Exhibit 99.4
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
IXEurope plc
We have audited the accompanying consolidated balance sheets of IXEurope plc as of 31 December 2006 and 2005 and the related consolidated income statement, consolidated statement of recognized income and expense and consolidated cash flows for each of the three years in the period ended 31 December 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IXEurope plc at 31 December 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended 31 December 2006, in conformity with International Financial Reporting Standards.
International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 27 to the consolidated financial statements.
BDO Stoy Hayward LLP
London
5 March 2007 except for Note 27 which is as of 12 September 2007
Consolidated income statements
For the years ended 31 December
Note | 2006 | 2005 | 2004 | ||||||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||||||
Revenue | 2 | 37,335 | 22,538 | 15,488 | |||||||
Cost of sales | (22,537 | ) | (12,537 | ) | (9,204 | ) | |||||
Gross profit | 14,798 | 10,001 | 6,284 | ||||||||
Administrative expenses | |||||||||||
General administrative expenses | (9,869 | ) | (8,309 | ) | (6,924 | ) | |||||
IPO related expenses | 3(a) | (1,179 | ) | — | — | ||||||
Share option charges | 3(b) | (510 | ) | — | — | ||||||
Depreciation and amortisation | (5,764 | ) | (3,887 | ) | (3,331 | ) | |||||
Negative goodwill | 3(c) | — | 1,315 | 571 | |||||||
Provision release | — | 146 | — | ||||||||
Restructuring costs | — | (889 | ) | — | |||||||
Gain on disposal of business | — | — | 165 | ||||||||
Total administrative expenses | (17,322 | ) | (11,624 | ) | (9,519 | ) | |||||
Loss from operations | 3 | (2,524 | ) | (1,623 | ) | (3,235 | ) | ||||
Financial income | 4 | 138 | 103 | 159 | |||||||
Financial expense | 4 | (1,863 | ) | (3,135 | ) | (207 | ) | ||||
Loss before taxation | (4,249 | ) | (4,655 | ) | (3,283 | ) | |||||
Income tax | 7 | 809 | (42 | ) | (11 | ) | |||||
Loss for the year attributed to equity holders of the parent | 2,14 | (3,440 | ) | (4,697 | ) | (3,294 | ) | ||||
Loss per share | |||||||||||
Basic | 8 | (2.4p | ) | (10.1p | ) | (7.0p | ) | ||||
Diluted | 8 | (2.4p | ) | (10.1p | ) | (7.0p | ) | ||||
Consolidated statements of recognised income & expense
For the years ended 31 December
2006 | 2005 | 2004 | |||||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||||
Foreign exchange losses on retranslation of overseas operations | (252 | ) | (623 | ) | (142 | ) | |||
Movement in fair value of designated cash flow hedges: | |||||||||
—taken to the cash flow hedging reserve in the year (net of tax) | 57 | — | — | ||||||
—Tax effect of gains and losses recognised directly in equity during the year | 390 | — | — | ||||||
Net expenses recognised directly in equity | 195 | (623 | ) | (142 | ) | ||||
Loss for the year | (3,440 | ) | (4,697 | ) | (3,294 | ) | |||
Total recognised income and expenses for the year | (3,245 | ) | (5,320 | ) | (3,436 | ) | |||
Effect of adoption of IAS 32 and IAS 39, net of tax, on 1 January 2005 on: | |||||||||
Share capital | — | (135 | ) | — | |||||
Share premium | — | (12,789 | ) | — | |||||
Retained earnings | — | (14,479 | ) | — | |||||
(3,245 | ) | (32,723 | ) | (3,436 | ) | ||||
Consolidated balance sheets
As of 31 December
Note | 2006 | 2005 | ||||||
£ ‘000 | £ ‘000 | |||||||
Assets | ||||||||
Non-current assets | ||||||||
Property, plant and equipment | 10 | 35,406 | 27,556 | |||||
Intangible assets | 9 | 3,860 | 3,596 | |||||
Deferred tax asset | 7 | 1,186 | — | |||||
Other receivables | 11 | 3,226 | 2,456 | |||||
Total non-current assets | 43,678 | 33,608 | ||||||
Current assets | ||||||||
Trade and other receivables | 11 | 6,677 | 3,895 | |||||
Cash and cash equivalents | 12 | 6,456 | 6,501 | |||||
Total current assets | 13,133 | 10,396 | ||||||
Total assets | 56,811 | 44,004 | ||||||
Capital and reserves attributable to equity holders of the parent | ||||||||
Issued capital | 13 | 1,726 | 8,677 | |||||
Share premium | 14 | 37,216 | 69,149 | |||||
Foreign exchange translation reserve | 14 | (1,017 | ) | (765 | ) | |||
Compound instrument reserve | 14 | — | 2,545 | |||||
Capital redemption reserve | 14 | 8,164 | — | |||||
Hedging reserve | 14 | 57 | — | |||||
Share option reserve | 14 | 879 | — | |||||
Retained earnings | 14 | (25,508 | ) | (71,066 | ) | |||
Total equity | 21,517 | 8,540 | ||||||
Liabilities | ||||||||
Non-current liabilities | ||||||||
Interest bearing loans and borrowings | 16 | 13,979 | 9,129 | |||||
Other financial liabilities | 17 | 1,219 | 793 | |||||
Provisions | 18 | 37 | 183 | |||||
Total non-current liabilities | 15,235 | 10,105 | ||||||
Current liabilities | ||||||||
Interest bearing loans and borrowings | 19 | 4,878 | 14,355 | |||||
Trade and other payables | 20 | 15,124 | 10,866 | |||||
Provisions | 21 | 57 | 138 | |||||
Total current liabilities | 20,059 | 25,359 | ||||||
Total equity and liabilities | 56,811 | 44,004 | ||||||
Consolidated cash flow statements
For the years ended 31 December
Note | 2006 | 2005 | 2004 | ||||||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||||||
Cash flows from operating activities | |||||||||||
Loss for the period | (3,440 | ) | (4,697 | ) | (3,294 | ) | |||||
Adjustments for | |||||||||||
Depreciation | 5,700 | 3,887 | 3,331 | ||||||||
Recognition of negative goodwill | — | (1,315 | ) | (571 | ) | ||||||
Amortisation of intangible assets | 64 | — | — | ||||||||
Share option charges | 510 | — | — | ||||||||
Foreign exchange losses/(gains) | 12 | 30 | (32 | ) | |||||||
Loss on disposal of fixed assets | 1 | 19 | 263 | ||||||||
Interest expense (net) | 1,725 | 3,032 | 47 | ||||||||
Income tax (credit)/expense | (809 | ) | 42 | 11 | |||||||
Operating profit before changes in working capital and provisions | 3,763 | 998 | (245 | ) | |||||||
Increase in trade and other receivables | (3,645 | ) | (1,949 | ) | (270 | ) | |||||
Increase in trade and other payables | 3,684 | 427 | (224 | ) | |||||||
Decrease in provisions | (220 | ) | (168 | ) | (496 | ) | |||||
Cash generated/(used) in the operations | 3,582 | (692 | ) | (1,235 | ) | ||||||
Income taxes paid | (8 | ) | — | (11 | ) | ||||||
Net cash from operating activities | 3,574 | (692 | ) | (1,246 | ) | ||||||
Cash flows from investing activities | |||||||||||
Interest received | 138 | 103 | 159 | ||||||||
Proceeds from sale of property, plant and equipment | — | — | 736 | ||||||||
Acquisition of property, plant and equipment | (13,037 | ) | (8,258 | ) | (553 | ) | |||||
Acquisition of subsidiary, net of cash received | — | (115 | ) | 2,228 | |||||||
Acquisition of businesses, net of cash received | (1,000 | ) | (1,677 | ) | — | ||||||
Net cash from investing activities | (13,899 | ) | (9,947 | ) | 2,570 | ||||||
Cash flows from financing activities | |||||||||||
Interest paid | (1,369 | ) | (715 | ) | (207 | ) | |||||
Proceeds from shareholders’ loans | — | 1,750 | 500 | ||||||||
Proceeds from issue of shares | 10,000 | — | — | ||||||||
Share issue costs taken to reserves | (403 | ) | — | — | |||||||
Repayment of deep discount bonds | (1,907 | ) | — | — | |||||||
Repayment of subordinated loan | — | — | (339 | ) | |||||||
Proceeds from bank loan | 10,294 | 13,152 | — | ||||||||
Repayment of bank loan | (5,373 | ) | — | — | |||||||
Capital elements of finance leases | (839 | ) | (807 | ) | (705 | ) | |||||
Net cash from financing activities | 10,403 | 13,380 | (751 | ) | |||||||
Net increase in cash and cash equivalents | 78 | 2,741 | 573 | ||||||||
Cash and cash equivalents at 1 January | 6,491 | 3,772 | 3,244 | ||||||||
Effect of exchange rate fluctuations on cash held | (113 | ) | (22 | ) | (45 | ) | |||||
Cash and cash equivalents at 31 December | 12 | 6,456 | 6,491 | 3,772 | |||||||
Notes to the consolidated financial statements
1 Accounting policies
IX Europe plc (the “Company”) is a company domiciled in England. The consolidated financial statements of the Company for the 3 years ended 31 December 2006 comprise the Company and its subsidiaries (together referred to as the “Group”).
Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs), its interpretations adopted by the International Accounting Standards Board (IASB), as adopted by the EU and with those parts of the Companies Act 1985 applicable to companies preparing accounts under IFRS.
The financial statements for the year ended 31 December 2004 were originally prepared under UK GAAP but were restated under IFRS in the comparative figures published in the financial statements for the year ended 31 December 2005.
The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods.
Standards, Amendments And Interpretations Effective 2006 But Not Relevant
The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2006 but they are not relevant to the Group’s operations for the year ended 31 December 2006:
• | IAS 19 (Amendment)—Employee Benefits. |
• | IAS 21 (Amendment)—Net investment in a foreign operation. |
• | IAS 39 (Amendment)—Cash flow hedge accounting of forecast intragroup transactions. |
• | IAS 39 (Amendment)—The fair value option. |
• | IAS 39 and IFRS 4 (Amendment)—Financial guarantee contracts. |
• | IFRS 1 (Amendment)—First time adoption of international financial reporting standards. |
• | IFRS 6—Exploration for and evaluation of mineral resources. |
• | IFRIC 4—Determining whether an arrangement contains a lease. |
• | IFRIC 5—Rights to Interests Arising from Decommissioning, Restoration and Environmental Funds. |
• | IFRIC 6—Liabilities Arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment |
Standards and Interpretations to Existing Standards That Are Not Yet Effective And Have Not Been Adopted Early By The Group
The following standards and interpretations to published standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2007 or later periods but which the Group has not adopted early:
IFRS 7—Financial Instruments: Disclosures and the complementary amendment to IAS 1, Presentation of financial statements – capital disclosures (effective for annual periods beginning on or after 1 January 2007). IFRS 7 introduces new disclosures relating to financial instruments. The Group will apply IFRS 7 from 1 January 2007, but it is not expected to have an impact on the classification or valuation of the Group’s financial instruments.
IFRIC 8—Scope of IFRS 2 (effective for annual periods beginning on or after 1 May 2006). IFRIC 8 clarifies that IFRS 2 Sharebased Payment applies to arrangements where an entity makes share-based payments for apparently nil or inadequate consideration. The Group will apply IFRIC 8 from 1 January 2007, but it is not expected to have an impact on the Group’s accounts.
IFRIC 10—Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006). IFRIC 10 concludes that an entity shall not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. The Group will apply IFRIC 10 from 1 January 2007 but it is not expected to have any impact on the Group’s accounts.
IFRS 8—Operating Segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 replaces IAS 14—Segmental Reporting and introduces new requirements relating to how segments are identified and disclosures required. The Company will apply IFRS 8 from 1 January 2009. The Group has yet to assess the impact this standard will have on the disclosure of segment results.
IFRIC 11—IFRS 2: Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). IFRIC 11 contains guidance on how an entity should account for share-based payment involving an entity’s own equity instruments in which the entity chooses or is required to buy its own equity instruments (treasury shares) to settle the share-based payment obligation, and guidance on the treatment when a parent grants rights to its equity instruments to employees of its subsidiary or a subsidiary grants rights to equity instruments of its parent to its employees in the individual entities’ financial statements. IFRIC 11 is not expected to have an impact on the Group because it does not intend nor is it required to purchase its own equity instruments to settle the share-based payment obligation and the individual entities do not produce accounts under International Financial Reporting Standards.
Interpretations To Existing Standards That Are Not Yet Effective And Not Relevant To The Operations Of The Group
IFRIC 7—Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies (effective for annual periods beginning on or after 1 March 2006). IFRIC 7 contains guidance on how an entity would restate its financial statements in the first year it identifies the existence of hyperinflation in the economy of its functional currency. As none of the Group entities has a currency of a hyperinflationary economy as its functional currency, IFRIC 7 is not relevant to the Group’s operations.
IFRIC 9—Reassessment of Embedded Derivatives (effective for annual periods beginning on or after 1 June 2006). IFRIC 9 concludes that an entity must assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. IFRIC 9 is not relevant to the Group’s operations because none of the terms of the Group’s contracts have been changed.
IFRIC 12—Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). IFRIC 12 clarifies how certain aspects of existing IASB literature are to be applied to service concession arrangements. IFRIC 12 is not relevant to the Group’s operations.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings made up to 31 December 2006. The acquisition method of accounting has been adopted. Under this method the results of subsidiary undertakings acquired or disposed of in the period are included in the consolidated income statement from the date the parent gained control until such time control ceases. Control exists where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
Critical Accounting Estimates And Judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed reasonable under the circumstances.
Estimated Impairment Of Goodwill
The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy on goodwill. The recoverable amounts of cash-generating units are determined by value-in-use calculations. These calculations require the use of estimates (See Note 9)
Fair Value Of Share Option Grants
The fair value of share options granted in the year is estimated at the date of grant using a valuation technique. The Group has carefully considered the inputs into the valuation model based on future expectations and comparative companies.
Details of valuation technique used, and inputs for the models are disclosed in Note 13.
Foreign Currencies
Transactions entered into by the Group entities in a currency other than the currency of the primary economic environment in which it operates (the “functional currency”) are recorded at the rates ruling at the date of the transaction. Foreign currency monetary assets and liabilities are translated at the rates ruling at the balance sheet date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are similarly recognised immediately in the income statement, except for foreign currency borrowings qualifying as a hedge of a net investment in a foreign operation.
On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the balance sheet date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised directly in equity (the “foreign exchange translation reserve”).
Pension Costs
A number of Group companies operate defined contribution pension schemes. The assets of these schemes are held separately to those of the Group in independently administered funds. The pension cost charge represents contributions payable by the Group in the year.
Property, Plant And Equipment
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment provisions.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.
Depreciation is provided to write off the cost less the estimated residual value of tangible fixed assets by equal instalments over their estimated useful economic lives as follows:
Plant and machinery | – | 10 years straight line | ||||
Fixtures, fittings, tools and equipment | – | 3 years straight line | ||||
Short leasehold improvements | – | Over the remaining period of the lease | ||||
Freehold buildings | – | 20 years |
Freehold land and assets in the course of construction are not depreciated.
Operating And Finance Leases
Operating lease rentals relating to colocation facilities are charged to cost of sales in the income statement on a straight line basis over the period of the lease.
Benefits received as an incentive to sign operating leases for colocation facilities are charged to the income statement on a straight line basis over the full length of the lease.
Assets acquired under finance leases are capitalised and the capital element of the lease rentals is included in creditors. Lease payments are analysed between capital and interest. The interest element is charged to the income statement over the period of the lease and is calculated so that it represents a constant proportion of the lease liabilities. The capital element reduces the balance owed to the lessor.
Assets under finance leases are depreciated over the shorter of the lease terms and the useful life of equivalent owned asset.
