interoute finco plc as the issuer of finco plc as the issuer of €240,000,000 senior se ured...
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Interoute Finco plc
As the Issuer of
€240,000,000 Senior Secured Floating Rate Notes due 2020
€350,000,000 7.375% Senior Secured Notes due 2020
Bondholder report of Interoute Communications Holdings SA
For the year ended 31 December 2015
Dated 28 April 2016
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TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS.......................................................................................................... 3
PRESENTATION OF FINANCIAL AND OTHER INFORMATION .................................................................... 4
SUMMARY OF CERTAIN DIFFERENCES BETWEEN LUXEMBOURG GAAP AND IFRS ............................... 11
DEFINITIONS ........................................................................................................................................... 15
RISK FACTORS ......................................................................................................................................... 18
SUMMARY OVERVIEW OF RESULTS ....................................................................................................... 45
CONSOLIDATED INTEROUTE FINANCIAL INFORMATION ....................................................................... 47
INTEROUTE MANAGEMENT DISCUSSION AND ANALYSIS ...................................................................... 51
EASYNET MANAGEMENT DISCUSSION AND ANALYSIS .......................................................................... 60
ADDITIONAL ANALYSIS FOR COMBINED BUSINESS ............................................................................... 64
OUR BUSINESS........................................................................................................................................ 72
MANAGEMENT ....................................................................................................................................... 90
PRINCIPAL SHAREHOLDERS .................................................................................................................... 96
RELATED PARTY TRANSACTIONS ............................................................................................................ 97
FINANCIAL AND OTHER MATERIAL CONTRACTUAL OBLIGATIONS ........................................................ 99
GLOSSARY OF INDUSTRY TERMS .......................................................................................................... 122
FINANCIAL STATEMENTS ...................................................................................................................... 126
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FORWARD-LOOKING STATEMENTS
This Annual Report has been prepared solely to provide additional information to bondholders of the 7.375%
Senior Secured Notes due 2020 (the “Senior Secured Notes”) and the Senior Secured Floating Rate Notes due
2020 (the “Floating Rate Notes” and, together with the Senior Secured Notes, the “Notes”), issued by
Interoute Finco plc. The report contains certain forward-looking statements about operational and financial
matters. Because they relate to future events and are subject to future circumstances, these forward looking
statements are subject to risks, uncertainties and other factors.
Accordingly, these forward-looking statements should not be relied upon as they speak only as of the date of
the Annual Report or as otherwise indicated. These statements are made by the directors in good faith
based on the information available to them up to the time of their approval of this report.
Such statements should be treated with caution due to the inherent uncertainties, including both economic
and business risk factors, underlying any such forward-looking information. We do not undertake any
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Financial information
The historical consolidated financial data included on the following pages for the year ended 31 December
2015 and 2014 for Interoute have been derived from the audited statutory accounts of Interoute, including
the notes related thereto (the “Interoute Audited Statutory Accounts”).
The financials have been derived from the internal accounting format based on Luxembourg legal and
regulatory requirements relating to the preparation of consolidated financial statements (“Luxembourg
GAAP”). Luxembourg GAAP differs in significant respects from International Financial Reporting Standards as
adopted by the European Union (“IFRS”).
Beginning with the results for the year ending 31 December 2016, the Company intends to present its annual
reports and its financial statements in accordance with IFRS, which could result in material differences
between the historical financial statements included in this Annual Report and our future financial
statements. The items that may be impacted by this change include the presentation of financial statements
(including cash flow statement), deferred taxes, loans and borrowings, business combinations and financial
instruments. A summary of certain differences between IFRS and Luxembourg GAAP that our management
believes could have a significant impact on our financial statements is included in “Summary of Certain
Differences Between Luxembourg GAAP and IFRS.”
We completed the acquisition of Easynet in October 2015 and its integration into our business is in progress.
The financial data presented in this Annual Report for year ended 31 December 2015 is derived from the
Interoute Audited Statutory Accounts and includes 2.5 months of Easynet’s financial data (post acquisition).
Where there is historical consolidated financial data presented for the twelve months ended 31 December
2015 and 2014 for Easynet, this has been derived from the management accounts, including the notes
related thereto (the “Easynet Management Accounts”). The Easynet Management Accounts have been
derived from Easynet’s internal accounting system based on IFRS and then converted to Luxembourg GAAP.
See “Easynet Management Discussion and Analysis―IFRS to Luxembourg GAAP” for a discussion of the
adjustments that were made for purposes of converting the Easynet Management Accounts into
Luxembourg GAAP. These adjustments have not been subject to review by the auditors.
The issuer, Interoute Finco plc (the “Issuer”), is a public limited company incorporated under the laws of
England and Wales as a private limited company on 11 August 2015 with the name Interoute Finance Limited
and was re-registered as a public limited company on 13 August 2015. The Issuer was formed for the purpose
of issuing the Notes and the related transactions. The Issuer has no material assets or liabilities and has not
engaged in any activities and, in the future its only material assets and liabilities are expected to be
intercompany balances. The Issuer is a wholly owned finance subsidiary of Interoute Communications
Holdings Limited. Because the Issuer is a finance subsidiary without significant operations, we do not present
any financial information or financial statements of the Issuer within this Annual Report.
Unless otherwise indicated, the financial information for Interoute presented in this report is the historical
consolidated financial information of Interoute Communications Holdings S.A. (“ICHSA”) and its consolidated
subsidiaries. ICHSA’s historical consolidated financial information includes certain minor administrative and
operating expenses incurred at the ICHSA level. As a result, ICHSA’s consolidated financial information is not
directly comparable to the consolidated financial information of Interoute Communications Holdings Limited
(“ICHL”) for any prior periods. The differences between the consolidated financial information of ICHSA and
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ICHL primarily relate to fees of auditors and certain minor administrative expenses incurred and paid at the
ICHSA level which amounted to €23k for the year ended 31 December 2015.
Non-GAAP financial information
This document contains references to certain non-Luxembourg GAAP and non-IFRS financial measures,
including EBITDA, EBITDA Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Pro Forma EBITDA, Pro Forma
Adjusted EBITDA, Pro Forma Synergy Adjusted EBITDA and Consolidated EBITDA as well as certain leverage
and coverage ratios that are not required by, or presented in accordance with, Luxembourg GAAP or IFRS.
Such measures should not be considered as alternatives to other indicators of operating performance, cash
flows or any other measure of performance derived in accordance with Luxembourg GAAP or IFRS. In
addition, these measures are used by different companies for differing purposes and are often calculated in
ways that reflect the circumstances of these companies, thus limiting their usefulness as comparative
measures. Certain of the non-Luxembourg GAAP and non-IFRS financial measures used in this Annual Report
are defined below:
For Interoute only:
“EBITDA” is defined as earnings before interest, tax, depreciation, amortisation and other non-operating items. Other non-recurring non-operating items include gains and losses on the disposal of fixed assets.
“EBITDA Margin” is defined as EBITDA divided by revenue.
“Adjusted EBITDA” is defined as EBITDA as adjusted for certain non-recurring items.
“Adjusted EBITDA Margin” is defined as Adjusted EBITDA divided by revenue.
“Transactional Revenue’’ is defined as the portion of our total revenues after deducting recurring revenues which due to their nature fluctuate from period to period. Transactional revenue is recognised immediately in our profit and loss account.
For Easynet only:
“EBITDA” is defined as earnings before interest, taxation, depreciation and amortisation.
“Adjusted EBITDA” is defined as Easynet EBITDA as adjusted for certain non-recurring and/or exceptional items.
For Interoute and Easynet combined:
“Pro Forma EBITDA” is defined as EBITDA after giving pro forma effect to the repayment of outstanding amounts under our existing term and revolving facility, the refinancing of Easynet’s indebtedness, the Acquisition, the equity contribution from our shareholder (each in connection with the issuance of the Notes) and the use of the Notes’ proceeds (the “Transactions”), as if they had occurred on 1 January 2015.
“Pro Forma Adjusted EBITDA” is defined as Pro Forma EBITDA as adjusted for certain non-recurring and/or non-cash items.
“Pro Forma Synergy Adjusted EBITDA” is defined as Pro Forma Adjusted EBITDA as further adjusted to take into account certain anticipated synergies expected as a result of the acquisition of Easynet.
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See ‘‘Risk Factors—Risks Relating to Our Combined Business—We may be unable to integrate Easynet effectively and realise the expected synergies from the acquisition of Easynet’’.
“Consolidated EBITDA” is defined as Interoute’s EBITDA including 2.5 months of Easynet’s EBITDA.
Selected Unaudited Pro Forma Condensed Combined Financial Information
We have included in the Annual Report selected unaudited pro forma condensed combined financial
information. The selected unaudited pro forma condensed combined financial information included is not a
full pro forma profit and loss account. In connection with the offering of the Notes, full pro forma financial
statements were prepared for the twelve months ended 30 June 2015, which are available on our website at:
Pro Forma Combined Financial Information; http://www.interoute.com/sites/default/files/Eagle-Pro-Formas-
from-Final-OM.pdf
The selected unaudited pro forma condensed combined financial information is presented in euro and,
unless otherwise specified, has been prepared on a basis that is consistent with the Luxembourg GAAP
accounting policies used in the preparation of the Interoute Consolidated Financial Statements.
The selected unaudited pro forma condensed combined financial information included in this Annual Report
for the year ended 31 December 2015 has been prepared to give pro forma effect to the acquisition of
Easynet as if it had occurred on 1 January 2015. In the selected unaudited pro forma condensed combined
financial information, Interoute’s historical financial data for the year ended 31 December 2015 is presented
without including the effect of the acquisition of Easynet for the last 2.5 months of the year.
The selected unaudited pro forma condensed combined financial information has been prepared for
illustrative purposes only and does not purport to represent what Interoute’s actual results of operations or
financial position would have been if the acquisition had actually occurred on the dates indicated, nor does it
purport to project Interoute’s consolidated results of operations or financial position at any future date.
Selected unaudited pro forma condensed combined financial information is based upon available financial
information and certain assumptions and estimates that management believes are reasonable but may differ
materially from the actual adjusted amounts. The selected unaudited pro forma condensed combined
financial information included in the Annual Report has not been prepared in accordance with the
requirements of Regulation S-X under the U.S. Securities Act, the Prospectus Directive or any generally
accepted accounting standards and has not been subject to review by our auditors.
It should also be noted that the Easynet financial information reflected in unaudited pro forma condensed
combined financial information has been derived from the unaudited management accounts of Easynet. The
financials have been derived from the internal accounting format based on IFRS and converted to
Luxembourg GAAP, based on a preliminary Luxembourg GAAP analysis (as further discussed in the “Easynet
Management Discussion and Analysis” section). This preliminary conversion has not been audited.
Pro forma adjustments relating to the summary unaudited pro forma condensed combined Profit and Loss
Account have been translated into euro using an average exchange rate for each period presented therein.
The balance sheet items for the combined business have been translated at the year-end rate for each
period. Unless otherwise specified herein, all pound sterling amounts have been translated into euro using
the 31 December 2015 exchange rate of £0.74 = €1.00.
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The selected unaudited pro forma condensed combined financial information should be read in conjunction
with the “Risk Factors”, “Interoute Management Discussion and Analysis” and “Easynet Management
Discussion and Analysis”.
Certain Differences between Luxembourg GAAP and IFRS
The financial information and the consolidated financial statements included herein for ICHSA are prepared
and presented in accordance with Luxembourg GAAP. Certain differences exist between Luxembourg GAAP
and IFRS which might be material to the financial information included elsewhere in this Annual Report. See
“Easynet Management Discussion and Analysis―IFRS to Luxembourg GAAP” for a discussion of the
adjustments that were made for purposes of converting the Easynet Management Accounts into
Luxembourg GAAP. These adjustments have not been subject to review by our auditors.
You should also consult your own professional advisers for an understanding of the differences between
Luxembourg GAAP and IFRS and how those differences might affect the financial information contained in
this Annual Report. In addition, no attempt has been made to identify potential future differences between
Luxembourg GAAP and IFRS resulting from prescribed changes in accounting standards. See “Summary of
Certain Differences between Luxembourg GAAP and IFRS”.
Interoute Key Operational Metrics
This Annual Report contains certain measures of operational data, including total recurring revenue, churn
rate, average new net monthly recurring revenue, revenue under contract and signed contracted value. Such
measures of operational data are not measurements of financial performance under Luxembourg GAAP or
IFRS and should not be considered as alternatives to other indicators of operating performance, cash flows or
any other measure of performance derived in accordance with Luxembourg GAAP or IFRS.
We believe that the presentation of total recurring revenue, churn rate, average new net monthly recurring
revenue, revenue under contract and signed contracted value may be helpful as indicators of operational
performance. However, the methodology for determining total recurring revenue, churn rate, average new
net monthly recurring revenue, revenue under contract and signed contracted value in this Annual Report
may not be comparable to the methodology used by other companies in determining these measures.
Total recurring revenue
“Total recurring revenue” is measured as delivered revenue in a given period which is under contract plus
any usage-based revenue, less any credit notes which relate to the period for incorrectly billed revenue or
lost revenue as a result of a failure to deliver services. Total recurring revenue includes deferred revenue,
which reflects the release of revenue from amounts billed in prior periods but delivered during the relevant
period. We present in this Annual Report total recurring revenue for our Network Services and our Enterprise
Services product groups.
Churn rate
“Churn rate” is measured as the rate of negative changes to total billed recurring revenue that are driven by
disconnections or cancellations of customer contracts and includes net losses or increases to total recurring
revenue resulting from the renewal of contracts and the sale of additional services or capacity to the same
customer location. We use the average monthly billed recurring revenue during the previous period as the
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base for measuring the churn rate in the following period. Churn rate is calculated by dividing the average
monthly negative change to the average monthly billed recurring revenue by the average monthly billed
recurring revenue during the previous period. We present in this Annual Report churn rate for our Network
Services and our Enterprise Services product groups.
Average new net monthly recurring revenue
“Average new net monthly recurring revenue” is measured as incremental additional revenue from new
sales delivered during a month and that will recur on a monthly basis, excluding any usage-based revenue
and net of any churn. Our average new net monthly recurring revenue is reported when new sales have been
delivered. These monthly figures are then combined for a twelve-month or six-month period, as the case
may be, and then divided by the total number of months within such period, with the resulting figure
representing the average new net monthly recurring revenue. We present in this Annual Report average new
net monthly recurring revenue for our Network Services and our Enterprise Services product groups.
Revenue under contract
“Revenue under contract” is measured at the end of each period and consists of the total revenue that is
billable under the terms of all contracts in place at the end of that period. Revenue under contract includes
all amounts (excluding any usage based amounts) billable under the terms of the contract to the earliest time
where the customer can terminate the contract without incurring termination fees. The majority of our
contracts allow customers to terminate upon 30 days’ notice subject to incurring significant termination fees.
However, our customers historically have rarely terminated their contracts at times when they would incur
such termination fees. Therefore, the calculation of revenue under contract assumes that customers will not
terminate their contracts prior to the point in time that the customer can terminate without incurring a
penalty under the contract. Revenue under contract is calculated on the basis of the contractual rates
specified in such contracts and assumes no changes to the pricing terms of the contract. To the extent work
advances on these contracts, revenue is recognised in accordance with our revenue recognition policies and
thereafter no longer constitutes revenue under contract.
Signed contracted value
“Signed contracted value” is measured as the increase in revenue under contract as at the end of each
period from either new contracts signed or old contracts renewed during the relevant period. To the extent
work advances on these contracts, revenue is recognised in accordance with our revenue recognition policies
and thereafter no longer constitutes signed contracted value. We present in this Annual Report signed
contracted value for our Network Services and our Enterprise Services product groups.
Revenue under contract and signed contracted value are calculated as an aggregate of potential future
revenue over the relevant contracted period for each contract, which in certain cases may be five years or
more and is not subject to a present value discount. These measures do not provide a precise indication of
the time period over which we are contractually entitled to receive such revenue and there is no assurance
that such revenue will be actually received by us in the time frames anticipated, or at all. Expectations
expressed in this Annual Report that a portion of revenue under contract and signed contracted value will be
realised in any particular year are based on scheduled payment dates as specified in the relevant contracts.
Past performance indicates that the majority of customers will meet their payment obligations on the
scheduled payment dates as specified in the relevant contracts; however, there is no guarantee of either
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event occurring and any deviation from such past performance could have a material adverse effect on the
realization of our revenue under contract and signed contracted value in a particular year. See “Interoute
Management Discussion and Analysis”.
Based on our operating history and in the course of dealing with our customers, the assumption that
contracts are almost always continued to the earliest point that a customer can terminate without penalties
forms a significant assumption in the calculation of both our revenue under contract and signed contracted
value. However, the contracts on the basis of which revenue under contract and signed contracted value are
calculated are subject to termination or variation in certain circumstances. In addition, our customers may
seek to negotiate the terms of contracts due to changes in market conditions or may have an interpretation
of certain terms included in their contracts with us that differs from our interpretation. Any early
termination, variation, alternative interpretation or renegotiation of a contract may mean that we may not
realise our revenue under contract and/or signed contracted value fully, on schedule or at all. In addition, we
are subject to the risk of non-payment under the contracts that make up our revenue under contract and
signed contracted value. There can be no guarantee that counterparties will make payments that are due,
either on schedule or at all.
To the extent work advances on these contracts, revenue is recognised in accordance with our revenue
recognition policies and thereafter no longer constitutes revenue under contract and signed contracted
value, as the case may be. At any particular time, we may have orders from customers in the form of letters
of intent or other non-binding commitments. Any such non-binding commitments are not counted in our
revenue under contract and signed contracted value. Revenue under contract and signed contracted value
include only the revenue attributable to signed contracts for which all preconditions to entry have been met
and does not include any revenue expected to arise from contracts under which the customer has no
commitment to draw upon our products and services.
We believe that our revenue under contract and signed contracted value are conservatively calculated
because they do not include any amounts attributable to the reimbursement of expenses incurred on behalf
of a customer or any other revenue apart from revenue attributable to the contractual rates specified in the
uncompleted portion of our contracts. We note that neither revenue under contract nor signed contracted
value are guarantees of future revenue. See “Risk Factors—Risks Relating to Interoute—A number of events
may impact our revenue under contract and signed contracted value, and revenue under contract and signed
contracted value may not be accurate indicators of our future results”.
In addition, a portion of our revenue under contract and signed contracted value relates to contracts entered
into by our subsidiaries located in countries outside the eurozone, and which are denominated in currencies
other than euro, including pound sterling, Swiss francs, Czech koruna and U.S. dollars. Our revenue under
contract and signed contracted value figures, reported in euros, include the non-euro revenue converted into
euro. Subsequent variations in exchange rates will cause the euro amount of revenue under contract and
signed contracted value to vary, although the underlying revenue under contract and signed contracted
value in the stated currencies will remain unchanged.
Easynet Operational Data
We present in this Annual Report Easynet average new net monthly revenue and Easynet churn rate as key
performance indicators for Easynet’s business. These metrics have been defined to align them with the
Interoute key performance indicators. Easynet average new net monthly revenue and Easynet churn rate are
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not measurements of financial performance under IFRS and should not be considered as alternatives to other
indicators of its operating performance, cash flows or any other measure of performance derived in
accordance with IFRS.
Easynet average new net monthly revenue
“Average new net monthly revenue” is defined as incremental additional revenue from new sales
during a month and that will recur on a monthly basis, excluding any usage-based revenue and net of any
churn. The average new net monthly recurring revenue is reported when new sales have been delivered.
These monthly figures are then combined for a twelve-month or six-month period, as the case may be, and
then divided by the total number of months within such period, with the resulting figure representing the
average new net monthly recurring revenue for the period.
Easynet churn rate
“Churn rate” is measured as the rate of negative changes to total recurring revenue that are driven
by disconnections or cancellations of customer contracts and includes net losses or increases to total
recurring revenue resulting from the renewal of contracts and the sale of additional services or capacity to
the same customer location. We use the average monthly recurring revenue during the previous period as
the base for measuring Easynet’s churn rate in the following period. Easynet churn rate is calculated by
dividing the average monthly negative change to the average monthly recurring revenue by the average
monthly recurring revenue during the previous period.
For Further Information E-mail: [email protected]
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SUMMARY OF CERTAIN DIFFERENCES BETWEEN LUXEMBOURG GAAP AND IFRS
Overview
The financial information and the consolidated financial statements included herein for ICHSA are
prepared and presented in accordance with Luxembourg GAAP. Certain differences exist between
Luxembourg GAAP and IFRS which might be material to the financial information included elsewhere in this
Annual Report. The matters described below summarise certain differences that may be material between
the consolidated financial statements of ICHSA prepared in accordance with Luxembourg GAAP and IFRS.
The Issuer is responsible for preparing the summary below. This summary does not attempt to be a
comprehensive analysis, including quantification of such differences, nor does it undertake a reconciliation of
the Luxembourg GAAP financial statements to IFRS. Had any quantification or reconciliation been prepared,
other potentially significant accounting differences may have been identified. Accordingly, no assurance is
provided that the following differences between Luxembourg GAAP and IFRS are complete.
Goodwill and Business Combinations
Business combinations are not defined as such under Luxembourg GAAP.
Under Luxembourg GAAP, goodwill is amortised over five years unless a longer useful life can be
justified. Goodwill is reviewed annually for impairment. Following an impairment test, a value adjustment is
recognised in the profit and loss account for the excess of the carrying amount over the lower value
attributed to the asset. If the reasons for which the value adjustments were made have ceased to apply,
goodwill impairments must be reversed through the profit and loss account.
When the fair value of the separable net assets exceeds the fair value of the consideration for an
acquired undertaking, the difference is treated as negative goodwill and is either capitalised in the balance
sheet and disclosed within equity or is recognised in the profit and loss account if such difference
corresponds to a realised gain.
Intangible assets acquired through a business combination are not recognised separately from
goodwill on acquisition if they cannot be identified. If they are identifiable, they are recognised at fair market
value depending on the purchase price allocation documentation. In determining the amounts of goodwill
recognised on acquisition, transactions costs can be included in the costs of acquisition and hence recognised
as part of goodwill.
Under IFRS, business combinations fall within the scope of IFRS 3 “Business Combinations”.
Goodwill acquired in a business combination is allocated to cash generating units (“CGUs”) that are
expected to benefit from the anticipated synergies of the combination. The goodwill is not subject to
amortisation and is carried at cost unless impaired. At each reporting date, impairment reviews of CGUs are
required whenever changes in events or circumstances indicate that their carrying amount may not be
recoverable. Goodwill impairment can never be reversed.
Within a bargain purchase, which is a business combination in which the net of the acquisition-date
amounts of identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3
“Business Combinations”) exceed the aggregate of the consideration transferred, the amount of any
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non-controlling interest and the acquisition-date fair value of the acquirer’s previously held equity interest in
the acquiree, the acquirer shall recognise the resulting gain in the income statement on the acquisition date.
In a business combination, the acquirer’s application of the recognition principle and conditions in
respect to the identifiable assets acquired and the liabilities assumed may result in recognising some assets
and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial
statements. For example, the acquirer recognises the acquired identifiable intangible assets, such as brand
name, a patent or a customer relationship that the acquiree did not recognise as assets because it developed
them internally and charged the related costs to expense.
Transaction costs incurred as part of the acquisition are expensed to the income statement.
Derivatives and hedge accounting
Under Luxembourg GAAP, derivatives follow the same recognition rules of any financial instrument.
They are recognised only when the entity becomes a party to its contractual provision (acquired for
consideration). Derivative contracts are recognised at cost (asset) or reimbursement value (liability).
Alternatively, derivatives may be valued at fair market value.
In general, unrealised gains on hedging instruments are deferred and recognised in the profit and
loss account when the losses on the underlying hedged transactions are realised. Losses arising on hedging
instruments are recognised at the balance sheet date in the profit and loss account.
Under IFRS, derivative financial instruments are classified as held for trading and measured at fair
value through profit or loss. Derivatives which are designated as hedging items under a hedge accounting
relationship follow the hedge accounting rules as described in IAS 39 “Financial Instruments—Recognition
and Measurement”. IAS 39 permits hedging instruments also to be non-derivative instruments.
The three types of hedging relationships defined under IFRS are: cash flows hedges, fair value hedges
and hedges of net investments in foreign operations.
To qualify for a hedge accounting an entity must:
• formally designate and document a hedge relationship between a qualifying hedging instrument
and a qualified hedged item at the inception of the hedge; and
• both at inception and on an ongoing basis demonstrate that the hedge is highly effective.
Hedge accounting ends when the hedging instrument expires, is sold or terminated or when the
hedge no longer meets the criteria for hedge accounting or it is revoked the designation. When a cash flow
hedge is designated, any excess of the fair value of the hedging instrument over the change in the fair value
of the expected cash flows (hedge ineffectiveness) is recognised in the income statement. The effective part
is recognised in other comprehensive income. The amount recognised in other comprehensive income is
recognised in profit or loss when the hedged item affects profit or loss or when the hedge relationship ends.
When a fair value hedge is designated, the gain or loss from remeasuring the instrument at fair value is
recognised directly in the income statement.
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Deferred taxation
Under Luxembourg GAAP, deferred tax arises from the discrepancies between a commercial balance
sheet and a tax balance sheet.
Under IFRS, deferred tax represents the amount of income tax payable or potentially recoverable in
the future in respect of taxable or deductible temporary differences, which are defined as differences
between the tax basis of an asset or liability and its carrying amount.
A deferred tax asset is recognised for all deductible temporary differences (and the carry forward or
unused tax losses and credits) unless the deferred tax asset arises from an exemption as defined under
IAS 12 “Income Taxes” and to the extent that it is probable that taxable profit will be available against which
the asset can be utilised.
A deferred tax liability is recognised by an entity for all taxable temporary differences except to the
extent that the deferred tax liabilities arise as an exemption as defined under IAS 12.
Employee benefits
Defined benefit plans are not specifically addressed in Luxembourg GAAP. However, references to
IFRS can be used.
The contributions are recognised as a complementary pension expense when they are due. If
contribution payments exceed the contribution due for service, the excess is recognised as an asset. The
entity recognises its defined benefit liabilities on the balance sheet based on the present value of the defined
benefit obligation less the fair value of plan assets. The entity records actuarial gains and losses from
experience adjustments and changes in actuarial assumptions as a profit or loss in the period in which they
arise.
Under IFRS, IAS 19 “Employee Benefits” addresses the accounting treatment of defined benefit
plans.
The related liability as disclosed in the statement of financial position comprises the defined benefit
obligations less the plan assets. Current service costs, past-service costs, net interest costs and the effect of
any settlement are recognised in profit or loss. Remeasurements (including the actuarial gains and losses) are
recognised in full immediately in other comprehensive income.
Share based payments
Under Luxembourg GAAP, stock option plans are only recognised in the balance sheet when issued
for consideration. In most cases where they are granted for free to employees, the options are not
accounted for on the balance sheet.
When options are settled, if new shares are issued there is an impact on equity based on the exercise
price. If existing shares are used or cash is paid, the difference between the cost of the shares and the
consideration paid by the option holder is recorded and spread over the vesting period in consideration for
future services.
Under IFRS, share-based payment transactions include equity settled and cash settled share-based
payments. Share-based payments encompass all arrangements where an entity purchases goods or services
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in exchange for the issue of equity instruments (including share or share options) or cash payments based on
the price or value of the equity instruments.
Equity settled share-based payment transactions with employees are measured at the fair value of
the equity instruments granted at its grant date and spread over the vesting period. Subsequently, as any
equity instrument, equity-settled share-based transitions are not remeasured. Cash settled share-based
payment transactions are measured at the fair value of the liability. Until the liability is settled, the fair value
of the liability is remeasured at each reporting date and at the date of the final settlement, with the
movement in fair value recognised in profit or loss.
Share-based payment awards that offer the counterparty the choice of settlement in equity or cash
are treated as compound instruments.
Leases
Luxembourg GAAP does not distinguish between finance and operating leases.
The approach generally follows the legal form of the arrangement. Under the substance over form
approach (optional), a distinction may be performed between the two types of leases under certain
conditions. Lease incentive received can be amortised over the term of the lease or taken into account in a
single instalment at the start of the lease.
Luxembourg GAAP does not provide guidance on distinguishing leases that are embedded in other
contracts.
Under IFRS, leases are classified as finance or operating leases depending on whether the lease
transfers substantially all of the risk and rewards of ownership based on the substance of the arrangement.
In accordance with IFRS, under operating leasing, the lease incentives are recognised by the lessee as a
reduction in the rental expense over the lease term, usually on a straight-line basis.
Where an arrangement is determined to contain a lease, because there is a specified asset and the
arrangement conveys the right to use the asset, the lease must be accounted for separately from the
non-lease components of the contract.
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DEFINITIONS
Definitions
Unless otherwise specified or the context requires otherwise, when we refer to “Interoute”, the
“Group”, “we”, “us” or “our”, for the purposes of this Annual Report, we are referring to ICHSA and its
consolidated subsidiaries (including any of their predecessors) and, following the completion of the
Acquisition, to Interoute together with Easynet. For the purposes of “Risk Factors—Risks Relating to Our
Combined Business”, the terms “we”, “us” and “our” refer to both Interoute and Easynet.
The following definitions apply throughout this Annual Report, unless the context otherwise
requires:
• “Acquisition” refers to the proposed acquisition of 100% of the share capital of Easynet by
Interoute Communications Limited.
• “Benelux” refers to Belgium, the Netherlands and Luxembourg, collectively.
• “CAGR” refers to compound annual growth rate.
• “Collateral” has the meaning ascribed to it under “Description of the Notes—Security”.
• “Company” refers to Interoute Communications Holdings Limited.
• “Completion Date” refers to the date on which the Acquisition is completed.
• “Easynet” refers to MDNX Group Holdings Limited and its subsidiaries (including any of their
predecessors).
• “Enterprise Services” refers to the suite of VPN & Security, Communications and Computing
products and services that we provide to our enterprise customers.
• “Equipment Vendor Loans” refers to the equipment vendor loans with Cisco, IBM and Lombard
as described under “Description of Certain Financing Arrangements—Equipment Vendor Loans”.
• “European Economic Area” or “EEA” refers to the trading area established by the European
Economic Area Agreement of 1 January 1994, currently comprising the Member States of the
European Union (currently Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic,
Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain,
Sweden and the United Kingdom) and Norway, Iceland and Liechtenstein.
• “European Union” or “EU” refers to the European economic and political union.
• “FSMA” refers to the Financial Services and Markets Act 2000, as amended.
• “Guarantees” refers, collectively, to the senior secured guarantees by the Guarantors to
guarantee the payment obligations of the Issuer with respect to the Notes.
• “Guarantors” refers, collectively, to the Company and the Subsidiary Guarantors as guarantors of
the Notes.
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• “IFRS” refers to International Financial Reporting Standards as adopted by the European Union.
• “Indenture” refers to the indenture governing the Notes to be dated as at the Issue Date.
• “Intercreditor Agreement” refers to the intercreditor agreement to be entered into on or about
the Completion Date amongst the creditors, trustees and agents under each of the Revolving
Credit Facility and the Notes, as amended and restated from time to time, and which is described
in more detail in “Description of Certain Financing Arrangements—Intercreditor Agreement”. The
entry into the Intercreditor Agreement is not a condition to the release of the funds from the
Escrow Account on the Completion Date.
• “Interoute” refers to ICHSA and its subsidiaries, collectively.
• “Interoute Communications Holdings S.A.” or “ICHSA” is a public limited liability company
(société anonyme), incorporated under the laws of Luxembourg, having its registered office at
2-8 avenue Charles de Gaulle, L-1653 Luxembourg, Grand Duchy of Luxembourg, registered with
the Luxembourg register of commerce and companies under number B.109435.
• “Interoute Consolidated Financial Statements” refers, collectively, to the 2012 Interoute
Consolidated Financial Statements, the 2013 Interoute Consolidated Financial Statements and
the 2014 Interoute Consolidated Financial Statements.
• “Interoute Holdings S.à r.l.” is a private limited liability company (société à responsabilité
limitée) incorporated under the laws of Luxembourg, having its registered office at 2-8 avenue
Charles de Gaulle, L-1653 Luxembourg, Grand Duchy of Luxembourg, registered with the
Luxembourg register of commerce and companies under number B.112820.
• “Issuer” refers to Interoute Finco plc.
• “Luxembourg” means the Grand Duchy of Luxembourg.
• “Luxembourg GAAP” refers to the legal and regulatory requirements relating to the preparation
of consolidated financial statements in Luxembourg.
• “MDNX” refers to MDNX Group Holdings Limited and its subsidiaries (including any of their
predecessors).
• “Member State” refers to a member state of the European Union.
• “Network Services” refers to the Infrastructure and Transport products and services that we
provide to our customers.
• “Notes” refers to the Floating Rate Notes and Fixed Rate Notes.
• “Restricted Group” refers to the Company and its Restricted Subsidiaries.
• “Restricted Subsidiary” has the meaning ascribed to it under “Description of the Notes—Certain
Definitions”.
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• “Revolving Credit Facility” or “Revolving Credit Facility Agreement” refers to the revolving
credit facility in an aggregate committed amount of €75.0 million, with an additional
uncommitted amount of €25.0 million, to be entered into on or about the Completion Date, as
described more fully under “Description of Certain Financing Arrangements—Revolving Credit
Facility”.
• “SEC” refers to the U.S. Securities and Exchange Commission.
• “Security Agent” refers to Barclays Bank PLC, as security agent under the Intercreditor
Agreement, the Revolving Credit Facility and the Notes.
• “Sellers” refers, collectively, to the sellers of 100% of the share capital of Easynet, as set out in
Schedule 1 to the Share Purchase Agreement.
• “Share Purchase Agreement” refers to the share purchase agreement, dated 8 August 2015,
between Interoute Communications Limited and the Sellers for the purchase of 100% of the
share capital of Easynet in order to effect the Acquisition. See “The Transactions—The
Acquisition”.
• “Shareholder Facility” refers to the subordinated shareholder funding facility between the
Company, as borrower, and Interoute Holdings S.à r.l., as lender, pursuant to a facility agreement
dated on or prior to the Completion Date.
• “Trustee” refers to HSBC Corporate Trustee Company (UK) Limited, as trustee for the Notes.
• “United Kingdom” or “U.K.” refers to the United Kingdom of Great Britain and Northern Ireland.
• “United States” or “U.S.” refers to the United States of America.
• “U.S. Exchange Act” refers to the U.S. Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
For a glossary of certain industry-related terms used in this Annual Report, see “Glossary of Industry
Terms”.
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RISK FACTORS
The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties of which we are not aware or that we currently believe are immaterial may also adversely affect our business, prospects, financial condition and results of operations. If any of the possible events described below were to occur, our business, prospects, financial condition and results of operations could be materially and adversely affected.
References to “we”, “our” and “us” refer to ICHSA and its subsidiaries, collectively.
RISKS RELATING TO OUR COMBINED BUSINESS
For the purposes of this “Risks Relating to Our Combined Business”, the terms “we”, “our” and “us”
refer to both Interoute and Easynet after giving effect to the Transactions. References to “Interoute” refer to
ICHSA and its subsidiaries, collectively, and references to “Easynet” refer to MDNX Group Holdings Limited
and its subsidiaries (including any of their predecessors).
Continued uncertainty and challenging conditions in the global economy may adversely impact our
business, financial condition and results of operations.
Our business is concentrated in Europe, which generally remains a challenging macroeconomic
environment. Future developments may continue to be dependent on a number of political and economic
factors, including the effectiveness of the European Central Bank and the European Commission to address
the debt burden of certain countries in Europe and the continued stability of the eurozone, and the viability
of the European Union. These risks have increased further with the upcoming UK referendum on whether
the UK should remain part of the EU.
Financial markets and the supply of credit may continue to be negatively impacted by ongoing fears
surrounding the sovereign debts and/or fiscal deficits of several countries in Europe (primarily France,
Greece, Italy, Portugal and Spain); the possibility of further downgrading of, or defaults on, sovereign debt;
concerns about a slowdown in growth in certain economies; and uncertainties regarding the overall stability
of the euro and the sustainability of the euro as a single currency given the diverse economic and political
circumstances in individual Member States. Governments and regulators have implemented austerity
programmes and other remedial measures to respond to the eurozone debt crisis and stabilise the financial
system, but the actual impact of such programmes and measures is difficult to predict.
It is possible that one or more countries may default on their debt obligations and/or cease using the
euro and re-establish their own national currency, that the eurozone may collapse or that countries may
elect to leave the European Union. On June 23, 2016, the United Kingdom will hold a referendum on
whether to exit the European Union. In the event of a UK exit from the European Union, we would likely face
new regulatory costs and challenges, the scope of which are presently unknown. Depending on the terms of
such exit, if any, the UK could also lose access to the single EU market and to the global trade deals
negotiated by the EU on behalf of its members. Such a decline in trade could affect the attractiveness of the
UK as a global investment centre and, as a result, could have a detrimental impact on UK growth. The
uncertainty prior to the referendum could also have a negative impact on the UK and other European
economies. We could be adversely affected by reduced growth and greater volatility in the UK and European
economies. Currency exchange rates in the British pound and the euro with respect to each other and the
US dollar have already been affected by the possibility of the UK’s exit from the EU. As we derive a significant
portion of revenue from our UK operations, further exchange rate fluctuations could adversely affect our
business, our results of operations and financial condition. However, a significant portion of our costs are
also UK based (giving a natural hedge) and thereby will limit the impact on business operations. In addition,
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the departure of one or more countries from the eurozone may lead to the imposition of, inter alia,
exchange rate control laws.
Should the euro dissolve entirely, the legal and contractual consequences for holders of
euro-denominated obligations and for parties subject to other contractual provisions referencing the euro
such as supply contracts would be determined by laws in effect at such time. These potential developments,
or market perceptions concerning these and related issues, could adversely affect our trading environment,
and could have adverse consequences for us with respect to our outstanding euro-denominated debt
obligations, which could adversely affect our financial condition. Further, certain of our debt instruments
contain covenants restricting our and our subsidiaries’ corporate activities. Certain of such covenants impose
limitations based on euro amounts (e.g. the amount of additional indebtedness we or our subsidiaries may
incur). As such, if the euro were to significantly decrease in value, the restrictions imposed by these
covenants would become tighter, further restricting our ability to finance its operations and conduct its
business.
An economic downturn in the Europe and the global financial markets, and in the European and
global economies, may have a material and adverse impact on our business and our financial condition. The
general financial instability in the stressed European countries could have a contagion effect on the region
and contribute to the general instability and uncertainty in the European Union. Businesses may further
reduce or postpone spending on IT infrastructure in response to tighter credit, negative financial news and
declines in income or asset values. We believe that such a reduction in, or postponement of, spending may
have a material adverse effect on the demand for our products and services. We cannot predict the timing or
severity of future economic or industry downturns. Further, if the market conditions remain weak or
uncertain, some of our customers may have difficulty paying us and we may experience an increased churn
rate in our customer base. Finally, we could also experience pricing pressure as a result of economic
conditions if our competitors lower prices and attempt to gain market share.
Additionally, financial markets generally have been experiencing extreme disruptions, including,
amongst other things, volatility in security prices, diminished liquidity and credit availability, rating
downgrades on certain investments and declining valuations of others, and delayed recovery in the global
financial markets could have an adverse effect on our business and our financial condition. Our ability to
access the capital markets may be severely restricted at a time when we would like, or need, to do so, which
could have an impact on our ability to pursue additional expansion opportunities and maintain our desired
level of revenue growth in the future.
Government regulations are continuously evolving and, depending on their evolution, may adversely affect
our operating results.
We are subject to varying degrees of regulation in each of the jurisdictions in which we provide
services. Local laws and regulations, and their interpretation and enforcement, differ significantly amongst
those jurisdictions. These regulations and laws may cover communication services, taxation, privacy, data
protection and retention, data interception, pricing, content, copyrights, distribution, electronic device
certification, electronic waste, electronic contracts and other communications, consumer protection, web
services, the provision of online payment services, unencumbered Internet access to our services, the design
and operation of websites and the characteristics and quality of products and services.
In particular, governments and agencies in many of the jurisdictions in which we operate have
adopted and could in the future adopt, modify, apply or enforce laws, policies and regulations covering user
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privacy, data security and/or the collection, use, processing, transfer, storage and/or disclosure of data
associated with a unique individual. The categories of data regulated under these laws vary widely and are
often ill-defined and subject to new applications or interpretation by regulators. Moreover, these laws can
be costly to comply with, can be a significant diversion to management’s time and effort, and can subject us
to claims or other remedies, as well as negative publicity. Many of these laws were adopted prior to the
advent of the Internet and related technologies and, as a result, do not contemplate or address the unique
issues that the Internet and related technologies produce. The uncertainty and inconsistency amongst these
laws, coupled with a lack of guidance as to how these laws will be applied to current and emerging
technologies, creates a risk that regulators, lawmakers or other third parties, such as potential plaintiffs, may
assert claims, pursue investigations or audits, or engage in civil or criminal enforcement. These actions could
limit the market for our products and services, harm our reputation or impose burdensome requirements on
our services and/or customers’ use of our services, thereby rendering our business unprofitable.
We face significant competition in the sectors in which we offer our products and services.
We face significant competition in both the Network Services and the Enterprise Services product
groups.
In Network Services, Interoute faces competition from larger network service providers who have
broader global distribution networks and presence, and may be able to provide bandwidth at lower costs or
provide network routing options in additional or different jurisdictions. In addition, in the past Interoute has
competed and expects to continue to compete with incumbent national players in a number of the
jurisdictions in which it operates, who have larger and more dense national networks. Further, a number of
smaller alternative networks will compete with Interoute on price, often aggressively, in order to sustain
their market share. Consequently, each of these competitors may be able to offer better routing or charge
lower prices for their transport products and services.
The Enterprise Services sector is highly competitive and fragmented and is characterised by evolving
industry standards, changing enterprise preferences and the frequent introduction of new and/or more
advanced technologies and products and services related to such technologies. New products and services
tend to generate higher margins than older products and services as a result of increased platform
convergence and automation, which typically enable customer cost savings through the consolidation of
multiple services to one supplier. Further, customers are increasingly seeking to migrate data and
applications to the cloud in order to reduce costs, as well as to improve accessibility and scalability.
Combined with the increasingly geographically diverse scale of businesses, these market conditions have led
to an increasing number of customers requiring an integrated global solution to their IT infrastructure needs.
Additionally, the proliferation of cloud-based services could potentially erode the value of our VPN & Security
products and services in the future, as customers become increasingly comfortable with transmitting and
storing data in the cloud.
We expect to face significant competition from our existing competitors, as well as additional
competition from new market entrants in the future as the actual and potential sector for hosting and cloud
computing continues to grow. Our current and potential competitors in the Enterprise Services sector include
both global IT infrastructure providers, such as BT Global Services, Orange Business Services, T-Systems and
Verizon, regional providers such as Colt and Redcentric, and cloud computing services providers such as
Amazon Web Services and Microsoft Azure.
