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RNS Number:8517N Colt Telecom Group PLC 23 July 2003 23 July 2003 COLT TELECOM GROUP PLC ANNOUNCES RESULTS FOR THE THREE AND SIX MONTHS ENDED 30 JUNE 2003 SECOND QUARTER HIGHLIGHTS * Turnover up 13.4% to #293.0 million compared to Q2 2002 * Constant currency turnover growth of 4.5% over Q2 2002 and 4% over Q1 2003 * Retail turnover up 18.4% to #171.3 million * Gross margin before depreciation and exceptional items improved from 29.1% to 33.3% * EBITDA (1) up 158% to #37.9 million * Capital expenditure #33.8 million * Profit on bond purchases of #7.2 million * Cash consumption reduced from #93.8 million to #13.3 million, excluding bond purchases * Strong liquidity position with cash and liquid resources of #920.5 million * 1,018 new customers added in Q2 bringing total to 17,334 * Staff levels including temporary and contract workers reduced by 145 during quarter Commenting on the results for the quarter COLT Telecom Group Chairman Barry Bateman said: "These results demonstrate COLT's ability to continue to win new business, grow revenues and improve margins in a lacklustre market. "Our performance reflected our focus on profitable revenue growth and tight management of operating costs and capital expenditure. It reinforces our confidence in achieving our objective of being free cash flow positive during 2005. "Capital expenditure in the quarter was #33.8 million and we now expect capital expenditure for the year to be between #170 million and #200 million. "We also continued to improve cash flow, with cash consumption reducing from #93.8 million in the second quarter of 2002 to #13.3 million in the second quarter of this year, excluding bond purchases. Our on-going success in continuing to grow; and ability to win new customers is underpinned by cash and liquid resources of #920.5 million. Steve Akin, COLT's President and Chief Executive Officer added: "I am encouraged by our performance. Our success in continuing to grow despite the toughness of the economies in which we operate demonstrates the support we have from our customers and their recognition of COLT's high levels of service and competitive prices. "Revenues grew by 13.4% to #293.0 million with retail revenues improving by 18.4% and wholesale by 7.1%. We have also improved our revenue mix at the product level with non-switched services accounting for 39.6% of revenues compared with 38.2% in the second quarter of 2002. Gross margin before depreciation and exceptional items improved from 29.1% in the second quarter of 2002 to 33.3% and EBITDA increased by 158% to #37.9 million. "Our emphasis on deepening our relationships with current customers is reflected in the new business we have won from Oracle. We have continued to develop our preferred supplier relationship with Oracle and as well as providing a range of high bandwidth network services we have been selected as a hosting service provider for Oracle's software outsourcing service. We have also made significant progress in increasing sales with Opodo, a leading pan-European online travel service, Harvey Nash, the recruitment services Group, UBS, the major Swiss bank and Clifford Chance, the law firm, among others. "Despite the tough conditions in the financial services market we have won a number of new contracts including Bear Stearns, a top ten U.S. investment bank and Banque Pictet. We continue to see good demand for our range of IPVPN services including new contracts with Toyota and Federal Express. We have also made good progress in the Government sector, especially in Italy, having added the Office of the Prime Minister and The Ministry of the Environment as new customers. "We continue to tightly manage operating costs. SG&A costs were reduced from #60.5 million, 23.4% of revenues, in the second quarter of 2002, to #59.6 million, 20.3% of revenues, in the second quarter of 2003. We have reduced staff numbers by a further 145 during the quarter, including temporary/contract workers, bringing the total to 4,479. We remain on course to reduce staff numbers to approximately 4,300 before the end of the year. "COLT is one of Europe's best in class telecommunications service companies. Our reputation for first class customer service, our extensive pan-European network coverage and our underlying financial strength leave us well positioned to achieve long term profitable growth." KEY FINANCIAL DATA Three months ended Six months ended 30 June 30 June 2002 2003 2002 2003 #m #m #m #m Turnover 258.2 293.0 505.1 564.7 Interconnect and network costs (183.0) (195.5) (359.1) (375.9) before exceptional items Gross profit before depreciation and exceptional items 75.2 97.5 146.0 188.8 Gross profit before depreciation and exceptional items % 29.1% 33.3% 28.9% 33.4% Network depreciation (53.1) (51.6) (103.7) (100.1) Exceptional interconnect and network -- -- (5.7) -- costs Gross profit 22.1 45.9 36.5 88.7 Loss for the period (before (55.6) (34.5) (129.5) (75.4) exceptional items) Loss for the period (after (16.0) (27.3) (63.7) (67.8) exceptional items) EBITDA (1) 14.7 37.9 24.5 71.9 OPERATING STATISTICS Growth Growth Q2 02 Q1 03 Q2 03 Q2 02- Q1 03- Q2 03 Q2 03 Customers (at end of period) North Region 3,731 4,555 5,040 35% 11% Central Region 5,329 