Maintel Regulatory News (MAI)

17 Mar 2008 07:00

Maintel Holdings PLC17 March 2008 Maintel Holdings Plc Preliminary results for the year to 31 December 2007 Maintel Holdings Plc, the telecoms services company, announces preliminaryresults for the year to 31 December 2007. These are reported under InternationalFinancial Reporting Standards ("IFRS"), with 2006 comparisons restatedaccordingly. Financial Highlights Group revenue increased by 20% to £19.3m (2006: £16.2m) Recurring revenue increased by 16% to £13.4m (2006: £11.5m) Sales of equipment including VoIP solutions up 25% to £6.0m (2006: £4.8m) Sales of broadband, call traffic and related products up 38% to £4.7m (2006:£3.4m) Cash balances of £2.1m (2006: £2.2m) after £448,000 cost of acquiring customerbase and £117,000 buy back of shares Margin (profit before tax as a percentage of revenue) improved to 11.5% in H2 07from 8.8% in H1 07 Profit before tax of £1.979m (2006: £2.012m) Adjusted profit before tax of £2.302m (2006: £2.200m); adjusted profit beforetax is basic profit before tax of £1.979m (2006: £2.012m), adjusted for goodwillimpairment and intangible amortisation and one-off professional costs Basic and diluted earnings per share of 11.1p (2006: 11.1p) Adjusted earnings per share of 13.1p (2006: 12.4p); adjusted earnings per shareis basic earnings per share of 11.1p (2006: 11.1p), adjusted for goodwillimpairment and intangible amortisation and one-off professional costs Final dividend proposed of 3.0p per share (2006: 2.9p), making 5.5p for the year(2006: 5.0p) Operational Highlights Further investment in recruitment and training of Nortel technical team Increased investment and training in customer account management Important contract wins in varied business sectors including law, finance,leisure, education and health. Acquisition in August of a customer base from Callmaster Limited for £448,000cash, satisfied from existing resources - annual contract value approx £850,000 Development of IT delivery and support for servers, networks and unifiedcommunications Winner of Nortel/Westcon Enterprise Achievement Award 2007 Tim Mason, Chief Executive said: "Group recurring revenues are running at a high of £13.4m representing 69% ofannual revenue." For further information please contact: Tim Mason, Chief Executive 020 7401 4601Dale Todd, Finance Director 020 7401 0562 Chairman's statement Maintel's revenue in 2007 continued to grow at a very satisfactory rate, by 20%from £16.2m to £19.3m, with network services and VoIP equipment sales putting inespecially good performances. Our recurring revenues increased by 16% from£11.5m to £13.4m during the year. We are reporting our results under IFRS for the first time. Group profit beforetax was £2.0m (2006: £2.0m). Adjusted IFRS profit before tax (IFRS profit beforetax, but adjusting for IFRS goodwill impairment and intangible amortisation andone-off professional costs) increased from £2.0m to £2.3m and IFRS earnings pershare were 11.1p, the same as in 2006. As these figures demonstrate, marginpressure continued over the year as a whole. It was a key objective of 2007 toimprove margins as the year progressed and more detailed analysis of 2006 and2007 comparisons show that margins improved sharply in the second half of 2007: H1 06 H2 06 2006 H1 07 H2 07 2007 £000 £000 £000 £000 £000 £000 Revenue 7,063 9,103 16,166 8,910 10,419 19,329 PBT 916 1,096 2,012 780 1,199 1,979 Margin* 13.0% 12.0% 12.4% 8.8% 11.5% 10.2% * PBT as a % of Revenue On the maintenance and equipment side of our business recent margin pressure hascome partly from our continuing investment in greater sales and engineeringresource as we have emphasised top line growth and built our platform for thefuture, but also from the greater pricing power enjoyed by the bigger corporateand institutional clients from whom we have increasingly won business. Thebigger end of the market remains competitive but our Nortel engineering capacityis now fully built and trained to the highest standards to take advantage of thehuge installed base of Nortel systems we are targeting as clients. Rebuildingmargins in this part of our business continues to be a priority as we enter 2008and further efficiencies have been identified. Network services grew turnover by 38% to £4.7m with gratifyingly low customerattrition. This division's size means that it is now well positioned to tenderfor bigger contracts. We have added to our sales force here too and believe thebusiness is well positioned for significant growth in 2008. Cash flow from operations remained strong at £1.1m for the year (2006: £1.0m)and cash balances at year-end were £2.1m (2006: £2.2m) after dividends of£672,000 and share buy backs of £117,000. We also acquired Callmaster's contractbase for £448,000 during the year, continuing our practice of fundingacquisitions out of cash. We are proposing a final dividend of 3p giving a totalof 5.5p for the year, an increase of 10%. We enter the new year with a strong pipeline of business and a robust platformfor future growth. It remains for me to thank all our staff for their continuinghard work and commitment as we build on our achievements in 2008. J D S Booth Chairman 14 March 2008Business review IFRS (International Financial Reporting Standards) This is the first year for which the Group, as described in note 2, is requiredto report under IFRS, the main effects of which are to alter the treatment ofgoodwill and its impairment, and to create a provision for accrued holiday pay.Prior period accounts have been restated under IFRS, and reconciliations betweenUK GAAP and IFRS are shown in note 9. Results The revenue growth highlighted at the half year has been sustained in the secondhalf, so that Group revenue for the year amounted to £19.3m, an increase of£3.2m (20%) over that of 2006. The primary areas of growth were the continued strong performance from thenetwork services division (assisted by the delayed termination of a major,though low margin, client), VoIP equipment sales, and a full year's contributionfrom customers of District Holdings Limited and its subsidiaries (the "Districtgroup") which was acquired in June 2006. In addition, the acquisition of acontract base from Callmaster Limited contributed £270,000 