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Many of these current and potential competitors in both Network Services and Enterprise Services
have substantially greater financial, technical and marketing resources, larger customer bases, longer
operating histories, greater brand recognition, and more established relationships in the industry than our
combined entity. As a result, some of these competitors may be able to:
• develop superior products or services, gain greater market acceptance and expand their service
offerings more efficiently or more rapidly;
• adapt to new or emerging technologies and changes in customer requirements more quickly;
• bundle services with other services they provide at reduced prices;
• adopt more-aggressive pricing policies and devote greater resources to the promotion,
marketing and sales of their services, which could cause us to have to lower prices for certain
products or services to remain competitive in the market; and
• devote greater resources to the research and development of their products and services.
Larger competitors may also be better capitalised to opportunistically acquire, invest or partner with
other domestic and international businesses.
Any failure to compete successfully against our competitors through price-based competition or
through a failure to develop and integrate our products and services could have a material adverse effect on
our business, results of operations and financial condition.
If we are unable to manage our growth effectively, our financial results could suffer.
The growth of our business and our service offerings could strain our operating and financial
resources. We intend to continue expanding our overall business, customer base, headcount and operations.
Creating a pan-European organisation with a global reach and managing a geographically dispersed
workforce requires substantial management effort and significant additional investment in our operating and
financial system capabilities and controls. If our information systems are unable to support the demands
placed on them by our growth, we may be forced to implement new systems, which would be disruptive to
our business. We may be unable to manage our expenses effectively in the future due to the expenses
associated with these expansions, which may negatively impact our gross margins or operating expenses. If
we fail to improve our operational systems or to expand our customer service capabilities to keep pace with
the growth of our business, we could experience customer dissatisfaction, cost inefficiencies and lost
revenue opportunities, which may materially and adversely affect our operating results.
We may be unable to integrate Easynet effectively and realise the expected synergies from the acquisition
of Easynet.
The combination of two independent companies is a complex, costly and time-consuming process. As
a result, we will be required to devote significant management attention and resources to integrating our
business practises and operations with Easynet. The integration process may disrupt our and/or Easynet’s
business and, if implemented ineffectively, could preclude realisation of the full benefits expected by us,
including potential run-rate cost synergies of approximately £18.0 million (€24.4 million equivalent) within
24 months of the acquisition.
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To date the execution of the anticipated cost synergies is progressing in line with expectations.
However, the implementation of the majority of those synergies is expected in Q3 2016 therefore the risk of
synergies not being achieved remains.
In order to realise the above run-rate cost synergies, we expect to make significant amounts of cash
outlays, which may be higher than our estimated amount. We currently estimate that through 2017, we will
incur approximately £18.9 million (€25.7 million equivalent) in integration costs to realise these synergies. In
addition, we expect to incur a number of non-recurring costs associated with the acquisition and combining
the operations of the two companies. The substantial majority of non-recurring expenses will be composed
of transaction costs related to the acquisition.
Actual costs incurred in connection with the acquisition of Easynet, the financing thereof and
achieving the synergies may be affected by a number of factors, including the following:
• the use of more cash or other financial resources on integration and implementation activities
than we expect, including restructuring, capital investment to integrate the networks and other
exit costs; and
• increases in other expenses related to the acquisition, which may offset the cost savings and
other synergies from the acquisition.
Realising the benefits of the acquisition will require the integration of some or all of the sales and
marketing, distribution, manufacturing, finance, information technology systems and administrative
operations of Easynet. If we cannot successfully integrate Easynet within a reasonable time frame following
the acquisition, we may not be able to realise the potential benefits anticipated from the acquisition.
Additionally, any failure by us to meet the challenges involved in successfully integrating the operations of
Interoute and Easynet or otherwise to realise the anticipated benefits of the acquisition could cause an
interruption of our activities and could seriously harm our results of operations. In addition, the overall
integration of the two companies may result in material unanticipated problems, expenses, liabilities,
competitive responses, the loss of customer relationships and the diversion of management’s attention. The
difficulties of combining the operations of the companies include, amongst others:
• managing a significantly larger company;
• the potential diversion of management focus and resources from other strategic opportunities
and from operational matters;
• issues in integrating information technology, communications and other systems, including
products and services related thereto;
• integrating two unique business cultures, which may prove to be incompatible;
• consolidating corporate and administrative infrastructures and eliminating duplicative
operations;
• uncertainties related to internal accounts and bookkeeping, where historic data may be
unavailable or unreliable;
• unanticipated changes in applicable laws and regulations;
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• cooperation from the works councils in France as related to Easynet’s employees that could
impact timing or the quantum of synergy benefits;
• customer churn relating to data centre consolidation or objections to proposed offshoring
activities;
• the speed of scalability should there be a high level of staff departures;
• the assumption that there will be no major competition issues that would impact synergies;
• managing tax costs or inefficiencies associated with integrating our operations; and
• unforeseen expenses or delays associated with the acquisition.
Further, our estimates of the anticipated synergies and benefits of the acquisition are based on
certain assumptions regarding Easynet and our analysis of its ability to generate cash. Whilst we believe that
these assumptions are reasonable and based on our analysis of Easynet’s historical performance, we can
provide no assurance that such cash generation is indicative of Easynet’s future results.
Many of these factors will be outside our control and any one of them could result in increased costs,
decreased revenues and the diversion of management’s time and energy. In addition, even if the operations
of Interoute and Easynet are integrated successfully, we may not realise the full benefits of the acquisition,
including the anticipated synergies, cost savings or sales or growth opportunities that we expect. These
benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure
investors that the combination of Interoute and Easynet will result in the realisation of the full benefits
anticipated from the acquisition and we may incur substantial costs in connection with achieving such
synergies. Any failure to realise such benefits could have a material adverse effect on our business, results of
operations and financial condition.
Our inability to integrate recently acquired businesses or to successfully complete future strategic
acquisitions could limit our future growth or otherwise be disruptive to our ongoing business.
We expect to continue to pursue bolt-on acquisitions in a disciplined manner to support our strategic
goals. Since 2003, it has successfully integrated ten businesses, including Comendo Networks AS, Quantix
Limited and Vtesse Group Limited (“Vtesse”), and may continue to pursue acquisitions in the future. In
addition, MDNX Group Limited was originally formed in 2010 and has successfully integrated four
acquisitions; it is in the process of integrating EGHL Limited, the former holding company of the Easynet
Group.
We could face significant challenges in managing and integrating our expanded or combined
operations, including acquired infrastructure and cloud assets, operations, facilities and personnel. There can
be no assurance that acquisition opportunities will be available on acceptable terms or at all, or that we will
be able to obtain necessary financing or regulatory approvals to complete potential acquisitions. Our ability
to succeed in implementing our strategy will depend to some degree upon the ability of our management to
identify, complete and successfully integrate commercially viable acquisitions. Further, we have in the past
and may again in the future acquire companies out of receivership with uncertain title to properties, as well
as other risks inherent to an acquisition out of receivership which may impact our ability to realise benefits
from such acquisitions. Acquisition transactions may disrupt our ongoing business, require additional
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investment and distract management from other responsibilities. Any such disruption could have a material
adverse effect on our business, results of operations and financial condition.
If we are unable to adapt to evolving technologies and customer demands in a timely and cost-effective
manner, our ability to sustain and grow our business may suffer.
The sectors in which we operate are characterised by rapidly changing technology, evolving industry
standards and frequent new product announcements, all of which impact the way our services are marketed
and delivered. The adoption of new technologies, a change in industry standards or the introduction of more
attractive products or services could make some or all of our offerings less desirable or even obsolete. These
potential changes are magnified by the continued rapid growth of the Internet and the significant
competition in our industry. To be successful, we must adapt to our rapidly changing environment by
forecasting customer demands; improving the performance, features and reliability of our products and
services; and modifying our business strategies accordingly. We cannot guarantee that we will be able to
identify the emergence of all of these new service alternatives successfully, modify our services accordingly,
or develop and bring new products and services to market in a timely and cost-effective manner to address
these changes.
In the Enterprise Services product group in particular, our products and services are subject to
changing technologies, frequent new product and service introductions, and changing user and customer
demands. The introduction of new technologies and services embodying new technologies and the
emergence of new industry standards and practices could render our existing technologies and services
obsolete and unmarketable or require unanticipated investments in technology. If we fail to adapt
successfully to such developments or timely introduce new technologies and services, we could lose
customers, our expenses could increase and we could lose advertising inventory.
Relatedly, we could also incur substantial costs if we need to modify our physical infrastructure in
order to adapt to these changes. For example, our data centre infrastructure could require improvements
due to the development of new systems to deliver power to or eliminate heat from the servers, or the
development of new server technologies. We may not be able to timely adapt to changing technologies, if at
all. Additionally, if we do not replace or upgrade technology and equipment that becomes obsolete, or if the
technology choices we or our equipment vendors make prove to be incorrect, ineffective or unacceptably
costly, we will be unable to compete effectively because we will not be able to meet the expectations of our
customers. Our ability to sustain and grow our business would suffer if we fail to respond to these changes in
a timely and cost-effective manner.
Finally, even if we succeed in adapting to a new technology or changing industry standards, and we
develop attractive products and services that we successfully bring to market, there can be no assurance that
our use of the new technology or standard or our introduction of the new products or services would have a
positive impact on our financial performance and could even result in lower revenue, lower margins and/or
higher costs, thereby negatively impacting our financial performance.
Our failure to provide platforms, products and services to compete with new technologies or the
obsolescence of our platforms, products or services would likely lead us to lose current and potential
customers or cause us to incur substantial costs by attempting to catch our offerings up to the changed
environment.
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Customers with mission-critical applications could potentially expose us to lawsuits for their lost profits or
damages, which could impair our financial condition.
Because our services are critical to many of our customers’ businesses, any significant disruption in
our services could result in lost profits or other indirect or consequential damages to our customers. In
particular, we may suffer significant adverse publicity and reputational harm if a significant service disruption
occurs generally or if any disruption affects one of our high-profile customers. Although we require our
customers to sign agreements that contain provisions attempting to limit our liability for service
interruptions, we cannot be assured that such contractual limitations on our liability will be enforceable in
the event that one of our customers brings proceedings against us as the result of a service interruption or
other problems that they may ascribe to us. The outcome of any such action would depend on the specific
facts of the case and any legal and policy considerations that we may not be able to mitigate. In such cases,
we could be liable for substantial damage awards that may exceed our liability insurance coverage by
unknown but significant amounts, which could materially impair our financial condition.
Our existing customers could elect to reduce or terminate the services they purchase from us, which could
adversely affect our operating results.
Customer contracts for Interoute’s services typically have initial terms of one to five years which,
unless terminated, typically renew automatically. For the year ended 31 December 2015, approximately 95%
of Interoute’s revenue was contracted and most of its contracts had termination charges for early
terminations of up to 75% of the contract value to the end of the contract term. The Interoute One,
Interoute OneBridge and Interoute VDC products, as well as Internet services, are to some degree
usage-based. Revenues from usage can be unpredictable since customers can reduce their usage, thus
reducing revenues generated from such contracts. These arrangements accounted for 2.3% of Interoute’s
revenues in the year ended 31 December 2015. Moreover, although Interoute has a dispersed customer base
with no single customer accounting for more than 4.0% of its revenue in the year ended 31 December 2015,
Interoute derives a significant amount of revenue from certain key customers.
Customer contracts for Easynet’s services typically have initial terms of between one and five years
which, unless terminated, typically operate as a rolling contract at the end of their term. Substantially all of
Easynet’s revenue is contracted and most of its contracts have termination charges for early terminations of
up to 100% of the contract value to the end of the contract term.
In the event that any key customer decides to reduce or terminate the services they purchase from
us, we may find such revenue difficult or impossible to replace. Additionally, customers may elect to reduce
or terminate services based on uncertainties related to the acquisition. Customer surveys and meetings
undertaken since the Acquisition have indicated that some customers were unhappy with the quality of
service they were receiving from Easynet. There can be no assurance that Interoute will be able to retain
these customers or that the customers will renew their services at the end of the term, and we expect this
will result in some customer losses. See “—Risks Relating to Easynet—Our and Easynet’s business
relationships may be subject to disruption due to uncertainty associated with the acquisition of Easynet”.
Should our customers terminate their service contracts or should customers on usage-based contracts
decrease their usage, we cannot assure you that we will be successful in generating additional revenue from
new customers to replace the revenue lost. Any failure by us to continue to retain our existing customers
could have a material adverse effect on our operating results.
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If we are unable to maintain a high level of customer service, customer satisfaction and demand for our
services could suffer, and our reputation could be damaged.
We believe that our success depends on our ability to provide customers with a quality of service
that not only meets our stated commitments, but also meets and exceeds customer service expectations. If
we are unable to provide customers with quality customer support in a variety of areas, we could face
customer dissatisfaction, the dilution of our brand, decreased overall demand for our services and a loss of
revenue. Further, the Easynet group was an amalgamation of several businesses which means customers
have been through several integrations. There is a risk that these integrations have impacted customer
satisfaction and therefore there is a risk some customers will terminate services at the end of their contracts.
Our inability to meet customer service expectations may damage our reputation and could consequently
limit our ability to retain existing customers and attract new customers, which would adversely affect our
ability to generate revenue and negatively impact our operating results.
We provide service level commitments to our customers, which could require us to issue credits for future
services if the stated service levels are not met for a given period and could significantly decrease our
revenue and harm our reputation.
Our customer agreements provide that we must maintain certain service level commitments to
customers relating primarily to network uptime, critical infrastructure availability and hardware replacement.
If we are unable to meet the stated service level commitments, we may be contractually obliged to provide
these customers with credits for future services. As a result, a failure to deliver services for a relatively short
duration could cause us to become obliged to issue these credits to a large number of affected customers.
For example, in 2015, Interoute was obliged to pay €0.7 million in credits to customers. Additionally,
Interoute’s customers may have the right to terminate their agreements if there are instances of repeated
failures to deliver service. Many of Easynet’s customer contracts contain structured service credit
arrangements that entitle customers to service level credits if Easynet fails to perform to certain service level
targets in its service level agreements. In the year ended 31 December 2015, Easynet was obliged to pay less
than €0.1 million in credits to customers. To date, the impact of credit payments on our revenues has been
relatively limited, but we cannot assure you that we will not be obliged to pay greater amounts in the future.
In addition, we cannot be assured that customers will accept these credits in lieu of other legal remedies that
may be available to them. Our failure to meet commitments could also result in substantial customer
dissatisfaction, loss or termination of customer contracts and subsequent revenue could be significantly
impacted if we cannot meet our service level commitments to our customers.
Failure to maintain adequate internal systems could cause us to be unable to properly provide service to
our customers, causing us to lose customers, suffer harm to our reputation and incur additional costs.
Some of our enterprise systems have been designed to support individual products, resulting in a
fragmentation amongst various internal systems, making it difficult to serve customers who use multiple
service offerings. This causes us to implement manual processes to overcome the fragmentation, which can
result in increased expense and manual errors.
We have systems initiatives underway that span infrastructure, products and business
transformation. These initiatives are likely to drive significant change in both infrastructure and business
processes and contain overlaps and dependencies amongst the programmes. Our inability to manage
competing priorities, execute multiple parallel programme tracks, plan effectively, manage resources
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effectively, and meet deadlines and budgets could result in us not being able to implement the systems
needed to deliver our services to our customers.
We may be subject to risks related to government contracts and related procurement regulations.
Our contracts with public bodies, including supranational, national and local governments and
non-governmental organisations, which comprised 11% of Interoute’s revenues from its top 250 customers
(in terms of revenue during the year ended 31 December 2015), are subject to various procurement
regulations and other requirements relating to their formation, administration and performance. Easynet
generated a similar proportion of its monthly recurring revenue from government procurement contracts for
the twelve months ended 31 December 2015.
The requirements and terms of government contracts may differ materially from contracts with
private parties, including, amongst other things, the accreditation requirements being maintained and the
right of government parties to unilaterally terminate contracts in certain instances or without cause. Under
certain government contracts, we may be subject to audits and investigations in certain circumstances, and
any violations could result in various civil and criminal penalties and administrative sanctions, including
termination of these contracts, refunding or suspending payments, the forfeiture of profits, the payment of
fines, and suspension or debarment from future government business.
Privacy concerns relating to our technology could damage our reputation and deter current and potential
users from using our products and services.
Since our products and services are cloud-based, we store substantial amounts of data for customers
on our servers, including personal information. Any systems failure or compromise of our security that
results in the release of customers’ data could (i) subject us to substantial damage claims from our
customers, (ii) expose us to costly regulatory remediation and (iii) harm our reputation and brand. We may
also need to expend significant resources to protect against security breaches. The risk that these types of
events could seriously harm our business is likely to increase as we expand our hosting footprint.
In addition, increased public focus on a variety of issues related to our operations, such as privacy
issues, government requests or orders for customer data have led to regulatory authorities around the world
considering a number of legislative proposals concerning data protection. It is possible that these laws may
be interpreted and applied in a manner that is inconsistent with our data practises. If so, in addition to the
possibility of fines, this could result in an order requiring that we change our data practises, which could have
an adverse effect on our business. Complying with these various laws could cause us to incur substantial
costs or require us to change our business practices in a manner adverse to our business.
If we do not prevent security breaches, we may be exposed to lawsuits, lose customers, suffer harm to our
reputation and incur additional costs.
The services we offer involve the transmission of large amounts of sensitive and proprietary
information over public communications networks, as well as the processing and storage of confidential
customer information. The inherent risks in Internet technology and communications include unauthorised
access, computer viruses, denial of service attacks, accidents, employee error, negligence or malfeasance,
cyberterrorism, intentional misconduct by computer hackers, infrastructure gaps, hardware and software
vulnerabilities, inadequate or missing security controls and exposed or unprotected customer data. Each of
these can (i) interfere with the delivery of services to our customers, (ii) impede our customers’ ability to do
business or (iii) compromise the security of systems and data or expose information to unauthorised third
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parties. An actual or perceived security breach or theft of our customers’ sensitive business data, regardless
of whether the breach or theft is attributable to the failure of our products, could adversely affect the
market’s perception of the efficacy of our solution and current or potential customers may look to our
competitors for alternatives to our solution.
Techniques used to obtain unauthorised access to or to sabotage systems (i.e. malware) change
frequently and generally are not recognised until launched against a target. We may be unable to implement
security measures in a timely manner or maintain the strength of these measures as we conduct our
business. Any breaches that occur could expose us to increased risk of regulatory sanctions, lawsuits,
settlements, investigations, the loss of existing or potential customers, harm to our reputation and increases
in our security costs. Although we typically require our customers to agree to terms of service that contain
provisions attempting to limit our liability for loss of data, we cannot assure you that such contractual
limitations on our liability will be enforceable if a customer brings proceedings against us. The outcome of
any such proceedings would depend on the specific facts of the case and legal and policy considerations that
we may not be able to mitigate. In such cases, we could be liable for substantial damage awards, which could
materially impair our financial condition. The laws of some countries in which we operate also require us to
inform any person whose data was accessed or stolen, which could harm our reputation and business.
Complying with the applicable notice requirements in the event of a security breach could result in
significant costs. We may also be subject to investigation and penalties by regulatory authorities and
potential claims by persons whose information was disclosed, even if such person was not actually a
customer.
If we fail to hire and retain qualified employees and management personnel, our growth strategy and
operating results could be harmed.
Our growth strategy depends on our ability to identify, hire, train and retain motivated executives, IT
infrastructure professionals, technical engineers, software developers, operations employees, and sales and
senior management personnel who maintain relationships with our customers and who can provide the
technical, strategic and marketing skills required for us to grow. There is a shortage of qualified personnel in
these fields and we compete with other companies for a limited pool of potential employees. In addition, as
our industry becomes more competitive, it could become especially difficult to retain personnel with unique
in-demand skills and knowledge, whom we would expect to become recruiting targets for competitors. There
can be no assurance that we will be able to recruit or retain qualified personnel, and this failure could cause
a dilution of our customer-focused culture and an inability to develop and deliver new products and services,
which could cause our operations and financial results to be negatively impacted.
Our success depends to a significant extent upon the continuing efforts and abilities of our key
executive officers and senior management personnel. We have programmes in place that have been
designed to motivate, reward and retain such employees, including cash bonus and equity incentive plans.
The loss or unavailability of any such key executives or senior management personnel, due to retirement,
resignation or otherwise, could have a material adverse effect on our business, financial condition and results
of operations.
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Any failure in our physical infrastructure or services or that of any third-party suppliers could lead to
significant costs and disruptions and could reduce our revenue, harm our business reputation and have a
material adverse effect on our financial results.
Interoute’s network, data centres and power supplies are subject to various points of failure.
Additionally, Easynet currently does not own its network and relies on various suppliers to provide its
services to customers, and such third-party infrastructure is also subject to failure risk. Problems with cooling
equipment, generators, uninterruptible power supply, routers, switches or other equipment, whether or not
within our control, could result in service interruptions for our customers, as well as equipment damage.
The total destruction or severe impairment of any of our data centre facilities could result in
significant downtime of our services and the loss of customer data. The services we provide are subject to
failure resulting from numerous factors, including:
• power loss;
• equipment failure;
• human error or accidents;
• theft, sabotage and vandalism;
• failure by us or our vendors to provide adequate service or maintenance to our equipment;
• network connectivity downtime;
• security breaches to our infrastructure;
• improper building maintenance by the landlords of the buildings in which our facilities are
located;
• physical or electronic security breaches;
• fire, earthquake, hurricane, tornado, flood and other natural disasters;
• water damage; and
• terrorism.
We have experienced interruptions in service in the past due to such things as human error, power
outages, power equipment failures, cooling equipment failures, routing problems, security issues, hard drive
failures, database corruption, system failures, software failures and other computer failures. Whilst we have
not experienced a material increase in customer attrition following these events, the extent to which our
reputation suffers is difficult to assess. We have taken and continue to take steps to improve our
infrastructure to prevent service interruptions, including upgrading our electrical and mechanical
infrastructure. However, service interruptions continue to be a risk for us, could materially impact our
business and are heightened by migration activity, such as the moving of physical data centres.
Any future service interruptions could:
• cause our customers to seek damages for losses incurred;
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• require us to replace existing equipment or add redundant facilities;
• affect our reputation as a reliable provider of hosting services;
• cause existing customers to cancel or elect to not renew their contracts; or
• make it more difficult for us to attract new customers.
Any of these events could materially increase our expenses or reduce our revenue, which would have
a material adverse effect on our operating results.
We rely on third-party other licensed operators and other suppliers to provide access technologies to
extend our network. The failure of such parties to perform their contractual obligations to our satisfaction,
or at all, may have a material adverse effect on our business, financial condition and results of operations.
We are and will continue to be dependent upon our OLO suppliers to provide access to certain
origination and termination points of their systems in various jurisdictions to enable us to extend our
network, and to provide access technologies ranging from DSL to wireless. We rely on these relationships to
provide our customers competitive pricing and delivery, as well as to connect our Enterprise Services product
group customers globally. For example, the cross-border nature of Interoute’s services and network
expansion require services and interconnection agreements with local operators in a large number of
jurisdictions; in 2015 Interoute worked with more than 400 such suppliers and had expenditure of
€103.2 million with OLOs (excluding Easynet).
Additionally, Easynet does not own its network and relies on various suppliers to provide any
required resources to its customers. Easynet’s results of operations can be affected by the prices of products
or services that Easynet must purchase from third parties in order to provide its products and services to its
own customers such as telecommunication services, equipment (i.e. routers), engineering and maintenance
services. Easynet’s reliance on third-party suppliers results in some supplier concentration risk, which can
particularly affect costs, especially with respect to national suppliers such as Deutsche Telecom in Germany,
BT and Sky in the United Kingdom and Telecom Italia in Italy, which service broad geographic areas and thus
are often subject to less pricing competition.
Disruptions created by suppliers’ failure to timely deliver satisfactory service could damage our
reputation and lead to the loss of current and potential customers. Further, because the liability of OLOs or
suppliers is often capped and limited to direct loss, we may not be able to recover full losses where we have
had to compensate our customers after the provision of unsatisfactory services (caused by failure stemming
from the third party). There can be no assurance that our third-party suppliers will perform their contractual
obligations or that there will not be disruptions in their performance of their contractual obligations which
may have a material adverse effect on our business, financial condition and results of operations.
We cannot predict our future tax liabilities. If we become subject to increased levels of taxation due to
changes in tax laws, or if tax contingencies are resolved adversely, our results of operations could be
materially adversely affected.
Due to the international nature of our operations, we are subject to multiple sets of complex and
varying tax laws and rules, which often require us to make subjective determinations. We cannot predict the
amount of future tax liabilities to which we may become subject. Any increase in the amount of taxation
incurred due to legislative or regulatory changes or as a result of the tax authorities’ disagreements with our
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determinations with respect to the application of tax law could result in a material adverse effect on our
business, financial condition and results of operations. Whilst we believe that our current tax provisions are
reasonable and appropriate, we cannot be assured that these items will be settled for the amounts accrued
or that additional exposures will not be identified in the future.
In 2011 and 2012 Interoute undertook actions to recapitalise its subsidiary Interoute Germany GmbH
in Germany, which could result in tax consequences that would not be considered in the ordinary course of
trade.
The first transaction was a retroactive merger in 2012 which, amongst other things, provided certain
tax benefits arising from off setting the income of the acquired company against accumulated losses of
Interoute Germany GmbH. In early 2013, during the accounting period following the consummation of the
merger, the relevant German tax laws were amended to prohibit companies from recognising tax benefits
arising from retroactive mergers. The relevant German law had prospective effect, so the implementation of
the law did not have an effect on the retroactive mergers that Interoute Germany GmbH entered into in
2012. Whilst Interoute believes that because there were tangible commercial benefits to undertaking the
retroactive merger, the German tax authorities would not characterise the transaction in a way that would
result in adverse tax consequence to us, we can provide no assurance that this will be the case. See “Our
Business—Disputes and Legal Proceedings”.
The second transaction relates to the acquisition of a group of companies that previously owned
property assets. The acquisition was completed in 2011 and, following a merger of all the acquired entities,
resulted in the creation of a tax group in Germany through which the release of deferred gains on the sale of
the properties were transferred into Interoute Germany GmbH with minimal tax cost. There has been no
change in tax law or relevant case law that would indicate that the structuring of this transaction was not
fully effective, but given the current focus of the German tax authorities on curtailing profit shifting and base
erosion, we can provide no assurance that this transaction will not be challenged by the relevant German tax
authorities. See “Our Business—Disputes and Legal Proceedings”.
To date, the German tax authorities have not indicated that Interoute Germany GmbH is under
investigation, or that any administrative actions or other legal proceedings will be brought against it in
relation to either of the transactions set out above. The transactions may be audited by the German tax
authorities in the future. Interoute’s affiliates have procured liability insurance on its behalf in the event that
the retroactive merger transaction is successfully challenged by the German tax authorities, which covers up
to €90.0 million in connection with the transaction. Such insurance may not be sufficient to fully address any
liabilities that may be imposed on us by the German tax authorities.
Additionally, a €1.5 million provision has been made in Easynet’s financial statements as at 31
December 2015 related to issues with the calculation, billing and collection of sales taxes in certain
U.S. states by Easynet U.S. that were not remitted to the necessary U.S. states. Whilst we believe that the
current accounting provisions as well as the indemnities provided by Easynet in the share purchase
agreement (the “Share Purchase Agreement”) entered into with certain sellers identified therein (the
“Sellers”) in connection with the acquisition of Easynet are adequate, the remediation process for these
taxes may be substantially time-consuming and we can provide no assurance that there will not be additional
costs and/or penalties associated with such process.
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Our insurance may not be adequate to cover losses or liabilities that may arise.
We maintain insurance for some, but not all, the potential risks and liabilities associated with our
business. In particular, we do not have insurance coverage for physical damage caused to our fibre network.
Any damage or failure that causes an interruption in services could reduce our revenues and have a material
adverse effect on our business, financial condition and results of operations. Also, whilst our property risk
insurance covers certain property damage caused by natural disasters up to a specified limit, we do not carry
insurance for all damage and losses caused by natural disasters. Further, insurance against acts of terrorism
is not always available in each jurisdiction in which we operate or may be prohibitively expensive. Therefore,
we do not have universal cover against acts of terrorism. If we seek to obtain additional insurance coverage
in the future, insurance may only be available at premium levels that are prohibitively expensive. As a result,
losses incurred or payments we may be required to make may have a material adverse effect on our
business, financial condition and results of operations to the extent such losses or payments are not insured
or the insured amount is not adequate.
We have been and may in the future be subject to litigation.
From time to time, we may be subject to litigation or arbitration arising out of our operations, which
could divert management’s attention from our day-to-day business. Damages claimed under such
proceedings may be material or may be indeterminate, and the outcome of such litigation or arbitration
could materially and adversely affect our business, results of operations and financial condition. Whilst we
assess the merits of each lawsuit and defend accordingly, we may be required to incur significant expenses in
defending against such litigation or arbitration and there can be no guarantee that a court or tribunal would
decide in our favour. Any adverse decisions could require us to, inter alia, pay damages, halt our operations
or stop our expansion projects, any one of which could adversely affect our business, prospects or financial
condition.
We are exposed to foreign currency exchange risk.
We transact business in numerous countries around the world and expect that a significant portion
of our business will continue to take place in international markets. We intend to continue to prepare our
consolidated financial statements in the functional currency of Interoute, which is the euro, although the
financial statements of certain of our subsidiaries are prepared in the functional currency of that entity. In
particular, approximately 72% of Easynet’s revenues were generated from the United Kingdom for the
twelve months ended 31 December 2015. We believe Easynet’s generation of revenues in pound sterling will
serve as a natural hedge to our combined currency exposure after the acquisition, but we cannot guarantee
that this will effectively reduce our exposure to exchange rate fluctuations. As such, it is expected that our
revenues and earnings will continue to be exposed to the risks that may arise from fluctuations in foreign
currency exchange rates, which could have a material adverse effect on our business, results of operations
and financial condition.
RISKS RELATING TO INTEROUTE
A number of events may impact our revenue under contract and signed contracted value, and revenue
under contract and signed contracted value may not be accurate indicators of our future results.
As at 31 December 2015, our revenue under contract was approximately €1.4 billion and our signed
contracted value was €393.5 million for the year months ended 31 December 2015. Our revenue under
contract consists of all future amounts (excluding any usage-based amounts) billable under the terms of the
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contract to the earliest time when the customer can terminate the contract without incurring termination
fees. Our signed contracted value consists of the increase in revenue under contract as at the end of each
period from either new contracts signed or old contracts renewed during the relevant period, and the
extension of those contracts at the option of our customers in accordance with the terms of their contracts.
Customers may choose to not extend their contracts or terminate their contracts, even if they have exercised
their option to extend the term of the contract, which may affect revenue under contract and signed
contracted value.
Expectations expressed in this Annual Report that a portion of revenue under contract and signed
contracted value will be realised in any particular year are based on scheduled payment dates as specified in
the relevant contracts. However, these measures do not provide a precise indication of the time period over
which we are contractually entitled to receive such revenue and there can be no assurance that such
revenue will be actually received by us in the time frames anticipated, or at all. There is no guarantee that
customers will meet their payment obligations, and such events could have a material adverse effect on the
realisation of our revenue under contract and signed contracted value in a particular year.
In addition, our customers may seek to negotiate the terms of contracts due to changes in their
requirements or in market conditions or may have an interpretation of certain terms included in their
contracts with us that differs from our interpretation. We note that neither revenue under contract nor
signed contracted value are guarantees of future revenue. Any early termination, variation, alternative
interpretation or renegotiation of a contract may mean that we may not realise our revenue under contract
and/or signed contracted value fully, on schedule or at all.
A portion of our revenue under contract and signed contracted value relates to contracts entered
into by our subsidiaries located in countries outside the eurozone, and which are denominated in currencies
other than the euro, including pound sterling, Swiss francs and U.S. dollars. Our revenue under contract and
signed contracted value figures, reported in euros, include the non-euro revenue converted into euro.
Subsequent variations in exchange rates will cause the euro amount of revenue under contract and signed
contracted value to vary, although the underlying revenue under contract and signed contracted value in the
stated currencies will remain unchanged. See “—Risks Related to Our Combined Business—Continued
uncertainty and challenging conditions in the global economy may adversely impact our business, financial
condition and results of operations” and “—Risks Related to Our Combined Business—We are exposed to
foreign currency exchange risk”.
For a description of how we calculate revenue under contract and signed contracted value, see
“Presentation of Financial and Other Information—Interoute Key Operational Metrics—Signed contracted
value” and “Presentation of Financial and Other Information—Interoute Key Operational Metrics—Revenue
under contract”, respectively. The amount of our revenue under contract or signed contracted value does
not necessarily indicate future earnings because of the possibility of early cancellations of contracts or
changes to the terms of the contract. In addition, the actual costs over the life of a contract may be higher
than the estimated costs that we used in negotiating our contracts. Many of our contracts specify the
liquidated damages to be paid should a customer desire to terminate a contract during its term. If a
customer terminates a contract, such termination would reduce our signed contracted value.
You should exercise caution in using revenue under contract and signed contracted value as a
measure of our performance, because they are measures that are not required by, nor are presented in
accordance with, Luxembourg GAAP.
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The markets in which we operate, or may operate in the future, may not offer the predictability of legal
systems in more mature markets.
The legal systems in certain markets in which we operate, or may operate in the future, including our
operations in Russia and Ukraine, are still developing and have undergone significant changes in recent years.
The interpretation of, and procedural safeguards relating to, these legal systems are still developing, creating
the risk of inconsistency in their application and uncertainty as to the actions necessary to guarantee
compliance with those laws. We may not be able to obtain the legal remedies provided for in these
jurisdictions in a timely manner or at all and may not be able to enforce our rights, including our contractual
rights and any judgments we obtain in our favour effectively. A lack of legal certainty or an inability to obtain
predictable legal remedies may have a material adverse effect on our results of operations, financial
condition and prospects.
Many of our customers are global in nature and our contracting counterparty for services may be
based in a jurisdiction in which we are not incorporated. Contracting with global counterparties creates risk
in our ability to enforce contractual commitments and, in particular, our ability to recover overdue amounts
and bad debts. We also carry a risk of withholding tax liability and, therefore, the amounts received may be
less than those anticipated at the time of contracting. Although we seek to provide for the gross-up of
payments in our contracts where withholding tax may apply, we are not always successful in doing so.
The market prices for many of our services have decreased in the past and may decrease in the future,
resulting in lower revenue and margins than we anticipate.
In recent years, the market prices per unit for many of our products and services, particularly within
our Network Services product group, have decreased, and we expect this trend to continue in the future. In
order to sustain revenues, we must increase the volume of sales. These price decreases resulted from
downward market pressure and other factors, including:
• technological changes and network expansions that have resulted in increased transmission
capacity available for sale by us and our competitors;
• customer agreements containing volume-based pricing; and
• a willingness of competitors to accept smaller operating margins in the short term in an attempt
to increase long-term revenue.
To retain customers and revenue in our Network Services product group, we often must reduce per
unit prices in response to market conditions and trends, and continue to increase our network capacity at
acceptable prices in order to realise our targets for anticipated revenue growth, cash flow, operating
efficiencies and the cost benefits of our network. As prices for some of our products and services decrease,
our operating results may suffer unless we are able to either reduce our operating expenses or increase
traffic volume from which we can derive additional revenue. Whilst we have, in the past, managed to offset
price decreases through increased capacity sold, we can provide no assurance that we will be able to
continue to do so in future periods.
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We cannot easily reduce our operating expenses in the short term, which could have a material adverse
effect on our business in the event of a slowdown in demand for our services or a decrease in revenue for
any reason.
Our operating expenses primarily consist of personnel, power and network costs. Personnel and
network costs cannot be easily reduced in the short term. Therefore, we are unlikely to be able to reduce our
expenses significantly in response to a slowdown in demand for our services or any decrease in revenue.
Personnel costs are fixed due to our contracts with our employees having set notice periods and local law
limitations in relation to the termination of employment contracts. Additionally, from time to time, we may
need to invest in the expansion of our network to increase our capabilities and to meet customer
commitments in order to remain competitive. Facility leases are also fixed and we may be unable to
terminate or amend facility leases quickly. In respect of our power costs, there is a minimum level of power
required to keep our data centres running irrespective of the number of customers using them, so our power
costs may exceed the amount of revenue derived from power. If we are unable to reduce our expenses to
respond sufficiently to a decrease in demand for services, our business, financial condition and results of
operations would be materially adversely affected.
The operation, administration, maintenance and repair of our network and data centres require significant
expenses and are subject to risks that could lead to disruptions in our services.
Our networks and data centres are subject to the risks inherent in large-scale and complex physical
infrastructures employing advanced technologies, including, amongst other things:
• design defects;
• equipment breakdowns;
• physical damage to cables, equipment and data centres;
• failure by us or our vendors to provide adequate service or maintenance to our equipment;
• power loss;
• human error or accidents;
• sabotage and vandalism; and
• natural disasters.
The operation, administration, maintenance and repair of these networks and data centres require
the coordination and integration of sophisticated and highly specialised hardware and software technologies
and equipment located throughout Europe and require significant operating and capital expenses. Networks
may not continue to function as expected in a cost-effective manner. The failure of the hardware or software
to function as required could render a system unable to perform at design specifications or at all, which
could have a material adverse impact on our business, financial condition and results of operations. The
failure of any of our infrastructure to operate for its full design life could have a material adverse effect on
our business, financial condition and results of operations.
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Future expansion or adaptation of our network will require substantial resources, which may not be
available at the time.
We will need to continue to expand and adapt our network to remain competitive, which may
require significant additional funding. Additional expansion and adaptations of our communication network’s
electronic and software components will be necessary to respond to:
• a growing number of customers;
• the development and launching of new services;
• increased demands by customers to transmit larger amounts of data;
• changes in customers’ service requirements;
• technological advances by competitors; and
• governmental regulations.
The future expansion or adaptation of our network will require substantial additional financial,
operational and managerial resources, which may not be available at the time. We may be unable to expand
or adapt our network to respond to these developments on a timely basis and at a commercially reasonable
cost.
A general lack of electrical power resources sufficient to meet our customers’ demands may impair our
ability to utilise fully the available space at our existing data centres or our plans to open new data
centres.
In each of our markets, we rely on third parties to provide a sufficient amount of power for current
and future customers. Power and cooling requirements are generally growing on a per customer basis. Some
of our customers are increasing and may continue to increase their use of high-density electrical power
equipment, such as blade servers, which can significantly increase the demand for power per customer and
cooling requirements for our data centres. Future demand for electrical power and cooling may exceed the
designed electrical power and cooling infrastructure in our data centres. As the electrical power
infrastructure is typically one of the most important limiting factors in our data centres, our ability to utilise
available space fully may be limited. This, as well as any inability to secure sufficient power resources from
third-party providers, could have a negative impact on the effective available capacity of a given data centre
and limit our ability to grow our business.
The ability to increase the power capacity or power infrastructure of a data centre, should we decide
to, is dependent on several factors including, but not limited to, the local utility’s ability and willingness to
provide additional power, the length of time required to provide that power and/or whether it is feasible to
upgrade the electrical infrastructure and cooling systems of a data centre to deliver additional power to
customers.
If we are unable to utilise fully the physical space available within our data centres, or successfully
develop additional data centres or expand existing data centres due to restrictions on available electrical
power or cooling, we may be unable to accept new customers or increase the services provided to existing
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customers, which may have a material adverse effect on our business, results of operations and financial
condition.
Required capital expenditures for our future development may be higher than currently expected.
Our future development may require higher than expected financial resources for capital
expenditures, which may lead to a cash outflow. Our product and service offering is based on the continued
evolution and efficiency of the platforms we build. Within some of our product and service offerings, such as
Transport, there is recognition that this constant evolution is critical to maintaining equilibrium between
capital expenditure and the revenue generated. It is conceivable in a competitive market that this
equilibrium will become negatively biased toward capital expenditure due to aggressive reductions in pricing.
This would result in higher than expected capital expenditure to support and maintain the revenue projected
in our financial planning. Debt or equity financing, or cash generated by operations, might not be available to
us or might not be sufficient to meet our requirements for capital expenditures or for other corporate
purposes. Even if debt or equity financing is available, it might not be available on terms acceptable to us.
We cannot guarantee that we will be able to obtain such funding on favourable terms, or at all, which could
have a materially adverse effect on us.
We may not be able to renew rights of way or could be forced to renew on onerous terms, which could
adversely affect our operating results.
We rely on rights of way to access land in order to build and manage the network infrastructure on
which our business relies. Rights of way agreements vary but are typically between 20 to 25 years in
duration. As the expiry or termination of a right of way approaches, we may not be able to come to an
agreement with providers to renew the right of way or could be forced to renew on onerous terms. Upon the
expiry or termination of rights of way, we are obliged to immediately cease using and remove our operations
equipment as soon as practicable. Our failure to renew any right of way could result in significant challenges
due to the costs associated with finding alternative arrangements, if alternatives are available. There may be
instances in which the right of way we possess does not properly cover all land that the network runs
through, and we may need to negotiate new rights of way and/or compensate landowners for any
unauthorised access. Significant difficulties in negotiations with right of way providers could result in
significant downtime for affected customers. This could damage our reputation and lead to the loss of
current and potential customers, which would harm our operating results and financial condition.
We have not prepared consolidated financial statements in accordance with U.S. GAAP or IFRS, and we do
not intend to prepare separate financial statements for the Guarantors.
We prepare our consolidated financial statements in accordance with Luxembourg GAAP. There
could be significant differences between Luxembourg GAAP and both generally accepted accounting
principles in the United States (“U.S. GAAP”) and IFRS. We have not presented a reconciliation of our
consolidated financial statements to U.S. GAAP or IFRS in this Annual Report. See “Summary of Certain
Differences Between Luxembourg GAAP and IFRS” for further information regarding these differences.
Moreover, the Indenture does not require us to reconcile future consolidated financial statements to
U.S. GAAP or IFRS. However, beginning with the year ended 31 December 2016, we intend to present our
financial statements in accordance with IFRS, but we cannot guarantee that we will do so. We also have not
presented separate consolidated financial statements or summary financial data for the guarantors of the
Notes (the “Guarantors”) and, with respect to the Guarantors, are not required to do so in the future under
the Indenture.
38
RISKS RELATING TO EASYNET
Operating information presented for Easynet may not fully illustrate historical trends.
In connection with its acquisition of EGHL Limited, the holding company of the Easynet Group, all the
rudimentary business systems in the Easynet Group were decommissioned in 2014 and data were moved
onto the integrated MDNX systems platform during the period from January 2014 to November 2014. As a
result, Easynet uses the same systems with workflow, billing and finance data now consolidated on the
MDNX system. However, the data on the Easynet Group’s old systems was deficient in various aspects and
therefore key operational and business performance indicators for the periods prior to the effective
migration of these systems are largely unreliable and are not presented in this Annual Report. Several
projects were commenced later in 2014 to recreate the missing operating information. Whilst considerable
progress has been made, these projects have not yet been completed. Given the limited nature of the
historical operational information available for Easynet, the information presented in this Annual Report may
not fully illustrate historical trends or be indicative of future periods.
Financial information presented for Easynet may not fully illustrate historical trends.