5,579 5,972 12% 7% South Region 3,728 4,596 4,811 29% 5% eBusiness 1,638 1,586 1,511 -8% -5% 14,426 16,316 17,334 20% 6% Buildings Connected (at end of period) North Region 2,564 2,775 2,840 11% 2% Central Region 3,676 3,774 3,722 1% -1% South Region 2,368 2,867 2,985 26% 4% 8,608 9,416 9,547 11% 1% Switched Minutes (million) (for period) North Region 1,307 1,444 1,490 14% 3% Central Region 2,862 2,717 2,784 -3% 2% South Region 949 931 971 2% 4% 5,118 5,092 5,245 2% 3% Private Wire VGEs (000) (at end of period) North Region 6,913 9,104 9,526 38% 5% Central Region 7,681 9,012 9,964 30% 11% South Region 2,570 3,643 3,857 50% 6% 17,164 21,759 23,347 36% 7% Racks (at end of period) eBusiness 2,516 2,858 2,959 18% 4% Headcount (at end of period) North Region 1,610 1,284 1,248 -22% -3% Central Region 1,758 1,490 1,455 -17% -2% South Region 952 917 878 -8% -4% eBusiness 608 455 444 -27% -2% Group/other 203 296 292 44% -1% 5,131 4,442 4,317 -16% -3% North Region comprises Belgium, Denmark, Ireland, The Netherlands, Sweden and the United Kingdom. Central Region comprises Austria, Germany and Switzerland. South Region comprises France, Italy, Portugal and Spain. FINANCIAL REVIEW Turnover Turnover increased from #258.3 million and #505.1 million for the three and six months ended 30 June 2002 to #293.0 million and #564.7 million for the three and six months ended 30 June 2003, increases of #34.7 million and #59.6 million or 13.4% and 11.8%, respectively. Turnover also benefited from the weakness of the British pound relative to the Euro; at constant exchange rates growth over the three and six months ended 30 June 2002 was 4%. The increase in turnover was driven by continued demand for COLT's services from existing and new customers and new service introductions. However, the rates of growth have been affected by the slowdown in economic growth across Europe generally. Turnover from retail customers increased from #144.7 million and #279.6 million for the three and six months ended 30 June 2002 to #171.3 million and #334.2 million for the three and six months ended 30 June 2003, increases of 18.4% and 19.3% respectively. Turnover from retail customers represented 58% and 59% of total turnover in the three and six months ended 30 June 2003 compared to 56% and 55% in the comparable periods of 2002. Switched turnover from retail customers for the three and six months ended 30 June 2003 was #83.8 million and #163.4 million, increases of 15.1% and 14.5%, respectively. Non-switched and other turnover from retail customers for the three and six months ended 30 June 2003 was #87.5 million and #170.7 million, increases of 21.7% and 24.7%, respectively. Turnover from wholesale customers increased from #113.6 million and #225.4 million for the three and six months ended 30 June 2002 to #121.7 million and #230.5 million for the three and six months ended 30 June 2003, increases of 7.1% and 2.3%, respectively and represented 42% and 41% of total turnover compared to 44% and 45% in the comparable periods of 2002. Switched turnover from wholesale customers for the three and six months ended 30 June 2003 was #93.0 million and #174.4 million increases of 7.9% and 3.6% respectively. Non-switched and other turnover from wholesale customers for the three and six months ended 30 June 2003 was #28.6 million and #56.1 million an increase of 4.7% and decrease of 1.6% respectively. For the three and six months ended 30 June 2003 5.2 billion and 10.3 billion switched minutes were carried compared to 5.1 billion and 10.4 billion in the equivalent periods of 2002 reflecting COLT's policy of reducing exposure to selected low margin wholesale customers. Average switched revenue per minute increased by 9% and 10% for the three and six months ended June 2003 compared to the equivalent periods in 2002 as a result of changes in mix and a more stable pricing environment. At 30 June 2003 COLT had 23.3 million voice grade equivalent private wires in service, an increase of 36% compared to 30 June 2002. Growth in non-switched network services reflected the growth in demand for local, national and international bandwidth services from retail customers, partially offset by circuit cancellations from selected carriers either exiting the market or rationalising their networks. The growth in non-switched network services also reflects the growing success COLT is achieving in the provision of IPVPN services. At 30 June 2003, COLT had 2,959 racks installed in its 11 Internet Solution Centres (ISC), an increase of 18% compared to 30 June 2002. Overall growth in racks was impacted by the closure or mothballing of 7 ISCs during 2002. Cost of Sales Cost of sales, before exceptional items, increased from #236.2 million and #462.8 million for the three and six months ended 30 June 2002 to #247.1 million and #476.0 million for the three and six months ended 30 June 2003, increases of #10.9 million and #13.2 million or 4.6% and 2.9%, respectively. Interconnection and network costs, before exceptional items, increased from #183.0 million and #359.1 million for the three and six months ended 30 June 2002 to #195.5 million and #375.9 million for the three and six months ended 30 June 2003, as a result of the overall increase in business partially offset by