31st Jan 2008 07:01
Spiritel PLC31 January 2008 31 January 2008 SPIRITEL PLC ("Spiritel" or "The Group") INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 OCTOBER 2007 Spiritel plc (AIM: STP), the business communications service provider, todayannounces interim results for the six months to 31 October 2007. Highlights: •Turnover £6.84 million (2006: £6.83 million) •Gross profit up 283% to £2.54 million (2006: £0.66m) •Gross margin increased to 37.1% (2006: 9.7%) •Adjusted EBITDA* increased to £0.23 million (2006:loss £0.57 million) •Post period end signed a £1.3 million managed service contract with Regent Inns plc - the UK's largest hosted VoIP contract •Acquisition and rapid integration of tdotcom into Spiritel's Business Division •Increased earnings visibility with over 35% of Business Division revenues now in contract for up to five years •New bank loan facility of £1.375 million •Extended product range and grew customer bases with early successes in cross selling Commenting on the results, Alastair Mills, Chief Executive, said: "I am delighted to report an excellent set of results which demonstrate thetransformation of Spiritel's operational and financial performance since ourrestructure in 2006. The progress in enhancing earnings visibility and restoringprofitability has accelerated during the past six months as Spiritel'smanagement team is successfully executing its growth strategy. "At the time of writing, the Company is trading ahead of management'sexpectations, building on a strong first half, which delivered operating profitat an underlying level*. Significant improvements in gross profit and margin forthe period under review demonstrate the value in the change of product mix androutes to market which have also dramatically increased earnings visibility." Copies of these results are available on the Company's website:www.spiritelplc.com. For further information please visit www.spiritelplc.com or contact: Spiritel PLC Tavistock Communications Daniel Stewart&Co.PlcAlastair Mills Simon Hudson Simon LeathersChief Executive Clemmie Carr Stewart Dick+44 (0) 20 7160 0100 +44 (0) 20 7920 3150 +44 (0) 20 777 6579 Review by the Chief Executive Introduction I am delighted to report an excellent set of results, which demonstrate thetransformation of Spiritel's operational and financial performance since ourrestructure in 2006. The progress in enhancing earnings visibility and restoringprofitability has accelerated during the past six months as Spiritel'smanagement team has successfully built upon the Company's programme of growth. Results I am pleased to report that, at the time of writing, the Company is tradingahead of management's expectations, building on a strong first half whichdelivered operating profit at an underlying level*. Significant improvements ingross profit and margin for the period under review demonstrate the value in thechange of product mix and routes to market, which have also dramaticallyincreased earnings visibility. Highlights: •Group turnover for the year was £6.84 million (2006: £6.83 million) •Gross profit up by 283% to £2.54 million (2006: £0.66 million) •Gross margin increased to 37.1% (2006: 9.7%) •Adjusted EBITDA* increased to £0.23 million (2006:loss £0.57 million) •Loss before tax £2.3 million (2006:£1.1 million) - after a one off, non-cash interest charge of £1.8 million** *Before interest, tax, depreciation, amortisation, restructuring and acquisitioncosts and share based payment charges.**Following shareholder approval in June 2007 to restructure debt from PentaCapital, a one-off £1.8 million redemption premium was agreed, alongside equityconversion rights, in lieu of accrued and ongoing interest charges. Divisional review Spiritel Business Throughout the period Spiritel's Business Division has continued to extend itsproduct offering to customers, further securing its position as a completeservice provider to businesses in both traditional and emerging IP based voiceand data products. The interim results show the positive contribution from theacquisitions made during our previous financial year and that they are providinga platform for future organic and acquisitive growth. The three successful transactions of the previous financial year were followedby a fourth, in October 2007, with the acquisition of tdotcom, an award-winningvalue added maintainer and supplier of voice and data systems and solutions tobusiness customers across the UK. It brought to Spiritel an impressive array ofover 50 customers including BBC Worldwide, The Barbican Centre and the City ofLondon Corporation. tdotcom demonstrated the success of our tried and tested strategy ofacquisition, integration and growth. The integration of tdotcom into SpiritelBusiness was completed within six weeks and we were quickly able to improve itsoperational performance. The transaction was immediately earnings enhancing forSpiritel and is now trading at a level significantly ahead of its previousresults. We expect tdotcom, now fully rebranded within Spiritel Business, tocontinue to grow rapidly and its impact on Spiritel's results will be reflectedin the second half of this financial year. The customer bases gained from our four acquisitions to date have also createdsignificant opportunities for organic growth. The management team is focussed oncross selling between our IP Communications, Networks and Mobile product linesand our pipeline of cross selling activity is at its highest level since theinception of Spiritel Business in 2006. During the first half we commenced a significant hosted VoIP trial with RegentInns plc, that included developing a hosted IP voice and Wi-Fi solution for oneof the UK's leading pub and restaurant operators. This was the first pilot ofits kind in the UK and Spiritel is currently working with other customers onsimilar projects. The trial also advanced Spiritel's relationship with Mitel whosupplied the underlying VoIP technology and with whom we hold the highest levelof accreditation as a premier partner. Following the successful conclusion of the trial during November 2007, RegentInns and Spiritel signed the UK's largest hosted VoIP deal in which Spiritelprovide hosted VoIP across Regent's 100 outlets and head office, enabling themto provide free Wi-Fi to their customers. The roll out of the service for RegentInns is expected to be complete by the end of February 2008. This contract is alandmark event for Spiritel and establishes