Where the Group has entered into a sale and leaseback arrangement resulting in a finance lease, any excess of sales proceeds over the carrying amount is deferred and amortised over the lease term.
Income Tax
Income tax on the loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither the accounting nor the taxable profit; and differences relating to investments in subsidiaries to the extent they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Goodwill
All business combinations are accounted for by applying the acquisition method. Goodwill represents amounts arising on acquisition of subsidiaries and businesses. In respect of business combinations that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under UK GAAP. The classification and accounting treatment of business combinations that occurred prior to 1 January 2004 were not reconsidered in preparing the Group’s opening IFRS balance sheet at 1 January 2004.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is no longer amortised but is tested annually for impairment.
Negative goodwill (representing the excess of the fair value of the separable net assets acquired over the fair value of the consideration given) is recognised directly in the income statement.
Revenue
Revenue represents the amounts (excluding value added tax) derived from the provision of colocation and related services to third party customers during the period. Where invoices are raised in advance for colocation services, the revenue is deferred and spread over the period to which it relates. All other revenue, including installation revenue, is recognised in the profit and loss account as agreed milestones are achieved.
Cash And Cash Equivalents
Cash and cash equivalents, for the purpose of the cash flow statement, comprise cash in hand and deposits repayable on demand, less overdrafts payable on demand. Restricted cash is disclosed under debtors.
Impairment
The carrying amounts of the Group’s assets, other than deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If such an indication of impairment exists, the asset’s recoverable amount is estimated.
For goodwill, the recoverable amount is estimated at each balance sheet date.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.
The recoverable amount of the Group’s assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risk specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss in respect of goodwill is not reversed.
In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment had been recognised.
In testing for impairment management has to make judgements and estimations about future events which are uncertain. Adverse results compared to these judgements could alter the decision of whether an impairment is required. See Note 9 for the key assumptions and results of the impairment review carried out in 2006.
Borrowing Costs
Borrowing costs are recognised as an expense in the period in which they are incurred except for borrowing costs relating to the acquisition of a qualifying asset which are capitalised with the cost of the asset. During the year borrowing costs of £Nil (2005: £103k) were capitalised.
Other Financial Liabilities
Other financial liabilities include the following items:
• | Trade payables and other short-term monetary liabilities, which are recognised at amortised cost. |
• | Bank borrowings and certain Preference shares are initially recognised at the amount advanced net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liabilities carried in the balance sheet. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding. |
Convertible Debt
The proceeds received on issue of the Group’s convertible debt are allocated into their liability and equity components. The amount initially attributed to the debt component equals the discounted cash flows using a market rate of interest that would be payable on a similar debt instrument that did not include the right to convert. Subsequently the debt component is accounted for as a financial liability measured at amortised cost.
The difference between the debt proceeds of the convertible debt and the amount allocated to the debt component is credited directly to equity and is not subsequently re-measured. On conversion, the debt element is credited to share capital and share premium as appropriate.
Share Option Schemes
Where share options are awarded to employees, the fair value of the options at the date of grant is charged to the income statement over the vesting period. Equity settled share options are recognised with a corresponding credit to equity and cash settled share options are recognised with a corresponding credit to accruals.
Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the income statement over the remaining vesting period. Where equity instruments are granted to persons other than employees, the income statement is charged with the fair value of goods and services received.
Intangible Assets
Externally acquired customer contract intangibles are initially recognised at cost on the balance sheet and amortised on a straight line basis over the life of the contract. The life of the intangible assets ranges from 4 months to 3 years.
IPO Costs
Costs relating directly to the issue of new shares are set against share premium. Costs that relate to both new and existing shares are set against share premium in the proportion of new shares issued to total shares listed.
Hedge Accounting
Hedge accounting is applied to financial assets and financial liabilities only where all of the following criteria are met:
• | At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge. |
• | For cash flow hedges, the hedged item in a forecast transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect profit and loss. |
• | The cumulative change in the fair value of the hedging instrument is expected to be within 80-125% of the cumulative change in the fair value or cash flows of the hedged item attributable to the risk hedged (i.e. it is expected to be highly effective). |
• | The effectiveness of the hedge can be reliably measured. |
• | The hedge is assessed on a quarterly basis and remains highly effective. |
The Group does not hold or issue derivative instruments for speculative purposes, although derivatives not meeting the above criteria are designated for accounting purposes at fair value through profit or loss as appropriate.
The Group enters into floating to fixed interest rate swaps. The effective part of these derivatives are measured at fair value with changes in fair value recognised directly to equity. If the Group closes out its position early, the cumulative gains and losses recognised directly in equity are frozen and recycled through the income statement using the effective interest rate method.
Dilapidation Provisions
Dilapidations are provided on leasehold properties where the terms of the lease require the Group to make good any changes made to the property during the period of the lease. Where a dilapidation provision is required the Group recognises an asset and provision equal to the discounted cost of restating the property to its original state. The asset is depreciated over the remaining term of the lease.
2 Segment information
Segment information is presented in respect of the Group’s geographical and business segments. The primary format, geographical segments, is based on the Group’s management and internal reporting structure.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly income earning assets and revenue, interest-bearing loans, borrowings and expenses, and corporate assets and expenses.
Geographical Segments
As at 31 December 2006, the Group operated datacentres in four European countries (United Kingdom, France, Germany and Switzerland). It is considered that France, Germany and Switzerland represent regions which are substantially similar and have therefore been combined. Thus, there are two reportable segments, United Kingdom and the Rest of Europe. There is no difference between location of the segment assets and the segment customers.
Business Segments
IX Europe plc has one class of business which is to provide carrier neutral datacentre and related services to its customers.
UNITED KINGDOM | 2006 | 2005 | 2004 | ||||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||||
External revenue | 14,543 | 9,345 | 7,060 | ||||||
Inter-segment revenue | — | 3,010 | 860 | ||||||
Total revenue | 14,543 | 12,355 | 7,920 | ||||||
Segment result | 822 | 1,947 | 948 | ||||||
REST OF EUROPE | 2006 | 2005 | 2004 | ||||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||||
External revenue | 22,792 | 13,193 | 8,428 | ||||||
Inter-segment revenue | 452 | 236 | — | ||||||
Total revenue | 23,244 | 13,429 | 8,428 | ||||||
Segment result | (2,216 | ) | (2,424 | ) | (2,524 | ) | |||
CONSOLIDATED | 2006 | 2005 | 2004 | ||||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||||
Total revenue | 37,787 | 25,784 | 16,348 | ||||||
Less: Inter-segment revenue | (452 | ) | (3,246 | ) | (860 | ) | |||
Revenue | 37,335 | 22,538 | 15,488 | ||||||
Segment result | (1,394 | ) | (477 | ) | (1,576 | ) | |||
Unallocated expenses | (2,855 | ) | (4,178 | ) | (1,707 | ) | |||
Income tax expense | 809 | (42 | ) | (11 | ) | ||||
Result | (3,440 | ) | (4,697 | ) | (3,294 | ) | |||
Assets | |||||||||
Segment assets – United Kingdom | 18,103 | 12,940 | 7,339 | ||||||
Segment assets – Rest of Europe | 36,348 | 29,128 | 21,142 | ||||||
Unallocated | 2,360 | 1,936 | 709 | ||||||
Total assets | 56,811 | 44,004 | 29,190 | ||||||
Liabilities | |||||||||
Segment liabilities – United Kingdom | 5,306 | 4,230 | 2,415 | ||||||
Segment liabilities – Rest of Europe | 9,985 | 7,024 | 6,688 | ||||||
Unallocated | 20,003 | 24,210 | 6,866 | ||||||
Total liabilities | 35,294 | 35,464 | 15,969 | ||||||
Capital Expenditure | |||||||||
Capital expenditure – United Kingdom | 6,839 | 4,708 | 111 | ||||||
Capital expenditure – Rest of Europe | 6,997 | 9,758 | 1,844 | ||||||
Capital expenditure – Unallocated | 69 | 18 | 29 | ||||||
Total capital expenditure | 13,905 | 14,484 | 1,984 | ||||||
Depreciation | |||||||||
Segment depreciation – United Kingdom | 2,121 | 960 | 942 | ||||||
Segment depreciation – Rest of Europe | 3,546 | 2,892 | 2,237 | ||||||
Segment depreciation – Unallocated | 33 | 35 | 153 | ||||||
Total depreciation | 5,700 | 3,887 | 3,332 | ||||||
Amounts within capital expenditure and depreciation include those acquired with subsidiaries and businesses during 2005.
2006 | 2005 | 2004 | ||||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Revenue | ||||||
Segment revenue – Colocation | 37,335 | 22,538 | 15,488 | |||
Assets | ||||||
Segment assets – Colocation | 54,451 | 42,068 | 28,481 | |||
Unallocated | 2,360 | 1,936 | 709 | |||
Total assets | 56,811 | 44,004 | 29,190 | |||
Capital Expenditure | ||||||
Capital expenditure – Colocation | 13,836 | 14,466 | 1,955 | |||
Capital expenditure – Unallocated | 69 | 18 | 29 | |||
Total capital expenditure | 13,905 | 14,484 | 1,984 | |||
3 Loss from operations
2006 | 2005 | 2004 | ||||||
£ ‘000 | £ ‘000 | £ ‘000 | ||||||
Loss from operations is stated after charging/(crediting): | ||||||||
Loss on disposal of fixed assets | 1 | 19 | 263 | |||||
Auditors’ remuneration: | ||||||||
—audit services | 86 | 54 | 118 | |||||
—services relating to corporate finance transactions entered into by the Company | 159 | — | — | |||||
—Taxation advice | — | — | 62 | |||||
Depreciation of tangible fixed assets | ||||||||
—owned assets | 4,925 | 3,174 | 2,910 | |||||
—leased assets | 775 | 713 | 421 | |||||
Amortisation of intangible assets | 64 | — | — | |||||
Recognition of negative goodwill | — | (1,315 | ) | (571 | ) | |||
Operating lease – lease payments | ||||||||
—Hire of plant and machinery | 39 | 63 | 92 | |||||
—Other | 4,563 | 3,647 | 3,012 | |||||
Net foreign currency translation loss/(gain) | 12 | 32 | (33 | ) | ||||
Share based payment expense | ||||||||
—Equity settled | 489 | — | — | |||||
—Cash settled | 21 | — | — |
Auditors’ remuneration for services relating to corporate finance transactions entered into in by the Company of £159k above was charged to the income statement in the year as part of IPO costs. £57k was charged to equity, being the portion that related to new shares issued on flotation.
Comparative presentation on the face of the income statement has been changed in order to present a fairer reflection of the results.
(a)—IPO Related Expenses
IPO related expenses totaled £1,582k of which £1,179k was recognised in the income statement.
(b)—Share Option Charges
During the year, the Company granted options to employees under three schemes. The details of the share options granted are set out in Note 13. Share option charges have been separately disclosed to aid understanding as they do not impact the underlying business.
(c)—Negative Goodwill
Negative goodwill was recognised in 2005 on acquisitions where the fair value of assets acquired exceeded the fair value of consideration paid.
4 Financing costs
2006 | 2005 | 2004 | ||||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Bank interest receivable | 55 | 85 | 40 | |||
Other interest receivable | 83 | 18 | 119 | |||
Financial income | 138 | 103 | 159 | |||
Bank interest payable | 1 | 6 | 6 | |||
Interest payable on third party loans | 1,359 | 490 | 60 | |||
Fair value gains on financial instruments—interest rate swaps: cash flow hedges, transfer from equity | 8 | — | — | |||
Interest payable on finance leases | 162 | 183 | 141 | |||
Interest charge on financial liabilities (Note 16) | 259 | 2,447 | — | |||
Finance charge on deferred consideration | 9 | — | — | |||
Other interest payable | 65 | 9 | — | |||
Financial expenses | 1,863 | 3,135 | 207 | |||
5 Acquisitions
Gesellschaft für Informationstechnologie mbH
On 5 April 2005, a business continuity provider in Germany was acquired by a Group subsidiary in Germany. All of the voting shares in GIC mbH (Gesellschaft für Informationstechnologie mbH) were acquired for £119k (including costs).
In the 9 months to 31 December 2005 the subsidiary contributed a net loss of £199k to the 2005 consolidated loss of £4,697k. If the acquisition had occurred on 1 January 2005, Group revenue in 2005 would have been £22,696k and 2005 Group loss would have been £4,763k.
Acquirees’s net assets at acquisition date:
Recognised Fair Value | Adjustment | Book Value | ||||||
£ ‘000 | £ ‘000 | £ ‘000 | ||||||
Property, plant and equipment | 155 | — | 155 | |||||
Trade and other receivables | 7 | — | 7 | |||||
Cash and cash equivalents | 4 | — | 4 | |||||
Trade and other payables | (21 | ) | — | (21 | ) | |||
Other creditors | (80 | ) | — | (80 | ) | |||
Net identifiable assets and liabilities | 65 | — | 65 | |||||
Goodwill on acquisition | 54 | |||||||
Consideration paid, satisfied in cash | 119 | |||||||
Cash (acquired) | (4 | ) | ||||||
Net cash outflow | 115 | |||||||
The main factors leading to the recognition of goodwill are:
• | synergistic cost savings which result in the Group being prepared to pay a premium; and |
• | the fact that a lower cost of capital is ascribed to the expected future cash flows of the entire operation acquired than might be to individual assets. |
London 3
On 17th November 2005, the assets and business were acquired in West London for £2,450k.
Net assets of business acquired at acquisition date at fair value
Recognised | |||
£ ‘000 | |||
Property, plant and equipment | 2,787 | ||
Negative goodwill on acquisition | (337 | ) | |
Purchase price | 2,450 | ||
Consideration paid, satisfied in cash | 1,000 | ||
Deferred consideration | 1,450 | ||
Purchase price | 2,450 | ||
Net cash outflow in the year | 1,000 | ||
Negative goodwill arose due to assets having a fair value higher than was paid.
In the one month to 31 December 2005, the business contributed a net loss of £67k to the 2005 consolidated loss of £4,697k. If the acquisition had occurred on 1 January 2005, Group revenue in 2005 would have been £22,962k and 2005 Group loss would have been £5,438k.
Frankfurt 2
On 29th September 2005, the assets and business were acquired in Frankfurt for £1,284k.
Net assets of business acquired at acquisition date at fair value
Recognised | |||
£ ‘000 | |||
Property, plant and equipment | 2,546 | ||
Creditors | (327 | ) | |
Debtors | 43 | ||
Net identifiable assets and liabilities | 2,262 | ||
Negative goodwill on acquisition | (978 | ) | |
Purchase price | 1,284 | ||
Consideration paid, satisfied in cash | 677 | ||
Vendor liabilities settled | 505 | ||
Deferred consideration | 102 | ||
Purchase price | 1,284 | ||
Net cash outflow | 677 | ||
Negative goodwill arose due to assets having a fair value higher than was paid.
In the 3 months to 31 December 2005, the business contributed a net profit of £125k to the 2005 consolidated loss of £4,697k. If the acquisition had occurred on 1 January 2005, Group revenue in 2005 would have been £24,078k and 2005 Group loss would have been £4,322k.
No customer related intangibles where recognised as the internal valuations revealed a negative contribution. Negative goodwill has been recognised as a result of the financial distressed position of the acquired businesses prior to the acquisition by IXEurope plc.
Geneva 1
On 25 March 2004 the Group acquired through IX Europe (Switzerland) AG all of the shares of Telehouse (Suisse) SA, Geneva, Switzerland for CHF 1.
