Final Results - Part 2

e-district.net PLC 18 June 2001 PART 2 Notes to the financial statements for the year ended 31 December 2000 1 Principal accounting policies These financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards. A summary of the more important accounting policies is set out below. Restatement of comparatives As described in the Chairman's statement, on 19 February 2001, the company issued a statement that it had reason to believe that the numbers for registered users, page impressions and revenues had been substantially overstated. The company has undertaken a full investigation, together with its external advisers, which has identified evidence of collusion within the company connected with the overstatement of registered users and page impressions. The investigations have established that revenues were overstated by altering the company's internal monthly reports which showed the level of business conducted with the company's sales agencies. In addition, supporting documentation, both written and electronic, has been fabricated or altered. Furthermore, a substantial majority of the monies received by the company's bankers and recorded in the company's records as being received from sales agencies was in fact received from bank accounts linked to Mr S Laitman with fabricated supporting documentation indicating that such receipts were from sales agencies. The investigations show that the reported numbers for revenues have been substantially overstated. The revenues reported in the financial statements for the 17 months ended 31 December 1999 were £781,571. Based on the information received from the sales agencies, these revenues were in fact only £96,938. Accordingly the profit and loss account for the period ended 31 December 1999 and the balance sheet at that date have been restated to reflect the correction of these overstatements. Additionally the comparative information in respect of cost of sales has been restated. Commissions on the revised turnover of £96,938 amount to £29,128. The comparative figures for trade debtors, accrued income and creditors have been restated to reflect the reduced revenue level. Cash received from Mr S Laitman has been recorded as exceptional receipts on the balance sheet (see note 13). As originally disclosed As restated 1999 1999 £ £ Turnover 781,571 96,938 Cost of sales (336,541) (116,564) Gross profit/(loss) 445,030 (19,626) Tax on profit on ordinary activities (20,000) - Profit/(loss) for the financial year 61,059 (383,597) Trade debtors 11,064 42,110 Accrued income 371,007 - Creditors (excluding exceptional receipts) 113,980 83,472 Exceptional receipts - 140,828 Corporation tax 14,375 - Deferred tax provision 5,625 - The comparatives are for the 17-month period from 4 August 1998 (date of incorporation) to 31 December 1999. Active trading commenced on 1 March 1999. Going concern The company has been notified of an investigation by solicitors, being undertaken on behalf of certain specified shareholders, concerning the possibility of claims being made in relation to the events set out in the Chairman's statement. The extent of any claims, which might arise and be successful, is unknown. The financial statements have been prepared on a going concern basis the validity of which depends on the lack of any significant, and successful, litigation against the company which might arise in respect of the matters referred to above, the outcome of which remains uncertain. Goodwill Goodwill arises on the excess of the consideration over the fair value of the identifiable assets acquired. Goodwill is eliminated by amortisation through the profit and loss account over its useful economic life. Tangible fixed assets The cost of fixed assets is their purchase cost together with any incidental expenses of acquisition. Depreciation is calculated so as to write off the cost of fixed assets, less their estimated residual values, on a straight line basis over the expected useful economic lives of the assets concerned. The principal annual rates used for this purpose, are: Computer equipment 33% Office equipment 33% Fixtures and fittings 33% Short leasehold improvements 20% Deferred taxation Provision is made for deferred taxation, using the liability method, on all material timing differences to the extent that it is probable that a liability or asset will crystallise. Turnover Turnover, which excludes value added tax, comprises mainly advertising revenues which were generated under several agency arrangements. Revenue is recognised in the period in which the advertisement is displayed on the basis of impressions or clicks delivered, as appropriate, at the agreed rate. Turnover is stated either gross or net of related agency commissions depending on the commercial substance of each underlying agency agreement. Foreign currencies Assets and liabilities in foreign currencies are translated into sterling at rates of exchange ruling at the end of the financial year. Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at the date of the transaction. Such foreign exchange differences are taken to the profit and loss account in the year in which they arise. Operating leases Costs in respect of operating leases are charged to the profit and loss on a straight line basis over the lease term. Development expenditure Development expenditure is written off as incurred to the profit and loss. Financial instruments The company's financial instruments comprise cash and liquid resources together with debtors and creditors that arise directly from its operations. The company does not enter into derivative or hedging transactions. It has been, throughout the period under review, the company policy that no trading in financial instruments shall be undertaken. The company does not have any committed borrowing facilities, because the cash balances held are adequate to fund its current activities. The company places the majority of its cash on short-term deposit. The company's objective is to minimise the risk of loss to the company by limiting the company's credit exposure to quality institutions maintaining a very high credit rating. The main risks arising from the company financial instruments are interest rate risks. Numerical disclosures relating to this risk are given in note 14 to the financial statements. The company's policy in relation to interest rate risk is to monitor short and medium-term interest rates and to place cash on deposit for periods that optimise the amount of interest earned while maintaining access to sufficient funds to meet day to day cash requirements. Movements in the exchange rates can affect the company's sterling balance sheet. The magnitude of this risk is not currently significant to the company and therefore no specific measures are currently undertaken to manage the risk. Related party disclosures FRS 8 'Related Party Disclosures' requires the disclosure of the details of material transactions between the reporting entity and any related parties. These are set out in Note 24. Share options issued to employees Under Urgent Issues Task Force Abstract 17 (UITF 17), the company is required to recognise as a charge to the profit and loss account the amount by which the fair market value of any share options issued to employees exceeds their respective exercise prices at the date of grant. These costs are recognised over the vesting period. The charge is notional in that there is no underlying cash flow or other financial liability associated with the charge, nor does it give rise to a reduction in assets or shareholders' funds. In addition there is no impact on distributable profits. As a result of the grant of share options under unapproved schemes since 6 April 1999, the company will be obliged to pay National Insurance contributions on the difference between the market value of the underlying shares and their exercise price when the options are exercised. The liability is calculated on the difference between the exercise price and the market value at the date the options are exercised. The liability is recalculated by reference to the market value at each balance sheet date and the charge is recognised over the performance period. 2 Segmental reporting The company's turnover and loss on ordinary activities before taxation are derived entirely from its principal activity which arose mainly in the United Kingdom. As set out in note 1 above the company's turnover and loss on ordinary activities for the 17 months ended 31 December 1999 have been restated. The restated amounts are derived entirely from its principal activity which arose mainly in the United Kingdom. 3 Operating expenses Year ended 31 17 months ended December 2000 31 December 1999 £ £ Sales and marketing expenses 368,557 14,639 Platform and development costs 391,167 116,754 Other administrative expenses before provision 1,615,462 236,883 for NIC and UITF 17 charge on share options Provision for NIC on share options 94,016 - UITF 17 charge 156,928 - Total administrative expenses 2,257,573 353,637 Total operating expenses 2,626,130 368,276 4 Operating loss Year ended 31 17 months ended 31 December 2000 December 1999 £ £ Operating loss is stated after charging Wages and salaries 1,054,416 184,036 Social security costs (including NIC 207,026 17,677 on share options) Staff costs 1,261,442 201,713 Depreciation of tangible fixed assets -owned assets 180,884 34,121 Amortisation of goodwill 28,989 24,158 Auditors' remuneration - audit 55,000 3,000 services - non-audit services (see also 101,613 15,000 below) Operating lease charges - other 123,460 15,136 Additionally in 2000, £399,044 of fees paid to PricewaterhouseCoopers are included within expenses of share issue, which has been charged to the share premium account. 