ongoing cost containment measures. Network depreciation decreased from #53.1 million and #103.7 million for the three and six months ended 30 June 2002 to #51.6 million and #100.1 million for the three and six months ended 30 June 2003. The decrease was primarily attributable to the impairment provisions recorded in September 2002, partially offset by further investment in fixed assets to support the growth in demand for services and new service developments. Operating Expenses Operating expenses, before exceptional items, decreased from #73.9 million and #149.3 million for the three and six months ended 30 June 2002 to #69.5 million and #136.3 million for the comparable period in 2003. Selling, general and administrative (SG&A) expenses, before exceptional items, decreased from #60.5 million and #121.5 million for the three and six months ended 30 June 2002 to #59.6 million and #116.8 million for the three and six months ended 30 June 2003 reflecting ongoing cost containment measures. SG&A before exceptional items as a proportion of turnover in the three months ended 30 June 2003 was 20.3% compared to 23.4% in the equivalent period of 2002 and 21.1% in the first quarter of 2003. Other depreciation and amortisation decreased from #13.4 million and #27.9 million for the three and six months ended 30 June 2002 to #9.9 million and #19.5 million in the comparable periods in 2003 reflecting the effect of the impairment provisions recorded in September 2002 and other assets being fully depreciated. For the six months ended 30 June 2002, an exceptional charge of #6.6 million was recognised for severance provisions related to the staff reduction programmes announced in February 2002. There were no exceptional charges for the three and six months ended 30 June 2003. Interest Receivable, Interest Payable and Similar Charges Interest receivable decreased from #10.3 million and #20.6 million for the three and six months ended 30 June 2002 to #6.7 million and #14.2 million for the three and six months ended 30 June 2003 due to reduced average balances of cash and investments in liquid resources and lower rates of return during the period. Interest payable and similar charges decreased from #24.5 million and #50.2 million for the three and six months ended 30 June 2002 to #22.7 million and #45.2 million for the equivalent periods in 2003. The decrease was due primarily to a reduction in debt levels reflecting the cumulative purchases of #373.8 million accreted amount of the Company's outstanding notes. Interest payable and similar charges for the three and six months ended 30 June 2003 included: #8.7 million and #17.3 million respectively of interest and accretion on convertible debt; #13.3 million and #26.5 respectively of interest and accretion on non-convertible debt; and #.7 million and #1.4 million respectively of interest and unwinding of discounts on provisions. Interest payable and similar charges for the three months ended 30 June 2003 comprised #16.6 million and #6.1 million of interest and accretion, respectively. Gain on Purchase of Debt Gains arising on the purchase of debt for the three and six months ended 30 June 2003 were #7.2 million and #7.6 million respectively compared with #34.7 million and #73.2 million in the equivalent periods in 2002 Exchange Gain (Loss) For the three and six months ended 30 June 2003, COLT had exchange gains of #5.1 million and #3.2 million respectively, compared with exchange gains of #10.5 million and #7.3 million in the equivalent periods in 2002. These gains and losses were due primarily to movements in the British pound relative to the U.S. dollar on cash and debt balances denominated in U.S. dollars. Tax on Loss on Ordinary Activities For the three and six months ended 30 June 2002 and 2003, COLT generated losses on ordinary activities of #16.0 million and #63.7 million and #27.3 million and #67.8 million, respectively and therefore did not incur a tax obligation. Financial Needs and Resources The costs associated with the initial installation and expansion of COLT's networks and services, including development, installation and initial operating expenses have resulted in negative cash flows. Capital expenditure in 2003 is estimated to be between #170 million and #200 million compared with #412.1 million in 2002. Negative cash flows are expected to continue until an adequate customer base and related revenue streams have been established. Net cash inflow from operating activities was #31.4 million and #57.3 million for the three and six months ended 30 June 2002 and #37.3 million and #67.7 million for the three and six months ended 30 June 2003. Changes to cash flow from operations include the effect of the timing of stage billings and payments with telecommunications operators associated with the construction of the Company's inter-city network and the effects of movements in provisions. Net cash outflow from returns on investments and servicing of finance and from capital expenditure and financial investment decreased from #125.2 million and #261.8 million in the three and six months ended 30 June 2002 to #50.7 million and #93.4 million for the three and six months ended 30 June 2003. Cash consumption, the sum of net cash inflow from operating activities less net