revenue from 1 August2007. An overview of Group revenue is as follows: +------------------------------------+---------------+--------------+|Revenue analysis (£000) | 2007| 2006|+------------------------------------+---------------+--------------+|Maintenance related | 8,756| 8,072|+------------------------------------+---------------+--------------+|Equipment, installations and other | 5,979| 4,801|+------------------------------------+---------------+--------------+|Total maintenance and equipment | | ||division | | || | 14,735| 12,873|+------------------------------------+---------------+--------------+|Network services division | 4,682| 3,400|+------------------------------------+---------------+--------------+|Intercompany | (88)| (107)|+------------------------------------+---------------+--------------+|Total Maintel Group | 19,329| 16,166|+------------------------------------+---------------+--------------+ Group recurring revenue (maintenance plus network services) has thereforeincreased from £11.5m (71% of total Group revenue) in 2006 to £13.4m (69%) in2007, providing a firm foundation for the Group. Under IFRS, Group profit before tax in 2007 was £2.0m, £33,000 less than in2006. Adjusted profit before tax (IFRS profit before tax, but adjusting for IFRSgoodwill impairment and intangible amortisation and one-off professional costs)shows an increase from £2.0m in 2006 to £2.3m in 2007. IFRS earnings per share were 11.1p in 2007, the same as in 2006, and adjustedearnings per share (IFRS earnings per share adjusted for IFRS goodwillimpairment, intangible amortisation and one-off professional costs) were 13.1pagainst 12.4p in 2006, the 2007 figures in each case benefiting from share buybacks, and a reduced absorption of residual tax losses from the District Groupcompared with 2006. Cash flow from operating activities continues to be strong, at £1.1m in 2007(2006 - £1.0m), and cash balances remained healthy at £2.1m (2006 - £2.2m) afterthe acquisition of the Callmaster contract base for £448,000 in cash, dividendpayments of £672,000 and the use of £117,000 to buy back shares in the Company. Divisional performance is described further below in conjunction with thefollowing KPIs. Maintenance and equipment division The maintenance and equipment division provides maintenance, service and supportof office-based voice and data equipment across the UK on a contracted basis. Italso supplies and installs voice and data equipment to maintenance customers. The division's revenues increased from £12.9m in 2006 to £14.7m in 2007, asshown in the table above. We acquired two maintenance bases in the year, WGTS Limited (c£60,000 pa inFebruary 2007) for which negligible maintenance income was recognised in theyear and Callmaster Limited (c£135,000 pa in August 2007) for which werecognised just under 6 months of revenue. These combined with organic growthhave seen our maintenance revenue grow by 8% against 2006. The annual value ofthe maintenance base at the end of the year was at a record high of £8.5m. There has been significant growth in sales of VoIP hardware solutions to ourcustomer base this year and to take advantage of this, further sales resourcewas invested in account management teams to encourage and develop equipmentrefresh programs within the base. +------------------------------------+---------------+---------------+|Division average headcount during | | ||the year | | || | 2007| 2006|+------------------------------------+---------------+---------------+|Sales and customer service | 59| 54|+------------------------------------+---------------+---------------+|Engineers | 86| 72|+------------------------------------+---------------+---------------+ This investment has produced equipment sales of £6.0m in 2007, a 25% increase on2006 sales of £4.8m, with equipment sales now representing 41% (2006 - 37%) ofthe division's sales. As mentioned last year, Maintel is the supplier of choice to many largerorganisations but this has meant that our normal high margin model cannot alwaysbe achieved and this is demonstrated by the division's gross profit % in 2007being 3 percentage points down on 2006, although £318,000 up on last year. +-----------------------------------+--------------+--------------+| | 2007| 2006|+-----------------------------------+--------------+--------------+|Division gross profit (£000) | 5,403 (37%)| 5,085 (40%)|+-----------------------------------+--------------+--------------+ A further factor impacting on the margin in the year was the continuedinvestment in employment and training of senior Nortel engineers. The large baseof Nortel systems installed by BT over the past 6 or 7 years gives us a hugesales opportunity and we are increasing our resource to take advantage of this.Although this has had a negative effect on our profitability in 2007 weanticipate it will stand us in good stead for 2008. Maintel has alwayspositioned itself as one of the few organisations able to provide multi-productsupport and we continue to invest in other product areas including Mitel,Siemens and Avaya allowing us to tender for and win multisite mixed maintenanceopportunities. Given the application of common resource across both maintenance and equipmentsales, it is not practical to quote definitive margin data on the separatebusiness sectors, however estimated management figures are used to monitorresults internally. Net margin (operating profit as a percentage of revenue) from the divisionreduced in line with gross margin, but remained strong at 11.4% (2006 - 13.0%),the division's overheads remaining tightly controlled during the year. Network services division The network services division re-sells a portfolio of products providing theinterconnectivity between customers and their staff and offices as well as theoutside world. This includes call minutes, line rental, ADSL/Broadband, Widearea IP networking and non-geographic numbers. Increased emphasis has been placed on growing the recurring revenues of thenetwork services division as we have seen expansion in requirements forinterconnectivity from our customers. In particular the connection of headoffices to remote sites and home workers to provide flexible working andcentralised database and telephony