Spiritel as a leading provider ofconverged communications to business customers. Spiritel Technologies Spiritel Technologies continues to play an important role in supporting the IPbased product offerings of our Business Division, clearly evidenced by the partit played during the Regent Inns VoIP trial and its ongoing contribution to thecurrent roll out. This strategic role will become even more important asSpiritel continues its product development with key partners, such as Mitel, aswe work to maintain our position as a leading player in IP based voice and datasolutions. In the wholesale arena, Technologies has enhanced its product offering andcontinued to focus on higher margin routes. Throughout the period, we continuedto expand our customer base and have seen significantly increased levels ofbusiness from some long term major carriers. This trend has continued into thesecond half of the financial year and we expect this to boost results for thefull year. Strategy and progress - acquire, integrate, grow The strategy set out in our 2007 Annual Report continues to bear fruit. Ouracquisition of a fourth business brought new customers, additional products and,crucially, new cross-selling opportunities. Whilst we are focussing our effortson delivery of organic growth, we continue to identify and pursue suitableearnings enhancing acquisitions that will bring complementary products and newcustomers to our existing portfolio. A significant step forward in the period was the enhancement of earningsvisibility. Over 35% of revenues from the Business Division are now underpinnedby contracts for up to five years. Our level of 'recurring' revenue, from longstanding customers with large scale solution roll outs, is significantly inexcess of the contracted income. This new level of earnings visibility,something the Company as previously structured was unable to achieve,demonstrates clearly how Spiritel's change in product mix and routes to marketare providing increased confidence about the future performance of the business. In July 2007 we announced that we had secured a new bank loan facility from TheClydesdale Bank. The £1.375 million facility is an important endorsement by theBank of Spiritel's strategy of acquisition, integration and growth. Thefacility, which has recently been increased, enhances Spiritel's scope formaking further acquisitions as we demonstrate a clear track record in successfulintegration and improving profitability. Board and appointments During the period we appointed Ronnie Smith to the Board following a period inwhich, as Chief Financial Officer, he made a substantial contribution to theturnaround and restructure process that has been underway over the last eighteenmonths. We also appointed a new Managing Director of Spiritel Business. David Anahoryjoined us from Carphone Warehouse where he was the commercial directorresponsible for over 100,000 customers in their Business Division. Hisappointment represented a significant step forward for Spiritel as his largercompany experience and product knowledge will prove essential in overseeing theroll out of our expanding product set to a growing and diverse business customerbase. David was appointed to the Spiritel Board on 24 January 2008. Current trading and outlook Post period end, in addition to signing the Regent Inns contract, we weredelighted to announce that we had signed an exclusive agreement to provide amanaged service for Virgin Mobile's new directory enquiry service. 118 918provides the same functionality as other UK directory services, but crucially itdonates 20 pence from every call to Virgin's selected children's charities, thehighest donation from any directories service. The fact that we were selected topartner such a significant UK mobile operator highlights our ability to provideinnovative communications solutions for major UK providers. Spiritel has progressed immeasurably following our concentrated period ofrestructure and refocus and we can now look forward to the full year withconfidence. The new management team has been successful in implementing the newbusiness model we announced in 2006 and I am delighted that this is now beingreflected so strongly with much improved financial performance. At the time ofwriting we are trading ahead of management's expectations and we look forward toa strong conclusion to the current financial year. We now have the right platform to continue our dual approach of making selectiveearnings enhancing acquisitions alongside the delivery of organic growth throughcross selling. In the coming months we expect our business model to deliversustained improvements in profitability and earnings visibility and so ensurelong term enhancement in shareholder value. Alastair MillsChief Executive30 January 2008 CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT Restated Restated Six months Six months Year ended ended ended 31 October 31 October 30 April 2007 2007 2006 Note Unaudited Unaudited Unaudited £'000 £'000 £'000 Continuing operations Revenue 6,842 6,837 13,649Cost of sales (4,302) (6,173) (11,613) ------------------------------------------Gross profit 2,540 664 2,036Administrative expenses (3,051) (1,703) (4,501) ------------------------------------------Operating loss (511) (1,039) (2,465)Share of operating loss of joint venture - (18) (25) ------------------------------------------ (511) (1,057) (2,490)Finance costs (1,828) (90) (589) ------------------------------------------Loss before taxation (2,339) (1,147) (3,079)Income tax expense - - 21 ------------------------------------------Loss for the financial period (2,339) (1,147) (3,058) ------------------------------------------ Attributable to:Equity holders of the parent (2,339) (1,013) (2,924)Minority interest - (134) (134) ------------------------------------------ (2,339) (1,147) (3,058) ------------------------------------------ Loss per ordinary share in pence 4 (0.74) (0.57) (1.35) There were no recognised gains or losses other than the loss for the financialperiod. CONDENSED CONSOLIDATED INTERIM BALANCE SHEET Restated Restated 31 October 2007 31 October 2006 30 April 2007 Unaudited Unaudited Unaudited £'000 £'000 £'000 ASSETS Non-current assetsProperty, plant and equipment 303 715 408Goodwill 816 691 789Other intangible assets 4,249 1,791 4,001 ------------------------------------------ 5,368 3,197 5,198 ------------------------------------------Current assetsInventories 