cash outflow from returns on investments and servicing of finance and from capital expenditure and financial investment, improved from #93.8 million and #204.5 million in the three and six months ended 30 June 2002 to #13.3 million and #25.7 million for the three and six months ended 30 June 2003. The decrease in net cash outflow was primarily a result of reduced purchases of tangible fixed assets, which decreased from #110.8 million and #249.8 million for the three and six months ended 30 June 2002 to #33.8 million and #75.4 million for the equivalent periods in 2003. Net cash outflow from financing decreased from #32.1 million and #68.8 million in the three and six months ended 30 June 2002 to #23.3 million and #23.8 million for the three and six months ended 30 June 2003. The decrease was primarily a result of reduced bond purchases, which decreased from #32.1 million and #68.9 million for the three and six months ended 30 June 2002 to #23.3 million and #23.8 million for the equivalent periods in 2003. COLT had balances of cash and investments in liquid resources at 30 June 2003 of #920.5 million compared to #934.9 million at 31 December 2002. Consolidated Profit and Loss Account Three months ended 30 June 2002 2002 2002 2003 2003 2003 2003 Before Exceptional After Before Exceptional After After Exceptional Items Exceptional Exceptional Items Exceptional Exceptional Items Items Items Items Items #'000 #'000 #'000 #'000 #'000 #'000 $'000 Turnover 258,252 -- 258,252 292,967 -- 292,967 484,245 Cost of sales Interconnect (183,038) -- (183,038) (195,477) -- (195,477) (323,104) and network Network (53,117) -- (53,117) (51,616) -- (51,616) (85,316) depreciation (236,155) -- (236,155) (247,093) -- (247,093) (408,420) Gross profit 22,097 -- 22,097 45,874 -- 45,874 75,825 Operating expenses Selling, general (60,474) -- (60,474) (59,564) -- (59,564) (98,453) and administrative Other depreciation and amortisation (13,425) -- (13,425) (9,897) -- (9,897) (16,359) (73,899) -- (73,899) (69,461) -- (69,461) (114,812) Operating (51,802) -- (51,802) (23,587) -- (23,587) (38,987) loss Other income (expense) Interest 10,290 -- 10,290 6,705 -- 6,705 11,083 receivable Gain on -- 34,743 34,743 -- 7,240 7,240 11,967 purchase of debt Interest (24,543) -- (24,543) (22,724) -- (22,724) (37,561) payable and similar charges Exchange 10,496 4,844 15,340 5,115 -- 5,115 8,455 (loss) (3,757) 39,587 35,830 (10,904) 7,240 (3,664) (6,056) Profit (loss)on ordinary activities before taxation (55,559) (39,587) (15,972) (34,491) 7,240 (27,251) (45,043) Taxation -- -- -- -- -- -- -- Loss for (55,559) 39,587 (15,972) (34,491) 7,240 (27,251) (45,043) period Basic and #(0.04) #0.03 #(0.01) #(0.02) #0.00 #(0.02) $(0.03) diluted loss per share There is no difference between the loss on ordinary activities before taxation and the retained loss for the periods stated above, and their historical cost equivalents all of the Group's activities are continuing. The basis on which this information has been prepared is described in Note 1 to these financial statements. Consolidated Profit and Loss Account Six months ended 30 June 2002 2002 2003 2003 2003 2003 2003 Before Exceptional After Before Exceptional After After Exceptional Items Exceptional Exceptional Items Exceptional Exceptional Items Items Items Items Items #'000 #'000 #'000 #'000 #'000 #'000 $'000 Turnover 505,050 -- 505,050 564,687 -- 564,687 933,371 Cost of sales Interconnect (359,092) (5,680) (364,772) (375,943) -- (375,943) (621,396) and network Network (103,733) -- (103,733) (100,062) -- (100,062) (165,393) depreciation (462,825) (5,680) (468,505) (476,005) -- (476,005) (786,789) Gross profit 42,225 (5,680) 36,545 88,682 -- 88,682 146,582 (loss) Operating expenses Selling, general (121,462) (6,574) (128,036) (116,799) -- (116,799) (193,057) and administrative Other depreciation and amortisation (27,854) -- (27,854) (19,491) -- (19,491) (32,216) (149,316) (6,574) (155,890) (136,290) -- (136,290) (255,273) Operating (107,091) (12,254) (119,345) (47,608) -- (47,608) (78,691) loss Other income (expense) Interest 20,562 -- 20,562 14,176 -- 14,176 23,432 receivable Gain on -- 73,152 73,152 -- 7,589 7,589 12,544 purchase of debt Interest (50,246) -- (50,246) (45,168) -- (45,168) (74,658) payable and similar charges Exchange 7,299 4,844 12,143 3,179 -- 3,179 5,254 (loss) (22,385) (77,996) (55,611) (27,813) 7,589 (20,224) (33,428) Profit (loss)on ordinary activities before taxation (129,476) 65,742 (63,734) (75,421) 7,589 (67,832) (112,119) Taxation -- -- -- -- -- -- -- Loss for (129,476) 65,742 (63,734) (75,421) 7,589 (67,832) (112,119) period Basic and #(0.08) #0.04 #(0.04) #(0.05) #0.00 #(0.05) $(0.07) diluted loss per share There is no difference between the loss on ordinary activities before taxation and the retained loss for the periods stated above, and their historical cost equivalents all of the Group's activities are continuing. The basis on which this information has been prepared is described in Note 1 to these financial statements. Consolidated Statement of Total Recognised Gains and Losses Three months ended 30 June Six months ended 30 June 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 Loss for the (15,972) (27,251) (45,043) (63,734) (67,832) (112,119) period Exchange 