The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the Group:
Book value | revaluation | Accounting policy adjustment | Other | Fair value | |||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||
Fixed assets | |||||||||||||||
Intangible | — | — | — | — | — | ||||||||||
Tangible | 117,819 | — | (63,844 | ) | (4,210 | ) | 49,765 | ||||||||
Current assets | |||||||||||||||
Stock | 32,931 | (32,931 | ) | — | — | — | |||||||||
Debtors | 261,280 | — | — | 3,766 | 265,046 | ||||||||||
Cash | 2,227,742 | — | — | — | 2,227,742 | ||||||||||
Total assets | 2,639,772 | (32,931 | ) | (63,844 | ) | (444 | ) | 2,542,553 | |||||||
Liabilities | |||||||||||||||
Provisions | — | — | — | (1,511,750 | ) | (1,511,750 | ) | ||||||||
Creditors | (459,612 | ) | — | — | — | (459,612 | ) | ||||||||
Total liabilities | (459,612 | ) | — | — | (1,511,750 | ) | (1,971,362 | ) | |||||||
Net assets | 2,180,160 | (32,931 | ) | (63,844 | ) | (1,512,194 | ) | 571,191 | |||||||
Negative goodwill | (571,191 | ) | |||||||||||||
Purchase consideration and Costs of acquisition | — |
The stock acquired was written off due to it being of a non-standard nature and unlikely to be used in the ongoing business.
The estimated useful lives of the fixed assets acquired were adjusted to bring them into line with the Group’s accounting policy.
A provision was made for a lease exit penalty of CHF 3 million upon the acquisition due to renegotiation of the lease of the company’s premises as well as a provision for legal and professional fees of CHF 300,000.
Telehouse (Suisse) SA was merged with IX Europe (Switzerland) AG on 15 June 2004.
In the seven months to 31 December 2004, the business contributed net profit of £43,075 to the consolidated loss of £3,293,338. If the acquisition had occurred on 1 January 2004, Group revenue would have been £15,705,727 and Group loss would have been £3,213,815.
6 Employee expenses
2006 | 2005 | 2004 | ||||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Wages, salaries and fees | 6,497 | 5,928 | 4,573 | |||
Share based payments | 510 | — | — | |||
Social Security costs | 1,009 | 858 | 755 | |||
Pension costs | 256 | 174 | 203 | |||
8,272 | 6,960 | 5,531 | ||||
Number of Employees | ||||||
2006 | 2005 | 2004 | ||||
The average monthly number of employees of the Group (including Directors) during the year want | ||||||
Administration | 42 | 48 | 36 | |||
Sales and marketing | 22 | 24 | 22 | |||
Operations | 73 | 45 | 36 | |||
137 | 117 | 94 | ||||
Remuneration Of The Directors
2006 | 2005 | 2004 | ||||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Aggregate emoluments | 906 | 853 | 771 | |||
Contributions to defined contribution pension schemes | 42 | 37 | 33 | |||
948 | 890 | 804 | ||||
Highest paid Director
2006 | 2005 | 2004 | ||||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Aggregate emoluments | 298 | 286 | 311 | |||
Contributions to defined contribution pension schemes | 12 | 14 | 14 | |||
310 | 300 | 325 | ||||
At 31 December 2006, 3 Directors (2005: 3; 2004: 3) had retirement benefits accruing under defined contribution pension schemes.
7 Taxation
2006 | 2005 | 2004 | |||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||
Current tax | |||||||
Foreign tax—Corporation tax | 12 | 42 | 4 | ||||
Foreign tax—capital gains tax | — | — | 7 | ||||
Total current tax | 12 | 42 | 11 | ||||
Deferred tax | |||||||
Asset not previously recognised on available losses | (674 | ) | — | — | |||
Asset on share options | (147 | ) | — | — | |||
Total deferred tax | (821 | ) | 42 | 11 | |||
Total tax (credit)/charge | (809 | ) | 42 | 11 | |||
The tax charge for the year is higher than the standard rate of corporation tax in the UK which is 30% (2005: 30%; 2004: 30%).
The differences are explained below:
2006 | 2005 | 2004 | |||||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||||
Tax reconciliation | |||||||||
Loss before tax | (4,249 | ) | (4,697 | ) | (3,294 | ) | |||
UK corporation tax at 30% (2005: 30%) | (1,275 | ) | (1,409 | ) | (988 | ) | |||
Effects of | |||||||||
Items not deductible for tax purposes | 457 | 1,435 | 683 | ||||||
Depreciation in excess of capital allowances | 23 | 188 | 198 | ||||||
Differences between overseas and UK tax rate | (256 | ) | (105 | ) | (182 | ) | |||
Utilisation of tax losses brought forward | (1,056 | ) | (979 | ) | 300 | ||||
Current year losses not utilised | 1,285 | 868 | — | ||||||
Other | 13 | 44 | — | ||||||
Total tax (credit)/charge for the year | (809 | ) | 42 | 11 | |||||
Deferred Tax
2006 Recognised | Un-recognised | 2005 Recognised | Un-recognised | ||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | ||||||
Deferred tax assets | |||||||||
Accelerated capital allowances | — | 1,116 | — | 787 | |||||
Losses carried forward | 674 | 10,315 | — | 10,270 | |||||
Share option recognised through | |||||||||
Income statement | 147 | — | — | — | |||||
Equity | 390 | — | — | — | |||||
1,211 | 11,431 | — | 11,057 | ||||||
Deferred tax liability | |||||||||
Hedge asset | (25 | ) | — | — | — | ||||
Net deferred tax asset | 1,186 | — | — | — | |||||
Subject to agreement with the Inland Revenue, the Group has United Kingdom tax losses of approximately £6,770k at 31 December 2006 (2005: £9,709k) available to relieve future trading profits in the United Kingdom. Additionally, the Group has overseas losses of £25,096k at 31 December 2006 (2005: £17,866k) available to relieve future overseas trading profits.
No deferred tax asset is recognised in relation to these losses nor in relation to accelerated capital allowances due to inherent uncertainty regarding their recoverability except for losses brought forward in Switzerland, where a deferred tax asset has been recognised on the basis of current profits and the probability of future profits in that entity.
A deferred tax asset also arises on share options granted in the year.
A deferred tax liability has been recognised on the fair value gains in the year on cash flow hedges.
8 Loss per share
Basic Loss Per Share
The basic loss per share has been calculated by dividing the net loss attributable to ordinary shareholders by the weighted average number of shares in issue during the year.
2006 | 2005 | 2004 | |||||||
Net loss attributable to ordinary shareholders (£ ‘000) | (3,440 | ) | (4,697 | ) | (3,294 | ) | |||
Weighted average number of ordinary shares in issue | 141,107,050 | 46,675,232 | 46,675,232 | ||||||
Basic and diluted loss per share | (2.4p | ) | (10.1p | ) | (7.0p | ) | |||
Diluted Loss Per Share
The diluted loss per share has been calculated by dividing the net loss attributable to ordinary shareholders by the weighted average number of shares in issue during the year, adjusted for potentially dilutive shares that are not antidilutive. All potentially dilutive shares are antidilutive.
2006 | 2005 | 2004 | |||||||
Weighted average number of ordinary shares in issue | 141,107,050 | 46,675,232 | 46,675,232 | ||||||
Adjustment for share options | 4,897,004 | 293,750 | 1,914,895 | ||||||
Adjustment for Priority Preference shares | 1,212,500 | 4,850,000 | 13,459,221 | ||||||
Adjustment for convertible shareholder loan | 2,000,000 | 8,000,000 | 8,000,000 | ||||||
Adjustment for convertible deep discount bonds | 458,799 | 1,835,198 | — | ||||||
Weighted average number of potential ordinary shares in issue | 149,675,353 | 61,654,180 | 70,049,348 | ||||||
9 Intangible assets
| |||||||||
Positive Goodwill | Customer Contracts | Total | |||||||
£ ‘000 | £ ‘000 | £ ‘000 | |||||||
Cost | |||||||||
Balance at 1 January 2005 | 3,648 | — | 3,648 | ||||||
Additions in the year | 54 | — | 54 | ||||||
Effect of movements in foreign exchange | (106 | ) | — | (106 | ) | ||||
Balance at 31 December 2005 | 3,596 | — | 3,596 | ||||||
Additions in the year | — | 397 | 397 | ||||||
Effect of movements in foreign exchange | (70 | ) | — | (70 | ) | ||||
Balance at 31 December 2006 | 3,526 | 397 | 3,923 | ||||||
Amortisation | |||||||||
Balance at 1 January 2005 and 31 December 2005 | — | — | — | ||||||
Charge for the year | — | 64 | 64 | ||||||
Effect of movements in foreign exchange | — | (1 | ) | (1 | ) | ||||
Balance at 31 December 2006 | — | 63 | 63 | ||||||
Net book value | |||||||||
Balance at 1 January 2005 | 3,648 | — | 3,648 | ||||||
Balance at 31 December 2005 | 3,596 | — | 3,596 | ||||||
Balance at 31 December 2006 | 3,526 | 334 | 3,860 | ||||||
Customer contracts
The customer contracts intangible asset arose on acquisition of contracts during the year and is amortised on a straight line basis over the finite life of the contract to which it relates. In the year amortisation of £64k (2005: Nil) was included in administrative expenses.
Impairment Tests For Cash-Generating Units Containing Goodwill
The following Group of units have significant goodwill:
2006 | 2005 | |||
£ ‘000 | £ ‘000 | |||
Group made of IXDatacentre Frankfurt1 & IXDatacentre Zurich1 | 3,473 | 3,542 | ||
Units without significant goodwill | 53 | 54 | ||
3,526 | 3,596 | |||
The recoverable amount of the Group of cash generating units Frankfurt1 & Zurich1 is based on value in use calculations. Those calculations use cash flow projections based on the three year budget ending 31 December 2009 as approved by the Group Board. Cash flows beyond this period have been extrapolated with no assumed growth. The discount factor has been determined as 13.6% based on the Company’s weighted average cost of capital.
The key assumptions used and the approach to determining their value are:
Assumption | How Determined | |
Operating margin | This is based on detailed plans of IXDatacentre™ space available and past experience of management after the period of the official budget. |
Management approved budgets are estimated based on past performance and expectations of future developments.
10 Property, plant and equipment
Year ended 31 December 2006
Freehold land and buildings | Short leasehold improvements | Assets in the course of construction | Plant and machinery | Fixtures, fittings, tools and equipment | Total | |||||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||||
Cost | ||||||||||||||||||
At beginning of year | 4,780 | 2,939 | 2,367 | 33,983 | 6,405 | 50,474 | ||||||||||||
Additions | — | 141 | 6,401 | 5,737 | 1,626 | 13,905 | ||||||||||||
Disposals | — | — | — | — | (2 | ) | (2 | ) | ||||||||||
Transfers | — | 15 | (6,239 | ) | 6,224 | — | — | |||||||||||
Currency translation differences | (93 | ) | (10 | ) | (56 | ) | (478 | ) | (124 | ) | (761 | ) | ||||||
At end of year | 4,687 | 3,085 | 2,473 | 45,466 | 7,905 | 63,616 | ||||||||||||
Depreciation | ||||||||||||||||||
At beginning of year | 57 | 1,795 | 532 | 16,215 | 4,319 | 22,918 | ||||||||||||
Charge for year | 169 | 62 | — | 4,462 | 1,007 | 5,700 | ||||||||||||
Disposals | — | — | — | — | (1 | ) | (1 | ) | ||||||||||
Currency translation differences | (4 | ) | (9 | ) | (29 | ) | (269 | ) | (96 | ) | (407 | ) | ||||||
At end of year | 222 | 1,848 | 503 | 20,408 | 5,229 | 28,210 | ||||||||||||
Net book value | ||||||||||||||||||
At 31 December 2006 | 4,465 | 1,237 | 1,970 | 25,058 | 2,676 | 35,406 | ||||||||||||
Net book value of assets held under finance lease | ||||||||||||||||||
At 31 December 2006 | — | — | — | 1,499 | 608 | 2,107 | ||||||||||||
At 31 December 2005 | — | — | — | 1,725 | 1,124 | 2,849 | ||||||||||||
All material assets are held as security against the bank loans of the Group.
Year ended 31 December 2005
Freehold land and buildings | Short leasehold improvements | Assets in the course of construction | Plant and machinery | Fixtures, fittings, tools and equipment | Total | ||||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | ||||||||||||
Cost | |||||||||||||||||
At beginning of year | — | 2,165 | 679 | 28,096 | 4,964 | 35,904 | |||||||||||
Acquisition | — | 832 | — | 5,038 | 505 | 6,375 | |||||||||||
Additions | 4,780 | — | 1,712 | 1,426 | 1,062 | 8,980 | |||||||||||
Disposals | — | — | — | — | (22 | ) | (22 | ) | |||||||||
Currency translation differences | — | (58 | ) | (24 | ) | (577 | ) | (104 | ) | (763 | ) | ||||||
At end of year | 4,780 | 2,939 | 2,367 | 33,983 | 6,405 | 50,474 | |||||||||||
Depreciation | |||||||||||||||||
At beginning of year | — | 1,836 | 551 | 13,084 | 3,066 | 18,537 | |||||||||||
Acquisition | — | — | — | 424 | 446 | 870 | |||||||||||
Charge for year | 56 | 8 | — | 2,956 | 867 | 3,887 | |||||||||||
Disposals | — | — | — | — | (3 | ) | (3 | ) | |||||||||
Currency translation differences | 1 | (49 | ) | (19 | ) | (249 | ) | (57 | ) | (373 | ) | ||||||
At end of year | 57 | 1,795 | 532 | 16,215 | 4,319 | 22,918 | |||||||||||
Net book value | |||||||||||||||||
At 31 December 2005 | 4,723 | 1,144 | 1,835 | 17,768 | 2,086 | 27,556 | |||||||||||
11 Trade and other receivables
Current | 2006 | 2005 | ||
£ ‘000 | £ ‘000 | |||
Trade debtors | 4,836 | 2,074 | ||
Other debtors | 449 | 783 | ||
Prepayments and accrued income | 1,392 | 1,038 | ||
6,677 | 3,895 | |||
Non current | 2006 | 2005 | ||
£ ‘000 | £ ‘000 | |||
Other debtors | — | 85 | ||
Hedging asset | 82 | — | ||
Prepayments and accrued income | 111 | — | ||
Security deposit | 3,033 | 2,371 | ||
3,226 | 2,456 | |||
Security deposits include long-term rent deposits for facilities held under operating leases and security held under a sale and leaseback facility.
12 Cash and cash equivalents
2006 | 2005 | ||||
£ ‘000 | £ ‘000 | ||||
Bank balances | 4,378 | 4,456 | |||
Cash and cash equivalents | 6,456 | 6,501 | |||
Bank overdrafts | — | (10 | ) | ||
Cash and cash equivalents in statement of cash flows | 6,456 | 6,491 | |||
Restricted cash included within cash and cash equivalents | 2,078 | 2,045 | |||
Restricted cash has been disclosed within cash and cash equivalents in accordance with IAS 7.