5 Directors' emoluments Year ended 31 17 months ended 31 December 2000 December 1999 £ £ Aggregate emoluments 353,856 90,000 Sums paid to third parties for 14,167 7,664 directors' services No retirement benefits are accruing to any directors. Emoluments payable to the highest paid director are as follows: Year ended 31 December 17 months ended 31 December 2000 1999 £ £ Aggregate emoluments 121,887 50,000 6 Employee information The average monthly number of persons (including executive directors) employed by the company during the year was: Year ended 31 December 17 months ended 31 December 2000 1999 By activity Number Number Office and management 13 2 Platform and 9 3 development Sales and marketing 4 1 26 6 7 Interest receivable Year ended 31 December 17 months ended 31 December 2000 1999 £ £ Bank interest 646,553 4,305 receivable 8 Tax on loss on ordinary activities There is no taxation charge in the year (period ended 31 December 1999: £nil). The company has unutilised tax losses of approximately £2,645,000 (period ended 31 December 1999: £355,000), which have yet to be agreed by the local tax authorities, available to be carried forward against future trading profits. 9 Loss per share The basic loss per share has been calculated by dividing the net loss for the year by the weighted average number of 76,056,035 shares in issue during the year (period ended 31 December 1999: 43,517,966, as restated for the bonus issues). The company had no dilutive potential ordinary shares in any of the periods, and therefore there is no difference between the loss per ordinary share and the diluted loss per ordinary share. 10 Intangible assets Goodwill £ Cost At 1 January 2000 and 31 December 2000 86,976 Accumulated amortisation At 1 January 2000 24,158 Charge for the year 28,989 At 31 December 2000 53,147 Net book amount At 31 December 2000 33,829 At 31 December 1999 62,818 Goodwill is eliminated by amortisation through the profit and loss account over its useful economic life, which the directors consider to be 3 years. 11 Tangible fixed assets Short Computer Office Fixtures & Total leasehold equipment equipment fittings Improvements £ £ £ £ £ Cost At 1 January - 87,408 31,539 10,090 129,037 2000 Additions 11,552 250,622 254,369 397,897 914,440 At 31 December 11,552 338,030 285,908 407,987 1,043,477 2000 Depreciation At 1 January - 24,010 7,329 2,782 34,121 2000 Charge for the 1,155 77,040 51,239 51,450 180,884 year At 31 December 1,155 101,050 58,568 54,232 215,005 2000 Net book value At 31 December 10,397 236,980 227,340 353,755 828,472 2000 Net book value At 31 December - 63,398 24,210 7,308 94,916 1999 12 Debtors 2000 1999 (restated) £ £ Amounts falling due within one year Trade debtors 22,951 42,110 Other debtors 327,439 1,200 Prepayments 69,641 6,270 Corporation tax recoverable 20,682 - 440,713 49,580 13 Creditors - Amounts falling due within one year 2000 1999 (restated) £ £ Trade creditors 86,817 67,012 Other taxation and social security 49,494 (906) Other creditors 51,608 14,366 Accruals and deferred income 316,108 3,000 Exceptional receipts 558,226 140,828 1,062,253 224,300 Included in other creditors at 31 December 1999 was a loan debt of £14,044, which was repaid during the year. Exceptional receipts A substantial proportion of the monies received by the company's bankers and recorded in the company's records as being received from sales agencies was in fact received from bank accounts linked to Mr S Laitman. These receipts have been recorded as exceptional receipts pending the outcome of any related legal action. 14 Financial instruments Details of the company's objectives with respect to financial instruments are given in note 1 to the financial statements. There have been no significant changes in these objectives from the prior year and before the approval of the financial statements. The numerical disclosures in this note deal with the financial assets and liabilities defined in FRS13 as financial instruments. Short-term debtors and creditors Short-term debtors and creditors (other than the rent deposit) have been excluded from the disclosures. In the opinion of the directors, they contain no material financial risks for the company. There are no creditors due after more than one year. Interest rate risk profile of financial assets 2000 1999 Floating Fixed Total Floating Fixed Total rate rate rate rate £ £ £ £ £ £ Sterling 5,329,044 7,400,000 12,729,044 87,859 - 87,859 US dollars 3,828 - 3,828 