446 - 392Trade and other receivables 3,817 1,059 3,007Cash and cash equivalents - 252 322 ------------------------------------------ 4,263 1,311 3,721 ------------------------------------------ ------------------------------------------Total assets 9,631 4,508 8,919 ------------------------------------------ LIABILITIES Current liabilitiesTrade and other payables (3,606) (1,777) (3,991)Short term borrowings 191) (2,243) (4,037)Current portion of long term borrowings ( 111) - -Current tax payable (207) (48) (236) ------------------------------------------ (4,115) (4,068) (8,264) ------------------------------------------ ------------------------------------------Non-current liabilitiesLong term borrowings (5,280) (4,695) (4,812)Deferred tax liabilities (17) (18) (17) ------------------------------------------ (5,297) (4,713) (4,829) ------------------------------------------ ------------------------------------------Total liabilities (9,412) (8,781) (13,093) ------------------------------------------ ------------------------------------------Net assets / (liabilities) 219 (4,273) (4,174) ------------------------------------------ EQUITY Capital and reservesShare capital 3,162 2,195 3,162Additional paid in capital 4,550 3,630 4,550 Reverse acquisition reserve (5,763) (5,763) (5,763)Other reserves 6,829 54 97Profit and loss account (8,559) (4,389) (6,220) ------------------------------------------Total equity 219 (4,273) (4,174) ------------------------------------------ CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY Share Additional Reverse Other Profit and Total capital paid in acquisition Reserves loss equity capital reserve account £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 May 2006 1,654 2,850 (5,763) 15 (3,376) (4,620)Loss for period - - - - (1,013) (1,013) ----------------------------------------------------------------Total recognised income & expense 654 2,850 (5,763) 15 (4,389) (5,633)Credit for equity settledshare based payments - - - 39 - 39Issue of share capital 541 780 - - - 1,321 ----------------------------------------------------------------Balance at 31 October 2006 2,195 3,630 (5,763) 54 (4,389) (4,273) ---------------------------------------------------------------- Balance at 1 May 2006 1,654 2,850 (5,763) 15 (3,376) (4,620)Loss for year - - - - (2,924) (2,924) ----------------------------------------------------------------Total recognised income & expense 1,654 2,850 (5,763) 15 6,300) (7,544)Credit for equity settledshare based payments - - - 62 - 62 Equity component ofcompound financialinstrument - - - 100 - 100Transfer between reserves - - - (80) 80 -Issue of share capital 1,508 1,700 - - 3,208 ----------------------------------------------------------------Balance at 30 April 2007 3,162 4,550 (5,763) 97 (6,220) (4,174) ---------------------------------------------------------------- Balance at 1 May 2007 3,162 4,550 (5,763) 97 (6,220) (4,174)Loss for period - - - - (2,339) (2,339) ----------------------------------------------------------------Total recognised income & expense 3,162 4,550 (5,763) 97 (8,559) (6,513)Credit for equity settledshare based payments - - - 101 - 101Equity component ofcompound financialinstrument - - - 6,631 - 6,631 ----------------------------------------------------------------Balance at 31 October 2007 3,162 4,550 (5,763) 6,829 (8,559) 219 ---------------------------------------------------------------- CONSOLIDATED INTERIM CASH FLOW STATEMENT Restated Six months Six months Year ended ended ended 31 October 31 October 30 April 2007 2006 2007 Unaudited Unaudited Unaudited £'000 £'000 £'000 Cash flows from operating activitiesLoss before taxation (2,339) (1,139) (3,079)Adjustments for:Depreciation and amortisation 517 225 610Impairment of tangible fixed assets 64 - 422Impairment of goodwill - - 227Loss on disposal of tangible fixed assets - 18 12Decrease / (increase) in inventory (54) - 2Decrease / (increase) in receivables (651) 132 14(Decrease) / increase in payables (994) 46 (44)Equity settled share based payments 101 125 45Share of loss of joint venture - 18 25Interest expense / (receipt) 1,766 90 (2)Income taxes (paid) / received - 17 (9) ----------------------------------------- Net cash used in operating activities (1,590) (468) (1,187) ----------------------------------------- Cash flows from investing activitiesAcquisition of subsidiaries net of cash acquired (109) (1,484) (2,810)Purchase of property, plant and equipment (74) (94 (101)Proceeds from sale of equipment - - 6 ----------------------------------------- Net cash used in investing activities (183) (1,578) (2,905) -----------------------------------------Cash flows from financing activitiesNet proceeds from issue of share capital - 500 1,223Proceeds from borrowings 1,280 1,700 3,100Payment of finance lease liabilities (20) - (7) ----------------------------------------- Net cash from financing activities 1,260 2,200 4,316 ----------------------------------------- Net (decrease) / increase in cash and equivalents (513) 154 224Cash and equivalents at beginning of period 322 98 98 -----------------------------------------Cash and equivalents at end of period (191) 252 322 ----------------------------------------- NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. Nature of operations and general information Spiritel Plc and its subsidiaries' ("the Group") principal activity is theprovision of telecommunications services. Spiritel Business supplies a range of products and services that includesdesign, supply and maintenance of traditional business telephone systems as wellas IP-based voice and data services. Spiritel Technologies is a supplier ofwholesale voice services to leading telecommunications providers. Spiritel Plc is the Group's ultimate parent company. It is incorporated anddomiciled in Great Britain. The address of Spiritel Plc's registered office,which is also its principal place of business, is 18 King William Street,London, EC4N 7BP. Spiritel Plc's ordinary shares are listed on the AlternativeInvestment Market of the London Stock Exchange. Spiritel Plc's consolidated interim financial statements are prepared in PoundsSterling ("£"), which is also the functional currency of the parent company. These consolidated condensed interim financial statements have been approved forissue by the Board of Directors on 30 January 2008. The financial information set out in this interim report does not constitutestatutory accounts as defined in Section 240 of the Companies Act 1985. TheGroup's statutory financial statements for the year ended 30 April 2007,prepared under UK GAAP, have been filed with the Registrar of Companies. Theauditor's report was unqualified and did not contain a statement under Section237(2) or Section 237(3) of the Companies Act 1985. 