The financial information presented for Easynet for the 12 month periods ending 31 December 2014
and 31 December 2015 have been derived from the unaudited management accounts of Easynet, including
the notes related thereto. The financials have been derived from the internal accounting format based on
IFRS. On 11 December 2013, MDNX Group Holdings Limited acquired MDNX Group Limited, the holding
company of the MDNX Group, and EGHL Limited, the holding company of the Easynet Group. MDNX Group
Limited prepared its financial statements on the basis of a 31 March year end and in accordance with
U.K. GAAP, whilst EGHL Limited prepared its financial statements on the basis of a 30 June year end and in
accordance with IFRS. The formation of MDNX Group Holdings Limited as a new holding company enabled
the consolidation of both the financial periods and accounting policies of MDNX Group Limited and EGHL
Limited.
In addition, prior to its acquisition by MDNX in December 2013, EGHL Limited moved its finance
department to Shepton Mallet in order to update its billing process. However, during the migration, the
billing processes and data integrity weakened such that the EGHL Limited finance team double-billed some
customers and did not bill others. The majority of these billing errors were corrected in 2014 with the
migration of the EGHL Limited systems to the integrated MDNX platform; however, the remedial work is still
ongoing. Errors generated by a lack of data integrity could cause an overstatement or understatement of the
financial position of Easynet and could lead to a restatement of its financial statements.
Our financial position and results of operations may differ materially from the selected unaudited pro
forma condensed combined financial data included in this Annual Report and it will be difficult to compare
our future financial information to the historical financial information of Interoute.
The selected unaudited pro forma condensed combined financial information contained in this Annual
Report is presented for illustrative purposes only. The unaudited pro forma condensed combined financial
information is presented in euro and, unless otherwise specified, has been prepared on a basis that is
consistent with the Luxembourg GAAP accounting policies used in the preparation of the Interoute
Consolidated Financial Statements. Certain adjustments and assumptions have been made regarding our
business after giving effect to the acquisition and associated financing transactions of Easynet as described in
the “Easynet Management Discussion and Analysis” section. The assumptions used in preparing the selected
unaudited pro forma condensed combined financial information may not prove to be accurate.
39
In addition, it should also be noted that the historical Easynet financial information reflected in
selected unaudited pro forma condensed combined financial information has been derived from the
unaudited management accounts of Easynet and the assumptions of management. The financials have been
derived from the internal accounting format based on IFRS and converted to Luxembourg GAAP, based on a
preliminary Luxembourg GAAP analysis (as further discussed in the “Easynet Management Discussion and
Analysis” section). The pro forma financial information included in this Annual Report has not been prepared
in accordance with the requirements of Regulation S-X of the SEC. Neither the adjustments nor the resulting
pro forma financial information have been audited in accordance with International Standards on Auditing or
U.S. GAAS, nor has the pro forma financial information been reviewed by our auditors. This pro forma data
should therefore not be relied on to reflect what our results of operations and financial condition would have
looked like after the acquisition of Easynet. For our pro forma financial information prepared as of and for
the last twelve months ended June 30, 2015, see: Pro Forma Combined Financial Information;
http://www.interoute.com/sites/default/files/Eagle-Pro-Formas-from-Final-OM.pdf
Easynet may have liabilities that are not known to us.
As a result of the acquisition, we will assume all of Easynet’s liabilities. There may be liabilities that
we failed or were unable to discover in the course of performing due diligence investigations into Easynet.
Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business,
results of operations and financial condition. As we integrate the Easynet business, we may learn additional
information about Easynet, such as unknown or contingent liabilities and issues relating to compliance with
applicable laws or otherwise, that could adversely affect our business, results of operation and financial
condition. With respect to Easynet’s previous acquisitions, should any claims or liabilities arise under
Easynet’s agreements with previous sellers, we may not be able to enforce any warranties or rights arising
from such agreements.
We may not be able to enforce the indemnity Easynet has provided to us, and we are exposed to Easynet’s
credit risk.
In connection with the acquisition, Easynet has agreed to indemnify us, subject to certain limitations,
for certain liabilities. Nonetheless, third parties could seek to hold us responsible for the liabilities Easynet
has agreed to retain, and there can be no assurance that we will be able to enforce our claims under the
indemnities against Easynet. Moreover, even if we ultimately succeed in recovering any amounts for which
we are held liable from Easynet, we may temporarily be required to bear these losses ourselves. Although we
had £76.0 million of warranty and indemnity insurance in place when the acquisition of Easynet was
completed, we cannot assure you that our insurance coverage will be sufficient to cover a breach of
representations and warranties. In addition, our ability to enforce our claims under the indemnities against
Easynet depends on its creditworthiness at the time we seek to enforce our claims, and there can be no
assurance regarding their financial condition in the future.
We may not be able to enforce claims with respect to the representations and warranties that the Sellers
have provided to us under the Share Purchase Agreement.
In connection with the acquisition of Easynet, the Sellers have given certain representations and
warranties related to their shares under the Share Purchase Agreement, and management sellers of Easynet
have given certain customary representations and warranties related to Easynet and the business of Easynet
40
under a management deed. There can be no assurance that we will be able to enforce any claims against the
Sellers or management sellers relating to breaches of such representations and warranties. The Sellers’
liability with respect to breaches of their representations and warranties under the Share Purchase
Agreement is limited. Moreover, even if we ultimately succeed in recovering any amounts from the Sellers or
our insurance provider, we may temporarily be required to bear these losses ourselves.
Interoute and Easynet may have difficulty attracting, motivating and retaining executives and other key
employees due to uncertainty associated with the acquisition.
After the acquisition has been completed, our success will depend in part upon our ability to retain
our and Easynet’s key employees. Competition for qualified personnel can be intense. Current and
prospective employees may experience uncertainty over the effect of the acquisition, which may impair our
ability to attract, retain and motivate key management, sales, marketing, technical and other personnel prior
to and following the acquisition. Employee retention and performance may be particularly challenging during
the pendency of the acquisition, as employees may experience uncertainty about their future roles with us.
Employee dissatisfaction with the acquisition and changes in headcount may lead to a lack of motivation,
employee misconduct or malfeasance or labour action.
In addition, there may be change of control provisions in Easynet’s employment and transition
agreements, and certain key employees of Easynet are entitled to receive severance payments upon a
constructive termination of employment. Certain key Easynet employees could potentially terminate their
employment following specified circumstances set out in the applicable employment or transition
agreement, including certain changes in such key employees’ duties, position, responsibilities or
compensation. If our or Easynet’s key employees depart, the integration of the companies may be more
difficult and our business following the acquisition may be harmed. Further, we may have to incur significant
costs in identifying, hiring and retaining replacements for departing employees and may lose significant
expertise and talent relating to our or Easynet’s businesses, and our ability to realise the anticipated benefits
of the acquisition may be adversely affected.
A number of senior employees have left the business following the completion of the transaction,
however those roles have been filled by existing Interoute employees and there has been no significant
disruption to the business.
Our and Easynet’s business relationships may be subject to disruption due to uncertainty associated with
the acquisition of Easynet.
Parties that conduct business with us or Easynet may experience uncertainty associated with the
acquisition of Easynet, including with respect to current or future business relationships with us, Easynet or
the combined group following the completion of the acquisition of Easynet. The acquisition will constitute a
change of control under certain of Easynet’s agreements with its existing customers and suppliers, and will
entitle these customers or suppliers to terminate certain of their agreements. We cannot exclude the
possibility that some customers and suppliers may exercise their termination rights, which could have an
adverse effect on our revenues following the acquisition. Additionally, certain government accreditations
similarly require a waiver in the event of a change of control and, although we expect to acquire such
waivers, we cannot guarantee that we will be successful in doing so. Further, our and Easynet’s business
relationships may be subject to disruption as customers, distributors, suppliers, vendors and others may
attempt to negotiate changes in, or under certain circumstances be entitled to withdraw from or terminate
existing business relationships or consider entering into business relationships with parties other than
41
Interoute, Easynet or the combined group following the completion of the acquisition. Such disruptions could
adversely affect our ability to realise the anticipated benefits of the acquisition. Any such disruptions could
have a material adverse effect on our business, results of operations and financial condition.
RISKS RELATING TO OUR FINANCIAL PROFILE AND STRUCTURE
Our leverage and debt service obligations could adversely affect our business and prevent us from fulfilling
our obligations.
We cannot guarantee that we will be able to generate enough cash flow from operations to service
our debt obligations. We are highly leveraged. As at 31 December 2015, we had total debt of €677.5 million.
The degree to which we will be leveraged could have important consequences, including, but not limited to:
• making it more difficult for us to satisfy our obligations with respect to the Notes and our other
debt and liabilities;
• making us vulnerable to, and reducing our flexibility to respond to, general adverse economic
and industry conditions;
• requiring us to dedicate a substantial portion of our cash flow from operations to the payment of
principal of, and interest on, indebtedness, thereby reducing the availability of such cash flow to
fund working capital, capital expenditures, acquisitions, joint ventures or other general corporate
purposes;
• limiting our flexibility in planning for, or reacting to, changes in our business and the competitive
environment and industry in which we operate;
• placing us at a competitive disadvantage compared to our competitors that are not as highly
leveraged; and
• limiting our ability to borrow additional funds or raise equity capital in the future and increasing
the cost of any such additional financings.
Any of these or other consequences or events could have a material adverse effect on our ability to
satisfy our debt obligations. Our ability to make payments on and refinance our indebtedness and to fund
working capital expenditures and other expenses will depend on our future operating performance and
ability to generate cash from operations. Our ability to generate cash from operations is subject, in large
part, to general economic, competitive, legislative and regulatory factors and other factors that are beyond
our control. We may not be able to generate sufficient cash flow from operations or obtain enough capital to
service our debt or fund our planned capital expenditures.
Further, we have substantially increased indebtedness following the completion of the acquisition,
which could have the effect, amongst other things, of reducing our flexibility to respond to changing business
and economic conditions and will increase our interest expense. In addition, the amount of cash required to
service our higher indebtedness is greater than the amount of cash required to service the indebtedness of
Interoute and Easynet prior to the acquisition. This increased level of indebtedness could also reduce funds
available for our investments in our network capabilities, including investments in conjunction with the
addition of more infrastructure (ground) capability and the expansion of the set of cloud services that
depend upon it, as well as for other capital expenditures and other activities, and may create competitive
disadvantages for us relative to other network and cloud computing companies with lower debt levels.
42
In connection with executing our business strategies, we expect to continue to evaluate the
possibility of acquiring additional assets and making further strategic investments, particularly those which
would enable us to expand our pan-European integrated IT infrastructure offering, and we may elect to
finance these endeavours by incurring additional indebtedness. Moreover, to respond to competitive
challenges, we may be required to raise substantial additional capital to finance new product or service
offerings, or serve new geographic markets. Our ability to arrange additional financing will depend on,
amongst other factors, our financial position and performance, as well as on prevailing market conditions
and other factors beyond our control. No assurance can be given that we will be able to obtain additional
financing on terms acceptable to us or at all. In addition, if we are able to obtain additional financing, our
credit ratings could be adversely affected, which could increase our borrowing costs and further limit our
access to capital and ability to satisfy our debt obligations. Accordingly, our substantially increased
indebtedness following the completion of the acquisition could have a material adverse effect on our
business, results of operations and financial condition.
Despite our leverage, we may incur more debt, which could adversely affect our business and prevent us
from fulfilling our obligations.
We may be able to incur substantial additional debt in the future. Although the Revolving Credit
Facility Agreement and the Indenture will contain restrictions on the incurrence of additional debt, these
restrictions are subject to a number of significant qualifications and exceptions, and under certain
circumstances the amount of debt that could be incurred in compliance with these restrictions could be
substantial. In particular, up to the greater of €100 million and 55% of the Consolidated EBITDA (as defined in
Indenture governing the Notes) of debt under credit facilities, as well as certain hedging liabilities may share
in the Collateral securing the Notes and receive priority to the proceeds from enforcement of the Collateral.
The Indenture will also allow our non-Guarantor subsidiaries to incur additional debt that would be
structurally senior to the Notes and will not prevent us from incurring liabilities that do not constitute
“Indebtedness” as defined therein. If new debt is added to our existing debt levels, the related risks that we
now face would increase.
We are subject to restrictive debt covenants that may limit our ability to finance future operations and
capital needs and pursue business opportunities and activities.
The Indenture and the Revolving Credit Facility Agreement will restrict, amongst other things, our
ability to:
• incur or guarantee additional indebtedness and issue certain preferred stock;
• enter into certain sale and leaseback transactions;
• create or incur certain liens;
• make certain payments, including dividends or other distributions;
• prepay or redeem subordinated debt or equity;
• make certain investments or acquisitions, including participation in joint ventures;
• create encumbrances or restrictions on the payment of dividends or other distributions, loans or
advances to, and on the transfer of, assets to the Issuer;
43
• sell, lease or transfer certain assets, including the stock of restricted subsidiaries;
• engage in certain transactions with affiliates;
• create unrestricted subsidiaries;
• consolidate or merge with other entities; and
• impair the security interest for the benefit of the holders of the Notes.
All these limitations will be subject to significant exceptions and qualifications. Despite these
exceptions and qualifications, the covenants to which we are subject could limit our ability to finance our
future operations and capital needs and our ability to pursue business opportunities and activities that may
be in our interest. In addition, the Revolving Credit Facility Agreement contains a leverage covenant which
requires us to ensure that our total leverage does not exceed a ratio of 5.5:1.0. This covenant is tested to the
extent that our outstanding aggregate exposures under the Revolving Credit Facility exceeds 35% of our total
commitments under the Revolving Credit Facility on the last day of the relevant testing period.
In addition, our ability to comply with these covenants and restrictions may be affected by events
beyond our control. These include prevailing economic, financial and industry conditions. If we breach any of
these covenants or restrictions, we could be in default under the terms of the Revolving Credit Facility
Agreement, and the relevant lenders could elect to declare the debt, together with accrued and unpaid
interest and other fees, if any, immediately due and payable and proceed against any collateral securing that
debt. This could also result in an event of default under the Indenture. If the debt under the Revolving Credit
Facility Agreement, the Notes or the guarantees or any other material financing arrangement that we enter
into were to be accelerated, our assets may be insufficient to repay in full the Notes and our other debt.
Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions also
may be accelerated or become payable on demand. In these circumstances, our assets may not be sufficient
to repay in full that indebtedness and our other indebtedness then outstanding, including the Notes.
Certain of our indebtedness, including under our Revolving Credit Facility and the Floating Rate Notes,
bears interest at floating rates that could rise significantly, increasing our costs and reducing our cash flow.
Certain of our indebtedness bears interest at floating rates of interest per annum equal to EURIBOR,
as adjusted periodically, plus a spread. The Floating Rate Notes will also bear interest at a per annum rate
equal to EURIBOR plus a margin. These interest rates could rise significantly in the future and could have a
material adverse effect on our ability to secure our debt obligations. Although we may enter into certain
hedging arrangements designed to fix a portion of these rates, there can be no assurance that hedging will
be available or continue to be available on commercially reasonable terms. To the extent that interest rates
or any drawings were to increase significantly, our interest expense would correspondingly increase,
reducing our cash flow.
The manner of calculating EURIBOR may change in the future and is under review, and there can be
no assurance that EURIBOR will continue to be calculated as it has been historically.
The interests of our shareholders may be inconsistent with the interests of the holders of the Notes.
The interests of our principal shareholders, in certain circumstances, may conflict with the interests
of holders of the Notes. Our shareholders are under no obligation to provide us with support. Emasan is
44
managed by the Sandoz Family Foundation and holds 70% of the shares of ICHSA, whilst Turbo Holdings Lux II
S.à r.l. is controlled by both Aleph Capital Partners and Crestview Partners and holds 30% of our shares.
These shareholders have, and will continue to have, directly or indirectly, the power, amongst other things,
to affect our legal and capital structure and our day-to-day operations, as well as the ability to elect and
change our management and to approve any other changes to our operations. For example, they could cause
us to incur additional indebtedness or to sell certain material assets, in each case, so long as the Indenture so
permits. Incurring additional indebtedness would increase our debt service obligations and selling assets
could reduce our ability to generate turnover, each of which could adversely affect holders of the Notes.
45
SUMMARY OVERVIEW OF RESULTS
Operational Data Interoute
Year ended 31 December
2014 2015
(€ millions, unless otherwise indicated)
Total recurring revenue ........................................................................... 383.2 434.0
Average new net monthly recurring revenue (‘000s) ................................. 175.1 192.9
Of which Network Services (‘000s) ..................................................... 1.9 41.6
Of which Enterprise Services (‘000s) .................................................. 173.2 151.3
Signed contracted value ........................................................................... 462.4 393.5
Of which Network Services ................................................................. 163.1 170.4
Of which Enterprise Services .............................................................. 299.3 223.2
Churn Rate .............................................................................................. 0.7% 0.7%
Of which Network Services ................................................................. 1.1% 0.9%
Of which Enterprise Services .............................................................. 0.4% 0.6%
Other financial data Interoute
Total revenue .......................................................................................... 424.9 473.4
Of which Network Services ................................................................. 171.3 197.5
Of which Enterprise Services .............................................................. 253.6 275.9
Gross margin ........................................................................................... 294.9 322.5
EBITDA1 ................................................................................................... 90.1 94.7
Adjusted EBITDA2 ............................................................................................. 92.5 93.7
Capital Expenditure .......................................................................................... 72.9 84.2
Adjusted EBITDA less Capital Expenditure ....................................................... 19.6 9.5
1 EBITDA to Net Profit/Loss reconciliation presented in the “Consolidated Interoute Financial Information” section.
2 Adjusted EBITDA reconciliation presented in the “Interoute Management Discussion And Analysis - Reconciliation of EBITDA to Adjusted EBITDA” section.
46
Operational Data Easynet
Year ended 31 December
2014 2015
(€ millions, unless otherwise indicated)
Average new net monthly recurring revenue (‘000s) ................................... n.a.3 (117.6)
Churn rate ............................................................................................... n.a. 1.1%
Other financial data Easynet
The Easynet financial data below for the twelve months ended 31 December 2015 and 2014 have been derived from the management accounts of Easynet. Adjustments have then been made to this data to convert this from IFRS to a Luxembourg GAAP format (please refer to the “Easynet Management Discussion and Analysis” section for explanation of the differences between IFRS and Luxembourg GAAP).
Total revenue........................................................................................... 267.7 275.7
Gross margin ............................................................................................ 139.0 143.8
EBITDA .................................................................................................... 35.3 41.3
Adjusted EBITDA4 ............................................................................................. 44.6 54.5
Capital Expenditure ......................................................................................... 16.4 12.5
Adjusted EBITDA less Capital Expenditure ...................................................... 28.2 42.0
3 Note: Data not available as acquisition of Easynet by MDNX only took place in January 2014.
4 For reconciliation of Easynet EBITDA to Adjusted EBITDA see “Easynet Management Discussion And Analysis - Reconciliation of EBITDA to Adjusted EBITDA”
47
CONSOLIDATED INTEROUTE FINANCIAL INFORMATION
Summary Consolidated Interoute Profit and Loss Account
On 15 October 2015, Interoute completed the acquisition of Easynet.
The following presents Interoute’s combined results following the Easynet acquisition and includes 2.5 months for Easynet in 2015 to reflect the acquisition of Easynet.
Results presented in this section are derived from the Interoute Audited Statutory Accounts.
Year ended 31 December
2014 2015
(€ millions, unless otherwise
indicated)
Total Revenue ............................................................ 424.9 530.1
Sales related costs ...................................................... (130.0) (179.7)
Gross Margin .............................................................. 294.9 350.4
Network Costs ............................................................ (81.6) (90.1)
Staff Costs ................................................................... (99.3) (122.5)
Administrative Costs ................................................... (23.8) (31.8)
Integration costs ......................................................... (4.0)
EBITDA ........................................................................ 90.1 102.0
Depreciation and Amortisation .................................. (69.7) (100.4)
Net Finance Costs ....................................................... (7.2) (19.7)
Other (costs)/income ................................................. (6.0) (1.8)
Profit/(loss) before taxes ........................................... 7.2 (19.8)
Income (charge)/Tax Credit ........................................ 0.5 4.0
Net profit/(loss) for the period ................................. 7.7 (15.8)
The consolidated business increased its revenues by 24.8%, from €424.9m in 2014 to €530.1m in 2015.
Excluding the impact of Vtesse and Easynet, organic revenues have increased by 6.6% from €418.2m in 2014
to €445.8m in 2015. Easynet performance was in line with expectations and contributed €56.8m of revenue
in the 2.5 months ending December ’15.
EBITDA increased by 17.8% to €106.0m before integration costs and by 13.3% to €102.0m after integration
costs are considered. Gross margin for the combined business is 66.1% for 2015. Organic absolute gross
margin grew by 4.0%.
48
Profits before tax reduced from €7.2m in 2014 to a loss of €19.8m in 2015, largely as a result of increased
interest charges arising on the financing obtained to fund the Easynet acquisition.
Staff costs as presented in this report include €13.2m of costs in the year ended 31 December 2014 and
€14.8m of costs in the year ended 31 December 2015 that, if presented in a Luxemburg statutory format,
would be recognised within Administrative costs.
Interoute EBITDA and Consolidated Adjusted EBITDA
The figures below show the EBITDA and Adjusted EBITDA per the Interoute Audited Statutory Accounts. For
Interoute this includes the EBITDA and Adjusted EBITDA for the twelve months period ended 31 December
2015 and 31 December 2015. Consolidated EBITDA and Adjusted EBITDA include the 2.5 month-period ended
31 December 2015 (following the Easynet acquisition).
The total EBITDA presented below is the Interoute EBITDA plus the Easynet EBITDA and the total Adjusted
EBITDA presented below is the Interoute Adjusted EBITDA plus the Easynet Adjusted EBITDA.
Twelve months ended 31 December
2014 2015
(€ millions, unless otherwise
indicated)
Interoute EBITDA ........................................................................ 90.1 94.7
Adjusted EBITDA ......................................................... 92.5 93.7
Easynet EBITDA ........................................................................ 7.35
Adjusted EBITDA6 ....................................................... 10.87
Total Consolidated EBITDA ............................................. 90.1 102.0
Consolidated Adjusted EBITDA .............................. 92.5 104.4
Consolidated Adjusted EBITDA increased by 12.8% to €104.4m in 2015 from €92.5m in 2014 driven by the
acquisition of Easynet. €10.8m of the Consolidated Adjusted EBITDA is generated from Easynet (in the 2.5
months ending 31 December 2015).
For the reconciliation between EBITDA and adjusted EBITDA in Interoute, please refer to the “Interoute
Management Discussion and Analysis” section.
5 Represents Easynet’s EBITDA for the last 2.5 months of the year ended 31 December 2015.
6 Adjusted EBITDA for Easynet is EBITDA adjusted for costs associated with the Easynet integration. See “Presentation of Financial and Other Information―Non-GAAP financial information”.
7 Represents Easynet’s Adjusted EBITDA for the last 2.5 months of the year ended 31 December 2015.
49
Reconciliation of EBITDA to Net Profit/Loss
Year ended 31 December
2014 2015
(€ millions)
EBITDA .................................................................................................... 90.1 102.0
Depreciation and Amortisation ....................................................................... (69.7) (100.4)
Net Finance Costs............................................................................................. (7.2) (19.7)
Other (costs)/income ....................................................................................... (6.0) (1.8)
Income (charge)/Tax Credit ............................................................................. 0.5 4.0
Net profit/(loss) for the period ................................................................. 7.7 (15.8)
50
Selected Pro Forma Combined Financial Data and Key Ratios
The results below show selected pro forma Interoute results as if the acquisition had taken place on 1
January 2015. The data for Interoute below has been derived from the audited statutory accounts prepared
in accordance with Luxembourg GAAP and attached to this Annual Report. For Easynet, the financials have
been derived from the management accounts of Easynet. The adjustments shown convert the Easynet
financials to the Interoute accounting policies (Luxembourg GAAP).
Please refer to the “Easynet Management Discussion and Analysis” section for explanation of the differences
between IFRS and Luxembourg GAAP. The below information is only selected pro forma combined financial
data. For our pro forma financial information for the twelve months ended 30 June 2015, see Pro Forma
Combined Financial Information; http://www.interoute.com/sites/default/files/Eagle-Pro-Formas-from-Final-
OM.pdf.
Year ended 31 December 2015
(€ millions, unless otherwise indicated)
Interoute8 Easynet
Management
Accounts9
Adjustments10 Combined
Interoute and
Easynet
Pro Forma Revenue 473.4 281.3 (5.6) 749.0
Pro Forma EBITDA 94.7 45.0 (3.7) 136.0
Pro Forma Adjusted EBITDA 93.7 58.2 (3.7) 148.2
Pro Forma Adjusted EBITDA margin 19.8% 20.7% 19.8%
LTM Pro Forma Synergy Adjusted EBITDA11 172.2
Pro Forma net debt 578.2
Pro Forma Interest Expense 53.8
Pro Forma Synergy Adjusted EBITDA / Pro
Forma Interest Expense
3.2
Net debt / Pro Forma Synergy Adjusted
EBITDA
3.4
Pro-forma interest expense includes amortisation of fees incurred on issuing debt of €4.8m.
8 Per the Interoute audited statutory accounts for the twelve month period ending 31 December 2015. This column excludes the impact on Interoute’s financial data of the 2.5 months after the acquisition of Easynet.
9 Per the Easynet management accounts for the twelve month period ending 31 December 2015 (prepared on IFRS basis).
10 Adjustments to convert Easynet data from IFRS to Luxembourg GAAP. For a reconciliation of these adjustments, please see “Easynet Management Discussion and Analysis - IFRS to Luxembourg GAAP Reconciliation”.
11 Includes anticipated synergies of €24.0 million, which are expected to be realised within 24 months after the Completion Date, with a substantial portion expected to be realised within 18 months. As at 31 December 2015, we have realised approximately €0.4m of the €24.4 million previously disclosed expected synergies (all related to staff costs). The €24.0 million of anticipated synergies are expected to be comprised of (i) €16.4 million related to the removal of duplicative functions, consolidation of our government services team with Easynet’s government services team and centralisation of hosting and data centre engineers as well as the centralisation of back office and support functions; (ii) €1.1 million related to the shift of certain Easynet supplier leases to our network and combining ours and Easynet’s overlapping network providers to leverage higher discounts from suppliers; (iii) €4.4 million related to expected rent, lease and power cost savings from the absorption of Easynet data centres into our current locations that are capable of assuming their utilisation; (iv) €1.1 million related to rent savings from the consolidation of Easynet’s office properties into our office locations; and (v) €1.0 million related to savings from shifting activities in-house and the elimination of duplicative marketing events, sponsorships and other costs. See ‘‘Risk Factors - Risks Relating to Our Combined Business - We may be unable to integrate Easynet effectively and realise the expected synergies from the acquisition of Easynet’’
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INTEROUTE MANAGEMENT DISCUSSION AND ANALYSIS
Explanation of Key Income Statement Line Items
The following is a brief description of the revenues and expenses that are included in the key line
items of our consolidated financial statements. These descriptions are applicable for the revenue and
expenses throughout this document.
Total Revenue
Our total revenue comprises revenue from Network Services and revenue from Enterprise Services.
The vast majority of our revenue in both our Network Services and our Enterprise Services product
groups is recurring in nature. The majority of such recurring revenue relates to contracts sold on a long-term
basis (with many such contracts being for a duration of 15 years or longer) and is recognised in our profit and
loss account over the entire period of the contract. By contrast, transactional revenue, which comprises the
remainder of our total revenue, tends to be derived from one-off events such as the sale of fibre IRUs and
hardware video sales and, as a result, often fluctuates from period to period. Transactional revenue is
recognised immediately in our profit and loss account.
Revenue represents amounts earned from telecommunications services provided and infrastructure
assets sold to customers (net of value added tax).
Connection fees are recognised as revenue over the expected customer relationship period. For the
majority of services, management has estimated the expected customer relationship period to be three
years.
Revenue attributable to the resale of hardware and licences is recognised on delivery.
Revenue attributable to infrastructure sales in the form of IRUs with characteristics that qualify the
transaction as an outright sale, or transfer of title agreements, is recognised at the later of delivery or
acceptance by the customer. Proceeds from the sale of infrastructure assets qualify as revenue where the
infrastructure assets have been classified as stock.
Revenue attributable to managed services is recognised over the period in which the service is
provided.
Usage revenue is recognised in proportion to the utilisation of the services by the customer during
any given period.
Sales related costs
Our sales related costs consist of costs directly related to sales, including the leasing of circuits,
third-party co-location, the resale of hardware, licences and services, customer patching, costs of
off-network duct and fibre (including operating and maintenance costs on the off-network fibre routes),
Internet transit and voice transit.
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Gross margin
Gross margin is revenue after incremental customer-specific costs (defined as sales related costs
above but before network costs, staff costs and administrative costs). Gross margin is also measured as a
percentage of revenue.
Network costs
Our network costs primarily comprise lease and utility costs for properties, fibre and bandwidth lease
costs, operating and maintenance costs in relation to our fibre network and equipment, costs in relation to
rights of way, costs of network systems and other costs related to the operation of the network.
Staff costs
Our staff costs comprise the costs of the wages and salaries of our employees, as well as social
security costs and supplementary pensions relating thereto. Staff costs also include the costs of sales
commissions, bonuses, staff redundancies and relocations, and other staff costs. Staff costs are included, net
of a deduction for capitalised labour, in costs relating to product and platform development and
improvements in respect of business systems.
Administrative costs
Our administrative costs comprise all other administrative costs not directly attributable to staff
costs and are primarily in relation to marketing, movements on bad and doubtful debt provisions, IT, legal,
audit and office overhead costs.
Depreciation and amortisation
These costs relate to the depreciation and amortisation of our tangible and intangible non-current
assets, as applicable. Depreciation and amortisation are charged on a straight-line basis over the useful
economic life of tangible fixed assets and intangible fixed assets, respectively.
Net finance costs
Net finance costs relate to the costs incurred in connection with our financial liabilities, including
interest costs. Net finance costs also include unrealised gains or losses arising from fluctuations in exchange
rates.
Other costs/income
Other costs/income relate to losses or profit on disposal of tangible fixed assets and other
non-operating items.
Income tax credits/(charges)
Income tax credits or income tax charges relate to either changes in deferred tax assets or liabilities
or to current tax liabilities.
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Summary Interoute Profit and Loss Account
The below discussion of results excludes Easynet. For a discussion of key line items relating to Easynet, please see the “Easynet Management Discussion and Analysis” section.
Year ended 31 December
2014 2015
(€ millions, unless otherwise indicated)
Total Revenue ............................................................ 424.9 473.4
Sales related costs...................................................... (130.0) (150.9)
Gross Margin ............................................................. 294.9 322.5
Network Costs ............................................................ (81.6) (88.5)
Staff Costs .................................................................. (99.3) (109.6)
Administrative Costs .................................................. (23.8) (29.1)
Integration costs ........................................................ (0.5)
Depreciation and Amortisation ................................. (69.7) (94.8)
Net Finance Costs....................................................... (7.2) (20.1)
Other (costs)/income ................................................. (6.0) (1.9)
Profit before taxes..................................................... 7.2 (22.0)
Income (charge)/Tax Credit ....................................... 0.5 3.4
Net profit/(loss) for the period ................................. 7.7 (18.6)
Total Revenue
Year ended 31 December 2015 and 31 December 2014
Total revenue increased by 11.4%, or €48.5m, in the year ended 31 December 2015 to €473.4m from
€424.9m in the year ended 31 December 2014. €20.9m of the increase was due to revenue from Vtesse,
which was acquired in September 2014. There was a further €5.3m increase in other Network Services
revenues (mainly for Transport). The remaining increase was largely driven by a €22.2m growth in Enterprise
Services revenues, of which VPN & Security contributed €14.9m. A further €8.9m of the increase was from
Computing due to higher VDC and Co-location revenues. VDC continued its strong growth in 2015, growing
by 162.3%. This was partially offset by lower revenue for Communication (€1.6m), as a result of lower
revenue for Video due to lower hardware sales.
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Recurring revenues increased by €50.8m, which included a €22.4m increase in the Enterprise Services
product group (representing a growth rate of 9.6%). The recurring revenues increased by 13.3% and
excluding Vtesse, it is 8.1% higher compared to the same period in the prior year.
Transactional revenues fell in the year to December 2015 due to lower fibre IRU sales and lower Video
hardware.
Our recurring and transactional revenue were as follows:
Year ended 31 December
2014 2015
(€ millions)
Recurring revenue ................................................. 383.2 434.0
Transactional revenue ........................................... 41.7 39.3
Total Revenue .................................................................. 424.9 473.4
The following table sets out our revenues from Network Services and Enterprise Services:
Year ended 31 December
2014 2015
(€ millions)
Networks Services ................................................... 171.3 197.5
Enterprise Services .................................................. 253.6 275.9
Total Revenue .................................................................... 424.9 473.4
Sales related costs
Year ended 31 December 2015 and 31 December 2014
Sales related costs increased by 16.1%, or €20.9m, to €150.9m in the year ended 31 December 2015 from
€130.0m in the year ended 31 December 2015 primarily as a result of the increase in revenue over this
period.
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Gross margin
Year ended 31 December 2015 and 31 December 2014
Gross margin increased by €27.6m, or 9.4%, to €322.5m in the year ended 31 December 2015 from €294.9m
in the year ended 31 December 2014, mainly as a result of increased gross margins in both our Network
Services and Enterprise Services product groups.
Gross margin from Network Services increased by €16.1m, or 12.8%, to €142.6m from €126.4m, primarily
due to an increase in Transport revenue of €19.1m, which was largely attributable to our acquisition of
Vtesse in September 2014 and an increase in Transport gross margins as a result of a growth in revenues
from Wavelength services. This is offset by lower margin achieved for Infrastructure. The margin % declined
on Network Services from 73.8% to 72.2% primarily as a result of lower margin IRU sales.
Gross margin from Enterprise Services increased by €11.5m, or 6.8%, from €168.4m to €179.9m, due to an
increase in margin in all Enterprise Services product groups. The Computing product category contributed to
the largest increase in gross margin (€6.3m), mainly due to higher margin achieved from VDC. Overall the
gross margin percentage for Enterprise Services declined from 66.4% to 65.2% due to lower margins on VPN
product as a result of the increased number of customers with global requirements.
Gross profitability of the Interoute group, in percentage terms, declined slightly to 68.1% from 69.4% in
2014.
Network costs
Year ended 31 December 2015 and 31 December 2014
Network costs increased by 8.5%, or €6.9m, to €88.5m in the twelve months ended 31 December 2015 from
€81.6m in the year ended 31 December 2014. This increase was primarily attributable to our acquisition of
Vtesse in September 2014, which increased Network costs by €7.7m in the year ended 31 December 2015
compared to the year ended 31 December 2014. Costs related to license fees, systems, fibre breaks and
maintenance on customer premise equipment also increased. This is partially offset by a credit booked in
relation to the change in the accounting treatment of dilapidation provisions (€3.1m) and also a decrease in
costs for the London office, which in 2015 have been categorised under Administration costs (€1.6m in
2015).
Staff costs
Year ended 31 December 2015 and 31 December 2014
Staff costs increased by €10.3m, or 10.4%, to €109.6m in the year ended 31 December 2015 from €99.3m in
the year ended 31 December 2014, partially due to the acquisition of Vtesse, which added €3.2m of costs in
the year ended 31 December 2015. Staff costs also increased due to additional headcount, which, excluding
Vtesse, increased by 60 to 1,453 employees as at 31 December 2015. The largest increase in headcount by
region is in Bulgaria (83 heads) and UK (25 heads) offset by a decrease in heads over this time in various
regions including Nordics. Including Vtesse, the headcount is 1,490 as at 31 December 2015 which has
increased from 1,443 as at 31 December 2014. The increase in headcount during the period was primarily
driven by the need to fill vacancies as a result of growth related to Interoute VDC and to supplement the
operations team in order to support delivery of increased revenue and to support future growth.
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Staff costs as presented in this report include €13.7m of costs in the year ended 31 December 2015 that, if
presented in a Luxemburg statutory format, would be recognised within Administrative costs.
Administrative costs
Year ended 31 December 2015 and 31 December 2014
Administrative costs increased by €5.2m, or 22.0%, to €29.1m in the year ended 31 December 2015 from
€23.8m in the year ended 31 December 2014. This increase was partly attributable to our acquisition of
Vtesse in September 2014, which added €0.7m to administrative costs in the year ended 31 December 2015.
In addition, marketing costs, excluding Vtesse, were €1.2m higher in the year ended 31 December 2015 than
in the prior period. Establishment costs also increased by €3.2m, excluding Vtesse, in the year ended 31
December 2015 primarily due to administrative costs for the London office which were formerly categorised
under Network costs.
Administrative costs as presented in this report exclude €13.7m of costs in the year ended 31 December
2015 that if presented in Luxembourg statutory format, would be recognised within this category (instead of
under Staff costs).
Depreciation and amortisation
Year ended 31 December 2015 and 31 December 2014
Depreciation and amortisation costs increased by €25.0m, or 35.9%, to €94.8m in the year ended December
2015 from €69.7m in the prior period. This was partially due to our acquisition of Vtesse in September 2014,
which contributed an additional €5.8m in depreciation costs in the year ended 31 December 2015 compared
to the year ended 31 December 2014. There was an additional €2.4m charge arising from a change in the
treatment of dilapidation provisions for leased sites that have a break clause in 2015, for which a
decommissioning asset has been booked which has then been depreciated, leading to an increased
depreciation charge in 2015. There were also additional charges compared to the prior period for
impairment on network assets (€1.6m), transmission equipment (€1.7m), depreciation of VDC (€1.3m)
related assets and customer premise equipment (€0.49m). In addition there was a one off adjustment
(€2.8m) in Italy following an exercise to reconcile the fixed asset register to the general ledger. Amortisation
of intangibles increased significantly due to the amortisation of Easynet goodwill (€4.7m).
Net finance costs
Year ended 31 December 2015 and 31 December 2014
Net finance costs increased by €12.9m, or 178.4%, to €20.1m in the year ended 31 December 2015 from
€7.2m in the year ended 31 December 2014. €9.4m of this increase is a result of the floating and fixed
interest (for the period from October 2015 to December 2015) on bonds issued to fund the Easynet
acquisition. In addition, there is a €1.2m charge in relation to the financing costs for Easynet and €1.2m has
been expensed for the previous Barclays loan. An additional €0.3m of the charge is for costs in Vtesse, as the
business was acquired in September 2014.
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Other costs/income
Year ended 31 December 2015 and 31 December 2014
Other costs amounted to €1.8m in the year ended 31 December 2015, compared to other costs of €6.0m in
the prior period, mainly relating to unrealised foreign exchange movements.
Income tax credits/(charges)
Year ended 31 December 2015 and 31 December 2014
Income tax credits increased by €2.9m in the year ended 31 December 2015 to €3.4m, from €0.5m in the
year ended 31 December 2014. The credit in 2015 is mainly caused by the movement in the group deferred
tax asset value (reflecting an increase in the estimate of recoverable NOLs as a result of an increase in profits
forecast for future periods).
Reconciliation of EBITDA to Adjusted EBITDA
The table below presents a reconciliation of EBITDA and Adjusted EBITDA to profit before taxes for the year
ended 31 December 2015 compared to their respective prior year periods.
Year ended 31 December
2014 2015
(€ millions)
EBITDA ....................................................................... 90.1 94.7
Integration costs ........................................... 0.5
Exceptional release of deferred revenue...... (0.5)
Valuation of dark fibre stock ........................ 1.0 (0.3)
Right of Way settlements ............................. (0.4)
Dilapidation and onerous lease provision
releases ......................................................... (0.3) (3.2)
Restructuring ................................................ 1.6 0.5
Other adjustments ........................................ 1.0 1.5
Adjusted EBITDA........................................................ 92.5 93.7
Year ended 31 December 2015 and 31 December 2014
Adjusted EBITDA increased by 1.3%, or €1.2m, to €93.7m in the year ended 31 December 2015 from €92.5m
in the year ended 31 December 2014. During this period, EBITDA increased by €4.6m, from €90.1m in the
year ended 31 December 2014 to €94.7m in the year ended 31 December 2015 (after integration costs). The
strong growth in gross margin was offset as a result of the increase in staff costs to support the growth in
Interoute VDC products and services and an increase in charges for marketing (€1.2m) and adverse
58
movements in exchange rates (mainly in pound sterling and Swiss francs) impacting salary costs (€1.9m). The
acquisition of Vtesse also increased Network and Operating costs to support the enlarged UK business. By
the end of Q3, Vtesse was fully integrated into Interoute and therefore is not reported separately at an
EBITDA level.
The variation between reported and adjusted EBITDA was mainly due to €3.2m for dilapidation and onerous
lease provision releases. This adjustment was significantly higher than the prior period following a change in
the group’s accounting policy for the recognition of dilapidation provisions on sites with a break clause in
2015. The original provision has been reversed in full and a decommissioning asset has been recognised and
depreciated. €0.5m are for costs associated with the Easynet integration while there is also a €0.3m
adjustment relating to the valuation of dark fibre stock which represents the impact of the timing difference
on gross margin between the commitment and delivery of IRU contracts signed. €0.5m is also included for
restructuring costs. The other adjustments included €0.8m for one off fibre breaks incurred in the first three
months of 2015, €0.3m for Easynet related waiver and indemnity insurance costs and €0.2m costs for a one
off project.
Capital Expenditure and Investments
The following table sets out our capital expenditures for the periods set forth below:
Year ended 31 December
2014 2015
(€ millions)
Maintenance.............................................................. 8.7 15.3
Base
Of which Network Services ........................... 12.2 24.0
Of which Enterprise Services ........................ 5.8 4.2
Total Base ................................................. 17.9 28.2
Strategic Growth
Of which Network Services ........................... 17.5 14.9
Of which Enterprise Services ........................ 27.4 23.2
Total Strategic Growth ............................... 44.9 38.1
Acquisition Integration .............................................. 0.8 2.6
Subtotal ................................................................ 72.2 84.2
Capitalised Buildings .................................................. 0.7 0.0
Total capital expenditure .......................................... 72.9 84.2
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Year ended 31 December 2015 and 31 December 2014
Capital expenditure increased by 15.5%, or €11.3m, to €84.2m in the year ended 31 December 2015 from
€72.9m in the year ended 31 December 2014.
€15.3m of total capital expenditure, or 18.1%, related to maintenance in the year ended 31 December 2015
compared to €8.7m, or 11.9%, in the year ended 31 December 2014. Maintenance capital expenditure in
2015 included €3.1m for an accounting (non-cash) adjustment relating to a decommissioning asset booked
following a change in treatment of the dilapidation provisions. Excluding this adjustment, the maintenance
category represented €12.2m, or 15.0%, of the total year ended 31 December 2015 capital expenditure.
Several one off maintenance projects have taken place in 2015 including DC spend and upgrades in Geneva
(€1m), Paris (€0.4m) and Berlin (€0.4m). In addition there have been costs incurred to realign Oracle licences
and upgrade Oracle hardware (€0.9m).
Base capital expenditure increased from €17.9m in the year ended 31 December 2014 to €28.2m in the year
ended 31 December 2015 due to our investment in the 500 Gb transport platform to enable the sale of 100
Gb channels as a result of the migration of customers towards higher speed services. Although this drives
additional revenues with Network Services, the majority of these revenues are replacement for lower speed
service which because they were sold at historic prices mean there is limited overall revenue growth.