applications. This has allowed the divisionto have another successful year, increasing revenues to £4.7m, from £3.4m in2006, a rise of 38%. The division's two main revenue streams - call traffic and line rental - bothgrew strongly in the year, the former up 25% and the latter 102%, includingrevenues of £138,000 and £117,000 respectively from the Callmaster acquisitionon 1 August 2007. +------------------------------------+---------------+---------------+|Revenue analysis (£000) | 2007| 2006|+------------------------------------+---------------+---------------+|Call traffic | 3,120| 2,487|+------------------------------------+---------------+---------------+|Line rental | 1,185| 586|+------------------------------------+---------------+---------------+|Other | 377| 327|+------------------------------------+---------------+---------------+|Total network services | 4,682| 3,400|+------------------------------------+---------------+---------------+ +-----------------------------------+--------------+-----------------+| | 2007| 2006|+-----------------------------------+----------------+---------------+|Division gross profit (£000) | 1,232| 1,005|+-----------------------------------+----------------+---------------+ The change in revenue mix - line rental earning lower margins than call traffic- together with some price pressure on call traffic margins, has caused thedivision's overall gross margin to drop from 30% in 2006 to 26% in 2007,although overall gross profit has continued to grow, from £1.00m in 2006 to£1.23m in 2007. As noted in the interim report, the division has received notice of cancellationfrom one of its larger but lower margin customers. The reduction in revenue fromthis was anticipated to have commenced in August 2007, but the transfer fromMaintel has not yet begun, though is now thought to be imminent. Likewise, thesignificant new customer highlighted at the half year has taken longer thananticipated to migrate and contribute fully, and so the full effects of thiscustomer will be seen in 2008. Attrition otherwise continues to be low in the division. Sales and administrative costs continue to be closely controlled, thoughnaturally increased in 2007 to support the revenue growth. Further specialistsales resource has been recruited in 2008, in particular to promote sales ofinterconnectivity mentioned above, with administrative support to follow. As the division grows, it is becoming able to tender for increasingly high valuebusiness, although as with its existing large customers, this often comes with alower margin than its historical SME business which continues to provide aprofitable but competitive base. Administrative expenses, excluding goodwill impairment and intangiblesamortisation +------------------------------------+---------------+---------------+|Administrative expenses (£000) | 2007| 2006|+------------------------------------+---------------+---------------+|Sales expenses | 2,290| 1,878|+------------------------------------+---------------+---------------+|Other administrative expenses | | ||(excluding Goodwill impairment) | | || | 2,115| 1,844|+------------------------------------+---------------+---------------+|District sales and admin costs | -| 211|+------------------------------------+---------------+---------------+|Total other administrative expenses | 4,405| 3,933|+------------------------------------+---------------+---------------+ Administrative expenses increased by £472,000 (12%) in the year, including afull year (2006 - 61/2 months) of District costs, albeit the District costs wereat a reduced level. Sales headcount increased slightly, but with some highercalibre individuals being employed and the increase in revenues impacting onvariable overheads, such as commission. Otherwise administration costs, including corporate, service and admin staff,remain controlled and we have re-signed our Head Office lease in Waterloo toMarch 2010 providing us with flexible reasonably priced office space. +-----------------------------------+--------------+--------------+| | 2007| 2006|+-----------------------------------+--------------+--------------+|Average Group headcount during the | | ||period | | || | 171| 160|+-----------------------------------+--------------+--------------+|Average sales and service headcount| 65| 64|+-----------------------------------+--------------+--------------+|Average corporate and admin | 20| 20||headcount | | |+-----------------------------------+--------------+--------------+|Group revenue (£000) | 19,329| 16,166|+-----------------------------------+--------------+--------------+ Acquisition of contract base On 1 August 2007, the Group acquired a contract base of maintenance, calltraffic, line rental and VoIP hosted service customers from Callmaster Limited,for a cash consideration of £440,000 plus £8,000 costs. Two of Callmaster'sengineers joined the Group at the same time. The annual value of the contractsat the date of acquisition was around £850,000, £715,000 in network servicesrevenue and £135,000 in maintenance revenue. In February 2007, the Group acquired a maintenance contract base of c£60,000 perannum from WGTS Limited. Negligible revenue was recognised from this arrangementin 2007, but will be during 2008. The Group continues to seek bolt-on customer bases at the right price, togetherwith suitable acquisitions to accelerate the ongoing development of its ITcapabilities which have allowed the Group to secure increasingly complex voiceand data contracts. Taxation The income statement shows a tax rate of 30.1% (2006 - 29.4%). The two maintrading companies are taxed at 30%, so that with disallowables the effectiverate is above this, increased further by an element of the goodwill impairmentcharge which does not attract tax relief, but benefiting from the effect ondeferred tax of next year's reduction in the rate of corporation tax from 30% to28%. In the year under review, use of the remaining portion of District's taxlosses has reduced the taxation charge by £15,000 (2006 - £49,000). Dividends A final dividend for 2006 of 2.9p per share (£361,000 in total) was paid on 25April 2007, and an interim 2007 dividend of 2.5p per share (£311,000) was paidon 5 October 2007. It is proposed to pay a