31 Jul 2008 07:00
For release, 07.00 31 July 2008
SPIRITEL PLC
("SpiriTel" or "The Group")
PRELIMINARY UNAUDITED RESULTS FOR THE YEAR ENDED 30 APRIL 2008
SpiriTel plc (AIM: STP), the business communications service provider, is pleased to announce preliminary unaudited results for the year ended 30 April 2008.
Commenting on the results, Lord St. John of Bletso said: "I am pleased to report on an excellent year of growth and development for SpiriTel plc. The Group is now a fully integrated business communications provider delivering fixed, mobile, data and networking services to wide ranging business customers across the UK. The Group is now very well placed to progress its chosen strategy further towards robust, accelerating profitability and value delivery to our shareholders."
Highlights:
Underlying EBITDA* 15% ahead of market expectations at £938,000 (2007: loss of £861,000)
Revenue up 20% to £16.7 million (2007: £13.9 million)
Gross profit up 220% to £6.42 million (2007: £2.0 million)
Pre tax loss £4.0 million (2007: £3.1 million), after non-cash finance costs** of £3.1m (2007: £0.6m)
New 5 year debt and overdraft facility of £2.7m from Clydesdale Bank
Cash inflow from operating activities of £0.9m (2007: £1.2m outflow)
Two earnings enhancing acquisitions completed: tdotcom and WN1
UK's largest hosted VoIP and WiFi contract with Regent Inns
Completion of two year business restructure and rationalisation
Post year end balance sheet restructure - partial conversion of Penta debt to ordinary shares and waiver of more than £800,000 annual interest costs
Post year end SpiriTel receives industry recognition with two national awards for the converged solution pioneered for Regent Inns
* Operating profit after adding back charges for depreciation, amortisation, share-based payments and exceptional costs
** Non-cash finance costs comprise redemption premiums on the Penta debt and preference shares granted alongside the conversion rights less interest waived plus IFRS charges.
Chief Executive, Alastair Mills added: "This has been a year of genuine turnaround for SpiriTel. We are profitable in the new financial year, turnover has increased markedly and we have achieved widespread recognition for the quality and pioneering nature of the IP communications services we are delivering to a broad range of business customers across the UK. Following two more acquisitions during the year, the Group is now a fully integrated business communications provider. This is a key differentiator for us in a market where customers are increasingly looking to one supplier to provide the full range of communications services they need. In a highly fragmented sector, we are also taking advantage of ongoing acquisition opportunities to expand our customer base, enhance earnings and, where appropriate, bring new products to the Group offering."
For further information please visit www.SpiriTelplc.com or contact:
| SpiriTel plc | Tavistock Communications | Daniel Stewart |
| Alastair Mills | Simon Hudson | Simon Leathers |
| Chief Executive | Clemmie Carr | Stewart Dick |
| Tel: +44 20 7160 0100 | Tel: +44 20 7920 3150 | Tel: +44 20 7776 6550 |
Chairman's statement
Introduction
I am pleased to report on a further year of growth and development for SpiriTel plc. The Group is now a fully integrated business communications provider delivering fixed and mobile, voice, data and networking services to a wide range of business customers across the UK.
SpiriTel has made significant progress this year and is a radically transformed business. The Group is currently profitable with strong cash flows and a robust debt and equity structure following the initial £2.6 million Penta debt conversion in May 2008. The operational restructuring and rebuilding of the business that we began some two years ago was only completed during the year under review and so this set of results reflects only partially the transformation achieved by the management team.
Results
Underlying EBITDA* has moved from a loss in 2007 of £0.9 million to a profit of £0.9 million and revenue was up 20% to £16.7 million (2007: £13.6 million). Gross profit increased by 220% to £6.4 million (2007: £2.0 million) with gross profit margins up to 38.5% from 14.9% in 2007. These margin improvements are a result of both enhanced margins on continued operations and an improving product mix towards higher margin products and services. Acquisitions have also contributed to the increased profits of the business and the level of operational gearing has enabled us to deliver higher earnings from these acquired businesses.
