 30 June 2011 £’000 30 June 2010 £’000 30 June 2011 £’000 30 June 2010 £’000 400 202 602 (2) 600 299 220 519 (37) 482 397 203 600 – 600 269 213 482 – 482 F i n a n c i a l S t a t e m e n t s 30 June 2011 £’000 30 June 2010 £’000 397 203 600 269 213 482 AVN2725 AR11 6 Notes AW03.indd 61 10/10/2011 18:50 62 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notes to the accounts continued 27. Obligations under operating leases The Group’s future aggregate minimum lease payments under non-cancellable operating leases are as follows: No later than one year Within 1 to 5 years After 5 years 30 June 2011 30 June 2010 Land & buildings £’000 Other £’000 Land & buildings £’000 345 794 595 1,734 18 30 – 48 345 874 860 2,079 Other £’000 – – – – Operating lease commitments principally relate to leased office space of the Group’s head office located at 74 Rivington Street, London. New operating leases entered into in the year include a fleet of 4 vans. The total of future sub-lease payments expected to be received under non-cancellable sub leases at 30 June 2011 is £50,000 over 1 year (as at 30 June 2010: £100,000 over 2 years). 28. Capital commitments As at 30 June 2011 the group has contracted but not provided for $50.8m. This amount relates to the procurement of Hylas 2, Avanti’s second satellite. These commitments are fully funded by the Exim/COFACE facility outlined in note 22. 29. Related party transactions and directors’ emoluments Transactions with Directors Details of the Directors’ remuneration are set out below in aggregate for each of the categories specified in the Companies Act 2006. Salaries and other short term employee benefits Bonus Payments into defined contribution schemes Gain on exercise of share options 30 June 2011 £’000 30 June 2010 £’000 1,172 494 1,666 161 189 2,016 693 – 693 196 – 889 Pension contributions amounting to £161,424 (2010: £196,000) were made into personal pension schemes in respect of four (2010: four) of the Directors. The emoluments of the highest paid Director totalled £586,966 (2010: £255,000), made up of: Total emoluments Salaries and other short term benefits Bonus Payments into defined contribution schemes (current year) Total emoluments 30 June 2011 £’000 30 June 2010 £’000 346 145 96 587 151 – 104 255 AVN2725 AR11 6 Notes AW03.indd 62 10/10/2011 18:50 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 63 Transacti ons with Directors and key management personnel - Group and company Details of the remunerati on of Directors and key management personnel are set out below in aggregate for each of the categories specifi ed in IAS 24 “Related Party Disclosures”. Salaries and other short term employee benefi ts Bonus Payments into defi ned contributi on schemes Share based payments Group Company 30 June 2011 £’000 30 June 2010 £’000 30 June 2011 £’000 30 June 2010 £’000 1,517 667 221 488 2,893 1,053 – 265 474 1,792 364 82 – 52 498 255 – – 19 274 Other related party transacti ons Subsidiaries Intra-group transacti ons are eliminated on consolidati on and are not reported in the group accounts. The company charged the following management fees to its subsidiaries: Avanti Communicati ons Limited Avanti Broadband Limited Avanti Space Limited Avanti (NI) Limited Avanti Caledonian Broadband Limited Avanti Hylas 2 Limited The parent company had the following intercompany balances outstanding at the year end: Avanti Communicati ons Limited Avanti Space Limited Avanti Space 2 Limited and Avanti Space 3 Limited Avanti Broadband Limited Avanti Hylas 2 Limited Avanti Communicati ons Infrastructure Limited Intercompany balances are unsecured and repayable on demand. 30 June 2011 £’000 30 June 2010 £’000 755 1,829 459 969 1,634 213 5,859 688 1,368 1,212 1,172 784 – 5,224 30 June 2011 £’000 30 June 2010 £’000 42,244 2,456 – 3,144 (141) 57,484 105,187 73,662 1,997 (130) 1,315 (494) 3,878 80,228 F i n a n c i a l S t a t e m e n t s AVN2725 AR11 6 Notes AW03.indd 63 10/10/2011 18:50 64 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 Notice of Annual General Meeting Notice is hereby given that the Annual General Meeting of the Company for 2011 will be held on 24 November 2011 at 9.00 am at 74 Rivington Street, London EC2A 3AY, for the following purposes: Ordinary business 1. 2. 3. 4. 5. To receive the accounts for the year ended 30 June 2011, together with the reports of the Directors and Auditors therein. To re-elect Nigel Fox as a Director of the Company. To re-elect William Wyatt as a Director of the Company. To elect Michael Walker as a Director of the Company. To re-elect PricewaterhouseCoopers LLP as auditors to the Company. Special business 6. That the Directors are generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006 (The “Act”) (in substitution for all or such existing authorities which are hereby revoked) to allot shares in the Company, and grant rights to subscribe for or to convert any security into shares of the Company (such shares, and rights to subscribe for or to convert any security into shares of the Company being “relevant