final dividend of 3.0p in respect of 2007, subject toshareholder approval at the AGM, and payable on 30 April to shareholders on theregister at the close of business on 28 March. In accordance with accountingstandards, this dividend is not accounted for in the financial statements forthe period under review as it had not been committed to pay it as at 31 December2007. Balance sheet The balance sheet remains solid, with £2.1m of cash, as noted above,facilitating continued growth in equipment sales and network services fromexisting resources. No significant expenditure has been required on plant and equipment, or onstock, during the period. The deferred tax liability arises from the application of IFRS, whereby aliability of £290,000 was created on the recognition of the intangible assetrelating to District. This is likely to be released in parallel with theamortisation of the intangible and is partially offset by deferred tax assets. Intangible assets Following the adoption of IFRS, the Group has three intangible assets - goodwillarising on the acquisition of Maintel Network Services Limited (previouslyPinnacle Voice and Data Limited) and an intangible asset represented by customercontracts and relationships acquired from District Holdings Limited andCallmaster, together with goodwill relating to the District acquisition. The Maintel Network Services goodwill is subject to an impairment test at eachreporting date. Impairment of £18,000 has been charged to the income statementin 2007 (2006 - £62,000), and the carrying value is £294,000 at that date. The intangible assets represented by the customer contracts and relationshipsare subject to an amortisation charge of 20% of cost per annum in respect ofmaintenance contract relationships and 14.2% per annum in respect of networkservices contracts, £222,000 having been amortised in 2007, leaving a carryingvalue of £1,094,000. The goodwill relating to the District acquisition has been subject to animpairment charge of £58,000 in 2007 (2006 - £29,000), leaving a carrying valueof £203,000. Purchase of own shares Further to the authority granted at the last AGM, the Company repurchased andcancelled 70,000 of its own shares in December 2007, at a price of 166p, at atotal cost of £117,000 and 240,000 shares in 2008 at 161.5p at a total cost of£391,000. The share price at 31 December 2007 was 167p. Cash flow At 31 December 2007 the group had cash and bank balances of £2.109m (2006 -£2.234m), all of it unrestricted. Net cash inflow from operating activities inthe year was £1.103m, Callmaster contracts were acquired for £448,000 net cash,£672,000 was paid in dividends, £117,000 used to buy back shares in the Company,and £759,000 corporation tax was paid. The group invests its surplus cash in high interest, low risk accounts or funds. Outlook Following on from a steady performance in 2007 we are pleased to report a solidstart to 2008 with a number of material sales including a large support win andanother two major prospects. The Group also continues to develop its IT capabilities to expand its targetmarket and encompass further constituent parts of larger contracts which mightotherwise be outsourced, including 24/7 network and server monitoring, remotebackup and application development with Microsoft Communications Server. Margin on equipment sales continues to improve from 2007 and we look forward tothe remainder of the year with confidence. Tim Mason Chief Executive14 March 2008 Maintel Holdings Plc Consolidated interim income statementfor the year to 31 December 2007 2007 2006 note £'000 £'000Revenue 3 19,329 16,166Cost of sales 12,762 10,167Gross profit 6,567 5,999Administrative expenses Goodwill impairment 76 91Intangibles amortisation 222 97Other administrative expenses 4,405 3,933 4,703 4,121 Operating profit 3 1,864 1,878Financial income 115 135Financial charges - (1) Profit before taxation 1,979 2,012 Taxation 595 592 Profit after taxation attributableto equity holders of the parent 1,384 1,420 Earnings per shareBasic and diluted (note 4) 4 11.1p 11.1p Maintel Holdings Plc Consolidated balance sheetas at 31 December 2007 2007 2006 note £'000 £'000Non current assetsIntangible assets 7 1,591 1,441Property, plant and equipment 208 238 1,799 1,679 Current assetsInventories 829 705Trade and other receivables 3,928 2,861Cash and cash equivalents 2,109 2,234 6,866 5,800 Total assets 8,665 7,479 Current liabilitiesTrade and other payables 6,025 5,271Current tax liabilities 295 380 Total current liabilities 6,320 5,651 Non current liabilitiesDeferred tax liability 139 217 Total net assets 2,206 1,611 EquityIssued share capital 124 124Share premium 628 628Capital redemption reserve 12 12Retained earnings 1,442 847 Total shareholders' equity 2,206 1,611 Maintel Holdings Plc Consolidated statement of changes in equityfor the period to 31 December 2007 +-------------------+--------+--------+----------+---------+-------+| | | | Capital| | || | | |redemption| | || | Share| Share| reserve| Retained| || | capital| premium| | earnings| || | | | | | Total|+-------------------+--------+--------+----------+---------+-------+| | £'000| £'000| £'000| £'000| £'000|+-------------------+--------+--------+----------+---------+-------+|At 1 January 2006 | 129| 628| 7| 850| 1,614| | | | | | |+-------------------+--------+--------+----------+---------+-------+|Profit for the year| -| -| -| 1,420| 1,420||* | | | | | |+-------------------+--------+--------+----------+---------+-------+|Dividend | -| -| -| (591)| (591)|+-------------------+--------+--------+----------+---------+-------+|Movements in | | | | | ||respect of purchase| | | | | ||of own shares | (5)| -| 5| (832)| (832)|+-------------------+--------+--------+----------+---------+-------+|At 31 December 2006| 124| 628| 12| 847| 1,611|+-------------------+--------+--------+----------+---------+-------+|Profit for the | -| -| -| 1,384| 1,384||period* | | | | | |+-------------------+--------+--------+----------+---------+-------+|Dividend | -| -| -| (672)| (672)|+-------------------+--------+--------+----------+---------+-------+|Movements in | | | | | ||respect of purchase| | | | | ||of own shares | -| -| -| (117)| (117)||-------------------+--------+--------+----------+---------+-------+|At 