These results are a significant achievement for SpiriTel and demonstrate that the progress made in restructuring and realigning the business is now flowing through to revenue and profit enhancement. The two acquisitions made in the year under review, tdotcom Limited and WN1 Limited, contributed for only six months and one month respectively. We look forward to incorporating a full year's earnings from these businesses, which should deliver a significantly enhanced level of profitability in the current financial year.
Dividend
SpiriTel is still pursuing its acquisition strategy and therefore reinvesting funds generated from operations into the business. The Directors are not recommending the payment of a dividend for the year to 30 April 2008.
Board
As reported in our interim statements, we appointed Ronnie Smith to the Board as the Group's Chief Financial Officer following his tenure as Finance Director. We also appointed David Anahory as Managing Director of SpiriTel Business. David joined us from Carphone Warehouse where he was the Commercial Director responsible for over 100,000 customers in their Business Division.
Both Ronnie and David are integral to the success of the business and played significant roles over the course of the financial year in the delivery of much improved financial and operational performance.
I am also pleased to report that our Chief Executive, Alastair Mills, received personal recognition for the Group's progress with a nomination as a finalist for the 2008 Ernst & Young Entrepreneur of the Year award. The award is recognised globally and marks entrepreneurial spirit, innovation and outstanding leadership and drive. I congratulate him on this achievement.
Current year and outlook
Revenues and profitability are currently running at levels significantly above those of a year ago with earnings visibility from contracted revenue continuing to grow. This is a reflection of our acquisitions and the strong organic growth being driven by our push to cross sell products and services into our expanded customer base. We also achieved substantial improvement in margins during the year under review and these strong margins have been maintained into the current financial year.
In June 2008, we completed the integration of our most recent acquisition, mobile specialist WN1 Communications, which has now been fully re-branded as SpiriTel Mobile and relocated to our Business Division's Wigan office. We look forward to reporting a full six months contribution from the WN1 acquisition in our next interim results.
During the year, we have successfully executed our 'Acquire, Integrate, Grow' strategy and as a result the business has delivered much improved financial and operational results. The Group is now very well placed to further progress its chosen strategy towards robust, accelerating profitability and value delivery to its shareholders.
Lord St John of Bletso
Chairman
31 July 2008
Chief Executive's review
2007/08 has been a year of considerable progress for SpiriTel and I am delighted to be able to provide the most positive review since the current management team took charge of SpiriTel's strategy. Our restructure of the Group is complete and the combination of organic growth alongside selective earnings enhancing acquisitions is now reflected in improved operational and financial performance across the Group. Whilst growing overall customer numbers, we have also sold more products to our existing customers, which is now a key focus for the management team. During the year, we also reached agreement for an important balance sheet restructure which was approved at our EGM post year end in May 2008.
During the year, we completed our fourth and fifth acquisitions with tdotcom Limited and WN1 Limited. The acquisition of WN1, now fully re-branded as SpiriTel Mobile, completed our B2B communications product set, adding mobile to our existing fixed line, data and networking services. The tdotcom transaction leveraged our existing operational infrastructure, enabling us to rapidly integrate the value of tdotcom's services and customers into SpiriTel Business. Both acquisitions are good examples of our acquisition strategy: buy quality businesses with attractive customer bases, integrate them swiftly and drive forward the resulting synergy benefits of cost savings and new sales opportunities.
Results
Revenue for the year to 30 April 2008 was up 20% to £16.7 million (2007: £13.6 million) and gross profit increased to £6.42 million (2007: £2.0 million), a rise of 220%. Underlying EBITDA* increased significantly to £938,000 profit (2007: £861,000 loss), albeit there was only a part year contribution from the two acquisitions, tdotcom and WN1. As a result of the timing of these acquisitions, the Group is currently performing at a level that is significantly ahead of the year ended 30 April 2008.
At a divisional level, SpiriTel Business' revenue increased by 313% to £6.74 million (2007: £1.63 million) while Underlying EBITDA* increased more than fourfold to £1,125,000 (2007: £236,000), Our other Division, SpiriTel Technologies, increased Underlying EBITDA* to £1,024,000 (2007: £40,000 loss).
The loss before taxation for the year was £4.0m (2007: £3.1m), after non- cash interest charges of £3.1m (2007: £0.6m). The non-cash interest charges relate to redemption premiums charged by Penta Capital Partners ("Penta") on the granting of conversion rights, waiver of accrued interest costs and finance charges related to the adoption of IFRS.