Strategic growth capital expenditure decreased by €6.7m from €44.9m to €38.1m. Most of the decrease is
due to €6.9m of one off spend in 2014 for the expansion of fibre routes including costs for the south route to
Italy. Costs categorised as Strategic growth under the Enterprise Services category support the growth for
this product line, particularly for capital expenditure on customer premises equipment to deliver VPN sales
and additional investment in the Interoute VDC platform and within Network Services due to the expansion
of the IP network and additional spend on laterals for customers.
Additionally, €2.6m was incurred during the year ended 31 December 2015 related to our integration of the
Vtesse network.
During the year ended 31 December 2014, the lease on the PoP in Lille was extended and thus became a
capitalised building. There were no such extensions during the year ended 31 December 2015.
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EASYNET MANAGEMENT DISCUSSION AND ANALYSIS
The below discussion of results is for Easynet only (excluding Interoute). For a discussion of key line items
relating to Interoute, please see the “Interoute Management Discussion and Analysis” section.
The results for the twelve months ended 31 December 2015 and 2014 for Easynet below have been derived
from the management accounts of Easynet which have then been adjusted to bring the data in line with the
Interoute accounting policies (as described below).
Year ended 31 December
2014 2015
(€ millions)
Revenue ........................................................................................................... 267.7 275.7
EBITDA .............................................................................................................. 35.3 41.3
Adjusted EBITDA12 ............................................................................................ 44.6 54.5
Capital Expenditure .......................................................................................... 16.4 12.5
Adjusted EBITDA less Capital Expenditure ....................................................... 28.2 42.0
Year ended 31 December, 2015 and 31 December, 2014
Revenues increased by 3.0%, or €8.0m, to €275.7m in the year ended 31 December 2015 from €267.7m in
the previous year. The increase is mainly due to the appreciation in the pound sterling currency against the
euro. On a constant currency basis, the revenue declined driven by the declining SME and channel business.
EBITDA increased by €6.0m, or 17.1%, to €41.3m partly due to the appreciation of the pound sterling against
the euro and also due to lower costs achieved through savings. Adjusted EBITDA increased by 22.1%, or
€9.9m, to €54.5m in the year ended 31 December 2015 from €44.6m in 2014. The increase in Adjusted
EBITDA was driven by integration cost savings. The increase in Adjusted EBITDA was driven from the
synergies achieved through the Easynet and MDNX merger which had not been achieved in 2014.
Adjusted EBITDA less capital expenditure increased by 49.0%, or €13.8m, to €42.0m in the year ended 31
December 2015 from €28.2m in the year ended 31 December 2014. The increase was driven by improved
EBITDA and lower capital expenditure due one off spend in 2014 relating to the Easynet / MDNX merger and
the integration and upgrades of the network.
On a constant currency basis, revenues decreased by 7.4% driven by declining SME and channel business and
Enterprise ceases. However, Adjusted EBITDA increased by 9.8% and Adjusted EBITDA less Capex increased
by 34.0% on using the constant currency.
12 For reconciliation of Easynet EBITDA to Adjusted EBITDA see “Easynet Management Discussion And Analysis - Reconciliation of EBITDA to Adjusted EBITDA”
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Reconciliation of EBITDA to Adjusted EBITDA
Year ended 31 December
2014 2015
(€ millions)
EBITDA ....................................................................... 35.3 41.3
Restructuring costs (a) .................................... 5.1 5.3
Redundancy costs (a)...................................... 4.2 3.5
Settlement of dispute (b) ............................... 3.9
Acquisition costs (c) ........................................ 0.4
Adjusted EBITDA........................................................ 44.6 54.5
(a) Represents the costs of the integration into the business of MDNX Group Limited and EGHL Limited and the integration of
Interoute and Easynet, including: (i) costs of the integration team, including costs for staff wholly focused on integration activities; (ii)
reorganisation costs, including redundancy costs; and (iii) provisions for onerous contracts for which services under contract were no
longer required after completion of the integration activities.
(b) Represents the impact of settlement of the dispute over the deferred consideration of the MDNX acquisition of Octium in 2012.
(c) Represents the non-recurring expenses incurred in connection with acquisitions.
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IFRS to Luxembourg GAAP Reconciliation
12 months ended 31 December 2014
12 months ended 31 December 2015
IFRS Lux GAAP IFRS Lux GAAP
(€ millions)
Revenue………………... 271.7 267.7 281.3 275.7
Gross Margin………... 133.4 139.0 138.0 143.8
EBITDA…………………… 38.2 35.3 45.0 41.3
Adjusted EBITDA…….. 47.5 44.6 58.2 54.5
Capital Expenditure... 16.4 16.4 12.5 12.5
Easynet’s condensed financial information has been derived from the Easynet management accounts on
which adjustments have been made to convert the financials from IFRS to Luxembourg GAAP. For more
details on the differences between IFRS and Luxembourg GAAP, see “Summary of Certain Differences
Between Luxembourg GAAP and IFRS.”
Adjustments to convert from IFRS to Luxembourg GAAP as applied by Interoute and to align with Interoute’s
accounting policies for the 12 months ended 31 December 2015 are as follows:
1. Interoute classifies the costs of operating their network as part of its fixed cost base, within
‘Operating expenses’, whereas Easynet recognises these as ‘Sales related costs’. For the 12 months
ended 31 December 2015, an adjustment of €9.5m represents the reclassification of the costs of
operating Easynet’s core network and data centres from ‘Sales related costs’ to ‘Operating
expenses’.
2. Where a non-cancellable IRU sale contract is for a term greater than 15 years and where
substantially all the risks and rewards of ownership are transferred to the customer, Interoute’s
policy is to treat this as an asset sale, recognising revenue and associated costs on the date right of
usage is granted. Easynet has historically recognised revenue on all IRU sales over the term of the
contract. Accordingly, an adjustment has been made to reduce ‘Revenue’ by €3.7m for the 12
months ended 31 December 2015.
Where the IRU sale is billed monthly, an adjustment of €1.2m has been made to reduce ‘Revenue’ by
the amount to be recognised at the date the sale was made for the Easynet 12 month period ended
31 December 2015. An adjustment of €1.2m to reduce ‘Sales related costs’ by the amount to be
recognised up front, has also been made for the 12 months ended 31 December 2015.
3. Interoute’s policy is to defer installation related revenue over the life of the associated contract,
whereas Easynet’s policy is to recognise the revenue in full up front where the services are
considered separable, defined as those where they could also be provided by the customer or
third-party suppliers. Accordingly, an adjustment to decrease revenue by €0.7m has been made to
align the revenue recognised in the 12 month period ended 31 December 2015. Interoute’s policy is
to capitalise the associated installation costs, because these benefit the rest of the network as well
as the associated customer. Since Easynet’s network is not owned and therefore the costs benefit
63
only one customer, an adjustment to decrease Sales related costs by €0.7m has been made to align
‘Sales related costs’ in the 12 month period ended 31 December 2015.
The adjustments have been translated into euro for the year ended 31 December 2015 using the average
rate per the period of £0.73 = €1.00.
Adjustments to convert from IFRS to Luxembourg GAAP as applied by Interoute and to align with Interoute’s
accounting policies for the 12 months ended 31 December 2014 are as follows:
1. Interoute classifies the costs of operating their network as part of its fixed cost base, within
‘Operating expenses’, whereas Easynet recognises these as ‘Sales related costs’. For the 12 months
ended 31 December 2014, an adjustment of €8.6m represents the reclassification of the costs of
operating Easynet’s core network and data centres from ‘Sales related costs’ to ‘Operating
expenses’.
2. Where a non-cancellable IRU sale contract is for a term greater than 15 years and where
substantially all the risks and rewards of ownership are transferred to the customer, Interoute’s
policy is to treat this as an asset sale, recognising revenue and associated costs on the date right of
usage is granted. Easynet has historically recognised revenue on all IRU sales over the term of the
contract. Accordingly, an adjustment has been made to reduce ‘Revenue’ by €3.4m for the 12
months ended 31 December 2014.
Where the IRU sale is billed monthly, an adjustment of €1.1m has been made to reduce ‘Revenue’ by
the amount to be recognised at the date the sale was made for the Easynet Fiscal Year Ended
31 December 2014. An adjustment of €1.0m to reduce ‘Sales related costs’ by the amount to be
recognised up front, has also been made for the 12 months ended 31 December 2014.
3. Interoute’s policy is to defer installation related revenue over the life of the associated contract,
whereas Easynet’s policy is to recognise the revenue in full up front where the services are
considered separable, defined as those where they could also be provided by the customer or
third-party suppliers. Accordingly, an adjustment to increase revenue by €0.5m has been made to
align the revenue recognised in the 12 month period ending 31 December 2014. Interoute’s policy is
to capitalise the associated installation costs, because these benefit the rest of the network as well
as the associated customer. Since Easynet’s network is not owned and therefore the costs benefit
only one customer, an adjustment to decrease Sales related costs by €0.02m has been made to align
‘Sales related costs’ in the 12 months period ended 31 December 2014.
The adjustments have been translated into euro for the year ended 31 December 2014 using the average
rate per the period of £0.81 = €1.00.
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ADDITIONAL ANALYSIS FOR COMBINED BUSINESS
Liquidity
Our liquidity requirements arise principally from our capital investment and working capital requirements.
Our principal uses of cash are for supplier payments, staff salaries and the expansion of our network and
product and service offerings through acquisitions or otherwise.
Our principal sources of liquidity have historically been cash generated from our operating activities and cash
raised through bank borrowings. For the nine month period ended 30 September 2015, our principal sources
of liquidity were our cash generated from operations and drawings under our term and revolving credit
facilities. On 9 October 2015, we issued the Notes and placed the proceeds from the issuance into escrow
pending completion of the Easynet acquisition. We used the net proceeds from the issuance of the Notes to
finance the acquisition of Easynet (including the repayment of certain outstanding Easynet indebtedness)
and to refinance our existing term and revolving facility. On 15 October 2015 we entered into a revolving
credit facility in an aggregate committed amount of €75.0 million, with an additional uncommitted amount
of €25.0 million. The new financing also added €44.9m cash. For the remainder of 2015 the primary source
of liquidity was the cash generated from operations, as at 31 December 2015 the new Revolving Credit
Facility was undrawn. We intend to use drawings under our new revolving credit facility together with cash
generated from our operating activities to meet our future working capital requirements, anticipated capital
expenditures and debt service requirements as they become due.
We held cash at bank, cash in postal cheque accounts and cash in hand of €24.1m at 31 December 2014 and
€99.3m at 31 December 2015. We also held restricted cash in connection with rental deposits and certain
guarantees of €11.8m at 31 December 2014 and €11.0m at 31 December 2015. All treasury matters are
managed from our head office in London, although bank accounts are held in locations in which we operate.
Following the issuance of the Notes on 9 October 2015 and the repayment of our existing term and revolving
facility and substantially all of the existing indebtedness of Easynet upon the closing of its acquisition on 15
October 2015, our long-term indebtedness consists primarily of the Notes, as well as any potential drawings
under our new Revolving Credit Facility. The amounts available under the Revolving Credit Facility will be
subject to our compliance with certain conditions, including certain financial maintenance ratios.
The Company may, from time to time, repurchase bonds on the open market.
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Net working capital
The following table sets out the principal components of our net working capital as at the end of the periods
indicated.
Ended 31 December
2014 2015
(€ millions)
Trade and other debtors .................................................................................. 104.0 129.3
Prepayments and accrued income .................................................................. 32.6 61.4
Trade and other creditors ................................................................................ (123.0) (194.5)
Deferred revenue ............................................................................................. (152.8) (215.8)
Net working capital ................................................... (139.3) (219.6)
Our trade debtors consist of amounts receivable for goods and services provided, net of provisions for bad
and doubtful debt and credit notes. Other debtors consist of VAT recoverable and sundry non-trade debtors.
Prepayments and accrued income consist of prepaid expenses and revenue delivered but not billed. Trade
creditors consist of amounts outstanding for goods and services received. Other creditors consist of accruals,
liabilities to employees and staff-related social security and pension costs and accrued interest. Deferred
revenue consists of amounts billed for which delivery of the goods or services is outstanding. Restricted cash
and deferred taxes are deducted from other debtors and deferred consideration on acquisitions is deducted
from other creditors in order to arrive at the working capital balances shown above versus the actual balance
sheet amounts.
The 2015 data above includes Easynet which has added €41.9m to trade and other debtors, €19.4m to
prepayments and accrued income, €52.5m to trade and other creditors and €61.5m to deferred revenue.
Excluding Easynet, net working capital decreased by €27.6m in 2015 primarily due to an increase in trade
creditors resulting from extending supplier payment terms and a reduction in trade debtors following
improved collections at the end of 2015.
Prior year reclassification
The disclosure of the amounts for the accounting year ended 31 December 2014 have been reclassified
where necessary to ensure the comparability with the figures of the year ended 31 December 2015. The
classification of certain balance sheet and profit and loss account items has been reassessed during the
period. In the profit and loss account, amounts have been reclassified from Wages and Salaries to Other
external charges and from Interest payable to Other operating charges. In the balance sheet, balances have
been reclassified from: Other receivables to Trade receivables; Other creditors to Trade creditors; Tax and
social security debtors to Other creditors; Deferred income and accruals to Other creditors; Trade and other
debtors to Prepayments.
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Financial and Other Material Contractual Obligations
Financial obligations
The following table summarises the aggregate principal amount of our financial liabilities as at
31 December 2015 and the related amounts falling due within the periods indicated:
Less than
1 year 1 – 4 years
5 years and
more Total
(€ millions)
Notes(1) ......................................................... — 590.0 — 590.0
Revolving Credit Facility(2) ............................ — — — —
Equipment Vendor Loans ............................. 18.9 18.2 — 37.1
Finance leases............................................... 4.6 7.1 29.2 40.9
Operating lease commitments(3) .................. 18.2 56.9 21.9 97.0
Capital expenditure commitments(4) ............ 13.7 — — 13.7
Total financial obligations ......................... 55.4 672.2 51.1 778.7
(1) The Notes have been reflected in the table above at their principal amount of €590 million.
(2) Represents the Revolving Credit Facility which was undrawn as at 31 December 2015.
(3) Represents commitments under our operating leases on an IFRS basis.
(4) Represents committed capital expenditures which are scheduled to be incurred within one year.
Off-Balance Sheet Arrangements
As at 31 December 2015, our commitments under certain operating leases, including leases for land
and buildings including offices and data centres, amounted to €219.6 million on a Luxembourg GAAP basis.
However, on an IFRS basis, which excludes operating lease commitments where there is a customer
commitment and where termination charges billable to customers are at least the value of the commitment,
our commitments under operating leases would have amounted to €97.0 million as at 31 December 2015.
Under IFRS, the costs associated with lease commitments are all recognised within Network costs. Under
Luxembourg GAAP, lease costs are recognised within network costs and sales related costs.
We are not a party to any other off-balance sheet arrangements that have, or are reasonably likely to
have, a current or future material effect on our financial condition or results of operations.
Net Operating Losses
We have significant net operating losses (“NOLs”) available within most of our subsidiaries. NOLs can
be used to offset tax arising on profits in current or future periods, subject to minimum tax rules which are
applied in some jurisdictions. We recognise a deferred tax asset to the extent that NOLs will be recoverable
on forecasts of profit for the next three years, as measured from each balance sheet date. As at 31 December
2015, unrecognised NOLs and similar tax attributes amounted to €1,241 million. We expect that the
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application of NOLs to our operating profits in future periods will allow us to continue to reduce tax paid on
operating profits going forward.
Quantitative and Qualitative Disclosures About Market Risk
Our activities expose us to a variety of financial risks in the normal course of business, including price risk,
credit risk, liquidity risk, currency risk and interest rate risk. Our risk management strategy seeks to limit the
adverse effects of such risks on our financial performance.
The following section provides quantitative and qualitative disclosures on the effects that these risks may
have. However, the quantitative data reported below do not have any predictive value and do not reflect the
complexity of the markets or reactions which may result from any changes that have taken place.
Price risk The Group is exposed to price risk as a result of downward pressure on prices in the telecommunications
market. The Group mitigates this risk in several ways:
• all contracts not strictly adhering to the Company’s standard prices are subject to approval by an independent team before they can be closed by the sales force thus ensuring a base level of margins is attained;
• a focus on controlling local tail costs, including the establishment of a team of professionals with experience in local tail acquisition and cost control;
• by structuring the sales force’s incentive plan such that higher commissions are earned on higher margin products; and
• by developing the Interoute CloudStore, which will help drive online sales and find new markets for Interoute products.
Credit risk The Group is exposed to credit risk to the extent that customers may default on payment for services provided or pay for the services after the due date, which disrupts cash flow. The Group has implemented policies to mitigate this credit risk, including:
• The requirement for appropriate credit checks on potential customers before sales are made.
• The establishment of counterparty credit limits. • Specific transaction approval procedures have been put in place. • The employment of debt collection agencies to recover overdue debts.
Liquidity risk Liquidity risk is that the Group does not have sufficient liquid assets to meet its obligations as they fall due.
Liquidity is maintained at a prudent level and the Group ensures there is an adequate liquidity buffer to
cover contingencies. The Group maintains sufficient cash and open committed credit lines from credit
institutions to meet its funding requirements and monitors cash flow as part of its day to day control
procedures. In addition, in 2015, the Group entered into a revolving credit facility in an aggregate committed
amount of €75.0 million, with an additional uncommitted amount of €25 million. As at 31 December 2015,
the Group held cash at bank, cash in postal cheque accounts and cash in hand of €99.3 million.
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Interest rate cash flow risk Interest rate risk refers to the risk that market interest rates will increase, resulting in higher borrowing costs
under any of our credit facilities which have floating interest rates (including under our revolving credit
facility).
In order to mitigate this risk, we use a mixture of floating rate and fixed rate instruments.
Foreign currency exchange rate risk The Group is exposed to currency risk as a result of our operations across a number of geographical
locations, including exposure to (i) transactional foreign exchange risk when a subsidiary enters into
transactions in a currency other than its functional currency and (ii) translational foreign exchange risk when
we translate the financial statements of certain of our subsidiaries into euro for purposes of the preparation
of our consolidated financial statements.
Transactional risk Our subsidiaries generally execute their operating activities in their respective functional currencies.
As a result, we are exposed to transactional foreign exchange risk, particularly with respect to the pound
sterling, the U.S. dollar and the Swiss franc. For Interoute (excluding Easynet), pound sterling was 18.5%,
U.S. dollar was 10.1% and Swiss franc was 4.2% of our revenues for the twelve months ended 31 December
2015. For Easynet, 71.7% of the revenues were from the pound sterling for the twelve months ended 31
December 2015. A significant portion of the costs are also in pound sterling.
In accordance with our investment policy (as approved by our CEO committee), we make use of derivative
financial instruments, primarily to mitigate currency risks arising from the different currencies in which we
transact with customers and suppliers. Our policy is not to enter into such instruments for speculative
purposes.
Translational risk Because our reporting currency is the euro, we may be exposed to translation risk when the income
statements of our subsidiaries located in countries outside the Eurozone are converted into euro using the
average exchange rate for the period, and whilst revenues and costs are unchanged in local currency,
changes in exchange rates may lead to effects on the converted balances of revenue, costs and the result in
euro.
Interest Rate Risk Interest rate risk refers to the risk that market interest rates will increase, resulting in higher borrowing costs
under any of our debt instruments that have floating interest rates (including under our Revolving Credit
Facility and the Floating Rate Notes).
In order to mitigate this risk, we have historically used a mixture of floating rate and fixed rate instruments.
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As a result of the issuance of the Notes on 9 October 2015, interest rates are currently materially fixed, with
the exception of the Floating Rate Notes and any amounts potentially drawn under our Revolving Credit
Facility.
Critical Accounting Estimates and Judgements
Our consolidated financial statements are prepared in accordance with Luxembourg GAAP. The
preparation of these financial statements requires management to make estimates and judgements that
affect the reported amounts of assets, liabilities, revenue and expenses. Changes in the economic
environment, financial markets and any other parameters used in determining such estimates and
judgements could cause actual results to differ.
Our accounting policies are more fully described in Note 2 to our audited consolidated financial
statements for the year ended 31 December 2015. However, we believe that of our significant accounting
policies, the following policies in particular require management to consider matters that are inherently
uncertain or to make subjective and complex judgements.
Goodwill
When the fair value of consideration for an acquired undertaking exceeds the fair value of its
separable net assets, the difference is treated as goodwill and is capitalised and then amortised through the
profit and loss account over its estimated economic life. Positive goodwill is amortised over a period of
between ten and 15 years.
When the fair value of the separable net assets exceeds the fair value of the consideration for an
acquired undertaking, the difference is treated as negative goodwill and is capitalised in the balance sheet
and disclosed within creditors. Negative goodwill arising on acquisitions which have no further economic
benefit to us are written off and credited to the income statement.
Provisional fair values are attributed to the assets and liabilities of subsidiaries acquired by us at the
date of acquisition, with a corresponding entry being made to goodwill. These provisional fair values may be
subject to further adjustments and are finalised at the time of approval of the consolidated financial
statements for the period following that in which the acquisition occurred.
Turnover
Turnover represents amounts earned from telecommunications services provided and infrastructure
assets sold to customers (net of value added tax).
Connection fees are recognised as turnover over the expected customer relationship period. For the
majority of services, we have estimated the expected customer relationship period to be three years.
Turnover attributable to infrastructure sales in the form of IRUs with characteristics which qualify the
transaction as an outright sale, or transfer of title agreements, are recognised at the later of delivery or
acceptance by the customer. Proceeds from the sale of infrastructure assets qualify as turnover where the
infrastructure assets have been classified as stock.
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Work performed by the undertaking for its own purposes and capitalised
Capitalised labour corresponds to those labour costs incurred by us for our own purposes in the
following three areas:
• the design of systems and software for internal use;
• the development of software integral to the operation of the network; and
• the installation of tangible fixed assets.
Capitalised labour costs are recorded under the heading “Plant and Machinery”.
Tangible fixed assets
Tangible fixed assets are recorded at historical cost less accumulated depreciation and accumulated
impairment losses. Network infrastructure and equipment costs comprise assets purchased and built, at cost,
together with labour and other associated costs which are directly attributable to the construction of such
assets.
Depreciation is calculated to write off the cost of tangible fixed assets on a straight-line basis over
their expected useful economic lives as follows:
Buildings .......................................................................................... 50 years or term of lease if shorter
Plant and machinery—Office equipment ........................................ 3 years
Plant and machinery—Computer equipment ................................. 3 years
Network infrastructure—Duct ........................................................ 40 years or term of lease if shorter
Network infrastructure—Fibre ........................................................ 25 years or term of lease if shorter
Network infrastructure—Other equipment .................................... 5 years
Tangible fixed assets are subject to impairment losses in the event of diminution in value considered
to be of a durable nature. Those impairment losses may not be continued if the reasons for which they were
made have ceased to apply.
Stocks
Network infrastructure assets that are constructed or acquired for the purpose of resale are
classified as stock. Stock is carried at the lower of cost and market value under the first in, first out method.
Cost includes the purchase price of the network infrastructure assets and does not include any other costs
incurred in the construction of the network. A value adjustment is recorded where the market value is below
the purchase price. These value adjustments are not continued if the reasons for which the value
adjustments were made have ceased to apply.
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Provisions
Provisions for liabilities and charges are intended to cover losses or debts the nature of which are
clearly defined and which at the date of the balance sheet are either likely to be incurred or certain to be
incurred but uncertain as to their amount or as to the date on which they will arise.
Onerous property, duct and fibre leases
We provide for obligations relating to excess capacity on telecommunication circuits and excess
space in offices and points of presence. The provision represents the net present value of the future
estimated costs and includes the proportion of the dilapidation costs relating to the excess space. The
unwinding of the discount on these provisions is included within the profit and loss account each year as
interest payable and similar charges.
Dilapidation
Where we have an obligation to return a leased property at the end of its lease to its original state, a
provision is made at each balance sheet date to reflect the estimated cost of repair to date. The provision
represents the net present value of the estimated costs accrued and the unwinding of the discount on these
provisions is included within the profit and loss account each year as interest payable and similar charges.
Other provisions
Other provisions relate to legal provisions and provisions for termination benefits. Provisions are
discounted where the time value of money is considered material.
Provisions are discounted at a rate of approximately 1% where appropriate.
Deferred taxation
Deferred tax is provided, except as noted below, on timing differences that have arisen but not
reversed by the balance sheet date, where the timing differences result in an obligation to pay more tax or a
right to pay less tax, in the future. Timing differences arise because of differences between the treatment of
certain items for accounting and taxation purposes.
Deferred tax is not provided on timing differences arising from:
• gains on the sale of non-monetary assets where, on the basis of all available evidence, it is more
likely than not that the taxable gain will be rolled over into replacement assets;
• extra tax payable on the unremitted earnings of the overseas subsidiaries and associates where
there is no commitment to remit these earnings; and
• deferred tax assets are recognised to the extent that it is regarded as more likely than not that
they will be recovered.
Deferred tax is measured at the tax rates that are expected to apply in the periods when the timing
differences are expected to reverse, based on tax rates and laws enacted or substantively enacted at the
balance sheet date. Deferred tax assets and liabilities are not discounted.
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OUR BUSINESS
Overview of Interoute
We are a leading European information communication technology (ICT) and cloud computing
company offering data transport and information communication products and services across our fibre
network and data centre platform. We provide our services to a diversified customer base that includes
multinational and national enterprises, public sector entities, mobile and fixed telecommunications
operators and Internet content providers.
We own and operate the largest pan-European fibre network by fibre route kilometres, directly
connecting 125 major cities in 28 countries. As at 31 December 2015, our network comprised approximately
70,000 route kilometres of fibre, 43 data or co-location centres and 14 virtual data centres. Following the
acquisition of Easynet on 15 October 2015, we have an additional 48 data and co-location centres, which we
anticipate will decrease as Easynet and Interoute’s networks are integrated. Our integrated fibre network
and data centre platform represents an estimated historical investment of approximately €2.0 billion and
provides us with significant additional network capacity in the form of fibre infrastructure which is currently
installed but unused. We believe that our ownership of a substantial majority of the capacity on our network
and the significant additional capacity available on our network is a competitive advantage, as it allows us to
directly control the underlying infrastructure and respond rapidly to changing market demands at low
incremental costs.
Through utilising this network and our data centre assets, we have built a Digital Platform that
provides an integrated ICT infrastructure offering to our customers, which combines our connectivity, data
and application hosting, voice and video communication, and conferencing platforms. This enables us to
address our customers’ complete ICT infrastructure needs with optimal scalability, security and efficiency.
We expect that our integrated product offering will drive our growth while facilitating our customers’
continuing digital transformations and transitions into improved IT platforms.
We completed the acquisition of Easynet in October 2015 and, since then, we have implemented one
Management team across the entire group. The combined group trades as Interoute, but will continue to
operate using both Interoute and Easynet brands through a transition period which varies by country. Until
Easynet is fully integrated, Easynet will operate as ‘Easynet, an Interoute company’.
During the year ended 31 December 2015, excluding Easynet, we generated total revenue of €473.4
million (of which 92% were recurring) and Adjusted EBITDA of €93.7 million. For the combined group, post-
acquisition, we generated total revenue of €530.1 million and Adjusted EBITDA of €104.4 million.
We classify our products and services into two broad product groups: Network Services and
Enterprise Services. For the year ended 31 December 2015, we derived, 42% of our total revenue from
Network Services and 58% of our total revenue from Enterprise Services (excluding Easynet).
Network Services
Our Network Services product group provides fibre, duct and data transport services for customers
requiring large cost-effective network capacity to cater to their increasing data traffic requirements. Our
Network Services customers include some of the world’s largest social media platforms and Internet content
providers, as well as mobile and fixed telecommunications operators including AT&T, British Telecom (“BT”),
Telefónica-O2 and Vodafone.
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Our Network Services products and services include:
• Infrastructure. We offer the largest pan-European fibre network in Europe by fibre route
kilometres, which, due to its scale and homogeneity, provides continuity of service across
geographic areas, which we believe enables us to provide a high-quality service with reliable
response times and minimal service disruptions. Our Infrastructure products and services allow
our customers to lease or acquire duct or dark fibre cables from us with an associated
maintenance contract.
• Transport. Our Transport offering includes technologically advanced, high-capacity connectivity,
including Ethernet services. These services are available across our long-haul, pan-European
network with speeds of up to 100 Gb/s per circuit.
Network Services revenues increased at a CAGR of 2.1% from €185.8 million for the year ended
31 December 2012 to €197.5 million for the year ended 31 December 2015 (excluding Easynet).
Enterprise Services
Our Enterprise Services product group addresses the increased demand from our clients for a single
Digital Platform upon which they can integrate and run all their ICT requirements. Our Enterprise Services
customers include public sector entities and prominent national and multinational corporations, such as Coca
Cola, DS Smith plc, Emirates Airline, European Space Agency, The Global Fund (“TGF”), Union Des
Associations de Football (“UEFA”) and Datwyler. Our Enterprise Services products and services include:
• VPN & Security. Our VPN & Security offerings provide solutions for our customers seeking to
connect dispersed locations and employees into a single secure, reliable and scalable network.
Our VPN product provides a common platform for customers to further consolidate and
integrate their ICT architecture by utilising our integrated Computing and Communications
products and services.
• Computing. Our Computing platform offers our customers a wide range of computing, storage
and network solutions, including cloud-based solutions. For example, our award-winning virtual
data centre product (“Interoute VDC”) provides a scalable on-demand cloud server and storage
solution for customers that can be configured as a private or public cloud. We also offer
database and application management services, enabling customers to outsource their ICT
infrastructure to us.
• Communications. Our Communications offerings deliver voice and video communications
solutions to our customers, such as Interoute hosted Skype for Business and Interoute One
Bridge Voice and Video Conferencing, providing them with a unified communications platform.
Enterprise Services revenues increased at a CAGR of 7.1% from €224.1 million in 2012 to €275.9 million in the year ended 31 December 2015 (excluding Easynet).
Overview of Easynet
Easynet complements Interoute’s core Enterprise services business. Before the acquisition, Easynet
was a leading European provider of IT infrastructure products and services, operating an integrated
pan-European IT platform, which enabled it to provide customers with efficient, scalable and responsive
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solutions to their IT infrastructure requirements. Easynet had an asset-light business model and offered its
products and services across a leased network.
Easynet had an operational presence throughout Europe and provided its products and services to
national and multinational enterprises and U.K.-based public sector entities, telecommunication channel
partners and small to medium-sized enterprises (“SMEs”).
For the twelve months ended 31 December 2015, Easynet generated revenues of €275.7 million (of
which 91.5% was recurring), Adjusted EBITDA of €54.5 million and €42.0 million of cash flow (Adjusted
EBITDA less capital expenditure). Easynet derives the majority of its revenue from the United Kingdom,
France and Benelux countries with the United Kingdom accounting for 72% of Easynet’s revenue for the
twelve months ended 31 December 2015.
Nearly all of Easynet’s revenues for the twelve months ended 31 December 2015 were generated
from products and services that would be classified within our Enterprise Services product group in
geographic areas in which we already operate. Its three primary Enterprise Services product and service
categories are Managed Networks, Managed Hosting and Unified Communications.
• Managed Networks. Easynet provided a full suite of Managed Network services, including
network security and managed IT services for customers seeking to connect dispersed locations
and employees into a single network. Easynet’s Managed Networks product group is
complementary to our VPN & Security products and services. As at 31 December 2015, Managed
Networks accounted for 79.3% of Easynet’s recurring revenue.
• Managed Hosting. Easynet’s Managed Hosting products and services provided enterprise
customers with a managed computing and storage platform and cloud solutions. Easynet’s
Managed Hosting product group is complementary to our Computing products and services. As
at 31 December 2015, Managed Hosting accounted for 15.0% of Easynet’s recurring revenue.
• Unified Communications. Easynet’s Unified Communications product group is complementary to
our Communications products and services. As at 31 December 2015, Unified Communications
accounted for 5.7% of Easynet’s recurring revenue.
Recent Developments
As part of the Easynet integration, Interoute put in place a single combined executive management
structure and engaged in a six-week formal discovery period to validate the integration principles and high
level plan developed during Interoute’s planning stages of the acquisition of Easynet. Subsequently,
Interoute implemented a combined management structure at the vice president and director levels, as well
as a separate governance structure, to effectively manage the integration process.
On 3 December 2015, Interoute entered into collective consultation with all UK employees from both
businesses to determine the operational structure of the business best suited to deliver excellent customer
service to the expanded global customer base. Consultation ended on 22 February 2016 and a plan is being
implemented to reduce our five operating centres to three centres: Easynet Bracknell, Interoute Prague and
Interoute Sofia, with a target to complete migration during 2016.
The rationalisation that has already been completed, mainly in consolidating management and
support functions, resulted in 37 positions being eliminated by 31 December 2015 at an annualised cash
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saving of €4.8m. This began impacting our P&L in Q4-15. See ‘‘Risk Factors—Risks Relating to Our Combined
Business—We may be unable to integrate Easynet effectively and realise the expected synergies from the
acquisition of Easynet’’.
Business Update
Interoute
Q4 was the largest quarter for both the new contracts and contract renewals in 2015. Revenues in the
quarter were split evenly between new business contracts, with new and existing customers accounting for
€62.6m of contracted revenues. Existing service contract renewals demonstrate and reflect ongoing
customer satisfaction and contributed a further €62.3m, bringing the total to €124.9m for the quarter.
Interoute’s enterprise Unified ICT strategy and the evolution of its digital infrastructure platform received
further validation with major contracts being signed with the following customers; The Global Fund,
Intertrust Group and the Dutch retailer Action Service & Distributie. In addition to Interoute’s continued
evolution of its Enterprise strategy Interoute’s position as a major digital core infrastructure provider in
Europe was further validated with contracts signed with Vodafone, Raiden and euNetworks.
Easynet
Within the Easynet business, Q4 new business contracts totalled €22.0m with renewal contracts from
existing customers contributing a further €41.3m. Within the quarter, Easynet were able to expand the
relationships with long time major enterprise customers Transport for London, Anglian Water and Vinci plc.
Q4 churn across the Easynet business was 1.4%.
Key Milestones
The integration of Interoute and Easynet services received its first 3rd party industry validation in Q4 with the
publication of Gartner’s Pan European Critical Capabilities for Network Services. Following the acquisition
Gartner recognised the increased breadth of capability and ranked Interoute ahead of both Colt and AT&T.
Interoute’s Unified ICT strategy expressed through its Digital Infrastructure Platform combining both
computing (cloud), connectivity (VPN & Security) and communications is increasingly being seen as a flexible,
cost effective and scalable platform for enterprise digital transformation. The Global Fund, the Bill and
Melinda Gates charity, deepened its services with Interoute migrating from its physical data centre to a
dedicated VDC POD. Interoute’s innovative ground to cloud approach with dedicated PODs allowed the Swiss
based charity to strike the right balance between cloud flexibility, compliance and scale.
Interoute’s ability to provide a flexible platform for digital transformation combining both connectivity and
computing led to the signing of a new deal for Intertrust, a global trust company, where Interoute’s digital
infrastructure platform (VDC, VPN and ICC) provide the framework for the complete digital transformation of
their global IT infrastructure and applications.
Our Products and Services
Our product group offerings include Network Services and Enterprise Services.
Network Services
We believe our core competitive advantage in the Network Services product group is the depth and
breadth of our physical infrastructure, which allows us to minimise our cost base and maximise efficiency
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whilst reducing the unit cost of capacity. Ownership of our network infrastructure allows us to continually
expand our capabilities and performance as technology evolves at minimal additional cost. We have
consistently adopted and deployed the most efficient and effective technologies to maintain our prominent
award-winning position in the market, as recently demonstrated by the launch of our 100G services in 2015.
The quality of our Network Services offerings has been widely recognised, as evidenced by Capacity
Magazine naming us the Pan-European Wholesale Provider of the Year for the seventh time in the past ten
years at the 2015 Global carrier Awards.
In our Network Services product group, we offer Infrastructure and Transport products and services,
as further described below.
Infrastructure
Infrastructure products and services are at the heart of our business, supporting all the platforms
that leverage its resources, and eliminating the need for significant investment in physical infrastructure.
These Infrastructure products and services have been chosen by several of the largest and most
sophisticated consumers of bandwidth infrastructure services for their European service needs. In addition,
excess network capacity allows us to capitalise on optical network services developments, enabling Interoute
to consistently offer high bandwidth solutions to customers. Our dark fibre network allows customers to
lease or acquire fibre cables on an IRU basis with associated maintenance contracts which provides
customers with direct control and allows them to manage their own networks according to their business
needs. The associated maintenance contract provides us with an ongoing long-term revenue stream.
We predominantly sell dark fibre to customers on our network, but we have the ability to procure
dark fibre from OLOs (Other Licensed Operators) if a customer requires a connection outside our network. As
a result of the flexibility inherent in our award-winning dark fibre network, we are able to provide flexible
solutions tailored to meet our customers’ requirements. The homogeneous nature of our fibre network, as
well as our ability to provide service to our customers with a single service level agreement that covers all of
Europe, simplifies and improves our offering. Through our dark fibre network, customers can directly access
our twelve data centres, 14 virtual data centres and 31 co-location centres. All of our data centres,
co-location centres and amplifier sites are included with our dark fibre and duct capability, upon which
customers can place equipment. Additionally, in limited instances, customers will purchase entire ducts from
us, usually on an IRU basis.
For the year ended 31 December 2015, our Infrastructure products generated €58.3 million in
revenues and a gross profit margin of 82% (excludes Easynet).
Transport
Our Transport products and services operate on one of the largest long-haul fibre networks in
Europe, maximising transport geography for our customers. Our two predominant Transport products are
Ethernet and Wavelength services. Our comprehensive Transport products and services provide our
customers with connectivity access to many of Europe’s major and emerging business centres. These
products cover key Western European cities, major Eastern European businesses and extend to major
continental locations beyond Europe.
Our Transport products and services also employ advanced high capacity fibre connectivity services,
ranging from 1 Gb/s up to 100 Gb/s, which support a variety of protocol interfaces. We believe that the
technology supporting our network has been designed to excel and adapt to the rapidly evolving
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telecommunications environment because it utilises carrier-class technologies and the latest photonic
integrated circuits. Our extensive and highly meshed networks provide extensive reach, but also a wide range
of routing options to meet the most stringent diversity and resiliency requirements.
For the year ended 31 December 2015, our Transport products generated €139.2 million in revenues
and a gross profit margin of 68% (excludes Easynet). We have maintained stable gross profit margins for our
Transport segment, with gross profit margins of 66% in the year ended 31 December 2012, 68% in the year
ended 31 December 2013, 68% in the year ended 31 December 2014 and 68% in the year ended 31
December 2015. Increases in Transport pricing pressures have largely been offset by increased volume in
sales, larger units being sold and decreased absolute unit costs.
Enterprise Services
Our Enterprise Services products and services offer customers an integrated package of high-quality
services based upon our pan-European network, DCs and Co-location centres providing numerous
opportunities to up-sell and cross-sell our products and services. The main driver of growth in the Enterprise
Services product group is digital transformation. Companies are increasingly focused on how they can use
digital technologies to improve the competitive advantage of the business. This increased focus on more
direct relationships with customers, streamlining of supply chain and a more dynamic software release
process necessitates a change in how they build services for their customers. Interoute facilitates this
through our Unified ICT approach to building an Enterprise Digital Infrastructure Platform (e.g. computing,
storage, networking and applications). Our unified approach to Enterprise Services is optimised to support
consolidation and migration of customers’ infrastructure to a more flexible and agile environment,
supporting their digital transformation goals. We believe that the trend towards optimisation and
consolidation of IT infrastructures to more cost-effective, accessible and scalable platform solutions positions
us well to be a leader in the large addressable Enterprise Services sector, as well as to retain our valued
customers and support them as they grow globally.
In our Enterprise Services product group, we have developed a full-service integrated ICT
infrastructure offering primarily aimed at Enterprise Services customers, which includes a broad portfolio of
managed and outsourced services across three main service areas: (1) VPN & Security; (2) Computing; and
(3) Communications.
VPN & Security
Our VPN & Security products and services allow enterprises to connect together two or more
locations (including offices, manufacturing sites or retail stores) to create their own virtual private network.
We accomplish this using a combination of third-party local access circuits and our own network. Our VPN
products and services offer our customers surety of performance and security, superior functionality and
optimisation (through complementary offerings such as Interoute Cloud Connect) and centralised
monitoring. The customer Wide Area Networks (WANs) created through our VPN products range in scale
from two connected locations to hundreds of connected locations, and span a number of geographic areas,
from purely in-country operations of domestic businesses to multinational corporations with global reach.
Through our VPN technology, we are able to centrally monitor connectivity, as well as administer functional
and management behaviour aligned with customer requirements. We connect customer sites to our network
with bandwidths starting at 1Mb/s and running through to 10 Gb/s based on their requirements and local
access infrastructure and provide them with the ability to create private point-to-point, point-to-multipoint
and full networks. Our VPN & Security services provide the connectivity layer that allows us to deliver
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additional communications services, including Interoute One, our Enterprise Services voice product, as well
as automatic access to Interoute VDC.
Our Security products and services control all access into and out of our customers’ VPNs through
the deployment of firewalls and other perimeter security elements. This ensures the integrity of our
customers’ data and/or communication streams. Additionally, our Security products and services can be
upgraded to include application filtering, intrusion detection services, intrusion prevention services and
two-factor authentication managed in association with our firewalls. All our Security offerings are monitored
and managed centrally by a dedicated Security Operation Centre based in Prague.
In May 2015, we launched Interoute Cloud Connect (ICC) as a complementary product to our VPN
service. ICC is an innovative product which enhances a VPN service by supporting multiple applications at
each customer site. ICC allows customers to combine routing, firewalling, WAN optimisation, application-led
routing, local IaaS and Skype for Business services functionality through a single site installation. Moreover, if
connected to Interoute VDC, ICC can offer customers prioritised access to their cloud-hosted applications
through a further WAN acceleration service.
For the year ended 31 December 2015, our VPN & Security products generated €140.0 million in
revenues and a gross profit margin of 52% (excludes Easynet).
Computing
Our Computing products and services integrate computation, storage and networking services across
multiple platforms and locations which, combined with increasing levels of automation and performance,
increases the cost efficiencies for customers. Through these products and services, we offer unique
cloud-enabled services, managed hosting, data centre and co-location services in the pan-European IaaS
(Infrastructure as a Service) sector.
Interoute VDC is our core platform for our Computing products and services. Interoute VDC is a
native cloud-based, scalable, fully automated IaaS solution, providing on-demand computing, storage and
applications that can be integrated easily into our customers’ ICT infrastructure. Interoute VDC is built into
our global network and connects our 14 virtual data centres. It provides a scalable, compliant and
cost-effective IT infrastructure solution to our customers. It is a cloud-based solution that has the power of a
physical data centre with the flexibility and redundancy of our network and eliminates the need for
customers to implement any additional programs in their native IT architecture, making it one of the lowest
latency and therefore highest throughput clouds globally. Additionally, Interoute VDC allows users to move
data and applications between our VDC locations across the world, via an online portal, for free. Because we
own and manage our integrated network and data centre platform, we can ensure that data remains in the
locations selected by each customer to help support compliance with local data residency laws.