31 December 2007| 124| 628| 12| 1,442| 2,206|+-------------------+--------+--------+----------+---------+-------+ \* Total recognised income and expenses for the period are the same as the profitfor the period shown above. Maintel Holdings Plc Consolidated cash flow statementfor the year to 31 December 2007 2007 2006 £'000 £'000Operating activitiesProfit before taxation 1,979 2,012Adjustments for:Goodwill impairment 76 91Intangibles amortisation 222 97Depreciation charge 136 136Interest received (115) (135)Other interest paid - 1Loss on disposal of fixed assets - 5 Operating profit before changes in working 2,298 2,207capital (Increase)/decrease in inventories (124) 12Increase in trade and other receivables (1,067) (671)Increase in trade and other payables 755 87 Cash generated from operating activities 1,862 1,635 Tax paid (759) (603) Net cash flows from operating activities 1,103 1,032 Investing activitiesPurchase of plant and equipment (106) (110)Purchase of subsidiary undertaking net of cash - (1,024)acquiredPurchase of base of customer relationships (448) -Interest received 115 135 Net cash flows from investing activities (439) (999) Financing activities Other interest paid - (1)Repurchase of own shares for cancellation (117) (832)Equity dividends paid (672) (591) Net cash flows from financing activities (789) (1,424) Net decrease in cash and cash equivalents (125) (1,391) Cash and cash equivalents at start of period 2,234 3,625 Cash and cash equivalents at end of period 2,109 2,234 Maintel Holdings Plc Notes to the preliminary statement 1. The abridged financial information set out in this document has beenextracted from financial statements approved by the directors on 14 March 2008and which will be delivered to the Registrar of Companies following theCompany's annual general meeting. The Group's auditors have reported on thefinancial statements and their report is unqualified and did not containstatements under sections 273 (2) or (3) of the Companies Act 1985. The abovefinancial information does not constitute statutory accounts as defined insection 240 of the Companies Act 1985. While the financial information included in this preliminary announcement hasbeen prepared in accordance with the recognition and measurement criteria ofInternational Financial Reporting Standards (IFRSs), this announcement itselfdoes not contain sufficient information to comply with IFRSs. As describedabove, the Group expects to publish full financial statements which comply withIFRSs, in March 2008. 2. Accounting policies The consolidated financial statements have been prepared under the historicalcost convention, and the principal policies adopted in their preparation are asfollows: (a) Basis of preparation The consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards, International Accounting Standardsand Interpretations (collectively IFRS) issued by the International AccountingStandards Board (IASB) as adopted by the European Union ("adopted IFRSs") andare in accordance with IFRS as issued by the IASB, and with those parts of theCompanies Act 1985 applicable to companies preparing their accounts in accordance with adoptedIFRSs. This is the first time the Group has prepared its annual financialstatements in accordance with adopted IFRSs, having previously prepared them inaccordance with UK accounting standards. Details of how the transition from UKaccounting standards to adopted IFRSs has affected the Group's reportedfinancial position, financial performance and cash flows are given in note 9. (b) Transition to International Financial Reporting Standards IFRS 1 "First-time Adoption of International Financial Reporting Standards" setsout the rules for first time adoption of IFRS and the optional exemptions whichmay be used in applying the standards retrospectively to comparative periods.The Group has used the following exemption in adopting IFRS. IFRS 3 "Business Combinations" has only been applied to acquisitions completedafter the date of transition, 1 January 2006. As a result, the carrying value ofgoodwill in the UK GAAP balance sheet at 31 December 2005, which relates to theacquisition of Maintel Network Solutions Limited (previously Pinnacle Voice andData Limited) in December 2005, is brought forward to the IFRS opening balancesheet without adjustment. (c) Basis of consolidation The financial statements consolidate the results of Maintel Holdings Plc andeach of its subsidiaries (the "Group"). The results of subsidiaries acquired areincluded within the consolidated income statement and balance sheet from theeffective date of acquisition, applying uniform accounting policies pursuant toIAS 27 "Consolidated and separate financial statements". The results of disposedsubsidiaries are included in the consolidated income statement up to theeffective date of disposal. All intra-group transactions and balances areeliminated on consolidation. Acquisitions are accounted for using theacquisition method of accounting. Subsidiaries are all entities over which the Group has the power to govern theirfinancial and operating policies. (d) Revenue Revenue represents sales to customers at invoiced amounts less value added tax.Revenue from sales of equipment, chargeable works carried out and networkservices, is recognised when the goods or services are provided. Amountsinvoiced in advance in respect of maintenance contracts are deferred andreleased to the income statement over the period covered by the invoice. Revenueand profit on long term supply and/or installation contracts is recogniseddependent on the stage of and costs to completion of each contract. (e) Intangible assets GoodwillGoodwill represents the difference between the cost of the acquisition and thefair value of the net identifiable assets, liabilities and contingentliabilities. Cost comprises the fair value of assets given, liabilities assumedand equity instruments issued, plus any direct costs of acquisition. Goodwill iscapitalised as an intangible asset, with any impairment in carrying value beingcharged to the income statement. Other intangible assets Intangible assets are stated at cost less accumulated amortisation and consistof customer relationships. Where these assets have been acquired through