13 Called up share capital
2006 | 2005 | 2006 | 2005 | |||||||||||
Authorised for issue | No. | No. | £ ‘000 | £ ‘000 | ||||||||||
Ordinary shares of £0.01 each | ||||||||||||||
Ordinary shares | 250,000,000 | 11,559,881 | 2,500 | 116 | ||||||||||
B Ordinary shares | — | 38,024,379 | — | 380 | ||||||||||
Deferred shares | — | 819,872,408 | — | 8,199 | ||||||||||
250,000,000 | 869,456,668 | 2,500 | 8,695 | |||||||||||
Shares of £0.01 each: | ||||||||||||||
Priority Preference shares | — | 15,390,779 | — | 154 | ||||||||||
250,000,000 | 884,847,447 | 2,500 | 8,849 | |||||||||||
2006 | Bonus Issue | Placing | Cancellation | Conversion | Conversion of Shareholder Loan | 2005 | ||||||||||
Allotted, called up and fully paid | No. | No. | No. | No. | No. | No. | No. | |||||||||
Ordinary shares of £0.01 each | ||||||||||||||||
Ordinary shares | 172,584,323 | 71,604,545 | 45,454,546 | — | 46,378,288 | — | 9,146,944 | |||||||||
B Ordinary shares | — | — | — | — | (37,528,288 | ) | — | 37,528,288 | ||||||||
Deferred shares | — | — | — | (816,372,408 | ) | — | — | 816,372,408 | ||||||||
172,584,323 | 71,604,545 | 45,454,546 | (816,372,408 | ) | 8,850,000 | — | 863,047,640 | |||||||||
Shares of £0.01 each: | ||||||||||||||||
Priority Preference shares | — | — | — | — | (8,850,000 | ) | 4,000,000 | 4,850,000 | ||||||||
172,584,323 | 71,604,545 | 45,454,546 | (816,372,408 | ) | — | 4,000,000 | 867,897,640 | |||||||||
2005 | Redesignation | Deferral | 2004 | |||||||
(total) | ||||||||||
Allotted, called up and fully paid | No. | No. | No. | No. | ||||||
Ordinary shares of £0.01 each | ||||||||||
Ordinary shares | 9,146,944 | 9,146,944 | — | — | ||||||
B Ordinary shares | 37,528,288 | 37,528,288 | — | — | ||||||
Ordinary shares: Class A | — | (200 | ) | — | 200 | |||||
Ordinary shares: Class B | — | (87,457 | ) | — | 87,457 | |||||
Ordinary shares: Class F | — | (45,760,051 | ) | — | 45,760,051 | |||||
Ordinary shares: Class G | — | (100 | ) | — | 100 | |||||
Preferred Ordinary shares | — | (827,424 | ) | — | 827,424 | |||||
Deferred shares | 816,372,408 | — | 8,609,221 | 807,763,187 | ||||||
863,047,640 | — | 8,609,221 | 854,438,419 | |||||||
Shares of £0.01 each: | ||||||||||
Priority Preference shares | 4,850,000 | — | (8,609,221 | ) | 13,459,221 | |||||
867,897,640 | — | — | 867,897,640 | |||||||
Ordinary shares | B Ordinary shares | Deferred shares | Priority Preference Shares | TOTAL | ||||||||||
Allotted, called up and fully paid | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||
Balance at 1 January 2006 | 91 | 375 | 8,164 | 47 | 8,677 | |||||||||
Conversion to Ordinary Shares | 375 | (375 | ) | — | — | — | ||||||||
Conversion of Shareholder Loan to Priority Preference Shares | — | — | — | 40 | 40 | |||||||||
Conversion of Priority Preference Shares to Ordinary Shares | 87 | — | — | (87 | ) | — | ||||||||
Transfer of Liability Portion of Priority Preference Shares on Conversion to Ordinary Shares | 2 | — | — | — | 2 | |||||||||
Cancellation of Deferred Shares | — | — | (8,164 | ) | — | (8,164 | ) | |||||||
Placing of New Ordinary Shares | 455 | — | — | — | 455 | |||||||||
Bonus Issue of Ordinary Shares | 716 | — | — | — | 716 | |||||||||
Balance at 31 December 2006 | 1,726 | — | — | — | 1,726 | |||||||||
Share issues
On 7th April 2006 the Company issued 45,454,546 Ordinary Shares with nominal value 1p for 22p per share which resulted in a premium of 21p per share or £9,545k.
Ordinary shares | B Ordinary shares | Ordinary shares: Classes A, B, F and G | Preferred Ordinary shares | Deferred shares | Priority Preference shares | TOTAL | ||||||||||||
Allotted, called up and fully paid | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||
Balance at 1 January 2005 | — | — | 458 | 8 | 8,078 | 135 | 8,679 | |||||||||||
Opening balance Adjustment—IFRS | — | — | — | — | — | (135 | ) | (135 | ) | |||||||||
Adjusted balance at 1 January 2005 | — | — | 458 | 8 | 8,078 | — | 8,544 | |||||||||||
Preference share liability transferred to deferred shares | 91 | 375 | (458 | ) | (8 | ) | 86 | — | 86 | |||||||||
Change in conditions of some Preference shares | — | — | — | — | — | 47 | 47 | |||||||||||
Balance at 31 December 2005 | 91 | 375 | — | — | 8,164 | 47 | 8,677 | |||||||||||
During the year, the Company restructured its equity. These changes are reflected in the tables above and described below.
Immediately prior to Admission on AIM, convertible shareholder loans of £4,000,000 were converted into 4,000,000 priority preference shares of £0.01 each in the share capital of the Company. These and the existing 4,850,000 priority preference shares were converted into 8,850,000 ordinary shares of £0.01 each in the share capital of the Company.
By resolutions passed on 22 March 2006, the following changes to the share capital of the Company were approved:
1. | Following the cancellation of all the issued and unissued but authorised deferred shares of 1p each in nominal value, the authorised share capital of the Company was increased to £1,500,000 in nominal value comprising 150,000,000 Ordinary Shares of 1p each. |
2. | All 816,372,408 issued deferred shares of 1p each in nominal value were transferred to the company and were cancelled along with the 3,500,000 authorised but unissued deferred shares of 1p each and the share capital of the Company was reduced accordingly. |
3. | All 37,528,288 issued B Ordinary Shares of 1p each in the capital of the Company were converted into Ordinary Shares of 1p each in the capital of the Company. |
By resolution passed on 3 April 2006 it was resolved that at Admission the authorised share capital of the Company be increased to £2,500,000 in nominal value comprising 250,000,000 Ordinary Shares of 1p each.
During 2005 the Company restructured its equity and adopted new Articles of Association. These changes are reflected in the table above and are described below.
The resulting changes to equity occurred on 28th December 2005:
• | Deferral of 63.965% of issued Priority Preference shares to Deferred shares. The authorised Super Priority Preference shares were also converted to Deferred shares. |
• | Redesignation I—conversion of Ordinary shares Classes A, C, D, E, G and 8,137 Preferred Ordinary shares to Ordinary shares. |
• | Redesignation II—conversion of Ordinary shares Classes B, F and remaining 819,287 Preferred Ordinary shares to B Ordinary shares. |
Share Options
Under the terms of the IXEurope Founders Share Option Scheme adopted on 30 June 2006, two Directors have been granted options to subscribe for Ordinary Shares of the Company as set out below:
Maximum no of shares over which the Option is held | Options price per share | Date of Grant of Option | ||||
Guy Willner | 2,500,000 | 1p | 30 June 2006 | |||
Christophe de Buchet | 2,500,000 | 1p | 30 June 2006 | |||
5,000,000 | ||||||
The Options may be exercised:
i. | as to 50% of the Ordinary Shares subject to the Option provided that the market value of an Ordinary Share reaches 40p on or after 18 months have elapsed since the admission of the Ordinary Shares to trading on AIM (irrespective of the share price subsequently); and |
ii. | as to the remaining 50% of the Ordinary Shares subject to the Option provided that the market value of an Ordinary Share reaches 50p on or after 30 months have elapsed since the admission of the Ordinary Shares to trading on AIM (irrespective of the share price subsequently). |
The Options will lapse, if not exercised, on the tenth anniversary of the date of grant.
Under the terms of the Company’s Unapproved Share Option Scheme adopted on 22 March 2006, Directors and certain senior employees have been awarded Options to subscribe for Ordinary Shares of the Company as set out in the table below.
Date of Grant | Options January | Options held at 31 December | Market price at date of grant | Exercise price | Earliest exercise date | Expiry date | ||||||||
Guy Willner | 07/04/06 | — | 1,258,427 | 30p | 22p | 07/04/09 | 06/04/16 | |||||||
Christophe de Buchet | 07/04/06 | — | 1,258,427 | 30p | 22p | 07/04/09 | 06/04/16 | |||||||
Karen Bach | 07/04/06 | — | 1,258,247 | 30p | 22p | 07/04/09 | 06/04/16 | |||||||
Senior Employees | 07/04/06 | — | 3,415,732 | 30p | 22p | 07/04/09 | 06/04/16 | |||||||
7,191,013 | ||||||||||||||
The Options will vest in three equal portions upon the signing of the 2006, 2007 and 2008 statutory accounts based on performance criteria of EBITDA and space targets.
EBITDA targets will govern 75% of the options available following each financial year. If the target is not reached in 2006, the awards will still vest if the combined EBITDA targets are met for 2006 and 2007. If the target is not reached in 2007, the awards will still vest if the combined EBITDA targets are met for 2007 and 2008.
Space targets will govern the vesting of 25% of the options available following each financial year. If the target is not reached in 2006 the awards will still vest if the target is met for 2007. If the target is not reached in 2007 the awards will still vest if the target is met for 2008.
Under the terms of the Company’s Unapproved Share Option Scheme, awards were made to employees as detailed below:
Date of Grant | Options held at 1 January 2007 | Options held at 30 | Market price at date of grant | Exercise Price | Earliest exercise date | Expiry date | ||||||
09/10/06 | 749,250 | 749,250 | 45p | 43p | 09/10/09 | 09/10/16 |
The following information is relevant in the determination of the fair value of options granted during the year. There were no share options granted in 2005.
Unapproved Scheme | IXEurope Founders Share Option Scheme | Unapproved Scheme | ||||
Date of Grant | 07/04/06 | 30/06/06 | 09/10/06 | |||
Option pricing model used | Binomial | Binomial | Binomial | |||
Adjusted bid price at date of grant | 20.75p | 29.44p | 44.00p | |||
Exercise price | 22p | 1p | 43p | |||
Option life | 10 years | 10 years | 10 years | |||
Expected volatility | 44% | 44% | 44% | |||
Risk-free interest rate | 4.39% | 4.74% | 4.80% |
The volatility assumption is based on the annualised volatility of IXEurope plc and a weighted average of comparative companies.
The performance based measures on the Unapproved Scheme granted on 7 April 2006 are modelled using an estimate of the probability of the non-market based performance criteria being met.
The equity settled element of the IXEurope Founders Share Option Scheme is modelled using the absolute values adjusted for the success probability derived for the required performance condition.
The cash settled element of the IXEurope Founders Share Option Scheme is modelled on the fair value of cash receivable based on estimates of the probability of the market conditions being met.
14 Share premium and reserves
Year ended 31 December 2006
Share premium | Retained earnings | Foreign exchange translation reserve | Other reserves | |||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||
At beginning of year | 69,149 | (71,066 | ) | (765 | ) | 2,545 | ||||||
Share capital reduction | (45,000 | ) | 45,000 | — | — | |||||||
Conversion of shareholder loan | 4,322 | 3,897 | — | (2,444 | ) | |||||||
Conversion of priority preference shares | 319 | 29 | — | (29 | ) | |||||||
Repayment of deep discount bonds | — | 72 | — | (72 | ) | |||||||
Bonus issue | (716 | ) | — | — | — | |||||||
Cancellation of deferred shares | — | — | — | 8,164 | ||||||||
Share capital issued in the year (net of cost chargeable to share premium) | 9,142 | — | — | — | ||||||||
Share option charge | — | — | — | 489 | ||||||||
Deferred tax on share option charge | — | — | — | 390 | ||||||||
Cash flow hedge | ||||||||||||
Fair value gains in year | — | — | — | 90 | ||||||||
Tax on fair value gains in year | — | — | — | (27 | ) | |||||||
Transfers to income statement in year | — | — | — | (8 | ) | |||||||
Tax on transfers to income statement in year | — | — | — | 2 | ||||||||
Loss for the year | — | (3,440 | ) | — | — | |||||||
Currency translation differences on foreign currency net investments | — | — | (252 | ) | — | |||||||
At end of year | 37,216 | (25,508 | ) | (1,017 | ) | 9,100 | ||||||
Year ended 31 December 2005
Share premium | Retained earnings | Foreign exchange translation reserve | Other reserve | ||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | ||||||||
At beginning of year | 56,573 | (51,890 | ) | (142 | ) | — | |||||
Opening balance adjustment—IFRS | (12,789 | ) | (14,479 | ) | — | — | |||||
Adjusted opening balance | 43,784 | (66,369 | ) | (142 | ) | — | |||||
Preference share liability transferred to deferred shares | 16,447 | — | — | — | |||||||
Change in conditions of some Preference shares | 8,918 | — | — | — | |||||||
Equity element of compound financial instruments | — | — | — | 2,545 | |||||||
Loss for the year | — | (4,697 | ) | — | — | ||||||
Currency translation differences on foreign currency net investments | — | — | (623 | ) | — | ||||||
At end of year | 69,149 | (71,066 | ) | (765 | ) | 2,545 | |||||
Share Premium Reserve
Amount subscribed for share capital in excess of the nominal value.
At an Extraordinary General Meeting on 6 February 2006, shareholders approved a resolution to reduce the share capital. The resolution was confirmed by the High Court on 1 March 2006 and became effective on registration at Companies House on 6 March 2006. The effect of the resolution was to reduce share premium by £45m.
Retained Earnings
Cumulative net gains and losses recognised in the consolidated income statement.
Foreign Exchange Translation Reserve
The translation reserve comprises all foreign exchange differences arising from translation of the financial statements of foreign operations that are not integral to the operation of the company.
Other Reserves
Other reserves comprises:
• | the compound instrument reserve which represents the equity element of compound financial instruments; |
• | the cost of equity settled share based payments that have not been exercised; |
• | the movement in fair value of designated cash flow hedges taken to reserves in the year; and |
• | the capital redemption reserve for deferred shares cancelled in the year. |
15 Changes in shareholders’ equity
2006 | 2005 | |||||
£ ‘000 | £ ‘000 | |||||
Total recognised income and expense | (3,245 | ) | (5,320 | ) | ||
Reclassification of financial instruments at 1 January 2005 at fair value under IFRS 1 transitional rule | — | (27,403 | ) | |||
Preference share liability transferred to deferred shares | — | 16,533 | ||||
Change in conditions of some Preference shares | — | 8,965 | ||||
Equity element of compound financial instruments | — | 2,545 | ||||
Conversion of shareholder loan | 5,817 | — | ||||
Conversion of priority preference shares | 319 | — | ||||
Share capital issued (net of costs taken to share premium) | 9,597 | — | ||||
Share option charged to reserves | 489 | — | ||||
12,977 | (4,680 | ) | ||||
Capital and reserves attributable to equity holders of the parent at the beginning of the period (as restated) | 8,540 | 13,220 | ||||
Capital and reserves attributable to equity holders of the parent at the end of the period | 21,517 | 8,540 | ||||
16 Interest bearing loans and borrowings: non current | ||||||
2006 | 2005 | |||||
£ ‘000 | £ ‘000 | |||||
Obligation under finance leases | 1,205 | 1,807 | ||||
Bank loans | 12,774 | — | ||||
Shareholders’ loan | — | 5,556 | ||||
Deep Discount Bonds | — | 1,766 | ||||
13,979 | 9,129 | |||||
The bank loan is repayable in stages until 2011, however it becomes repayable in 45 days in the event of a sale, de-listing, change of management or change of control of the entity. Security is held over the shares, assets and bank accounts of certain Group entities.
Finance Leases
The minimum future lease payments to which the Group is committed under finance leases are as follows:
Minimum 2006 | Principal 2006 | Interest 2006 | Minimum 2005 | Principal 2005 | Interest 2005 | |||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||
Less than one year | 760 | 624 | 136 | 991 | 830 | 161 | ||||||
Between one and five years | 1,563 | 1,087 | 476 | 1,947 | 1,447 | 500 | ||||||
More than five years | 177 | 118 | 59 | 541 | 361 | 180 | ||||||
2,500 | 1,829 | 671 | 3,479 | 2,638 | 841 | |||||||
Maturity Of Borrowings Excluding Finance Leases:
2006 | 2005 | |||
£ ‘000 | £ ‘000 | |||
Debt can be analysed as falling due: | ||||
Between one and two years | 12,503 | 7,322 | ||
More than five years | 271 | — | ||
12,774 | 7,322 | |||
17 Other financial liabilities: non current
2006 | 2005 | |||
£ ‘000 | £ ‘000 | |||
Other creditors | 1,098 | 559 | ||
Accruals and deferred income | 121 | 234 | ||
1,219 | 793 | |||
18 Provisions: non current
Provision for pension scheme | |||
£ ‘000 | |||
At 31 December 2005 | 183 | ||
Released in the year | (141 | ) | |
Exchange rate movements | (5 | ) | |
At 31 December 2006 | 37 | ||
The provisions relate to the pension scheme in Switzerland.