securities”) at such times and to such persons, on such terms and in such manner as they think fit, up to an aggregate nominal amount of £60,000, such authority to expire on 28th February 2012 or at the conclusion of the Annual General Meeting next following the date on which this resolution is passed (whichever is earlier), save that the Company may before such expiry make any offer or agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offer or agreement as if that authority had not expired. Special resolutions 7. That, in substitution for any equivalent authorities and powers granted to the directors prior to the passing of this resolution, the directors be and they are hereby empowered pursuant to section 570(1) of the Act to allot equity securities (as defined in section 560 of the Act) of the Company wholly for cash pursuant to the authority of the directors conferred by resolution 6 above, and/or where such an allotment constitutes an allotment of equity securities by virtue of section 560(2) of the Act, as if section 561(1) of the Act did not apply to such allotment provided that the power conferred by this resolution shall be limited to: (a) (b) (c) the allotment of equity securities in connection with an invitation or offer of equity securities to the holders of ordinary shares in the capital of the Company (excluding any shares held by the Company as treasury shares (as defined in section 724(5) of the Act)) on a fixed record date in proportion (as nearly as practicable) to their respective holdings of such shares or in accordance with the rights attached to such shares (but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements or as a result of legal or practical problems under the laws of, or the requirements of any regulatory body or any stock exchange in any territory or otherwise howsoever); the allotment of equity securities pursuant to the exercise of any options granted by the Company at the date of this resolution; and the allotment, otherwise than pursuant to paragraph (a) above, of equity securities up to an aggregate nominal value equal to £60,000, and unless previously renewed, revoked, varied or extended, this power shall expire on the earlier of the date falling 15 months after the date of the passing of this resolution and the conclusion of the next annual general meeting of the Company except that the Company may at any time before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the directors may allot relevant securities in pursuance of such an offer or agreement as if this power had not expired. By Order of the Board Nigel Fox Secretary Registered office: 74 Rivington Street, London EC2A 3AY Registered number: 6133927 30 September 2011 AVN2725 AR11 6 Notes AW03.indd 64 10/10/2011 18:50 Avanti Communicati ons Group plc Annual Report and Accounts for the year ended 30 June 2011 65 Notes to Notice of Annual General Meeting 1. Proxies A member who is enti tled to att end, speak and vote at the Annual General Meeti ng may appoint a proxy to att end, speak and vote instead of him. A proxy need not be a member of the Company but must att end the meeti ng in order to represent you. A member may appoint more than one proxy provided each proxy is appointed to exercise rights att ached to diff erent shares (so a member must have more than one share to be able to appoint more than one proxy). A Form of Proxy accompanies this document. The notes to the Form of Proxy include instructi ons on how to appoint the Chairman of the Annual General Meeti ng or another person as a proxy and how to appoint a proxy electronically. To be valid the Form of Proxy must reach the Company’s registrar, Neville Registrars at Neville House, 18 Laurel Lane, Halesowen, West Midlands B63 3DA by at least 48 hours before the Annual General Meeti ng. 2. Documents on display The following documents are available for inspecti on at the registered offi ce of the Company during the usual business hours on any weekday (Saturday, Sunday or public holidays excluded) from the date of this noti ce unti l the conclusion of the Annual General Meeti ng and will also be available for inspecti on at the place of the Annual General Meeti ng from 9:30 a.m. on the day of the Annual General Meeti ng unti l its conclusion: (a) copies of the executi ve directors’ service contracts with the Company and any of its subsidiary undertakings and lett ers of appointment of the non-executi ve directors; and (b) the Register of Directors’ Interests in the share capital of the Company. 3. Right to att end and vote The Company, pursuant to Regulati on 41 of the Uncerti fi cated Securiti es Regulati ons 2001, specifi es that only those shareholders registered in the register of members of the Company at 9.00 a.m. on 24 November 2011 (or, if the Annual General Meeti ng is adjourned, 2 working days before the ti me fi xed for the adjourned Annual General Meeti ng) shall be enti tled to att end and vote at the Annual General Meeti ng in respect of the number of shares registered in their name at that ti me. In each case, changes to the register of members aft er such ti me shall be disregarded in determining the rights of any person to att end or vote at the Annual General Meeti ng. 4. Please note that communicati ons regarding the matt ers set out in this Noti ce of Annual General Meeti ng will not be accepted in electronic form, other than as specifi ed in the accompanying Form of Proxy. 