abusiness combination, the cost will be the fair value allocated in theacquisition accounting; where they have been acquired other than through abusiness combination, the initial cost is the aggregate amount paid and the fairvalue of any other consideration given to acquire the asset. Customer relationships are amortised over their estimated useful lives of (i)five years in respect of maintenance contracts, and (ii) seven years in respectof network services contracts. Impairment of goodwill and other intangible assets Impairment tests on goodwill with an indefinite useful economic life areundertaken annually on 31 December. Customer relationships and other assets aresubject to impairment tests whenever events or changes in circumstances indicatethe carrying amount may not be recoverable. Where the carrying value of an assetexceeds its recoverable amount (being the higher of value in use and fair valueless costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individualasset, the impairment test is carried out on the asset's cash-generating unit(being the lowest group of assets in which the asset belongs for which there areseparately identifiable cash flows). Goodwill is allocated on initialrecognition to each of the Group's cash-generating units that are expected tobenefit from the synergies of the combination giving rise to goodwill. Impairment charges are included in the administrative expenses line item in theincome statement. (f) Property, plant and equipment Property, plant and equipment is stated at historic cost, less accumulateddepreciation. Depreciation is provided to write off the cost, less estimatedresidual values, of all tangible fixed assets over their expected useful lives,at the following rates: Property, plant and machinery over the life of the lease to third parties Office and computer equipment 25% straight line Motor vehicles 25% straight line Leasehold improvements over the remaining period of the lease (g) Inventories Inventories comprise (i) maintenance stock, being replacement parts held toservice customers' telecommunications systems, and (ii) work in progress, beingstock purchased for customer orders which has not been installed at the end ofthe financial period. Inventories are valued at the lower of cost and netrealisable value. (h) Cash and cash equivalents Cash and cash equivalents comprise cash balances and short term deposits with anoriginal maturity of three months or less. Bank overdrafts that are repayable ondemand and form an integral part of the Group's cash management procedures arealso included as a component of cash and cash equivalents for the purposes ofthe cash flow statement. (i) Taxation Current tax is the expected tax payable on the taxable income for the year,together with any adjustments to tax payable in respect of previous years. Deferred tax is provided using the liability method, providing for temporarydifferences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for taxation purposes, except fordifferences arising on: • the initial recognition of goodwill; • goodwill for which amortisation is not tax deductible; • the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and • investments in subsidiaries where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. The amount of the deferred tax asset or liability is determined using tax ratesthat have been enacted or substantively enacted by the balance sheet date andare expected to apply when the deferred tax assets/liabilities are recovered/settled. Deferred tax balances are not discounted. Deferred tax assets and liabilities are offset when the Group has a legallyenforceable right to offset current tax assets and liabilities and the deferredtax assets and liabilities relate to taxes levied by the same tax authority oneither: • 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 liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered. (j) Financial assets and liabilities The Group's financial assets and liabilities mainly comprise cash, trade andother receivables and trade and other payables. The Group's policy is, and hasbeen throughout the year, not to trade in financial instruments. Cash comprises cash in hand and deposits held at call with banks. Trade and other receivables are not interest bearing and are stated at theirnominal value as reduced by appropriate allowances for irrecoverable amounts oradditional costs required to effect recovery. Trade and other payables are not interest bearing and are stated at theirnominal amount. (k) Operating leases Annual rentals payable are charged to the income statement on a straight-linebasis over the term of the lease. Annual rentals receivable from third parties are credited to the incomestatement on a straight line basis over the term of the lease. This income isincluded in revenue. (l) Employee benefits The Group contributes to a number of defined contribution pension schemes inrespect of certain of its employees; the Group does not contribute and has notcontributed to any defined benefit pension schemes. The amount charged in theincome statement represents the employer contributions payable to the schemes inrespect of the financial period. The assets of the schemes are held separatelyfrom those of the Group in independently administered funds. The cost of all short term employee benefits is recognised during the period theemployee service is rendered. Holiday pay is expensed in the period in which it accrues. (m) Dividends Dividends unpaid at the balance sheet date are only recognised as a liability atthat date to the extent that they are appropriately authorised and are no longerat the discretion of the Company. Proposed but unpaid dividends that do not meetthese criteria are disclosed in the notes to the financial statements. 