2. Basis of preparation These interim condensed consolidated financial statements are for the six monthsended 31 October 2007. They have been prepared in accordance with therequirements of IFRS 1 "First-time Adoption of International Financial ReportingStandards" relevant to interim reports, because they are part of the periodcovered by the Group's first IFRS financial statements for the year ended 30April 2008. They do not include all of the information required for full annualfinancial statements, and should be read in conjunction with the consolidatedfinancial statements of the Group for the year ended 30 April 2007. These financial statements have been prepared under the historical costconvention, except for revaluation of certain financial instruments. These condensed consolidated interim financial statements (the interim financialstatements) have been prepared in accordance with the accounting policies setout below which are based on the recognition and measurement principles of IFRSin issue as adopted by the European Union (EU) and are expected to be adoptedand effective at 30 April 2008, our first annual reporting date at which we arerequired to use IFRS accounting standards adopted by the EU. Spiritel Plc's consolidated financial statements were prepared in accordancewith United Kingdom Accounting Standards (United Kingdom Generally AcceptedAccounting Practice) until 30 April 2007. The date of transition to IFRS was 1May 2006. The comparative figures in respect of 30 April 2007 and 31 October2006 have been restated to reflect changes in accounting policies as a result ofadoption of IFRS. The disclosures required by IFRS 1 concerning the transitionfrom UK GAAP to IFRS are given in the reconciliation schedules, presented andexplained in note 6. The accounting policies have been applied consistently throughout the Group forthe purposes of preparation of these condensed consolidated interim financialstatements. 3. Summary of significant accounting policies Basis of consolidationThe consolidated financial statements incorporate the financial statements ofthe Company and all subsidiary undertakings, together with the Group's share ofthe net assets and results of joint ventures. The financial statements of allGroup companies are adjusted, where necessary, to ensure the use of consistentaccounting policies. The results of companies acquired or disposed of areincluded in the Group income statement from or up to the date that controlpasses respectively. Acquisitions are accounted for under the acquisition method. The acquisition ofExpo Communications Limited during 2005 has been accounted for under the reverseacquisition method, on the basis that the substance of the business combinationwas that Expo Communications Limited acquired Spiritel Plc in a reverseacquisition. Business combinations completed prior to date of transition to IFRSThe Group has elected not to apply IFRS 3 Business Combinations retrospectivelyto business combinations prior to 1 May 2006. Accordingly the classification of the combination (acquisition, reverseacquisition or merger) remains unchanged from that used under UK GAAP. Assetsand liabilities are recognised at date of transition if they would be recognisedunder IFRS, and are measured using their UK GAAP carrying amount immediatelypost-acquisition as deemed cost under IFRS, unless IFRS requires fair valuemeasurement. Deferred tax and minority interest are adjusted for the impact ofany consequential adjustments after taking advantage of the transitionalprovisions. The transitional provisions used for past business combinations apply equally topast acquisitions of interests in associates and joint ventures. RevenueRevenue is the total amount receivable by the Group for services provided,excluding VAT and trade discounts. Revenue relates principally to calltermination services, which are recognised as income on the same day as the calloccurs. Revenue from the sale of goods is recognised when the significant risks andbenefits of ownership of the product have transferred to the buyer, which may beupon shipment, completion of the product or the product being ready fordelivery, based on specific contract terms. Revenue from services provided by the Group is recognised when the Group hasperformed its obligations and in exchange obtained the right to consideration.For maintenance sales, revenue is recognised only on the part of the maintenanceperiod that falls within the financial year. GoodwillGoodwill representing the excess of the cost of acquisition over the fair valueof the Group's share of the identifiable net assets acquired is capitalised andreviewed annually for impairment. Goodwill is carried at cost less accumulatedimpairment losses. Negative goodwill is recognised immediately after acquisitionin the income statement. Goodwill written off to reserves prior to the date of transition to IFRS remainsin reserves. There is no re-instatement of goodwill that was amortised prior totransition to IFRS. Goodwill previously written off to reserves is not writtenback to profit and loss on subsequent disposal. Property, plant and equipmentProperty, plant and equipment are included at cost, less accumulateddepreciation. Depreciation is provided on tangible fixed assets, excluding land,on a straight line basis to write off their historical cost, less estimatedresidual value, over their estimated useful economic lives as follows: Leasehold improvements - over the period of the leaseOffice and computer equipment - 10% or 33% straight lineMotor vehicles - 33% straight line Intangible assets In accordance with IFRS 3 Business Combinations an intangible asset acquired ina business combination is deemed to have a cost to the Group of its fair valueat the date of acquisition. The fair value of the intangible asset reflects themarket expectations about the probability that the future economic benefitsembodied in the asset will flow to the Group. The acquisitions of CallPlan Limited, Networks Direct (UK) Limited, AshlandGroup Limited and Tdotcom Limited have resulted in the following categories