52,768 1,133 1,872 52,172 25,495 42,140 differences Total 36,796 (26,118) (43,171) (11,562) (42,337) (69,979) recognised losses Consolidated Reconciliation of Changes in Equity Shareholders' Funds Three months ended 30 June Six months ended 30 June 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 Loss for (15,972) (27,251) (45,043) (63,734) (67,832) (112,119) period Issue of -- 1 2 110 1 2 share capital Shares to be (22) 55 91 (212) (112) (185) issued Exchange 52,768 1,133 1,872 52,172 25,495 42,140 difference Net changes 36,774 (26,062) (43,078) (11,664) (42,448) (70,162) in equity shareholders' funds Opening 1,575,921 938,624 1,551,452 1,624,359 955,010 1,578,536 equity shareholders' funds Closing 1,612,695 912,562 1,508,374 1,612,695 912,562 1,508,374 equity shareholders' funds Consolidated Balance Sheet At 31 December 2002 At 30 June 2003 #'000 #'000 $'000 Fixed assets Intangible fixed assets (net) 10,639 10,336 17,084 Tangible fixed assets (cost) 2,695,499 2,871,620 4,746,501 Accumulated depreciation (1,316,690) (1,481,524) (2,448,811) Tangible fixed assets (net) 1,378,809 1,390,096 2,297,690 Investments in own shares 206 206 340 Total fixed assets 1,389,654 1,400,638 2,315,114 Current assets Trade debtors 189,788 201,625 333,266 Prepaid expenses and other 74,606 70,960 117,290 debtors Investments in liquid 889,590 879,298 1,453,392 resources Cash at bank and in hand 45,292 41,221 68,134 Total current assets 1,199,276 1,193,104 1,972,082 Total assets 2,588,930 2,593,742 4,287,196 Capital and reserves Called up share capital 37,688 37,688 62,295 Share premium 2,314,335 2,314,336 3,825,366 Merger reserve 27,227 27,227 45,004 Shares to be issued 454 342 565 Profit and loss account (1,424,694) (1,467,031) (2,424,856) Equity shareholders' funds 955,010 912,562 1,508,374 Provisions for liabilities and 87,368 79,173 130,865 charges Creditors Amounts falling due within one 352,653 361,120 596,895 year Amounts falling due after more than one year: Convertible debt 639,829 679,295 1,122,807 Non-convertible debt 554,070 561,592 928,255 Total amounts falling due after 1,193,899 1,240,887 2,051,062 more than one year Total creditors 1,546,552 1,602,007 2,647,957 Total liabilities, capital and 2,588,930 2,593,742 4,287,196 reserves Consolidated Cash Flow Statement Three months ended 30 June Six months ended 30 June 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 Net cash inflow 31,425 37,324 61,693 57,297 67,688 111,881 from operating activities Returns on investments and servicing of finance Interest 10,501 6,747 11,152 21,188 14,255 23,562 received Interest paid, (29,761) (23,646) (39,085) (37,972) (32,295) (53,380) finance costs and similar charges Gain on 4,844 -- -- 4,844 -- -- cancellation of forward foreign currency contracts Net cash inflow (14,416) (16,899) (27,933) (11,940) (18,040) (29,818) (outflow) from returns on investments and servicing of finance Capital expenditure and financial investment Purchase of (110,764) (33,762) (55,805) (249,817) (75,391) (124,614) tangible fixed assets Net cash (110,764) (33,762) (55,805) (249,817) (75,391) (124,614) outflow from capital expenditure and financial investment Management of 133,446 31,585 52,207 259,589 42,843 70,815 liquid resources Financing Issue of -- 1 2 110 1 2 ordinary shares Issue (23,299) (14,166) (23,415) (45,546) (14,166) (23,415) (purchase) of non-convertible debt Issue (8,755) (9,182) (15,177) (23,386) (9,606) (15,878) (purchase) of convertible debt Net cash inflow (32,054) (23,347) (38,590) (68,822) (23,771) (39,291) (outflow) from financing Increase 7,637 (5,099) (8,428) (13,693) (6,671) (11,027) (decrease) in cash Notes to Financial Statements 1. Basis of presentation and principal accounting policies COLT Telecom Group plc ("COLT" or the "Company"), together with its subsidiaries, is referred to as the Group. Consolidated financial statements have been presented for the Company for the three and six months ended 30 June 2002 and 2003 and at 31 December 2002 and 30 June 2003. The financial statements for the three and six months ended 30 June 2002 and 2003 are unaudited and do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. In the opinion of management, the financial statements for these periods reflect all the adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods in conformity with U.K. generally accepted accounting principles. All adjustments, with the exception of the separately identified exceptional items for the three and six months ended 30 June 2002 and 2003, were of a normal recurring nature. The Balance Sheet at 31 December 2002 has been extracted from the Group's audited statements for that period and does not constitute the Group's statutory accounts for that period. Accounting policies and presentation applied are consistent with those applied in preparing the Group's financial statements for the year ended 31 December 2002. Certain British pound amounts in the financial statements have been translated into U.S. dollars at 30 June 2003 and for the periods then ended at the rate of $1.65290 to the British pound, which was the noon buying rate in the City of New York for cable transfers in British pounds as certified for customs purposes by the Federal Reserve Bank of New York on such date. Such