3. Segmental analysis +-----------------------------------------+-----------+-----------+| | 2007| 2006|+-----------------------------------------+-----------+-----------+| | £'000| £'000|+-----------------------------------------+-----------+-----------+|Revenue | | |+-----------------------------------------+-----------+-----------+|Maintenance and equipment | 14,735| 12,873|+-----------------------------------------+-----------+-----------+|Network services | 4,682| 3,400|+-----------------------------------------+-----------+-----------+|Intercompany | (88)| (107)||-----------------------------------------|-----------|-----------|| | 19,329| 16,166|+-----------------------------------------+-----------+-----------+|Operating profit | | |+-----------------------------------------+-----------+-----------+|Telephone system maintenance and | 1,680| 1,678||equipment sales | | |+-----------------------------------------+-----------+-----------+|Telephone network services | 477| 400|+-----------------------------------------+-----------+-----------+|Central/intercompany | (293)| (200)|+-----------------------------------------+-----------+-----------+| | 1,864| 1,878|+-----------------------------------------+-----------+-----------+|Interest (net) | 115| 134|+-----------------------------------------+-----------+-----------+|Profit before taxation | 1,979| 2,012|+-----------------------------------------+-----------+-----------+|Taxation | (595)| (592)|+-----------------------------------------+-----------+-----------+|Profit after taxation | 1,384| 1,420|+-----------------------------------------+-----------+-----------+ 4. Earnings per share Earnings per share is calculated by dividing the profit after tax for the periodby the weighted average number of shares in issue for the period, these figuresbeing as follows: +-----------------------------------------+-----------+-----------+| | 2007| 2006|+-----------------------------------------+-----------+-----------+| | £'000| £'000|+-----------------------------------------+-----------+-----------+|Weighted average number of shares | 12,452| 12,783|+-----------------------------------------+-----------+-----------+|Earnings used in basic and diluted EPS, | | ||being profit after tax | | || | 1,384| 1,420|+-----------------------------------------+-----------+-----------+|Goodwill impairment and intangibles | | ||amortisation, less tax thereon | | || | 231| 159|| | | |+-----------------------------------------+-----------+-----------+|One-off professional costs, less tax | 18| -||thereon | | |+-----------------------------------------+-----------+-----------+|Adjusted earnings | 1,633| 1,579|+-----------------------------------------+-----------+-----------+|Basic and diluted EPS | 11.1p| 11.1p|+-----------------------------------------+-----------+-----------+|Adjusted EPS | 13.1p| 12.4p|+-----------------------------------------+-----------+-----------+ The adjustment above in respect of goodwill impairment, intangiblesamortisation, one-off professional costs and tax thereon has been made in orderto provide a clearer picture of the trading performance of the Group. 5. Dividends 2007 2006 £'000 £'000Dividends paid Final 2005, paid 24 April 2006- 2.5p per share - 323 Interim 2006, paid 29 September 2006- 2.1p per share - 268 Final 2006, paid 25 April 2007- 2.9p per share 361 - Interim 2007, paid 5 October 2007- 2.5p per share 311 - 672 591 The directors propose to pay a final dividend of 3.0p (2006 - 2.9p) per share on30 April 2008 to shareholders on the register at 28 March 2008. 6. Purchase of own shares Pursuant to the authority granted at the last AGM, the Company repurchased andcancelled 70,000 of its own 1p ordinary shares during 2007, at 166p each, at atotal cost of £117,000. The purchase represents 0.6% of the Company's issuedshare capital as at 31 December 2007. On 16 January 2008, the Company repurchased and cancelled 240,000 of its 1pordinary shares at 161.5p per share. The purchase represents 1.9% of theCompany's issued share capital as at 31 December 2007. 7. Acquisitions and intangible assets In February 2007, the Group acquired a maintenance contract base of c£60,000 perannum from WGTS Limited at nil cost, the vendor being paid a subsequentcommission to re-sign the contracts on a longer term basis. Given the nil cost,this contract base has not been incorporated as an intangible asset. The Group acquired a base of customer relationships from Callmaster Limited on 1August 2007, for a consideration, including costs, of £448,000. Theserelationships are estimated to have a useful life of five (maintenancecontracts) or seven (network services contracts) years and are thereforeamortised over those periods and subject to annual impairment review. The 2007amortisation charge is £29,000 and the estimated contribution to Group profitsin the year resulting from the acquisition is £90,000. Customer relationships Goodwill Total £'000 £'000 £'000CostAt 31 December 2006 664 965 1,629Acquisition of customer - 448 448relationships At 31 December 2007 664 1,413 2,077 Amortisation and impairmentAt 31 December 2006 91 97 188Amortisation in the year - 222 222Impairment in the year 76 - 76 At 31 December 2007 167 319 486 Net book valueAt 31 December 2007 497 1,094 1,591 At 31 December 2006 573 868 1,441 For the purposes of impairment review, the estimated life of a relationship isfive or seven years as noted above. Projected operating margins are based oncurrent trends, and a discount rate of 17.6% is applied to the resultantprojected cash flows. 8. The annual report and accounts will be posted to shareholders in due courseand copies will also be available on the Group's web site www.maintel.co.uk andon request from the Company's registered office at 61 Webber Street, London SE10RF. 9. Transition to International Financial Reporting Standards The Group's reported financial performance and position is altered as describedbelow as a result of the adoption of IFRS and the accounting policies detailedin note 2 above. The following table summarises the impact of the adoption of IFRS on the Group'sprofit after tax for the year ended 31 December 2006. 2006 £'000Profit after tax - under UK GAAP 1,459Reversal of goodwill amortisation 122Amortisation of intangible assetsand goodwill impairment (188)Staff costs - holiday pay (2)Deferred tax on amortisation of intangible 29assets Profit after tax - under IFRS 1,420 The following table summarises the impact of the adoption of IFRS on the Group'stotal equity as at 1 January 2006 and 31 December 2006. 