2,025 - 2,025 5,332,872 7,400,000 12,732,872 89,884 - 89,884 Of which: Cash at bank and in hand 123,732 - 123,732 89,884 - 89,884 Short-term deposits 5,074,309 7,400,000 12,474,309 - - - Other debtors (rent deposit) 134,831 - 134,831 - - - 5,332,872 7,400,000 12,732,872 89,884 - 89,884 Floating rate cash and rent deposits earn interest at prevailing bank rates. Floating rate short-term deposits earn interest at 10 basis points below the prevailing bank rate. The fixed rate short-term deposits in sterling are placed with banks for periods of up to two weeks. Contracts in place at 31 December 2000 had a weighted average annualised rate of interest of 5.43% (31 December 1999: nil) and weighted average period for which the rate is fixed is 14 days (31 December 1999: nil). The directors are of the opinion that there is negligible exchange rate risk. Fair value The directors consider that the fair values of the financial instruments of e-district.net plc are not materially different from their book value. 15 Provision for liabilities and charges Employers National Insurance on share options £ At 1 January 2000 - Transfer from profit and loss 94,016 account At 31 December 2000 94,016 Employers National Insurance on share options On exercise of share options issued after 5 April 1999, under an unapproved executive option scheme, the company is required to pay National Insurance on the difference between the exercise price and market value at the exercise date of the shares issued. The company will become unconditionally liable to pay the National Insurance upon exercise of the options, which are exercisable over a period of 10 years from date of grant. The company therefore makes a provision following the grant of options as opposed to on vesting or on exercise. The amount of National Insurance payable will depend on the number of employees who remain with the company and exercise their options, the market price of the company's ordinary shares at the time of exercise and the prevailing National Insurance rates at that time. The provision of £94,016 included in these financial statements has been calculated based upon the share price of £1.04 at the year end with reference to the total current number of options at 31 December 2000 which have been granted since 5 April 1999 and have not since lapsed. The share price at the date the shares were suspended was £1.075. Deferred taxation The deferred tax asset which has not been recognised is: 2000 1999 (restated) £ £ Accelerated capital allowances 78,233 3,499 Losses (529,096) (71,044) Other (2,000) - (452,863) (67,545) 16 Called up share capital 2000 1999 £ £ Authorised 100,000,000 ordinary shares of 10p each 10,000,000 - 3,000 'A' ordinary shares of 10p each - 300 5,500 'B' ordinary shares of 10p each - 550 1,500 'C' ordinary shares of 10p each - 150 10,000,000 1,000 Allotted, called up and fully paid 76,758,071 ordinary shares of 10p each 7,675,807 - 300 'A' ordinary shares of 10p each - 30 550 'B' ordinary shares of 10p each - 55 10 'C' ordinary shares of 10p each - 1 7,675,807 86 On 26 January 2000 the shareholders agreed to an increase in the authorised share capital from £1,000 to £601,000, consisting of 1,803,000 A ordinary 10p shares and 4,207,000 B ordinary 10p shares. On the same date, the C ordinary shares issued in March 1999 were redesignated as B ordinary shares. On 26 January 2000, the company applied part of the share premium account in issuing 516,000 fully paid bonus shares (with a total nominal value of £51,600) on the basis of 600 A or B ordinary shares for each existing A or B ordinary share held. On 28 February 2000, the authorised share capital of the company was increased from £601,000 to £10,455,331 by the creation of 25,242,000 A ordinary shares, 47,118,400 B ordinary shares and 26,182,916 new ordinary shares. On the same date 4,553,316 A ordinary shares were converted into deferred shares at 10p each. The company applied part of the share premium account in issuing 72,360,400 fully paid bonus shares (with a total nominal value of £7,236,040) on the basis of 140 new A ordinary shares and B ordinary shares for each existing A or B ordinary share held, conditionally upon admission becoming effective on 7 March 2001 On 7 March 2000, all remaining issued A and B ordinary shares were converted into ordinary shares of 10p each and the company bought the 4,553,316 deferred shares for a total of £1 out of distributable profits as reflected in the relevant financial statements at the time. On the same date, the company issued 8,434,127 ordinary shares of 10p each at £1.95 per share raising cash proceeds of £16,446,547 before expenses. 