translations should not be construed as representations that the British pound amounts have been or could be converted into U.S. dollars at that or any other rate. Notes to Financial Statements 2. Segmental information North Region comprises Belgium, Denmark, Ireland, The Netherlands, Sweden and UK. Central Region comprises Austria, Germany and Switzerland. South Region comprises France, Italy, Portugal and Spain. Non-switched turnover in North, Central and South Regions includes managed and non-managed network services data and bandwidth services. Non-switched turnover in eBusiness segment includes hosting and professional services. Wholesale turnover includes services to other telecommunications carriers, resellers and internet service providers (ISPs). Retail turnover includes services to corporate and government accounts. For the three months ended 30 June 2002 and 2003, turnover by region was as follows: Three months ended 30 June 2002 Retail Wholesale North Central Region South Region eBusiness Total Region #'000 #'000 #'000 #'000 #'000 #'000 #'000 Switched 72,843 86,192 45,554 73,751 39,730 -- 159,035 Non-Switched 71,468 27,295 31,366 32,606 21,085 13,706 98,763 Other 381 73 8 312 134 -- 454 Total 144,692 113,560 76,928 106,669 60,949 13,706 258,252 Three months ended 30 June 2003 Retail Wholesale North Central Region South Region eBusiness Total Region #'000 #'000 #'000 #'000 #'000 #'000 #'000 Switched 83,792 93,059 53,342 82,199 41,310 -- 176,851 Non-switched 87,370 28,575 38,110 38,408 26,538 12,889 115,945 Other 142 29 36 15 120 -- 171 Total 171,304 121,663 91,488 120,622 67,968 12,889 292,967 Notes to Financial Statements For the six months ended 30 June 2002 and 2003, turnover by region was as follows: Six months ended 30 June 2002 Retail Wholesale North Central Region South Region eBusiness Total Region #'000 #'000 #'000 #'000 #'000 #'000 #'000 Switched 142,726 168,418 90,854 145,048 75,242 -- 311,144 Non-switched 136,089 56,497 60,392 64,483 40,899 26,812 192,586 Other 818 502 45 1,073 202 -- 1,320 Total 279,633 225,417 151,291 210,604 116,343 26,812 505,050 Six months ended 30 June 2003 Retail Wholesale North Central Region South Region eBusiness Total Region #'000 #'000 #'000 #'000 #'000 #'000 #'000 Switched 163,367 174,435 103,255 155,688 78,859 -- 337,802 Non-switched 170,407 55,786 74,671 74,564 51,368 25,590 226,193 Other 377 315 81 332 279 -- 692 Total 334,151 230,536 178,007 230,584 130,506 25,590 564,687 3. Profit (loss) per share Three months ended 30 June Six months ended 30 June 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 Profit (15,972) (27,251) (45,043) (63,734) (67,832) (112,119) (loss) for period Weighted 1,507,104 1,507,507 1,507,507 1,507,094 1,507,371 1,507,371 average of ordinary shares ('000) Basic #(0.01) #(0.02) $(0.03) #(0.04) #(0.05) $(0.07) and diluted profit (loss) per share 4a. Net cash inflow from operating activities Three months ended 30 June Six months ended 30 June 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 Operating (51,802) (23,587) (38,987) (119,345) (47,608) (78,691) loss Depreciation, 66,542 61,513 101,675 131,587 119,553 197,609 amortisation of fixed assets Exchange 863 (20) (33) 962 143 236 differences Decrease 23,783 (882) (1,458) 34,375 3,814 6,304 (increase) in debtors Increase (6,199) 4,498 7,435 3,506 4,260 7,041 (decrease) in creditors Movement in (1,762) (4,198) (6,939) 6,212 (12,474) (20,618) provision for liabilities and charges Net cash 31,425 37,324 61,693 57,297 67,688 111,881 inflow from operating activities Notes to Financial Statements 4b. EBITDA reconciliation Three months ended 30 June Six months ended 30 June 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 Net cash inflow from operating activities 31,425 37,324 61,693 57,297 67,688 111,881 Adjusted for: Exchange (863) 20 33 (962) (143) (236) differences Movement in (23,783) 882 1,458 (34,375) (3,814) (6,304) debtors Movement in 6,199 (4,498) (7,435) (3,506) (4,260) (7,041) creditors Total working (17,584) (3,616) (5,977) (37,881) (8,074) (13,345) capital adjustments Movement in 1,762 4,198 6,939 (6,212) 12,474 20,618 provision for liabilities and charges Add back Exceptional -- -- -- 5,680 -- -- interconnect and Network charges Exceptional -- -- -- 6,574 -- -- selling and Administrative charges EBITDA before 14,740 37,926 62,688 24,496 71,945 118,918 exceptional items 5. Changes in cash and investments in liquid resources Three months ended 30 June Six months ended 30 June 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 Beginning of 1,154,896 953,970 1,576,817 1,304,477 934,882 1,545,266 period Net increase (133,446) (31,585) (52,207) (259,589) (42,843) (70,815) (decrease) in investments in liquid resources before exchange differences Effects of 29,867 3,302 5,458 29,914 32,551 53,804 exchange differences in investments in liquid resources Net increase 7,637 (5,099) (8,428) (13,693) (6,671) (11,027) decrease) in cash before exchange differences Effects of (804) (69) (114) (2,959) 2,600 4,298 exchange differences in cash End of 1,058,150 920,519 1,521,526 1,058,150 920,519 1,521,526 period Notes to Financial Statements 6. Summary of differences between U.K. Generally Accepted Accounting Principles ("U.K. GAAP") and U.S. Generally Accepted Accounting