* Operating profit after adding back charges for depreciation, amortisation, share-based payments and exceptional costs
Balance sheet
Post year end, we successfully agreed on the restructuring of the Group's balance sheet. Conversion rights were granted over the Group's total indebtedness of £11 million to Penta in exchange for a waiver of all interest costs from 1 November 2007 until 1 May 2010. An initial conversion of £2.6 million of indebtedness took place on 22 May 2008 at 1.1 pence per ordinary share (a premium to the then share price) which increased Penta's shareholding to 49.99%. The remaining indebtedness of £8.4 million is convertible at the higher of the most recent placing price and 1.5 pence per ordinary share, subject to Penta's shareholding not exceeding 49.99%.
The waiver of interest costs will save the Group approximately £0.8 million in annual interest charges and will result in a credit to profits of £0.4 million in the current year to 30 April 2009. This is a milestone for SpiriTel that significantly strengthens the Group's balance sheet and improves our ability to attract future funding partners. I would like to take this opportunity to thank Penta for their support, encouragement and advice during our restructure of the Group's business.
During the year, we secured an initial £1.0 million loan and overdraft facility from Clydesdale Bank to support our acquisition strategy. The successful negotiation of this facility represented a welcome endorsement of both our progress and our acquisition strategy. The facility was extended by £500,000 on 31 January 2008 and by a further £1,200,000 on 2 April 2008 giving a total facility of £2.7 million, of which £1.95 million is repayable over five years.
Strategy
The UK communications market remains highly fragmented on the supply side whilst the demand from customers for converged IP based services is accelerating and these are key drivers behind the ongoing consolidation in our sector.
SpiriTel continues to play a significant role in this consolidation through our "Acquire, Integrate, Grow" strategy as we build a business with the operational scale and the broad product offering that corporate customers demand. During the year, we successfully executed two earnings enhancing acquisitions that expanded both our product portfolio and customer base. Our bespoke and proven integration framework was used effectively to incorporate these acquisitions swiftly and efficiently, as illustrated by the full integration of tdotcom into SpiriTel Business in just 25 working days.
We continue to target growth by selective acquisition in order to leverage the scale of our operations and breadth of our product portfolio. Increasingly, our focus is on cross selling our now complete integrated suite of voice and data services into our expanding customer base. Cross selling is a major focus during the current year as many of our acquired customers have only ever taken one or two products from the Group. As a result, product penetration is currently low and we are confident of our ability to benefit from the considerable upside opportunity that cross selling presents. As customers start to migrate to hosted and managed services under long term contracts, we are also benefiting from a much increased visibility of future earnings.
Acquisitions
During the year we completed two acquisitions that added both scale and new product lines and services to our Business Division. The first of these was tdotcom, a London based value added maintainer and supplier of telecommunications systems, acquired in October 2007. This was a loss making business which we turned around, post integration, into a business with an operating profit margin in excess of 30% that contributed immediately to Group earnings. The process of integration involved cost saving measures alongside cross selling upsides and clearly demonstrated the success of our model which we consider to be highly replicable for future acquisitions. tdotcom brought to SpiriTel a number of high profile clients such as The City of London and BBC Worldwide and also strengthened our strategic relationship with Mitel. tdotcom was combined with Wigan-based Ashland Group, acquired in March 2007, to form our IP Communications product line within SpiriTel's Business Division.
The second acquisition, in April 2008, was WN1 Limited. WN1 is a leading reseller of mobile voice, data and Blackberry services, and holds key industry accreditations as an O2 Advance Partner, T-Mobile Business Partner and a Blackberry Alliance Member. It services exclusively business customers, which include Lufthansa, Servisair and Wigan Athletic Football Club. At the time of writing, we have completed the re-branding of WN1 as SpiriTel Mobile, also within the Business Division, and have moved their staff into our Wigan office with a number of back office functions being merged.
Both acquisitions were immediately earnings enhancing for SpiriTel and in line with our organic growth strategy they have provided many significant cross selling opportunities for the Group. For example, we have had several wins in providing fixed line services to tdotcom (now SpiriTel IP Communications) clients and WN1 (now SpiriTel Mobile) has successfully tendered for the supply of mobile voice and data services to existing Group customers.