19 Interest bearing loans and borrowing: current
2006 | 2005 | |||
£ ‘000 | £ ‘000 | |||
Obligation under finance leases | 624 | 830 | ||
Bank loan – Bridge | — | 4,811 | ||
Bank loan | 4,254 | 8,384 | ||
Preference share liabilities | — | 320 | ||
Bank overdrafts | — | 10 | ||
4,878 | 14,355 | |||
The bank loan is repayable in stages until 2011, however it becomes repayable in 45 days in the event of a sale, de-listing, change of management or change of control of the entity. Security is held over the shares, assets and bank accounts of certain Group entities.
20 Trade and other payables: current
2006 | 2005 | |||
£ ‘000 | £ ‘000 | |||
Trade creditors | 4,788 | 3,064 | ||
Taxation and social security | 632 | 196 | ||
Other creditors | 2,702 | 2,704 | ||
Accruals and deferred income | 6,696 | 4,902 | ||
Deferred consideration for customer contracts | 306 | — | ||
15,124 | 10,866 | |||
21 Provisions: current
Provision for claims | |||
£ ‘000 | |||
At 31 December 2005 | 138 | ||
Utilised in the year | (79 | ) | |
Exchange rate movements | (2 | ) | |
At 31 December 2006 | 57 | ||
The provisions relate to claims against the Group and the associated costs of defending those claims. The provisions are expected to be utilised within the next year.
22 Financial instruments
Exposure to credit, interest rate and currency risks arises in the normal course of the Group’s business.
Credit Risk
Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. It is Group policy to obtain credit evaluations or a deposit covering several months’ revenue for all companies.
At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.
Interest Rate Risk
The Group is exposed to interest rate fluctuations on its variable rate long term borrowing. The Group aims to obtain funding to meet its business needs at competitive rates of interest.
The fair value of interest rate swaps designated as hedging instruments in cash flow interest rate hedges of variable rate debt is £82k.
The interest rate swaps are considered to be highly effective hedges. As a result, the full amount of the fair value has been debited to equity.
Effective Interest Rates And Repricing Analysis
In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they reprice.
Interest rate | 2006 Total | 1 year or less | 1-2 years | 2-5 years | More than 5 years | ||||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||||
Cash and cash equivalents | 2.28% | 4,516 | 4,516 | — | — | — | |||||||||||
Bank loan – CIT facility A & C – Euro | EURIBOR + 2.5% | (1,659 | ) | (1,659 | ) | — | — | — | |||||||||
Bank loan – CIT facility A & C – Sterling | LIBOR + 2.5% | (3,381 | ) | (3,381 | ) | — | — | — | |||||||||
Bank loan – CIT facility B – Euro | EURIBOR + 3.0% | (1,329 | ) | (1,329 | ) | — | — | — | |||||||||
Bank loan – CIT facility B – Sterling | LIBOR + 3.0% | (277 | ) | (277 | ) | — | — | — | |||||||||
Bank loan – CIT Euro fixed * | 3.72% | (4,582 | ) | — | — | (4,582 | ) | — | |||||||||
Bank loan – CIT Sterling fixed * | 5.18% | (5,800 | ) | — | — | (5,800 | ) | — | |||||||||
Finance lease liabilities* | 7.87% | (1,830 | ) | (624 | ) | (351 | ) | (737 | ) | (118 | ) | ||||||
(14,342 | ) | (2,754 | ) | (351 | ) | (11,119 | ) | (118 | ) | ||||||||
* | These assets/liabilities bear interest at a fixed rate. Other assets and liabilities in the table above bear interest at a variable rate. |
Interest rate | 2006 Total | 1 year or less | 1-2 years | 2-5 years | More than 5 years | ||||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||||
Cash and cash equivalents | 2.10% | 4,446 | 4,446 | — | — | — | |||||||||||
Bank loans – CIT senior term – Euro | EURIBOR + 3.5% | (3,985 | ) | (3,985 | ) | — | — | — | |||||||||
Bank loans – CIT senior term – Sterling | LIBOR + 3.5% | (4,250 | ) | (4,250 | ) | — | — | — | |||||||||
Bank loans – CIT Bridge | EURIBOR + 3.5% | (4,810 | ) | (4,810 | ) | — | — | — | |||||||||
Bank loans – CIT PIK | EURIBOR + 3.5% | (79 | ) | (79 | ) | — | — | — | |||||||||
Shareholder loan* | 20.00% | (5,556 | ) | — | (5,556 | ) | — | — | |||||||||
Deep Discount Bonds* | 20.00% | (1,766 | ) | — | (1,766 | ) | — | — | |||||||||
Redeemable Preference Shares* | 20.00% | (320 | ) | (320 | ) | — | — | — | |||||||||
Finance lease liabilities* | 7.44% | (2,638 | ) | (830 | ) | (619 | ) | (828 | ) | (361 | ) | ||||||
(18,958 | ) | (9,828 | ) | (7,941 | ) | (828 | ) | (361 | ) | ||||||||
* | These assets/liabilities bear interest at a fixed rate. Other assets and liabilities in the table above bear interest at a variable rate. |
Fixed rate liabilities
2006 | 2005 | |||||||||
Weighted average interest rate | Weighted average period | Weighted average interest rate | Weighted average period | |||||||
Finance leases | 7.87 | % | 4.27 years | 7.44 | % | 4.67 years | ||||
Bank loan – Euro | 3.72 | % | 2.67 years | — | — | |||||
Bank loan – Sterling | 5.18 | % | 2.67 years | — | — | |||||
Shareholder loan | — | — | 20.00 | % | 2 years | |||||
Deep Discount Bonds | — | — | 20.00 | % | 2 years | |||||
Redeemable Preference Shares | — | — | 20.00 | % | * |
* | The interest rate on redeemable Preference Shares was fixed until such time as they were redeemed in accordance with the terms of the instruments. |
Foreign Currency Risk
The Group is exposed to profit and loss foreign currency risk on sales, purchases and borrowings denominated in a currency other than the functional currency of the Group entity.
The Group hedges some of its exposure to foreign currency risk by ensuring sales, purchases and borrowings are denominated in the currency appropriate to the related transaction. It is not Group policy to enter into hedging arrangements to mitigate foreign exchange risk.
The Group is exposed to foreign currency risk on the translation of overseas subsidiaries into Sterling.
The majority of borrowings are in the functional currency of the entity of which they are being used as funding.
Net assets by currency: | Net Assets in local currency | |||||
2006 | 2005 | |||||
‘000 | ‘000 | |||||
Sterling | 3,482 | (2,839 | ) | |||
Euro | 25,645 | 16,821 | ||||
Swiss Franc | (1,031 | ) | 417 | |||
Swedish Kronor | — | 64 |
Liquidity Risk
The Group manages liquidity risk through an appropriate mix of funding sources.
Sensitivity Analysis
In managing interest rate and currency risks, the Group aims to reduce the impact of short term fluctuations on the Group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings.
At 31 December 2006, it is estimated that a general increase of one percentage point in interest rates would decrease the Group’s profit before tax by approximately £105k (2005: £586k).
It is estimated that a general increase of one percentage point in the value of the British Pound against other foreign currencies would decrease the Group’s profit before tax by approximately £38k (2005: £537k).
Fair Values
To the extent that financial instruments are not carried at fair value in the consolidated balance sheet, book value approximates to fair value at 31 December 2005 and 2006.
23 Commitments
Operating Leases
Future minimum lease payments under non-cancellable operating leases are as follows:
Land and buildings | Other | Land and buildings | Other | |||||
2006 | 2006 | 2005 | 2005 | |||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||
Within one year | 5,471 | 101 | 4,433 | 137 | ||||
In two to five years | 21,318 | 118 | 17,371 | 210 | ||||
In more than five years | 23,305 | — | 20,443 | — | ||||
50,094 | 219 | 42,247 | 347 | |||||
At 31 December 2006, the Group had committed capital expenditures for the development of IXDatacentres™ of £2,866k (2005: £2,215k).
Future minimum lease receivables under non-cancellable operating leases are as follows:
Land and buildings | Land and buildings | |||
2006 | 2005 | |||
£ ‘000 | £ ‘000 | |||
Within one year | 186 | 139 | ||
In two to five years | 256 | 331 | ||
442 | 470 | |||
24 Pension Commitments
Certain Group companies participate in The Group Personal Pension Plan which is a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund.
The pension charge represents contributions payable by the Group to the fund and amounted to £164k (2005: £174k). Contributions payable at the year end amounted to £18k (2005: £16k).
A Group company operates a post-employment pension scheme for its employees of a defined benefit nature. A provision has been made of £37k in respect of the deficit arising on this scheme at 31 December 2006 (2005: £183k).
25 Subsequent events
Capital Increased
On 5th February 2007, IX Europe plc placed 8,600,000 new shares with institutional investors at a price of 59p per share.
Renegotiation Of Banking Facilities
On 28th February 2007, IX Europe plc renegotiated and increased its banking facilities to £40m.
26 Related parties
Identity Of Related Parties
The Group has a related party relationship with its subsidiaries (see note 29) and with its Directors and executive officers.
Director’s Services
Milestone Capital Partners Limited, a major shareholder, were due £23k for the year (2005: £Nil)
Transactions With Key Management Personnel
The interests of the Directors in the share capital of the Company are disclosed in the Directors’ Report and the compensation of key management personnel is disclosed in Note 6. During the year a charge of £334k was recognised in the income statement relating to share options granted to Executive Directors in the year (2005: £Nil). There were no other key management personnel other than the Directors of the Company during the year.
Loans
Shareholders have provided loans to the company of £Nil (2005: £7,321k). See note 16 for further details.
Other
There were no other related party transactions at any time during the year.
27 Summary of differences between International Financial Reporting Standards and accounting principles generally accepted in the United States of America
A. Introduction
The consolidated financial statements of IXEurope (the Company) are prepared in accordance with International Financial Reporting Standards (IFRS) which differ in certain respects from generally accepted accounting principles in the United States of America (US GAAP). Reconciliations of net income and shareholders’ equity under IFRS and US GAAP are set out below.
The Company adopted IFRS with a transition date of 1 January 2004. The Company previously prepared its consolidated financial statements in accordance with generally accepted accounting principles in the United Kingdom (UK GAAP).
B. Significant differences between accounting principles
Note | Revenue | 2006 Gross Profit | Loss | Revenue | 2005 Gross Profit | Loss | ||||||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||||||
Adjustments to Consolidated Income Statements | ||||||||||||||||||||
IFRS | 37,335 | 14,798 | (3,440 | ) | 22,538 | 10,001 | (4,697 | ) | ||||||||||||
US GAAP adjustments: | ||||||||||||||||||||
Business combinations | (i) | — | — | 60 | — | — | (1,102 | ) | ||||||||||||
Shareholder loan | (ii) | — | — | 130 | — | — | 1,778 | |||||||||||||
Convertible deep discount bonds | (iii) | — | — | 71 | — | — | 1 | |||||||||||||
Installation revenue and costs | (iv) | (1,981 | ) | (462 | ) | (295 | ) | (175 | ) | (121 | ) | (78 | ) | |||||||
Stock options | (v) | — | — | — | — | — | (8 | ) | ||||||||||||
Derivatives and hedging activities | (vi) | — | — | 82 | — | — | — | |||||||||||||
Tax effect of US GAAP adjustments | (vii) | — | — | (25 | ) | — | — | (456 | ) | |||||||||||
Valuation allowance on deferred tax | (vii) | — | — | (134 | ) | — | — | 36 | ||||||||||||
Reallocation of depreciation to cost of sales | — | (5,638 | ) | — | — | (3,786 | ) | — | ||||||||||||
US GAAP Final | 35,354 | 8,698 | (3,551 | ) | 22,363 | 6,094 | (4,526 | ) | ||||||||||||
Loss per share | ||||||||||||||||||||
Basic loss per share | (2.52p | ) | (9.70p | ) | ||||||||||||||||
Diluted loss per share | (2.52p | ) | (9.70p | ) | ||||||||||||||||
Note | Total Assets | 2006 Total Liabilities | Equity | Total Assets | 2005 Total Liabilities | Equity | ||||||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||||||
Adjustments to Consolidated Balance Sheets | ||||||||||||||||||||
IFRS | 56,811 | 35,294 | 21,517 | 44,004 | 35,464 | 8,540 | ||||||||||||||
US GAAP adjustments: | ||||||||||||||||||||
Business combinations | (i) | (821 | ) | — | (821 | ) | (957 | ) | — | (957 | ) | |||||||||
Redeemable convertible priority preference shares | (viii) | — | — | — | — | 23 | (23 | ) | ||||||||||||
Shareholder loan | (iii) | — | — | — | — | (2,778 | ) | 2,778 | ||||||||||||
Convertible deep discount bonds | (iii) | — | — | — | — | 71 | (71 | ) | ||||||||||||
Installation revenue and costs | (iv) | 2,789 | 3,459 | (670 | ) | 1,103 | 1,478 | (375 | ) | |||||||||||
Deferred tax effect | (vii) | (390 | ) | — | (390 | ) | — | — | — | |||||||||||
Valuation allowance on deferred tax | (vii) | (629 | ) | — | (629 | ) | (533 | ) | — | (533 | ) | |||||||||
Reallocation of debt issuance costs | 1,012 | 1,012 | — | 335 | 335 | — | ||||||||||||||
US GAAPFinal | 58,772 | 39,765 | 19,007 | 43,952 | 34,593 | 9,359 | ||||||||||||||
(i) Business combinations
Under IFRS, the Company accounts for all business combinations by applying the acquisition method. In respect of business combinations that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. The Company elected not to apply IFRS 3, ‘Business Combinations’, to business combinations that were recognised on or before 1 January 2004. As a result, the carrying value of purchased goodwill recognised under UK GAAP was treated as deemed cost upon the transition to IFRS. Under UK GAAP, goodwill arising from acquisitions was capitalised and amortised over the period of its expected useful life of 10 years.
Goodwill is no longer amortised since the transition to IFRS but is tested annually for impairment. Negative goodwill arising at acquisition is recognised directly in the income statement.
Under IFRS, the benefit of pre-acquisition tax loss carry forward positions that were not recognised as a deferred tax asset at the time of the acquisition but that are recognised subsequently are credited to the income statement.
Under IFRS, restructuring provisions are only recognised as part of the acquired liabilities if the acquiree had an existing liability at the acquisition date for the restructuring costs.
Under US GAAP, business combinations are accounted for under the purchase accounting method similar to IFRS, however, the following accounting differences exist
• | From 1 January 2002, under FAS 142 ‘Goodwill and Other Intangibles Assets’, the amortisation of goodwill and indefinite lived intangibles ceased resulting in higher carrying values under US GAAP compared to IFRS; |
• | negative goodwill is allocated against the carrying value of the long-lived assets thereby resulting in different carrying values of long-lived assets and lower future amortisation and depreciation expenses under US GAAP; |
• | the benefit of pre-acquisition tax losses carry forward positions that are recognised subsequently are adjusted against the historically recognised goodwill, then intangible assets and finally reduce income tax expenses; and |
• | acquisition related restructuring provisions are recognised as part of the acquired liabilities if certain specific criteria are met |
(ii) Redeemable convertible priority preference shares
Under IFRS, preference shares issued by the Company where distributions are not discretionary are classified as debt.