Our cloud platform assists our customers in reducing costs associated with planning and expanding
their IT infrastructure, without sacrificing network security, availability, speed or control. A number of
leading European companies, universities and governmental organisations utilise our VDC solutions,
including TGF and UEFA. In addition, for smaller companies, we offer Interoute Jump Start-up, a cloud
hosting package designed to give start-up businesses and developers a year’s access to VDC on a trial basis.
Through Interoute VDC, we also offer virtual co-location services, reducing power, space, cabling and
network overheads for our customers, whilst also providing flexibility through customisable RAM, storage
and CPU requirements.
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To complement our infrastructure services, we have developed a series of management tiers ranging
from managed infrastructure to fully managed services. Our highly skilled teams of local engineers, both in
the locations in which we operate and at our central network operations centre in Sofia, ensure that our
customers’ infrastructure environments remain reliable and responsive to changes in their business
requirements. In certain cases, our Computing products and services include the provision of dedicated staff,
which work in-house at a customer site to ensure their specific IT infrastructure requirements are addressed.
Another major component of our Computing products and services is our data centre services. Our
data centres are directly connected to our award-winning pan-European network. We can configure data
centre services to span two data centres (within a delineated proximity) in order to support multi-site
redundancy and automated failover. Our multi-site data centre solutions are designed to provide resiliency
against extreme uptime demands. We also provide co-location services in data centres under our Network
Services product group.
For the year ended 31 December 2015, our Computing products generated €94.1 million in revenues
and a gross profit margin of 82% (excludes Easynet).
Communications
Our Communications products and services enable our customers to speak or see each other
securely from any device, anywhere. We believe that we are well placed to grow our Communications
products and services as the industry shifts from vendor-based solutions requiring physical infrastructure to
cloud-based, “as-a-Service” (“aaS”) solutions, which eliminates the need for customers to buy, install,
maintain or upgrade hardware or software, which can be addressed via the cloud. Moreover, we believe our
customers’ increased need for multi-device collaboration and communications increases the attractiveness
of our network-centric communications solutions. Through our Communications products and services,
customers can consolidate their cost base whilst retaining the flexibility and freedom to adapt to the
platforms their end-users adopt as technology and user behaviour changes.
We significantly expanded our Communications products and services through the acquisition of the
video conferencing reseller VCG in early 2011. This acquisition transformed the scale of our Communications
business whilst concurrently turning VCG from a reseller of Cisco products into an aaS provider. In addition,
through this acquisition we integrated video services into our network capabilities and voice platform. This
acquisition led to the development of our flagship conferencing platform, Interoute One Bridge. Interoute
One Bridge enables customers to dial into a video conference from any Internet-enabled device, including
Hosted Skype for Business, or through a variety of other third-party vendor systems, as well as through
popular web browsers. Complementing Interoute One Bridge is Interoute One, our secure business VoIP
solution, which offers global outbound termination and inbound numbers in more than 40 countries.
Interoute One Bridge’s vendor agnostic approach enables it to be integrated into any existing voice
infrastructure.
In addition to Interoute One Bridge and Interoute One, we offer a number of other solutions to our
customers through our Communications products and services, including the following:
• Hosted Skype for Business and Microsoft Exchange. Our high capacity, low latency pan-European
network supports our Hosted Skype for Business Communications-as-a-service, which combines
voice, video and streaming applications, such as desktop sharing, into a single, cloud-based
application to serve our customers’ conferencing needs. Our hosted Microsoft Exchange product
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is hosted on our VDC infrastructure, and is monitored 24 hours a day, seven days a week from
our main operations centre in Sofia.
• Video-as-a-Service. In addition to hosting video conferencing through Microsoft Skype for
Business, we also provide stand-alone video conferencing services on our award-winning data
infrastructure. We provide installation, set-up and a range of support services, and we are a
qualified partner of two of the largest video teleconferencing hardware vendors, Cisco and
Polycom. As part of our VaaS offering, we also provide each customer with our “Meeting-Host”
services, which includes access to one of our dedicated support specialists to ensure that all
parties properly connect (and remain connected) to the conference. We also provide secretarial
services for our video meetings.
• Interoute SmartPoint. Interoute SmartPoint is our all-in-one videoconferencing solution that
offers ready-to-use, out-of-the-box videoconferencing tools. As part of the package, customers
receive a codec, related software, a camera and an LED screen, all of which are customisable
based on individual requirements, and which may be upgraded should the customer’s needs
change over time.
For the year ended 31 December 2015, our Communications products generated €41.8 million in
revenues and a gross profit margin of 72% (excludes Easynet).
Customers
The data provided under this “Customers” section below excludes Easynet:
We believe that we have been successful in retaining a significant portion of our customers and in
selling them additional services. We have a diversified customer base with approximately 3,044 customers as
at 31 December 2015. In addition, we also enjoy significant incremental revenue visibility as a result of our
low churn rate.
We believe that our products and services appeal to a wide range of enterprise sectors, therefore
reducing our dependence on any particular industry. We achieve this diversified customer concentration by
targeting against a typical customer profile rather than a particular industry. Customers for Interoute’s IT
outsourcing services within Enterprise Services generally fall into three distinct categories: (i) traditional
enterprises who generally have greater than €0.5 billion of yearly turnover, more than two geographic
locations and employ more than 250 people; (ii) customers who are seeking to either transform their
infrastructure from traditional integration to a model that enables and supports a digital transformation
strategy; or (iii) customers who have already undergone such a digital transformation and are seeking to
increase the scale and sophistication of their systems.
We have a diversified base of Network Services customers, with our top ten customers (by revenue)
representing approximately 20% of our Network Services revenue in the year ended 31 December 2015. Our
customers are well represented across a number of industries, with Internet content providers representing
approximately 14% of our Network Services billed revenue (within revenue from our top 250 customers),
mobile operators representing 21% and traditional telecommunications representing 65% in the year ended
31 December 2015.
We also have a diversified base of Enterprise Services customers, with our top ten customers (by
revenue) representing approximately 19% of our Enterprise Services revenue in the year ended 31 December
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2015. Our customers are well represented across a number of industries, with professional services
representing approximately 26% of our Enterprise Services billed revenue (within revenue from our top
250 customers), service and entertainment industries representing approximately 27%, retailers representing
approximately 11%, and industrials and technology representing approximately 36% of our Enterprise
Services revenue in the year ended 31 December 2015.
During the year ended 31 December 2015, our top ten customers by revenue accounted for less than
15% of our total billed revenue, with no single customer accounting for more than 4% of our total billed
revenue. Additionally, our top 25 customers by revenue accounted for less than 25% of our billed revenues,
and our top 100 customers accounted for approximately 47% of billed revenues.
Customer Contracts
Network Services Agreements
Agreements in our Network Services product group include standard indemnity provisions, as well as
certain exceptional indemnities. These include an indemnity from us relating to the sufficiency of our rights
to grant IRUs, our title in and to property and the title of any person or entity through which we derive our
title. Customers typically indemnify us for claims related to the use of our services by the customer and its
users, including content sent through our network.
However, under most of our Network Services agreements, we and our counterparties disavow
liability for certain losses, including actual or anticipated profits, revenues, downtime costs and loss of data.
Further, aggregate liability for the parties is capped under all our Network Services agreements. For
long-term agreements (over five years), the liability caps are based on the remaining performance value of
the contract. For shorter-term agreements, the liability caps will relate to a portion/multiple of charges for
twelve months. Network Services contracts tend to be longer-term than our Enterprise Services contracts,
ranging from one to 25 years.
Enterprise Services Agreements
Enterprise Services agreements consist of master agreements and purchase orders. The master
agreement governs the customer’s relationship with us, and the purchase orders allow customers to request
services on specific terms. Purchase orders may generally be amended by change order forms or terminated
by certain customers with 30 days’ notice in certain situations. The term for an enterprise master agreement
is generally shorter than for our Network Services agreements, with many contracts ranging from three to
five years. Of our total recurring revenue, approximately 97% is committed under contract, with the
remaining 3% being usage-based revenue that is incurred at our customers’ discretion. 3% of our Enterprise
Services contracts include products that have a usage-based element, which means that revenues derived
from these contracts fluctuate based on customer needs. See “Risk Factors—Risks Relating to Our Combined
Business—Our existing customers could elect to reduce or terminate the services they purchase from us,
which could adversely affect our operating results”.
Enterprise Services contracts include standard reciprocal indemnities, representations and
warranties.
We provide service credits to customers based on certain contracted performance metrics. These
metrics include our ability to meet service installation deadlines, interruptions in service availability, service
repair time and other service targets. Service credit amounts are usually determined based on a percentage
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decrease in the installation charges or, where relevant, the monthly charges for the affected service and the
amount of time that we fail to provide the affected service. In the majority of our enterprise agreements,
service credits are capped in the range of 50% to 100% of the monthly charges for the services provided, and
may not be provided for more than one breach of service in a given period under contract. In the year ended
31 December 2015, service credits accounted for 0.11% of our revenue (including Easynet).
Some of our enterprise agreements may be terminated immediately under certain circumstances,
including insolvency, material breaches, material service level defaults, changes of control that could
adversely affect the customer’s business and provision of our services, violation of law and failure to
maintain required insurance.
Marketing and Sales
Our sales and marketing division was split into two geographic regions before the acquisition of
Easynet. Our Southern region sales and marketing division has a greater focus on Network Services, and
includes a global sales team headquartered in London, selling to non-European telecommunications
companies, mobile services and Internet content providers, as well as local sales teams in Italy, Spain and
Central and Eastern Europe. Our Northern region sales and marketing division has a greater focus on
Enterprise Services products and services, and covers the United Kingdom, the Benelux region, the Nordic
countries, Germany, France and Switzerland. Both regions sell the full portfolio of our products and services.
We also have a small team focused on selling our Interoute VDC solutions to small and medium-sized
businesses. After the acquisition of Easynet, the U.K. Business was separated from the Northern region to
create a third geographic region.
We direct our marketing efforts through a number of approaches, including general public relations
(including media appearances by our senior management), telemarketing, direct mail, our website and digital
marketing. In addition, through our relationship with UEFA, we have provided, or will provide, sponsorship
for match tickets and other hospitality packages for the UEFA Champions League, the Europa League and
EURO 2016, amongst other events.
As at 31 December 2015, our Sales & Marketing function was comprised of 520 employees located
across Europe. 201 of these employees are in Easynet. In addition, we also have approximately 70
third-party sales agents (including 22 in Easynet) and channels to provide assistance to our customers.
We also have sales teams focused on generating additional revenue through new customer
acquisitions and increased sales from existing customers. We assign account personnel for each sales team,
who are responsible for monitoring revenue growth and maintaining existing revenue in assigned accounts.
Through our sales incentive plan, compensation to account personnel is based on new sales and growth
achieved for their assigned accounts. Our sales incentive plan spans all areas of our sales force, with targets
set for each group of our personnel (i.e. Acquisition, Key Accounts, Channel, Central Accounts & SME, Sales
Engineers and senior sales management).
Our sales approach in our Enterprise Services product group has two distinct phases. First, a sales
representative, with the aid of a local sales engineering team (a technical support liaison to our sales team
who assists with providing technical designs of solutions to potential customers) and, where necessary,
centralised product and solution specialists, will meet a potential new customer seeking to purchase a
product or service in our principal product groups in our integrated IT infrastructure offering (i.e. VPN &
Security, Computing or Communications). In most instances, a customer is acquired with a single product
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sale (usually VPN) or a group of products with a strong relational compatibility. However, in a limited number
of cases, the design of a solution may also involve sales consulting provided by a small professional services
unit. Second, once the customer relationship is established, responsibility shifts from our acquisition team to
our key accounts team. Our key accounts team is compensated through commissions for cross- and
up-selling our products and services. In addition, our key account management team closely interacts with
customers during the delivery phase, ensuring their needs are met. Our key account management team has a
number of policies in place to maximise customer engagement, including our “Five Touches Per Annum”
programme, ensuring that the marketing and sales teams engage with key customers, as well as our monthly
health check programme, to ensure that customer contracts are renewed in a timely fashion. This
programme also increases opportunities for cross- and up-selling to our existing Enterprise Services
customers. For our top 50 customers, we assign a single senior executive with responsibility for maintaining
and monitoring the relationship.
Research and Development
We focus our research and development on integrating our Infrastructure, Communications and
Computing products and services to create an expansive service platform for our customers through our
integrated IT infrastructure offering. In our London-based technology centre, we have focused on the
development of new products and services, as well as online portable design and development. Notable
developments in recent years include a shift to a new orchestration capability as part of Interoute VDC
version 2.0, the development of Interoute Cloud Connect and development of the Interoute CloudStore,
supplemented by further enhancements to the CloudStore and My Services portals. As at 31 December 2015,
we employed 153 personnel (including 9 in Easynet) in activities related to research and technology, and had
a budget of approximately €8.4 million (year ended December 2015, excluding Easynet). In the future, we
plan to focus our research and development efforts on expanding the ability of our customers and partners
to integrate and control our integrated IT infrastructure offering through the expansion of our offering of
application programming interfaces.
Centralised Operations and Systems
Our centralised operations and systems are a key factor in our ability to maintain our strong
operating leverage. Our business model focuses on the delivery and support of our products at minimal
marginal cost, and we have implemented three core strategies to achieve this goal. First, we have maintained
a common approach to operations and monitoring, built on a common operational and business support
platform across our suite of Network Services and Enterprise Services. Second, we have maintained and
improved our margins through centralising our customer service, operations and engineering personnel in
lower-cost jurisdictions. Third, we have improved our efficiency and decreased delivery times for our projects
and services through further integrating our platforms, as well as the automation of our delivery mechanisms
in certain instances.
In keeping with our strategic objectives, we are continuing to shift our centralised operations to
Southeast Europe, a lower-cost region with a pool of well-educated engineering and support talent. In 2006,
we moved our London support operations to Prague, the Czech Republic and between 2010 and 2011, we
shifted our disaster recovery network operations centre from Geneva, Switzerland to Sofia, Bulgaria in order
to further reduce operational costs. In 2012, we moved our primary operational support centre from Prague
to Sofia. As at 31 December 2015, approximately 70% of our operations and engineering staff was located in
Sofia and Prague, out of a total of 631 (excluding Easynet) operations and engineering employees overall.
We estimate that our cost for our operations in the Czech Republic and Bulgaria are €53,000 and €19,000 per
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employee, respectively, compared to €87,000 per employee in the United Kingdom. As a result of our cost
optimisation strategy of moving operations to lower-cost jurisdictions in Eastern Europe, most of our support
personnel are now located outside the United Kingdom. As part of the integration of the two businesses
(Interoute & Easynet) Interoute will consolidate our customer service operations at Interoute's existing
centres in Prague and Sofia as well as in Easynet's UK operational centre in Bracknell. The majority of the 90
job roles in Easynet’s other operational location in the UK (Shepton Mallet) will move to Bulgaria, which is
currently expected to occur during the third quarter of 2016.
The performance of our platforms is an important factor in our ability to attract new customers and
retain existing customers. All our platforms are constantly monitored 24 hours a day, seven days a week,
365 days a year, with dedicated assurance teams. Our assurance teams form part of our wider engineering
and operation function, which operates a continuous improvement process to maintain and improve optimal
operational and service efficiency. We aim to provide service to our customers with minimal disruption from
network outages. Our network architecture also mitigates downtime risk for our customers, as we are able to
re-route traffic across separate network paths.
Customer Service Management
We prioritise customer satisfaction by delivering high-quality service and building long-term
relationships with our customers. Our goal is to provide a consistent level of high-quality service for all
customer interaction, which has helped us to achieve numerous customer testimonials and rank highly in
customer satisfaction indices. Our customer service management team is responsible for all in-country
customer-facing staff, outside of our sales teams. Amongst other things, the customer service management
team acts as a primary conduit for communications with customers (following hand-off by our sales team).
The team provides project management of larger orders (and coordinates smaller orders), follow-on service
management to ensure our products and services meet customer expectations and technical service
management for the life cycle of customer contracts. We maintain regional customer service teams in
Amsterdam, Berlin, Copenhagen, Frankfurt, Geneva, London, Madrid, Paris, Rome, Stockholm and Zurich,
which are responsible for coordinating and managing local customer orders, as well as service management
for key customer accounts.
Operations & Engineering
Our operations & engineering team is centrally located, and responsible for the management of local
physical assets and suppliers, and serve as the customer relationship managers for our Network Services
customers. We maintain expertise centres in Prague (general engineering) and Nottingham (applications
management) as well as an operations centre in Prague. In our Prague operations & engineering centre, our
customer call centre supports 15 European languages, and we have service delivery capability in a number of
languages. Prague also hosts our security operations centre, as well as dedicated product support teams for
key customers. We also maintain an operations centre in Sofia, where we monitor our network and
computing platforms 24 hours a day, seven days a week, 365 days a year. Sofia also houses our
English-language customer call centre, and serves as our primary centre for service delivery, including logical
design and provisioning.
In addition, we outsource our field maintenance operations, including all building, fibre and
equipment maintenance to third parties. To support our third-party partners, we have regional field
operations staff in 25 cities across Europe that are responsible for their training and oversight, as well as 25
spare centres with certain of our operations and maintenance contractors in addition to on-site spares. In
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addition, we maintain spare parts for certain third-party equipment that we use to produce our products and
services, including manufacturers such as Alcatel, Cisco, Infinera and Juniper.
Automation
We automate the delivery of certain products and services through platforms such as CloudStore and
MyServices, which support the creation, management and support of our products and services. Through
these platforms, we are able to deliver certain services and bundled products directly to customers, with
reduced invoice times and limited or no employee intermediaries. Our automated services enable us to
capitalise on customer demands at reduced delivery costs, supporting our overall profits whilst increasing
the convenience and availability of our products and services to customers.
Intellectual Property
We rely on a combination of patent, copyright, trademark, service mark and trade secret laws in the
United Kingdom, the European Union, the United States and other jurisdictions in which we operate to
establish and protect proprietary rights in our data, applications and services. We have trademarks
registered in the United Kingdom, the European Union, the United States and other jurisdictions. We rely on
copyright laws and licences to use and protect software and certain other elements of our proprietary
technologies. We also enter into confidentiality with our employees and confidentiality agreements with
other third parties.
Generally, most of our software licences for our networks are granted to us on a perpetual basis or
for an unspecified period. Under our various business support system contracts with third parties such as
Oracle, we are granted licences to use the software in those systems on a fixed-term basis subject to
renewal. Although we seek to rigorously protect our rights to use this technology, any significant impairment
of these rights or third-party claims could harm our business or our competitive position in the marketplace.
Employees
As at 31 December 2015, we had 2,229 employees and 82 consultants. This includes 739 employees
and 42 consultants in Easynet.
We contribute to retirement, pension and other social security schemes for our employees in
accordance with the regulations applicable to such employees in the relevant jurisdictions. As at
31 December 2015, we had no material unfunded contributions to such schemes.
Other Properties
We lease our principal executive offices in London. We also lease significant corporate office space
and smaller sales, administrative and support offices in the various locations in which we conduct business.
We own or lease properties and operate our fibre and distribution network facilities, point-to-point
distribution capacity, switching equipment and other technical facilities.
As at 31 December 2015, we leased 42 offices in 40 cities in 22 countries (including Easynet). All of
these premises are in reasonable condition and are suitable for the conduct of our business.
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Principal Suppliers
We do not have a high dependency on any single supplier. In the twelve months ended 31 December
2015 our largest supplier accounted for 13% of our network and capital spending. We generally adopt a dual
vendor approach for many of our platforms to limit our dependency on any particular supplier.
In terms of our capital expenditure, our largest suppliers are Infinera (Transport), Cisco and Acano
(video platform), Cosseta Srl, Avnet and Alef (which distribute our customer premises equipment) and Telent
Tecnology Services Ltd. Our major OLO suppliers are Du, Gateway Global Communications Ltd, Vodafone,
Orange and T-systems. However, for the vast majority of our OLO circuits alternative suppliers are generally
available. The largest OLO suppliers in Easynet are BT, Sky Network Services Ltd, TalkTalk Business, Virgin
Media Business and Orange.
Our four major network suppliers are Gasline, SFR, Global Switch Estates Ltd and Stadtwerke
Hannover AG.
IRU Contracts
Like other network operators, some of the fibre cable used in our network is owned by other
licensed operators and is leased to us on an IRU basis. These IRUs typically have terms of 15 to 25 years
before we are required to renegotiate the terms of the contract. IRUs grant us the right to operate, lease or
grant indefeasible rights of use in the ducts in accordance with the terms of the IRU agreements. Under the
agreements, we may also offer any telecommunications and data transmission services, including the right to
grant our rights in the IRU to our customers. Certain IRUs require the supplying party to be responsible for
obtaining the rights of way to operate the ducts in accordance with the IRU agreements. The IRUs may be
terminated in very limited circumstances, including the non-payment of fees under the contract.
Rights of Way Contracts
We rely on rights of way to build and manage our network infrastructure. Rights of way give us
access to construct operational equipment—for example, fibre—on a property owner’s land and
subsequently to retain access and use to the equipment. Access to the equipment is generally given along
specific routes, and some rights of way agreements limit the purposes for which operational equipment may
be used. Installation of any new equipment usually requires approval of the property owner.
In certain of our existing agreements, the property owner may temporarily withdraw the rights of
access granted or require the cessation of work by us in connection with the management of the property,
the carrying out of construction works or in the event of emergency or for safety and security reasons.
Property owners may inspect the operating equipment, but may not generally interfere with it. Under certain
of our agreements, the liability of the building owners is capped and we typically must indemnify the
property owner against certain losses, damages and expenses.
The rights of way agreements may be terminated with immediate effect under certain
circumstances, including a material breach of the agreement which cannot be cured. Upon the termination
or expiry of a right of way agreement, each party’s rights and obligations cease and we, amongst other
things, must immediately cease using its operational equipment and remove such equipment as soon as
practicable. Our rights under a right of way agreement are generally not assignable. See “Risk Factors—Risks
Relating to Interoute—We may not be able to renew rights of way or could be forced to renew on onerous
terms, which could adversely affect our operating results”.
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Disputes and Legal Proceedings
From time to time, we are party to various disputes and legal proceedings in the ordinary course of
business or otherwise. Except for the proceedings cited in this section, there are no governmental, legal or
arbitration proceedings (including any such proceedings pending or threatened, of which we are aware), nor
have there been any during the previous twelve months, which may have or have had in the past material
effects on our financial position or profitability.
German Tax Acquisitions
Our German subsidiary, Interoute Germany GmbH and certain of its predecessor entities entered
into two transactions that may be audited or otherwise called into question by the German tax authorities in
the future. The first transaction was a retroactive merger in 2012 which, amongst other things, provided the
Interoute Group with certain tax benefits arising from setting off the income of the acquired company
against losses for the accounting period of Interoute Germany GmbH. In early 2013, during the accounting
period following the consummation of the merger, the relevant German tax laws were amended to prohibit
firms from recognising tax benefits arising from retroactive mergers. The relevant German law did not apply
retroactively, so the implementation of the law did not have an effect on the mergers that Interoute
Germany GmbH entered into in 2012. In addition, although we can provide no assurance, we believe that the
relevant German tax authorities would not re-characterise the transaction in a way that would create
adverse tax consequences for us because there were tangible commercial benefits to undertaking the
retroactive merger.
The second transaction relates to two acquisitions of a group of companies that previously owned
property assets, the first by Interoute UK Limited that was subsequently transferred to Interoute
Germany GmbH, and the second by ATP3 Dusseldorf GmbH. The acquisitions were completed in 2011, and,
following the resulting merger of the acquired entities, a tax group in Germany was created. Through this tax
group, the release of deferred gains on the sale of the properties was transferred into Interoute
Germany GmbH with minimal tax liability incurred. Whilst there has been no change in the relevant German
tax law or case law to suggest that this transaction was not structured in compliance with the relevant
German tax laws, we cannot provide any assurance that this transaction will not be challenged, especially
considering the current focus on minimising profit shifting and base erosion by the German tax authorities.
To date, the German tax authorities have not indicated that Interoute Germany GmbH is under
investigation, or that any administrative actions or other legal proceedings will be brought against it in
relation to either of the transactions set out above. However, the transactions may be audited by the
German tax authorities in the future. Our affiliates have procured liability insurance on our behalf in the
event that the retroactive merger transaction is successfully challenged by the German tax authorities, which
covers up to €90.0 million in connection with the transaction. Such insurance may not be sufficient to fully
address any liabilities that may be imposed on us by the German tax authorities. See “Risk Factors—Risks
Relating to the Combined Business—We cannot predict our future tax liabilities. If we become subject to
increased levels of taxation due to changes in tax laws, or if tax contingencies are resolved adversely, our
results of operations could be materially adversely affected”.
Clouditalia Arbitration
On 19 January 2015, we were notified by Clouditalia that it had filed an arbitration claim against us
alleging breach of contract, abuse of dominance and other anticompetitive behaviours.
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The dispute arises under two contracts we have with Clouditalia: an IRU agreement and a
maintenance agreement. Under the IRU agreement, Clouditalia received an indefeasible right of use to a
duct in Italy for a term of 25 years in exchange for the payment of an up-front fee. Under the maintenance
agreement, we provided duct maintenance services in exchange for annual payments to be made by
Clouditalia in advance. Clouditalia paid only a portion of its 2014 maintenance agreement fee and sent us a
formal letter alleging that the fees were too high, that we were in abuse of a dominant position and that we
were in breach of the maintenance agreement. We have denied all allegations and claims alleged by
Clouditalia, and we believe that Clouditalia’s non-payment constitutes a breach of contract. We have,
therefore, suspended the maintenance services provided to Clouditalia in 2014 and restarted again in 2015.
In relation to the maintenance agreement, Clouditalia has asked for approximately €16.4 million for
the abuse of dominance claim and a minimum of €200,000 in damages, with additional damage amounts in
the alternative. We believe the damage claims under the breach of the IRU agreement to be immaterial.
Arbitration proceedings have commenced with the panel of three arbitrators, with one appointed by each
party and the chairman jointly nominated by the two arbitrators and confirmed by the International
Chamber of Commerce on 27 April 2015. The panel have agreed to a timetable, and a number of procedural
hearings have taken place between December 2015 and March 2016. Witnesses are currently due to be
called in May 2016.
Whilst we can provide no assurance, we believe that Clouditalia’s claims under the maintenance
agreement and IRU agreement are without merit and accordingly we have made a minimal provision in our
accounts for this arbitration.
Navigli Lombardi Dispute
Interoute SpA has been disputing several rights of way charges from the Lombardi region in Italy. Six
separate proceedings were undertaken in the court of Milan and in 2015 Interoute had lost four of the cases
in the first instance. Interoute SpA took the decision to appeal these cases on the basis of a change in law
and, in February 2016, Navigli Lombardi agreed to surrender its claims. As a result, we anticipate releasing a
provision of €1,191,000 in May 2016 and Navigli have additionally agreed to return to Interoute SpA a
payment in the amount of approximately €353,000.
Kipco-Damaco BV Domain Name Dispute
Easynet Belgium previously supplied connectivity and domain name services to Kipco-Damaco BV
beginning in 2003. In 2009, Easynet Belgium sold its small and medium enterprises’ customer base to Toledo
Telecommunications, including its services to Kipco-Damaco BV. After the sale, Kipco-Damaco BV’s domain
name was not renewed and lapsed. Subsequently, Kipco-Damaco BV claimed damages of approximately
€400,000 from Easynet Belgium NV and Toledo Telecommunications related to lost profits, damage to stock
and litigation costs. The case is pending before the Supreme Court of Justice of Belgium.
Employee Disputes
Easynet SAS is engaged in approximately six employment disputes as at 31 December 2015. Each of
these lawsuits involves employees petitioning the French labour courts to challenge an employment
termination. In one litigation, Easynet SAS was required to pay €132,000 to the claimant. Following an appeal
decision, this payment was made in February 2015 and preliminarily challenged in front of the French
Supreme Court. A preliminary report recently written by the French Supreme Court confirmed that we will
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not win this case. The company therefore decided to cease litigating the matter and will not recover any
additional amounts.
The remaining five litigants allege damages in the aggregate of approximately €1.8 million. Easynet
has made accounting provisions for a total of €306,500 to address these claims. We expect judgment on two
of the claims to be made by 20 May 2016. A third claim will be decided by 12 July 2016.
Insurance
We have in place insurance coverage which we consider to be reasonable and which insures us
against the type of risks usually incurred by companies carrying on the same or similar types of business as
ours. In line with industry best practices, we do not insure our duct and fibre networks against physical
damage. Our insurance broadly falls under the following five categories: professional indemnity; general
third-party liability; directors’ and officers’ liability; property damage insurance; and business interruption
insurance.
Licences and Authorisations
We hold licences and authorisations to provide communication services in each of the
21 jurisdictions in which we have an active sales force promoting our products and also in Hong Kong,
Singapore and Australia. In addition, we may sell connectivity in certain countries in reliance on the licence of
the underlying network provider, as is customary in the industry. Although regulatory requirements vary
from country to country, most countries require telecommunications providers to be approved through
licences or registration with certain authorities. In order to acquire and maintain these approvals, we must
usually pay administrative charges and annual renewal fees and provide data on our services to the
regulatory authorities. We believe that all of our licences and authorisations are current as at the date of this
Annual Report.
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MANAGEMENT
Board of Directors of the Issuer
The Issuer, Interoute Finco plc, is a public limited company incorporated under the laws of England and Wales as a private limited company on 11 August 2015 with the name Interoute Finance Limited and was re-registered as a public limited company on 13 August 2015. The business address of the directors of the Issuer is 25 Canada Square, 31st Floor, London E14 5LQ, United Kingdom.
The following table sets forth certain information with respect to members of the board of directors of the Issuer as at the date hereof. The Issuer is not aware of any potential conflicts of interest between the duties of the persons listed under its board of directors and their private interests or other duties.
Name Age Position
Gareth Williams 50 Chairman Maurice Woolf 47 Director Catherine Birkett 42 Director
Board of Directors of ICHSA
The Issuer’s ultimate parent, ICHSA, is a société anonyme which was incorporated under the laws of Luxembourg on 6 July 2005. The following table sets forth certain information with respect to members of the board of directors (the “Board”) of ICHSA as at the date hereof.
Name Age Position
Gabriel Prêtre 58 Chairman Robert McNeal 60 Vice Chairman Hugues Lepic 51 Director Brian Cassidy 42 Director Gareth Williams 50 Director
Gabriel Prêtre was appointed as Chairman in July 2014. Mr Prêtre has over 25 years of experience in the telecommunications sector in Europe. Before joining Interoute, Mr Prêtre worked as an Associate at Booz Allen & Hamilton, London, focussing on telecommunications, then as Chief Operating Officer at IDB WorldCom Europe, an alternative carrier owned by MotorColumbus AG, a large Swiss company. He later joined UBS Investment Bank where he advised telecommunications companies on M&A and IPO. Today, Mr Prêtre serves as CFO and member of the Executive committee of the Sandoz Family Foundation overseeing the business activities as well as the investments and financial portfolio management of the Foundation. Mr Prêtre has been a member of the Board of ICHSA since its formation. He also serves as a director for Interoute Managed Services Switzerland S.a.r.l. Mr Prêtre earned a Mechanical Engineering Degree from the Swiss Federal Institute of Technology of Zurich and an MBA from The Wharton School of the University of Pennsylvania.
Robert McNeal was appointed as our Vice Chairman in 2003. Mr McNeal has nearly 30 years of experience in high technology. Mr McNeal started his career as an officer in the U.S. Air Force, flying jets. Since that time, he has worked in numerous positions in the telecommunications industry, including serving as a political appointee to the White House, as well as leading Time Warner’s early Web-based business efforts. Before joining Interoute, Mr McNeal headed Corporate Strategy and Development at World Online, where he helped design and execute the consolidation of the industry to form Europe’s largest independent ISP, Tiscali. Mr McNeal earned a BA in Physics and Mathematics from the U.S. Air Force Academy, an MS in Electrical Engineering from Syracuse University and a MBA from The Wharton School of the University of Pennsylvania.
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Hugues Lepic was appointed as a Director in April 2015 and serves on the ICHSA nomination and compensation committees. Mr Lepic has twenty-five years of professional experience in the investment and telecommunications industry. Mr Hugues Lepic is the CEO of Aleph Capital Partners LLP, an investment firm based in London, which he founded in 2013. Prior to that, Mr Lepic spent most of his career at The Goldman Sachs Group, Inc., which he joined in New York in 1990. From 2006 to 2012, he was head of the private equity investing business (Principal Investment Area) of Goldman Sachs in Europe, and, from 2009 to 2012, head of the Merchant Banking Division of Goldman Sachs in Europe. Mr Lepic was responsible for investing in the Telecom, Media and Technology (TMT) sectors in the Principal Investment Area of Goldman Sachs in Europe between 1998 and 2006. Mr Lepic was a member of Goldman Sachs’ European Management Committee between 2008 and 2012. He was promoted to Managing Director in 1998 and to Partner of Goldman Sachs in 2000. He holds an MSc from École Polytechnique in France and an M.B.A. from the Wharton School of the University of Pennsylvania.
Brian Cassidy was appointed as a Director in March 2015 and serves on the Audit and Risk Committee. Mr Cassidy has over 15 years of experience in private equity and investment banking, primarily focusing on companies in the media and communications industries. Mr Cassidy is a Partner at Crestview Partners, a private equity firm, one of our shareholders, and also serves as a director of NEP Group, Inc., Camping World/Good Sam Enterprises and Cumulus Media, Inc. Mr Cassidy earned an AB in Physics from Harvard College and an MBA from the Stanford Graduate School of Business.
Gareth Williams was appointed as our Chief Executive Officer in 2007. Mr Williams has 28 years of experience in the information and communication technology services sector. Before joining Interoute, Mr Williams held senior positions in the telecommunications and information technology services sector, ranging from high-tech startups to major telecommunications joint ventures. Mr Williams spent the first 13 years of his career at British Telecom and played a part in the globalization of telecommunications. In 2003, Mr Williams joined Interoute and was appointed President of Global Sales at Interoute, a position that he held until becoming Chief Executive Officer. Mr Williams earned a BA (Hons) in Business Administration from Cardiff University.
Our Senior Management
Name Age Position
Gareth Williams 50 Chief Executive Officer Catherine Birkett 42 Chief Financial Officer Matthew Finnie 50 Chief Technology Officer Maurice Woolf 47 General Counsel & EVP Corporate Support Ian Wade 42 Executive Vice President, Corporate Development John Shearing 67 Executive Vice President, Group Solutions and Security Jan Louwes 53 Executive Vice President, Sales and Marketing Renzo Ravaglia 63 Executive Vice President, Network Services Philip Grannum 47 Executive Vice President, UK Sales
Andrew Holder 43 Executive Vice President, Customer Operations Paul Monteiro 40 Vice President, Platform Engineering and Operations Mark Lewis 39 Vice President, Communications and VPN & Security Yasmin Jaffer 58 Vice President, Human Resources
Catherine Birkett was appointed as our Chief Financial Officer in 2004. Ms Birkett has 20 years of accounting experience and 15 years of industry experience. Before joining Interoute, she trained in the audit department of KPMG. On qualification she moved into the Transaction Services team focusing on due diligence assignments for clients over multiple sectors. In 2000, she joined Interoute to lead the Financial Planning and Analysis department and was an integral part of the team that drove the restructuring of the Interoute Group in 2003 and the acquisitions of Ebone and Cecom. Following her appointment as CFO in 2004, she was part of the team to raise the equity funding from Dubai Holdings and, with the General
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Counsel, led the acquisitions of seven further companies including the raising of two senior debt facilities to finance the transactions. She has guided the company through a period of significant revenue and profit growth and has led the development of the finance-shared services centre in Nottingham. Ms Birkett earned a BA (Hons) in Mathematics and Economics from Durham University and is a qualified chartered accountant.
Matthew Finnie was appointed as our Chief Technology Officer in 2003. Mr Finnie has nearly 25 years of experience in the information and communication technology services sector. He started his career designing mixed-signal semiconductors and overseeing the development of some of the first consumer-oriented applications for digital signal processing. In the early 1990s, he founded Internet collaborative computing startup, Insitu, which was later acquired by the VOIP pioneer Vocaltec. On joining Interoute in 2000, he held several senior management roles, including leading the product group. Following the restructuring of the business in 2003 he was appointed as CTO. He is a regular advisor to the European Commission on information and communication technology research and innovation and a member of the CONNECT Advisory Forum advising the EU commission on investment priorities as part of the digital futures and horizon 2020 initiatives. Mr Finnie earned a BSC (Hons) in Electrical Engineering and Mixed Signal Microelectronics from Lancaster University.
Maurice Woolf was appointed as our General Counsel in 2003 and our EVP Corporate Support in 2015. Mr Woolf has 23 years of experience in the legal services field. In 2003, he joined Interoute as General Counsel. Between 1991 and 1992, he passed his Law Society Finals at the University of Glamorgan, and then qualified as a solicitor at a predecessor law firm to SNR Dentons. From 1996-2002, Mr Woolf was Senior Vice President and Deputy General Counsel for the principal operating division of GTS (known as Ebone), one of the first alternative carriers to take advantage of the deregulation of telecoms in Europe and was retained following the acquisition of GTS by KPN Qwest as KPN Qwest’s Head of Legal and Commercial. Before joining Interoute, he was General Counsel of Bulldog Communications Limited, a U.K.-based provider of DSL services. Mr Woolf earned an LLB (Hons) from King’s College, University of London.
Ian Wade was appointed as our Executive Vice President, Corporate Development in 2015. Prior to joining Interoute, Mr Wade was the head of ING Bank’s telecommunications advisory practice where he actively covered alternative telecommunications operators and the infrastructure layers of the European communication industry. Mr Wade started his career as a high-yield bond originator at CIBC World Markets in Toronto before moving over to the advisory business in 1998. Mr Wade earned a Bachelor of Commerce (Hons) from the University of British Columbia and is a Chartered Financial Analyst.
John Shearing joined Interoute in 2004 with executive responsibility for Networks & Operations, a position he held for eight years. Subsequently Mr Shearing has held executive positions responsible for systems, products, customer solutions and service management and is currently the Executive Vice President, Integration. Mr Shearing has over 40 years of experience in the information communication technology services sector, most of it operating global time-sharing, banking and carrier networks and data centres. Following eight years at SWIFT, where he was head of global telecommunications, Mr Shearing was a founding executive of the first pan-European facilities based carrier, formed by GTS in 1995. At GTS/Ebone he was the Networks & Operations executive until its acquisition by KPNQwest, at which point he took on the role for the combined organization. Mr Shearing earned a B.Sc. (Hons) in Computer Science from City University, London and an M.Sc. from the University of London.
Jan Louwes was appointed as our Executive Vice President, Sales and Marketing in 2007. Mr Louwes has 21 years of experience in information communication technology sales. Before joining Interoute, he was the head of the Europe, Middle East and Africa sales and sales support organization for Forrester Research. Additionally, he led the International Sales teams at KPN and KPN affiliates, as well as in management positions for AT&T and AT&T-Unisource in Europe and the United States. Mr Louwes completed various studies in law, economics and marketing.
Renzo Ravaglia was appointed as our Executive Vice President, [Network Services] in 2010. Mr Ravaglia has over 35 years of experience in the information and communication technology services sector. Before joining
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Interoute, he spent 20 years with Alcatel, leading the Telecommunications Division of its Italian subsidiary, and three years in CSELT as a researcher in fibre optic communication. In 2000, Mr Ravaglia was appointed as Italy and Mediterranean Country Manager at Interoute, a position that he held until becoming Executive Vice President, Network Services. Mr Ravaglia earned a BA (Hons) in Telecommunication Engineering from the University of Bologna, Italy.
Philip Grannum was appointed as our Executive Vice President UK Sales in October 2015, following the acquisition of Easynet. Mr Grannum has in excess of 20 years’ experience within telecoms and technology across a variety of roles. Previous roles include CEO of Thus, a telecommunications reseller based in Glasgow, Managing Director of Enterprise with Cable & Wireless with responsibility of annual revenues in excess of €1bn. Mr Grannum began his career as a graduate accountant with Xerox before joining AT&T and subsequently Energis, which was acquired by Cable & Wireless in 2005. Mr Grannum has a degree in Applied Economics & Mathematics.
Andrew Holder was appointed as our Executive Vice President, Customer Operations in 2011. Mr Holder has 20 years of experience in the information and communication technology services sector. Before joining Interoute, he held various customer delivery and assurance positions for ACC Long Distance & Level 3 Communications. In 2007, Mr Holder was appointed Director, Customer Support Services at Interoute, a position he held until becoming Executive Vice President, Customer Operations. Mr Holder earned a BSc (Hons) degree in Economics from Loughborough University.
Paul Monteiro was appointed as our Executive Vice President, Platform Engineering and Operations in 2013. Mr Monteiro has over 15 years of experience in the information and communication technology services sector. Before joining Interoute, Mr Monteiro held engineering positions with Nortel & Tiscali and a telecommunications firm in New Zealand. In 2012, he was appointed Vice President Network Engineering at Interoute, a position that he held until becoming Executive Vice President, Platform Engineering and Operations. Mr Monteiro earned a BTech (Hons) in Optoelectronics from the University of Auckland.
Mark Lewis was appointed as our Executive Vice President, Connectivity & Unified Communications in 2012. Mr Lewis has 13 years of experience in the information and communication technology services sector. Before joining Interoute, he held roles in a variety of software firms, where he gained experience in a number of fields, including 3D modelling, content protection and CDNs, from which his interest in networks and all forms of communications stems. In 2011, Mr Lewis was appointed Vice President, Architecture and Services at Interoute, a position that he held until becoming Vice President, Connectivity & Unified Communications. Mr Lewis earned a BSc (Hons) and MSc in Applied Mathematics from Natal University in Durban.
Yasmin Jaffer joined Interoute in 2000 as a Director within the HR department following the restructuring of the business in 2003 she was appointed as our Vice President, Human Resources. Ms Jaffer has more than ten years of experience in senior human resources. In 1992, she completed her qualification with the CIPD. Before joining Interoute, Ms Jaffer spent six years as Group Human Resources Manager at Psion Group PLC, where she was responsible for the professional training and development of all staff within the Group and its subsidiaries. Ms Jaffer earned a degree in Human Resources from Thames Valley University and is a member of the Chartered Institute of Personnel Development.
Board Meetings
The Board meets on a regular basis to review performance and business plans of the Group. Formal Board meetings take place at least once a quarter and additional meetings are scheduled for specific business matters as necessary. The Board has established policies for the conduct of business within the Group and has a schedule of matters reserved for the Board. In addition, the Board appoints committees to ensure appropriate oversight of the Group’s operations. As at the date of this Annual Report, appointed committees include the Audit and Risk Committee and the Remuneration Committee.
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Audit and Risk Committee
The Audit and Risk Committee assists the Board in their governance and oversight by: (i) reviewing the performance and independence of the external audit and by making recommendations in terms of appointment and scope of the auditors; (ii) monitoring and reviewing the integrity of financial statements; and (iii) reviewing the suitability of accounting policies adopted by the Group and any recommended changes; (iv) reviewing operational and compliance risk in the Group and approving recommendations on the application of resources to mitigate such risks. The Audit and Risk Committee is also responsible for the ongoing development and co-ordination of risk management, as well as the consolidation, challenge and reporting of all risk management information. It provides support and guidance on the application of risk management and controls assurance across the Group. The Audit and Risk Committee meets twice per year. It was established in 2008 and is composed of Gabriel Prêtre, Hugues Lepic and Gareth Williams. Catherine Birkett, Maurice Woolf and John Shearing report to the Audit and Risk Committee on the matters within its purview.