We currently have a strong pipeline of acquisition targets that meet our criteria of being quickly earnings enhancing with additional upside opportunity from cost savings and cross selling. All acquisitions add scale in terms of customer numbers and some add engineering resource (for instance, tdotcom). Others, such as WN1, add new product lines as well as expanding our customer base which, in turn, provides further cross selling opportunities. In a rapidly consolidating sector, the opportunity to acquire complementary businesses is compelling. We remain selective in our evaluation of targets so as to ensure we minimise execution risk through adding the right customers, products and staff to our existing base. Furthermore, the restructuring of the balance sheet and the Penta Debt Conversion agreement lends further support to the strategy, as further fund raisings will also enable Penta to convert further debt and thereby reduce SpiriTel's gearing.
Operations
SpiriTel is structured into two complementary divisions: SpiriTel Business and SpiriTel Technologies - working alongside and supporting each other. Both divisions have undergone a period of expansion and enhancement in the past year and the Group now employs over 120 staff (2007: 102).
SpiriTel Business has grown dramatically over the course of the financial year. The Business Division now has three lines of business: IP Communications, Networks and Mobile. SpiriTel IP Communications provides an advanced range of IP networking services to business customers alongside traditional structured cabling, equipment and maintenance services. SpiriTel Networks offers fixed line services including calls, lines and broadband. SpiriTel Mobile provides mobile voice and data, including Blackberry services. The acquisition of WN1 completed the integrated communications portfolio that SpiriTel Business now offers.
SpiriTel Business has substantially increased its customer numbers from 700 at the beginning of the year and currently has over 1,500 business customers. These range from smaller UK SMEs, to high profile customers such as Wigan Athletic Football Club and blue chips like Whitbread, Marriott, and Lufthansa. These customers are supported by a team of 45 accredited engineers, providing 24/7 nationwide engineering coverage.
SpiriTel Business has developed a particularly close relationship with Mitel, and this relationship was key in the VoIP and WiFi solution that SpiriTel developed for Regent Inns, the UK's largest converged VoIP/WiFi deal. SpiriTel won this contract against fierce competition from much larger companies. Our solution provides Regent Inns with a complex and pioneering service that encompasses all their voice and data services across over 100 sites. I am delighted to report that in June 2008, this solution won both the "UK's Best Converged Solution" at the 2008 national Comms Business Awards and also the Federation of Communication Services "Best VoIP Solution" 2008 award. We are confident of our ability to roll this award winning solution out to other major corporate customers in the current year.
We see ongoing scope for rapid growth - both organic and acquisitive - in our Business Division. We are particularly focused on cross selling opportunities to our existing customer base and we hope to increase significantly the product penetration of the Division's 10 core products and services.
SpiriTel Technologies continues to play a critical role in the development of the Group, both on its own account and in its support of SpiriTel Business. The Technologies team sees the Business Division as a key customer and their IP infrastructure and experience is a key differentiator for SpiriTel. SpiriTel Technologies provides the platform and credibility for us to deliver large scale, managed IP solutions for UK wide customers. Technologies was particularly instrumental in the hosted solution provided for Regent Inns where our next generation IP network architecture was the key component that enabled the Business Division to deliver the necessary high level of service to the customer. Technologies has built a robust and dynamic IP network that has three operation centres, five points of presence and several Tier 1 carrier interconnects. It provides the backbone for the support and development of the products and network infrastructure that the Business Division takes to market.
In addition to the development and maintenance of the Group's IP network infrastructure, SpiriTel Technologies also generates a significant revenue stream from the provision of wholesale voice services to its own blue chip customers, including most of the UK's largest telecoms companies with whom the Business Division has established long term relationships. In the past year, the Business Division has grown into a 24/7 service with higher levels of traffic from a broader customer base and this has resulted in enhanced earnings and margins.
In November 2007, SpiriTel re-launched its charity directory inquiry service with Richard Branson's Virgin Mobile. 118 918 is now fully branded as a Virgin Mobile number and gives 20 pence from every call to charity, the highest amount of any charity 118 service. This is a managed service for Virgin Mobile provided by SpiriTel Technologies.