Principles ("U.S. GAAP") a. Effects of conforming to U.S. GAAP - impact on net loss Three months ended 30 June Six months ended 30 June 2002 2003 2003 2002 2003 2003 #'000 #'000 $'000 #'000 #'000 $'000 Loss for (15,972) (27,251) (45,043) (63,734) (67,832) (112,119) period Adjustments: Deferred (657) (253) (418) (1,261) (523) (865) compensation (i), (ii) Amortisation 242 547 905 489 1,068 1,766 of intangibles iii) Capitalised 1,704 (641) (1,060) 3,579 (1,553) (2,567) interest, net of depreciation (iv) Profit on 261 261 432 522 522 863 sale of IRUs (v) Warrants (1,227) 141 233 (1,223) (16) (26) (vi) Installation 6,190 (636) (1,051) 4,723 (1,271) (2,102) revenue (vii) Direct costs (6,190) 636 1,051 (4,723) 1,271 2,102 attributable to installation revenue (vii) Unrealised (467) -- -- -- -- -- gain on forward foreign exchange contracts (viii) Impairment -- (2,805) (4,636) -- (5,610) (9,273) (ix) Loss for (16,116) (30,001) (49,587) (61,628) (73,944) (122,222) period under U.S. GAAP Weighted 1,507,104 1,507,507 1,507,507 1,507,094 1,507,371 1,507,371 average of ordinary shares ('000) Basic and #(0.01) #(0.02) #(0.03) #(0.04) #(0.05) #(0.08) diluted loss per share (i) On 3 July 2001 the Company completed the acquisition of Fitec. A total of 1,518,792 ordinary shares and 4.04 million Euros was paid at completion, with an additional 1.2 million Euros and 317,784 shares to be earned over the two year period ending June 2003, subject to certain conditions being met. The final payments were made in July 2003. Under U.K. GAAP, the deferred shares and payments have been included in the purchase consideration. The excess purchase consideration over the fair value of assets and liabilities acquired is attributed to goodwill and is being amortised over its estimated economic life. Under U.S. GAAP, these deferred shares and payments are excluded from the purchase consideration and recognised as compensation expense in the profit and loss accounts over the period in which the payments vest. The total compensation charge for the three and six months ended 30 June 2002 was #0.4 million and #0.9 million respectively and for the three and six months ended 30 June 2003 #0.2 million and #0.3 million respectively. (ii) The Company operates an Inland Revenue approved Savings-Related Share Option Scheme ("SAYE Scheme"). Under this scheme, options may be granted at a discount of up to 20%. Under U.K. GAAP no charge is taken in relation to the discount. Under U.S. GAAP, the difference between the market value of the shares on the date of grant and the price paid for the shares is charged as a compensation cost to the profit and loss account over the period over which the shares are earned. During 2002 the Company adopted the provisions of EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FIN 44". In accordance with this, an employers offer to enter into a new SAYE contract at a lower price causes variable accounting for all existing awards subject to the offer. Variable accounting commences for all existing awards when the offer is made, and of those awards that are retained by employees because the offer is declined, variable accounting continues until the award is exercised, forfeited or expire unexercised. New awards are accounted for as variable to the extent that the previous, higher priced options are cancelled. The adoption of this guidance has not had a material effect on the compensation charge. The total expected compensation cost is recorded within equity shareholders' funds as unearned compensation and additional paid in share capital, with unearned compensation being charged to the profit and loss account over the vesting period. The total compensation charge for the three and six months ended 30 June 2002 was #0.2 million and #0.4 million respectively and for the three and six months ended 30 June 2003 #0.1 million and #0.3 million respectively. (iii) Under U.S. GAAP goodwill with indefinite useful lives is not amortised but is tested for impairment annually. Under U.K. GAAP goodwill is amortised on a straight line basis over its useful economic life. At 30 September 2002, as set out in note (ix), the Company completed an impairment review of its reporting units. As a result the goodwill and other intangible assets attributable to Fitec were considered fully impaired and written off. These were also written off in full for U.K. GAAP purposes. The Company had unamortised goodwill of #6.6 million at 1 January 2003, which is no longer amortised under U.S. GAAP but will be assessed for impairment annually. Amortisation expense related to goodwill, under U.K. GAAP, was #0.2 million and #0.5 million for the three and six month months ended 30 June 2002 respectively and #0.5 million and #1.1 million for the three and six month months ended 30 June 2003 respectively . (iv) Adjustment to reflect interest amounts capitalised under U.S. GAAP, less depreciation for the period. (v) The Company has concluded a number of infrastructure sales in the form of 20-year indefeasible rights-of-use ("IRU") with characteristics which qualify the transactions as outright sales under U.K. GAAP. Under U.S. GAAP, these sales are treated as 20-year operating leases. The adjustment reflects the recognition of revenue previously