5. In order to facilitate voti ng by corporate representati ves at the Annual General Meeti ng, arrangements will be put in place at the Annual General Meeti ng so that (a) if a corporate shareholder has appointed the chairman of the Annual General Meeti ng as its corporate representati ve to vote on a poll in accordance with the directi ons of all of the other corporate representati ves for that shareholder at the Annual General Meeti ng, then on a poll those corporate representati ves will give voti ng directi ons to the chairman and the chairman will vote (or withhold a vote) as corporate representati ve in accordance with those directi ons; and (b) if more than one corporate representati ve for the same corporate shareholder att ends the Annual General Meeti ng but the corporate shareholder has not appointed the chairman of the Annual General Meeti ng as its corporate representati ve, a designated corporate representati ve will be nominated, from those corporate representati ves who att end, who will vote on a poll and the other corporate representati ves will give voti ng directi ons to that designated corporate representati ve. Corporate shareholders are referred to the guidance issued by the Insti tute of Chartered Secretaries and Administrators on proxies and corporate representati ves (www.icsa.org.uk) for further details of this procedure. The guidance includes a sample form of appointment lett er if the chairman is being appointed as described in (a) above. Introducti on Aft er his opening remarks, the Chairman will explain in the detail the procedures for the conduct of the meeti ng, parti cularly for asking questi ons. The resoluti ons which are set out in the Noti ce of Meeti ng will then be put to the meeti ng. How to ask questi ons At the meeti ng, shareholders will be given the opportunity to ask questi ons. Please explain the nature of your questi on and give your name and address. You may be asked to wait unti l called upon to speak. Please remember to state your name before asking your questi on. Time The doors will open at 8.30 am and the meeti ng will start promptly at 9.00 am. Cameras, tape recorders etc. No cameras, video recorders, tape recorders or mobile phones will be allowed into the meeti ng. S h a r e h o l d e r I n f o r m a ti o n AVN2725 AR11 6 Notes AW03.indd 65 10/10/2011 18:50 66 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011  l T e a r a o n g p e r f o r a ti o n Notes to Notice of Annual General Meeting continued Registration To ensure your entrance to the meeting is dealt with promptly, please bring your attendance card with you and register at the registration desk inside the building. Shareholder information If you have any questions concerning your shareholding, please speak to Avanti Communications Group plc staff. Important If you have questions about the meeting, or if you need any assistance, please telephone Georgina Campbell-Harris at Avanti Communications Group plc on 0207 749 1600 during normal working hours. Analysis of Shareholders Range of holdings Less than 10,001 10,001-20,000 20,001-50,000 50,001-100,000 100,001-150,000 150,001-300,000 300,001-500,000 500,001-1,000,000 1,000,001 + Financial Calendar November 2011 Annual General Meeting Number of shares 3,604,946 1,101,597 2,187,758 2,160,449 1,963,502 6,009,844 6,023,984 11,379,105 50,519,950 Number of shareholders 2,214 75 71 29 16 28 16 17 14 February 2012 Interim results for the six months ended 31 December 2011 September 2012 Preliminary results for the year ended 30 June 2012 Shareholder information Annual General Meeting The Annual General Meeting will be held at 74 Rivington Street, London, EC2A 3AY. Details of the resolutions to be proposed at the Annual General Meeting are contained in the Notice of Annual General Meeting on page 64. Dividend The Directors have not recommended the payment of a dividend for the year ended 30 June 2011. Listing Ordinary shares of Avanti Communications Group plc are traded on AIM. The share price is available from the Avanti website at www.avantiplc.com and in The Financial Times and The Times. Registrars All administrative enquiries relating to shareholdings should be directed to The Registrar, Neville Registrars Limited, Neville House, 18 Laurel Lane, Halesowen, West Midlands B63 3DA. Avanti’s services Information about Avanti’s services can be found at www.avantiplc.com AVN2725 AR11 6 Notes AW03.indd 66 10/10/2011 18:50  l T e a r a o n g p e r f o r a ti o n Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 67 Form of Proxy for Avanti Communications Group plc (incorporated and registered in England and Wales under number 6133927) (the ‘Company’) For