Summary and outlook
The year to 30 April 2008 was a year of genuine turnaround for SpiriTel. We moved from losses to underlying EBITDA* profitability, revenue has increased markedly and we have earned widespread recognition for the quality of the communications services that we can and are delivering to a broad range of business customers across the UK. Following two further acquisitions, the Group is now a fully integrated business communications provider that is delivering the full range of fixed, mobile, data and networking services. This integrated capability is crucial in a market where customers are increasingly looking to suppliers to provide the full range of services they need from a one-stop shop supplier. In a highly fragmented marketplace, in which there are up to a thousand resellers with less than £5 million of turnover, we are among the few that can offer this scale and range of products and services. Customers recognise this as a differentiator in a competitive market place and we are enjoying the benefits of providing a fully converged offering
We have completed the process of restructure and rebuilding, begun two years ago, and now have a level of revenues and earnings that provide the perfect springboard to take SpiriTel to the next stage in its rapid development. We have a highly replicable model where we can bolt on new, earnings enhancing acquisitions alongside consistent organic expansion. We are now demonstrating the benefits of our 'Acquire, Integrate, Grow' strategy which translates into a robust business model, an expanded product portfolio and ever increasing customer base.
SpiriTel has an energised management team and highly skilled and committed staff. The foundations are now in place to deliver ongoing value to shareholders. I look forward to the coming year with real confidence.
Alastair Mills
Chief Executive
31 July 2008
Consolidated income statement
Year ended 30 April 2008
| 2008 £000 | 2007 £000 | ||
| Continuing operations | |||
| Revenue | 16,674 | 13,649 | |
| Cost of sales | (10,259) | (11,613) | |
| Gross profit | 6,415 | 2,036 | |
| Administrative expenses | (7,261) | (4,503) | |
| Underlying EBITDA | 938 | (861) | |
| Depreciation | (180) | (322) | |
| Share based payments | (190) | (45) | |
| Exceptional costs | (620) | (991) | |
| Amortisation of other intangible assets | (794) | (248) | |
| Operating loss | (846) | (2,467) | |
| Operating loss | (846) | (2,467) | |
| Finance income | 5 | 5 | |
| Finance costs | (3,206) | (594) | |
| Loss before taxation | (4,047) | (3,056) | |
| Tax credit | 289 | 95 | |
| Loss for the financial year | (3,758) | (2,961) | |
| Attributed to: | |||
| Equity holders of the parent | (3,758) | (2,827) | |
| Minority interest | - | (134) | |
| (3,758) | (2,961) | ||
| Loss per share in pence | |||
| Basic and diluted | (1.19) | (1.33) |
Consolidated statement of changes in shareholders' equity
| Share capital £000 | Additional paid in capital £000 | Reverse acquisition reserve £000 | Other reserves £000 | Retained losses £000 | Total £000 | |
| Balance at 1 May 2006 | 1,654 | 2,850 | (5,763) | 15 | (3,360) | (4,604) |
| Loss for the financial year | - | - | - | - | (2,961) | (2,961) |
| Minority interest | 134 | 134 | ||||
| Issue of share capital | 1,508 | 1,700 | - | - | - | 3,208 |
| Credit for equity settled share based payments | - | - | - | 62 | - | 62 |
| Equity component of compound financial instruments | - | - | - | 100 | - | 100 |
| Transfer between reserves | - | - | - | (80) | 80 | - |
| Balance at 1 May 2007 | 3,162 | 4,550 | (5,763) | 97 | (6,107) | (4,061) |
| Loss for the financial year | - | - | - | - | (3,758) | (3,758) |
| Credit for equity settled share based payments | - | - | - | 190 | - | 190 |
| Equity component of compound financial instruments | - | - | - | - | 333 | 333 |
| Transfer between reserves | - | - | - | (55) | 55 | - |
| Balance at 30 April 2008 | 3,162 | 4,550 | (5,763) | 232 | (9,477) | (7,296) |
Consolidated balance sheet
As at 30 April 2008
| 2008 £000 | 2007 £000 | ||
| Assets | |||
| Non-current assets | |||
| Goodwill | 5,292 | 2,357 | |
| Other intangible assets | 4,392 | 3,579 | |
| Property, plant and equipment | 438 | 408 | |