Under US GAAP, these preference shares are classified as temporary equity, as the redemption is not solely within the control of the Company.
(iii) Shareholder loan and convertible deep discount bonds
Under IFRS, the shareholder loan and the convertible deep discount bonds were recorded at fair value at 1 January 2005, being the transition date for IAS 32, Financial Instruments: Presentation and IAS 39, Financial Instruments: Recognition and Measurement. The fair value at that date was then allocated between the liability and equity components. Subsequently the debt component is accounted for as a financial liability measured at amortised cost and the amount credited directly to equity is not subsequently remeasured.
Under US GAAP, the conversion features are not separated from the shareholder loan and convertible deep discount bonds.
Shareholder loan
The conversion feature allowed the shareholder loan not repaid by the date specified in the agreement date to be converted into Priority Preference Shares (“PPS”), which were not exchange traded securities, on the basis of 1 PPS for every £1. Since none of the criteria of SFAS 133.9 were met (i.e. no net settlement, no market mechanism that would facilitate net settlement and the PPS shares were not traded equity securities and therefore could not be readily converted to cash), the embedded conversion feature did not meet the criteria specified in SFAS 133.12(c) and therefore was not separated from the host contract.
Deep Discount Bonds
The conversion feature gave the holders and the issuer of the bond an option to convert the Deep Discount Bonds into Priority Preference Shares (“PPS”), which were not exchange traded securities. None of the criteria of SFAS 133.9 were met (i.e. no net settlement, no market mechanism that would facilitate net settlement and the PPS shares were not traded equity securities and therefore could not be readily converted to cash). The embedded conversion feature did not meet the criteria specified in SFAS 133.12(c), and therefore was not separated from the host contract. Furthermore, the conversion feature was not “in the money” at issuance and therefore no beneficial feature needed to be recognised.
Under US GAAP since the shareholder loan is non-interest bearing the difference between the proceeds received and the present value of the repayments due has been recorded as a capital contribution.
The gain arising on the conversion of the shareholder loan into ordinary shares at the time of the Admission to AIM is recognised directly into equity under both GAAP’s.
(iv) Installation revenue and costs
The Company’s contracts typically require the customer to pay an installation fee and a monthly service fee. Under IFRS, the company separately accounts for installation fee revenue and monthly recurring revenue from customer contracts as they represent separate identifiable components. The Company recognizes installation revenue on completion of the installation and acceptance by the customer. The company recognizes monthly service fee revenue as the services are performed.
Under US GAAP, EITF 00-21, ‘Revenue Arrangements with Multiple Deliverables’, sets forth criteria for the separation of different components of a revenue arrangement including a requirement that the delivered component has value to the customer on a standalone basis. Pursuant to these criteria the installation fees are recognised over the longer of the contract period or the estimated customer life.
Under IFRS installation costs related to installation fees charged to customers are expensed as incurred. Under US GAAP, installation cost are deferred and amortised over the same period as the related installation fee revenue.
US GAAP allows expensing but the Company has elected to defer and amortise.
(v) Stock options
Under IFRS 2, the Company did not have to recognise compensation expense for the share options plans of 2000 and 2002 because they were granted before 7 November 2002.
Under US GAAP, the Company applies the modified retrospective method of SFAS 123(R). The requirements of SFAS 123R are similar to IFRS 2 with the exception of the transition requirements. In particular, under US GAAP the Company has recognised compensation costs of the options granted in 2002.
(vi) Derivatives and hedging activities
Under IFRS, gains and losses arising from changes in the fair value of a derivative are recognised as they arise in profit or loss unless the derivative is the hedging instrument in a qualifying hedge. The Company entered into one hedge relationship using interest rate swaps to hedge the variability in cash flows on variable rate debt (cash flow hedges).
US GAAP principles are similar to IFRS. There are however differences in their detailed application in particular, US GAAP requires effectiveness testing to be performed at least quarterly. As a result, the Company has not designated any hedge relationships for US GAAP purposes. Therefore all changes in fair value of the interest rate swaps are recognised in the income statement.
(vii) Income taxes
IFRS and US GAAP accounting principles for current and deferred income tax accounting are similar except as described below. Under IFRS, deferred tax on share-based compensation is provided based on the actual tax credit expected to be received based upon the fair market value of the share price at the period end (the intrinsic value). The deferred tax is credited to the income statement to the extent of the tax recognised on the share-based compensation charge with the excess recognised directly in equity.
Under US GAAP, deferred tax is recognised to the extent of the cumulative amount of compensation cost recognised through the income statement. Upon exercise, any excess tax benefits are credited to equity, creating an Additional Paid In Capital (APIC) pool. If the tax deduction received is less than the compensation expense, the write off of the excess deferred tax asset is written off to the income statement or to APIC, depending on the availability of an APIC pool.
Under IFRS deferred taxes are calculated using tax rates enacted or substantively enacted at the balance sheet rate.
Deferred taxes have been provided at the applicable effective tax rate on relevant US GAAP adjustments shown in the reconciliation above. The group has tax loss carry forward available to offset against future taxable income. Due to the uncertainty over the realisation of these deferred tax assets in future years, the Group has recorded a valuation allowance against all of its net deferred tax assets and tax effect on applicable US GAAP adjustments shown in the reconciliation above except where the deferred tax assets relate to the Swiss operations, Share Option Compensation expense and the interest rate swaps.
A deferred tax asset is recognised as the company records an expense before the tax benefit is realised. Under IFRS, the company compares the allowable tax deduction with the related financial statement compensation expense and credits the tax benefit relating to the expense in the income statement to the income statement with any excess tax deduction to equity.
Under US GAAP, the Company is only allowed to recognise an asset up to the value of the tax benefit relating to the expense in the income statement, giving rise to a GAAP difference of £390k for 2006 and £Nil for 2005.
Pre-acquisition tax losses carried forward are recognised against goodwill under US GAAP while in Income Statement under IFRS. This leads to an adjustment of £Nil for 2006 and £456k for 2005.
Under IFRS hedge accounting was considered effective and deferred tax is recognised directly in equity. Under US GAAP this is recognised in the income statement, giving rise to an expense of £25k for 2006 and £Nil for 2005.
Valuation allowances have been recognised on deferred tax assets created where the recoverability is uncertain.
The amounts recognised in the income statement relate to:
2006 | 2005 | |||||
Business combinations | 33 | 79 | ||||
Installation revenue and costs | (167 | ) | (43 | ) | ||
(134 | ) | 36 | ||||
The amounts recognised in equity relate to:
2006 | 2005 | |||
Business combinations | 316 | 387 | ||
Installation revenue and costs | 313 | 146 | ||
629 | 533 | |||
(viii) Redeemable convertible priority preference shares
Under IFRS, preference shares issued by the Company where distributions are not discretionary are classified as debt.
Under US GAAP, these preference shares are classified as temporary equity, as the redemption is not solely within the control of the Company.
C. Presentational differences
In addition to the recognition and measurement differences between IFRS and US GAAP there are a number of differences in the manner in which amounts are presented and classified in the financial statements. The principal presentation and classification differences are summarised below.
Debt issuance costs
Under IFRS, debt issuance costs are offset against the proceeds received. Under US GAAP debt issuance costs are recorded as a separate deferred cost. As of 31 December 2006 and 31 December 2005, the Group had debt issuance costs of £1.0m and £0.3m, respectively.
Restricted cash
Under IFRS, restricted cash is disclosed as part of cash & cash equivalents. Under US GAAP restricted cash is disclosed separately as part of debtors. As of 31 December 2006 and 31 December 2005, the Group had restricted cash of £2.1m and £2.0m, respectively.
Balance sheet format
The format of a balance sheet prepared in accordance with IFRS differs in certain respects from US GAAP. IFRS requires assets to be presented in ascending order of liquidity, whereas under US GAAP assets are presented in descending order of liquidity.
D. Supplemental disclosures required by US GAAP
Concentration of credit risk
For the years ended 31 December 2006 and 2005, there was a customer that accounted for 11% of revenues for the year.
As of 31 December 2006, one customer accounted for 15% of trade debtors and another accounted for 11% of trade debtors. As of 31 December 2005, one customer accounted for 23% of trade debtors and another accounted for 15% of trade debtors.
No other single customer accounted for greater than 10% of accounts receivables or revenues for the periods presented.
Amortisation profile of intangible assets
The Company’s customer contract intangible asset is expected to be fully amortised by 2009. The Company expects to record amortisation expense through 2009 as follows:
Year ending: | £ ‘000 | |
2007 | 258 | |
2008 | 62 | |
2009 | 14 | |
334 | ||
Trade debtors
Trade debtors, net, consists of the following as of 31 December:
2006 | 2005 | |||||
£ ‘000 | £ ‘000 | |||||
Trade debtors | 4,929 | 2,164 | ||||
Bad debt provision | (93 | ) | (90 | ) | ||
4,836 | 2,074 | |||||
Deferred income
The Group has separately material deferred income balances with 3 customers totaling £1.0m at 31 December 2006.
Bank loan
As at the 31 December 2006, the Company had £9.4m of unused commitments under the bank loan with CIT. Undrawn commitments attract a commitment fee of 0.5%. Availability is based on a pro-forma last quarter annualised multiple of Group EBITDA.
At year end, there were four Financial Covenant tests on the bank loan with CIT:
Cash Flow Test: The ratio of Cashflow Available For Debt Service to Total Debt Service in respect of each Relevant Period shall not be less than a set ratio;
Interest Cover I: The ratio of Pro Forma Borrowing Group EBITDA to Total Interest Costs in respect of any Relevant Period specified shall be or shall exceed the ratio set out for each Relevant Period.
Leverage: The ratio of Total Debt as at the end of any Relevant Period specified to Pro Forma Borrowing Group EBITDA in respect of such Relevant Period shall not be more than the ratio set out for each Relevant Period.
Capital Expenditure: The aggregate Capital Expenditure of the Borrowing Group in respect of each other financial year of the Company specified, shall not exceed the amount set out for that financial year.
As of 31 December 2006, the Company was in compliance with all covenants in connection with the CIT bank loan.
Property, plant and equipment
The Company has plant and machinery and fixtures, fittings, tools and equipment held under finance leases with aggregated cost of £4,376k and £4,382k at 31 December 2006 and 31 December 2005 respectively. Accumulated depreciation on such assets totaled £2,269k and £1,533k for the years ended 31 December 2006 and 31 December 2005 respectively.
Share options
Number of shares outstanding | Weighted average exercise price per share | Weighted average fair value at date of grant per share | ||||
£ | £ | |||||
Share options outstanding at 31 December 2003, 2004 and 2005 | — | |||||
Share options granted | 12,940,263 | 0.15 | 0.13 | |||
Share options outstanding at 31 December 2006 | 12,940,263 | 0.15 | ||||
Share option models assumed no dividend growth in the period of the calculation.
As at 31 December 2006 the aggregate intrinsic value of share options was £4.4m. There were no share options in issue as at 31 December 2005.
As at 31 December 2006 the total compensation cost relating to non-vested share options not yet recognised was £0.9m and the weighted average period over which it is expected to be recognised is 1.4 years.
Income statement classification differences
2006 | 2005 | |||||
£ ‘000 | £ ‘000 | |||||
Space and related revenue | 27,941 | 19,738 | ||||
Power revenue | 7,413 | 2,625 | ||||
Total revenue | 35,354 | 22,363 | ||||
2006 | Cost of revenues | Selling, general and | Total | |||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Depreciation | 5,574 | 33 | 5,607 | |||
Amortisation | 64 | — | 64 | |||
5,638 | 33 | 5,671 | ||||
2005 | Cost of revenues | Selling, general and | Total | |||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Depreciation | 3,786 | 23 | 3,809 | |||
Expenses for rent were £4,563k and £3,647k for the years ended 31 December 2006 and 2005, respectively.
Guarantor Arrangements
The Company has agreements whereby the Company indemnifies its directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no significant liabilities recorded for these agreements as of 31 December 2006.
The Company has service level commitment obligations to certain of its customers. As a result, certain service interruptions such as power, temperature or humidity, whether or not within the Company’s control, could result in service level commitments to these customers. The Company’s liability insurance may not be adequate to cover those expenses. There were no significant service level credits recorded during the year ended 31 December 2006. The Company generally has the ability to determine such service level credits prior to the associated revenue being recognised. The Company has no significant liabilities in connection with service level credits as of 31 December 2006.
Tax disclosures
UK | Rest of Europe | |||||||||||||
Accelerated Allowances | Losses carried | Share option | Hedging | Losses carried | ||||||||||
Gross deferred tax asset/(liability) | 1,116 | 2,031 | 537 | (25 | ) | 8,958 | ||||||||
Valuation allowance | (1,116 | ) | (2,031 | ) | — | — | (8,284 | ) | ||||||
Net deferred tax asset/(liability) | — | — | 537 | (25 | ) | 674 | ||||||||
The UK tax losses of £6,770k can be carried forward indefinitely. Of the overseas tax losses of £25,096k, £21,724k can be carried forward indefinitely. The remaining £3,354k will expire, if not utilized, after 2010.
There are no valuation allowances which would be applied against goodwill upon realization.
Finance leases
Combined aggregate maturities for future minimum payments under finance leases as of 31 December 2006 are as follows:
£ ‘000 | |||
2007 | 760 | ||
2008 | 472 | ||
2009 | 379 | ||
2010 | 358 | ||
2011 | 354 | ||
2012 and thereafter | 177 | ||
2,500 | |||
Less amount representing unamortised discount | (671 | ) | |
1,829 | |||
Less current portion | (624 | ) | |
1,205 | |||
Operating leases
Minimum future operating lease payments as of 31 December 2006 are as follows:
£ ‘000 | ||
2007 | 5,572 | |
2008 | 5,527 | |
2009 | 5,556 | |
2010 | 5,255 | |
2011 | 5,098 | |
2012 and thereafter | 23,305 | |
50,313 | ||
Accounting Policies
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share;” SEC Staff Accounting Bulletin (“SAB”) No. 98; EITF Issue 03-6, “Participating Securities and the Two-Class Method Under FASB 128” and EITF Issue 04-8 “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” Under the provisions of SFAS No. 128, SAB No. 98 and EITF Issues 03-6 and 04-8, basic and diluted net loss per share are computed using the weighted-average number of common shares outstanding. Options, warrants and contingently convertible instruments were not included in the computation of diluted net loss per share.
Fair Value of Financial Instruments
The carrying value amounts of the Company’s financial instruments, which include cash equivalents, short-term and long-term investments, accounts receivable, accounts payable, accrued expenses and long-term obligations, approximate their fair value due to either the short-term maturity or the prevailing interest rates of the related instruments.
Bad debt provision
Management reviews accounts receivable on a regular basis to determine if any provisions are required. A specific bad debt provision of up to the full amount of a particular invoice value is recorded for certain problematic customer balances. A general provision is not maintained. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable.