deferred. (vi) The Company has received warrants from certain suppliers in the ordinary course of business. Under U.K. GAAP, warrants are treated as financial assets and recorded at the lower of cost or fair value. Hence for U.K. GAAP purposes the warrants have been recognised at nil. Under U.S. GAAP, the warrants are recorded at fair value with unrecognised gains and losses reflected in the profit and loss account. (vii) In accordance with SAB 101 "Revenue Recognition in Financial Statements", for the three and six months ended 30 June 2002 and 2003, customer installation revenues together with attributable direct costs, up to the level of the associated revenue, are recognised over the expected customer relationship period. The expected relationship period for wholesale customers was reduced during the three months ended 30 June 2002. At 30 June 2003, the cumulative impact on net losses under SAB 101 was nil, representing cumulative deferred installation revenues of #56.4 million and costs of the same amount. (viii) The Company entered into forward foreign exchange contracts for payments relating to its U.S. dollar denominated senior discount notes, a portion of which were purchased during the twelve months ended 31 December 2001 and 2002. The forward foreign exchange contracts were cancelled in June 2002. Prior to June 2002, unrealised gains on the ineffective portion of the ineffective hedge attributable to the cumulative notes purchased were recognised through the profit and loss account. (ix) During the quarter ended 30 September 2002, the Company recorded charges of #443.8 million under U.S. GAAP to reflect the impairment of goodwill (see note iii), network and non-network fixed assets, resulting in a GAAP difference of #107.2 million. For the three and six months ended 30 June 2003 depreciation in the amount of #2.8 million and #5.6 million respectively was recorded in respect of the assets which had not been impaired for U.S. GAAP purposes. Notes to Financial Statements b. Effects of conforming to U.S. GAAP - impact on net equity ------------------- At 30 June 2003 ------------------- #'000 $'000 Equity shareholders' funds for the Company 912,562 1,508,374 U.S. GAAP adjustments: Adjustment for deferred compensation (10,276) (16,986) Unearned compensation (852) (1,408) Additional paid in share capital 11,128 18,394 Own shares held in trust (i) (206) (340) Amortisation of intangibles 4,968 8,212 Shares to be issued (117) (193) Warrants 836 1,382 Impairment 98,780 163,273 Deferred profit on IRUs (18,245) (30,157) Capitalised interest, net of depreciation 39,407 65,136 Approximate equity shareholders' funds under U.S. 1,037,985 1,715,686 GAAP (i) Under U.K. GAAP, shares held by a QUEST, and similar employee share schemes, are recorded as fixed asset investments at cost less amounts written off. Under U.S. GAAP, these shares are recorded at historical cost in the balance sheet as a deduction from shareholders' funds. The adjustment reflects the net impact on U.S. GAAP equity after U.K. GAAP write-offs. c. Effects of conforming to U.S. GAAP - stock options At 30 June 2003 the Company had certain options outstanding under its Option Plan. As permitted by SFAS No.123, "Accounting for Stock-Based Compensation", the Company elected not to adopt the recognition provisions of the standard and to continue to apply the provisions of Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees," in accounting for its stock options and awards. Had compensation expense for stock options and awards been determined in accordance with SFAS No.123, the Company's loss for the three and six months ended 30 June 2003 would have been #34.3 million ($56.6 million) and #83 million ($137.2 million) respectively. Forward Looking Statements This report contains "forward looking statements" including statements concerning plans, future events or performance and underlying assumptions and other statements which are other than statements of historical fact. The Company wishes to caution readers that any such forward looking statements are not guarantees of future performance and certain important factors could in the future affect the Company's actual results and could cause the Company's actual results for future periods to differ materially from those expressed in any forward looking statement made by or on behalf of the Company. These include, among others, the following: (i) any adverse change in the laws, regulations and policies governing the ownership of telecommunications licenses, (ii) the ability of the Company to expand and develop its networks in new markets, (iii) the Company's ability to manage its growth, (iv) the nature of the competition that the Company will encounter and (v) unforeseen operational or technical problems. The Company undertakes no obligation to release publicly the results of any revision to these forward looking statements that may be made to reflect errors or circumstances that occur after the date hereof. Enquiries: COLT Telecom Group plc John Doherty Director Corporate Communications Email: jdoherty@colt.net Tel: +44 (0) 20 7390 3681 This information is provided by RNS The company news service from the London Stock Exchange END IR FGGZNLZNGFZM
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