| 10,122 | 6,344 | ||
| Current assets | |||
| Inventories | 353 | 392 | |
| Trade and other receivables | 2,151 | 3,007 | |
| Cash and cash equivalents | 1,058 | 322 | |
| 3,562 | 3,721 | ||
| Total assets | 13,684 | 10,065 | |
| Current liabilities | |||
| Trade and other payables | (4,595) | (3,890) | |
| Borrowings | (457) | (4,037) | |
| Obligations under finance leases | (84) | (60) | |
| Current tax payable | (442) | (236) | |
| (5,578) | (8,223) | ||
| Non-current liabilities | |||
| Trade and other payables | (432) | - | |
| Borrowings | (13,603) | (4,695) | |
| Obligations under finance leases | (55) | (117) | |
| Deferred tax liabilities | (1,312) | (1,091) | |
| (15,402) | (5,903) | ||
| Total liabilities | (20,980) | (14,126) | |
| Net liabilities | (7,296) | (4,061) | |
| Equity | |||
| Capital and reserves | |||
| Share capital | 3,162 | 3,162 | |
| Additional paid in capital | 4,550 | 4,550 | |
| Reverse acquisition reserve | (5,763) | (5,763) | |
| Other reserves | 232 | 97 | |
| Profit and loss account | (9,477) | (6,170) | |
| Total equity | (7,296) | (4,061) |
Consolidated statement of cash flows
| 2008 £000 | 2007 £000 | ||
| Cash flows from operating activities | |||
| Loss before taxation | (4,047) | (3,052) | |
| Adjustments for: | |||
| Net finance costs | 3,201 | 589 | |
| Depreciation and amortisation | 974 | 566 | |
| Impairment of tangible fixed assets | 64 | 422 | |
| Impairment of goodwill | - | 269 | |
| Loss on disposal of tangible fixed asset | - | 12 | |
| (Increase) / decrease in inventory | 63 | 2 | |
| (Increase) / decrease in receivables | (17) | 14 | |
| Increase / (decrease in payables | 617 | (44) | |
| Equity settled share based payments | 190 | 45 | |
| Interest paid | (135) | (1) | |
| Cash from / (used in) operating activities | 910 | (1,178) | |
| Income taxes paid | - | (9) | |
| Net cash from / (used in) operating activities | 910 | (1,187) | |
| Cash flows from investing activities | |||
| Acquisition of subsidiaries net of cash acquired | (998) | (2,810) | |
| Payment of deferred consideration | (1,227) | - | |
| Purchase of property, plant and equipment | (229) | (101) | |
| Proceeds from sale of equipment | - | 6 | |
| Net cash used in investing activities | (2,454) | (2,905) | |
| Cash flows from financing activities | |||
| Net proceeds from issue of share capital | - | 1,223 | |
| Proceeds from borrowings | 2,347 | 3,100 | |
| Payment of finance lease liabilities | (67) | (7) | |
| Net cash from financing activities | 2,280 | 4,316 | |
| Net increase in cash and equivalents | 736 | 224 | |
| Cash and equivalents at beginning of year | 322 | 98 | |
| Cash and equivalents at end of year | 1,058 | 322 |
Year ended 30 April 2008
Notes to the financial information
1. Basis of preparation
SpiriTel Plc's consolidated financial statements were prepared in accordance with UK GAAP for the year ended 30 April 2007. For 2008, the Group has prepared final financial information in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), for the first time.
In relation to IFRS 1, "First-time Adoption of International Financial Reporting Standards", the date of transition for 2008 financial statements was 1 May 2006. The comparative figures in respect of 30 April 2007 have been restated to reflect changes in accounting policies as a result of adoption of IFRS.
This financial information has been prepared under the historical cost convention, except for the revaluation of certain financial instruments. The financial information set out in this announcement does not constitute the Group's statutory accounts for the years ended 30 April 2008 or 30 April 2007. The financial information for the year ended 30 April 2007 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies, as amended for the adoption of IFRS. The auditors reported on those accounts; their report was unqualified and did not contain a statement under s237(2) or (3), Companies Act 1985. The audit of the statutory accounts for the year ended 30 April 2008 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting.
Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement in itself does not contain sufficient information to comply with IFRS.