Remuneration Committee
The Remuneration Committee assists the Board in their governance and oversight by: (i) determining the appropriate philosophy, policies and practices for all aspects of executive and management remuneration; (ii) ensuring that executive and management remuneration supports the broader objectives and goals of the Group; and (iii) approving share based incentive schemes. The Remuneration Committee meets twice per year. It was established in 2015 and, as at the date of this Annual Report, includes Gabriel Prêtre, Hugues Lepic and Gareth Williams.
Code of Ethics
We have adopted a written code of ethics applicable to our directors, officers and employees, including our principal executive officer and senior financial officers, in accordance with the U.K. Bribery Act 2010. In the event that we make any changes to, or provide any waivers from, the provisions of our code of ethics applicable to our principal executive officer and senior financial officers, we plan to disclose such events on our website within four business days of such event.
Compensation Paid to Directors and Senior Management
The aggregate annual compensation payable to all of our directors and senior management during the year ended 31 December 2015 was €3.7 million. No fees are paid to our non-executive directors.
Management Equity Plan
Under the terms of the Interoute Communications Holding S.A. Restricted Share Plan (the “Share Plan”), selected employees of the Group may, from time to time, receive compensation in the form of Beneficiary Shares (“Beneficiary Shares”) in Interoute Communications Holding S.A. which are held by the trustee of the Interoute Communications Holdings Limited Employee Share Trust (the “Trust”), Computershare Trustees (Jersey) Limited (“Computershare”). The employee is considered to be the full beneficial owner of the Beneficiary Shares, subject to certain contractual provisions set forth in the Share Plan. Beneficiary Shares are a Luxembourg Law-based instrument that do not form part of the capital of the company but provide an entitlement to the proceeds of a liquidation on the terms set out in the company’s Articles of Association. Among other things, employees generally forfeit their shares if they cease to be employees prior to the end of the “restricted period”. The end of the “restricted period” is triggered by a sale of the Company and certain other exit events delineated in the Articles of Association of Interoute Communications Holding S.A., including the listing of the Company on the London Stock Exchange or a sale or loss of control of Interoute Communications Limited, in which case the Beneficiary Shares would vest into the name of the relevant employee. The Share Plan in place for employees in the U.K., the Czech Republic, Italy and the U.S. Certain employees in other jurisdictions are provided with a similar scheme, under which individuals will receive cash
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bonuses of equivalent gross value to that which they would have received if they had an interest in the Share Plan.
Currently, 412 employees of Interoute participate in the Share Plan. From time to time, we offer to purchase the beneficial interest in some of the Shares held by certain employees, and may continue to do so in the future. In November 2015, we purchased a total of 3,386,634 A Beneficiary Shares and 741,302 B Beneficiary Shares at a cost of €0.85 (£.6625 for UK based employees) per Beneficiary Share.
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PRINCIPAL SHAREHOLDERS
As at the date of this Annual Report, the Issuer’s entire issued and outstanding share capital was held
by the Company, a wholly owned indirect subsidiary of ICHSA.
ICHSA has an outstanding share capital of €214,535,713.75, comprised of 120,000,000 A ordinary
shares, 51,428,571 B ordinary shares and 200,000 preference shares with a par value of €1.25, each being
fully paid-up. The following table sets out certain information concerning ICHSA’s significant shareholders as
at 31 December 2015.
Name of shareholder Number of shares
Total percentage
of shares owned
Emasan AG(1) ................................................ 120,000,000 A ordinary shares and 140,000
preference shares
70%
Turbo Holdings Lux II S.à.r.l.(2) ..................... 51,428,571 B ordinary shares and 60,000
preference shares
30%
(1) The Sandoz Family Foundation beneficially owns all the voting share capital of Emasan AG. Emasan AG for purposes of the shareholding
includes certain business associates and affiliates.
(2) Aleph Turbo Investors LP and Crestview Partners III GP, L.P. beneficially own all of the voting share capital of Turbo Holdings Lux II S.à.r.l.
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RELATED PARTY TRANSACTIONS
In the course of our ordinary business activities, we may from time to time enter into agreements
with or render services to related parties. In turn, such related parties may render services or deliver goods
to us as part of their business. Purchase and supply agreements between subsidiaries and affiliated
companies and with associated companies or shareholders of such associated companies are entered into
from time to time within the ordinary course of business.
We believe that all transactions with affiliated companies are negotiated and conducted on a basis
equivalent to those that would have been achievable on an arm’s-length basis, and that the terms of these
transactions are comparable to those currently contracted with unrelated third-party suppliers,
manufacturers and service providers.
Interoute Related Party Transactions
During the year ended 31 December 2014, we entered into a transaction with a former member of
the administrative, managerial and supervisory bodies, for the sale of intellectual property relating to a
product of the Group that was in development at the time of the sale. The initial consideration for the sale
was €1, with deferred consideration in an amount of up to £1 million contingent on the amount of any return
of value to the buyer within five years of the sale.
Shareholder Facility
The Shareholder Facility is in the initial principal amount €97.0 million bearing interest at a rate to be
determined by the parties, provided that such rate shall not exceed 15% above the applicable base rate,
payable on a quarterly basis in arrears, and is compounded at the end of each calendar month. The
Shareholder Facility is a back-to-back facility from our principal shareholders to ICHSA. The Shareholder
Facility (together with all accrued interest) is payable in full six months after the maturity of the Notes. The
Shareholder Facility constitutes a subordinated unsecured obligation of the Company and is not guaranteed
by any subsidiary of the Company. The Shareholder Facility is subject to the terms of the Intercreditor
Agreement, which will contain customary payment blockage and standstill provisions. The Shareholder
Facility is governed by the laws of England and Wales.
Management Equity Plan
Under the terms of the Interoute Share Plan, selected employees of the Group may, from time to
time, receive compensation in the form of Beneficiary Shares in Interoute Communications Holding S.A.
which are held by the trustee of the Trust, Computershare. The employee is considered to be the full
beneficial owner of the Beneficiary Shares, subject to certain contractual provisions set out in the Share Plan.
Beneficiary Shares are a Luxembourg law-based instrument that do not form part of the capital of the
company, but provide an entitlement to the proceeds of a liquidation on the terms set out in the company’s
Articles of Association. Amongst other things, employees generally forfeit their shares if they cease to be
employees prior to the end of the “restricted period”. The end of the “restricted period” is triggered by a sale
of the Company and certain other exit events delineated in the Articles of Association of Interoute
Communications Holding S.A., including the listing of the Company on the London Stock Exchange or a sale or
loss of control of Interoute Communications Limited, in which case the Beneficiary Shares would vest into the
name of the relevant employee.
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Currently, 412 employees of Interoute participate in the Share Plan. From time to time, we offer to purchase
the beneficial interest in some of the Beneficiary Shares held by certain employees, and may continue to do
so in the future. In 2015, we purchased a total of 3,386,634 A Beneficiary Shares (2014: 4,560,200) and
741,302 B Beneficiary Shares (2014: nil) at a cost of €0.85 (£.6625 for U.K.-based employees) per Beneficiary
Share (2014: €0.80).
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FINANCIAL AND OTHER MATERIAL CONTRACTUAL OBLIGATIONS
The Notes
In September 2015, Interoute Finco plc issued the €240,000,000 senior secured floating rate notes due 2020
(the “Floating Rate Notes”) and the €350,000,000 senior secured 7.375% notes due 2020 (the “Fixed Rate
Notes”, and together with the Floating Rate Notes, the “Notes”) in an offering that was not subject to the
registration requirements of the U.S. Securities Act.
The Notes are governed by an indenture entered into by, amongst others, Interoute Finco plc, HSBC
Corporate Trustee Company (UK) Limited, as trustee for the holders, Interoute Communications Holdings
Limited, as parent guarantor, and certain of Interoute Communications Holdings Limited’s wholly owned
subsidiaries, as subsidiary guarantors.
The Notes are general obligations of Interoute Finco plc and rank pari passu in right of payment with all
existing and future indebtedness of Interoute Finco plc that is not subordinated in right of payment to the
Notes; and are senior in right of payment to any existing and future indebtedness of Interoute Finco plc that
is subordinated in right of payment to the Notes.
At any time prior to 15 October 2016, Interoute Finco plc may redeem any or all of the Floating Rate Notes at
100% of their principal amount plus accrued and unpaid interest, if any, plus a redemption premium. At any
time prior to 15 October 2017 for the Fixed Rate Notes, respectively, Interoute Finco plc may redeem any or
all of the Fixed Rate Notes at 100% of their principal amount plus accrued and unpaid interest, if any, plus a
redemption premium.
On or after 15 October 2017, Interoute Finco plc may redeem any or all of the Floating Rate Notes initially at
101.000% of their principal amount plus accrued and unpaid interest, if any, with the premium declining to
100.000% after that date. On or after 15 October 2017, Interoute Finco plc may redeem any or all of the
Fixed Rate Notes initially at 103.688% of their principal amount plus accrued and unpaid interest, if any, with
the premium declining annually after that date.
The Notes are also subject to certain customary covenants and events of default.
The Notes are guaranteed on a senior secured basis by Interoute Communications Holdings Limited and
certain of its subsidiaries of Interoute Communications Holdings Limited. The guarantee of the Notes by each
guarantor ranks pari passu in right of payment with any existing and future indebtedness of such guarantor
that is not subordinated in right of payment to such guarantee; is junior in right of payment to any and all of
the existing and future indebtedness of such guarantor that is subordinated in right of payment to such
guarantee; and are effectively subordinated to such guarantor’s existing and future indebtedness that is
secured by property and assets that do not secure its guarantee, to the extent of the value of the property
and assets securing such indebtedness.
If an event treated as a change of control occurs, then Interoute Finco plc must make an offer to repurchase
the Notes at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase.
The Notes are secured by shares of the Interoute Finco plc, the notes proceeds loans receivables, bank
accounts and intercompany loans of Interoute Finco plc, shares of Interoute Communications Holdings
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Limited, rights of Interoute Holdings S.à.r.l. under the shareholder loans to the Interoute Communications
Holdings Limited, and a debenture over most of the assets of certain guarantors.
Intercreditor Agreement
In connection with entering into the Revolving Credit Facility Agreement (the “RCF Agreement”) and
the Indenture governing the Notes (the “Indenture”), the Company, Interoute Finco plc and Interoute
Holdings S.à r.l., amongst others, entered into an intercreditor agreement (the “Intercreditor Agreement”)
to govern the relationships and relative priorities amongst:
(1) the arrangers under the RCF Agreement (the “RCF Arrangers”) and the lenders of the RCF
(the “RCF Lenders”);
(2) the trustee in respect of the Notes (the “SSN Representative”) on behalf of itself and the
holders of the Notes (the “Noteholders”);
(3) the hedge counterparties under certain hedging agreements (the “Hedge Counterparties”);
(4) the trustee or agent in respect of any Pari Passu Debt (as defined below) (the “Pari Passu
Representative”) and any other creditors of any Pari Passu Debt (the “Pari Passu Creditors”);
(5) the trustee (the “Senior Notes Representative”) in respect of any Senior Notes (as defined
below) on behalf of itself and the holders of such Senior Notes (the “Senior Noteholders”
and together with the Senior Notes Representative, the “Senior Notes Creditors”);
(6) certain intra-group creditors and debtors from time to time;
(7) the direct or indirect shareholders of the Company in respect of certain shareholder debt
that the Company has incurred or may incur in the future;
(8) various creditor representatives; and
(9) the Security Agent.
Under the Intercreditor Agreement, only the Company and each of its subsidiaries that incurs any
liability or provides any guarantee under the RCF Agreement, the Indenture, the documentation for any Pari
Passu Debt or the indenture governing any Senior Notes (the “Senior Notes Indenture”), and any person that
grants security in support of any such liabilities, is a “Debtor”.
The Intercreditor Agreement sets out amongst other things:
• the relative ranking of certain indebtedness of the Debtors;
• the relative ranking of certain security granted by the Debtors;
• when payments can be made in respect of certain indebtedness of the Debtors;
• when enforcement actions can be taken in respect of that indebtedness;
• the terms pursuant to which that indebtedness will be subordinated upon the occurrence of
certain insolvency events;
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• turnover provisions; and
• when security and guarantees will be released to permit a sale of any assets subject to
transaction security (the “Collateral”).
The Intercreditor Agreement contains provisions relating to future indebtedness that may be
incurred by the Debtors provided that it is permitted by the terms of the RCF Agreement, the Indenture and
any Pari Passu Debt then outstanding and any Senior Notes then outstanding. This future indebtedness may
include, amongst other things, (i) an increase in the commitments under any facility made available under
the RCF Agreement (the “RCF”) or entering into an additional revolving credit facility under the RCF
Agreement (an “RCF Increase”); (ii) indebtedness which ranks pari passu to the Notes and may be secured by
the Collateral (such indebtedness, “Pari Passu Debt”) and (iii) indebtedness which may be issued by a direct
wholly owned subsidiary of Interoute Holdings S.à r.l. that is not itself the holding company of any other
member of the Group and does not hold any interest in any other person (the “Senior Notes Issuer”), and
benefit from subordinated guarantees from the Debtors and certain security (such indebtedness, “Senior
Notes”), in each case, subject to the terms of the Intercreditor Agreement.
The Intercreditor Agreement allows for a refinancing of the RCF in full with another credit facility
and/or a refinancing of the Notes or any Pari Passu Debt in whole or in part. For the purposes of this
description, any references to the RCF, RCF Lenders, RCF Liabilities (as defined below), Pari Passu Debt, Notes
or Noteholders should be read as including any such refinancing debt, the document pursuant to which it is
incurred, the creditors thereof and the liabilities thereunder, as appropriate.
Ranking and Priority
The Intercreditor Agreement provides, subject to the provisions regarding permitted payments
below, that all present and future liabilities and obligations of the Debtors shall rank in right and priority of
payment in the following order and are postponed and subordinated to any prior ranking liabilities as
follows:
• first, any liabilities under the RCF (including any RCF Increase, the “RCF Liabilities”), any liabilities
under certain hedging agreements entered into by the Hedge Counterparties (the “Hedging
Liabilities”), any liabilities under the Notes (the “Notes Liabilities”), any liabilities in respect of
the Pari Passu Debt (together with the RCF Liabilities, the Hedging Liabilities and the Notes
Liabilities, the “Secured Liabilities”) and any amounts owed to the Senior Notes Representative
pari passu without any preference between them;
• second, any liabilities under the guarantees of the Senior Notes (the “Senior Notes Guarantees”)
and under any on-loan by Interoute Holdings S.à r.l. to the Company of the proceeds of issue of
any Senior Notes (a “Senior Notes Proceeds Loan”, together with the Senior Notes Guarantees,
the “Senior Notes Liabilities”) pari passu without any preference between them; and
• third, any liabilities owed by the Company and any other Debtor to any other member of the
Group where those liabilities exceed €5,000,000 and that member of the Group has acceded to
the Intercreditor Agreement (other than those owed by FinCo or any Pari Passu Notes Issuer
under any Senior Secured Proceeds Loan) (the “Intra-Group Liabilities”) and liabilities owed
under any investor debt (which consists of liabilities owed by any Debtor to any shareholder,
direct or indirect, of the Company but excludes, for the avoidance of doubt, any Senior Notes
Proceeds Loan) (the “Investor Liabilities” and together with the Intra-Group Liabilities, the
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“Subordinated Liabilities”). The Intercreditor Agreement does not purport to rank the
Subordinated Liabilities as between themselves.
The Intercreditor Agreement does not purport to rank the liabilities owed by the Senior Notes Issuer
in respect of the Senior Notes.
Investor Liabilities may only be incurred by the Company.
No loan by FinCo in respect of the proceeds of issue of any Notes or by Interoute Finco plc or another
direct wholly owned subsidiary of the Company (a “Pari Passu Notes Issuer”) in respect of the proceeds of
issue of any Pari Passu Debt in the form of notes (each a “Senior Secured Proceeds Loan”) may be made to
any member of the Group other than the Company.
No loan by any Senior Notes Issuer in respect of the proceeds of issue of any Senior Notes may be
made to any person other than Interoute Holdings S.à r.l. and no on-loan of the proceeds of an issue of
senior notes may be made to any member of the Group other than the Company.
Collateral and Guarantees
The RCF Arrangers, the RCF Lenders, the Hedge Counterparties, the Noteholders and the Pari Passu
Creditors (together, the “Secured Creditors”) benefit from a common guarantee and first-ranking security
package (which may be subject to customary limitations on guarantees and security) and (subject to any
customary exceptions) no such Secured Creditor may take the benefit of any guarantee or security unless
such guarantee or security is also offered for the benefit of the other Secured Creditors (in each case, to the
extent permitted by law), provided that nothing shall prevent the RCF Lenders from taking, accepting or
receiving the benefit of any Security, guarantee, indemnity or other assurance against loss in respect of the
RCF Liabilities if the same is not capable of being granted in support of some or all of the liabilities of the
other Secured Creditors.
The Collateral ranks and secures the liabilities owed to the RCF Lenders, the Hedge Counterparties,
the Noteholders and the Pari Passu Creditors pari passu and without any preference between them, except
that pursuant to the terms of the Intercreditor Agreement all proceeds from enforcement of the Collateral
and the proceeds of certain distressed disposals will be applied as provided under “—Application of
Proceeds”.
The security that may be granted in support of liabilities under the Senior Notes Indenture is:
• the shares held by Interoute Holdings S.à r.l. in the Senior Notes Issuer and the Senior Notes
Issuer’s rights under any loan in respect of the proceeds of issue of any Senior Notes made by it
to Interoute Holdings S.à r.l. (“Senior Only Security”); and
• the shares held by Interoute Holdings S.à r.l. in the Company, Interoute Holdings S.à r.l.’s rights
under any Senior Notes Proceeds Loan made by it to the Company and the rights of any
shareholder, direct or indirect, of the Company in respect of Investor Liabilities (in each case,
with the security ranking first against the Secured Liabilities and second against the Senior Notes
Liabilities) (“Shared Security”).
At the option of the Company only the Senior Notes Liabilities could benefit from Senior Only
Security or Shared Security or there could be a combination of Senior Only Security and Shared Security.
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Permitted Payments
The Intercreditor Agreement permits payments to be made by the Debtors under the RCF
Agreement, the Indenture and any Pari Passu Debt documentation (provided such payments are permitted
under the relevant documents) and does not limit or restrict any other payment by any Debtor other than in
respect of the Hedging Liabilities, the Senior Notes Liabilities and the Subordinated Liabilities.
The Intercreditor Agreement also permits payments to lenders of Intra-Group Liabilities provided
that there has been no automatic acceleration or notice of acceleration or enforcement of the Collateral
except to facilitate a payment in respect of the secured liabilities.
No payments may be made in respect of Investor Liabilities except as permitted by the RCF
Agreement, the Indenture and any Pari Passu Debt documentation.
There are also restrictions on payments to Hedge Counterparties except certain specified permitted
payments.
An acceleration event includes the relevant creditor representative exercising any or all of its rights
under the acceleration provisions of the RCF Agreement, or any other acceleration provisions under any
replacement facility agreement, the Indenture and any Pari Passu Debt documentation (in each case, other
than placing any amounts on demand, but including the making of a demand in respect of amounts placed
on demand).
Payment Blockage (Senior Notes Guarantees and Senior Notes Proceeds Loan)
Prior to the discharge of the Secured Liabilities, no payment may be made in respect of any Senior
Notes Liabilities or any Senior Notes Proceeds Loan by any Debtor (other than the Senior Notes Issuer), in
each case without the prior consent of the Secured Creditors:
• if a payment default or payment event of default (other than an amount (a) not constituting
principal, interest or fees and (b) in an aggregate amount not exceeding €150,000) has occurred
under the finance documents relating to the relevant Secured Liabilities (a “Secured Debt
Payment Default”), for so long as such Secured Debt Payment Default is continuing; or
• if an event of default in respect of any Secured Liabilities (a “Secured Debt Event of Default”)
(other than a Secured Debt Payment Default) has occurred and is continuing and the Senior
Notes Representative has received a payment blockage notice from either an agent under the
RCF Agreement (acting on the instructions of the relevant finance parties) or a SSN
Representative (acting on the instructions of the relevant Noteholders) or a representative of
any Pari Passu Debt (acting on the instructions of the relevant Pari Passu Creditors), specifying
the event or circumstance in relation to the relevant Secured Debt Event of Default, such
payments are suspended until the earliest of:
• 179 days after the receipt by the Senior Notes Representative of the payment blockage
notice;
• the expiration of any enforcement standstill period in existence at the time of service of
such payment blockage notice;
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• the date on which such Secured Debt Event of Default is remedied or waived or ceases to
exist (or, if the relevant Secured Liabilities have been accelerated, such acceleration has
been rescinded, revoked or waived) provided that no other Secured Debt Event of
Default is continuing at that time;
• (if the payment blockage notice has been provided by an agent under the RCF
Agreement or by a SSN Representative or Pari Passu Representative) the date on which
such agent or representative notifies the Senior Notes Representative that the payment
blockage notice is cancelled;
• the discharge of the Secured Liabilities in full; or
• the date on which the Security Agent or the Senior Notes Representative takes
enforcement action against a member of the Group which it is permitted to take in
accordance with the Intercreditor Agreement.
Not more than one payment blockage notice may be served in respect of the same event or set of
circumstances and no more than one payment blockage notice may be given in any 360-day period and must
be served no later than 45 days after the relevant creditor representative received written notice of the
Secured Debt Event of Default.
For the avoidance of doubt, the Intercreditor Agreement does not directly limit the right of the
Senior Notes Representative or any Senior Noteholder to receive payments from the Senior Notes Issuer, or
the Senior Notes Issuer to make such payments.
Prior to the discharge of the Secured Liabilities, the Debtors may make payments in respect of the
Senior Notes Liabilities (and corresponding amounts under the relevant Senior Notes Proceeds Loan) then
due in accordance with the Senior Notes Indenture or the relevant Senior Notes Proceeds Loan:
• if:
• the payment is of (a) principal (including capitalised interest) of the Senior Notes
Liabilities which is permitted to be paid by the RCF and not prohibited by the Indenture
and the Pari Passu Debt documentation or which is paid on or after its final maturity
date; or (b) any other amount (including cash pay interest) that is not principal or
capitalised interest;
• no payment blockage notice is outstanding; and
• no Secured Debt Payment Default has occurred and is continuing; or
• if the payment is for certain costs and expenses (other than principal, interest and redemption
and prepayment premia) of the Senior Notes Representative in their capacity as such; or
• if the payment is of certain costs (including administrative costs of the Senior Notes Issuer),
commissions, taxes, consent fees, underwriter or lead manager fees and expenses incurred in
respect of the Senior Notes; or
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• if the payment is of costs, commissions, taxes, premiums and any expenses incurred in respect of
any financing or refinancing of the Senior Notes in compliance with the Intercreditor Agreement
and the RCF; or
• if the Majority Super Senior Creditors and the Majority Senior Secured Creditors each give their
consent to such payment.
On or after the discharge of the Secured Liabilities, the Debtors may make payments in respect of the
Senior Notes Liabilities then due in accordance with the Senior Notes Indenture.
Limitations on Enforcement
The Security Agent may refrain from enforcing the Collateral unless otherwise instructed by the
Instructing Group or, in certain circumstances, the Senior Notes Representative (acting on the instructions of
the required Senior Noteholders).
The instructing group entitled to give instructions to the Security Agent in respect of enforcement of
the Collateral (the “Instructing Group”) comprises the Majority Super Senior Creditors and/or the Majority
Senior Secured Creditors (in each case acting through their respective creditor representative) as determined
in accordance with “—Enforcement Instructions” and, after the discharge of the Secured Liabilities, the
Senior Notes Representative (acting on the instructions of the required Senior Noteholders).
If the Company has chosen to have Shared Security in respect of any Senior Notes Liabilities, that
security may also be enforced on the instructions of the Senior Notes Representative in certain
circumstances.
The Security Agent may disregard any instructions from any other person to enforce the Collateral
and may disregard any instructions to enforce any Collateral if those instructions are inconsistent with the
Intercreditor Agreement. The Security Agent is not obliged to enforce the Collateral if it is not appropriately
indemnified by the relevant creditors.
“Debt Related Hedging Liabilities” means, on any date, in respect of a Hedge Counterparty and its
Hedging Liabilities, the amount, if any, that would be payable to that Hedge Counterparty if the relevant
hedging transactions were closed out on that date (in respect of hedging transactions which have not been
closed out) or the close-out amount, if any, that is payable to that Hedge Counterparty (in respect of hedging
transactions which have been closed out) in respect of Exchange Rate Hedging Transactions and Interest Rate
Hedging Transactions in respect of which a close-out amount would be or is payable to the Hedge
Counterparty, in each case, as calculated in accordance with the relevant hedging agreement.
“Designated Priority Long Term Operational FX Hedging Amount” means, in respect of a Hedge
Counterparty and its Hedging Liabilities, the maximum amount that would be payable to that Hedge
Counterparty if the relevant hedging transactions were closed out in respect of Long Term Operational FX
Hedging Transactions, up to which such Hedging Liabilities shall be entitled to share in the proceeds of
enforcement of any security created by any transaction security document and receive recoveries pari passu
with, inter alia, the RCF Liabilities as Super Senior Hedging Liabilities. The aggregate of the Designated
Priority Long Term Operational FX Hedging Amounts allocated by the Borrower shall not exceed €10,000,000.
“Exchange Rate Hedging Transaction” means a derivative transaction entered into by a Debtor and a
Hedge Counterparty for the purposes of protection against or benefit from fluctuations in the rate of
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exchange of one currency into another, in respect of Notes Liabilities, Senior Notes Liabilities and/or Pari
Passu Debt.
“Interest Rate Hedging Transaction” means a derivative transaction entered into by a Debtor and a
Hedge Counterparty for the purposes of protection against or benefit from fluctuations in interest rates, in
respect of Notes Liabilities, Senior Notes Liabilities and/or Pari Passu Debt.
“Long Term Operational FX Hedging Transaction” means a derivative transaction entered into by a
Debtor and a Hedge Counterparty for the purposes of hedging exchange rate exposures, with a tenor of
longer than 12 months, other than Exchange Rate Hedging Transactions.
“Majority Senior Secured Creditors” means a simple majority in value of a combined class of the
Senior Secured Creditors. A Non-Super Senior Hedge Counterparty will vote in accordance with the close-out
amount that is payable to that Non Super Senior Hedge Counterparty (in respect of hedging transactions
which have been closed out), to the extent the Hedging Liabilities owed to it are Non-Super Senior Hedging
Liabilities.
“Majority Super Senior Creditors” means 662/3% in value of a combined class of the Super Senior
Creditors. A Super Senior Hedge Counterparty will vote in accordance with the close-out amount that is
payable to that Super Senior Hedge Counterparty (in respect of hedging transactions which have been closed
out), to the extent the Hedging Liabilities owed to it are Super Senior Hedging Liabilities.
“Non-Super Senior Hedge Counterparties” means Hedge Counterparties to the extent they are owed
Non-Super Senior Hedging Liabilities.
“Non-Super Senior Hedging Liabilities” means Hedging Liabilities that are not Super Senior Hedging
Liabilities.
“Priority Long Term Operational FX Hedging Liabilities” means, on any date, in respect of a Hedge
Counterparty which has been allocated a Designated Priority Long Term Operational FX Hedging Amount and
its Hedging Liabilities, the amount that would be payable to that Hedge Counterparty if the relevant hedging
transactions were closed out on that date (in respect of hedging transactions which have not been closed
out) or the close-out amount that is payable to that Hedge Counterparty (in respect of hedging transactions
which have been closed out) in respect of Long Term Operational FX Hedging Transactions, in each case, as
calculated in accordance with the relevant hedging agreement, up to, but not exceeding, the Designated
Priority Long Term Operational FX Hedging Amount.
“Senior Secured Creditors” means the Noteholders, the Pari Passu Creditors, their creditor
representatives (including, inter alia, the Trustee) and the Non-Super Senior Hedge Counterparties.
“Short Term Operational FX Hedging Liabilities” means, on any date, in respect of a Hedge
Counterparty and its Hedging Liabilities, the amount that would be payable to that Hedge Counterparty if the
relevant hedging transactions were closed out on that date (in respect of hedging transactions which have
not been closed out) or the close-out amount owing that is payable to that Hedge Counterparty (in respect of
hedging transactions which have been closed out) in respect of Short Term Operational FX Hedging
Transactions, in each case, as calculated in accordance with the relevant hedging agreement.
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“Short Term Operational FX Hedging Transaction” means a derivative transaction entered into by a
Debtor and a Hedge Counterparty for the purposes of hedging exchange rate exposures, with a tenor of
12 months or less, other than Exchange Rate Hedging Transactions.
“Super Senior Creditors” means the RCF Arrangers, the RCF Lenders, their creditor representatives
and the Super Senior Hedge Counterparties.
“Super Senior Hedge Counterparties” means Hedge Counterparties to the extent they are owed
Super Senior Hedging Liabilities.
“Super Senior Hedging Liabilities” means the aggregate of each Hedge Counterparty’s Hedging
Liabilities, up to, in respect of each Hedge Counterparty, a maximum amount equal to the aggregate of the
Debt Related Hedging Liabilities, the Short Term Operational FX Hedging Liabilities and the Priority Long Term
Operational FX Hedging Liabilities with respect to such Hedge Counterparty.
Enforcement Instructions
If the Majority Super Senior Creditors or the Majority Senior Secured Creditors wish to issue
enforcement instructions, the applicable creditor representatives shall deliver a copy of the proposed
enforcement instructions (an “Initial Enforcement Notice”) to the Security Agent and the Security Agent shall
promptly forward such Initial Enforcement Notice to each other creditor representative and each Hedge
Counterparty.
Save as provided below, the Security Agent will act in accordance with enforcement instructions
received from the Majority Senior Secured Creditors provided that if:
(a) the Majority Senior Secured Creditors have not either:
(i) made a determination as to the method of enforcement they wish to instruct the
Security Agent to pursue and notified the Security Agent in writing; or
(ii) appointed a financial adviser to assist them in making such a determination,
within three months of the date of the Initial Enforcement Notice; or
(b) the RCF Liabilities and the Super Senior Hedging Liabilities have not been discharged in full
(the date of such discharge being the “Super Senior Discharge Date”) within six months of
the date of the Initial Enforcement Notice,
the Security Agent will act in accordance with enforcement instructions received from the Majority Super
Senior Creditors until the Super Senior Discharge Date has occurred.
If an insolvency event (other than an insolvency event directly caused by enforcement action taken
by or at the request or direction of the Majority Super Senior Creditors or any Super Senior Creditor, in each
case, that is not otherwise permitted under the Intercreditor Agreement) is continuing with respect to a
Debtor then the Security Agent will, to the extent the Majority Super Senior Creditors elect to provide
enforcement instructions, act in accordance with such enforcement instructions until the Super Senior
Discharge Date has occurred.
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If the Majority Senior Secured Creditors have not either (i) made a determination as to the method
of enforcement they wish to use and instructed the Security Agent in writing to pursue it, or (ii) appointed a
financial adviser to assist them in making such a determination, and the Majority Super Senior Creditors:
(a) determine in good faith that a delay in issuing enforcement instructions could reasonably be
expected to have a material adverse effect on the ability to effect a distressed disposal or on
the expected realisation proceeds of any enforcement; and
(b) deliver enforcement instructions which they reasonably believe to be consistent with the
security enforcement principles before the Security Agent has received any enforcement
instructions from the Majority Senior Secured Creditors,
then the Security Agent will act in accordance with the enforcement instructions received from the Majority
Super Senior Creditors until the Super Senior Discharge Date has occurred.
Following the discharge of the Secured Liabilities, any enforcement instructions with respect to the
Shared Security may be given by the Senior Notes Representative (acting on the instructions of the required
Senior Noteholders).
Subject to the Collateral having become enforceable, the Instructing Group may give or refrain from
giving instructions to the Security Agent to take enforcement action or, in the circumstances set out in the
following paragraph, the Senior Notes Representative (acting on the instructions of the required Senior
Noteholders) may give or refrain from giving instructions to the Security Agent to enforce the Shared
Security.
Prior to the discharge of the Secured Liabilities, if the Instructing Group has instructed the Security
Agent to cease or not to proceed with enforcement, or has not provided enforcement instructions, the
Security Agent shall give effect to any instructions to enforce the Shared Security which the Senior Notes
Representative is then entitled to provide.
Notwithstanding the preceding two paragraphs, if the Senior Notes Representative is then entitled to
give the Security Agent instructions as to enforcement of the Shared Security and it gives such instruction,
then the Majority Super Senior Creditors or the Majority Senior Secured Creditors may give enforcement
instructions to the Security Agent in lieu of any instructions to enforce given by the Senior Notes
Representative and the Security Agent shall act on the first such instructions received.
If the Shared Security is being enforced or certain other enforcement action is being taken, the
Security Agent shall enforce the applicable security or take such other action in such manner as:
(a) the Instructing Group shall instruct; or
(b) if, prior to the discharge of the Secured Liabilities, the Instructing Group has not given
enforcement instructions and the Senior Notes Representative is entitled to give
enforcement instructions, as the Senior Notes Representative shall instruct,
provided that such instructions are consistent with the security enforcement principles or, in the absence of
any such enforcement instructions, as the Security Agent considers in its discretion to be appropriate and
consistent with the security enforcement principles.
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Any enforcement instructions given must comply with certain security enforcement principles
(“security enforcement principles”), including:
• to achieve the security enforcement objective, namely to maximise, so far as consistent with
prompt and expeditious realisation of value from enforcement of the Collateral, the recovery of
all of the secured parties;
• all enforcement proceeds will be received in cash by the Security Agent or, if the enforcement is
on the instructions of the Majority Senior Secured Creditors, sufficient enforcement proceeds
will be received in cash by the Security Agent to ensure that, after distribution in accordance
with the Intercreditor Agreement, the RCF Liabilities and Super Senior Hedging Liabilities will be
repaid and discharged in full; and
• to the extent that the enforcement is over Collateral with an aggregate book value exceeding
€5 million or over shares of a member of the Group, the Security Agent shall, if requested by the
Majority Super Senior Creditors and/or the Majority Senior Secured Creditors and to the extent
that financial advisers have not adopted a general policy of not providing such opinion, obtain an
opinion from a financial adviser (whose liability in giving such opinion may be limited to the
amount of its fees in respect of such engagement) that the consideration from such enforcement
is fair from a financial point of view for a prompt and expeditious sale taking into account all
relevant circumstances provided that if such enforcement action is conducted by way of Public
Auction, no financial adviser opinion is required.
“Public Auction” is an auction or other competitive sales process in which more than one bidder
participates or is invited to participate and which is conducted in accordance with the advice of a financial
adviser and subject to certain other requirements specified in the Intercreditor Agreement.
Standstill on Acceleration and Enforcement (Senior Notes Guarantees, Senior Notes Proceeds Loan and
Senior Notes Security)
Prior to the discharge of the Secured Liabilities, neither the Senior Notes Representative nor the
Senior Noteholders may take certain defined enforcement actions with respect to any Senior Notes
Guarantees of any Debtor, any Senior Notes Proceeds Loan or any Shared Security except if:
• there is a failure to pay principal at maturity of the Senior Notes;
• the Secured Creditors take enforcement action (in which case the Senior Notes Creditors may
only take the same enforcement action in relation to the same guarantor);
• an insolvency event (other than an insolvency event directly caused by action taken by or at the
request or direction of any Senior Notes Creditor that is not otherwise permitted under the
Intercreditor Agreement) has occurred with respect to a Debtor that has guaranteed the Senior
Notes in respect of which enforcement action is to be taken, provided that the Senior Notes
Creditors may only take the same enforcement action in relation to the same guarantor;
• an existing standstill period in respect of Senior Notes Liabilities expires (other than by reason of
a cure, waiver or other permitted remedy);
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• consented to by the Majority Super Senior Creditors (if prior to the discharge of the RCF
Liabilities and the Super Senior Hedging Liabilities) and the Majority Senior Secured Creditors (if
prior to a discharge of the Secured Liabilities); or
• an event of default under the Senior Notes has occurred (otherwise than solely by reason of a
cross-default (other than a cross-default which is a payment default) to any finance document
relating to Senior Secured Notes, RCF Liabilities or Pari Passu Debt) and a period of 179 days has
passed from the date of receipt by the relevant agent or trustee with respect to the Secured
Liabilities of a notice in writing of such event of default from the Senior Notes Representative.
The Senior Notes Creditors shall always have the right to take enforcement action against the Senior
Notes Issuer and in respect of any Senior Only Security.
Turnover
Subject to certain exclusions including in favour of certain Super Senior Creditors and certain Senior
Secured Creditors, if any Noteholder, RCF Lender, Pari Passu Creditor, any Hedge Counterparty or any Senior
Notes Creditor (or any of their respective creditor representatives) receives or recovers the proceeds of any
enforcement of any Collateral or certain distressed disposals except in accordance with “—Application of
Proceeds” below, that person must:
• in relation to amounts not received or recovered by way of set-off, hold that amount for the
Security Agent and promptly pay an amount equal to that amount to the Security Agent for
application in accordance with the terms of the Intercreditor Agreement; and
• in relation to receipts and recoveries received or recovered by way of set-off, promptly pay an
amount equal to that recovery to the Security Agent for application in accordance with the terms
of the Intercreditor Agreement.
The SSN Representative shall only have an obligation to turn over or repay amounts received or
recovered by it as described above (a) if it had actual knowledge that the receipt or recovery is an amount
received in breach of a provision of the Intercreditor Agreement and (b) to the extent that, prior to receiving
that knowledge, it has not distributed the amount of that receipt to the Noteholders in accordance with the
Indenture. A similar protection applies to any trustee in respect of any Pari Passu Debt in the form of notes
or any Senior Notes.
There is also a general turnover obligation on the subordinated creditors to turn over all amounts
not received in accordance with the Intercreditor Agreement.
Application of Proceeds
All amounts from time to time received pursuant to the provisions described under “—Turnover”
above or recovered by the Security Agent in connection with the realisation or enforcement of all or any part
of the Collateral or in connection with a distressed disposal in respect of assets which are subject to
Collateral or otherwise paid to the Security Agent under the Intercreditor Agreement for application as set
out below (including in respect of any guarantees of the Secured Liabilities and the Senior Notes) shall be
held by the Security Agent on trust and (subject to applicable law) applied in the following order:
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• first, pro rata and pari passu, in payment of certain costs and expenses (other than principal,
interest and redemption and prepayment premia) owing to any agent under the RCF Agreement,
the SSN Representative, any trustee in respect of any Pari Passu Debt documentation and any
Senior Notes Representative in their capacity as such and the costs and expenses owing to the
Security Agent and any receiver or delegate;
• second, pro rata and pari passu, in payment of all costs and expenses incurred by the RCF
Lenders, the Super Senior Hedge Counterparties, the Noteholders, the Pari Passu Creditors, the
Non-Super Senior Hedge Counterparties and the Senior Noteholders in connection with the
enforcement of the Collateral or a distressed disposal or any action taken at the request of the
Security Agent, in each case, in accordance with the terms of the Intercreditor Agreement;
• third, pro rata and pari passu, in payment to (i) the agent of the RCF Lenders on behalf of the RCF
Arrangers and the RCF Lenders for application towards the discharge of the RCF Liabilities and
(ii) the Super Senior Hedge Counterparties for application towards the discharge of the Super
Senior Hedging Liabilities (on a pro rata and pari passu basis between the Super Senior Hedging
Liabilities of each Super Senior Hedge Counterparty);
• fourth, pro rata and pari passu, in payment to (i) the SSN Representative on behalf of the
Noteholders for application towards the discharge of the Notes Liabilities in accordance with the
Indenture; (ii) the creditor representatives of the Pari Passu Creditors for application towards the
discharge of the Pari Passu Debt (on a pro rata and pari passu basis between the Pari Passu Debt
of each Pari Passu Creditor); and (iii) the Non-Super Senior Hedge Counterparties for application
towards the discharge of the Non-Super Senior Hedge Liabilities (on a pro rata and pari passu
basis between the Non-Super Senior Hedging Liabilities of each Non Super Senior Hedge
Counterparty);
• fifth, pro rata and pari passu, in payment to the Senior Notes Representative on behalf of the
Senior Noteholders for application towards the discharge of the Senior Notes Liabilities in
accordance with the Senior Notes Indenture;
• sixth, if none of the Debtors are under any further actual or contingent liability under the
relevant debt documents, in payment to any person to whom the Security Agent is obliged to
pay in priority to any Debtor; and
• seventh, the balance, if any, in payment to the relevant Debtor.
Option to Purchase
The Noteholders and the Pari Passu Creditors may, after a distress event and subject to various
conditions set out in the Intercreditor Agreement (including the grant of an acceptable indemnity against
clawback to the RCF Lenders and the Super Senior Hedge Counterparties), exercise an option to purchase the
RCF Liabilities and the Super Senior Hedging Liabilities in full and at par.
The Senior Noteholders may, after a distress event and subject to various conditions set out in the
Intercreditor Agreement (including the grant of an acceptable indemnity against clawback to the RCF
Lenders, the Noteholders, the Pari Passu Creditors and the Hedge Counterparties), exercise an option to
purchase the RCF Liabilities, the Notes Liabilities, the Pari Passu Debt and the Hedging Liabilities in full and at
par.
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In the event that any Super Senior Hedging Liabilities are purchased and any other Hedging Liabilities
(which arose under a hedging agreement which was designated as being super-senior) remain outstanding,
the relevant purchaser(s) must also purchase those other Hedging Liabilities.
Release of security and guarantees—non-distressed disposals
In circumstances where a disposal is not a distressed disposal (and is otherwise permitted by the
terms of the RCF Agreement, the Indenture and any Pari Passu Debt documentation and any Senior Notes
Indenture), the Intercreditor Agreement provides that the Security Agent is authorised and required:
(a) to release the Collateral or any other claim over the relevant asset; and
(b) if the relevant asset consists of shares in the capital of a Debtor or a holding company of a
Debtor, to release the Collateral or any other claim over that Debtor’s or holding company’s
assets and the assets of any of their subsidiaries and, with such a disposal to a person
outside of the Group, any guarantees from that Debtor or holding company or any of their
subsidiaries,
provided that in the case of a disposal to another member of the group, (A) the disposal is either made
subject to the Collateral or any required replacement security (on substantially the same terms and ranking,
save to the extent otherwise permitted by the debt documents) is granted by the transferee before or at the
same time as the release and, if required by the terms of the RCF Agreement, the Indenture, any hedging
agreement, any Pari Passu Debt documentation or any Senior Notes Indenture, any proceeds from the
disposal are applied in mandatory prepayment or redemption of the relevant debt; and
(B) contemporaneously with such release, the Security Agent receives either (1) a solvency opinion from a
financial adviser, in form and substance reasonably satisfactory to the Security Agent confirming the solvency
of that Debtor and its subsidiaries, taken as a whole, after giving effect to the disposal and any transactions
related to such release and retaking; (2) a certificate from the board of directors or chief financial officer of
that Debtor (acting in good faith) that confirms the solvency of that Debtor granting such security after giving
effect to the disposal and any transactions related to such release and retaking; or (3) an opinion of counsel,
in form and substance reasonably satisfactory to the Security Agent (subject to customary exceptions and
qualifications), confirming that, after giving effect to the disposal and any transactions related to such
release and retaking, the Collateral so released and retaken is valid and perfected security not otherwise
subject to any new limitation imperfection or hardening period, in equity or at law.