ofintangible assets being identified: • Customer relationships • Marketing assistance • Customer order backlogs • Trade names Amortisation The estimated useful lives of intangible assets are as follows: Customer relationships - 6 yearsThird party marketing assistance - 3 yearsCustomer order backlog - over the period that the orders will be invoicedTrade names - 1 to 2 years Impairment testing of goodwill, other intangible assets and property, plant andequipment For the purposes of assessing impairment, assets are grouped at the lowestlevels for which there are separately identifiable cash flows (cash-generatingunits). As a result, some assets are tested individually for impairment and someare tested at cash-generating unit level. Goodwill is allocated to thosecash-generating units that are expected to benefit from synergies of the relatedbusiness combination and represent the lowest level within the Group at whichmanagement monitors the related cash flows. Goodwill, other individual assets or cash-generating units that includegoodwill, other intangible assets with an indefinite useful life, and thoseintangible assets not yet available for use are tested for impairment at leastannually. All other individual assets or cash-generating units are tested forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's orcash-generating unit's carrying amount exceeds its recoverable amount. Therecoverable amount is the higher of fair value, reflecting market conditionsless costs to sell, and value in use based on an internal discounted cash flowevaluation. Impairment losses recognised for cash-generating units, to whichgoodwill has been allocated, are credited initially to the carrying amount ofgoodwill. Any remaining impairment loss is charged pro rata to the other assetsin the cash generating unit. With the exception of goodwill, all assets aresubsequently reassessed for indications that an impairment loss previouslyrecognised may no longer exist. Investments in joint venturesEntities whose economic activities are controlled jointly by the Group and byother ventures independent of the Group are accounted for using the equitymethod. Investments in joint ventures are recognised initially at cost and subsequentlyaccounted for using the equity method. Acquired investments in joint venturesare also subject to purchase method accounting. However, any goodwill or fairvalue adjustment attributable to the share in the joint ventures is included inthe amount recognised as investment in joint ventures. All subsequent changes to the share of interest in the equity of the jointventures are recognised in the Group's carrying amount of the investment.Changes resulting from the profit or loss generated by the joint ventures arereported in "share of profits of joint ventures" in the consolidated incomestatement and therefore affect net results of the Group. These changes includesubsequent depreciation, amortisation or impairment of the fair valueadjustments of assets and liabilities. Items that have been recognised directly in the joint venture's equity arerecognised in the consolidated equity of the Group. However, when the Group'sshare of losses in a joint venture equals or exceeds its interest in the jointventure, including any unsecured receivables, the Group does not recognisefurther losses, unless it has incurred obligations or made payments on behalf ofthe joint ventures. If the joint ventures subsequently reports profits, theinvestor resumes recognising its share of those profits only after its share ofthe profits equals the share of losses not recognised. Unrealised gains on transactions between the Group and its joint ventures areeliminated to the extent of the Group's interest in the joint ventures.Unrealised losses are also eliminated unless the transaction provides evidenceof an impairment of the asset transferred. Amounts reported in the financialstatements of joint ventures have been adjusted where necessary to ensureconsistency with the accounting policies adopted by the Group. Leased assets Finance leases and hire purchase agreements Where the Company enters into a lease that transfers substantially all the risksand rewards of ownership of an asset to the lessee, the lease is treated as afinance lease. The asset is recorded in the balance sheet as a tangible fixedasset at the present value of the minimum lease payments and is depreciated overthe shorter of the lease term and the asset's useful economic life. Futureinstalments under such leases, net of finance charges, are included increditors. Rentals payable are apportioned between the finance element, which ischarged to the income statement at a constant rate of charge on the balance ofcapital repayments outstanding, and the capital element, which reduces theoutstanding obligation. Operating lease agreementsLeases where substantially all of the risks and rewards of ownership are nottransferred to the Company are treated as operating leases. Rentals underoperating leases are charged against profits on a straight-line basis over theperiod of the lease. InventoriesInventories are stated at the lower of cost and net realisable value, afterprovisions are made in respect of obsolete and slow moving items. Net realisablevalue is the estimated selling price less all further costs to complete and allcosts to be incurred in marketing, selling and distribution. Current taxThe current tax charge is based on the profit or loss for the year and ismeasured at the amounts expected to be paid based on the tax rates and lawssubstantively enacted by the balance sheet date. Current and deferred tax isrecognised in the income statement for the period except to the extent that itis attributable to a gain or loss that is or has been recognised directly in thestatement of total recognised gains and losses. Deferred taxDeferred tax is recognised on all timing differences where the transactions orevents that give the Group an obligation to pay more tax in the future, or aright to pay less tax in the future, have occurred by the balance sheet date.Deferred tax liabilities are provided in full, with no discounting. Deferred taxassets are recognised to the extent that it is probable that the underlyingdeductible temporary differences will be able to be offset against futuretaxable income. Deferred tax assets and liabilities are calculated at tax ratesthat are expected to apply to their respective period of realisation, providedthat they