The accounting policies have been applied consistently throughout the Group for the purposes of the preparation of this financial information.
Transition to IFRS
This financial information shows the results for the years ended 30 April 2008 and 30 April 2007. The results for the year ended 30 April 2007 have been extracted from the financial statements for that year and have been adjusted for the effects of changes in accounting policies on transition to IFRS.
IFRS 1 "First Time Adoption of IFRS" sets out the procedures that the Group must follow when it adopts IFRS for the first time as the basis for preparing its consolidated financial statements.
The Group has identified its IFRS accounting policies as at 30 April 2008 and had applied these retrospectively to determine the IFRS opening balance sheet at its date of transition, 1 May 2006. This standard provides a number of optional and mandatory exemptions to this general principle. The only exemptions adopted by the Group are set out below.
IFRS 3 - Business combinations
The Group has elected not to apply IFRS 3 to the business combinations that took place prior to the date of transition. Accordingly, combinations prior to 1 May 2006 have not been restated. As a result the carrying value of goodwill is frozen as at 1 May 2006 but accounted for thereafter in accordance with IFRS.
IFRS 2 - Share based payments
The Group has elected to apply IFRS 2 only to relevant share based payment transactions granted after 7 July 2005 and not vested at 1 May 2006. Previously, share based payments were accounted for under FRS 20. There was no impact on the UK GAAP income statement because at the date of the grant the exercise price was materially equal to the intrinsic value.
2. Business combinations
Companies acquired during the year are as described below.
(a) tdotcom Limited
On 22 October 2007, SpiriTel plc acquired 100% of the issued share capital of tdotcom Limited, a company based in the UK. The total cost includes the components stated below. The purchase price was settled in cash.
| £000 | |
| Purchase price | 80 |
| Contingent consideration under earn out agreement payable in cash | 150 |
| Due diligence fees | 10 |
| Other professional fees | 23 |
| 263 |
Up to a further £150,000 of consideration may become payable in the event that the acquired business achieves certain earn-out sales targets during the eighteen months following the date of acquisition. In the opinion of the directors the likely amount payable is £150,000.
The share purchase agreement includes a payment of £70,000 due on 1 May 2008 against which any deficit in target net assets can be offset. The final net asset amount has not been agreed with the vendors but in the opinion of the directors this amount will not be payable.
The assessment of the fair values of the assets and liabilities of tdotcom Limited was only provisionally completed at 30 April 2008 due to ongoing discussions with the vendor on the completion accounts. The amounts provisionally recognised for each class of the acquiree's assets and liabilities recognised at the acquisition date are as follows:
| Book value £000 | Fair value adjustments £000 | Provisional fair value to the Group £000 | |
| Intangible fixed assets identified | - | 615 | 615 |
| Trade and other receivables | 86 | - | 86 |
| Inventories | 7 | - | 7 |
| Current tax assets | 29 | - | 29 |
| Cash and cash equivalents | 11 | - | 11 |
| Total assets | 133 | 615 | 748 |
| Trade payables | (258) | - | (258) |
| Deferred income | (133) | - | (133) |
| Other taxes | (39) | - | (39) |
| Other payables | (103) | - | (103) |
| Deferred tax | - | (172) | (172) |
| Total liabilities | (533) | (172) | (705) |
| Net assets / (liabilities) acquired | (400) | 443 | 43 |
| Provisional goodwill arising on the acquisition | 220 | ||
| Consideration | 263 | ||
| Satisfied by: | |||
| Cash | 113 | ||
| Contingent consideration to be settled in cash | 150 | ||
| 263 |
During the period from the date of acquisition to 30 April 2008, tdotcom Limited generated revenue of £685,000 and an operating profit of £127,000.(b) WN1 Limited
On 2 April 2008, SpiriTel Plc acquired 100% of the issued share capital of WN1 Limited, a company based in the UK. The total cost includes the components stated below. The purchase price was settled by a combination of cash and loan notes.
| £000 | |
| Purchase price | 2,260 |
| Loan notes repayable on 1 May 2009 | 248 |
| Contingent consideration under earn out agreement payable in cash | 432 |
| Due diligence fees | 25 |
| Other professional fees | 202 |
| 3,167 |
Up to a further £550,000 of consideration may become payable in the event that the acquired business achieves certain earn-out sales and profit targets during the twelve months following the date of acquisition. In the opinion of the directors the likely amount payable is £550,000.