use by holders of ordinary shares of 1p each in the Company (the ‘Shareholders’) at the annual general meeting of the Company to be held at 74 Rivington Street, London EC2A 3AY at 9.00 am on 24 November 2011 (the ‘AGM’). Please read the Notice of AGM and associated notes. I/We* of being Shareholder(s)* entitled to attend and vote at meetings of Shareholders, hereby appoint the Chairman of the AGM † as my/our proxy to attend, speak and vote for me/us and on my/our behalf at the AGM and at any adjournment thereof in relation to the resolutions specified in the notice of the AGM dated 30 September 2011 (the “Resolutions”) and any other business (including adjournments and amendments to the Resolutions) which may properly come before the AGM or any adjournment thereof. † If it is desired to appoint some other person to be your proxy: (i) delete ‘the Chairman of the AGM’; (ii) initial the alteration; and (iii) insert the full name, title and address of the person you wish to appoint as your proxy IN BLOCK CAPITALS. * Delete as appropriate. Please indicate with an ‘X’ in the appropriate space how you wish your proxy to vote on the Resolutions set out in the Notice For Against Vote withheld (note 2) Discretionary (note 2) Ordinary Resolutions To receive the accounts for the year ended 30 June 2011, together with the reports of the Directors and Auditors therein. To re-elect Nigel Fox as a Director of the Company. To re-elect William Wyatt as a Director of the Company. To elect Michael Walker as a Director of the Company. To re-elect PricewaterhouseCoopers LLP as auditors to the Company. Special Business To authorise directors to allot shares Special Resolutions To disapply the statutory pre-emption rights in certain circumstances. 1 2 3 4 5 6 7 Number of shares: Class of shares: This proxy appointment is one of a multiple proxy appointment (Note 4) Dates: Signed: S h a r e h o l d e r I n f o r m a ti o n 68 Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011  l T e a r a o n g p e r f o r a ti o n Form of Proxy for Avanti Communications Group plc continued (incorporated and registered in England and Wales under number 6133927) (the ‘Company’) 1. Only holders of ordinary shares of 1p each in the capital of the Company are entitled to attend, speak and vote at the AGM and may appoint one or more proxies to attend, speak and vote instead of them. 2. Please indicate by inserting an ‘X’ in the appropriate box how you wish your vote to be cast on the Resolutions. If you mark the box “vote withheld” it will mean that your proxy will abstain from voting and, accordingly, your vote will not be counted either for or against the relevant resolution. If you mark the box “discretionary” or fail to select any of the given options, the proxy can vote as he or she chooses or can decide not to vote at all. 3. If the proxy is being appointed for less than your full entitlement, please indicate above your signature the number and class of shares in relation to which that person is authorised to act as your proxy. If left blank, your proxy will be deemed to be authorised in respect of your full entitlement. 4. A member may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares (so a member must have more than one share to be able to appoint more than one proxy). A separate form of proxy must be deposited for each proxy appointed. Further copies of this form may be obtained by contacting Neville Registrars Limited between 9.00am and 5.00pm (London time) Monday to Friday on 0121 585 1131 from within the UK or +44 121 585 1131 if calling from outside the UK or you may photocopy this form. If you appoint multiple proxies, please indicate above your signature the number and class of shares in relation to which the person named on this form is authorised to act as your proxy. Please also indicate by ticking the box provided if the proxy instruction is one of multiple instructions being given. All forms must be signed and returned to Neville Registrars Limited, Neville House, 18 Laurel Lane, Halesowen, West Midlands B63 3DA together in the same envelope. Where multiple proxies are appointed, failure to specify the number of shares to which this proxy appointment relates, or specifying a number which exceeds the number held by the member when totalled with the number specified on other proxy appointments by the same member, will render all appointments invalid. 5. To be valid, this form of proxy together with any power of attorney or other authority under which it is signed or a notarially certified copy of such power or authority must reach the Company’s registrars, Neville Registrars Limited, Neville House, 18 Laurel Lane, Halesowen, West Midlands B63 3DA by no later than 48 hours before the time of the AGM (or if the AGM is adjourned, 48 hours before the time fixed for the adjourned AGM). 6. The appointment of a proxy will not preclude a member from attending the AGM and voting in person but if he or she does so this proxy appointment will terminate automatically. 