Release of security and guarantees—distressed disposals
In circumstances where a distressed disposal is being effected, the Intercreditor Agreement provides
that the Security Agent is authorised and required:
(a) to release the Collateral or any other claim over the relevant asset;
(b) if the asset which is disposed of consists of shares in the capital of a Debtor, to release
(i) that Debtor and any subsidiary of that Debtor from all or any part of its borrowing
liabilities (other than those of FinCo or any Pari Passu Notes Issuer), guarantee liabilities
(including in relation to the Senior Secured Notes and the Senior Notes) and certain other
liabilities; (ii) any Collateral granted over those shares in the capital of that Debtor, that
Debtor’s assets and the assets of any of its subsidiaries; and (iii) any other claim of a Debtor
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or intra-group lender over that Debtor’s assets or over the assets of any subsidiary of that
Debtor;
(c) if the asset which is disposed of consists of shares in the capital of any holding company of a
Debtor, to release (i) that holding company and any subsidiary of that holding company from
all or any part of its borrowing liabilities (other than those of FinCo or any Pari Passu Notes
Issuer), guarantee liabilities (including in relation to the Senior Secured Notes and the Senior
Notes) and certain other liabilities; (ii) any Collateral granted over the shares in the capital of
that holding company, the assets of that holding company and any subsidiary of that holding
company; and (iii) any other claim of a Debtor or intragroup lender over the assets of that
holding company and any subsidiary of that holding company;
(d) if the asset which is disposed of consists of shares in the capital of a Debtor or any holding
company of a Debtor, to dispose of all or any part of that Debtor’s or the holding company of
that Debtor’s borrowing liabilities (other than those of FinCo or any Pari Passu Notes Issuer),
guarantee liabilities (including in relation to the Senior Secured Notes and the Senior Notes)
and certain other liabilities; and
(e) if the asset which is disposed of consists of shares in the capital of a Debtor or any holding
company of a Debtor, to transfer Intra-Group Liabilities and debtor liabilities owed by that
Debtor or holding company of a Debtor or any of their respective subsidiaries to another
Debtor,
provided that, if such distressed disposal results in the release of any Senior Notes Guarantee or any
liabilities under a Senior Notes Proceeds Loan or Shared Security, it is a further condition to the release that
either:
(i) the Senior Notes Representative (acting on the instructions of the required Senior
Noteholders) consents to such release; or
(ii) where shares or assets of a Senior Notes Guarantor are sold:
(A) the proceeds of such sale or disposal are in cash (or substantially in cash);
(B) all liabilities owed to the Secured Creditors by that Senior Notes Guarantor being
disposed of and each of its direct and indirect subsidiaries are unconditionally
released and discharged or are sold or disposed of concurrently with such sale (such
sale or disposal being a “liabilities disposal”) (and, in each case, are not assumed by
the purchaser or one of its affiliates), and all security under the transaction security
documents in respect of the assets that are sold or disposed of is simultaneously and
unconditionally released and discharged concurrently with such sale, provided that,
in the event of a liabilities disposal, the aggregate cash proceeds of such liabilities
disposal together with the cash proceeds of the relevant share or asset disposal are
greater than if the relevant liabilities had been released or discharged; and
(C) such sale or disposal (including any liabilities disposal) is made:
(I) pursuant to a Public Auction; or
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(II) where a financial adviser selected by the Security Agent has delivered an
opinion in respect of such sale or disposal that the amount received in
connection therewith is fair from a financial point of view taking into account
all relevant circumstances including the method of enforcement provided
that the liability of such financial adviser in giving such opinion may be
limited to the amount of its fees in respect of such engagement.
Any net proceeds of the enforcement or disposal of Collateral or a distressed disposal must be
applied in accordance with the enforcement proceeds waterfall described under “—Application of Proceeds”.
Release of security and guarantees—unrestricted subsidiaries and permitted reorganisations
In circumstances where a Debtor is designated as an unrestricted subsidiary in accordance with the
RCF Agreement, the Indenture, the Pari Passu Debt documentation and the Senior Notes Indenture, the
Intercreditor Agreement provides that the Security Agent is authorised and required to release (i) that
Debtor and any subsidiary of that Debtor from all or any part of its guarantee liabilities (including in relation
to the Senior Secured Notes and the Senior Notes) and certain other liabilities; and (ii) any Collateral granted
over that Debtor’s assets and the assets of any of its subsidiaries.
In circumstances where a Debtor is part of a solvent liquidation, reorganisation, merger,
amalgamation or consolidation that is permitted and not prohibited by the RCF Agreement, the Indenture,
the Pari Passu Debt documentation and the Senior Notes Indenture (a “Reorganisation”), the Intercreditor
Agreement provides that, to the extent necessary for that Reorganisation to occur only, the Security Agent is
authorised and required to release:
(i) that Debtor from all or any part of its guarantee liabilities (including in relation to the Senior
Secured Notes and the Senior Notes) if that Debtor is the subject of a solvent winding-up or
similar solvent process; and
(ii) any Collateral granted over the shares in that Debtor and/or that Debtor’s assets,
provided that (A) any required replacement security (on substantially the same terms and ranking, save to
the extent otherwise permitted by the debt documents) is granted by the surviving entity of such
Reorganisation before or at the same time as the release; and (B) contemporaneously with such release, the
Security Agent receives either (1) a solvency opinion from a financial adviser, in form and substance
reasonably satisfactory to the Security Agent confirming the solvency of that Debtor (or the surviving entity)
and its subsidiaries, taken as a whole, after giving effect to the Reorganisation and any transactions related
to such release and retaking; (2) a certificate from the board of directors or chief financial officer of that
Debtor (acting in good faith) that confirms the solvency of that Debtor (or the surviving entity) granting such
security after giving effect to the Reorganisation and any transactions related to such release and retaking; or
(3) an opinion of counsel, in form and substance reasonably satisfactory to the Security Agent (subject to
customary exceptions and qualifications), confirming that, after giving effect to the Reorganisation and any
transactions related to such release and retaking, the Collateral so released and retaken is valid and
perfected security not otherwise subject to any new limitation imperfection or hardening period, in equity or
at law.
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Amendment
Subject as specified in the next paragraph, the Intercreditor Agreement may be amended with the
consent of the Majority Super Senior Creditors, the Majority Senior Secured Creditors, the required
percentage of Senior Noteholders (as set out in the Senior Notes Indenture), the Company and the Security
Agent.
If an amendment relates to certain specified matters such as ranking, priority, subordination,
turnover, enforcement, distressed disposal proceeds, the amendments clause or the payment waterfall, the
Intercreditor Agreement may only be amended with the consent of all RCF Lenders under the initial RCF (or
the required percentage of lenders under any subsequent RCF), the required percentage of Noteholders (as
set out in the Indenture), the required percentage of Pari Passu Creditors (as set out in the relevant Pari
Passu Debt documentation), the required percentage of Senior Noteholders (as set out in the Senior Notes
Indenture), each Hedge Counterparty (to the extent such amendments adversely affect it), the Company and
the Security Agent.
An amendment that relates to the guarantee granted for the benefit of the Hedge Counterparties
may only be made with the consent of each Hedge Counterparty to the extent such amendment adversely
affects it.
No amendment or waiver of the Intercreditor Agreement may impose new or additional obligations
on or withdraw or reduce the rights of any party (other than in a way which affects creditors of that party’s
class generally) to the Intercreditor Agreement without the prior consent of that party (or its representative).
In certain circumstances the Intercreditor Agreement may be amended without the consent of the
Noteholders.
To the extent the Debtors wish to enter into Pari Passu Debt or other additional or replacement
indebtedness (“Additional Indebtedness”) which is permitted to share in the Collateral (on a pari passu or
lower ranking basis) pursuant to the RCF Agreement, the Indenture and any Pari Passu Debt documentation,
then the parties to the Intercreditor Agreement may be required to enter into a replacement intercreditor
agreement on substantially the same terms as the Intercreditor Agreement (or amend the Intercreditor
Agreement to the extent necessary) and to which the creditors of such Additional Indebtedness shall accede.
The Intercreditor Agreement also permits the Security Agent to enter into new or supplemental
security and/or release and retake Collateral if certain conditions are met.
Revolving Credit Facility
Overview and Structure
The Company and certain of its subsidiaries (including the Issuer) are party to a new super senior
multicurrency revolving agreement, as amended from time to time (the “Revolving Credit Facility
Agreement”) with, amongst others, Credit Suisse AG, London Branch, Morgan Stanley Bank International
Limited, Barclays Bank PLC, Deutsche Bank AG, London Branch, ING Bank and DNB (UK) Limited, as arrangers,
and Barclays Bank PLC as facility agent and as security agent.
The Revolving Credit Facility may be utilised by the original borrower (Interoute Communications
Limited, a wholly owned subsidiary of the Company) or future borrowers under the Revolving Credit Facility
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Agreement in euro, pound sterling, U.S. dollars or any other readily available or agreed currency by the
drawing of cash advances or the issue of letters of credit and ancillary facilities.
The Revolving Credit Facility may be used for general corporate and working capital purposes (but
not towards prepayment, repayment, purchase, defeasance or redemption of any Notes or Pari Passu Debt
or, the declaration or payment of any dividend or any other distribution in respect of the Company’s share
capital or distribution of any share premium reserve by the Company or the redemption or purchase of any
of the Company’s share capital or repayment, prepayment, purchase, redemption, defeasance or discharge
of any principal amount (or capitalised or any other interest) outstanding under any Shareholder Facility or
any other shareholder liabilities or similar distributions in respect of the share capital of the Company or
Shareholder Facility or any other shareholder liabilities).
In addition, the Company may elect to request additional facilities either as a new facility or as
additional tranches of the Revolving Credit Facility (the “Additional Facility”) in a maximum aggregate
principal amount outstanding in respect of all such Additional Facilities not exceeding €25,000,000.
The Company and the Additional Facility lenders may agree to certain terms in relation to the
Additional Facility, including the margin and the termination date (each subject to parameters as set out in
the Revolving Credit Facility Agreement) and the availability period.
Interest and Fees
Loans under the Revolving Credit Facility Agreement initially bears interest at rates per annum equal
to EURIBOR or, for loans denominated in U.S. dollars or pound sterling, LIBOR, plus a margin of 3.25% per
annum. Providing no event of default has occurred and is continuing under the Revolving Credit Facility
Agreement and a period of at least twelve months has expired since the completion date of the acquisition
of Easynet (the “Completion Date”), the margin on the loans will be subject to reduction if certain leverage
ratios are met. The margin on any loans under an Additional Facility will be agreed between the Company
and the relevant Additional Facility lenders.
A commitment fee will be payable on the aggregate undrawn and uncancelled amount of the
Revolving Credit Facility from the Completion Date to the end of the availability period for the Revolving
Credit Facility at a rate of 35% of the applicable margin for the Revolving Credit Facility. The commitment fee
is payable quarterly in arrears, on the last date of availability of the Revolving Credit Facility and on the date
the Revolving Credit Facility is cancelled in full or on the date on which a lender cancels its commitment.
The Company is required to pay customary agency fees to the facility agent and the security agent in
connection with the Revolving Credit Facility. The Company is also required to pay an arrangement fee to the
arrangers in connection with the Revolving Credit Facility.
Default interest is calculated as an additional 1% on the overdue amount.
Repayments
Each advance will be repaid on the last day of the interest period relating thereto, subject to a
netting mechanism against amounts to be drawn on such date. All outstanding amounts under the Revolving
Credit Facility will be repaid on the termination date which is three months prior to the maturity date of the
Notes. The termination date for an Additional Facility is the date agreed between the Company and the
relevant Additional Facility lenders. Amounts repaid by the borrowers on loans made under the Revolving
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Credit Facility Agreement may be reborrowed during the availability period for that facility, subject to certain
conditions.
Mandatory Prepayment
The Revolving Credit Facility Agreement allows for voluntary prepayments (subject to de minimis
amounts). The Revolving Credit Facility Agreement also entitles each lender to elect to be prepaid all
amounts under the Revolving Credit Facility and related finance documents attributable to that lender upon
a change of control or sale.
Guarantees
The Company, the Issuer, Interoute Communications Limited and each Completion Date Guarantor
provided a senior guarantee of all amounts payable to the finance parties under the Revolving Credit Facility
Agreement.
The Revolving Credit Facility Agreement requires that (subject to agreed security principles) each
member of the Restricted Group (other than any member which is incorporated under the laws of Italy (each
an “Excluded Guarantor Company”)) which becomes a Material Company (which definition includes,
amongst other things, a Restricted Subsidiary of the Company that has earnings before interest, tax,
depreciation and amortisation representing 5% or more of Consolidated EBITDA or gross assets (excluding
goodwill and intra-Group items) representing 5% or more of the gross assets of the Restricted Group,
calculated on a consolidated basis and any Restricted Subsidiary of the Company which hold shares in a
Material Company) is required to become a guarantor under the Revolving Credit Facility Agreement.
Further, if on the last day of a financial year of the Company, the guarantors represent less than 65%
of each of the Consolidated EBITDA or the total gross assets of the Restricted Group (subject to certain
exceptions including disregarding from Consolidated EBITDA and total gross assets the EBITDA and gross
assets of any Excluded Guarantor Company), within 60 business days of delivery of the annual financial
statements for the relevant financial year, such other members of the Group (subject to agreed security
principles) are required to become additional guarantors until the requirement is satisfied (to be calculated
as if such additional guarantors had been guarantors on such last day of the relevant financial year).
Security
The Revolving Credit Facility is secured (subject to agreed security principles) by the same Collateral
as the Senior Secured Notes.
In addition, any member of the Group which becomes a guarantor of the Revolving Credit Facility is
required (subject to agreed security principles) to grant security over its material assets in favour of the
security agent under the Revolving Credit Facility.
Representations and Warranties
The Revolving Credit Facility Agreement contains certain customary representations and warranties
(subject to certain exceptions and qualifications and with certain representations and warranties being
repeated), including status and incorporation, binding obligations, non-conflict with constitutional
documents, laws or other obligations, power and authority, authorisations, governing law and enforcement,
no insolvency, no filing or stamp taxes, no default, no misleading information, financial statements, no
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proceedings pending or threatened, no breach of laws, compliance with environmental laws and permits,
taxation, security and financial indebtedness, title to assets, shares fully paid, intellectual property
ownership, accurate Group structure chart, centre of main interests, pensions, sanctions, anti-corruption
law, holding company, pari passu ranking, accounting reference date, acquisition documents and U.S. margin
regulations.
Covenants
The Revolving Credit Facility Agreement contains certain of the incurrence covenants and related
definitions (with certain adjustments). In addition, the Revolving Credit Facility Agreement contains a
financial covenant (see “—Financial Covenant”).
The Revolving Credit Facility Agreement also contains a “notes purchase condition” covenant.
Subject to certain exceptions set out in the Revolving Credit Facility Agreement, no member of the Restricted
Group may prepay, purchase defease or redeem any Notes. The exceptions to such covenant include
(amongst other things) payments that reduce the aggregate principal amount of the Notes by no more than
50% of the aggregate original principal amount of the Notes and any permitted refinancing indebtedness
used to refinance such liabilities from time to time in existence at the Completion Date or incurred at any
time after the Completion Date. However, the exceptions to such covenant shall not apply if an event of
default is continuing or an event of default would result from any such prepayment, purchase, defeasance or
redemption.
The Revolving Credit Facility Agreement also requires certain members of the Group to observe
certain affirmative covenants (subject to certain exceptions and qualifications), including covenants relating
to:
• maintenance of authorisations;
• compliance with laws;
• compliance with environmental laws and permits;
• compliance with anti-corruption laws;
• compliance with sanctions laws;
• discharge of tax liabilities;
• holding companies;
• preservation of assets;
• maintenance of pari passu ranking of the Revolving Credit Facility;
• preservation and enforcement of rights under the Share Purchase Agreement and certain other
acquisition related documents;
• maintenance of insurance;
• maintenance of pension schemes;
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• access for the facility agent and/or security agent;
• maintenance of intellectual property;
• restrictions on amendments to constitutional documents;
• compliance with financial assistance laws;
• maintenance of centre of main interests;
• restrictions on change to accounting reference date;
• provision of due diligence reports in respect of certain proposed acquisition;
• restrictions on change of business;
• restrictions on designating Unrestricted Subsidiaries;
• restrictions on acquisition in restricted jurisdictions; and
• maintenance of guarantor and security coverage and further assurances.
The Revolving Credit Facility contains an information covenant under which, amongst other things,
the Company is required to deliver to the facility agent annual financial statements, quarterly financial
statements and compliance certificates.
Financial Covenant
The Revolving Credit Facility Agreement requires the Company to comply with a Consolidated
Secured Net Leverage Ratio. The covenant is tested quarterly.
The Consolidated Secured Net Leverage Ratio for any relevant period shall not exceed a ratio of
5.5:1.0 provided that such financial covenant shall not be required to be satisfied (and accordingly no breach
of representation, warranty, undertaking or other term in the finance documents or a default or event of
default shall occur solely as a result of failure to so ensure) unless, on the last day of the relevant period, the
aggregate outstanding amount of all Revolving Credit Facility utilisations (excluding any ancillary
outstandings that are not in the form of cash or letters of credit supporting borrowings and any non-cash
utilisations to the extent that they are not a letter of credit or guarantee supporting borrowings) exceeds
35% of the total Revolving Credit Facility commitments (the “Revolving Test Condition”).
The Company is permitted to prevent or cure breaches of the Consolidated Secured Net Leverage
Ratio by applying any additional shareholder funding (being net cash proceeds received by the Company
pursuant to any new equity or permitted subordinated debt) (a) as if Secured Indebtedness had been
reduced by such amount or (b) to prepay Revolving Credit Facility utilisation(s) until the Revolving Test
Condition is no longer met. In the case of (a) above, there is no requirement to apply any additional
shareholder funding in prepayment of the Revolving Credit Facility. The Company may not exercise its rights
to prevent or cure breaches of the Consolidated Secured Net Leverage Ratio more than four times in
aggregate over the life of the Revolving Credit Facility or in consecutive financial quarters.
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Events of Default
The Revolving Credit Facility contains the following events of default:
• non-payment of amounts due under finance documents;
• breach of the financial covenant;
• breach of obligations under finance documents;
• inaccuracy of a representation or statement when made;
• cross-default;
• insolvency;
• unlawfulness, repudiation, rescission, invalidity or unenforceability of any finance documents
entered into in connection with the Revolving Credit Facility;
• breach of intercreditor agreement;
• audit qualification;
• expropriation; and
• material adverse change.
Equipment Vendor Loans
Cisco Loan
In June of 2011, Interoute Communications Limited entered into a master loan agreement governed
by the laws of England and Wales with Cisco Systems Finance International (“Cisco”) providing for a facility
with a limit of $40.0 million for the purchase of IT products (including services manufactured, supplied or
licensed by Cisco). The amounts, interest rates and payment schedules differ per usage and are included in
the loan schedules. The availability period for the facility has been extended to 31 August 2016. The
outstanding amount of loans as at 31 December 2015 is €11.2 million with payment instalments scheduled
until 20 October 2018.
IBM Loan
In January of 2008, Interoute Communications Limited entered into a master loan agreement
governed by the laws of England and Wales with IBM United Kingdom Financial Services Limited (“IBM”)
providing for leases, loans and other financing of equipment, software and services from IBM. The individual
transaction documents incorporate additional provisions such as the term of the loans and number of
repayments. The IBM loan prohibits the granting of liens over the equipment financed by IBM. There are
currently nine transaction documents and as at 31 December 2015, the amount outstanding under this
facility is €22.1 million. The agreement can be terminated by 30 days’ notice by either party.
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Lombard Loans
The Lombard loans are secured financings for equipment governed by the laws of England and Wales
provided by Lombard North Central Plc to Interoute Communications Limited and Interoute Germany GmbH.
The total outstanding amount under these loans as at 31 December 2015 is €3.7 million. The Lombard loans
are secured by liens over the equipment financed by Lombard North Central Plc. Prepayments are subject to
indemnification for related costs and expenses associated therewith. In December of 2012, Interoute
Communications Limited entered into the first loan agreement for £5.0 million for a term of 36 months. The
guarantors are Interoute Communications Holdings SA and Interoute Network Limited. In August of 2013,
Interoute Germany GmbH entered into a second loan agreement for €2.6 million for a term of 36 months.
The guarantors are Interoute Communications Holdings SA and Interoute Communications Limited. Also in
August of 2013, Interoute Communications Limited entered into a £1.9 million loan agreement for a term of
36 months. The guarantor is Interoute Communications Holdings SA. On acquisition of Vtesse, Interoute
Cirrus had a loan principle obligation of £2.5 million (full term 60 months, remaining term of 48 months on
acquisition).
Finance Leases
As at the date of this Annual Report, several of our Restricted Subsidiaries, including Interoute
Managed Services Netherlands B.V., Interoute France SAS, Interoute Communications Limited, Interoute
Germany GmbH, are parties to a global master lease and financing agreements with Hewlett-Packard
International Bank plc for the lease and finance of equipment sold by various Hewlett Packard entities.
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GLOSSARY OF INDUSTRY TERMS
“Cloud/Cloud Computing” ......... A style of computing in which physical resources—such as servers and
network—are made available in a “virtual” or abstracted way, so that
services and capacity dynamically scale without the user having to add
additional hardware or software. Users need not have knowledge of,
expertise in, or control over the technology infrastructure in the “cloud”
that supports them. Many services provided on the Internet are Cloud
Computing, as are those services provided by true IP-based Next
Generation Networks like Interoute.
“Dark fibre” ................................ Fibre optic infrastructure that is currently installed but unused (i.e. unlit).
“Digital Subscriber Line” or
“DSL” ....................................
A family of technologies that are used to transmit digital data over
traditional copper telephone lines. DSL offers dense geographic coverage
at generally lower speeds, but is suitable for connecting small offices and
retail premises when used to create a corporate data network using MPLS.
“duct” ......................................... The conduit (typically PVC and 100 millimetres in diameter) into which the
fibre cable is placed. Ducts can typically accommodate multiple cables
allowing for upgrade without civil engineering works.
“Enterprise Services sector” ...... The business opportunity for our Enterprise Services product group, i.e.
services that enterprises purchase in the countries where Interoute
operates/sells its services. Enterprise Services sector typically are
businesses where the focus of the business is not a licenced operator or a
cloud-based service provider.
“Ethernet” .................................. Ethernet, in the context of our services, refers to a layer 2 (ISO model)
point-to-point service to which the customers attach a router. Ethernet
services require the customer to control the routing of the packets.
“Exabytes” .................................. 1021 bytes of data.
“Ground to the cloud” ............... Interoute’s approach to services. Customers can buy the core
infrastructure of computing and networking (the core infrastructure for all
digital services) from the “ground to the cloud”. Customers can buy
different levels of control, cost and management from fibre and
co-location through to a VPN and VDC. The nearer to the cloud, the higher
the level of flexibility in terms of on-demand access and service
integration, the smaller the incremental cost and the greater level of
service offered by Interoute. The closer to the ground, the greater the
capital cost, the longer the term of the contract but the greater the ability
to create services at a low cost. Enterprises typically migrate to the cloud
whereas OTT providers and operators migrate to the ground to achieve
better service economics.
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“Infrastructure-as-a-Service” or
“IaaS” ......................................
An infrastructure provisioning model in which an organisation/customer
outsources the equipment used to support operations, including
networking components, hardware, and servers. The IaaS provider owns
the equipment and is responsible for housing, running and maintaining it
on behalf of the organisation/customer.
“integrated IT infrastructure
offering” ..................................
Interoute’s holistic approach to providing outsourced integrated
information technology services to our customers, with a single network
architecture, combining voice/video, data and application hosting
platforms. These strategic and fully integrated platforms deliver a
customer’s complete information communication technology needs, with
optimal cost, scalability, security and efficiency.
“Internet Service Provider” or
“ISP” ........................................
In the context of Interoute an ISP is a provider of backbone connectivity to
the Internet comprising of multiple interconnects “peers” with others.
“Interoute Cloud Connect” ........ A single device delivering WAN optimisation, firewalling, routing and
virtual machine-hosting capability for customer premise IT, cloud
migration and optimal cloud access. This is a unique adjunct to our
substantial and rapidly growing Virtual Private Networks business.
“Interoute CloudStore” .............. A web-based interface through which customers can buy, monitor and get
support for their Cloud-based services provided by Interoute (also see
“Virtual Data Centre”).
“IRU” ........................................... A contractual agreement between the operators of a communications
cable, such as submarine communications cable or a fibre optic network.
Customer IRU agreements are typically long-term (greater than 15 years)
and paid for upfront, with ongoing operations and maintenance charges.
“Metropolitan Area Networks”
or “MAN” ................................
A fibre or duct network located within city centres that connect important
data centres within that city.
“Multi-Protocol Label
Switching” or “MPLS” .............
A mechanism in high-performance telecommunications networks that
directs data from one network node to the next based on short path labels
rather than long network addresses, avoiding complex lookup in a routing
table. MPLS creates a secure Layer 2 (not able to attack from the Internet)
connection between multiple sites allowing a customer to route traffic on
an any-to-any basis between its locations.
“Network Services sector” ......... The business opportunity for Network Services (i.e. services that Network
customers purchase in the countries where Interoute operates/sells its
services).
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“Next Generation Network” ...... The most important evolution in modern telecommunications
architecture, resulting in a single infrastructure to transport voice and data
(including video) over the same core IP network, using the same packet
technology as the Internet. This architecture replaces the multiple systems
that traditional telecommunications companies use, and thus a next
generation network provider generally offers services at substantial cost
savings and deploys them more rapidly.
“Other Licensed Operators” or
“OLO” ......................................
Third-party providers who provide an extension of a service from our
network to customer premises through provisioning access circuits.
“Platform-as-a-Service” or
“PaaS” .....................................
Platform-as-a-Service, or PaaS, is a category of cloud computing that
provides a platform and environment to allow developers to build
applications and services over the Internet. PaaS services are hosted in the
cloud and accessed by users via their web browser.
“Points of Presence” or “PoP” ... A point or location where Interoute has the ability to offer services. From
which services collected are “on-net” and the services away from that
point are “off net”.
“Public Services Network” or
“PSN” ......................................
The Public Services Network, or PSN, is the U.K. government’s series of
interconnected public sector networks designed to improve the efficiency
of public resources.
“SaaS” or
“Software-as-a-Service” .........
Software-as-a-Service describes any cloud service where consumers are
able to access software applications over the Internet. The applications are
hosted in “the cloud” and can be used for a wide range of tasks for both
individuals and organisations.
“Unified Communications” ........ A communication service that is agnostic to the devices used to connect to
it and allows customers to have a common communication medium for all
types of communication from PC’s, smartphones, tablets, video meeting
rooms etc.
“Video-as-a-Service” .................. A service where Interoute provides the equipment and network
(connectivity) to build for a customer a complete video conferencing
capability “as a service”. The customer does not pay for the individual
elements of the platform but pays a monthly lease for an agreed minimum
term.
“Virtual Data Centre” or “VDC” . A platform build on the Interoute network that provides computing and
storage capabilities on a pay-as-you-go basis, allowing customers to
instantaneously expand their capabilities using a web-based set of tools
(also see Interoute CloudStore). The Interoute Virtual Data Centre allows
customers to create templates or their own custom “virtual machines” as
well adding and configuring network.
125
“Virtual Private Networks” or
“VPN” ......................................
A virtual private network is a secure connection which is created on shared
infrastructure. Separation and privacy can be created via encryption. In the
context of Interoute VPN almost always refer to a VPN created using
MPLS. MPLS VPNs are typically run over private backbone networks which
add an additional layer of security and performance quality.
“Wide Area Network” or
“WAN” ....................................
A network that covers a broad area (i.e. any telecommunications network
that links across metropolitan, regional, national or international
boundaries) using leased communication lines.
126
FINANCIAL STATEMENTS
INDEX TO THE FINANCIAL STATEMENTS Page
Audit Report…………………………………………………………………………………………………………………………………………………….F-1
Consolidated Balance Sheet………………………………………………………………………………………………………………………….….F-3
Consolidated Cash Flow Statement…………………………………………………………………………………………………………….…….F-5
Consolidated Profit And Loss Account………………………………………………………………………………………………………………F-6
Notes To The Annual Consolidated Financial Statements…………………………………………………………………………..…….F-7
F-1
Audit report
To the Shareholders of Interoute Communications Holdings S.A.
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Interoute Communications
Holdings S.A. and its subsidiaries, which comprise the consolidated balance sheet as at 31 December 2015, the
consolidated cash flow statement at that date, the consolidated profit and loss account for the year then ended
and a summary of significant accounting policies and other explanatory information.
Board of Directors’ responsibility for the consolidated financial statements
The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Luxembourg legal and regulatory requirements relating to the preparation of
the consolidated financial statements, and for such internal control as the Board of Directors determines is
necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Responsibility of the “Réviseur d’entreprises agréé”
Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg
by the “Commission de Surveillance du Secteur Financier”. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the judgment of the “Réviseur
d’entreprises agréé”, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the “Réviseur
d’entreprises agréé” considers internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
PricewaterhouseCoopers, Société coopérative, 2, rue Gerhard Mercator, B.P. 1443, L-1014 Luxembourg
T : +352 494848 1, F : +352 494848 2900, www.pwc.lu
Cabinet de révision agréé. Expert-comptable (autorisation gouvernementale n°10028256) R.C.S. Luxembourg B 65 477 - TVA LU25482518
F-2
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the financial position of
Interoute Communications Holdings S.A. and its subsidiaries as of 31 December 2015, of its cash flow
statement at that date, and of the results of its operations for the year then ended in accordance with
Luxembourg legal and regulatory requirements relating to the preparation of the consolidated financial
statements.
Report on other legal and regulatory requirements
The management report, which is the responsibility of the Board of Directors, is consistent with the
consolidated financial statements.
PricewaterhouseCoopers, Société coopérative Luxembourg, 23 March 2016
F-3
FINANCIAL STATEMENTS
Interoute Communications Holdings S.A.
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2015
Denominated in thousands of Euros
Note Year ended 31 December
2015 2014
ASSETS
Fixed assets
Intangible assets 3
Concessions, patents, licenses, trademarks and similar rights and assets 4,908 - Positive goodwill acquired for valuable consideration 671,131 72,425
Tangible assets 4
Land and buildings 107,528 102,027 Plant and machinery 154,544 115,539 Other fixtures and fittings, tools and equipment 188,678 204,237 Payments on account and tangible assets under construction 24,139 13,971
Financial assets Securities held as fixed assets 5 25 -
Own shares or own corporate units 5 7,131 3,651
Current assets Stocks
Finished goods and merchandise 704 228
Debtors
Trade receivables
becoming due and payable within one year 114,301 98,491 becoming due and payable after more than one year 8,077 -
Other receivables 6
becoming due and payable within one year 42,477 38,819 becoming due and payable after more than one year 853 1,172
Cash at bank, cash in postal cheque accounts and cash in hand 99,306 24,051 Prepayments 7 84,423 34,077
TOTAL ASSETS 1,508,225 708,688
The accompanying notes are an integral part of these consolidated financial statements. All items included in current assets and liabilities are payable within one year unless otherwise stated.
F-4
Interoute Communications Holdings S.A.
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2015 (Continued)
Denominated in thousands of Euros
Note Year ended 31 December 2015 2014
LIABILITIES Capital and reserves Subscribed capital 8 214,536 214,536 Share premium and similar premiums 8 408,390 408,390
Reserves 9 Legal reserve 15,000 15,000 Other reserves Translation reserve
74,222 532
74,222 1,468
Profit or loss brought forward (445,557) (453,208) Profit or loss for the financial year (15,814) 7,651 Provisions for liabilities and charges
Provisions for pensions and similar obligations 11 1,427 1,062 Other provisions 12 21,795 16,514 Provisions for taxation 13 43,448 -
Creditors Trade creditors 110,332 59,718 Tax and social security debts 5,684 3,452 Amounts owed to affiliated undertakings
becoming due and payable after more than one year 23 97,363 24,993 Amounts due to credit institutions
becoming due and payable within one year 14 32,842 22,299 becoming due and payable after more than one year 15 644,654 93,445
Other creditors becoming due and payable within one year 83,538 66,329
Deferred income becoming due and payable within one year 16 96,336 74,835
becoming due and payable after more than one year 17 119,496 77,982
TOTAL LIABILITIES 1,508,225 708,688
The accompanying notes are an integral part of these consolidated financial statements. All items included in current assets and liabilities are payable within one year unless otherwise stated.
F-5
Interoute Communications Holdings S.A.
CONSOLIDATED CASH FLOW STATEMENT AS AT 31 DECEMBER 2015
Denominated in thousands of Euros
Note Year ended 31 December 2015 2014
Net cash flow from operating activities 24 126,099 97,526
Return on investments & Servicing of Finance
Interest received 623 227 Interest paid (4,785) (3,732) Interest element of finance leases (3,905) (3,053)
(8,067) (6,558) Taxation
Tax paid (2,626) (6,982) Capital expenditure and financial investment
Purchase of intangible and tangible fixed assets (83,518) (72,945) Acquisitions 27
Purchase of subsidiary undertakings (156,938) (13,480) Net cash acquired with subsidiaries Deferred payment for the acquisition of subsidiary undertakings
9,893 -
2,217 (1,479)
Deferred payment for the acquisition of other investments (1,850) (1,850) Acquisition of own shares (3,480) (3,641)
(152,375) (18,233) Disposals
Proceeds on disposal of subsidiary undertakings - 110 Net cash disposed of with subsidiaries - (168)
- (58) Deposits and collateralised guarantees
Cash in-flow on receipt of deposits and collateralised guarantees
1,413 2,711
Net cash flows before financing (119,074) (4,539) Financing
Capital element of finance lease repayments 26 (1,853) (2,794) Capital element of finance lease increase 26 - 2,325 Repayment of other loans 26 (471,644) (28,614) Arrangement fees 26 (23,821) - Drawdown of other loans 26 695,742 29,986 Repayment of interest on parent company loan 26 (4,095) (1,023)
194,329 (120)
Net cash flow 25, 26 75,255 (4,659)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Interoute Communications Holdings S.A.
CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2015
Denominated in thousands of Euros
Note Year ended 31 December 2015 2014
CHARGES Other external charges 21 316,382 248,638 Staff costs 19
Wages and salaries 98,122 74,396 Social security costs accruing by reference to wages and salaries 16,023 13,739 Supplementary pension costs 2,179 1,607
Other operating charges 1,757 6,029 Value adjustments in respect of formation expenses and tangible and intangible fixed assets
3, 4 100,421 69,746
Interest payable and similar charges concerning affiliated undertakings
23 465 367
Interest payable and similar charges – other interest payable and charges
14 19,353 7,066
Profit for the financial year - 7,651
Total charges 554,702 429,239
INCOME Net turnover 18 530,144 424,856 Work performed by the undertaking for its own purposes and capitalised
4,607 3,625
Other interest receivable and similar income 153 227 Income tax 10 3,985 531 Loss for the financial year 15,813 -
Total income 554,702 429,239
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Interoute Communications Holdings S.A.
NOTES TO THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWELVE MONTH PERIOD ENDED 31 DECEMBER 2015
1 General information Interoute Communications Holdings S.A. (hereafter “the Company” or “ICHSA”) was incorporated on 7 July 2005 and organised under the laws of Luxembourg as a Société Anonyme for an unlimited period of years. The Company together with its subsidiaries are referred to as “the Group”. The Group’s financial year starts on 1 January and ends on 31 December of each year and the main activity of the Group is the provision of telecommunication services. 2 Principle accounting policies A summary of Group’s accounting policies is set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation The consolidated financial statements have been prepared in accordance with Luxembourg legal and regulatory requirements. Accounting policies and valuation rules are, besides the ones laid down by the Law of 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of undertakings, determined and applied by the Board of Directors. The preparation of the consolidated financial statements requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgement in the process of applying the accounting policies. Changes in assumptions may have a significant impact on the annual accounts in the period in which the assumptions changed. Management believes that the underlying assumptions are appropriate and that the consolidated financial statements therefore present the financial position and results fairly. The Company makes estimates and assumptions that affect reported amounts of assets and liabilities in the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events, that are believed to be reasonable under the circumstances. (b) Basis of consolidation The consolidated financial statements include those of the Company and all of its subsidiary undertakings up to 31 December 2015. Subsidiary undertakings are those entities controlled directly or indirectly by the Company. Control arises when the Company has the ability to direct the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiary undertakings acquired or disposed of are accounted for under acquisition accounting rules and are included in the profit and loss account from the effective date control is obtained until the effective date control is lost. Intra-group balances, sales and profits are eliminated on consolidation. On 29 July 2005, the Company became the holding company of Interoute Communications Holdings Limited (ICHL). The former shareholders of ICHL were issued with new shares in the Company. The acquisition of ICHL has been accounted for as a reverse acquisition. For accounting purposes in a reverse acquisition, the acquirer (ICHL), is the entity whose equity interests have been acquired and the issuing entity (the Company) is the acquiree. The effect of this is that the consolidated financial statements of the combined group represent a continuation of ICHL's consolidated financial statements. The assets and liabilities of ICHL have been measured and recognised in these consolidated financial statements at their pre-combination carrying amounts. The consolidated accumulated losses and other reserves of the combined group are based on the amount of ICHL's pre-combination total equity.
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued (b) Basis of consolidation (continued) There was no difference between the fair value of consideration for the business combination and the fair value of the net assets and liabilities of ICHSA acquired by ICHL. Therefore no goodwill has been recognised. As a result of the combination, a reverse acquisition reserve was created. (c) Goodwill When the fair value of consideration for an acquired undertaking exceeds the fair value of its separable net assets, the difference is treated as goodwill and is capitalised and then amortised through the profit and loss account over its estimated economic life. Positive goodwill is amortised over a period of between ten and fifteen years. When the fair value of the separable net assets exceeds the fair value of the consideration for an acquired undertaking the difference is treated as negative goodwill and is either capitalised in the balance sheet and disclosed within “Other reserves”, or is recognised in the profit and loss account if such difference corresponds to a realised gain. Provisional fair values are attributed to the assets and liabilities of subsidiaries acquired by the Group at the date of acquisition, with a corresponding entry being made to goodwill. These provisional fair values may be subject to further adjustments and are finalised at the time of approval of the consolidated financial statements for the period following that in which the acquisition occurred. (d) Brand name Brand or trade names of an acquired undertaking is recognised at cost within Intangible fixed assets, based on the fair value determined at acquisition, and then amortised through the profit and loss account over its estimated economic life. The fair value has been determined based on the expected cash flows of an independent market participant. Brand names are subject to impairment losses in the event of diminution in value considered to be of a durable nature. Those impairment losses may not be continued if the reasons for which they were made have ceased to apply. (e) Turnover Turnover represents amounts earned from telecommunications services provided and infrastructure assets sold to customers (net of value added tax). Connection fees are recognised as turnover over the expected customer relationship period. For the majority of services the Directors have estimated the expected customer relationship period to be three years. Turnover attributable to infrastructure sales in the form of Indefeasible-Rights-of-Use (“IRUs”) with characteristics which qualify the transaction as an outright sale, or transfer of title agreements, are recognised at the later of delivery or acceptance by the customer. Proceeds from the sale of infrastructure assets qualify as turnover where the infrastructure assets have been classified as stock. Turnover in respect of telecommunications services is recognised rateably over the period in which the service is provided. Amounts invoiced in advance are shown as deferred income and recognised as turnover in the period in which the service is provided. (f) Research and development Research costs are charged to the profit and loss account as incurred. Costs of developing computer software that is integral to the operation of the network are capitalised as tangible assets when the following can be demonstrated:
The intention to complete the tangible asset and use or sell it and the availability of adequate technical and financial resources for this purpose;
That the tangible asset will generate probable future economic benefits for the Group;
That the Group can reliably measure the expenditure attributable to the tangible asset during its development.
Development costs are capitalised and depreciated over their estimated useful economic lives, which are between 3 and 5 years.
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued (g) Work performed by the undertaking for its own purposes and capitalised Capitalised labour corresponds to those labour costs incurred by the Group for its own purposes in the following 3 areas:
the design of systems and software for internal use;
the development of software integral to the operation of the network;
the installation of tangible fixed assets. Capitalised labour costs are recorded under the heading "Plant and machinery".