1 January 31 December 2006 2006 £'000 £'000Total equity - under UK GAAP 1,648 1,684Reversal of goodwill amortisation - 122Amortisation of intangible assets andgoodwill impairment - (159)Staff costs - holiday pay net of deferred (34) (36)tax Total equity - under IFRS 1,614 1,611 More detailed disclosure of the effects of IFRS on the UK GAAP financialstatements is shown in the following tables. Maintel Holdings Plc Reconciliation of the Group's consolidated income statement for the year to 31 December 2006 2006 Holiday 2006 pay UK GAAP Goodwill IFRS £'000 £'000 £'000 £'000 (notes a, (note c) b)Revenue 16,166 - - 16,166Cost of sales 10,167 - - 10,167Gross profit 5,999 - - 5,999 Administrative expensesGoodwill amortisation 122 (122) - -Goodwill impairment - 91 - 91Intangibles amortisation - 97 - 97Other administrative 3,931 2 3,933expenses 4,053 66 2 4,121 Operating profit 1,946 (66) (2) 1,878 Financial income 135 - - 135Financial charges (1) - - (1) Profit before taxation 2,080 (66) (2) 2,012 Taxation 621 (29) - 592 Profit after taxationattributable to equityholders of the parent 1,459 (37) (2) 1,420 Earnings per shareBasic and diluted 11.4p 11.1p Maintel Holdings Plc Reconciliation of the Group's consolidated balance sheetas at 1 January 2006 (the opening IFRS balance sheet) 31 December 31 December 2005 2005 Holiday UK GAAP pay IFRS £'000 £'000 £'000 (note c)Non current assetsIntangible assets 227 - 227Property, plant and equipment 240 - 240Deferred tax asset 30 15 45 497 15 512 Current assetsInventories 585 - 585Trade and other receivables 1,917 - 1,917Cash and cash equivalents 3,625 - 3,625 6,127 - 6,127 Total assets 6,624 15 6,639 Current liabilitiesTrade and other payables 4,613 49 4,662Current tax liabilities 363 - 363 Total liabilities 4,976 49 5,025 Total net assets 1,648 (34) 1,614 EquityIssued share capital 129 - 129Share premium 628 - 628Capital redemption reserve 7 - 7Retained earnings 884 (34) 850 Total shareholders' equity 1,648 (34) 1,614 Maintel Holdings Plc Reconciliation of the Group's consolidated balance sheet as at 31 December 2006 31 December 31 December 2006 2006 Holiday UK GAAP pay IFRS Goodwill £'000 £'000 £'000 £'000 (notes a, (note c) b)Non current assetsIntangible assets 1,217 224 - 1,441Property, plant andequipment 238 - - 238 1,455 224 - 1,679 Current assetsInventories 705 - - 705Trade and other 2,861 - - 2,861receivablesCash and cash 2,234 - - 2,234equivalents 5,800 - - 5,800 Total assets 7,255 224 - 7,479 Current liabilitiesTrade and other 5,220 - 51 5,271payablesCurrent tax 380 - - 380liabilities Total liabilities 5,600 - 51 5,651 Non currentliabilities Deferred tax liability (29) 261 (15) 217 Total net assets 1,684 (37) (36) 1,611 EquityIssued share capital 124 - - 124Share premium 628 - - 628Capital redemption 12 - - 12reserveRetained earnings 920 (37) (36) 847 Total shareholders'equity 1,684 (37) (36) 1,611 Maintel Holdings Plc Explanatory notes to the UK GAAP to IFRS reconciliations (a) Business combinations, goodwill and intangible assets Under UK GAAP, the cost of an acquisition over and above the fair value of thenet assets acquired was deemed to be goodwill. IFRS 3 requires that for eachacquisition a fair value is attributed to any identifiable other intangibleassets such as customer relationships. The goodwill cost is therefore thedifference between the consideration paid for the investment after deducting thefair value of net assets including other intangible assets. IFRS 1 provides for an exemption from restating the acquisition of MaintelNetwork Solutions Limited (previously Pinnacle Voice and Data Limited) on thisbasis as the acquisition took place on 5 December 2005 - before the Group's IFRStransition date of 1 January 2006 - and so the historical goodwill of £374,000relating to that company has been retained. In such circumstances, IFRS 3requires that this goodwill, being an asset of indefinite life, is not amortisedbut is tested for impairment annually, and any such impairment is applied inaccordance with IAS 36. The directors have considered the acquisition of District Holdings Limited -acquired on 12 June 2006 - and attributed a value of £965,000 to the customercontracts and associated relationships of District. This intangible asset willbe amortised over its useful life, this being deemed to be 5 years, andsubjected to an impairment review at each reporting date. Under UK GAAP goodwill was capitalised and amortised over its estimated usefullife, which under Maintel's accounting policies was 7 years. Goodwill impairmentof £122,000 which was charged to the profit and loss account for the year ended31 December 2006 has been reversed, and the replacement charges under IFRSconsist of goodwill impairment of £91,000 and intangibles amortisation of£97,000. (b) Deferred tax Under IAS 12 "Income taxes", deferred tax is recognised on the basis oftemporary differences between the carrying value of assets and liabilities inthe balance sheet, and their tax bases. A deferred tax liability (at 30%) of£290,000 has accordingly been created in respect of the £965,000 intangibleasset recognised as at the date of the acquisition of District Holdings Limited,with subsequent releases of the deferred tax liability to the income statementas impairment of the intangible is recognised. An equal and opposite amount of £290,000 is included as goodwill as required byIFRS, this and the deferred tax of £290,000 being amortised over 5 years,subject to annual impairment review. The effect of adopting this standard is shown under the goodwill column in thereconciliation tables above. (c) Holiday pay accrual IAS 19 requires that a liability for holiday pay is recorded for all accruedentitlement at each balance sheet date. The Group's primary holiday year end is31 December, in line with its financial year end, and most employees areentitled to carry forward a maximum of 10 days' holiday to the following holidayyear. As at 30 June, therefore, there tends to be a larger accrual (andtherefore expense in the income statement) required than is the case at 31December. (d) Cash flow statements The only changes to the cash flow statement are presentational, the principalones being classifying tax cash flows as relating to operating activities andequity dividends as relating to financing activities. This information is provided by RNS The company news service from the London Stock Exchange