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Consolidated income statements
Note | Unaudited Six 30 June | Unaudited Six 30 June | ||||||
£ ‘000 | £ ‘000 | |||||||
Revenue | 25,816 | 15,308 | ||||||
Cost of sales | (14,498 | ) | (9,271 | ) | ||||
Gross profit | 11,318 | 6,037 | ||||||
Administrative expenses: | ||||||||
General administrative expenses | (5,866 | ) | (4,199 | ) | ||||
IPO related expenses | — | (1,179 | ) | |||||
Share option charges | 3 | (1,084 | ) | (105 | ) | |||
Depreciation and amortisation | 3 | (3,872 | ) | (2,473 | ) | |||
Total administrative expenses | (10,822 | ) | (7,956 | ) | ||||
Profit/(loss) from operations | 496 | (1,919 | ) | |||||
Financial income | 4 | 151 | 101 | |||||
Financial expense | 4 | (761 | ) | (1,108 | ) | |||
Loss before taxation | (114 | ) | (2,926 | ) | ||||
Income tax expense | (210 | ) | (2 | ) | ||||
Loss for the period | (324 | ) | (2,928 | ) | ||||
Loss per share | ||||||||
Basic | 5 | (0.2p | ) | (2.7p | ) | |||
Diluted | 5 | (0.2p | ) | (2.7p | ) | |||
Consolidated statements of recognised income and expense
Unaudited Six months to 30 June 2007 | Unaudited Six months to 30 June 2006 | |||||
£ ‘000 | £ ‘000 | |||||
Foreign exchange losses on retranslation of overseas operations | (80 | ) | (64 | ) | ||
Movement in fair value of designated cash flow hedges: | — | |||||
—taken to the cash flow hedging reserve in the year (net of tax) | 145 | — | ||||
—Tax effect of gains and losses recognised directly in equity during the year | (390 | ) | — | |||
Net expenses recognised directly in equity | (325 | ) | (64 | ) | ||
Loss for the period | (324 | ) | (2,928 | ) | ||
Total recognised income and expenses for the period | (649 | ) | (2,992 | ) | ||
Consolidated balance sheets
Note | Unaudited 30 June 2007 | Audited Year to 31 December 2006 | ||||||
£ ‘000 | £ ‘000 | |||||||
Assets | ||||||||
Non-current assets | ||||||||
Property, plant and equipment | 43,141 | 35,406 | ||||||
Intangible assets | 3,726 | 3,860 | ||||||
Deferred tax asset | 626 | 1,186 | ||||||
Other receivables | 3,336 | 3,226 | ||||||
Total non-current assets | 50,829 | 43,678 | ||||||
Current assets | ||||||||
Trade and other receivables | 8,683 | 6,677 | ||||||
Cash and cash equivalents | 5,976 | 6,456 | ||||||
Total current assets | 14,659 | 13,133 | ||||||
Total assets | 65,488 | 56,811 | ||||||
Equity | ||||||||
Issued capital | 5 | 1,812 | 1,726 | |||||
Share premium | 6 | 41,959 | 37,216 | |||||
Foreign exchange translation reserve | 6 | (1,098 | ) | (1,017 | ) | |||
Capital redemption reserve | 6 | 8,164 | 8,164 | |||||
Hedging reserve | 6 | 202 | 57 | |||||
Share option reserve | 6 | 823 | 879 | |||||
Retained earnings | 6 | (25,832 | ) | (25,508 | ) | |||
Total equity | 26,030 | 21,517 | ||||||
Liabilities | ||||||||
Non-current liabilities | ||||||||
Interest bearing loans and borrowings | 18,351 | 13,979 | ||||||
Other financial liabilities | 1,595 | 1,219 | ||||||
Provisions | 36 | 37 | ||||||
Total non-current liabilities | 19,982 | 15,235 | ||||||
Current liabilities | ||||||||
Interest bearing loans and borrowings | 816 | 4,878 | ||||||
Trade and other payables | 18,603 | 15,124 | ||||||
Provisions | 57 | 57 | ||||||
Total current liabilities | 19,476 | 20,059 | ||||||
Total equity and liabilities | 65,488 | 56,811 | ||||||
Consolidated cash flow statements
Unaudited Six months to 30 June 2007 | Unaudited Six months to 30 June 2006 | |||||
£ ‘000 | £ ‘000 | |||||
Cash flows from operating activities | ||||||
Loss for the period | (324 | ) | (2,928 | ) | ||
Adjustments for | ||||||
Depreciation | 3,737 | 2,473 | ||||
Amortisation of intangible assets | 135 | — | ||||
Share option scheme expense | 364 | 105 | ||||
Foreign exchange losses | (21 | ) | 22 | |||
Loss on disposal of fixed assets | — | 1 | ||||
Interest expense | 610 | 1,007 | ||||
Income tax expense | 210 | 2 | ||||
Operating profit/(loss) before changes in working capital and provisions | 4,711 | 682 | ||||
Increase in trade and other receivables | (3,544 | ) | (935 | ) | ||
Increase in trade and other payables | (38 | ) | 1,137 | |||
Increase/(decrease) in provisions | — | — | ||||
Cash generated/(used) in the operations | 1,129 | 884 | ||||
Income taxes paid | (15 | ) | (2 | ) | ||
Net cash from operating activities | 1,114 | 882 | ||||
Cash flows from investing activities | ||||||
Interest received | 151 | 101 | ||||
Acquisition of property, plant and equipment | (6,853 | ) | (6,728 | ) | ||
Acquisition of subsidiary, net of cash acquired | — | — | ||||
Acquisition of businesses, net of cash acquired | — | — | ||||
Net cash from investing activities | (6,702 | ) | (6,627 | ) | ||
Cash flows from financing activities | ||||||
Interest paid | (781 | ) | (853 | ) | ||
Proceeds from issue of shares | 5,074 | 10,000 | ||||
Share issue costs taken to reserves | (245 | ) | (307 | ) | ||
Proceeds from bank loan | 3,916 | 2,187 | ||||
Repayment of bank loan | (2,372 | ) | (4,998 | ) | ||
Repayment of deep discount bonds | — | (1,907 | ) | |||
Capital element of finance leases | (417 | ) | (445 | ) | ||
Net cash from financing activities | 5,175 | 3,677 | ||||
Net (decrease)/increase in cash and cash equivalents | (413 | ) | (2,068 | ) | ||
Cash and cash equivalents at 1 January | 6,456 | 4,446 | ||||
Effect of exchange rate fluctuations on cash held | (67 | ) | 26 | |||
Cash and cash equivalents | 5,976 | 2,404 | ||||
1 Accounting policies
IX Europe plc (the “Company”) is a company domiciled in England. The consolidated interim results of the Company for the six months ended 30 June 2007 comprise the Company and its subsidiaries (together referred to as the “Group”).
The comparatives for the full year ended 31 December 2006 are not the Group’s full statutory accounts for that year. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditors’ report on those accounts was unqualified and did not contain a statement under section 237(2)-(3) of the Companies Act 1985.
Statement of compliance
These consolidated interim results have been prepared in accordance with International Financial Reporting Standards as adopted by the EU for use in the Company’s annual financial statements and in accordance with accounting policies and presentation adopted in the last consolidated financial results. The company has elected not to adopt IFRS 7 “Financial Instruments: Disclosure” early.
2 Segment information
Segment information is presented in respect of the Group’s geographical and business segments. The primary format, geographical segments, is based on the Group’s management and internal reporting structure.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly income earning assets and revenue, interest-bearing loans, borrowings and expenses, and corporate assets and expenses.
Geographical Segments
As at 30 June 2006, the Group operated data centres in four European countries (United Kingdom, France, Germany and Switzerland). It is considered that France, Germany and Switzerland represent regions which are substantially similar and have therefore been combined. Thus, there are two reportable segments, United Kingdom and the Rest of Europe. There is no difference between location of the segment assets and the segment customers.
UNITED KINGDOM | Unaudited Six 30 June | Unaudited Six 30 June | ||
£ ‘000 | £ ‘000 | |||
External revenue | 9,252 | 5,999 | ||
Inter-segment revenue | — | — | ||
Total revenue | 9,252 | 5,999 | ||
Segment result | 1,381 | 616 | ||
REST OF EUROPE | Unaudited Six 30 June | Unaudited Six 30 June | ||||
£ ‘000 | £ ‘000 | |||||
External revenue | 16,564 | 9,309 | ||||
Inter-segment revenue | 226 | — | ||||
Total revenue | 16,790 | 9,309 | ||||
Segment result | (1,013 | ) | (391 | ) | ||
CONSOLIDATED | Unaudited Six 30 June | Unaudited Six 30 June | ||||
£ ‘000 | £ ‘000 | |||||
Total revenue | 26,042 | 15,308 | ||||
Less: Inter-segment revenue | (226 | ) | — | |||
Revenue | 25,816 | 15,308 | ||||
Segment result | 368 | 225 | ||||
Unallocated expenses | (482 | ) | (3,151 | ) | ||
Income tax expense | (210 | ) | (2 | ) | ||
Result | (324 | ) | (2,928 | ) | ||
Assets | ||||||
Segment assets – United Kingdom | 24,465 | 17,021 | ||||
Segment assets – Rest of Europe | 37,994 | 29,847 | ||||
Unallocated | 3,029 | 288 | ||||
Total assets | 65,488 | 47,156 | ||||
Liabilities | ||||||
Segment liabilities – United Kingdom | 9,949 | 5,959 | ||||
Segment liabilities – Rest of Europe | 8,804 | 6,870 | ||||
Unallocated | 20,705 | 12,847 | ||||
Total liabilities | 39,458 | 25,676 | ||||
Capital Expenditure | ||||||
Capital expenditure – United Kingdom | 6,630 | 3,566 | ||||
Capital expenditure – Rest of Europe | 4,836 | 3,212 | ||||
Capital expenditure – Unallocated | 52 | 17 | ||||
Total capital expenditure | 11,518 | 6,795 | ||||
Depreciation | ||||||
Segment depreciation – United Kingdom | 1,513 | 852 | ||||
Segment depreciation – Rest of Europe | 2,203 | 1,611 | ||||
Segment depreciation – Unallocated | 22 | 10 | ||||
Total depreciation | 3,738 | 2,473 | ||||
Amounts within capital expenditure and depreciation include those acquired with subsidiaries and businesses during the year.
3 Financing costs
Unaudited Six months to 30 June 2007 | Unaudited Six months to 30 June 2006 | ||||
£ ‘000 | £ ‘000 | ||||
Bank interest receivable | 127 | 26 | |||
Other interest receivable | 24 | 75 | |||
Financial income | 151 | 101 | |||
Bank interest payable | 3 | 331 | |||
Interest payable on third party loans | 645 | 347 | |||
Fair value gains on financial instruments—interest rate swaps: cash flow hedges, transfer from equity | (8 | ) | — | ||
Interest payable on finance leases | 87 | 85 | |||
Interest charge on financial liabilities | — | 259 | |||
Finance charge on deferred consideration | 17 | — | |||
Other interest payable | 17 | 86 | |||
Financial expenses | 761 | 1,108 | |||
4 Loss per share
Basic loss per share
The basic loss per share has been calculated by dividing the net loss attributable to ordinary shareholders by the weighted average number of shares in issue during the year.
Unaudited Six months to 30 June 2007 | Unaudited Six months to 30 June 2006 | |||||
Net loss attributable to ordinary shareholders (£ ‘000) | (324 | ) | (2,928 | ) | ||
Weighted average number of ordinary shares in issue | 179,750,990 | 109,629,778 | ||||
Basic and diluted loss per share | (0.2p | ) | (2. 7p | ) | ||
Diluted loss per share
The diluted loss per share has been calculated by dividing the net loss attributable to ordinary shareholders by the weighted average number of shares in issue during the year, adjusted for potentially dilutive shares that are not antidilutive. All potentially dilutive shares are antidilutive.
Unaudited Six months to 30 June 2007 | Unaudited Six months to 30 June 2006 | |||
Weighted average number of ordinary shares in issue | 179,750,990 | 109,629,778 | ||
Adjustment for share options | 13,191,930 | 146,875 | ||
Adjustment for Priority Preference shares | — | 2,425,000 | ||
Adjustment for convertible shareholder loan | — | 4,000,000 | ||
Adjustment for convertible deep discount bonds | — | 1,223,465 | ||
Weighted average number of potential ordinary shares in issue | 192,942,920 | 117,425,118 | ||
5 Called up share capital
Unaudited 30 June 2007 | Unaudited 30 June 2007 | |||
Authorised for issue | No. | £ ‘000 | ||
Ordinary shares of £0.01 each | ||||
Ordinary shares | 250,000,000 | 2,500 | ||
Unaudited 30 June 2007 | Unaudited 30 June 2007 | |||
Allotted, called up and fully paid | No. | £ ‘000 | ||
Ordinary shares of £0.01 each | ||||
Ordinary shares | 181,184,323 | 1,812 | ||
6 Share premium and reserves
Unaudited – 6 months ended 30 June 2007
Share premium account | Profit and loss account | Foreign exchange translation reserve | Other Reserves | |||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||
At 1 January 2007 | 37,216 | (25,508 | ) | (1,017 | ) | 9,100 | ||||||
Issue of Ordinary shares | 4,988 | — | — | — | ||||||||
Share issue costs | (245 | ) | — | — | — | |||||||
Share option charge | — | — | — | 334 | ||||||||
Deferred tax on share option charge | — | — | — | (390 | ) | |||||||
Cash flow hedge | ||||||||||||
Fair value gains in year | — | — | — | 137 | ||||||||
Transfers to income statement in year | — | — | — | 8 | ||||||||
Loss for the period | — | (324 | ) | — | — | |||||||
Currency translation differences on foreign currency net investments | — | — | (81 | ) | — | |||||||
At end of period | 41,959 | (25,832 | ) | (1,098 | ) | 9,189 | ||||||
7 Summary of differences between International Financial Reporting Standards and accounting principles generally accepted in the United States of America
A. Introduction
The consolidated financial statements of IXEurope (the Company) are prepared in accordance with International Financial Reporting Standards (IFRS) which differ in certain respects from generally accepted accounting principles in the United States of America (US GAAP). Reconciliations of net income and shareholders’ equity under IFRS and US GAAP are set out below.
The Company adopted IFRS with a transition date of 1 January 2004. The Company previously prepared its consolidated financial statements in accordance with generally accepted accounting principles in the United Kingdom (UK GAAP).
B. Significant differences between accounting principles
Note | Revenue | 30 June 2007 Gross Profit | Loss | Revenue | 30 June 2006 Gross Profit | Loss | ||||||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||||||
IFRS | 25,816 | 11,318 | (324 | ) | 15,308 | 6,037 | (2,928 | ) | ||||||||||||
US GAAP Adjustments | ||||||||||||||||||||
Business combinations | (i) | — | — | 60 | — | — | 61 | |||||||||||||
Shareholder loan | (ii) | — | — | — | — | — | 130 | |||||||||||||
Convertible deep discount bonds | (ii) | — | — | — | — | — | 71 | |||||||||||||
Installation revenue and costs | (iii) | (773 | ) | (273 | ) | (175 | ) | (552 | ) | (66 | ) | (28 | ) | |||||||
Stock options | (iv) | — | — | 719 | — | — | — | |||||||||||||
Derivatives and hedging activities | (v) | — | — | 121 | — | — | — | |||||||||||||
Valuation allowance on deferred tax | (vi) | — | — | (66 | ) | — | — | (5 | ) | |||||||||||
Reallocation of depreciation to cost of sales | — | (3,761 | ) | — | — | (2,365 | ) | — | ||||||||||||
US GAAPFinal | 25,043 | 7,284 | 335 | 14,756 | 3,606 | (2,699 | ) | |||||||||||||
Earnings/(loss) per share | ||||||||||||||||||||
Basic earnings/(loss) per share | 0.2p | (2.5p) | ||||||||||||||||||
Diluted earnings/(loss) per share | 0.2p | (2.5p) | ||||||||||||||||||
Note | Total Assets | 30 June 2007 Total Liabilities | Equity | Total Assets | 30 June 2006 Total Liabilities | Equity | ||||||||||||||
£ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | £ ‘000 | |||||||||||||||
IFRS | 65,488 | 39,458 | 26,030 | 47,156 | 25,676 | 21,480 | ||||||||||||||
US GAAP Adjustments | ||||||||||||||||||||
Business combinations | (i) | (761 | ) | — | (761 | ) | (899 | ) | — | (899 | ) | |||||||||
Installation revenue and costs | (iii) | 3,387 | 4,232 | (845 | ) | 1,627 | 2,029 | (402 | ) | |||||||||||
Stock options | (iv) | — | (719 | ) | 719 | — | — | — | ||||||||||||
Valuation allowance on deferred tax | (vi) | (694 | ) | — | (694 | ) | (540 | ) | — | (540 | ) | |||||||||
Reallocation of debt issuance costs | 2,454 | 2,454 | — | 654 | 654 | — | ||||||||||||||
US GAAPFinal | 69,874 | 45,425 | 24,449 | 47,998 | 28,359 | 19,639 | ||||||||||||||
(i) Business combinations
Under IFRS, the Company accounts for all business combinations by applying the acquisition method. In respect of business combinations that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. The Company elected not to apply IFRS 3, ‘Business Combinations’, to business combinations that were recognised on or before 1 January 2004. As a result, the carrying value of purchased goodwill recognised under UK GAAP was treated as deemed cost upon the transition to IFRS. Under UK GAAP, goodwill arising from acquisitions was capitalised and amortised over the period of its expected useful life of 10 years. Goodwill is no longer amortised since the transition to IFRS but is tested annually for impairment. Negative goodwill arising at acquisition is recognised directly in the income statement.