Due to the proximity of the acquisition to the Group's year end, the assessment of the fair values of the assets and liabilities of WN1 Limited was only provisionally completed at 30 April 2008. The amounts provisionally recognised for each class of the acquiree's assets and liabilities recognised at the acquisition date are as follows:
| Book value £000 | Fair value adjustments £000 | Provisional fair value to the Group £000 | |
| Intangible fixed assets identified | - | 992 | 992 |
| Property, plant and equipment | 45 | - | 45 |
| Inventories | 17 | - | 17 |
| Trade and other receivables | 391 | - | 391 |
| Cash and cash equivalents | 1,591 | - | 1,591 |
| Total assets | 2,044 | 992 | 3,036 |
| Trade payables | (110) | - | (110) |
| Other payables | (522) | - | (522) |
| Current tax liabilities | (295) | - | (295) |
| Hire purchase agreements | (29) | - | (29) |
| Deferred tax | - | (278) | (278) |
| Total liabilities | (956) | (278) | (1,234) |
| Net assets acquired | 1,088 | 714 | 1,802 |
| Provisional goodwill arising on the acquisition | 1,365 | ||
| Consideration | 3,167 | ||
| Satisfied by: | |||
| Cash | 2,487 | ||
| Loan notes repayable on 1 May 2009 | 248 | ||
| Contingent consideration to be settled in cash | 432 | ||
| 3,167 |
During the period from the date of acquisition to 30 April 2008, WN1 Limited generated revenue of £229,000 and an operating profit of £77,000.
Due to the lack of IFRS specific data for tdotcom Limited and WN1 Limited prior to their acquisitions, the pro forma revenue and profit of the Group, had these acquisitions taken place on 1 May 2007, have not been disclosed as they cannot be determined reliably.
Reconciliation to the consolidated statement of cash flows:
| £000 | |
| Cash consideration | 2,600 |
| Cash and cash equivalents acquired | (1,602) |
| Net cash outflow arising on acquisition | 998 |
3. Post balance sheet events
On 22 May 2008, the Company's shareholders in an Extraordinary General Meeting approved the grant by the Panel on Takeovers and Mergers of a waiver in favour of Penta Fund 1 Limited Partnership and Penta Fund 1 SP Limited Partnership (the "Penta Funds") of any obligation on them to make a mandatory offer for the Company in the event that they implement conversion rights attaching to loan instruments held by them which could result in them holding up to an aggregate of 49.99% of the Company's issued ordinary share capital.
The conversion rights over facilities outstanding to the Penta Funds following the shareholder approval can be summarised as follows: of the £11,017,000 of outstanding indebtedness at 31 October 2007, such of the indebtedness as shall be required to be converted in order for the Penta Funds to hold 49.99% of the shares carrying voting rights shall be convertible at 1.1p per ordinary share thereafter, any remaining indebtedness shall be convertible at a price per share which is the higher of (i) the then most recent placing price of ordinary shares and (ii) 1.5p per ordinary share. However, the Penta Funds have undertaken to limit their rights to convert into ordinary shares so that after any subsequent conversion their aggregate holdings of ordinary shares shall be less than 50% of the issued ordinary shares.
On 22 May 2008, the Penta Funds converted 2,611,467 preference shares into 237,406,046 ordinary shares, as a result of which the Penta Funds held 49.99% of the issued shares carrying voting rights.
As a result of the shareholder approval mentioned above, the Penta Funds agreed to waive interest and redemption premiums on the outstanding indebtedness of £11,017,000 accruing after 1 November 2007. Accrued interest of £444,000 charged to the profit and loss account in 2007/08 will consequently be written back in the financial statements for 2008/09.
With effect from 1 May 2010, any outstanding indebtedness subject to the agreement with the Penta Funds will accrue interest in respect of any month at the rate of 8 per cent per annum if, for that month, the average closing mid-market price of the ordinary shares is below 1.5p. If the average closing mid-market price of the ordinary shares is above 1.5p for that month, the Company shall have no liability for interest.