7. In the case of a company, this form of proxy must be executed under the common seal or signed on its behalf by an officer or attorney of the company. 8. In the case of joint holders, the proxy appointment of the most senior holder will be accepted to the exclusion of any appointments by the other joint holders. For this purpose, seniority is determined by the order in which the names are stated in the register of members of the Company in respect of the joint holding. 9. Any alterations made to this form of proxy should be initialled. 10. A member wishing to change his or her proxy instructions should submit a new proxy appointment using the methods set out in note 4 above. A member who requires another form of proxy should contact Neville Registrars Limited, Neville House, 18 Laurel Lane, Halesowen, West Midlands B63 3DA. The time limits for proxy appointments in note 5 also apply to changes to proxy instructions. Any change to proxy instructions received after that time will be disregarded. If a member submits more than one valid proxy appointment, the appointment received last before the time limit in note 3 will take precedence. 11. A member wishing to revoke his or her proxy appointment should do so by sending a notice to that effect to the Company’s registrars to the address set out in note 5. The revocation notice must be received by the Company’s registrars by the time limit set out in note 5. Subject to note 6, any revocation notice received after this time will not have effect. 12. Please note that communications regarding the matters set out in this form of proxy will not be accepted in electronic form. AVN2725 AR11 6 Notes AW03.indd 68 10/10/2011 18:50 This year we enjoyed the successful launch of HYLAS 1, Europe’s first Ka-band satellite. Our second satellite, HYLAS 2, is fully financed and under construction. It is scheduled to launch in Q2 2012. These satellites will operate for 15 years. Avanti is building a global business with a very long term view. Watch the launch of HYLAS 1: www.avantiplc.com/satellite-fleet/ hylas-1 Avanti’s first satellite, HYLAS 1, launched on 26 November 2010 and is the first superfast broadband satellite launched in Europe. Who we are What we do Our satellites We are bringing a new approach to the satellite communications industry We are 125 people drawn together from space, telecoms and finance backgrounds bringing a new approach to the satellite communications industry. Our operational managers have an average of 7 years service at Avanti. We have built this company together from the beginning and have a shared long term ambition to build a global business of significant scale. We are headquartered in London but with significant operations in Cornwall, Cyprus, Germany and the USA. We are a data communications provider Avanti sells satellite data communications services to telecoms companies which use them to supply institutional, enterprise and consumer users. Our technology is new, but so is our flexible business model which responds to the different needs and strategies of our service providers in 50 countries. HYLAS 1 HYLAS 2 HYLAS 3 The first Ka-band satellite in Europe serves every country between Ireland and Poland. We enjoyed its successful launch in November 2010 and target to have it full by Spring 2014. HYLAS 2, Avanti’s second satellite, is being built by the Orbital Sciences Corporation in the USA. HYLAS 2 will quadruple Avanti’s satellite capacity and provide new capacity across the Middle East and Africa. Thus we become predominantly an emerging markets telecoms business. The business plans seeks to fill it by 2017, but the pre-sales activity suggests we will beat this target by a long way. HYLAS 3 is being financed with very low cost government funded debt and customer pre-sales, which over the long term greatly enhances shareholder returns. It will put new capacity into the Americas and Africa. Avanti Communications Group plc Annual Report and Accounts for the year ended 30 June 2011 69 Officers and Professional Advisers Bankers HSBC Bank Plc 70 Pall Mall London SW1Y 5EZ Solicitors Osborne Clark 2 Temple Black East Temple Quay Bristol BS1 6EG Registered Auditors PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH Directors F E J G Brackenbury CBE Chairman D J Williams Chief Executive D J Bestwick Managing Director Cyprus N A D Fox Group Finance Director M J O’Connor Chief Operating Officer D A Foster Non-Executive Director W P Wyatt Non-Executive Director C R Vos Non-Executive Director M Walker OBE Non-Executive Director Secretary N A D Fox Registered Office 74 Rivington Street London EC2A 3AY Company Number 6133927 S h a r e h o l d e r I n f o r m a ti o n Avanti Communications Group plc Avanti Communications Group plc Annual Report & Accounts 2011 New high speed communications products for high growth markets. A v a n t i C o m m u n i c a t i o n s G r o u p p l c A n n u a l R e p o r t & A c c o u n t s 2 0 1 1 Avanti Communications Group plc 74 Rivington Street London EC2A 3AY www.avantiplc.com

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