Under IFRS, the benefit of pre-acquisition tax loss carry forward positions that were not recognised as a deferred tax asset at the time of the acquisition but that are recognised subsequently are credited to the income statement.
Under IFRS, restructuring provisions are only recognised as part of the acquired liabilities if the acquiree had an existing liability at the acquisition date for the restructuring costs.
Under US GAAP, business combinations are accounted for under the purchase accounting method similar to IFRS, however, the following accounting differences exist
• | From 1 January 2002, under FAS 142 ‘Goodwill and Other Intangibles Assets’, the amortisation of goodwill and indefinite lived intangibles ceased resulting in higher carrying values under US GAAP compared to IFRS; |
• | negative goodwill is allocated against the carrying value of the long-lived assets thereby resulting in different carrying values of long-lived assets and lower future amortisation and depreciation expenses under US GAAP; |
• | the benefit of pre-acquisition tax losses carry forward positions that are recognised subsequently are adjusted against the historically recognised goodwill, then intangible assets and finally reduce income tax expenses; and |
• | acquisition related restructuring provisions are recognised as part of the acquired liabilities if certain specific criteria are met. |
(ii) Shareholder loan and convertible deep discount bonds
Under IFRS, the shareholder loan and the convertible deep discount bonds were recorded at fair value at 1 January 2005, being the transition date for IAS 32, Financial Instruments: Presentation and IAS 39, Financial Instruments: Recognition and Measurement. The fair value at that date was then allocated between the liability and equity components. Subsequently the debt component is accounted for as a financial liability measured at amortised cost and the amount credited directly to equity is not subsequently remeasured.
Under US GAAP, the conversion features are not separated from the shareholder loan and convertible deep discount bonds.
Shareholder loan
The conversion feature allowed the shareholder loan not repaid by the date specified in the agreement date to be converted into Priority Preference Shares (“PPS”), which were not exchange traded securities, on the basis of 1 PPS for every £1. Since none of the criteria of SFAS 133.9 were met (i.e. no net settlement, no market mechanism that would facilitate net settlement and the PPS shares were not traded equity securities and therefore could not be readily converted to cash), the embedded conversion feature did not meet the criteria specified in SFAS 133.12(c) and therefore was not separated from the host contract.
Deep Discount Bonds
The conversion feature gave the holders and the issuer of the bond an option to convert the Deep Discount Bonds into Priority Preference Shares (“PPS”), which were not exchange traded securities. None of the criteria of SFAS 133.9 were met (i.e. no net settlement, no market mechanism that would facilitate net settlement and the PPS shares were not traded equity securities and therefore could not be readily converted to cash). The embedded conversion feature did not meet the criteria specified in SFAS 133.12(c), and therefore was not separated from the host contract. Furthermore, the conversion feature was not “in the money” at issuance and therefore no beneficial feature needed to be recognised.
Under US GAAP since the shareholder loan is non-interest bearing the difference between the proceeds received and the present value of the repayments due has been recorded as a capital contribution.
The gain arising on the conversion of the shareholder loan into ordinary shares at the time of the Admission to AIM is recognised directly into equity under both GAAP’s.
(iii) Installation revenue and costs
The Company’s contracts typically require the customer to pay an installation fee and a monthly service fee. Under IFRS, the company separately accounts for installation fee revenue and monthly recurring revenue from customer contracts as they represent separate identifiable components. The Company recognizes installation revenue on completion of the installation and acceptance by the customer. The company recognizes monthly service fee revenue as the services are performed.
Under US GAAP, EITF 00-21, ‘Revenue Arrangements with Multiple Deliverables’, sets forth criteria for the separation of different components of a revenue arrangement including a requirement that the delivered component has value to the customer on a standalone basis. Pursuant to these criteria the installation fees are recognised over the longer of the contract period or the estimated customer life.
Under IFRS installation costs related to installation fees charged to customers are expensed as incurred. Under US GAAP, installation cost are deferred and amortised over the same period as the related installation fee revenue.
US GAAP allows expensing but the Company has elected to defer and amortise.
(iv) Stock options
Under IFRS 2, the Company recognises an expense for the social security tax on share options plans. Under US GAAP, this accrual is not required until the liability crystallises which will be when the options are exercised.
(v) Derivatives and hedging activities
Under IFRS, gains and losses arising from changes in the fair value of a derivative are recognised as they arise in profit or loss unless the derivative is the hedging instrument in a qualifying hedge. The Company entered into one hedge relationship using interest rate swaps to hedge the variability in cash flows on variable rate debt (cash flow hedges).
US GAAP principles are similar to IFRS. There are however differences in their detailed application; in particular, US GAAP requires effectiveness testing to be performed at least quarterly. As a result, the Company has not designated any hedge relationships for US GAAP purposes. Therefore all changes in fair value of the interest rate swaps are recognised in the income statement.
(vi) Income taxes
Valuation allowances arise on deferred tax assets where recoverability is uncertain. In the income statement these relate to
30 June 2007 | 30 June 2006 | |||||
Business combinations | 33 | 33 | ||||
Installation revenue and costs | (99 | ) | (38 | ) | ||
(66 | ) | (5 | ) | |||
In equity these relate to
30 June 2007 | 30 June 2006 | |||||
Business combinations | (283 | ) | (356 | ) | ||
Installation revenue and costs | (411 | ) | (184 | ) | ||
(694 | ) | (540 | ) | |||
C. Presentational differences
In addition to the recognition and measurement differences between IFRS and US GAAP there are a number of differences in the manner in which amounts are presented and classified in the financial statements. The principal presentation and classification differences are summarised below.
Debt issuance costs
Under IFRS, debt issuance costs are offset against the proceeds received. Under US GAAP debt issuance costs are recorded as a separate deferred cost. As of 30 June 2007 and 30 June 2006, the Group had debt issuance costs of £2.5m and £0.7m, respectively.
Restricted cash
Under IFRS, restricted cash is disclosed as part of cash & cash equivalents. Under US GAAP restricted cash is disclosed separately as part of debtors. As of 30 June 2007 and 30 June 2006, the Group had restricted cash of £2.1m.
Balance sheet format
The format of a balance sheet prepared in accordance with IFRS differs in certain respects from US GAAP. IFRS requires assets to be presented in ascending order of liquidity, whereas under US GAAP assets are presented in descending order of liquidity.
D. Supplemental disclosures required by US GAAP
Concentration of credit risk
For the periods ended 30 June 2007 and 2006, one customer accounted for 11% and 13%, respectively, of revenues for those periods.
As of 30 June 2007, one customer accounted for 15% of trade debtors and another accounted for 11% of trade debtors. As of 30 June 2006, one customer accounted for 20% of trade debtors.
Amortisation profile of intangible assets
The Company’s customer contract intangible asset is expected to be fully amortised by 2009. The Company expects to record amortisation expense through 2009 as follows:
£ ‘000 | ||
6 months to 31 December 2007 | 122 | |
Year to 31 December 2008 | 62 | |
Year to 31 December 2009 | 20 | |
204 | ||
Trade debtors
Trade debtors, net, consists of the following:
30 June 2007 | 30 June 2006 | |||||
£ ‘000 | £ ‘000 | |||||
Trade debtors | 6,078 | 2,531 | ||||
Bad debt provision | (75 | ) | (61 | ) | ||
6,003 | 2,470 | |||||
Deferred income
The Group has separate material deferred income balances with 3 customers totaling £1.2m at 30 June 2007.
Bank loan
As at the 30 June 2007, the Company had £62.8m of unused commitments under the bank loan with CIT. Undrawn commitments attract a commitment fee of 0.5%. Availability is based on a pro-forma last quarter annualised multiple of Group EBITDA.
At year end, there were four Financial Covenant tests on the bank loan with CIT:
Cash Flow Test: The ratio of Cashflow Available For Debt Service to Total Debt Service in respect of each Relevant Period shall not be less than a set ratio;
Interest Cover I: The ratio of Pro Forma Borrowing Group EBITDA to Total Interest Costs in respect of any Relevant Period specified shall be or shall exceed the ratio set out for each Relevant Period.
Leverage: The ratio of Total Debt as at the end of any Relevant Period specified to Pro Forma Borrowing Group EBITDA in respect of such Relevant Period shall not be more than the ratio set out for each Relevant Period.
Capital Expenditure: The aggregate Capital Expenditure of the Borrowing Group in respect of each other financial year of the Company specified, shall not exceed the amount set out for that financial year.
As of 30 June 2007, the Company was in compliance with all covenants in connection with the CIT bank loan.
Income statement classification differences
Six months to 30 June 2007 | Six months to 30 June 2007 | |||
£ ‘000 | £ ‘000 | |||
Space and related revenue | 18,803 | 12,372 | ||
Power revenue | 6,240 | 2,384 | ||
Total revenue | 25,043 | 14,756 | ||
6 months ended 30 June 2007 | Cost of revenues | Selling, general and | Total | |||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Depreciation | 3,627 | 19 | 3,646 | |||
Amortisation | 134 | 0 | 134 | |||
3,761 | 19 | 3,780 | ||||
6 months ended 30 June 2006 | Cost of revenues | Selling, general and | Total | |||
£ ‘000 | £ ‘000 | £ ‘000 | ||||
Depreciation | 2,365 | 14 | 2,379 | |||
Guarantor Arrangements
The Company has agreements whereby the Company indemnifies its directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no significant liabilities recorded for these agreements as of 30 June 2007.
The Company has service level commitment obligations to certain of its customers. As a result, certain service interruptions such as power, temperature or humidity, whether or not within the Company’s control, could result in service level commitments to these customers. The Company’s liability insurance may not be adequate to cover those expenses. There were no significant service level credits recorded during the year ended 31 December 2006. The Company generally has the ability to determine such service level credits prior to the associated revenue being recognised. The Company has no significant liabilities in connection with service level credits as of 30 June 2007.
Share Options
Under the terms of the IXEurope Founders Share Option Scheme adopted on 30 June 2006, two Directors have been granted options to subscribe for Ordinary Shares of the Company as set out below:
Maximum no of shares over which the Option is held | Options price per share | Date of Grant of Option | ||||
Guy Willner | 2,500,000 | 1p | 30 June 2006 | |||
Christophe de Buchet | 2,500,000 | 1p | 30 June 2006 | |||
5,000,000 | ||||||
The Options may be exercised:
i. | as to 50% of the Ordinary Shares subject to the Option provided that the market value of an Ordinary Share reaches 40p on or after 18 months have elapsed since the admission of the Ordinary Shares to trading on AIM (irrespective of the share price subsequently); and |
ii. | as to the remaining 50% of the Ordinary Shares subject to the Option provided that the market value of an Ordinary Share reaches 50p on or after 30 months have elapsed since the admission of the Ordinary Shares to trading on AIM (irrespective of the share price subsequently). |
The Options will lapse, if not exercised, on the tenth anniversary of the date of grant.
Under the terms of the Company’s Unapproved Share Option Scheme adopted on 22 March 2006, Directors and certain senior employees have been awarded Options to subscribe for Ordinary Shares of the Company as set out in the table below.
Date of Grant | Options January | Options held at 31 December | Market price at date of grant | Exercise price | Earliest exercise date | Expiry date | ||||||||
Guy Willner | 07/04/06 | — | 1,258,427 | 30p | 22p | 07/04/09 | 06/04/16 | |||||||
Christophe de Buchet | 07/04/06 | — | 1,258,427 | 30p | 22p | 07/04/09 | 06/04/16 | |||||||
Karen Bach | 07/04/06 | — | 1,258,247 | 30p | 22p | 07/04/09 | 06/04/16 | |||||||
Senior Employees | 07/04/06 | — | 3,415,732 | 30p | 22p | 07/04/09 | 06/04/16 | |||||||
7,191,013 | ||||||||||||||
The Options will vest in three equal portions upon the signing of the 2006, 2007 and 2008 statutory accounts based on performance criteria of EBITDA and space targets.
EBITDA targets will govern 75% of the options available following each financial year. If the target is not reached in 2006, the awards will still vest if the combined EBITDA targets are met for 2006 and 2007. If the target is not reached in 2007, the awards will still vest if the combined EBITDA targets are met for 2007 and 2008.
Space targets will govern the vesting of 25% of the options available following each financial year. If the target is not reached in 2006 the awards will still vest if the target is met for 2007. If the target is not reached in 2007 the awards will still vest if the target is met for 2008.
Under the terms of the Company’s Unapproved Share Option Scheme, awards were made to employees as detailed below:
Date of Grant | Options held at 1 January 2007 | Options held at 30 | Market price at date of grant | Exercise Price | Earliest exercise date | Expiry date | ||||||
09/10/06 | 749,250 | 749,250 | 45p | 43p | 09/10/09 | 09/10/16 | ||||||
16/03/07 | — | 377,500 | 71p | 67p | 16/03/10 | 16/03/17 |
The following information is relevant in the determination of the fair value of options granted during the year. There were no share options granted in 2005.
Unapproved Scheme | IXEurope Founders Share Option Scheme | Unapproved Scheme | Unapproved | |||||
Date of Grant | 07/04/06 | 30/06/06 | 09/10/06 | 16/03/07 | ||||
Option pricing model used | Binomial | Binomial | Binomial | Binomial | ||||
Adjusted bid price at date of grant | 20.75p | 29.44p | 44.00p | 69.42p | ||||
Exercise price | 22p | 1p | 43p | 67p | ||||
Option life | 10 years | 10 years | 10 years | 10 years | ||||
Expected volatility | 44% | 44% | 44% | 44% | ||||
Risk-free interest rate | 4.39% | 4.74% | 4.80% | 5.14% |
The volatility assumption is based on the annualised volatility of IXEurope plc and a weighted average of comparative companies.
The performance based measures on the Unapproved Scheme granted on 7 April 2006 are modelled using an estimate of the probability of the non-market based performance criteria being met.
The equity settled element of the IXEurope Founders Share Option Scheme is modelled using the absolute values adjusted for the success probability derived for the required performance condition.
The cash settled element of the IXEurope Founders Share Option Scheme is modelled on the fair value of cash receivable based on estimates of the probability of the market conditions being met.
Number of shares outstanding | Weighted average exercise price per share | Weighted average fair value at date of grant per share | |||||
£ | £ | ||||||
Share options outstanding at 1 January 2007 | 12,940,263 | 0.15 | |||||
Share options granted | 377,500 | 0.67 | 0.29 | ||||
Share options cancelled | (14,500 | ) | 0.43 | ||||
Share options outstanding at 30 June 2007 | 12,940,263 | 0.15 | |||||
Share option models assumed no dividend growth in the period of the calculation.
As at 30 June 2007 and 30 June 2006 the aggregate intrinsic value of share options was £14.4m and £2.0m, respectively.
As at 30 June 2007 the total compensation cost relating to non-vested not yet recognised was £0.9m and the weighted average period over which it is expected to be recognised is 1.3 years.