(h) Licence fees Annual telecommunications licence fees are charged to the profit and loss account over the period to which they relate and disclosed within other external charges. Long term telecommunications licence fees are capitalised as intangible assets and amortised over the period of the licence. (i) Tangible fixed assets Tangible fixed assets are recorded at historical cost less accumulated depreciation and accumulated impairment losses. Network infrastructure and equipment costs comprise assets purchased and built, at cost, together with labour and other associated costs which are directly attributable to the construction of such assets. Depreciation is calculated to write off the cost of tangible fixed assets on a straight line basis over their expected useful economic lives as follows:
Freehold buildings 50 years Leasehold buildings 50 years or term of lease if shorter Leasehold improvements 20 years or term of lease if shorter Plant and machinery – Office equipment 3 years Plant and machinery – Computer equipment 3 years Network infrastructure – Duct 40 years or term of lease if shorter Network Infrastructure – Fibre 25 years or term of lease if shorter Network infrastructure – Other equipment 5 years
Tangible fixed assets are subject to impairment losses in the event of diminution in value considered to be of a durable nature. Those impairment losses may not be continued if the reasons for which they were made have ceased to apply. (j) Tangible fixed asset spares The cost of tangible fixed asset spares, included within “Payments on account and tangible assets under construction” is written off over the assets remaining useful economic life commencing from the date assets are purchased by the Group. (k) Leased assets Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a finance lease. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over the shorter of its estimated useful life and the lease term. The asset is subject to impairment losses in the event of diminution in value considered to be of a durable nature. Those impairment losses may not be continued if the reasons for which they were made have ceased to apply. Future instalments under such leases, net of interest charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account as interest, and the capital element, which reduces the outstanding obligation for future instalments. All other leases are operating leases and rental charges are taken to the profit and loss account on a straight-line basis over the life of the lease.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(l) Financial assets The Group’s investments in financial assets are stated at cost and are subject to a provision for impairment in the event of a diminution in value. Financial assets comprise securities held as fixed assets and own shares at nominal value. Those impairment losses may not be continued if the reasons for which they were made have ceased to apply. (m) Impairment Tangible and intangible fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. (n) Stocks Network infrastructure assets that are constructed or acquired for the purpose of resale are classified as stock. Stock is carried at the lower of cost and market value under the first in, first out (“FIFO”) method. Cost includes the purchase price of the network infrastructure assets and does not include any other costs incurred in the construction of the network. A value adjustment is recorded where the market value is below the purchase price. These value adjustments are not continued if the reasons for which the value adjustments were made have ceased to apply. (o) Current debtors and creditors Current debtors and creditors are valued at their nominal value. Current debtors are subject to value adjustments where their recovery is compromised. The value adjustments are not continued if the reasons for which value adjustments were made have ceased to apply. Current debtors includes income earned during the financial year but which has not yet been invoiced at year end. (p) Prepayments This asset item includes expenditure incurred during the financial year but relating to a subsequent financial year. Prepayments include costs directly attributable to raising finance. Prepaid financing costs are amortised through the profit and loss accounts over the term of the associated borrowings. (q) Pension costs The Group operates a number of defined contribution pension schemes for eligible employees. Contributions are charged to the profit and loss account as they become payable. The assets of these schemes are held in separate trustee administered funds. The Group also operates a defined benefit pension scheme for eligible employees in Switzerland. Obligations under defined benefit plans are measured by the projected unit credit method. Under this method each period of service gives rise to an additional unit of benefit entitlement and each unit is measured separately to build up the final obligation which is then discounted. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The calculation is based on demographic assumptions concerning retirement age, rates of future salary increases, staff turnover rates, and financial assumptions concerning future interest rates (to determine the discount rate) and inflation. These assumptions are made at the level of each individual entity, based on its macro-economic environment. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to the profit and loss account in the period in which they arise. Past-service costs are recognised immediately in the profit or loss. (r) Provisions Provisions for liabilities and charges are intended to cover losses or debts the nature of which are clearly defined and which at the date of the balance sheet are either likely to be incurred or certain to be incurred but uncertain as to their amount or as to the date on which they will arise. Onerous property, duct and fibre leases The Group provides for obligations relating to excess capacity on telecommunication circuits and excess space in offices and Points of Presence (“PoP”). The provision represents the net present value of the future estimated costs and includes the proportion of the dilapidation costs relating to the excess space. The unwinding of the discount on these provisions is included within the profit and loss account each year as interest payable and similar charges.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Dilapidation Where the Group has an obligation to return a leased property at the end of its lease to its original state, a provision is made at each balance sheet date to reflect the estimated cost of repair to date. The provision represents the net present value of the estimated costs accrued and the unwinding of the discount on these provisions is included within the profit and loss account each year as interest payable and similar charges. Wear and tear costs on leased properties are recognized on an incremental basis over the total lease term, and are expensed to the profit and loss account. A decommissioning asset amount equivalent to the initial provision for dilapidation costs less the wear and tear costs is capitalised and amortised over the life of the underlying asset on a straight line basis. Any change in the present value of the estimated expenditure is reflected as an adjustment to the provision. Other provisions Other provisions relate to legal provisions and provisions for termination benefits. Provisions are discounted where the time value of money is considered material. Provisions are discounted at the relevant risk free rate. (s) Borrowings Borrowings are recognised at their nominal value. (t) Accruals and deferred income This liability item includes income received during the financial year but relating to a subsequent financial year. (u) Deferred taxation Deferred tax is provided, except as noted below, on timing differences that have arisen but not reversed by the balance sheet date, where the timing differences result in an obligation to pay more tax, or a right to pay less tax, in the future. Timing differences arise because of differences between the treatment of certain items for accounting and taxation purposes. Deferred tax is not provided on timing differences arising from:
gains on the sale of non-monetary assets where, on the basis of all available evidence, it is more likely than not that the taxable gain will be rolled over into replacement assets;
extra tax payable on the unremitted earnings of the overseas subsidiaries and associates where there is no commitment to remit these earnings; and
Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax is measured at the tax rates that are expected to apply in the periods when the timing differences are expected to reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted. (v) Foreign currencies Transactional foreign exchange differences: Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the profit and loss account. The principal rates of exchange used to convert foreign currency balances to Euros at 31 December 2015 were:
UK Sterling: 0.7371 Swiss Francs: 1.0829 United States Dollar: 1.0927 Czech Koruna: 27.0389
Translation to the presentational currency: These consolidated financial statements have been prepared in Euros. The profit and loss accounts and balance sheets of subsidiaries that have functional currencies other than the Euro, are translated as follows: Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet. Income and expenses for each profit and loss account presented are translated at exchange rates at the dates of the transactions. All resulting exchange differences are recognised in as a separate component of equity.
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued (w) Financial instruments The Company may enter into derivatives financial instruments such as options, swaps, futures or foreign exchange contracts. The Company records initially derivative financial instruments at cost. At each balance sheet date, unrealised losses are recognised in the profit and loss account whereas gains are accounted for when realised. Commitments relating to options, swaps, futures, foreign exchange contracts transactions are recorded in the off-balance sheet accounts. (x) Entities included in the consolidated financial statements The following subsidiary undertakings have been included in these consolidated financial statements from the date of acquisition. The Group holds 100% of the share capital in these subsidiary undertakings. The trading subsidiary undertakings carry out the same trade as the Group.
Name of company (and country of incorporation if outside Luxembourg) Nature of activity
ATP3 Dusseldorf GmbH (Germany) Trading
Flute Limited (United Kingdom) Dormant
Interoute Application Management Limited (United Kingdom) Trading
Interoute Australia Pty Limited (Australia) Trading
Interoute Austria GmbH (Austria) Trading
Interoute Belgium NV (Belgium) Trading
Interoute Bulgaria JSCO (Bulgaria) Trading
Interoute Capital Markets B.V (Netherlands) Dormant
Interoute Cirrus Limited (United Kingdom) Trading
Interoute Communications Holdings Limited (United Kingdom) Holding company
Interoute Communications Limited (United Kingdom) Trading
Interoute Communications LLC (Russia) Trading
Interoute Czech s.r.o (Czech Republic) Trading
Interoute Denmark Filial af Interoute Managed Services Sweden AB (Denmark) Trading
Interoute Deutschland GmbH (Germany) Trading
Interoute Finco PLC (United Kingdom) Trading
Interoute Finland OY (Finland) Trading
Interoute France SAS (France) Trading
Interoute Germany GmbH (Germany) Trading
Interoute Holdings (Cyprus) Limited (Cyprus) Holding company
Interoute Holdings Sarl Holding company
Interoute Hong Kong Limited (Hong Kong) Trading
Interoute Hungary Limited (Hungary) Trading
Interoute Iberia SAU (Spain) Trading
Interoute İletіsim Hizmetleri Limited Şirketi (Turkey) Trading
Interoute Managed Services Belgium BVBA (Belgium) Trading
Interoute Managed Services Denmark A/S (Denmark) Trading
Interoute Managed Services Netherlands BV (Netherlands) Trading
Interoute Managed Services Norge AS (Norway) Trading
Interoute Managed Services Sweden AB (Sweden) Trading
Interoute Managed Services Switzerland Sarl (Switzerland) Trading
Interoute Media Services Limited (United Kingdom) Trading
Interoute Networks Limited (United Kingdom) Trading
Interoute Poland Sp. Z.o.o (Poland) Trading
Interoute Singapore Pte Limited (Singapore) Trading
Interoute Slovakia sro (Slovakia) Trading
Interoute SpA (Italy) Trading
F-13
Interoute Treasury Services B.V. (Netherlands) Dormant
Interoute UK Limited (United Kingdom) Trading
Interoute Ukraine LLC (Ukraine) Trading
Interoute Vtesse Limited (United Kingdom) Trading
Interoute USA Incorporated (United States of America) Trading
Mawlaw 653 Limited (United Kingdom) Dormant
Mawlaw 660 Limited (United Kingdom) Dormant
Newinco 635 Limited (United Kingdom) Dormant
S.C. Interoute srl (Romania) Trading
Twenty First Century Telecommunications Finance Limited (United Kingdom) Dormant
Via Net.Works France Holding SAS (France) Holding company
Videokonferensbolaget Försäljning I Sverige AB (Sweden) Dormant
Vtesse Group Limited (United Kingdom) Holding company
Allurian Limited (United Kingdom) Trading
B2B Holding Limited (United Kingdom) Holding Company
Easynet AG (Switzerland) Trading
Easynet Belgium NV/SA (Belgium) Trading
Easynet Channel Partners Limited (United Kingdom) Trading
Easynet Corporate Services Limited (United Kingdom) Trading
Easynet Enterprise Services (United Kingdom) Trading
Easynet Espana SAU (Spain) Trading
Easynet Financeco Limited (United Kingdom) Trading
Easynet Global Services GmbH (Germany) Trading
Easynet Global Services Limited (United Kingdom) Trading
Easynet Group Inc (United States of America) Trading
Easynet Intermediate Holding Limited (United Kingdom) Holding Company
Easynet Internet Services Limited (United Kingdom) Trading
Easynet Italia Spa (Italy) Trading
Easynet Limited (United Kingdom) Trading
Easynet Managed Services Limited (United Kingdom) Trading
Easynet Nederland BV (Netherlands) Trading
Easynet Network Services Limited (United Kingdom) Trading
Easynet SAS (France) Trading
Easynet (Shanghai) Information & Technology Company Limited (China) Trading
Easynet Worldwide Limited (United Kingdom) Trading
EGHL Limited (United Kingdom) Trading
EGHL (UK) Limited (United Kingdom) Trading
EGSL Holding Limited (United Kingdom) Holding Company
Hong Kong Easynet Technology Company Limited (Hong Kong) Trading
Interdart Limited (United Kingdom) Dormant
MDNX CIG Limited (United Kingdom) Trading
MDNX Group Holdings Limited (United Kingdom) Holding Company
MDNX Group Limited (United Kingdom) Trading
MDNX Holdings Limited (United Kingdom) Holding Company
MDNX Limited (United Kingdom) Trading
MDNX Internet Limited (United Kingdom) Dormant
MDNX S1 Limited (United Kingdom) Trading
Octium Limited (United Kingdom) Trading
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(y) Share-based payments The Group operates a number of cash or equity settled share-based payment incentives, under which the entity receives services from employees as consideration for either equity instruments.
Under these arrangements employees are entitled to receive a cash payment (the “award”), based on the consideration received on the occurrence of certain vesting events (for example a sale or listing of the Group) dependent on specific criteria being met. In certain limited circumstances, at the option of the shareholders of the Company, a vesting event would result in employees receiving non-cash consideration, such as equity shares, in lieu of a cash award. Employee awards are forfeited if, prior to a vesting event, an individual’s employment with the Group ceases.
An element of the obligation for the payment of these awards rests with the Company, with the balance of the obligation resting with the Group’s shareholders. A contingent liability is disclosed in a note to the accounts. The contingent liability is determined by reference to the fair value of the shares granted, which is estimated based on the portion of the estimated equity value of the group attributable to the award scheme shares in issue. (z) Prior year reclassification The disclosure of the amounts of the accounting year ended 31 December 2014 have been reclassified where necessary to ensure the comparability with the figures of the year ended 31 December 2015. The classification of certain balance sheet and profit and loss account items has been reassessed during the period. In the profit and loss account, amounts have been reclassified from Wages and Salaries to Other external charges and from Interest payable, to Other operating charges. In the balance sheet, balances have been reclassified from Other receivables to Trade receivables and from Other creditors to Trade creditors. 3 Intangible assets The movements in intangible assets during the year are as follows: Concessions,
patents, licenses, trademarks and
similar rights and assets
Brand
Positive goodwill acquired for
valuable consideration Total
€’000 €’000 €’000 €’000
Gross book amount
At 1 January 2015 - - 108,831 108,831 Acquisitions (note 27) - 5,447 - 5,447 Additions 30 - 611,625 611,655 Fair value adjustments - - 2,215 2,215 Disposals - - (302) (302)
At 31 December 2015 30 5,447 722,369 727,846
Amortisation
At 1 January 2015 - - 36,406 36,406 Charge for the year 2 567 15,116 15,685 Disposals - - (284) (284)
At 31 December 2015 2 567 51,238 51,807
Net book amount At 1 January 2015 - - 72,425 72,425
At 31 December 2015 28 4,880 671,131 676,039
Positive goodwill comprises purchased goodwill which arose on the following acquisitions of companies or businesses:
VIA Net.works Holdco Inc and its subsidiaries (26 August 2005)
Telecom Network Partners (31 July 2006)
Pi.se (2 July 2007)
KPN (31 December 2010)
Visual Conference Holding AB and its subsidiaries (4 March 2011)
Newinco 635 Limited and its subsidiaries (12 September 2011)
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 3 Intangible assets (continued)
Comendo Networks AS (4 December 2012)
Vtesse Group Limited and its subsidiaries (30 September 2014)
MDNX Group Holdings Limited and its subsidiaries (15 October 2015) (see note 27a). Positive goodwill includes the value of customer contracts acquired of €187.0m.
During the year, there was an increase in goodwill of €2,215,000 arising from fair value adjustments made to the assets and liabilities of Vtesse Group Limited (see Note 27(b)). 4 Tangible assets The movements in tangible fixed assets during the year are as follows:
Land and buildings
Plant and machinery
Other fixtures and fittings,
tools and equipment
Payments on account and
tangible assets under construction Total
€’000 €’000 €’000 €’000 €’000
Cost
At 1 January 2015 144,962 464,057 496,104 63,928 1,169,051 Additions during the year 10,024 36,371 10,773 29,440 86,608 Acquisitions 4,505 29,149 - 1,846 35,500 Transfers* - 23,021 - (21,127) 1,894 Disposals during the year (67) (7,316) (3,724) (542) (11,649)
At 31 December 2015 159,424 545,282 503,153 73,545 1,281,404
Accumulated depreciation At 1 January 2015 42,935 348,518 291,867 49,957 733,277 Charge for the year 9,014 44,772 26,257 4,693 84,736 Transfers - 4,720 - (4,720) - Disposals during the year (53) (7,272) (3,649) (524) (11,498)
At 31 December 2015 51,896 390,738 314,475 49,406 806,515
Net book amount
At 1 January 2015 102,027 115,539 204,237 13,971 435,774
At 31 December 2015 107,528 154,544 188,678 24,139 474,889
*Transfers to Plant and machinery includes €21,127,000 transferred from Payments on account and tangible assets under construction and €1,894,000, transferred from Stocks. Properties held under finance leases, capitalised and included in tangible fixed assets within Land and Buildings: 2015 2014 €’000 €’000
Cost 27,026 26,751 Accumulated depreciation (2,910) (1,925)
Net book amount 24,116 24,826
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 5 Securities held as fixed assets and own shares or own corporate units Own shares or
own corporate units
Securities held as
fixed assets
Total
€’000 €’000 €’000
Cost
At 1 January 2015 3,651 848 4,499
Additions 3,480 25 3,505
At 31 December 2015 7,131 873 8,004
Provision for impairment
At 1 January 2015 and 31 December 2015 - 848 848
Net book amount
At 1 January 2015 3,651 - 3,651
At 31 December 2015 7,131 25 7,156
The addition in Own shares or own corporate units in the year is in respect of the repurchase of the legal and beneficial interest in 3,321,815 of the Company’s own A Deferred Beneficiary shares, 405,823 of the Company’s own B Deferred Beneficiary shares and 366,053 rewards under its reward scheme, for a consideration of €3,479,975. These shares were repurchased from the Trust that holds the legal interest in the Beneficiary shares. Rewards are not shares, but are instruments that entitle the holder to a cash payment, valued on the basis of the equivalent Beneficiary share. The Trust holds one share for each reward issued. Prior to the repurchase, the Trust had purchased the beneficiary interest from the employees of the Company’s subsidiaries, which held the beneficiary interest under an employee incentive scheme. Under this employee incentive scheme, employees are entitled to receive a cash payment (the “award”), based on the consideration received on the occurrence of certain vesting events (for example a sale or listing of the Company) dependent on specific criteria being met. At the reporting date, a vesting event has not occurred. The share buy-back arrangement has been implemented by the Company to allow employees to realise some of the value in their shares, in advance of a vesting event. Further offers to buy back Beneficiary shares are expected to occur on an annual basis. The addition in Securities held as fixed assets in the year is in respect of the purchase of 100,000 €1 shares of Open HUB MED scarl by Interoute Spa, representing 13% of the issued share capital of Open HUB MED scarl. Open HUB MED scarl was established on 5 November 2015 and is a consortium created to establish one or more data centres in southern Italy. 6 Other receivables Other receivables becoming due and payable after more than one year include €11.0m (2014: €11.8m) in respect of cash covered bank guarantees and rental deposits with third parties. Other receivables becoming due and payable after more than one year includes a deferred tax asset of €24.0m (2014: €20.2m). 7 Prepayments Year ended 31 December 2015 2014 €’000 €’000
Financing fees 22,996 1,456 Other 61,427 32,621
84,423 34,077
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 8 Subscribed capital
Share class
Authorised, allotted, called up and fully paid share capital Nominal value in Euro (€000)
Share premium and similar premiums
€000
A Ordinary shares 120,000,000 1.25 150,000 147,915 B Ordinary shares 51,428,571 1.25 64,286 60,715 A Deferred Beneficiary shares 25,000,000 0.00025 - 6
B Deferred Beneficiary shares 15,000,000 0.00025 - 4
Preference shares 200,000 1.25 250 199,750
214,536 408,390
There have been no changes to share capital in the year. A brief description of the rights attaching to each class of shares is given below:
(a) Voting rights A and B Ordinary shares The holders of Ordinary shares have the right to vote at General Meetings of the Company with each Ordinary shareholder entitled to one vote per share. The holders of A Ordinary shares have the right to nominate four directors. The holders of B shares have the right to nominate 2 directors. A quorum comprises directors nominated by A and B Ordinary shareholders in the proportion to their respective shareholding. A and B Deferred Beneficiary shares The holders of Deferred Beneficiary shares have no right to receive notice of or to attend or vote at any General Meeting of the Company. Preference shares The holders of Preference shares have no voting rights except in the following circumstances where Preference Shareholders are entitled to vote in any general meeting of shareholders called upon to deal with the following matters (with the same voting rights as the holders of ordinary shares):
The issue of new shares carrying preferential rights
The determination of the preference dividend attaching to the preference shares
The conversion of the preference shares into ordinary shares
The reduction of the share capital of the Company
Any change to its corporate object
The issue of convertible bonds
The dissolution of the Company before its term
The transformation of the Company into a Company of another legal form
(b) Rights to dividends A and B Ordinary shares The holders of Ordinary shares have no rights to dividends other than those recommended by the directors. A and B Deferred Beneficiary shares The holders of Deferred Beneficiary shares have no right to receive any dividend. Preference shares In the event that in any year the annual general meeting of shareholders elects to pay a dividend from distributable profits, the preference shareholders are entitled to a dividend, in priority to a dividend payable to holders of any other shares, of an amount equal to 4.2% per annum of the preferred nominal price, compounded annually, being increased by any unpaid amount of 4.2% of the preferred nominal price in any previous financial year, plus the aggregate of 4.2% of the preferred premium price calculated from the date of issue of the preferred shares until a dividend payment date less any dividend amounts paid in any subsequent year. No dividend shall be paid to holders of other shares and there shall be no redemption or repurchase of shares of another class until the aggregate of all preference dividends declared from the date of issue is at least equal to 4.2% per annum of the issue price compounded annually until the dividend payment date.
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 8 Subscribed capital (continued) No amount has been accrued (2014: €nil). The cumulative amount is €61,373,800 (2014: €50,838,579). (c) Priority and the amounts receivable on a winding up A and B Ordinary shares On winding up, the Ordinary shareholders will receive an amount dependent on the value of the assets of the Company available for distribution to members (after the payment of all debts and liabilities of the Company and of the actual charges and expenses of the winding-up) subject to certain thresholds. A and B Deferred Beneficiary shares In the event of a winding up, the Deferred Beneficiary shareholders are entitled to receive the nominal value of each such share but only after payment of any amounts receivable by the Ordinary shareholders as described immediately above. Preference shares In the event of a winding up, the Preference shareholders are entitled to a dividend equal to 4.2% per annum of the issue price compounded annually until the date of liquidation plus the issue price of the preference shares. The rights of the preference shareholders in the event of liquidation are in priority to the rights of holders of any other class of shares. The remainder of any assets in the event of a winding up following the payments, if any, to the Preference Shareholders, Ordinary shareholders and the Deferred Beneficiary shareholders are receivable by the Ordinary shareholders. 9 Movements for the year on the reserves and loss items The movements for the year are as follows:
Legal reserve
Translation reserve
Other reserves
Profit or loss brought forward
Profit or loss for the
financial year €’000 €’000 €’000 €’000 €’000
As at 1 January 2014 15,000 1,468 74,222 (473,380) 20,172 Allocation of prior year’s profit - - - 20,172 (20,172) Translation reserve - - - - - Profit for the financial year - - - - 7,651
At 31 December 2014 15,000 1,468 74,222 (453,208) 7,651
As at 1 January 2015 15,000 1,468 74,222 (453,208) 7,651 Allocation of prior year’s profit - - - 7,651 (7,651) Translation reserve - (936) - - - Loss for the financial year - - - - (15,813)
At 31 December 2015 15,000 532 74,222 (445,557) (15,813)
Luxembourg companies are required to allocate to a legal reserve a minimum 5% of the annual net income, until this reserve equals 10% of the subscribed capital. This reserve may not be distributed. Included in Other reserves are:
Amounts related to a reverse acquisition reserve (€4,061,000, non-distributable) (see note 2 (b)); and
Negative goodwill arising on the acquisitions of i-21 Group (on 31 December 2003, amounting to €62,660,000, non-distributable) and Cecom Group (on 1 May 2004, amounting to €7,500,000, non-distributable) (see note 2(c)).
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 10 Income tax Year ended 31 December 2015 2014 €’000 €’000
Corporation tax: - Current 1,305 1,264 - Adjustments in respect of prior years 541 (438)
Total corporation tax 1,846 826 Deferred tax: - Current (5,206) (1,357) - Amortisation of deferred tax liability on acquired intangible assets (625) -
Total deferred tax (5,831) (1,357)
Total tax (3,985) (531)
The Group operates in a number of tax jurisdictions. The recognition of deferred tax assets for trading losses incurred requires management judgement in determining the amounts to be recognised. In particular, significant judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration given to the timing and level of future taxable income, time limits on the availability of taxable losses for carry forward together with any future tax planning strategies. As at 31 December 2015 there are further unrecognised tax losses of €1,241m (2014: €1,223m) relating to trading losses, decelerated capital allowances, reinstatable debt instruments and impairment timing differences. These are expected to attract tax relief at rates of approximately 29%, subject to local tax authority approval. The €1.3m current tax charge in 2015 and the prior year current tax charge of €1.3m reflects the emerging profits across the footprint coupled with the minimum tax laws in a number of countries. The €5.2m deferred tax credit in 2015 and the prior year deferred tax credit of €1.4m relates primarily to the ordinary recognition of deferred tax assets as a result of the increase in the profits of the Group. 11 Provisions for pensions and similar obligations Year ended 31 December 2015 2014 €’000 €’000
Liability brought forward as at 1 January 1,062 885 Charge for the financial year 365 177
Liability carried forward as at 31 December 1,427 1,062
The Company sponsors one independent pension plan. All employees in Switzerland are covered by this plan. Retirement benefits are based on contributions, computed as a percentage of salary, adjusted for the age of the employee and shared approximately 41%/59% by employee and employer. In addition to retirement benefits, the plan provides death and long-term disability benefits to its employees. Liabilities and assets are reviewed annually by an independent actuary. Plan assets have been estimated at fair market values and liabilities have been calculated according to the "projected unit credit" method. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to the profit and loss account in the period in which they arise.
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
11 Provisions for pensions and similar obligations (continued) The amounts recognised in the balance sheet are as follows: Year ended 31 December 2015 2014 €’000 €’000
Defined benefit obligation (5,757) (4,798) Fair value of plan assets 4,330 3,736
Funded status before unrecognised gains/losses (1,427) (1,062) Unrecognised gains/losses - -
Net pension fund liability (1,427) (1,062)
The pension cost is as follows: Year ended 31 December 2015 2014 €’000 €’000
Service cost (including employees contributions) (735) (550) Interest cost (75) (82) Expected return on plan assets 49 68 Employees contributions 203 163
(558) (401)
The movement in the liability recognised in the balance sheet is as follows: Year ended 31 December 2015 2014 €’000 €’000
Liability at 1 January (1,062) (885) Expense for the year (558) (401) Company contributions paid 311 241 Exchange differences (118) (17)
Liability at 31 December (1,427) (1,062)
The principal assumptions used in the calculation of the pension obligations are as follows: Year ended 31 December 2015 2014
Discount rate 1.25% 2.20% Future salary increase 1.00% 1.00% Pension increase rate 0.50% 0.50% Expected return on plan assets 1.25% 1.25% Retirement age Male 65- Female 64 Male 65 - Female 64 Turnover 10% on average 10% on average Life expectancy in years at retirement age Male 18.9- Female 22.3 Male 18.9 - Female 22.3
Expected return on plan assets is applied when calculating the subsequent year’s pension cost.
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 11 Provisions for pensions and similar obligations (continued) The movements in the defined benefit obligation, fair value of plan assets and unrecognised gains/ (losses) are as follows: Year ended 31 December 2015 2014 Movement in defined benefit obligation €’000 €’000
Defined benefit obligation at 1 January 4,798 3,474 Service cost 735 550 Interest cost 75 82 Change in assumptions 112 - Actuarial losses from experience adjustments 148 281 Benefit payments (408) 375 Exchange differences 297 36
Defined benefit obligation at 31 December 5,757 4,798
Year ended 31 December
2014 2014 Movement in fair value of plan assets €’000 €’000
Fair value of plan assets at 1 January 3,736 2,837 Interest income 49 68 Employees contributions 203 163 Company contribution 311 241 Plan assets gains / (losses) 24 (2) Benefit payments (408) 375 Exchange differences 415 54
Fair value of plan assets at 31 December 4,330 3,736
The actual return on plan assets in 2015 was €73,552 (2014: €66,153) and the estimated company contribution to the pension plans for the financial year ended 31 December 2016 amounts to €308,742. The categories of plan assets and their corresponding expected return are as follows: 31 December 2015 31 December 2014 Proportion in
% Expected
return Proportion in
% Expected
return
Cash 1.5% - 0% - Bonds 56.8% - 62.8% - Shares 4.7% - 3.7% - Real estate 33.1% - 29.5% - Alternative investments 3.9% - 4% -
Total 100% 1.25% 100% 2.2%
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 12 Other provisions Other provisions comprise the following items:
Onerous leases €’000
Property dilapidations
€’000
Legal claims €’000
Tax €’000
Termination benefit
€’000 Total €’000
At 1 January 2015 1,843 10,038 1,229 500 2,904 16,514 Charge / (credit) for the year 372 (324) (36) - 768 780 Acquisitions (note 27) 921 2,015 2,935 - 140 6,011 Discount on provisions 11 57 - - - 68 Utilised in the year (632) - (7) - (985) (1,624) Movement in foreign exchange - 3 43 - -
46
At 31 December 2015 2,515 11,789 4,164 500 2,827 21,795
Provisions for onerous leases The onerous leases are for excess rental property space and leases of telecommunications circuits that are surplus to requirements. The Group is undergoing an exercise to terminate these contracts, where possible. Any estimated costs of termination are included in the provision. The onerous lease provision is expected to be utilised in 1 to 30 years. Provisions for property dilapidations The Group has leased certain properties that require it to reinstate the property to its original condition. Estimates have been made as to the total cost of such remedial works. The dilapidation provision is expected to be utilised in between 1 and 30 years. Provisions for legal claims There are a number of legal claims outstanding against the Group. Estimates have been made of the total expected cost of settling these claims based on the advice of our legal advisors and in house counsel. Provision for tax An estimate has been made of the potential cost, including penalties and a provision made for this uncertain tax position. Provision for termination benefit Eligible employees of the Group’s Italian subsidiary are entitled to a payment on retirement based on a percentage of their accumulated annual salary. An estimate has been made of the expected total cost of such payments.
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
13 Provisions for taxation The deferred tax liability of €43.4m (2014: €nil) relates to the customer contracts and brand name recognised on the acquisition of Easynet. The amortisation of the acquired intangible assets is not tax deductible. The deferred tax liability is amortised through Income tax in the profit and loss account over the period that the related intangible assets are amortised.
14 Amounts due to credit institutions becoming due and payable within one year Amounts shown under “Amounts due to credit institutions” are as follows: Year ended 31 December 2015 2014 €’000 €’000
Borrowings 28,271 19,839 Finance leases 4,571 2,460
32,842 22,299
Borrowings bear interest rates between 3.2% and 7.3% and are secured on network assets. 15 Amounts due to credit institutions becoming due and payable after more than one year Amounts shown under “Amounts due to credit institutions” are as follows: Year ended 31 December 2015 2014 €’000 €’000
Borrowings 608,316 58,095 Finance leases 36,338 35,350
644,654 93,445
Borrowings include €350m of 7.375% fixed rate loan notes and €240m 6.25% plus 3 month Euribor floating rate loan notes, issued on 9 October 2015 (repayable October 2020). Other borrowings due and payable after more than one year bear interest rates between 3.2% and 7.3% and are secured on network assets. The Group’s future minimum payments under arrangements with credit institutions are as follows: Year ended 31 December 2015 2014 €’000 €’000
Within one year 32,842 22,299 In more than one year, but not more than five years 615,247 51,653 After five years 29,407 41,792
677,496 115,745
Amounts owed to credit institutions relate to liabilities for finance leases and other borrowings advanced for the purchase of tangible fixed assets and for the acquisition of companies. 16 Deferred income becoming due and payable within one year Year ended 31 December 2015 2014 €’000 €’000
Deferred income (note 2(d)) 96,336 74,835
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 17 Deferred income becoming due and payable after more than one year Year ended 31 December 2015 2014 €’000 €’000
Deferred income (note 2(d)) 119,496 77,982
Amounts in respect of deferred income are expected to be recognised as turnover in the profit and loss account as follows: Year ended 31 December 2015 2014 €’000 €’000
Within 1 year 96,336 74,835 Between 1 and 5 years 88,670 52,722 In over 5 years 30,827 25,260
215,833 152,817
18 Net Turnover The Group operates a pan European telecommunications network and the Directors consider that the Group’s activities consist solely of the provision of telecommunication services. Activities are managed on a regional and functional basis. The Directors consider that the Group’s reportable segments are the United Kingdom (UK), Northern Europe and US (excluding UK), Southern Europe, Central Europe, Eastern Europe and Asia, based on management structure. Northern Europe and US comprise the United States of America (US), Belgium, Netherlands, Sweden, Denmark, Finland and Norway; Southern Europe comprises Italy and Spain; Central Europe comprises Austria, France, Germany and Switzerland; and Eastern Europe and Asia comprises Czech Republic, Hungary, Poland, Romania, Russia, Bulgaria, Turkey, Slovakia, Ukraine and Hong Kong. In addition the Group’s activities are organised to address the requirements of its customers, which fall into two market segments, Service Provider and Enterprise. Consequently the Directors consider these market segments to be secondary reportable segments. Turnover represents amounts billed to customers, net of discounts and rebates, where applicable. Net turnover by geographical markets as follows: Year ended 31 December 2015 2014 €’000 €’000
United Kingdom 210,150 135,717
Central Europe 135,381 117,266
Northern Europe and US (excluding UK) 106,867 95,963
Southern Europe 60,803 57,417
Eastern Europe and Asia 16,943 18,493
Total 530,144 424,856
Net turnover by market segments as follows: Year ended 31 December 2015 2014 €’000 €’000
Service Provider 197,499 171,248
Enterprise 332,645 253,608
Total 530,144 424,856
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 19 Staff The average monthly number of persons employed by the Group during the year, including executive directors, is as follows: Year ended 31 December 2015 2014
Sales 496 422 Technical 720 531 Administrative 258 171 Communications and Connectivity 267 293
1,741 1,417
20 Emoluments granted to the members of the administrative, managerial and supervisory bodies and
commitments in respect of retirement pensions for former members for those bodies The emoluments granted to the members for the administrative, managerial and supervisory bodies in that capacity and the obligations arising or entered in respect of retirement pensions for former members of those bodies for the financial year are broken down as follows: Year ended 31 December 2015 2014 €’000 €’000
Emoluments 998 809
No advances or loans were granted to the members of the administrative, managerial and supervisory bodies. Proceeds from the sale of A Deferred Beneficiary shares held by members of the administrative, managerial and supervisory bodies and repurchased by the Company are as follows: Year ended 31 December 2015 2014 €’000 €’000
Shares repurchased 423 514
21 Other external charges Other external charges comprise: Year ended 31 December 2015 2014 €’000 €’000
Sales related costs 179,687 129,984 Network costs 90,139 81,609 Administrative costs (other than staff costs) 31,794 23,842 Staff related administrative costs 14,762 13,203
316,382 248,638
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 22 Leasing and financial commitments As at the year end the Group had the following off-balance sheet commitments. Year ended 31 December 2015 2014
Restated €’000 €’000
Operating lease commitments 219,605 177,306 Capital commitments 13,727 6,004
Total 233,332 183,310
The Group has commitments in respect of services provided by third parties for Operations and Maintenance (O&M) of leased fibre, ducts or Indefeasible Rights of Use (IRUs) on duct or fibre. At 31 December 2015 these commitments amount to €54,477k (2014 restated: €60,139k). 23 Transactions with related entities The Group has a loan facility with its shareholders, Emasan AG and Turbo Holdings Lux II Sarl (formerly Al Mada Investments Sarl). The balances are as follows: As at 31 December 2015
Emasan AG
Turbo Holdings
Lux II Sarl
Total €’000 €’000 €’000
Principal 64,667 28,000 92,667 Interest 3,425 1,271 4,696
68,092 29,271 97,363
As at 31 December 2014
Emasan AG
Turbo Holdings
Lux II Sarl
Total €’000 €’000 €’000
Principal 11,666 5,000 16,666 Interest 5,966 2,361 8,327
17,632 7,361 24,993
The loans are unsecured, bear interest at the 3 month Euribor rate plus a margin of 125 basis points and the earliest date for repayment is 9 October 2020.
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 23 Transactions with related entities (continued) During the year, the Group entered into various transactions with related undertakings. Transactions with affiliates of Al Mada Investments Sarl are disclosed for the period to 21 April 2015, after which these undertakings ceased to be related, as there was a change of control of Al Mada Investments Sarl. Transactions and balances are disclosed as follows. Period to 21 April 2015
Year to 31 December 2015 As at 31 December 2015
Year to 31 December 2014 As at 31 December 2014 Net turnover
Other
external charges
Trade receivables
Trade creditors
€’000 €’000 €’000 €’000
Emirates Integrated Telecommunications Company, PJSC (Du)
820
4,780
63
1,030
Tunisie Telecom 1,633 1,034 324 316 Forthnet 11,552 679 453 125 Go Communications Systems Limited 1,711 380 340 167 Maltacom PLC - - - 1 Janna 206 - 122 33
15,922 6,873 1,302 1,672
Net turnover
Other external charges
€’000 €’000
Emirates Integrated Telecommunications Company, PJSC (Du)
205
1,105
Tunisie Telecom 366 391 Forthnet 273 173 Go Communications Systems Limited 300 16
1,144 1,685
Net turnover
Other external charges
Trade receivables
Trade creditors
€’000 €’000
Janna - 29 21 1
- 29 21 1
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
24 Reconciliation of operating profit to net cash flow from operating activities Year ended 31 December 2015 2014 €’000 €’000
Operating (loss)/ profit (132) 18,609
Depreciation of fixed assets 84,736 61,996
Amortisation of positive goodwill 15,685 7,750
Loss on disposal of fixed assets 616 1,299
Unrealised foreign exchange (384) 887
Capitalised decommissioning costs (3,090) -
(Increase)/ decrease in stocks (475) 936
Decrease/ (increase) in trade receivables 24,390 (19,681)
Decrease in other receivables 2,105 2,573
(Increase)/ decrease in prepayment and accrued income (10,036) 6,292
Increase in trade creditors 27,841 10,126
(Decrease)/ increase in other creditors, tax and social security creditors (9,759) 4,710
Increase in deferred income 73 5,281
(Decrease)/ increase in long term deferred income (5,279) (3,389)
Decrease in provisions (192) 137
Cash flow from operating activities 126,099 97,526
25 Analysis of changes in net debt
At 1 January 2015 €000
Cash Flow €000
Non-cash changes
€000
At 31 December 2015 €000
Cash in hand and at bank 24,051 75,255 - 99,306
Deposits and collateralised guarantees 11,813 (1,413) 623 11,023 Finance leases due within one year (2,461) 3,995 (6,105) (4,571) Finance leases due after one year (35,349) (989) - (36,338)
Loans from parent undertakings (24,993) (71,905) (465) (97,363)
Prepaid financing fees 1,455 23,264 (1,724) 22,995
Other loans due within one year (19,839) (8,432) - (28,271)
Other loans due after one year (58,095) (139,746) (410,475) (608,316)
(103,418) (119,971) (418,146) (641,535)
26 Reconciliation of net Cashflow to movement in net debt €000
Increase in cash 75,255 Cash inflow from deposits and collateralised guarantees (1,413) Repayment of finance leases 3,006 Net cash inflow from loans (200,914) Repayment of interest on parent company loans 4,095
Change in net debt from cash flows (119,971) Interest on parent company loans accrued (465) Interest on other loans accrued (9,409) Amortisation of prepaid financing fees (1,724) Deposits and collateralised guarantees acquired with subsidiaries 623 Finance leases acquired with subsidiaries (6,105) Loans acquired with subsidiaries (401,066)
Net debt at start of the year (103,418)
Net debt at end of the year (641,535)
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
27 Acquisitions (a) On 15 October 2015, the group acquired 100% of the share capital of MDNX Group Holdings Limited for a total
consideration of €156,938k. The book values (which have been extracted from the management accounts) and fair values of the assets acquired are shown below:
Book values
Accounting policy changes and fair
value adjustments Fair values
€000 €000 €000
Intangible fixed assets 5,040 407 5,447
Tangible fixed assets 29,770 5,730 35,500
Trade receivables 48,278 - 48,278
Other receivables 336 4,147 4,483
Prepaid expenses and accrued income 17,298 1,337 18,635
Cash and bank 9,893 - 9,893
Trade creditors (24,720) - (24,720)
Other creditors (28,039) 1,100 (26,939)
Tax (1,532) - (1,532)
Accruals and deferred income (70,038) 3,550 (66,488)
Tax and social security debts (2,315) (3,790) (6,105)
Borrowings (401,065) - (401,065)
Provisions (39,614) (10,460) (50,074)
Net assets/ (liabilities) (456,708) 2,021 (454,687)
Goodwill 611,625
Total consideration paid 156,938
Consideration comprises the following: Consideration paid 156,938
Goodwill comprises:
Goodwill 424,658
Customer relationships 186,967
611,625
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
27 Acquisitions (continued)
(b) On 30 September 2014, the group acquired 100% of the share capital of Vtesse Group Limited for a total consideration of €12,715k (previously reported as €13,481k).
During the year the provisional fair values of the assets and liabilities acquired have been finalised. The changes in fair value adjustments are set out below:
Provisional fair value on acquisition as previously
presented Adjustments to fair
values Fair value on
acquisition
€000 €000 €000
Fixed assets 14,790 - 14,790
Trade receivables 2,820 - 2,820
Other receivables 2,525 (1,420) 1,105
Prepaid expenses and accrued income 4,804 153 4,956
Cash and bank 2,217 - 2,217
Trade creditors (7,590) - (7,590)
Other creditors (462) - (462)
Accruals and deferred income (8,135) (1,714) (9,849)
Tax and social security debts (121) - (121)
Borrowings (5,949) - (5,949)
Provisions (663) - (663)
Net assets 4,236 (3,005) 1,255
Goodwill 11,460
Total consideration paid 12,715
Consideration comprises the following:
Consideration previously presented
Adjustments to consideration Consideration
€000 €000 €000
Consideration paid 12,715 - 12,715
Deferred consideration 766 (766) -
Total consideration paid 13,481 (766) 12,715
Fair value adjustments comprise adjustments to bring the book value of the assets and liabilities of Vtesse Group Limited to fair value, principally through the derecognition of deferred tax assets of €1,420k, and a correction to the initial valuation of prepayments of €153k and of deferred income of €1,737k arising from foreign exchange translations. The deferred consideration previously presented of €766k was to be equal to the gross profit (up to but not exceeding £600k) earned on a specific sales contract to be delivered by the acquired business at the date of acquisition or at the end of the reporting period. The sales contract was ultimately not delivered and therefore no deferred consideration was payable. The final consideration and goodwill on this acquisition is €12,715k and €11,460k respectively (previously reported as €13,481k and €9,245k respectively).
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
28 Contingent liabilities Share-based payment incentives The Group operates a number of share-based payment incentives. All of the Group’s employees are eligible to participate in at least one of these arrangements. Under these arrangements employees are entitled to receive a cash payment (the “award”), based on the consideration received on the occurrence of certain vesting events (for example a sale or listing of the Group) dependent on specific criteria being met. In certain limited circumstances, at the option of the shareholders of the Company, a vesting event would result in employees receiving non-cash consideration, such as equity shares, in lieu of a cash award. Employee awards are forfeited if, prior to a vesting event, an individual’s employment with the Group ceases. An element of the obligation for the payment of these awards rests with the Company, with the balance of the obligation resting with the Group’s shareholders. The Directors currently estimate that the occurrence of a vesting event where all specific criteria set out in the schemes are met would lead to a cash payment by the Company’s shareholders of approximately €19.6m (2014: €19.6m). At the date of these consolidated financial statements, no liability has been booked by the Group or Company in this respect as any such payment is contingent upon the occurrence of a vesting event. Guarantees At 31 December 2015 the group had provided €11.7m (2014: €11.8m) in guarantees, both collateralised and uncollateralised in respect of a number of commitments including those relating to some property and equipment rental agreements and customer contracts. The majority of these guarantees are in respect of liabilities disclosed elsewhere in these financial statements, in note 22. 29 Subsequent events There are no material subsequent events after 31 December 2015. 30 Financial instruments During the year, the Group utilised exchange rate options to mitigate the financial risk arising from exchange rate fluctuations in the British Pound Sterling/Euro exchange rate. The Group’s policy is to take out exchange rate options to secure the Group’s budgeted exchange rate for the shortfall in Sterling inflows compared to outflows. Forward exchange contracts The Group has entered into forward exchange contracts in Czech Kroner and Hong Kong Dollar to hedge against fluctuations in future cash flows. Various criteria affect the actual commitment at the date of settlement, and the maximum potential commitment from these contracts as at 31 December 2015 amounts to €15.3m (31 December 2014: €86.6m). The fair value of the contracts was a liability of €0.1m (31 December 2014: asset of €3.6m). 31 Immediate parent undertaking The Group’s immediate and ultimate parent undertaking is Emasan AG, an entity incorporated in Switzerland.
32 Auditor’s remuneration Fees billed to the Group by PricewaterhouseCoopers are as follows: Year ended 31 December 2015
€’000 2014
€’000
Audit and review of financial statements 1,723 1,033 Tax advisory services 121 - Other non-audit services 900 170
2,744 1,203
Non-audit fees of €840,000 related to Reporting Accountant work in relation to the Group’s subsidiary Interoute Finco Plc’s issuance of listed loan notes and is expected to be non-recurring.