are enacted or substantively enacted by the balance sheet date. Deferred tax is not provided on the initial recognition of goodwill, or on theinitial recognition of an asset or liability unless the related transaction is abusiness combination or affects tax or accounting profit. Deferred tax ontemporary differences associated with shares in subsidiaries and joint venturesis not provided if reversal of these temporary differences can be controlled bythe Group and it is probable that reversal will not occur in the foreseeablefuture. CashCash, for the purposes of the consolidated cash flow statement, comprises cashin hand and deposits repayable on demand, less overdrafts payable on demand. Foreign currencyTransactions in foreign currencies are translated at the exchange rate ruling atthe date of the transaction. Monetary assets and liabilities in foreigncurrencies are translated at the rate of exchange ruling at the balance sheetdate. Any exchange differences arising on the settlement of monetary items or ontranslating monetary items at rates different from those at which they wereinitially recorded are recognised in the income statement in the period in whichthey arise. Contributions to pension schemesThe Company contributes to the personal pension schemes of certain Directors andemployees. The pension costs are charged against operating profit in therelevant accounting period. Financial instrumentsFinancial assets are recognised when the Group becomes a party to thecontractual provisions of the instrument. Financial liabilities are obligationsto pay cash or other financial assets and are recognised when the Group becomesa party to the contractual provisions of the instrument. Financial liabilitiescategorised as at fair value through profit or loss are recorded initially atfair value and all transaction costs are recognised immediately in the incomestatement. All other financial liabilities are recorded initially at fair value,net of direct issue costs. Financial liabilities categorised as at fair value through profit or loss arere-measured at each reporting date at fair value, with changes in fair valuebeing recognised in the income statement. All other financial liabilities arerecorded at amortised cost using the effective interest method, withinterest-related charges recognised as an expense in finance cost in the incomestatement. Finance charges, including premiums payable on settlement orredemption and direct issue costs, are charged to the income statement on anaccruals basis using the effective interest method and are added to the carryingamount of the instrument to the extent that they are not settled in the periodin which they arise. Financial liabilities are categorised as at fair value through profit or losswhere they are classified as held-for-trading or designated as at fair valuethrough profit or loss on initial recognition. Financial liabilities aredesignated as at fair value through profit or loss where they are measured andtheir performance evaluated on a fair value basis in accordance with the Group'sdocumented risk management strategy. Classification as equity or financial liabilityFinancial liabilities and equity instruments are classified according to thesubstance of the contractual arrangements entered into. A financial liability exists where there is a contractual obligation to delivercash or another financial asset to another entity, or to exchange financialassets or financial liabilities under potentially unfavourable conditions. Inaddition, contracts which result in the entity delivering a variable number ofits own equity instruments are financial liabilities. Shares containing suchobligations are classified as financial liabilities. Finance costs and gains or losses relating to financial liabilities are includedin the income statement. The carrying amount of the liability is increased bythe finance cost and reduced by payments made in respect of that liability.Finance costs are calculated so as to produce a constant rate of charge on theoutstanding liability. An equity instrument is any contract that evidences a residual interest in theassets of the group/company after deducting all of its liabilities. Dividendsand distributions relating to equity instruments are debited directly toreserves. Compound instrumentsCompound instruments comprise both a liability and an equity component. Theelements of a compound instrument are classified in accordance with theircontractual provisions. At the date of issue, the liability component isrecorded at fair value, which is estimated using the prevailing market interestrate for a similar debt instrument without the equity feature. Thereafter, theliability component is accounted for as a financial liability in accordance withthe accounting policy set out above. The residual is the equity component, which is accounted for as an equityinstrument. Equity Equity comprises the following: • Share capital represents the nominal value of equity shares. • Share premium represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. • Other reserves represent equity-settled share-based employee remuneration until such share options are exercised and the equity component of compound financial instruments. • Reverse acquisition reserve represents the amount recognised in respect of the reverse acquisition accounting treatment of the acquisition of Spiritel plc by Spiritel Technologies Limited (formerly Expo Communications Limited) in 2005. • Profit and loss account represents retained losses. Government grants Government grants in respect of capital expenditure are netted against the costof the asset. Share-based payments Equity settled share-based paymentThe Group issues equity settled share-based payments to certain Directors andemployees. All share-based payment arrangements granted after 5 March 2004 thathad not vested prior to 1 May 2006 are recognised in the financial statements.Where employees are rewarded using share-based payments, the fair values ofemployees' services are determined indirectly by reference to the fair value ofthe instrument granted to the employee. This fair value is appraised at thegrant date and excludes the impact of non-market vesting conditions. All equitysettled share-based payments are ultimately recognised as an expense in theprofit and loss account with a corresponding credit to other reserves. If vesting periods or other non-market vesting conditions apply, the expense isallocated over the vesting period, based on the best available estimate of thenumber of share options expected to vest. Estimates are revised subsequently ifthere is any indication that the number of share options expected to vestdiffers from previous estimates. Any cumulative adjustment prior to vesting isrecognised in the current period. No adjustment is made to any expenserecognised in prior periods if share options that have vested are not exercised. Upon exercise of share options, the proceeds received net of attributabletransaction costs are credited to share capital, and where appropriate sharepremium. 