17 Reserves Capital redemption Share premium Profit and loss reserve account account £ £ £ At 1 January 2000 (as - 456,409 61,059 previously reported) Prior year adjustment - - (444,656) At 1 January 2000 (as - 456,409 (383,597) restated) Repurchase of deferred shares 455,331 - (1) Premium arising on issues of - 15,603,135 - shares Issue of bonus shares, fully - (7,287,640) - paid Expenses of share issue - (1,738,733) - UITF 17 charge 156,928 Loss for the financial year - - (2,192,853) At 31 December 2000 455,331 7,033,171 (2,419,523) As referred to in the Chairman's statement, significant irregularities were discovered after the year end. Accordingly, the opening balance sheet has been restated to correct the effect of the irregularities. Revenue and cost of sales have been reduced by £684,633 and £219,977 respectively, together with a reduction of £20,000 in the related tax charge. 18 Share options The company has an approved and an unapproved executive option scheme. The unapproved executive option scheme relates to options granted to certain directors and senior management. The approved option scheme is an Inland Revenue approved scheme available to eligible directors and employees. The total number of options outstanding over ordinary shares of 10p each that had been granted at 31 December 2000 were as follows: Number of Exercise Grant date Date from which Expiry date shares price exercisable 1,239,390*1 10p 28 January 1 April 2001 28 January 2000 2010 170,836*2 68p 20 June 2000 20 June 2003 20 June 2010 *1 Of these options, over 195,990 ordinary shares of 10p at an exercise price of 10p each lapsed in February 2001 as a result of an employee leaving the company. *2 Of these options, over 21,507 ordinary shares of 10p at an exercise price of 68p each lapsed in February 2001 as a result of an employee leaving the company. 19 Reconciliation of movements in shareholders' funds 2000 1999 (restated) £ £ Loss for the year (2,192,853) (383,597) Proceeds of ordinary shares issued 16,446,547 456,495 Expenses of share issue (1,738,733) - UITF 17 charge 156,928 - Repurchase of deferred shares (1) - Net addition to shareholders' funds 12,671,888 72,898 Opening shareholders' funds (as restated) 72,898 - Closing shareholders' funds 12,744,787 72,898 20 Financial commitments At 31 December 2000, the company had annual commitments under non-cancellable operating leases expiring as follows: Land and Land and buildings Buildings 1999 2000 £ £ Within one year - 6,966 Within two to five years 139,000 - 139,000 6,966 21 Cash flow from operating activities Reconciliation of operating loss to net cash outflow from operating activities: Year ended 31 17 months ended 31 December 2000 December 1999 (restated) Continuing operations £ £ Operating loss (2,839,406) (387,902) Depreciation charge 180,884 34,121 Amortisation of goodwill 28,989 24,158 UITF 17 charge 156,928 - UITF 25 provision for National 94,016 - Insurance on share options Increase in debtors (341,672) (49,580) Increase in creditors 851,996 210,256 Net cash outflow from continuing (1,868,265) (168,947) operations 22 Reconciliation of net cash flow to movement in net funds Year ended 31 December 17 months ended 31 2000 December 1999 £ £ Increase in cash in the 33,848 89,884 period Movement in deposits 12,474,309 - Borrowings 14,044 (14,044) Movement in net funds in the 12,522,201 75,840 period Net funds at beginning of the 75,840 - year Net funds at end of the 12,598,041 75,840 period 23 Analysis of net funds At 1 Jan Cash flow At 31 Dec 2000 2000 £ £ £ Cash in hand and at bank 89,884 33,848 123,732 Loan debt due within 1 year (14,044) 14,044 - Liquid resources - 12,474,309 12,474,309 Total 75,840 12,522,201 12,598,041 Liquid resources comprise short-term deposits with banks. 24 Related party transactions Sums paid to third parties for directors' services, as disclosed in note 5, include £14,167 in respect of amounts paid toVCF partners, advisers to Foresight Technology VCT PLC, a major shareholder, for the services of B Fairman. S D Laitman and F Lewis, who served during the year as directors, and their relatives are amongst the beneficiaries of Clearsearch Limited and Swiftventure Limited respectively, which held 25,277,300 and 8,329,100 ordinary shares of 10p each, respectively, on trust, in the company at 31 December 2000. 25 Post balance sheet events Details of post balance sheet events are set out within the directors' report which refers to the Chairman's statement. Auditors' report to the members of e-district.net plc We have audited the financial statements which comprise the profit and loss account, the balance sheet, the cash flow statement, the statement of total recognised gains and losses and the related notes which have been prepared under the historical cost convention and the accounting policies set out in the statement of accounting policies. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the annual report and the financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of directors' responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards issued by the Auditing Practices Board. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors' report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors' remuneration and transactions is not disclosed. We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent mis-statements or material inconsistencies with the financial statements. The other information comprises only the chairman's statement, the Chief Executive's statement, the operating and financial review, the directors' report, the corporate governance statement and the report of the remuneration committee. We also, at the request of the directors (because the Company applies the Financial Services Authority Listing Rules as if it is a fully listed company on the London Stock Exchange), review whether the corporate governance statement reflects the Company's compliance with the seven provisions of the Combined Code specified by the Financial Services Authority for review by the auditors of listed companies, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls or to form an opinion on the effectiveness of the Company's corporate governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material mis-statement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Potential claims and going concern In forming our opinion we have considered the adequacy of the disclosures made in note 1 of the financial statements concerning potential claims against the company and the going concern basis of preparation. The company has been notified of an investigation by solicitors, being undertaken on behalf of certain specified shareholders, concerning the possibility of claims being made. The extent of any claims, which might arise and be successful, is unknown. The financial statements have been prepared on a going concern basis, the validity of which depends on the lack of any significant, and successful, litigation against the company which might arise in respect of the matters referred to above and in the Chairman's statement, the outcome of which remains uncertain. In view of the significance of these uncertainties we consider that they should be brought to your attention but our opinion is not qualified in this respect. Exceptional receipts In forming our opinion we have considered the adequacy of the disclosure in Note 13 to the financial statements regarding exceptional receipts. During the year £417,398 (period ended 31 December 1999: £140,828) of the monies received by the company's bankers and originally recorded in the company's records as being received from sales agencies was in fact received from bank accounts linked to Mr S Laitman. Subsequent to the year end a further £422,389 was similarly received. Due to the uncertainty regarding the terms of these receipts and the circumstances in which they were received by the company, these receipts, in the year and the previous year, have been recorded under creditors - amounts falling due in under one year as exceptional receipts, pending the outcome of any related legal action. Should it ultimately be determined that these amounts are the property of the company they would be credited to the company's profit and loss account. In view of the significance of this uncertainty we consider that it should be drawn to your attention but our opinion is not qualified in this respect. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company at 31 December 2000 and of the loss and cash flows of the company for the year then ended and have been properly prepared in accordance with the Companies Act 1985. As explained in the Chairman's statement, the company's internal financial controls and accounting systems were not fully effective throughout the financial year and the prior period. However, subsequent to the balance sheet date, a comprehensive investigation of revenues and costs and of year end balances has been carried out, including obtaining evidence directly from third parties, and in our opinion appropriate adjustments have been made to correct the underlying accounting records from which financial statements have been prepared on which we are able to form our opinion. As a result of the matter referred to above, in our opinion proper accounting records were not adequately kept at all times throughout the financial year and the prior period so as to comply in all respects with section 221 of the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors Reading 18 June 2001

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