4. Loss per share The calculation of the basic loss per share is based on the loss attributable toordinary shareholders divided by the weighted average number for shares in issueduring the period. The share options are not dilutive and therefore a dilutedearnings per share calculation has not been presented. The losses and weighted average number of shares used in the calculation are setout below: Weighted Per share Loss average number amount £'000 of shares Pence Continuing and total operations 6 months to 31 October 2007Loss after tax (2,339) --------Loss attributable to ordinary shareholders (2,339) --------Weighted average number of shares 316,232,646Loss per share (pence) (0.74) 6 months to 31 October 2006Loss after tax (1,147) --------Loss attributable to ordinary shareholders (1,013) --------Weighted average number of shares 176,477,807Loss per share (pence) (0.57) Year ended 30 April 2007Loss after tax (3,058) --------Loss attributable to ordinary shareholders (2,924) --------Weighted average number of shares 217,231,927Loss per share (pence) (1.35) 5. Business combination On 22 October 2007, Spiritel Plc acquired 100% of the issued share capital ofTdotcom Limited, a company based in the UK. The total cost includes thecomponents stated below. The purchase price was settled in cash. £'000 Purchase price 80Contingent consideration under earn out agreement payable in cash 120Due diligence fees 10Other professional fees 21 ------- 231 ------- Up to a further £150,000 of consideration may become payable in the event thatthe acquired business achieves certain earn-out sales targets during theeighteen months following the date of acquisition. In the opinion of thedirectors the likely amount payable is £120,000. The allocation of the purchase price to the assets and liabilities of TdotcomLimited was only provisionally completed at 31 October 2007. The amountsprovisionally recognised for each class of the acquiree's assets and liabilitiesrecognised at the acquisition date are as follows: Carrying Provisional amount under Adjustments fair value IFRS £'000 £'000 £'000 Other intangible assets 650 - 650Trade and other receivables 159 - 159Current tax asset 29 - 29Cash and cash equivalents 3 - 3 ---------------------------------------Total assets 841 - 841 Trade payables (167) - (167)Deferred income (169) (71) (240)Other taxes (132) - (132)Other payables (97) - (97) ---------------------------------------Total liabilities (565) (71) (636) --------------------------------------- Net assets 276 (71) 205 ---------------------------- Goodwill 26 -----------Fair value of purchase consideration 231 ----------- A provisional fair value adjustment has been made to align the company's revenuerecognition policy on contracted maintenance income with that of the Group. 6. Explanation of transition to IFRS As stated in the note 2, these are the Group's first condensed consolidatedinterim financial statements, for part of the period covered by the first IFRSannual consolidated financial statements, prepared in accordance with IFRS. Business combinations prior to 1 May 2006, the Group's date of transition toIFRS, have not been restated to comply with IFRS3 Business Combinations.Goodwill arising from these business combinations of £33,000 has not beenrestated and no other adjustments are required to the balance sheet as at 1 May2006. An explanation of how the transition from UK GAAP to IFRS has affected theGroup's financial position, financial performance and cash flows is set outbelow. Reconciliation of equity at 31 October 2006 UK GAAP (a) (b) (c) IFRS £'000 £'000 £'000 £'000 £'000ASSETS Non-current assetsProperty, plant and equipment 715 - - - 715Goodwill 2,490 (1,799) - - 691Other intangible assets - 1,799 - (8) 1,791 ------------------------------------------------ 3,205 - - (8) 3,197 ------------------------------------------------ Current assetsTrade and other receivables 1,059 - - - 1,059Cash and cash equivalents 252 - - - 252 ------------------------------------------------ 1,311 - - - 1,311 ------------------------------------------------ ------------------------------------------------Total assets 4,516 - - (8) 4,508 ------------------------------------------------ LIABILITIES Current liabilitiesTrade and other payables (1,777) - - - (1,777)Short term borrowings (2,243) - - - (2,243)Current tax payable (48) - - - (48) ------------------------------------------------ (4,068) - - - (4,068) ------------------------------------------------Non-current liabilitiesLong-term borrowings (4,695) - - - (4,695)Deferred tax liabilities (18) - - - (18) ------------------------------------------------ (4,713) - - - (4,713) ------------------------------------------------ ------------------------------------------------Total liabilities (8,781) - - - (8,781) ------------------------------------------------ ------------------------------------------------ Net liabilities (4,265) - - (8) (4,273) ------------------------------------------------ EQUITY Capital and reservesShare capital 2,195 - - - 2,195Additional paid in capital 3,630 - - - 3,630Reverse acquisition reserve (5,763) - - - (5,763)Other reserves 54 - - - 54Profit and loss account (4,381) - - (8) (4,389) ------------------------------------------------Total equity (4,265) - - (8) (4,273) ------------------------------------------------ Reconciliation of equity at 30 April 2007 UK GAAP (a) (b) (c) IFRS £'000 £'000 £'000 £'000 £'000ASSETS Non-current assetsProperty, plant and equipment 408 - - - 408Goodwill 4,859 (4,247) 177 - 789Other intangible assets - 4,247 - (246) 4,001 ------------------------------------------------ 5,267 - 177 (246) 5,198 ------------------------------------------------ Current assetsInventories 392 - - - 392Trade and other receivables 3,007 - - - 3,007Cash and cash equivalents 322 - - - 322 ------------------------------------------------ 3,721 - - - 3,721 ------------------------------------------------ ------------------------------------------------Total assets 8,988 - 177 (246) 8,919 ------------------------------------------------ LIABILITIES Current liabilitiesTrade and other payables (3,991) - - - (3,991)Short term borrowings (4,037) - - - (4,037)Current tax payable (236) - - - (236) ------------------------------------------------ (8,264) - - - (8,264) ------------------------------------------------Non-current liabilitiesLong-term borrowings (4,812) - - - (4,812)Deferred tax liabilities (17) - - - (17) ------------------------------------------------Total non-current liabilities (4,829) - - - (4,829) ------------------------------------------------ ------------------------------------------------Total liabilities (13,093) - - - (13,093) ------------------------------------------------ ------------------------------------------------Net liabilities (4,105) - 177 (246) (4,174) ------------------------------------------------ EQUITY Capital and reservesShare capital 3,162 - - - 3,162Additional paid in capital 4,550 - - - 4,550Reverse acquisition reserve (5,763) - - - (5,763)Other reserves 97 - - - 97Profit and loss account (6,151) - 177 (246) (6,220) ------------------------------------------------Total equity (4,105) - 177 (246) (4,174) ------------------------------------------------ Reconciliation of loss for the 6 months ended 31 October 2006 UK GAAP (a) (b) (c) IFRS £'000 £'000 £'000 £'000 £'000Continuing operationsRevenue 6,837 - - - 6,837Cost of sales (6,173) - - - (6,173) ------------------------------------------------Gross profit 664 - - - 664 ------------------------------------------------Administrative expenses (1,695) - - (8) (1,703) ------------------------------------------------Operating loss (1,031) - - (8) (1,039)Share of operating loss of joint venture (18) - - - (18) ------------------------------------------------ ( 1,049) - - (8) (1,057)Finance costs (90) - - - (90) ------------------------------------------------Loss before taxation (1,139) - - (8) (1,147)Income tax expense - - - - - ------------------------------------------------Loss for the financial period (1,139) - - (8) (1,147) ------------------------------------------------ Reconciliation of loss for the year ended 30 April 2007 UK GAAP (a) (b) (c) IFRS £'000 £'000 £'000 £'000 £'000Continuing operationsRevenue 13,649 - - - 13,649Cost of sales (11,613) - - - (11,613) ------------------------------------------------Gross profit 2,036 - - - 2,036Administrative expenses (4,432) - 177 (246) (4,501) ------------------------------------------------Operating (loss)/profit (2,396) - 177 (246) (2,465)Share of operating loss of joint venture (25) - - - (25) ------------------------------------------------ (2,421) - 177 (246) (2,490)Finance costs (589) - - - (589) ------------------------------------------------Loss before taxation (3,010) - 177 (246) (3,079)Income tax expense 21 - - - 21 ------------------------------------------------Loss for the financial period (2,989) - 177 (246) (3,058) ------------------------------------------------ Notes to the reconciliations (a) The Group acquired CallPlan Limited (renamed Spiritel CallPlanLimited) on 11 September 2006. Application of IFRS 3 to this businesscombination resulted in the identification of a number of intangible assetsother than goodwill, including customer relationships and a marketing contract.Under IFRS these have been recognised separately in the balance sheet at theirfair value at the date of combination. Under UK GAAP these intangible assetswere included within goodwill. The result of this adjustment is to decreasegoodwill and increase intangible assets by £506,000 at the date of combination. The Group acquired Networks Direct (UK) Limited (renamed Spiritel NetworksLimited) on 13 October 2006. Application of IFRS 3 to this business combinationresulted in the identification of a number of intangible assets other thangoodwill, including customer relationships. Under IFRS these have beenrecognised separately in the balance sheet at their fair value at the date ofcombination. Under UK GAAP these intangible assets were included withingoodwill. The result of this adjustment is to decrease goodwill and increaseintangible assets by £1,293,000 at the date of combination. The Group acquired Ashland Group Limited (renamed Spiritel IP CommunicationsLimited) on 2 March 2007. Application of IFRS 3 to this business combinationresulted in the identification of a number of intangible assets other thangoodwill, including customer lists. Under IFRS these have been recognisedseparately in the balance sheet at their fair value at the date of combination.Under UK GAAP these intangible assets were included within goodwill. The resultof this adjustment is to decrease goodwill and increase intangible assets by£2,448,000 at the date of combination. At 31 October 2006 and 30 April 2007 the value of intangible assets wasincreased by £1,799,000 and £4,247,000 respectively. The Group acquired tdotcom Limited (renamed Spiritel IP Communications (London)Limited) on 22 October 2007. Application of IFRS 3 to this business combinationresulted in the identification of a number of intangible assets other thangoodwill, including customer lists. Under IFRS these have been recognisedseparately in the balance sheet at their fair value at the date of combination. (b) Goodwill recognised by the Group on the acquisitions of CallPlanLimited, Networks Direct (UK) Limited and Ashland Group Limited under UK GAAPwas amortised over a period of 10 years. Under IFRS goodwill is not amortisedbut is tested annually for impairment. The goodwill amortisation charge of£177,000 recognised in accordance with UK GAAP during the year ended 30 April2007 has been written back. (c) In accordance with IFRS 3 as described above, intangible assets, otherthan goodwill, identified on these business combinations, are amortised inaccordance with the accounting policy explained in note 3. The result of theseadjustments is to increase the amortisation charge in the income statement forthe six months ended 31 October 2006 by £8,000 and by £246,000 for the yearended 30 April 2007 and decrease the carrying value of those intangible assetsby the same amounts. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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